Income Tax Appellate Tribunal - Delhi
Aircom International (India) Pvt. ... vs Dcit, New Delhi on 2 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
SMT. BEENA A. PILLAI, JUDICIAL MEMBER
ITA No.6402/Del/2012
Assessment Year : 2008-09
Aircom International (India) Pvt. Ltd., Vs. DCIT,
M-12, Balrama House, Circle-1(1),
Karampura Commercial Complex, New Delhi.
New Delhi.
PAN: AADCA0915A
(Appellant) (Respondent)
Assessee By : Shri Nageshwar Rao, Advocate
Department By : Shri Amrendra Kumar, CIT, DR
Date of Hearing : 31.07.2017
Date of Pronouncement : 02.08.2017
ORDER
PER R.S. SYAL, VP:
This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read ITA No.6402/Del/2012 with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2008-09.
2. The first issue assailed before us is the addition of Rs.37,28,9290/- made by the Assessing Officer in relation to the international transaction of 'Software development services.'
3. Briefly stated, the facts of the case are that the assessee is a 100% subsidiary of Aircom International Ltd., UK., which is engaged in the business of 'Software solutions' and 'Consultancy services' in the area of telecommunication industry. The assessee, an Indian company, reported certain international transactions in Form No.3CEB. For the purposes of transfer pricing analysis, the assessee divided its business into three broader categories, viz., (i) Software Development; (ii) Software Deployment, Training, Consultancy and Equipment Rental; and (iii) Support Services which include licence fee paid and support and maintenance fees paid. In respect of 'Software Development Services', the assessee used Transactional Net Margin Method (TNMM) as the most appropriate method with Profit Level Indicator 2 ITA No.6402/Del/2012 (PLI) of Operating Profit to Total Cost (OP/TC). The assessee computed its own PLI at 9.81% as against that of comparables at 12.06% and claimed that the international transaction of 'Provision of software development services', transacted at Rs.5,45,05,847/-, was at arm's length price (ALP). The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price of the international transactions. The TPO did not dispute the category-wise accounts drawn up by the assessee in the above referred three segments and went on to analyze the same. As regards the international transactions relating to 'Software Development Services', the TPO observed that the assessee developed some software to be used as input for the product 'ENTERPRISE suite' sold/licensed by the Aircom Group worldwide. The assessee was being remunerated on cost plus 10% mark-up. As against the assessee's selection of 25 companies as comparable, the TPO, applying certain filters, restricted the number of comparable companies to 19. Their average OP/TC was computed at 26.21% which, after carrying out working capital adjustment, was revised to 27.98%. By applying this as arm's length margin, the TPO 3 ITA No.6402/Del/2012 worked out the ALP of the `Software development services' rendered by the assessee at Rs.6.00 crore and odd. Since the assessee declared the value of international transaction of 'Provision of software services' at Rs.4.69 crore, the TPO worked out the shortfall, being, the amount of transfer pricing adjustment at Rs.55,25,459/-. The assessee assailed the TPO's determination of the ALP before the Dispute Resolution Panel (DRP). One company was excluded by the DRP. The TPO, in his order giving effect to the direction of the DRP, computed average adjusted OP/TC of the remaining 18 companies at 24.15%. Treating the same as a benchmark, he worked out transfer pricing adjustment amounting to Rs.37,28,929/- in the segment of 'Software development services.' The Assessing Officer, in his final assessment order, made an addition for this sum, against which the assessee has come up in appeal before us.
4. We have heard the rival submissions and perused the relevant material on record. There is no dispute as regards the application of TNMM as the most appropriate method or the PLI for the international transaction of `Provision of Software Development Services'. Similarly, 4 ITA No.6402/Del/2012 there is no dispute about the assessee's calculation of its own margin from the international transaction. The assessee has restricted its challenge before us only to the inclusion and exclusion of some companies from the final tally of comparables.
5. Before proceeding to consider the comparability or otherwise of the companies challenged before us, it is sine qua non to consider the nature of work performed by the assessee under this segment. On a specific query, it was submitted by the ld. AR that no specific agreement was entered into between the assessee and its AE for the provision of software development services. Making a reference to the Transfer pricing study report, the ld. AR brought to our notice that Aircom was established in 1995 in UK by a group of leading cellular communication specialists to satisfy the demands of network operators and infrastructure suppliers for expert mobile network engineering services and software tools. Aircom group provides solutions for three key areas viz., Consulting, Software and Training. Aircom `ENTERPRISE suite' is a PC based solution for all aspects of network engineering. It includes 5 ITA No.6402/Del/2012 tools for radio planning, backhaul/core planning and performance engineering and configuration management. ENTERPRISE suite offers the advantage of seamless working management between disciplines throughout the organization and avoids the data transfer problems. The assessee develops software as per the requirements of Aircom, UK. Software developed by the assessee act as inputs for the ENTERPRISE suite of products which are sold/licensed by the Aircom group world- wide. As per the transfer pricing study report, the functions performed by the assessee include design of the software and its development. With the above general backdrop of the nature of activities carried out by the assessee under the 'Provisions of software development services' segment, let us see the comparability or otherwise of the companies assailed before us.
