IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K., JM
ITA No.5645/Del/2011
2007-08
Assessment Year : 2007-
Toluna India Pvt. Ltd. Vs. ACIT,
(formerly known as Greenfield Circle 12(1),
Online Pvt. Ltd.), New Delhi.
1st Floor, Unitech Trade Centre,
Sushant Lok Phase-I,
Gurgaon
PAN : AACCG0003G
(Appellant) (Respondent)
Assessee By : Shri Ashwani Taneja C.A. & Shri
Rohit Tiwari, CA
Department By : Shri Yogesh K. Verma, CIT, DR
ORDER
PER R. S. SYAL, AM:
This appeal by the assessee is directed against the order
passed by the Assessing Officer on 24.10.2011 u/s 143(3) read
with section 144C of the Income-tax Act, 1961 (hereinafter also
called `the Act') in relation to the assessment year 2007-08.
ITA No.5645/Del/2011
2. The assessee is aggrieved only against the inclusion of
certain companies in the list of comparables, which, in his
opinion, are functionally incomparable and also because of
differences in the assets employed and risks assumed.
3. Briefly stated, the facts of the case are that the assessee
was incorporated in India in the year 2003 as a wholly owned
subsidiary of Greenfield Online Inc., USA (Greenfield US), the
ultimate parent entity of the Greenfield Group. The assessee is in
the business of software development and providing related
services to the Greenfield Group. Certain international
transactions were reported in the requisite Form. The assessee is
compensated on a time cost or fixed price basis for the projects
assigned. Greenfield US is providing end to end information
technology services which include the provision of consulting and
systems integration services to managing IT and business
functions on behalf of its customers. The dispute raised in the
present appeal is in relation to the international transactions of
receipt of revenue amounting to ` 17,81,69,412/- from Greenfield
US, stated to be towards the provision of contract IT services.
The assessee benchmarked its international transactions by using
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Transactional Net Margin Method (TNMM) with the profit level
indicator (PLI) of Operating profit/Operating cost. The assessee
was compensated by its AE at a mark-up of 15% on costs incurred
by it. The assessee claimed that it did not own any intangibles,
conducted no research and development activities and, hence,
did not carry out any risk related activities. Certain comparables
were chosen by the assessee with their financial results for the
period ending between 1.4.2004 to 15.02.2007. On the basis of
certain filters adopted by the assessee, it was claimed that its
international transactions were at arm's length price (ALP). The
Transfer Pricing Officer (TPO) considered each and every
comparable adopted by the assessee and finally came to the
conclusion that out of 13 comparables chosen by the assessee,
only two viz., SIP Technologies and Exports Ltd. and Bodh Tree
Consulting Ltd., were of suitable comparison. The TPO also
rejected the assessee's adoption of multiple year data. He opined
that only the data for the relevant financial year, being 1.4.2006
to 31.3.2007, was required to be considered. A fresh search was
undertaken by the TPO. After due notice to the assessee on all
such chosen comparable companies and seeking comments of
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the assessee on their inclusion, the TPO shortlisted the following
26 companies as comparable:-
1. Accel Transmatic Limited (Software services segment)
2. Avani Cimcon Technologies Limited
3. Celestial Labs Limited
4. Datamatics Limited
5. E-Zest Solutions Limited
6. Flextronics Software Systems Limited (Products and Services
segment)
