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"59. Ground No.3.6 & 3.7 primarily assails the inclusion/exclusion of certain companies on the basis of functions performed, assets employed and risks assumed. In this regard, main contention of ld. Counsel for the assessee is that ld. TPO / DRP have not correctly appreciated the difference in functional profile of companies. He submitted that the distinction has to be kept between the software development service provider and software Product Company.
60. Ld. Counsel vehemently submitted that a software product company cannot be compared with a pure software service provider. He explained that a software product company undertakes all the steps involved in creating software from domain analysis to testing. In this case, intellectual property belongs to the company. The products are sold generally on license basis wherein right to use the software is transferred without giving the source code. However, a pure software development service provider imparts a part of the entire software development Assessment Year: 2009-2010 process. It does not generate any intellectual property for its own. The intellectual property generated belongs to the customer and not to the service provider. With reference to this distinction ld. Counsel submitted that in the case of tested party i.e., the assessee, a comparable can be selected which is primarily carrying out the functions of as software service provider. He, therefore, submitted that if a comparable is both software product as well as software development service provider then unless the segmental details are available, the company has to be excluded from the list of comparable.
61. We have considered the submissions of both the parties on this count and find considerable force in the argument of ld. Counsel for the assessee because unless there is functional comparability between tested party and the comparable selected, the same cannot be taken as a comparable for bench marking the arm's length price. The arguments of ld. Counsel for the assessee in regard to software Product Company do not require detailed elaboration. The intellectual property in this case belongs to the company. The company primarily deals in software produces per se. Whenever it sells its product it will only grant license to use the software but will not part with the source code. The payment received by this company are (is) the payments for the use of its copyright and, accordingly, taxed as royalty. However, as far as software development service provider is concerned, in our opinion, it imparts twin services - firstly as software developer and secondly as software service provider. As far as software developer companies are concerned they primarily develop the software depending upon the need of its clients which is primarily a customized service. However, a service provider mainly imparts consultancy regarding software. In common parlance, however, this distinction often gets blurred and both are taken as performing similar functions and, therefore, categorized in one category only. Therefore, at least the segmental details in the case of a company which is both software product as well as software development service provider have to be available in respect of both these segments. While selecting the comparable ld. TPO / Ld. DRP in principle were agreeable that software Product Company cannot be compared with software service provider. This is evident from the fact that TPO while applying the filters had accepted the assessee's filter of rejecting companies undertaking significantly different functions compared to assessee. In para 8(3) o his show-cause notice ld. TPO applied following filter stating as under: