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Appellant's comparable company rejected by the learned TPO/Hon'ble DRP

8. erred in rejecting Maveric Systems Limited and Thinksoft Global Services Limited as comparable companies grounds that the companies are engaged in software testing services, and undertake research and development activities, disregarding the fact that software testing forms a part of the overall software development life cycle and that no filter with respect to research and development expenses was applied by the learned TPO/the Appellant;

6. By way of Ground of appeal No.15, the plea of the assessee is that M/s. M/s.E-Infochips Limited has been wrongly included in the list of comparables because the said concern is functionally dissimilar. It is ITA No. 696& 1006/Mum/2016 (Assessment Year 2011-12) pointed out that the said concern is engaged in rendering variety of services, i.e. software development services, sale of software products and I.T enabled services; and, further that no segmental data is available in respect of different segments, whereas the assessee is rendering pure software development services to its associated enterprises. On this aspect, Ld. Representative for the assessee referred to para 11.2.2 of the order of DRP and pointed out that the said concern was primarily engaged in providing IT enabled services and products and, therefore, it is wrongly directed by the DRP that the said concern is includible as a comparable. It is also pointed out that the said concern fails the service income filter of 75% adopted by the assessee in its Transfer Pricing Study, and such filter has been otherwise accepted by the Transfer Pricing Officer. In support, reference has been made to para 11.2.2 of the order of the DRP wherein, it is noted that the revenues earned by the said concern from software development services constitute 73.27% of the total revenue, thus, it is canvassed that the said concern is excludible from final set of comparables due to the aforesaid differences.

7. On the other hand, Ld. Departmental Representative pointed out that the Transfer Pricing Officer has noted in para 4.1.6 of his order that the said concern was mainly engaged in software development services and, therefore, it is includible as a good comparable for the purpose of bench marking the international transactions undertaken by the assessee by way of Provision of Software Development Services.

8. We have carefully considered the rival submissions. In the context of the objections raised by the assessee, we have perused the ITA No. 696& 1006/Mum/2016 (Assessment Year 2011-12) Annual Report of the said concern, a copy of which has been placed in the Paper Book at pages 418 to 429. A perusal of the same reveals that apart from providing software development services, the said concern is also engaged in selling software products. The Annual Report also reveals that the said concern is also engaged in manufacturing EVM and VDB Electronic Boards, which is a hardware related activity. Notably, the Annual Report reveals that all the activities have been clubbed and considered as single reportable business segment, and segmental data for software services is not available so as to be used for benchmarking the transactions which are being tested. On the contrary, in so far as the activity of the assessee, which is under benchmarking is concerned, it relates to pure software development services and it does not involve sale or development of software products or hardware. It is also quite evident that M/s.E-Infochips Limited is undertaking I.T enabled services, which also is distinct from the software development activities undertaken by the assessee. In fact, at the time of hearing, Ld. Representative for the assessee had relied upon the decision of the Delhi Bench of the Tribunal in the case of Saxo India Pvt. Ltd. vs. ACIT, identical situation, M/s.E-Infochips Limited has been found to be incomparable to a concern engaged in rendering pure software development services. Notably, the Tribunal has referred to the Annual Report of the said concern and made the following observations:-

"10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025, Schedule of Income indicates its operating revenue from software development, hardware maintenance, ITA No. 696& 1006/Mum/2016 (Assessment Year 2011-12) information technology, consultancy etc. Revenue from hardware maintenance stands at Rs.3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opi8nion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables."