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TMI Blog2021 (12) TMI 1422X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing support of the Appellant do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 ( "the Act"), thereby making a transfer pricing (TP) adjustment of INR 24,39,53,671, INR 5,01,93,449 and INR 33,95,51,306 respectively. The appellant prays that the TP analysis conducted by the Appellant be accepted and consequently the TP adjustment be deleted. 2. Ground No.2- Comparable Companies in relation to the provision of software Development Services 2.1 On the facts and in the circumstances of the case and in law, NeAC erred in excluding the following companies from the comparable set which are comparable to the provision of Software Development Service segment's functions, asset base and risk profile. i. Kals Information Systems. ii. Akshay Software Technologies Limited iii. Sagarsoft (India) Limited iv. Accel Frontline Ltd. (Segmental) v. Maveric Systems Limited vi. Mudunuru Limited vii. CG-VAK Software & Exports Limited viii. Infomile Technologies Limited ix. Cigniti Technologies Limited x. R Systems International Limited ( Segmental) xi. SQS India BFSI Limited (formerly Thinksoft Global Services Ltd.(Consolidated) and xii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's functions, asset base and risk profile. i. Domex E-Data Private Limited ii. Manipal Digital Systems Private Limited iii. C E S Limited and iv. M P S Limited The Appellant prays that the TP analysis conducted by the Appellant ought to be accepted and aforementioned comparable companies ought to be rejected. Consequently, the TP adjustment in relation to the Provision of Technical Support Service Segment ought to be deleted. 4. Ground No.4- Comparable companies in relation to Provision of Sales and Marketing Support Services On the facts and circumstances of the case and in law, NeAC erred in excluding the following companies in the comparable set which are comparable to the Provision of Sales and Marketing Support Service segment's functions, asset base and risk profile: i. MCI Management (India) Limited; ii. India Tourism Development Corporation Limited and iii. EDCIL (India) Limited (Segmental) The appellant prays that the TP analysis conducted by the Appellant ought to be accepted and consequently the TP adjustment in relation to the Provision of Sales and Marketing Support services segment ought to be deleted. 5. Ground No. 5- Treatment of goodwill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Support Services and Provision of Sales and Marketing support services to its Associate Enterprises (AEs). The return of income for the assessment year 2016-17 was filed on 30.11.2016 declaring total income of Rs.64,74,70,080/-. The said return of income was selected for scrutiny assessment. The Assessing Officer on noticing that the assessee company had reported international transactions in Form 3CEB, referred the matter to the TPO u/s.92CA(1) of the Act for the purpose of benchmarking the international transactions. The assessee company reported the following international transactions in Form 3CEB: No. Nature of Transaction Amount as per 3CEB Method 1. Provision of software development services and consultancy services 2,47,69,11,000 TNMM 2. Provision of technical support services 52,17,39,000 TNMM 3. Provision of sales and marketing support services 41,94,99,000 TNMM 4. Payment of interest on convertible debentures 17,06,10,000 CUP 5. Reimbursement of expenses to AEs 7,57,78,034 OM 6. Recovery of expenses from AEs 18,04,039 OM Total 366,63,41,073 4. The assessee company sought to justify the consideration received for the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's set of comparable Companies in the TPSR PLI (OP/TC) 1. Akshay Software Technologies Limited 1.08% 2. Sagar Soft India Limited 1.52% 3. Accel Frontline Ltd. (SS Segmental) 6.03% 4. Sasken Communication Technologies Limited 8.00% 5. Kals Information Systems 8.11% 6. Maveric Systems Limited 9.27% 7. Infomine Technologies Ltd. 10.87% 8. CG-VAK Software & Exports Limited 12.35% 9. Mudunuru Ltd. 13.18% 10. Cigniti Technologies Ltd. 19.82% 11. Kellton Tech Solutions Ltd. 33.32% 12. R Systems International Limited (Segmental) 22.22% 13. SQS India BFSI Limited (formerly Thinksoft Global Services Ltd.)(Consolidated) 23.58% 14. Larsen & Toubro Infotech Limited 24.07% 15. Infobeans Technologies Ltd 29.94% 16. R.S. Software (India) Ltd 21.22% 8. However, the TPO had rejected the TP study report and proceeded to identify different set of comparables by adopting the following filters/criteria: S. No. Criteria (i) Companies with income from services> 75% of the operating revenue or segmental revenue are selected. (ii) Companies with less than 75% earning from export rejected (iii) Companies with related party transactions less than 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Economic Circumstances are rejected (vi) Companies that are functionally different from you were excluded. (vii) Companies having turnover of less than Rs. 5.21 Cr and More than Rs. 521 Cr. have been excluded (viii) Companies having different accounting year are rejected (ix) Companies with employee cost less than 25% of operating cost have been rejected. (x) Companies with gross intangibles greater than 50% of operating revenue are rejected. (xi) Companies with forex spending greater than 75% of operating cost are rejected. (xii) Companies for which data for 2015-16 and 2014-15 is not available are rejected. 