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TMI Blog2019 (8) TMI 1630X X X X Extracts X X X X X X X X Extracts X X X X ..... group entities. BMC India can be classified as a captive software development service provider and a sales support service provider. BMC India provides software development services, ITes and sales support services to BMC, US on cost plus a margin of 10%. For the purpose of benchmarking its international transactions assessee has followed TNMM with external comparables and with operating profit over total cost as profit level indicator (PLI). Having given this background facts, the Ld. Counsel for the assessee submitted that with regard to "Software Development", if three companies i.e. (i) Bodhtree Consulting Ltd. (ii) KALs Information Technology Systems Ltd. and (iii) Infosys Technologies Ltd. are excluded from the final list of comparables then they will be in house and their grievance would be satisfied. SOFTWARE DEVELOPMENT SERVICES SEGMENT (A) Bodhtree Consulting Ltd. The assessee has objected to the inclusion of this company as comparable. The assessee has stated that this company is functionally different as it is a software solution company as well as it has service offerings and no revenue break up is available. The assessee has further stated that it is a super profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the end of the year, there may arise two situations , viz., the first, in which the expenses incurred in respect of such software development may be capitalized, which appears to be a more rational manner of depicting the true and fair view of the profitability of the enterprise; and the second, in which such expenses may be straightway taken as revenue costs for the year of its incurring itself, which may not reflect a true and fair view of the profits on year to year basis. The contention of the ld. AR is that whereas Bodhtree falls into the second situation, the assessee falls in the first. Though the contention that Bodhtree was accounting for expenses in the year of incurring but considering income only on the conclusion of the project in the subsequent year sounded a little awkward, we attempted to find out the amount of capitalized expenses in respect of incomplete projects at the end of the year. Ex facie, we could not find out any such capitalized value of work-inprogress in the balance sheet of the company on standalone basis nor the ld. DR could point out any. This prima facie shows that the expenses incurred in respect of incomplete projects of software development at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Bodhtree Consulting Ltd. is quite different from the assessee in as much as unless the software is fully developed and billed, it will go on debiting expenses to the Profit and loss account but the invoice will be raised only in the year of completing the project. This leads to fluctuating margins from year to year. The Hon‟ble Gujarat High Court in Pr. CIT Vs. Allscripts (India) Private Ltd. (2016) 288 CTR 675 (Gujarat) considered the fluctuating margins of this company from the F.Ys. 2005-06 to 2012-13 which have been tabulated in para 6 of the judgment, viz., 13.87%, 80.15%, 19.89%, 62.27%, 33.42%, (-) 4.46%, 3.29% and (-)11.53%. Considering the fluctuating profit margins based on an altogether different revenue recognition model, the Hon‟ble High Court upheld the exclusion of this company from the list of comparables. Respectfully following the precedent, we order to delete this company from the list of comparables." We have perused the aforesaid order of the Co-ordinate Bench of the Tribunal, Pune and gone through the Annual Report of the company. We are in conformity with our findings given in assessee's own case hereinabove stated and hold that "Bodhtre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Training". Profit and loss account of this company has been set out at page 14 of the Annual Report. First item under the head "Income" is "Sales, Services & Training" with the figure of Rs. 2,19,82,589/-. Break-up of this amount has been given in Schedule No.12 showing `Income from Software Development - Export‟ - Rs. 2,05,40,685/-; `Translation and Interpretation‟ - Rs. 5,07,985/-; and `Training receipts‟ - Rs. 9,33,919/-. Under the head "Operating Expenses", an item worth Rs. 27,19.495/- has been shown with narration of "Software Consumption from Inventory". Balance sheet of this company shows `Inventories‟ at Rs. 85,77,723/-. The above information clearly deciphers that Kals Information Technology Systems Ltd. is not only engaged in providing Software Development Services but is also dealing in Software products under the relevant segment. As the assessee is not engaged in the business of Software products but is rendering only Software services on captive basis, in our considered opinion, this company cannot be considered as comparable. The Hon‟ble jurisdictional High Court in CIT vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 0176 (Bom) has held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company i.e. Infosys Technologies Ltd. We agree with the reasoning put forth by the Co-ordinate Bench of the Tribunal, Delhi for exclusion of this company from the final list of comparables and similarly in the case of assessee also, there is no match as compared to Infosys Technologies Ltd. with regard to huge turnover, R & D and other factors. Accordingly, we direct for exclusion of Infosys Technologies Ltd. from the final list of comparables. ITES SERVICES SEGMENT 7. The second set of arguments of the Ld. Counsel for the assessee was with regard to "ITes Services". It is the contention of the assessee that they are only doing paper work processing and back office services once the sale is done or the procurement is completed. In TP study report, the assessee has taken five comparables out of which the TPO rejected three comparables and added more five comparables which is placed at Page 59 of the TPO's order. The DRP has confirmed the same. The argument of the Ld. Counsel was that if three companies i.e. (i) Accentia Technologies Ltd. (ii) Cosmic Global Limited and (iii) Eclerx Services Limited are excluded from the final set of comparables of "ITes Services", they will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed does not give rise to any substantial question of law. Thus, not entertained." Therefore, M/s. Accentia Technologies Ltd. develops its own software and rendered Medical transcription services which is different from BPO services and hence, it was held that this company was not comparable. 9. Reverting to the facts of the present case and analyzing the Annual Report of the Company vis-à-vis M/s. Accentia Technologies Ltd., we find that they are functionally substantially different and as held by the Hon'ble Bombay High Court that KPO services are not same as BPO services and hence, cannot be held to be comparable. Respectfully following the ratio laid down by the Hon'ble Bombay High Court, we hold this company to be excluded from the final list of comparables. (D) Cosmic Global Limited : The assessee has objected on inclusion of this company on the grounds that exceptionally high margins were earned by this company during the year as compared to the trend in other years. Moreover, it is argued that this company should be rejected as a super normal profit making company. The assessee further contended that this company outsources significant portion of its wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also functionally different being a KPO company engaged in providing data analytics and data processing solutions. 12. The Ld. Counsel for the assessee has placed reliance on the decision of the Hon'ble Bombay High Court in the case of The Pr. Commissioner of Income Tax-2, Pune Vs. PTC Software (I) Pvt. Ltd. (supra.) wherein the Hon'ble Bombay High Court has held as follows: "6. Re. Question (d) :- (i) The impugned order of the Tribunal held that Exlerx Services Ltd. is not a comparable to the Respondent-Assessee for the reasons that it was providing knowledge process outsourcing (KPO)-whereas Respondent is engaged in BPO services. (ii) The impugned order of the Tribunal place reliance upon the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. (Income Tax Appeal No.7466/Mum/2012), to hold that Exlerx Services Ltd. was engaged in providing KPO services which is distinct from the BPO services. Thus, excluded the same from the list of comparables. (iii) The impugned order of the Tribunal, in fact, relies upon the following extract in the Special Bench‟s decision of the Tribunal in Maersk Global Centres (India) Pvt. Ltd., as u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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