6. At this juncture, we would like to deal with the preliminary objection taken up by the ld. DR. It was submitted that some of the companies now challenged were in fact chosen by the assessee itself as comparable. Having done so, it was contended that the assessee cannot 6 ITA No.6402/Del/2012 now turn around and seek exclusion of these companies before the tribunal.
7. We are disinclined to sustain the preliminary objection taken by the ld. DR that the assessee should be prohibited from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the TPO. It goes without saying that the object of assessment is to determine the income in respect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is otherwise not chargeable, should be excluded. There can be no estoppel against the provisions of the Act. Extending this proposition further to the context of the transfer pricing, if the assessee fails to report an otherwise comparable case, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP study and then later on claims that it should be 7 ITA No.6402/Del/2012 excluded then, there should be nothing to forbid the assessee from claiming so, provided the company so originally reported as comparable is, in fact, not comparable. Simply because a company was wrongly chosen by the assessee as comparable, cannot tie his hands in contending before the Tribunal that a particular company was wrongly considered as comparable which is, in fact, not. There is no difference in the situation where the assessee claims that a wrong company inadvertently included for the purpose of comparison should be excluded and the situation in which the Revenue does not accept a particular company chosen by the assessee as comparable. The underlying object of the entire exercise is to determine the arm's length price of an international transaction. Simply because a company was wrongly considered by the assessee as comparable, cannot, act as a deterrent from challenging the fact that this company is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has held that a case which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was 8 ITA No.6402/Del/2012 wrongly included. Similar view has been upheld by the Hon'ble Delhi High Court in Xchanging Technology Services India Pvt Ltd [TS-446- HC-2016(DEL)-TP]. The Hon'ble Bombay High Court in Tata Power Solar Systems Ltd [TS-1007-HC-2016(BOM)-TP] and the Hon'ble Punjab & Haryana High Court in CIT VS. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P&H) have also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR.
8. At this stage, it is also essential to deal with a submission advanced by the ld. AR, which is common to most of the companies under challenge, to the effect that certain Benches of the Tribunal in other cases have held them to be not comparable. In that view of the matter, it was urged that those companies, being ex facie incomparable, be excluded from the list of comparables drawn by the TPO.
9. We express our reservations in accepting such a broad proposition. It is axiomatic that if company 'A' is functionally different from company 'B', then, such a company cannot be considered as comparable. Two 9 ITA No.6402/Del/2012 companies can be treated as comparable when both are discharging overall similar functions, though there may be some minor differences in such functions, not marring the otherwise comparability. Notwithstanding the functional similarity, many a times a company ceases to be comparable because of other reasons as well. To cite an example, if company 'A', though functionally similar to company 'B', but has related party transactions (RPTs) breaching a particular level, then, such company cannot be considered as comparable to company 'A' in the year in which the RPTs breach such a level. If, however, in the subsequent year, the related party transactions fall below that barrier, then such company would again become comparable. In the like manner, a company might have been treated as non-comparable due to the TPO adopting its entity level results for comparison with the segmental results of the case before him, but in a later case, the TPO may take only the related segment results. In such a later case, the company treated as non-comparable to the first company may become comparable to the second company. To put it simply, if company 'A' has been held to be incomparable vis-a-vis company 'B', then it is not essential that 10 ITA No.6402/Del/2012 company 'A' would be incomparable to company 'C' also. What is relevant to consider is, firstly, the functional profile of company 'A' vis- a-vis company 'C'. If both are functionally similar, then notwithstanding the fact that company 'A' was held to be incomparable to company 'B', it may still be comparable to company 'C'. Despite the fact that company 'A' is functionally similar to company 'B', it still might have been declared as incomparable to company 'B' because of other relevant reasons. If company 'A' passes the same reasons vis-a-vis company 'C', then company 'A' will find its place in the list of comparables of company 'C', notwithstanding the fact that it was held to be incomparable to company 'B'. The crux of the matter is that the mere fact that company 'A' has been held to be not comparable in a judicial order passed in the case of company 'B', does not per se make it incomparable in all the subsequent cases to follow. Not only company 'A' held to be incomparable to company 'B' can be comparable to company 'C', but company 'X' held to be comparable to company 'Y' can also be incomparable to company 'Z', depending upon the functional profile and the applicability or otherwise of the related 11 ITA No.6402/Del/2012 factors. Thus, it is clearly deductible that if a particular company has been held to be not comparable in the case of another company, then such former company may not always be non-comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile and the relevant reasons of the other company. Ergo, this preliminary contention raised on behalf of the assessee is rejected as devoid of merits.
10. We would also deal with another preliminary legal contention raised by the ld. AR. It was submitted that the TPO, during the course of proceedings before him, received information u/s 133(6) of the Act from various companies. Relying on such information, the TPO made certain inclusions/exclusions from the list of comparables which, in the opinion of the ld. AR, was not warranted. He stated that the TPO should not have collected information u/s 133(6) or used the same against the assessee in deciding the comparability or otherwise of the companies before him. This was strongly opposed by the ld. DR.
12 ITA No.6402/Del/2012
11. We are not convinced with the argument of the ld. AR for prohibiting the TPO from collecting any information u/s 133(6) for the purpose of determining the comparability and then using the same. Section 92(1) of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92C empowers the Assessing Officer to determine the arm's length price of the international transactions. Sub-section (3) provides that the AO may proceed to determine the ALP of an international transaction, where he 'on the basis of material or information' or documents in his possession, is of the opinion that the price charged or paid in an international transaction is not at arm's length price etc. Section 92CA provides that the Assessing Officer may refer the determination of ALP in relation to the international transactions to the Transfer Pricing Officer (TPO). Sub-section (3) of section 92CA provides that the TPO shall pass order determining the ALP of the international transaction "... after taking into account all relevant materials which he has gathered." Sub-section (7) of section 92CA explicitly provides that: "the Transfer Pricing Officer may, for the 13 ITA No.6402/Del/2012 purposes of determining the arm's length price under this section, exercise all or any of the powers specified in ........ sub-section (6) of section 133 ........". In view of the clear-cut provision enshrined under sub-section (7) empowering the TPO to collect information, inter alia, u/s 133(6) of the Act read in conjunction with sub-section (3) of section 92CA, there remains no doubt whatsoever that the TPO is fully empowered to seek information u/s 133(6) of the Act for the purpose of determining the arm's length price. There is no embargo on his powers in collecting information from the relevant companies for seeing if they are really comparable/incomparable. In our considered opinion, it is not the prerogative, but, the duty of the TPO to collect vital missing information necessary for determining the comparability of the companies considered or to be considered as comparable with the assessee company. It is possible that sometimes important information concerning the exact functional profile or that of a relevant segment may not be available in the database or may not emanate from the annual report available in the public domain and such missing information is essential. Similarly, there may be a lack of proper disclosure of the 14 ITA No.6402/Del/2012 related party transactions or any other information necessary for determining the comparability. Some otherwise comparable companies may have a different financial year ending and sometimes it becomes essential to obtain the data for the year matching with the assessee. Similarly, there may be several other situations warranting collection of information from the companies u/s 133(6) of the Act. The information so collected can always be lawfully used for or against the assessee provided the assessee is confronted with such information and has been given opportunity of explaining its stand on the same. If the information so collected by the TPO u/s 133(6) of the Act has been confronted and the assessee given an opportunity to explain its position qua such information, there can be no fetter on the powers of the TPO to validly take cognizance of the same. The information for the relevant year, available as such in the public domain or so collected, is always more authentic than the information available on the website of the comparable company, which is normally taken during the course of proceedings before the TPO. Such information on the website is ordinarily germane to the date when it is taken, which is normally after a 15 ITA No.6402/Del/2012 period of few years from the end of the relevant assessment year. In contrast to that, the information collected by the TPO u/s 133(6) of the Act is for the year in question, which is authentic and reliable.
12. Adverting to the facts of the instant case, we find from page 135 of the TPO's order that: "the copies of notice u/s 133(6) issued to the companies as well as the copy of the replies received from the companies were, in fact, given to the tax payer in a soft copy for its comments." Not only that, the decision of the TPO based on the information collected was also communicated to the assessee vide his show cause notice. Under these circumstances, we fail to countenance the contention of the ld. AR for not relying on such information as obtained by the TPO u/s 133(6) of the Act. The contention raised by the ld. AR in this regard is, therefore, jettisoned.
13. Now we espouse the challenged companies in seriatim for consideration as to their comparability or otherwise. For the sake of convenience, the companies have been divided into two parts, viz., first, the companies whose inclusion has been challenged and second, the 16 ITA No.6402/Del/2012 companies whose exclusion has been assailed. Firstly, we are taking up the companies, which in the opinion of the assessee, have been wrongly removed.
