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TMI Blog2017 (3) TMI 1933X X X X Extracts X X X X X X X X Extracts X X X X ..... e social enterprise management sector and is remunerated on a cost plus basis for the services rendered. For this ay , it filed its return declaring a taxable income of Rs.43,210 after claiming a deduction u/s.10A at Rs.3,41,93,046/-. The AO has recomputed the deduction u/s.10A , by reducing Rs.35,32,499/- & Rs.15,57,339/-, incurred towards communication expenses & expenses on travel in foreign currency as attributable to delivery of services outside India, respectively, from the export turnover without simultaneously reducing similar amount from the total turnover and hence reduced the deduction claimed u/s.10A . 03. On its international transactions pertaining to "provision of software development and support services" with its AE, the assessee had undertaken analysis selecting the TNMM as the most appropriate method. For the 21 companies identified as comparables, weighted average of operating profit earned on operating costs were computed .The arithmetic mean of the unadjusted net margins of the comparable companies was at 11.26 % on operating cost. The assessee's net margin of 13.02 % was higher than the mean margin of the comparables and hence it considered that the price ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lines of the grounds of appeal. The AR opposed them with charts , paper books, copies of case laws and other material. The gist of the AR's submissions are extracted as under: 9.1. In support of its contentions, the assessee relied on the following case laws : 1. Curam Software International P. Ltd v. ITO [ITA No.1280/Bang/2012] 2. Agnity India Technologies P. Ltd v. CIT [ITA No.1204/Del/2011] 3. DCIT v. Ikanos Communication India P. Ltd [ITA No.137/Bang/2015] 4. DCIT v. Applied Materials India P. Ltd [IT(TP)A.180/Bang.2015] and 5. DCIT v. Novell Software Development India P. Ltd [IT(TP)A.281/Bang/2015]. Now, let us examine the relevant portion of the order of this Tribunal, in the assessee's own case, supra, in the earlier year as under : "11.0 (3) KALS Information Systems Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on the grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions rendered in the following cases : a) Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) b) Mercedes Benz Research & Development India Pvt. Ltd. (IT(TP)A No.1222/Bang/2011). 11.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details called out from the Annual Report and quoted above (supra). 11.4 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. As discussed earlier in this order, there is merit in the contention of the learned Departmental Representative that the ruling rendered in the case of Triology E-Business India Pvt. Ltd. (supra) was with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs.200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions:- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in software development services. According to him, DRP had simply relied on the annual report of Infosys Ltd, while direction its exclusion without closely verifying the reasons why TPO had rejected the contentions of the assessee. 06. Per contra, Ld. AR supported the order of the DRP. Reliance was also placed on the decision of Hyderabad bench of this Tribunal in the case of Pegasystems Worldwide India P. Ltd v. ACIT [ITA.1758 & 1936/Hyd/2014, dt.16.10.2015. As per the Ld. AR, Pegasystems Worldwide India P. Ltd, was also into software development services and the Tribunal had considered the comparability of Infosys Ltd, in the said case. 07. We have perused the orders and heard the rival contentions. It is not disputed that Infosys brand has a significant intangible value and it had revenue from software product segment also. Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies P. Ltd [93 DTR 375], while affirming a decision of this Tribunal where it was held that Infosys Ltd could not be considered as a comparable, had upheld the view that it was a giant company in the area of development of software, assuming all risks leading to higher profits. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the orders and heard the rival contentions. Notes to accounts of ICRA Techno Analytics Ltd forming a part of its audited financial statement of accounts and annual report for year ended 31.03.2010 mentions as under : In the note detailing of the revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web development and hosting. Thus ICRA Techno Analytics had more than one segment. There is no case for the Revenue that the segmental results were separately available in public domain or was not obtained by the TPO from the said company, invoking the powers vested on him. In such a situation the DRP, in our opinion, was justified in directing exclusion of ICRA Techno Analytics Ltd from the list of comparables. 11. Ld. DR assailing the order of DRP for exclusion of Kals Information Systems Ltd, submitted that Kals Information Systems Ltd was a software development services company not a software product development company. As per the ld. DR though the assessee had stated that Kals Information Systems Ltd was a full-fledged product development company, the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the DRP for exclusion of Persistent Systems and Solutions Ltd, Ld. DR submitted that assessee had not raised any objection on this comparable before the TPO. According to him assessee had for the first time assailed its comparability before the DRP, while accepting it as a good comparable before the TPO. According to him, DRP had accepted the contentions of the assessee without verifying the data furnished by it. 16. Per contra, Ld. AR submitted that Persistent Systems and Solutions Ltd was rendering outsourced product development services and not any software development as such. According to him, its revenue was from sale of product software development services and segmental results were not available. Relying on the annual report of Persistent Systems and Solutions for F. Y. 2009-10, Ld. AR submitted that it was providing end to end product development services. Further as per the Ld. AR web-site of the said company clearly indicated that it was developing products like paxpro, ChemLMS, VieMOR, CLAP, e2GMigrator, TLALOC, eMee. Thus according to him, directions of the DRP were just and proper. 17. We have perused the orders and heard the rival contentions. No doubt as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corresponding grounds of the Revenue are dismissed. Per contra, ground nos.1, 2 & 3 of the CO of the assessee are allowed. 10. The next issue is seeking inclusion of the following two comparables (Ground No.7 of Revenue's appeal and ground no 4 of the assessee's CO). The gist of the AR's submissions are as under : 1. R S Software (India) Ltd : The TPO's/DRP's reason for exclusion is that 82% expenses in the P & L are incurred by foreign branches , hence it is an onsite software development company The assessee's reasons for inclusion are that : * The company is engaged in the provision of software development services. Onsite development should not be a criteria to judge comparability. * Onsite revenue is not one of the filters adopted by the TPO in the order. 2. Persistent Systems & Solutions Ltd : The TPO's/DRP's reason for exclusion is that no segmental information is available with regard to software services and product separately. The assessee's reasons for inclusion are : * As per notes to accounts, the company is predominantly engaged in providing software development services to its global customers. * As per revenue recognition, the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT services comprising if software development system solution, application software system and maintenance of software and no segmental information is provided in this regard. * Engaged in onsite development of software. The assessee's reasons for inclusion are : Extrapolated data can be considered in the light of the High Court ruling in Mckinsey Knowledge Centre India Pvt Ltd * The company is engaged in the provision of software development services. Onsite development should not be a criteria to judge comparability. * Onsite revenue is not one of the filters adopted by the TPO in the order. * As per the Annual Report of the company, there is only one segment i.e., IT Service. The other services provided are a sub-classification of the IT services provided and hence functionally comparable. 5. Caliber Point Business Solution : The DRP's reasons for exclusion are : Revenue from foreign branches are a part of the business turnover, assets and liabilities, other income and interest have not been identified to segments. Hence, the segmental are unreliable. The assessee's reasons for inclusion are : Assets and liabilities have no role to play for determina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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