11. In respect of the technical support services, applying the above filters, the TPO rejected the comparables selected by the assessee company by accepting the three companies. The TPO vide order passed u/s 92CA(3) of the Act dated 30.10.2019 suggested transfer pricing adjustments of Rs.24,39,53,671/- in respect of software development services. The assessee is not challenging the inclusion of the comparables selected by the assessee company. However, the assessee company is only seeking the exclusion of the following set of comparables chosen by the TPO :- ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices as below: Background: Nihilent technologies Limited ('NTL' or the 'Company' or 'Nihilent' is engaged in rendering software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. The company is considered as comparable and the objection of the assessee is hereby rejected." (C). Even before DRP, the same contentions were reiterated and the DRP held that this company is purely software company, accordingly, upheld the inclusion of this company in the list of the comparables. (D). Before us, it is contended that this company is engaged into IT consultancy, software development and related services. It is further contended that the software development services are different from the provisions of software consultancy services placing reliance on the decision of the Hon'ble Delhi High Court in the case of Avenue Asia Advisors (P.) Ltd. vs. DCIT, 398 ITR 120 (Delhi). (E). On the other hand, ld. CIT-DR contended that the contentions of the assessee company are based on the website information of the company which cannot be relied upon. He further submitted that page 111 of the annual repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xceeding 20% as applied by the TPO. (D). On the other hand, ld. CIT-DR submitted that the revenue derived from operations of the company constitutes revenue from sale of software services for the financial year 2013-14 whereas in the financial years 2014-15 and 2015-16 revenue from software services worked out to 99.42% and 98.35% respectively. Thus, it is submitted that revenue derived from software services constitutes very high. Further, it is submitted that the company had not earned any revenue from project engineering services as claimed by the appellant. It is submitted that the assessee company had not discharged the onus on establishing because of this acquisition there is a positive impact on the financials of the company for the year. Hence, it is submitted that this company cannot rejected only on the ground of acquisition of other companies. (E). We heard the rival submissions and perused the material on record. From the annual report in the notes forming part of the financial statements, it is stated as under :- "The company is a global company specializing in software products, services and technology innovation. The company offers complete product life cycle ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service of onsite and offshore. (C). On the other hand, ld. CIT-DR contended that the annual report does not reveal any income for sale of software products, ITES, in-fact the annual report revealed that the entire revenue operation only from onsite of software services, software development and the information contained in the website cannot be relied upon. As regards to the amalgamation to the company applied Development Software (India) Pvt. Ltd. and Pure Apps Consulting Services Private Limited, it is submitted that the assessee has not demonstrated as to how the amalgamation of this two companies has impacted the profitability of the assessee company and in any event both the companies are engaged in the business of development of software and provisions of software services. (D). We heard the rival submissions and perused the material on record. The company considered its business segment as its primary segment. The company is engaged in the business of providing outsourced technology services. The company focused on helping software companies creates innovating products through its onsite and offshore model. The company activities are not distinguishable on the basis of ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not supported by the information contained in the annual report. (C). Being aggrieved, the appellant is in the present appeal before us reiterating the same submissions as made before the lower authorities. Our attention is drawn to explanatory note given on revenue recognition at page 2144 stated that : "Revenue is primarily derived from software development, implementation services, application management services and other related services and from the sale of license and subscription for software application." It is further submitted that revenue from subscription for software application and sale of license indicates that there is income from development of software