TMI Blog2021 (1) TMI 908X X X X Extracts X X X X X X X X Extracts X X X X ..... not rendering on-site services - this company is also into Products, which is borne out from its balance sheet showing value of Inventories and work in progress at ₹ 3.37 crore. - This company has clubbed both the Product Development services and on-site services in one overall segment of Information Technology services . Thus, it is overt that the IT services segment of this company, which has been construed by the TPO as comparable, cannot be so held as the assessee is neither rendering on-site services nor engaged in software products. We, therefore, direct to exclude this company from the list of comparables. Thirdware Solution Ltd. - this company, apart from rendering software services, is also engaged in software products. Segmental information has been given on the basis of geographical segments. Thus, it becomes crystal clear that no information regarding revenue from software services distinct from other activities is available on record. As the assessee is engaged only in rendering software development services, this company on the basis of figures available on record, cannot be considered as comparable. We, therefore, direct to exclude it from the list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, reverse the view of the DRP and direct to exclude it from the list of comparables. Thinksoft Global Services Pvt. Ltd. be excluded from the list of comparables and consequently reverse the view taken by the DRP on this issue. Accentia Technologies Ltd directed to exclude this company from the list of comparables. Coral Hubs Ltd. (Vishal Technologies Ltd.) this company is mainly engaged in outsourcing its business activities which is further proved from the fact that the Personnel cost is only ₹ 1.89 crore as against outsourcing cost of ₹ 54.47 crore. It goes without saying that outsourcing services is an altogether different business model vis-a-vis rendering services by engaging one's own employees and facilities - we direct to exclude this company from the list of comparables. Jeevan Softech (BPO segment) - The view point of the assessee that ITES segment is not comparable because of the inclusion of ERP revenue is, therefore, not sustainable because the figures of revenue and profit from the BPO segment is separately available and the nature of work admittedly matches with that of the assessee. The Directors' report unequivocally d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross appeals - one by the assessee and other by the Revenue - arise out of the final assessment order dated 31-12-2014 passed by the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter called 'the Act') in relation to the assessment year 2010-11. 2. Briefly stated, the facts of the case are that the assessee is a domestic company engaged in providing Software Development services and Sales support services to BMC, US and BMC Software, Inc., which is a company based in Houston, Texas, US. The assessee is solely engaged in providing such services to BMC group entities. Return was filed declaring total income of ₹ 3.02 crore. Certain international transactions were reported in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. I. PROVISION OF SOFTWARE DEVELOPMENT SERVICES 3. The first issue raised in this appeal is against the transfer pricing addition of ₹ 15,11,98,577/- made by the AO in the international transaction of Software Development services . The facts anent to this are that the assessee decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in all the deliverables remain with BMC overseas entities. Conceptualization of the required software products is done by BMC overseas entity. The assessee, on the basis of the requirements of the clients and market, works on designing of the product in consultation with BMC overseas entities. Functional specification and requirement analysis for the Software Development is jointly undertaken by the assessee and BMC overseas entity. However, the assessee undertakes coding and development of the software modules as per the functional specifications and requirement analysis. Thereafter, testing is done by the assessee. The overseas entities undertake coding and testing of the software in respect of modules which are not developed by the assessee. In certain cases, the assessee undertakes modifications of existing products on the basis of customized requirements. At times, the assessee directly liaises with the customers to understand their exact requirements. 5. The assessee entered into an Agreement with BMC, Houston; BMC, Singapore; and BMC, Netherlands effective from 01-04-2009 for rendering all the services, including the software development services. A copy of the Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 R.S. Software India Ltd. 10.21 10 Thinksoft Global Services Ltd. 14.71 11 Silverline Technologies 6.71 Arithmetical Mean 20.43 7. Whereas the assessee has challenged inclusion of Kals Information Technology System Ltd; Acropetal (Segment); Thirdware Solution Ltd; and Persistent Systems Private Ltd; the Revenue has challenged the inclusion of R.S. Software India Ltd.; Thinksoft Global Services Ltd.; and Silverline Technologies. 