(i) Avani Cincom Technologies 14.1. The TPO considered this company as comparable as it was not figuring in the accept/reject matrix of the assessee's transfer pricing study. The TPO noticed that it is a software development and consulting company. Information u/s 133(6) was called for which was confronted to the assessee. The assessee contended, inter alia, that this company is functionally dissimilar. Rejecting the assessee's contention, the TPO included it in the final list of comparables, against which the assessee has come up in appeal before us.
14.2. Having heard both the sides and perused the relevant material on record, it is noticed that this company, in response to notice u/s 133(6), replied to the TPO as under:-
"5. Customization of Software: We are Pure Software Development Service Provider so Point No.6 is Nil or Not Applicable. 17 ITA No.6402/Del/2012 Software Development Process: We are Pure Software Development Service provider and Software Description is attached as per Exhibit
3. Description of Business Activity: Avani Cimcon Technologies is in providing software development and consulting IT services to our international clients. We utilize proven technologies to enable customer's business systems. This technology focus has given us the opportunity to become proficient on a wide variety of industry leading tools as well as gaining experience with most database platforms. We are concentrating on Internet enabled business information systems in a wide range of industries."
14.3. The above extraction has been reproduced from page 83 of the TPO's order. This company clearly described its business activity as:
"providing software development and consulting IT services" to its international clients. It is obvious from the reply tendered by this company that it is engaged in providing software development and also consulting IT services. In opposition, the assessee company is engaged in providing software development services alone and is not rendering consulting IT services. The effect of the revenue from consulting IT services in the overall financials of the company is not available. As this company is also providing consulting IT services, which is an essential ingredient of its revenues from 'Software development services', we cannot treat it as comparable with the assessee company, which is not 18 ITA No.6402/Del/2012 providing any consulting IT services. The same is, therefore, directed to be excluded.
(ii) Bodhtree Consulting Ltd.
15.1. This company was offered as comparable by the assessee itself. As such, there was no occasion for the TPO to controvert its functional similarity. The assessee has challenged for the first time before us that Bodhtree Consulting Ltd. is not comparable and was wrongly included in the list of comparables.
15.2. We find from the Annual report of this company that it: "has only one segment, namely, software development. Being a software solutions company, which is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies." Thus, it can be seen that this company is providing end-to-end solutions and also consultancy which is not the case with the assessee company. Another relevant factor to be noticed is Page 1254 of the paper book, which divulges the significant 19 ITA No.6402/Del/2012 accounting policies of this company. Under the head 'Revenue recognition', it has been mentioned that: "revenue from software development is recognized based on software developed and billed to clients." As against this, the Schedule forming part of the accounts of the assessee company provides for revenue recognition in the terms :
"revenue from software developed is recognized over the contracted period of development on cost plus basis." It can be seen that there is a lot of difference in the revenue and recognition models of the assessee was well as Bodhtree Consulting Ltd. This factor, in addition to the functional dissimilarity as discussed above, makes this company non- comparable with the assessee company. We, therefore, order to exclude it from the list of comparables.
(iii) e-Zest Solutions Ltd.
16.1. This comparable was included by the TPO in his final set of comparables. On the basis of information received in response to notice u/s 133(6), the TPO found that this company to be engaged in software development services and qualifying all the filters applied by him. The 20 ITA No.6402/Del/2012 assessee objected to its inclusion on the basis of functional differences. Not satisfied, the TPO considered it as comparable. Now, the assessee is before us challenging the inclusion of this company. While briefly dealing with the functional profile of the assessee supra, we have noticed that `ENTERPRISE suite' is a PC based solution for all aspects of network engineering including tools for radio planning, backhaul core planning and performance engineering and configuration management. It is not disputed that the ENTEPRISE suite is a very complex software solution. The software developed by the assessee, after designing, acts as an input for the ENTERPRISE suite which is sold/licensed by the Aircom group. Thus, it becomes palpable that the assessee is engaged in providing high end technical services, which are akin to the KPO services. The contention of the ld. AR that the assessee is involved in rendering BPO and not KPO services is clearly unsustainable for the nature of work carried out by it as discussed hereinabove. Coming to the Annual accounts of e-Zest Solutions Ltd., whose copy has been provided by the assessee from pages 1292 onwards of the paper book, it is found to be engaged in providing 'computer software development 21 ITA No.6402/Del/2012 services.' Reliance of the ld. AR on the decision dated 05.03.2015 of NXP Semiconductors India Pvt. Ltd. vs. DCIT [IT (TP) A No.1560/B'lore/2012) is misconceived. It rather supports the case of the Revenue. The Bangalore Tribunal on page 29 of its order has held this company as not comparable vis-à-vis the assessee in that case on the ground that e-Zest Solutions is rendering product development services and high end technical services which come under the category of KPO services. As the assessee in that case was a BPO service provider, the Tribunal held e-Zest Solutions Ltd., to be non-comparable. When we examine the factual matrix obtaining before us, it becomes patent that the assessee is also falling under the category of KPO service providers. Under these circumstances, we approve the inclusion of e-Zest Solutions Ltd. in the list of comparables by the TPO.
(iv) Infosys Technologies Ltd.
17.1. The TPO noticed that this company was finding place in the accept/reject matrix but was rejected in the TP documentation by claiming that it failed functional area comparability. The TPO found 22 ITA No.6402/Del/2012 this company to be into software development services qualifying all the filters applied by him. The assessee raised certain objections against the inclusion of this company, but without any success. The TPO computed operating profit margin of this company at 40.41% and included it in the final list of comparables. The assessee is aggrieved against such inclusion.
17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee's contentions. The assessee is providing and assigning software services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., 23 ITA No.6402/Del/2012 being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon'ble Delhi High Court held Infosys Ltd. to be non-comparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are similar to the extent that the extant assessee is also not owning any branded products and having no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt that Infosys Technologies Ltd. is not comparable with the assessee company. Respectfully following the judgment of the Hon'ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables.
(v) Kals Information Systems Ltd. (Seg.) 18.1. This company was offered by the assessee. However, during the course of the proceedings before the TPO, the assessee objected to its 24 ITA No.6402/Del/2012 inclusion. The assessee submitted that it is primarily a software product company. For this proposition, the assessee relied on the website of the company. The TPO called for information u/s 133(6) of the Act from this company, which was replied as under:-
"Para 3 of your letter:
The core of our business may be classified as that of Pure Software Development service Provider. In essence we get project (software development) orders from our clients drawn from various verticals such as Insurance, Telecom, Manufacturing, etc. We execute the project through the entire SDLC (Software Development Life Cycle) in most cases - i.e., starting from design to delivery, testing and training. In some instances especially in the insurance vertical - we use ready made object libraries (code that is already written) and build customized portions on the top of that. The use of ready made object libraries is only to the tune of about (3.4 to 6.96)% in the year2007-08 to 2008-09.
These apart we have a small amount of revenue from domestic language activities contributing between 4.24% to 7.01% in the year 2007-08 to 2008-09."
18.2. On the basis of the above, the TPO came to hold that the software products and training constitute only 4.24% of its revenues. Thus the revenues from software development services constitute more than 75% of the total operating revenue and hence it qualifies to be included in the list of comparables. 25 ITA No.6402/Del/2012 18.3. After considering the rival submissions and perusing the relevant material on record, we find that the entire premise of the TPO's inclusion of this company in the list of comparables is that the software products and training constitute only 4.24% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: "the use of readymade object laboratories is only to the tune of about (3.4 to 6.96) % in the year 2007-08 to 2008-09 ". We fail to comprehend as to how the above line conveys that the software products' revenue stands at 4.24%. What has been written is that the company's use of the readymade object laboratories is only to the tune of maximum 4.24%. By no imagination this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software products revenue limited to 4.24%. On the contrary, it has been mentioned in the Notes to the financial statement that: "the company is engaged in development of software and software products since its inception." The company consisting of STPI unit is engaged in software products and development of software and is 26 ITA No.6402/Del/2012 also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. It is clear that the assessee is not providing any training under this segment, which has been rather included by the assessee in the second category of the assessee's business, namely, 'Software Deployment, Training, Consultancy and Equipment Rental.' Since the assessee's activity under this segment does not include any revenue from training, but the revenue of Kals Information Systems Ltd., for the purpose of comparison includes income from training, this company ceases to be comparable with the assessee's segment of `Software development services'. Similar view has been taken by the Tribunal in the assessee's own case for the immediately preceding assessment years 2006-07 and 2007-08. Respectfully following the precedents, we hold that Kals Information Systems Ltd. (Seg.) should be expunged from the set of comparables. 27 ITA No.6402/Del/2012
(vi) Persistent Systems Ltd.
19.1. The TPO observed this company to be engaged in software development services with predominant revenues from software development services. He called for some information u/s 133(6) of the Act from this company regarding break up of software products and software development services. On consideration of such information, he observed that 95.1% of the total revenue of this company was from software development services and the remaining amount from software products. After considering the assessee's objections, the TPO included it in the list of comparables. The assessee is aggrieved against the consideration of this company as comparable.
19.2. We have heard the rival submissions and perused the relevant material on record. It can be seen from the information supplied by this company u/s 133(6) of the Act, a part of which has been reproduced in the TPO's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at Rs.288.93 million as against the revenue from 28 ITA No.6402/Del/2012 software development services at Rs.4829.57 millions. Though this company is more engaged in software development services, but, at the same time is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total revenue of the company on entity level also, inter alia, includes revenue from product licences. There is no information available from the Annual report of this company or the data collected by the TPO u/s 133(6) of the Act to divulge the amount of revenue from software development services alone to the exclusion of revenue from product licences. In such circumstances, it is not possible to ascertain the impact of such revenue on the total revenue of this company. As the assessee is not engaged in the sale of any software products, this company on entity level, cannot be considered as comparable. The Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. Vs. ACIT (ITA No.5645/Del/2011, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India 29 ITA No.6402/Del/2012 Pvt. Ltd. Vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Respectfully following the precedents, we order for the exclusion of this company from the list of comparables.
(vii) Quintegra Solutions Ltd.
20.1. The assessee initially treated this company as comparable in its TP documentation. The TPO obtained information from this company which transpired that it was into software development services. The assessee objected to the same by contending that it had certain peculiar economic circumstances. Not convinced with the assessee's submissions and considering the information obtained from this company u/s 133(6) of the Act, the TPO treated it as comparable. The assessee is aggrieved. 20.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it has 'Copyrights' included in its Schedule of fixed assets with the 30 ITA No.6402/Del/2012 closing written down value at Rs.2.71 crore. This company has its own Software with the closing balance of Rs.2.70 crore. Such software are also appearing in the Schedule of fixed assets of this company on standalone basis. This shows that this company is utilizing its software for rendering software development services. In contrast, the assessee in question is not having any software to be used in rendering software development services. It is, therefore, held that this company cannot be considered as comparable not only because of using its own software, but also having copyrights worth Rs.2.71 crore to be used in its business. These crucial factors are absent in the assessee's case. We, therefore, order for the exclusion of this company.
(viii) Softsol India Ltd.
21.1 This company was finding place in the assessee's accept/reject matrix, but, was rejected in the TP documentation by mentioning that it was functionally different. Notice u/s 133(6) was issued. In response to that the company stated that it was into only one segment of software development services. Apart from challenging the functional profile of 31 ITA No.6402/Del/2012 this company, the assessee also contended that the calculation done by the TPO was erroneous. The TPO rejected such submissions and treated this company as comparable.
21.2. Having heard both the sides and perused the relevant material on record, it is noticed that this company has specifically stated before the TPO that it was in to only one segment, i.e., 'Software development services.' From the financials of this company available in the paper book, it can be seen that there is no other income except from software development. Note No.15 to its annual accounts clearly states that:
'there are no separate reportable segments as per the Accounting Standard-17.' In view of the fact that this company is engaged in pure software development services, it has to be considered as comparable. The TPO's action in treating this company as comparable is, therefore, upheld. However, we send the matter back to the TPO for examining the assessee's contention about the erroneous calculation of margins. 32 ITA No.6402/Del/2012
(ix) Tata Elxsi (Seg.)
22.1. This company was rejected by the assessee in its TP documents by claiming it to be `functionally different'. The TPO observed from the Annual report of this company that it has two segments, namely, 'Software development and services segment' and 'Systems integration and support segment.' Noticing the segmental details, the TPO considered `Software development and service segment' as comparable. The assessee's objections against the incomparability were set aside. The assessee remained unsuccessful before the DRP as well. 22.2. After considering the rival submissions and perusing the relevant material on record, we find that the TPO has adopted 'Software development and services' segment which, in turn, consists of three sub-segments, namely, Product design services (design and development of hardware and software), Innovation design and engineering (mechanical design with a focus on industrial design) and Visual Computing Labs (Animation and Visual Effects). Since this company offers integrated hardware and packaged software solutions, the same 33 ITA No.6402/Del/2012 cannot be considered as comparable with the assessee company, which is simply providing software related services. The Tribunal in Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions India Pvt. Ltd. (supra), both of which were rendering software development services, has treated this company as functionally not comparable. We, therefore, order for the exclusion of this company from the list of comparables.
(x) Thirdware Solutions Ltd.
23.1. The TPO treated this company as comparable. The DRP refused to accept the assessee's contention for the removal of this company from the list of comparables.
23.2. We have perused the Annual report of this company which is available in the paper book. The Profit & Loss Account of this company shows `Sales & Other income'. Bifurcation of 'Sales ' is available as per Schedule 12, which comprises of `Sale of licence' amounting to Rs.39.16 lac, `Software services' amounting to Rs.7.67 crore, `Export 34 ITA No.6402/Del/2012 from SEZ unit' amounting to Rs.26.39 crore, `Export from STPI unit' amounting to Rs.16.88 crore and `Revenue from subscription' amounting to Rs.92.93 lac. These figures indicate that apart from the revenue from `Software services' which is only to the tune of Rs.7.67 crore, this company earned total gross revenue from `Sales' to the tune of Rs.52.27 crore including from export from SEZ/STPI units. When we consider the figures of this company on an entity level as have been adopted by the TPO for comparison, it becomes vivid that it ceases to be comparable with the assessee's `Software development services' segment. The reason hardly needs any highlighting, being the income of this company also largely including revenues from exports from SEZ/STPI units apart from sale of licence. These distinguishing features make this company as non-comparable. We, therefore, order for the removal of this company from the list of comparables.
