TMI Blog2023 (9) TMI 379X X X X Extracts X X X X X X X X Extracts X X X X ..... business intelligence. For this reason it was found that this company, was found not a suitable comparable - See Symantec Software Services India Pvt. Ltd. [ 2017 (1) TMI 1388 - ITAT CHENNAI ] ICRA Techno Analytics Ltd., is engaged in diversified business activities and therefore functionally not comparable with that of pure software development services. in view of this specific finding we hold that this company is functionally not comparable with that of pure software development services provider like assessee. Igate Global Solutions Ltd. -TPO clearly found that though the terms used are generic in nature giving an impression that the company is engaged in diversified activities, the core activity of the assessee is only SWD services. In the absence of any information to show that such diversified activities constitute a sizeable portion of its business so as to render it not comparable to the assessee, we are not inclined to accept the findings of the learned DRP that in the absence of any segmental information, this company cannot be retained in the list of comparables. Such a logic will not hold good if the other activities constitute a miniscule proportion to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follow the view taken and accordingly, direct the learned TPO to exclude this company. Sasken Communication Technologies Ltd. - As except stating that this company is involved in products also, as in the case of Zylog Ltd., no reference to any closing stock, inventories or work in progress is brought to our notice suggesting that other than software development, this company is involved into some manufacturing products. As held already, software product is also the result of software development only, and merely because the use of generic terms, a software development entity cannot be held as a non-comparable. We, therefore, direct the retention of this entity in the list of comparables. Computing notional interest on the outstanding receivables - Assessee contented that no transfer pricing adjustment need be made in respect of the notional interest on delay in collection of dues from the associated enterprise, because it is not an international transaction and secondly contending that if at all such an adjustment has to be made only such dues which are outstanding for more than 180 days shall be considered and the rate of interest shall be restricted to LIBOR +1.5% - HELD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation and intellectual property provided to assessee for the purpose of development of computer software required by the AE, and all derivatives thereof, shall remain the property of AE. 3. During the year under consideration, as per Form 3CEB, the assessee valued the international transaction of providing software development services at Rs. 46,34,75,390/- and the analysis of the TP study shows that the operating cost of the assessee was Rs. 40,97,63,606/- and operating profit was Rs. 5,37,11,784/- and the margin was 13.11%, whereas the margin of the 12 comparables selected by the assessee was 12.78%. Therefore, according to the assessee, the transaction is at Arm s Length Price (ALP). 4. Out of the 12 comparables selected by the assessee, learned TPO rejected 10 and accepted two only. Later on, learned TPO conducted search and selected 16 more comparables, whose margin was 23.71% (post working capital adjustment) and accordingly, suggested upward adjustment of Rs. 4,77,78.542/-. On account of interest on overdue receivables, according to the assessee, the interest on overdue receivables was Rs. 88,02,460/-. 5. Against the draft assessment order, assessee filed objectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f extraordinary events, effecting the profitability of the company, the same may not be considered. Learned Assessing Officer observed that there was no acquisition during the year, but it was only planned. According to the learned Assessing Officer, under IT segment, Acropetal Technologies Ltd (Seg.) is providing end-to-end services, which are software development services and, therefore, such activities are not different from the activities of the assessee company. Learned DRP, however, observed that the substantial portion of software development of Acropetal Technologies Ltd (Seg.) is outsourced and the information relating to the employee cost or export sales is not available. 11. About E-Zest Solutions Ltd., assessee submitted before the learned TPO that such company is a product engineering and software development company, covering entire product development life cycle such as product design and development, produce feature enhancement, product platform migration, software product testing, product maintenance and support, Saas, etc., and by placing reliance on the decision of Agnity I. Technologies P. Ltd., and 3D PLM Software Solutions Ltd., assessee pleaded that this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t makes it clear that the main business of the company is SWD and IT services and, therefore, it cannot be said that this company is not a good comparable. But, according to the learned DRP, Igate Global Solutions Ltd., is providing IT services as well as IT enabled services, but it financials do not contain the segmental information. On this ground, learned DRP directed to exclude this company from the list of comparables. 14. Coming to Infosys Ltd., the submissions of the assessee before the learned TPO were very long and sum and substance is that this company deals in software products, and owns copyright product. Its comparability was questioned on the basis of its size, diversity of activities, sources of revenue, brand value, intangibles, premium pricing, so on and so forth. Learned TPO rejected all these reasons, and refused to exclude this company stating that when functions are similar, namely, providing SWD services, there is no linkage between turnover and profit or the scale of operations. According to him, brand comes with cost and, therefore, it cannot be a factor impacting the profitability. Since 75% of the revenues of Infosys Ltd., are from SWD services, Infosys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Canada, thereby acquiring new customer database, new geographical area of business, new services and product offerings. Apart from this, it has a huge turnover as compared to the assessee with a specialised R D wing possessing huge intangibles, which are the reasons to exclude this company from the list of comparables. Learned TPO, however, commented that this company is one of the verticals within the SWD services with the main activity of software development services and, therefore, no other parameter like hugeness of turnover, possessing intangibles etc., cannot be grounds to exclude the same. He draw analogy of Infosys Ltd., to retain this comparable. learned DRP, however, recorded that 45.2% revenue of this company is from solutions and products, 5.6% from IT services and 49.2% from consulting; that out of Rs. 899 crores revenue, Rs. 623 crores are coming from on-site activities; and that 50% of the expenses are incurred on-site, and, therefore, Zylog Ltd., being predominantly engaged in rendering services on-site, to be excluded from list of comparables. 18. It is the submission of the learned DR that though the terms describing the functions performed by various entiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reporting, the income from Information Technology Services is Rs. 81.40 crores out of the total income of Rs. 141.65 crores, indicating that the income from software development services is only 57-46% of its total operating revenue. In the case of Symantec Software Services India Pvt. Ltd. vs. DCIT (ITA No. 614/Mds/2016) there is a finding of the Tribunal that this company is into different business model being engaged in onsite development of software and it does not pass the filter applied by TPO of 75% export turnover and that ratio of onsite to total employee related expenses comes to 86.2%. In the case of Zynga Game Network India (P) Ltd. vs. ACIT (ITA No. 360/Bang/2016) there is a finding of the Tribunal that the income of this company from IT services is Rs. 81.40 crores out of total income of Rs. 141.65 crores, thus failing 75% of total revenue filter. In our opinion, these facts render Acropetal Technologies Ltd (Seg.) not a good comparable to the assessee. 22. Turning to E-Zest Solutions Ltd., the information available in the annual report shows that this company is a certified product engineering and software development company, having special expertise in emergin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook, only one segment is mentioned as primary segment and no details of revenue in respect of the other activities is to be found. Further, this company had income from sale of traded goods. It was found in Zynga Game Network India (P) Ltd., (supra), that ICRA Techno Analytics Ltd., is engaged in diversified business activities and therefore functionally not comparable with that of pure software development services. in view of this specific finding of the Co-ordinate Bench of the Tribunal, we hold that this company is functionally not comparable with that of pure software development services provider like assessee. 24. Annual report of Igate Global Solutions Ltd., shows that this company s operations predominantly relate to providing IT services, contact centre services and IT enabled services. The company considers all of these services to be relating to one segment i.e. IT enabled services and operates in this segment with respect to products and services. Except this no segmental information is available for its diversified business operations. Coming to its nature of operations, this company offers services in the fields of IT and IT enabled services, offshore outsourcing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, in assessee's own case for assessment year 2013-14 in ITA No. 2122/Hyd/2017 it was found that on the grounds of huge intangibles and no availability of segmental information between software service and products, L T Infotech Ltd. was found not suitable to be compared with assessee. It is not the case of the revenue that there is any change in the functional profile of assessee or Infosys Ltd. and L T Infotech Ltd. We, therefore, in tune with the findings of the Tribunal for the earlier assessment years, hold that Infosys Ltd. and L T Infotech Ltd., are not good comparables. 26. In case of Sankhya Infotech Ltd., as per the annual report, Sankhya is a leading 'simulation and training solutions company'. It provides end to end simulation solutions which are customized to the end user and the company has developed customizable products for imparting training. Sankhya Infotech Ltd., deals the products like eLearning solution to State Bank of India's 3,00,000 employees and signed MOU with defence public sector company Bharat Electronics Ltd., to collaborate in the field of simulation and virtual training and recorded a successful execution of SILICON suite of prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at other than software development, this company is involved into some manufacturing products. Software product is also the result of software development only. Merely because the use of generic terms, a software development entity cannot be held as a non-comparable. Unless it is established that substantial portion of its work is outsourced, the off-site or in-house development of software will not impact the margins. We, therefore, direct the retention of this entity in the list of comparables. 28. Coming to the Persistent Systems Ltd., and Sasken Communication Technologies Ltd., assessee insists that these two entities shall be excluded from the list of comparable on the ground of functional dissimilarity. Learned Assessing Officer submitted that in assessee s own case for the assessment year 2013-14 in ITA No. 2122/Hyd/2017, Persistent Systems Ltd., was directed to be excluded on the ground of its engagement in both software product, services and technology innovation, but without disclosing the segmental details. Since no change of circumstances is brought to our notice, we deem it necessary to follow the view taken for the assessment year 2013-14 and accordingly, direct th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in respect of the notional interest on delay in collection of dues from the associated enterprise, because it is not an international transaction and secondly contending that if at all such an adjustment has to be made only such dues which are outstanding for more than 180 days shall be considered and the rate of interest shall be restricted to LIBOR +1.5%. 34. Ld. DR is placing reliance on the decisions of the coordinate benches in the cases of McKinsey knowledge Centre India (P) Ltd (2018) 96 Taxmann.com 237 (Delhi), decision of the Hon ble Karnataka High Court in the case of PCITvs. M/s AMD India Pvt. Ltdin ITA No. 274/2018 dated 31/8/2018, view of the coordinate Bench of this Tribunal in the case Zeta Infrastructure in ITA No. 1812 /Hyd/ 2017 dated 7/6/2022, such ventures in ITA No. 362/Hyd/2021 dated 28/6/2022an Apache Footwear India Pvt. Ltd vs. ACIT in ITA-TP No. 568 /Hyd/ 2022 dated 16/1/2023and submitted that this issue is no longer res integra, it has only been examine in the above matters and in all these cases the consistent view is that outstanding receivables is an international transaction requiring separate benchmarking, extra credit in excess of 30 days wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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