8. We will first deal with the companies challenged by the assessee. (a) Kals Information Technology System Ltd.: 9. The TPO included this company in the list of comparables despite the assessee's objections, inter alia, that the company was also a Software company since its inception. The assessee could not get any succor from the DRP on this count. 10. We have examined the Annual report of this company, whose copy has been placed at page 565 onwards of the paper book. Profit and Loss accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite development services to a greater extent. Out of total expenses of ₹ 87.26 crore including operating and non-operating, this company incurred employees related on-site development expenses to the tune of ₹ 55.85 crore, which includes a sum of ₹ 42.32 crore towards on-site development expenses only. Thus, it emerges that roughly 50% of the total expenses incurred by this company are towards on-site development costs. As against that, the assessee is not rendering any on-site development services. It goes without saying that on-site services business model entails its own risks and rewards, which are incomparable to the services rendered from the business model of rendering services from own premises. One cannot construe both as one and the same. The assessee under consideration is not rendering on-site services. Notwithstanding that, it is further seen that this company is also into Products, which is borne out from its balance sheet showing value of Inventories and work in progress at ₹ 3.37 crore. It is still further noted that the company has clubbed both the Product Development services and on-site services in one overall segment of Information Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he exclusion of this company before the Tribunal but submitted that his entire focus was on functional differences warranting exclusion from the list of comparables. 17. We observe from the material on record, as has also been accepted by the Ld. AR, that the contention about the functional dissimilarity between the assessee and Persistent Systems Pvt. Ltd. was never raised before the authorities below. As such, neither the TPO nor the DRP could examine such a contention. Since the assessee has abandoned before the Tribunal the basis of turnover filter as was originally taken and harped on a new base of functional differences for exclusion of this company for the first time, we, being an appellate authority, cannot straight away accept or reject such contention unless the authorities below apply their mind to the functional differences as has been sought by the assessee. Without going into the merits, we set aside the impugned order and remit the matter to the file of AO/TPO with a direction to examine the assessee's contention on functional dissimilarities and then decide the question of its inclusion. 18. Apart from the above exclusions, the assessee has also agitated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be included in the list of comparables. 22. The reason given by the TPO for excluding this company is its engagement in rendering on-site activities. We are unable to corroborate this version from the material on record. We have examined the Annual report of this company which has been placed at 1335 onwards of the paper book. Page 1361 contains the details of Expenditure in foreign currency'. It enlists Travel Foreign' of ₹ 13.31 lakh and Expenditure met by Branch offices' amounting to ₹ 24.38 crore. It is this detail of the incurring of expenditure by foreign branches, which seems to have prompted the TPO to infer that the company earned on-site revenue. In our view incurring of expenses in foreign currency by foreign branches cannot be equated with the rendering of on-site services. Moreover, the Ld. DR also failed to point out anywhere from the Annual report of this company that it rendered any on-site services. 23. The DRP assigned another reason for its exclusion, being, loss incurred by this company for the year under consideration vis-a-vis the assessee's work on cost plus business model. In this regard, it is overt that no compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three companies was actually engaged in rendering on-site services. We have perused the Annual report of RS Software, which is available at page 1062 onwards of the paper book. It is seen that except for incurring expenses in foreign currency, there is no mention of rendering on-site services. This company has also branches in certain countries outside India and the expenses in foreign currency were incurred by such branches. The Ld. DR also could not point out from the Annual report of this company that it rendered any on-site services. In such circumstances, we direct to include this company in the list of comparables. 