TMI Blog2022 (5) TMI 1450X X X X Extracts X X X X X X X X Extracts X X X X ..... les. Thirdware Solutions Pvt. Ltd is to be excluded from the list of comparables. L T Infotech Ltd - We see the revenue in Schedule M of the profit loss account, there is no break-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies. Melstar Information Technologies Ltd - A.R. submitted that this company Melstar Information Technologies Ltd. is a loss making company in the last 3 continuous successive assessment years and if there is a profit in any one of the past 3 financial years, then that company cannot be excluded on the basis of persistent loss making filter - it is appropriate to remit the issue to the file of AO/TPO to decide the same in the light of above findings of the Tribunal. Accordingly, the issue is remitted to AO/TPO for fresh consideration. Appropriate adjustments towards working capital - After hearing the parties, we direct the AO/TPO to grant appropriate adjustments towards working capital as directed by Ld. DRP. In other words, actual working capital adjustment to be given. Directed accordingly. Levy of interest u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% of the total sales, leading to a narrower comparable set. 8. The learned AO/learned TPO/Hon'ble DRP erred in rejecting companies having ratio of employee cost to sales of less than 25%. 9. The learned AO/ learned TPO/ Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies. 10. The learned AO/ learned TPO/ Hon'ble DRP erred in the method of computing the percentage of related party transaction of 25% to total sales. 11. The learned AO/ learned TPO/ Hon'ble DRP erred in accepting companies that ought to have been rejected as comparable: Tata Elxsi Ltd. Mincltree Ltd. Persistent Systems Ltd. InfoBeans Technologies Ltd. Nihilent Technologies Ltd. Aspire Systems (India) Pvt. Ltd. Infosys Ltd. Thirdware Solutions Ltd.k---- Cybage Solutions Ltd. Larsen Toubro Infotech Ltd. Rheal Software PVt. Ltd. Inteq Software Pvt. Ltd. 12. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting companies that ought to have been ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The Ld. A.R. submitted that this company is not functionally comparable as it is engaged in providing service in diverse areas such as analytics, information management, application development business process management, business technology consulting, infrastructure management services, product engineering SAP services. It was also contended that this company is engaged in sale of product and also engaged in outsourcing IT services in banking and financial services and insurance sector and also as R D operations and patents and hence not functionally comparable. However, Ld. Dispute Resolution Panel ( DRP ) observed that this company is only engaged in software development and related services as seen from its financials. Therefore, the plea of the assessee that company performs different and diverse activities and hence functionally different was rejected by Ld. DRP. Further, it was observed by Ld. DRP that provision of data analytic services is not functionally different from software development activity. Data analytic services also used only in certain software and tools, writes codes task. Like in other software application, these tools also facilitate and enable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent services, technology consulting and SAP services. - Acquisition of subsidiary Discoverture Solutions LLC 42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R D intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. (supra) and in the light of this decision and the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly. 5.2. In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Directed accordingly. II. Persistent systems Limited:- 6. The Ld. A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of internally developed which constitute 0.18% of operating revenue, and all others license revenue was from distribution or reselling activity. Besides, the company has also categorically clarified in its reply u/s 133(6) that it is engaged in software product development services only. The relevant extract of the reply is as under:- Persistent System Limited is predominantly engaged in the business of providing outsourced software product development services to customers across the globe from following industry verticals: Infrastructure and systems, Telecom and Wireless, Life science and Healthcare and Financial services. The company reports segment information based on the above industry verticals. The nature of services provided that each of these segments differs only in terms of the industry and specific requirements of customers in each of these industries. The essential activity across all business segments can be considered to be software product development services . 6.3 Further, Ld. DRP observed that the assessee based on certain information discussed in the consolidated annual report (which included discussion of financial results of Persistent S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that the IP related and product revenue pertain to other group entities and does not pertain to M/s Persistent Systems Ltd, which is being compared. It is also relevant to note that this company has clarified in its reply given u/s 133(6) of the Act, that M/s Persistent Systems Ltd is predominantly engaged in the business of rendering software development services; the revenue reported is primarily on account of rendering of software development services only. The relevant extract is as under:- In respect of the information you have requested under 3(a) and 3(c) in respect of software products and innovations, overseas subsidiary companies of Persistent Group have acquire certain Intellectual Property (IP) products and generating some revenue from licencing and support of these products. In case of PSL India, which is predominantly engaged in the business of rendering software development services, the revenue reported is primarily on account of rendering of software development services only 6.7 The above clarification also makes it clear that this company is not into diversified activities. 6.8 Further, Ld. DRP observed that the expenditure incurred towards R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for expense transaction is logical and correct. Further, the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, Ld. DRP did not find any infirmity in the approach. Hence, Ld. DRP rejected the assessee's plea. 6.11 In view of the above discussion, Ld. DRP upheld the selection of this company as comparable. 6.12. Against this assessee is in appeal before us. 6.13. We have heard the rival submissions and perused the materials available on record. As rightly pointed out by Ld. A.R., this comparable is considered as not a comparable in the case of Yahoo Software Development India Pvt. Ltd. cited (supra), wherein it was held as under: 32. At the time of hearing, the ld. counsel for the assessee has prayed for exclusion of 4 comparable companies that remain after the order of the DRP viz., Persistent Systems Ltd., Infosys Ltd., Mindtree Ltd. and L T Infotech Ltd. He brought to our notice that as far as Persistent Systems Ltd. is concerned, the reasoning given for excluding this company for AY 2014-15 will equally hold good for the present year as well. In this regard, our attention was drawn to page 601 of the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'ble ITAT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005- G6 in IT (TP)A 1372/B/11 20/2012 dated 28.03.2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd vide ITA No.5277/De1/2011 dated 12.10.2012. On perusal of the Annual Report of Persistent, we observe that the company has RPT in excess of 25% of the sales. The calculation of the same has been provided below for your ease of reference: RPT to sales ratio for FY 2014-15 Particulars Amount (INR Million) Sale of services 2,410.02 Commission received 10.26 Purchase of software 1.49 Cost of technical professional 1,339.1 Commission paid on sales 111.79 Traveling and conveyance 19.27 Total relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs. 65. The next objection of the Assessee is with regard to Assets employed. The companies, which predominantly generate revenues from onsite activity, do not have significant assets as most of the work is carried on the site of customer outside India. The argument that the TPO has himself observed that software service providers do not require much assets cannot be basis to accept the Assessee s plea. Those observations are made by the TPO in the context of application of turnover filter and have been quoted out of context by the Assessee. 66. The next argument of the Assessee is that TPO has held that margins are lower in onsite software services and that margin is not a criteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore, this company is directed to be excluded from the list of comparable company. 6.14 In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude this company Persistent Systems Ltd. from the list of comparables. III. Infosys Ltd.:- 7. The Ld. A.R. submitted that this company has to be excluded from the list of comparables on the following reasons:- Infosys is functionally dissimilar and ought to be rejected. No segmental de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is enough that that the services are similar and fall within the same domain of software development. Accordingly, the pleas raised were rejected by the Ld. DRP. 7.3 It was pleaded by assessee that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report show that the growth in revenue was on account of various business initiatives taken to accelerate growth such as - internal re-organization, implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, reducing attrition rate, increasing the offshore mix, improving delivery expertise etc., As per information in page 14 of annual report, 97.8%' of revenues was from repeat business. At page 67 of the annual report, it is discussed, -Clients often cite our industry expertise, comprehensive end-to-end solutions, ability to scale, superior quality and process execution, global delivery model, experienced management team, talented professionals, track record and competitive prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable on the ground of size and level of operations. Hence, these pleas were rejected by the Ld. DRP. 7.6 In view of the above, Ld. DRP upheld this company as comparable to the assessee. 7.7 Against this assessee is in appeal before us. 7.8 We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. This comparable is considered as no comparable in the case of Yahoo Software Development India Pvt. Ltd. cited (supra) wherein it was held as under: 39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- Functionally dissimilar - owns intellectual properties, incurs significant R D costs onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foot note given at page 147 of annual report, it is clearly mentioned that the revenue on account of export of software services was Rs.22,473.24 lakhs, from software services from domestic market Rs.475.67/- lakhs, from subscription and training Rs.44.32/-lakhs, from sale of licenses 14.75 lakhs. The revenue from software license constitute meagre 0.06% of total operating revenue. Thus, the information in the annual report clearly show that this company is predominantly (99.93%) into sale of software services and hence, it is, functionally comparable to the assessee. Further, as per information provided in response to notice u/s 133(6), the company has categorically stated that it is engaged in providing IT software services; and that the revenue of Rs.14.75 lakh represent trading in software license. In view of these, Ld. DRP upheld the selection of this company as comparable. 8.3 Against this assessee is in appeal before us. We have heard the rival submissions and perused the materials available on record. As rightly pointed out by the Ld. A.R., this comparable is considered as not a comparable in the case of LG Soft India Pvt. Ltd. Vs. Deputy Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices and Infrastructure Management Services. The services offerings are focussed mainly towards four verticals namely manufacturing, utilities, financial services and telecom. For the period ended March 31, 2015, March 31, 201,4 and March 31, 2013. 100% of the operating revenues respectively were derived from software development services . However, without giving reasons, it has raised a plea that it is functionally different, when the TPO has selected this company as comparable. Further, Ld. DRP also noted that this company has two business segments -services cluster and industrials cluster operating in software development services. The information in the annual report clearly shows that the entire revenue is from provision of software services. As per Note 2, regarding Accounting principle on Revenue Recognition, it is stated that revenue is recognized when services are rendered and related costs incurred; and there is no reference to sale of products. The financial statements do not mention about any product sale or inventory. As there is no revenue stream on account of product sales, Ld. DRP did not find any merit in the argument that the company is engaged in product sales. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable in the case of LG Soft Pvt. Ltd. cited (supra) wherein it was held as under:- 38. As far as L T Infotech Ltd. is concerned, the ld. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, ITA No.6148/Del/2015 for AY 2011- 12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The company was excluded from the list of comparable companies with reference to SWD services provider such as the assessee. The ld. Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee s PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee s PB that this company as part of its operating profit in Schedule O of profit loss accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the absence of any specific information, there is merit in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly, we do not agree with the reasoning given by Ld DRP for excluding this company as a comparable. Accordingly, we direct the AO/TPO to include this company. 11.2 In view of the above, we direct the AO/TPO to verify this company s annual report for AY 2015-16 and decide accordingly in the light of above observations of the Tribunal. II. Melstar Information Technologies Ltd.:- 12. The Ld. A.R. submitted that this company has to be included in the list of comparables on the following reasons:- The TPO has erred in stating that Melstar has incurred persistent losses Melstar is functionally comparable and ought to be accepted. Melstar qualifies all the filters applied by the TPO. 12.1 Ld. DRP in his report observed that the TPO has applied filter to remove companies who have incurred losses during 2 years out of 3 years (including the year under consideration) to arrive at final set of comparables. The rationale for adopting consistent lossm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deserves to be included as a comparable company. 12.4 In view of the above, in our opinion, it is appropriate to remit the issue to the file of AO/TPO to decide the same in the light of above findings of the Tribunal. Accordingly, the issue is remitted to AO/TPO for fresh consideration. 13. In ground No.13, the Ld. A.R. submitted that the TPO arrived in computing the operating markup for Sasken Communications Technologies Ltd. and Daffodil Software Ltd. After hearing both the parties, we direct the AO/TPO to take a correct operating markup of these two companies. Directed accordingly. 14. Ground No.14 is not pressed and dismissed accordingly. 15. Ground No.15 is with regard to granting of appropriate adjustments towards working capital. After hearing the parties, we direct the AO/TPO to grant appropriate adjustments towards working capital as directed by Ld. DRP. In other words, actual working capital adjustment to be given. Directed accordingly. 16. With regard to ground No.16, no argument was put forth on this ground. Accordingly, this ground is not considered. 17. Ground No.17 is with regard to the levy of interest u/s 234A of the Act. The contention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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