(xi) Wipro Ltd. (Seg.) 24.1. The assessee rejected this company in its TP document by treating it as functionally different. The TPO observed that the IT 35 ITA No.6402/Del/2012 services segment of this company on standalone basis was comparable with the assessee company. He sought some information from this company u/s 133(6) of the Act and, thereafter, came to the conclusion that its IT services segment was comparable with the assessee. In doing so, he rejected the assessee's contention about functional dissimilarity, brand value and size etc. The DRP upheld the finding of the AO/TPO in treating it as a correct comparable. The assessee is aggrieved. 24.2. We have heard the rival submissions the perused the relevant material on record. It can be observed from the TPO's order itself that the facts and circumstances of Wipro Ltd., are somewhat similar to Infosys Technologies Ltd., inasmuch as he has proceeded to reject the assessee's objections by relying on the reasoning given by him for the inclusion of Infosys Ltd., which we have held to be incomparable in an earlier para. It is further observed that Wipro Limited (Seg.) was considered as comparable by the TPO in the case of Toluna India (supra) and Lear Automotive (supra). The Tribunal, in both the cases, has held Wipro Ltd. (Seg.) as not comparable. This company is 36 ITA No.6402/Del/2012 operating as a full-fledged risk taking entity; engaged in providing technology infrastructure services, testing services, package implementation having more than 82,000 employees. It has its own R&D centre. It incurred around 11% of net sales as expenditure on research and development. None of the above factors match with the assessee company. Respectfully following the above precedents, we hold that this company is not comparable.
24.3. There is another reason for holding this company as incomparable. It can be seen that there was a merger of Wipro Infrastructure Engineering Ltd., Wipro Healthcare IT Ltd., Quantech Global Services Ltd., with this company during the year in question. This merger was approved by the Hon'ble Karnataka High Court and the Hon'ble AP High Court during the financial year 2007-08. The Mumbai Bench of the Tribunal in Petro Arandite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176 has held that a company cannot be considered as comparable because of financial results distorted due to mergers and demergers, etc. Similar view has been taken by the Delhi Bench of the 37 ITA No.6402/Del/2012 Tribunal in the case of Toluna India Pvt. Ltd. (supra). As there were amalgamations in Wipro Ltd. during the financial year in question, this fact also makes it incomparable with the assessee company. In view of the foregoing reasons, we direct to exclude Wipro Limited (Seg.) from the list of comparables.
25. Now, we take up for consideration some of the companies, which the assessee claims as comparable, but such companies came to be excluded by the TPO.
(i) Arman Software Pvt. Ltd.
26.1. The TPO did not consider this company as comparable by observing that the RPT information was not available. The assessee is aggrieved against the exclusion of this company from the list of comparables.
26.2. We have heard the rival submissions and perused the relevant material on record. In our considered opinion, the reasoning adduced by the TPO is not correct. He has rejected this company by noticing that there were no export sales in this year. He, therefore, inferred that the 38 ITA No.6402/Del/2012 revenue pertained to the earlier years. This contention is unfounded when we examine the financial statements of this company for the year under consideration. Page 2281 of the paper book is the Profit & Loss Account of this company. There are both revenue and expenses from software development. On the one hand, the company has shown income from operations at Rs.1.55 crore and, on the other hand, there are software development cost amounting to Rs.1.18 crore. This shows that the company is having sale proceeds relating to the year in question. As the TPO has not controverted the functional similarity, we direct this company to be treated as comparable.
(ii) Akshay Software Technologies Ltd.
27.1. The TPO excluded this company from the list of comparables on the premise that RPT information was not available. He further rejected the assessee's contention that the financial data of this company was not available at the time of preparation of documentations. The assessee is aggrieved by this exclusion.
39 ITA No.6402/Del/2012 27.2. Having heard both the sides and perused the relevant material on record, we find from the Annual accounts of this company, whose copy has been placed on record, that it is into sale of products. This fact is borne out from the total of sales which include 'Sale of products.' In view of the reasons given above while allowing the exclusion on the ground of functional dissimilarity because of such companies also engaged in software products, we hold that the TPO was right in not treating this company as comparable.
(iii) Nihar Info Global Ltd.
28.1. The TPO excluded this company on the ground that it was also a product company.
28.2. We have gone through the Annual report of this company for the year under consideration. Page 2351 of the paper book clearly records under Schedule-M[3(i)] that: 'income from software products is recognized on the basis of the sale to the clients.' Since this company is also engaged in the sale of products, we hold that this company was 40 ITA No.6402/Del/2012 rightly not included in the list of comparables. The assessee fails on this count.
(iv) VMF Softtech Ltd.
29.1. The TPO did not consider this company as comparable because of its outsourcing the work to be rendered to its clients. This is evident from the Annual accounts of this company. The ld. AR was fair enough to concede this company as not comparable, which is also subcontracting the work. We, therefore, approve the view taken by the TPO in this regard.
30. The next issue raised in this appeal is against the transfer pricing adjustment in relation to intra-group services. The assessee paid a sum of Rs.126.63 lac and odd as Management fees, which was claimed as payment to AEs on cost to cost basis. On being called upon to furnish the details of such expenses, the assessee submitted that this include IT charges; General management, Finance, Legal & Consulting Support; and Sales and Marketing & Training Support. The TPO examined the above categories of services claimed to have been availed by the 41 ITA No.6402/Del/2012 assessee and observed that the services were either not received or were duplicate in nature. That is how, he determined Nil ALP of the international transaction of payment to AEs amounting to Rs.1,26,63,787/- The assessee is aggrieved against the addition thus made by the Assessing Officer in his final order on this score.
31. We have considered the rival submissions and perused the relevant material on record. It is found that similar issue was raised in the assessee's appeal for the immediately preceding assessment year. Vide order dated 27.07.2017 passed in ITA No.5743/Del/2011, we have restored such issue to the file of the Assessing Officer/TPO for a fresh decision. Following the view taken for the immediately preceding assessment year, we direct the Assessing Officer/TPO to decide this issue afresh in consonance with the view to be taken pursuant to the order of the Tribunal for the assessment year 2007-08.
32. To sum up, we set aside the impugned order on the issue of two additions towards transfer pricing adjustments and remit the matter to the file of AO/TPO for fresh determination of the ALP of these 42 ITA No.6402/Del/2012 international transactions in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
33. The last issue raised in this appeal is against the addition of Rs.1,12,50,337/- made by the Assessing Officer towards Licence expenses. The factual matrix of this issue is that the assessee debited a sum of Rs.172.51 lac in its Profit & Loss Account as licence expenses. On being required to furnish the details of such expenses, the assessee submitted that as per the agreement with its AE, the ITP charges were to be paid by the subsidiary to the parent company @ 45% of the total sale value of software and support and maintenance charges. Treating this amount paid by the assessee to its AE as an intangible asset, the Assessing Officer allowed depreciation @ 25% and made addition for the remaining sum of Rs.112.50 lac, against which the assessee has come up in appeal before us.
34. After considering the rival submissions and perusing the relevant material on record, it is noticed that Aircom, UK, offers solution for 43 ITA No.6402/Del/2012 network engineering requirements with its software, namely, `ENTERPRISE suite', which is a solution for all aspects of network engineering. Apart from directly licensing ENTERPRISE suite by Aircom, UK, the assessee also sells the software in the domestic market Since the intellectual property rights relating to ENTERPRISE suite vest in Aircom, UK, the assessee entered into contract with Aircom, UK to sell this Product directly in the domestic market. As a quid pro quo, the assessee agreed to share a percentage of sale price to Aircom, UK. Clause (1) of the Agreement provides that: "ITP charges to be paid by the subsidiary to the parent company @ 45% of the total sale value of software and support and maintenance charge." Pursuant to this Agreement, the assessee raised invoices on certain customers in India. The invoice value was shown as its income and the amount paid to its AE was shown as Licence fee expenditure in its Annual accounts. We are at loss to appreciate as to how the assessee can be said to have created an `Intangible asset' by paying the Licence fee to its AE in respect of sales made. Such payment @ 45% of the invoice value was the obligation of the assessee ab initio without which it could not have 44 ITA No.6402/Del/2012 procured the licnence of ENTERPRISE suite for sale in India. This amount can be loosely characterized as cost of goods transferred to the customers in India, which has necessarily to be allowed as a revenue expenditure. Similar view has been taken by the tribunal in its order for the immediately preceding year. We, therefore, overturn the impugned order on this score and direct the deletion of addition of Rs.112.50 lac and odd made by the Assessing Officer.
35. In the result, the appeal is partly allowed.
The order pronounced in the open court on 02.08.2017.
Sd/- Sd/-
[BEENA A. PILLAI] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 02nd August, 2017.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT AR, ITAT, NEW DELHI.
45