30. Now we turn to Silverline Technologies Ltd. The DRP gave the same reason that this company was not engaged in rendering on-site services. We have examined the Annual report of this company, whose copy is available at page 1270 of the paper book. Page 1295 contains the figure of Expenditure in foreign currency' to the tune of ₹ 26,13,74,026/-. As against that, total income from sales and service of this company stands at ₹ 30.88 crore. Thus, it is evident that the expenses in foreign currency have resulted in earning income. This being a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, it is sine qua non to first ascertain the true nature of services rendered by the assessee under the segment of Provision of IT enabled services. We have gone through the Agreement entered into by the assessee with its AE, namely, BMC Software Inc., under which the assessee rendered the services. In fact, it is a composite agreement for provision of Software Development services; ITES; and Sales Support services. We have referred to this Agreement in the earlier part of the order while discussing the nature of Software Development services. Insofar as the instant international transaction of the Provision of ITES is concerned, we find from Appendix-A that the services rendered by the assessee under this segment include:- b. Call centre and other support centre services, including IT support, financial applications support, human resource applications support, sales applications support and other internal IT business support applications. c. Remote maintenance d. Data processing services e. Back-office operations including payroll processing, receivables, accounting, tracking and general accounting work etc. g. Revenue accounting i. Procuremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. Thus, it is apparent that this company is mainly engaged in outsourcing its business activities which is further proved from the fact that the Personnel cost is only ₹ 1.89 crore as against outsourcing cost of ₹ 54.47 crore. It goes without saying that outsourcing services is an altogether different business model vis-a-vis rendering services by engaging one's own employees and facilities. It is further noticed that the Hon'ble Bombay High Court in PCIT Vs. BNY Mellon International Operations (India) (P). Ltd. (2018) 255 Taxman 397 (Bom.) has held that an assessee rendering BPO services cannot be compared with the companies providing KPO services. Coral Hubs Limited has been considered as non-comparable on this count also. In view of the foregoing discussion, we direct to exclude this company from the list of comparables. (iii) Jeevan Softech (BPO segment): 39. The assessee objected to the inclusion of this company which came to be jettisoned by the TPO. No succor was allowed by the DRP, against which the assessee has come up in appeal before the Tribunal. 40. We have examined the Annual report of this company whose copy is available at pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ 141.10 lakh and income of ₹ 52.99 lakh. (iv) Informed Technologies Ltd. 43. The assessee has challenged the inclusion of this company with the help of an additional ground. Inclusion of this company was not challenged either before the TPO or the DRP and the same has been assailed before the Tribunal for the first time. 44. Several orders have been passed by various Benches of the Tribunal holding that an assessee is entitled to challenge a comparable for the first time before the Tribunal notwithstanding the fact that it remained uncontested before the TPO or the DPO. In view of the fact that the comparability of this company has not been examined by the authorities below, we direct the AO/TPO to scrutinize the comparability of Informed Technology and then decide on its inclusion or otherwise in the final tally of comparables. III SALES SUPPORT SERVICES : 45. The assessee reported an international transaction of 'Provision of Sales Support services' with transacted value of ₹ 12,86,10,541/- It applied separate TNMM for showing that the international transaction was at the ALP. The TPO did not separately examine the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h consideration by the TPO. As the Directors' report of this company categorically declares that the income from the Information services segment pertains to the Software products, the same ergo does not qualify for inclusion. We, therefore, direct to exclude this company from the list of comparables. 51. Ground No. 12 of the assessee's appeal is against not allowing working capital adjustment. 52. We find from page 85 of the directions given by the DRP that the AO was directed to examine the computation of working capital adjustment worked out by the assessee. However, while giving effect to the directions of the DRP, this direction remained to be complied with. We, therefore, direct the AO/TPO to give effect to the direction given by the DRP as contained in para 2.14.3. 53. The only other ground is against not allowing the Risk Adjustment. 54. This is a recurring issue. The matter came up for consideration before the Tribunal in assessee's own case for the assessment year 2008-09. Following the order passed by the Tribunal for the assessment year 2006-07, the Tribunal restored the matter to the file of AO/TPO for computing risk adjustment after granting re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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