products. (D). On the other hand, ld. CIT-DR referring to the annual report of the company i.e. Thirdware Solutions Ltd. submits that 99% of income is derived from the provisions of software services. He further submits that the contention of the appellant that this company is engaged in diversified activities is not supported by the information contained in the annual report of the company and, therefore, the contention of the appellant company cannot be accepted. (E). We heard the rival submissions and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the annual report wherein, it is clearly stated that the entire revenue is derived from the activities of software development services. We find no merit in the submissions of the appellant that a super normal profit-making company cannot be included in the list of the comparables for the reasons that firstly, this contention was not raised before the lower authorities and secondly, a super profit-making company, ipso facto, leads to exclusion from the comparables. Therefore, we do not find any merit in the contention made by the appellant seeking exclusion of this company from the list of comparables. Therefore, we uphold the inclusion of this company in the list of the comparables with that of the appellant company. 17. DUN AND BRADSTREET TECHNOLOGIES & DATA SERVICES PVT. LTD. : The appellant sought the exclusion of this company from the list of comparables selected by the TPO on the ground that (i) Functional dissimilarity, as the company is engaged into diversified activities and no segmental information is available. However, the TPO rejected the contention of the appellant by holding that entire revenue of the company is derived from the activities of the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO/TPO. Hence, we remit this issue of comparability of this company to the TPO/AO. 18. E-INFOCHIP LIMITED : The appellant company is seeking the exclusion of this company from the list of comparables selected by the TPO as confirmed by the DRP. The appellant has objected inclusion of this company in the list of comparables before the TPO on the ground that (i) It is engaged in sale of products, product engineering and semiconductor, service computer programming , consultancy and IT enabled services. The appellant submitted that in the absence of any segmental data, this company cannot be compared with that of the appellant company. (ii) Two subsidiary companies were merged with the appellant company. The impact of merger of these two companies has not been evaluated. (iii) However, the TPO upheld the inclusion by holding that 97% of the revenue is generated from the operations of Software Development activity and the acquisition had insignificant impact on the profitability of this company. (B) The TPO further held that the company cannot be excluded based on the website information. Even the DRP also upheld the inclusion. (C) Being aggrieved, the appellant is before us in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits are not available. Therefore, the impact of profitability from provisions of technical know-how and sale of products on the profitability of software developer segment is not known. Hence, we are of the considered opinion that this company cannot be considered as comparable. Hence, we direct the AO/TPO to exclude this company from the list of comparables. 19. EXILANT TECHNOLOGIES PVT. LTD. : The appellant company objected to the inclusion of this company in the list of comparables before the TPO on the ground that (i) It is engaged in provision of information technology consulting and implementation, provides business process management and product engineering services, develops and owns intangible properties. Segmental information is not available. (B). However, the TPO rejected the above contentions by holding that 98.39% of the total revenue is from the activities of Software Development and therefore, held that the company is comparable with that of the appellant company. (C). Apart from the contention raised before the TPO, it is urged before the DRP that the company is also into Research and Development work and possess intangibles in the form of patents. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced at page 3678 also shows that this company is in possession of intangibles worth Rs.1,67,46,061/-. It is settled position of law that a company which is engaged in the diversified activities such as Development of Software and sale of products cannot be compared with another company which is purely a Software Development company. We have noted in the above discussion that the company is into Software Development and sale of products. Further, there is no segmental data available. In the light of the above factual matrix, this company cannot be compared with that of the appellant company which is purely a Software Company in view of the law laid down by the Hon'ble Delhi High Court in the case of Open Solutions Software Services (P) Ltd. (supra). In the light of these findings given by us, we direct the AO/TPO to exclude this company from the list of comparables. 20. TECHNICAL SUPPORT SERVICE AGREEMENT : In this segment, the appellant company provides technical support which includes resolution of queries from the customers of AEs qua the calls. The appellant company is remunerated on cost plus model in consideration of providing these services. The appellant has selected 12 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 taxmann.com 355 (Delhi) for the proposition that ITeS comprises of a wide range of services and classification between BPO/KPO services must be done to establish comparability. (E). On the other hand, the ld. CIT-DR submitted that 85.27% of the total revenue is derived from the operations of ITeS activity and therefore, the company should be treated accordingly. (F). We heard the rival submissions and perused the material on record. We have gone through the annual report of this company. On perusal of the same, it shows that the company is engaged in diversified activities such as web-development and e-book distribution, digital solutions, graphic solutions and packaging branch management which are value added services and can be classified as KPO activity. Though the breakup of the revenue and segment wise details are available, the details of profit or loss of the two segments are not available. The law laid down in the Rampgreen Solutions (P) Ltd. (supra) fortifies the view that the company providing KPO services cannot be compared with that of another company which is purely engaged in ITeS company. We, therefore, direct the AO/TPO to exclude this company from the list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the paper book also discloses intangible assets at Rs.45,996,313/-. Page 2847 of the paper book states method of revenue recognition which reads as under : "2.3 Revenue recognition : Income from software services and products. Revenue from professional services consist primarily of revenue earned from services performed on a "time and material" basis. The related revenue is recognized as and when the services are performed. The company also performs time bound fixed-price engagements, under which revenue is recognized using the percentage of completion method of accounting. The cumulative impact of any revision in estimates of the percentage of work completed is reflected in the year in which the change becomes known. Provision for estimated losses on such engagements are made during the year in which a loss becomes probable and can be reasonably estimated. Revenue from the sale of user licenses for software applications is recognized on transfer of the title in the user license, except in case of multiple element contracts requiring significant implementation services, where revenue is recognized as per the percentage of completion method." From the above, it is appa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Production, Transformation. The content production and transformation teams across the facilities in India provide end-to-end delivery across all print and digital formats through smart workflows powered by relevant platforms." (F). On perusal of the annual report of the company, it would show that the company is engaged in publishing tools like Digi Edit and Digi Comp, etd., and typesetting of data digitalization services. These services are undoubtedly can be classified as KPO services. There is no segmental data available. Considering the above facts, we direct the AO/TPO to exclude this company from the list of comparables. 24. DOMEX E-DATA PVT. LTD. : The appellant company objected for inclusion of this company before the TPO on the ground that (i) Insufficient information is available but no nature of activities performed and no website information is available. (ii) It was contended by the appellant that this company cannot be comparable as sufficient information is not available in the public domain. (B) However, the TPO rejected the same and held that this company is an ITeS company. The DRP confirmed the inclusion of this company in the list of comparables. (C). Bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate measure of the Risk adjustment required to be made. In the absence of a reliable and accurate measure of the risk difference between the assessee and the comparables, no risk adjustment can be granted." 28. Nothing is demonstrated before us as to how the findings of the DRP are incorrect. Hence, we dismiss this ground of appeal no.7. 29. The additional ground of appeal no.1 challenges seeking deduction of education cess from computation of taxable income. The ld. AR submits that the above ground raised by the assessee is purely legal ground and raised for the first time before this Tribunal. Since, the Education Cess paid by the assessee available with the respondent revenue which does not require any further examination of facts and prayed to allow the additional ground. Further, he submitted that this Tribunal taking support from the decision of Hon'ble High Court of Bombay in the case of Sesa Goa Ltd. reported in 423 ITR 426 directed the AO to allow deduction paid towards Education Cess. 30. After hearing both the parties, we note that the assessee paid Education Cess while computing the taxable income under normal provision of the I.T. Act. The Hon'ble High Court of Bomb ..... 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