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(ii) ITO vs. Vendio Technolgoies India Pvt. Ltd. in IT(TP)A No.1374/Bang/2011 dated 19/09/2014; (iii) ITO vs. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 dt.11/06/2015; (iv) IVY Comptech Pvt Ltd.

(2014) 43 taxmann.com 183)(Hyd); and (v) M/s.Intoto Software India Pvt. Ltd. TS-141-ITAT-2013(Hyd).

10. We heard rival submissions and perused material on record. It is clear from the Annual Report of the company as extracted above, this company is also engaged in business of BPO as a product development company. Now, the law is quite settled that product development company cannot be compared with that of software development company. Further it is also clear that there is amalgamation of Holool India Ltd., with the assessee-company as a result of which there were abnormal profits. The relevant part of the decision in the case of Intoto Software India Pvt. Ltd., (supra) is extracted below:

"17. Having heard both parties and having considered the material available on record, we find that there is no dispute that the assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of IT(TP)A No.462/B/2013 & CO 149/B/2015 two companies i.e., Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Higher Forums that to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by the assessee are made for the first time before the Tribunal. The Tribunal being the final fact finding authority is bound to take note of the objections of the assessee. As the material relied upon by the learned Counsel for the assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, we deem it fit and proper to remand this issue to the file of the Assessing Officer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz., Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 17. Having heard both parties and having considered the material available on record, we find that there is no dispute that the assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i.e., Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Higher Forums that to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by the assessee are made for the first time before the Tribunal. The Tribunal being the final fact finding authority is bound to take note of the objections of the assessee. As the material relied upon by the learned Counsel for the assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, we deem it fit and IT(TP)A No.462/B/2013 & CO 149/B/2015 proper to remand this issue to the file of the Assessing Officer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz., Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct the Assessing Officer/TPO to exclude this company from the list of comparables."
The assessee has objected to selection of this entity on the basis of following objections:
• The entity has fluctuating margins • The company is more of a product company rather than software service company.
The Panel has considered the objections of the assessee. Insofar as the contention regarding the rejection of this entity on the basis of fluctuating margin is concerned, in order to appreciate the compatibility or otherwise of this entity, it is important to first note that the Indian software industry uses two different models for revenue recognition. The first is the Time and Material (T&M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model (FPP). Under the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below:
3. Revenue Recognition :
Revenue from software development is recognised based on software developed and billed to clients.
From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Project model. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year, for which the revenue may have been recognised in the earlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the profitability margin of such entity. Merely because of such fluctuations, an entity engaged in the development IT(TP)A No.462/B/2013 & CO 149/B/2015 of software, being functionally comparable to the assessee, cannot be rejected only on this ground."