7. Geometric Limited (Segmental)
8. Helios & Matheson Information Technology Limited
9. IGate Global Solutions Limited
10. Infosys Technologies Limited
11. Ishir Infotech Limited
12. KALS Information Systems Limited (Segmental)
13. LGS Global Limited (Lanco Global Solutions Limited)
14. Lucid Software Limited
15. Mediasoft Solutions Limited
16. Megasoft Limited (Consulting/Blue Alley Division)
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17. Mindtree Limited
18. Persistent Systems Limited
19. Quintegra Solutions Limited
20. R S Software (India) Limited
21. R Systems International Ltd. (Segmental)
22. Sasken Communication Technologies Limited (Segmental)
23. SIP Technologies & Exports Limited
24. Tata Elxsi Ltd. (Software development and services segment)
25. Thirdware Solutions Limited (Segmental)
26. Wipro Limited (IT Services segment).
4. Arithmetic mean of OP/OC of such comparable companies
was computed at 25%. A negative working capital adjustment at
(-) 0.13% was worked out to compute adjusted arithmetical mean
of comparables at 25.13%. This led to the transfer pricing
adjustment of ` 1,55,78,623/-. The assessee objected to the draft
order passed by the AO proposing addition on account of such
transfer pricing adjustment before the Dispute Resolution Panel
(DRP), but without success. The Assessing Officer made the
addition on account of transfer pricing adjustment to the tune of
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ITA No.5645/Del/2011
Rs.1.55 crore vide the impugned order, against which the
assessee has come up in appeal before us.
5. We have heard the rival submissions and perused the
relevant material on record. As the assessee has objected to the
inclusion of companies chosen by the TPO as comparable largely
on functional analysis, it becomes sine qua non first to analyze
the functional profile of the assessee with a view to determine the
functionality of the assessee so as to decide whether the
companies chosen by the TPO are comparable or not.
6. It can be seen from page 2 of the TPO's order, wherein the
business profile of the assessee has been discussed, that the
assessee rendered software development and related services to
Greenfield Group. For the sake of completeness and to precisely
ascertain the assessee's correct functional profile, we refer to the
copy of the assessee's Transfer pricing study report which has
been placed at pages 1-48 of the paper book. Greenfield Group is
a leading provider of internet service solutions. Para 1.2.4 of the
TP study report presents that Greenfield US owns virtually all the
valuable intellectual property rights and other commercial or
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ITA No.5645/Del/2011
marketing intangibles and is involved in complex web based
operations. Greenfield US bears all significant business and
entrepreneurial risks of the product acceptability and
performance in the market and Greenfield India does not own any
interest in any of these intangibles. Para 4.2.1 of the TP study
report states that Greenfield US is a leading online market
research service company. It provides consumers an opportunity
to participate in surveys and give their opinion about various
products and services offered by companies. It serves the data
collection and infrastructure needs of market research and
advertisement companies. It offers service solutions exclusively
using internet based methods which are customized to its clients'
needs. Summary of functions performed by the Greenfield US is
given in para 4.2.6 of the TP study report, which is as under:-
"- Marketing and sales to build the Greenfield brand and
reach the top end market Research companies;
- Maintaining a large, varied panel group that is a true
representative sample of the society;
- Continuous expansion of the panel group through panel
recruitment;
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ITA No.5645/Del/2011
- Maintaining a network of affiliates to enable effective
panel recruitment;
- Maintaining a strong set up of servers to host the
surveys."
7. The assessee serves Greenfield US through its following
functional divisions, the details of which are available in paras
4.2.8 to 4.2.16 of the TP study report. Relevant parts of such
paras are as under :-
"(a) SURVEY PROGRAMMING Survey Programming is
the first step in delivery process. All the Questionnaires
provided by the client in word format are converted into
WEB FORMS in this process. Greenfield India programs
the surveys in Hyper Text Markup Language (HTML). The
questionnaires involve data validation, quota checking,
quote stops, etc. as part of coding. Usually templates
are used to start with. Different templates are for
different types of surveys or for specific clients. Use of
templates eases the process of creating the survey........
(b) SAMPLING Once the survey is programmed and
cleared by the client as good to launch, sampling team
takes over. They launch the survey on the website.
Then identify the right group of panelists based on
criteria given by the client. An e-mail invitation is sent
to the panelists, giving them the unique web link to the
survey. The e-mail invitation also talks of the payout
that will be given for taking part in this survey. Once the
survey is live, the sampling team monitors the progress
of completes received for each survey. They also send
reminders or new invites based on the results being
achieved from the hosting of survey. Once the required
number of completes are received, the survey is closed
and handed over for Data Processing.......
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(c) DATA PROCESSING Data processing is the next
step. In this step, the teams prepare the data for
presentation to the client. The data is cleaned and re-
formatted so that client can analyze it. The output
format depends on the requirements specified by the
client. To verify that the data is accurate, a sanity check
is done by generating various kinds of reports. The
reports are called Marginals and Frequencies........
(d) SOFTWARE DEVELOPMENT This group within
Greenfield India focuses on development/enhancement
of software projects that relate to business automation,
increase in efficiency and making the business easier for
specific functions performed by Greenfield India. They
also contribute to web-site re-design, enhancement,
image-makeovers, etc. The software are web based
developments using Microsoft Technologies.....Since
Greenfield US is an Online Data collection company, all
the data is collected online on MS-SQL server databases.
The DB's (Database Programmer) help in maintaining
the database and running any reporting based on the
data.'
(e) PROJECT MANAGEMENT SUPPORT Currently,
Greenfield India employs 13 project managers which
provide support to a large team of project managers at
Greenfield US in their client servicing functions, including
managing the projects when the main project manager
is away on leave, etc.
(f) HELP DESK - While panelists are taking part in
the survey, they have some questions that need to be
answered. Helpdesk team is dedicated to supporting
panelists and their queries.
(g) QUALITY - Greenfield puts a lot of importance on
Quality of deliverables. We follow Six Sigma
methodology to eliminate all process related
problems....."
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8. An overview of the above functional divisions of the assessee
indicates that the first three and sixth divisions deal with online
services rendered to its AE; the fourth division is for software
development projects contributing towards website redesign
enhancement and image makeovers, etc.; the fifth division is for
providing support to the projects managers and Greenfield US in
their client serving functions including managing the projects; and
the last division is for quality maintenance. Here, it is pertinent to
mention that all the above divisions of the assessee serve only its
AE on the cost plus basis. After analyzing the work done by
various divisions, there remains no doubt about the nature of
work done by the assessee, which is obviously not only of
software service provider but also that of a software developer
(fourth division above), though IP rights in such developed
software do not vest in the assessee but with its AE. The ld. AR
vehemently argued that the assessee is only a software service
provider and not a software developer and this fact has also been
acknowledged by the TPO. He argued that a software product
company cannot be compared with a pure software service
provider. A software product company has to assume all the
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costs/risks from the conceptual stage, passing through
development stage culminating into the successful completion
stage of the software product finally developed. The intellectual
property rights of such ultimate product ordinarily vest in the
software product company. The software service provider simply
plays some role assigned to him in the entire process, who does
not acquire any intellectual property rights of the work done by
him.
9. We do not agree with this view canvassed by the ld. AR in
view of the discussion made above about the functional divisions
of the assessee, which makes it vivid that the assessee is both a
software service provider and also a software developer. The TPO
has nowhere acknowledged in his order, as argued by the ld. AR,
that the assessee is only a software service provider. While
discussing the Business Profile of the company in para 2.2 of his
order, the TPO has mentioned in no uncertain terms that the
assessee : "is in the business of providing software development
and related services to Greenfield Group'. As regards the
submission about difference between a software service provider
and a software product company, we agree, in principle, that a
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software product company cannot be compared with a simple
software service provider. It has been noticed supra that the
assessee is not only a software service provider but also a
software developer. To contend that all the software product
companies are per se incomparable to the assessee, is not fully
correct. Before reaching any decision as to comparability or
otherwise of a software product company with the assessee, it is
paramount to see the nature of software product of that company
and its user. If it is such a software product whose license is
given to outsiders for commercial use and income is earned by
the company from its commercial exploitation, then it would
mean that such a product must have been developed after
intensive research and development and the owner of such a
product will be holding its I.P. rights also. Such a software product
company cannot be compared with the assessee company, which
is also in to software development, but the software products
produced by it are not meant for commercial use to others and
neither the assessee is holding any I.P. rights of such products.
But where a company is engaged into software product
development on contract basis, whether for its AEs or outsiders,
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without having any intellectual property rights in the products,
then such a company cannot be excluded from the list of the
assessee's comparables. At this stage, it is pertinent to mention
that the assessee is doing both - providing software service and
also software development - for its AEs at cost plus 15% markup.
On a specific query, the ld. AR candidly accepted that there is no
bifurcation available of the assessee's revenues from these two
areas. Since income from providing software services and
software development is in a common pool and the PLI of OP/OC
in both of them is 15%, we hold that the companies engaged
either in software development or providing software service or
doing both, are functionally comparable to the assessee. In this
overall segment, only the companies engaged as non-contract
software developers, having intellectual property rights over the
products developed by them, would be functionally different.
10. Having seen the functional profile of the assessee company
and formed the basis for the testing the functional comparability
of the companies chosen by the TPO, we would like to deal with
two contentions raised by the ld. AR, which are germane to all or
most of the companies chosen by the TPO as comparable.
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11. First point argued by the ld. AR was that the TPO in selecting
several companies as comparables, got information directly from
such companies u/s 133(6), which was not made available to the
assessee. On that score, it was contended that such companies
be declared as not comparable. This argument was countered by
the ld. DR by putting forth that each and every document
collected by the TPO from such companies was duly made
available to the assessee.
12. We do not find any merit in this contention raised on behalf
of the assessee. It can be seen from the order of the TPO that
before including any company in the list of comparables, he gave
a show cause notice to the assessee proposing it as comparable
vide his office letters, inter alia, the one dated 26.8.2010 and
also forwarded soft copies of the data so collected. It was then,
that he called upon the assessee to explain its stand. The
assessee made detailed submissions before the TPO against the
comparability of such companies vide its letters dated
3/14.9.2010 running into more than 100 pages, copies of which
are available in the paper book. Through these letters, the
assessee objected to treating such companies as comparable
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giving specific reasons. It is self evident that the assessee could
try to distinguish such companies only on the perusal of the data
of such companies supplied by the TPO. All the objections taken
by the assessee have also been incorporated in the order of the
TPO. We fail to understand as to how the ld. AR can raise such a
plea in the circumstances as are presently obtaining in this case,
that he was not confronted with the material used against him.
When the ld. AR pressed such objection beyond a point, the
Bench directed him to place on record the copies of the
notices/letters written by the TPO and also other material supplied
including soft copies, to demonstrate that which material was not
supplied to it. There was no compliance from the side of the
assessee. In view of the above discussion, it is manifest that such
objection has no substance and the same deserves to be and is
hereby repelled.
13. Second point argued by the ld. AR common to many
companies in the list of comparables was that certain Benches of
the Tribunal have held some of such companies to be not
comparable. In that view of the matter, it was argued that those
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companies be automatically declared as not comparable and,
hence, excluded from the list of comparables drawn by the TPO.
14. We again express our reservations in accepting this too
broad proposition. It is axiomatic that if company `A' is
functionally different from company `B', then, such company
cannot be considered as comparable. Two companies can be
considered as comparable when both are discharging the 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 the failure of
certain filters. To cite an example, if company `A', though
functionally similar to company `B', but has related party
transactions (RPT) breaching a particular level, then, such
company cannot be considered as comparable to company `A' in
the year in which the RPT breach such level. If, however, in the
subsequent year, the related party transactions fall below that
barrier, then such company would again become comparable. To
put it simply, if company `A' has been held to be incomparable
vis-a-vis company `B', then it is not essential that company `A'
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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 would still be comparable to company `C'. Despite
the fact that company `A' is functionally similar to company `B', it
may still have been declared as incomparable to company `B'
because of failing some filter. If company `A' passes the same
filter vis-a-vis company `C', then company `A' will find its place in
the list of comparables of company `C', despite 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', it cannot be said that company `A' would automatically
cease to be comparable to all the 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 filters. There can be no hard and fast rule
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that if a particular company has been held to be not comparable
in the case of another company, then such former company would
also cease to be comparable to the assessee company also. The
comparability of each company needs to be ascertained only after
matching the functional profile and the applicable filters of the
other company. Ergo, this contention raised on behalf of the
assessee cannot be accepted.
15. With the above parameters and the factual matrix, we will
distinctly examine the companies chosen by the TPO to ascertain
if they are really comparable.
Accel Transmatic Limited (Software Services segment):
16.1. The TPO noticed that this company was finding place in the
accept/reject matrix of the tax payer, but was rejected in the TP
documents by stating that it failed the filter of Advertising,
marketing and distribution expenses to sales at less than 3%. As
the data of the Software services segment of this company was
available, the TPO proposed to include it in the list of
comparables. The assessee objected to the inclusion of this
company on two issues, namely, the related party transactions
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were more than 10% and the advertisement expenses were more
than 3% of sales. After rejecting such objections, the TPO included
the software service segment of this company in the list of
comparables. The assessee's objections before the DRP also met
with failure before the DRP.
16.2. After considering the rival submissions and perusing the
relevant material on record, we find that the assessee itself
considered this company as functionally comparable by including
it in the accept/reject matrix, but, rejected it on the ground that
advertisement expenses were more than 3%. It is important to
mention that the TPO has taken the figures of this company's
Software services segment alone, which is admittedly akin to that
of the assessee and that the Advertisement, marketing and
distribution spend in this segment is less than 3%, being the filter
applied by the assessee.
16.3. In so far as the other objection of the percentage of
related party transactions is concerned, the ld. AR relied on two
tribunal orders in which filter of 15% RPT has been accepted. On
the contrary, we find the predominant view of the Tribunal across
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the country in several cases including Actis Advisors Pvt. Ltd. Vs.
DCIT [(2012) 20 ITR (Trib.) 138 (Del)], Stream International Pvt.
Ltd. Vs. ADIT (IT) [(2013) 141 ITD 492 (Mum) [authored by the AM
of this order] and Agilent Technologies International Pvt. Ltd. Vs.
ACIT [(2013) 36 CCH 187 (Del) (Trib.)], is that a company having
more than 25% of related party transactions is considered as
controlled. In other words, if the related party transactions in a
company are less than 25%, then, it cannot be considered as
controlled and hence qualifies to be comparable, if it is otherwise
so.
16.4. Since both the objections taken by the assessee against the
inclusion of this company are not sustainable, we uphold the
inclusion of the Software service segment of Accel Transmatic
Limited in the list of comparables. The assessee fails.
Avani Cimcon Technologies Limited:
17.1. The TPO found this company to be engaged in software
development. Notice u/s 133(6) was issued to the company to
get complete information. According to the TPO, this company
qualified all the filters. The assessee argued before the TPO that
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this company was into software products and the segmental
results were not available. The TPO rejected such contention by
relying on the specific information collected from the company u/s
133(6) which divulged that this company was a purely software
development company engaged in providing software
development and consulting IT services to its clients. This
company was concentrating on internet enabled business
information systems in a wide range of industries. Resultantly,
this company was included in the list of comparables.
17.2. After considering the rival submissions and perusing the
relevant material on record, we find from the description of
business activity of this company as reproduced on internal page
90 of the TPO's order, that it is a pure software development
service provider. In the absence of any other specific objection
against this company, we are of the considered opinion that this
company has been rightly included by the TPO in the list of
comparables. The assessee fails.
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Celestial Labs limited:
18.1. The TPO included this company in the list of comparables
by observing that it was rendering mainly software development
services.
18.2. After considering the rival submissions and perusing the
relevant material on record, we find from the annual accounts of
this company, a copy of which is available on page 41 of the
paper book, that it is engaged mainly in the developing the
software products in the shape of tools etc., which are protected
using the patent. This company developed a tool, "CELSUITE" to
drug discovery in finding the lead molecules for drug discovery.
As this company is engaged in developing software tools after
enough research and development activity and the tools so
produced by it are its intellectual property, it cannot be
considered as comparable to the assessee which is, also albeit in
software development, but is doing it on contract basis without
having any I.P. rights in the software developed by it. It is further
relevant to note that this company has been held to be not
comparable by the Dispute Resolution Panel (DRP) in its
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Directions for a subsequent year, a copy of which is available on
record. Thus this company can't be considered as functionally
similar to that of the assessee. We, therefore, direct to exclude
this company from the list of comparables. The assessee
succeeds.
Datamatics Limited:
19. The assessee has no objection to the inclusion of this
company in the list of comparables.
E-Zest Solutions Limited:
20.1. The annual report of this company was available, but, the
functionality was not clear. Notice u/s 133(6) was issued by the
TPO. On receipt of reply from the company, it was noticed that it
was engaged in software development services and, hence,
qualified all the filters applied by the TPO. After considering the
objections of the assessee, the TPO held it to be includible in the
list of comparables. The DRP upheld the draft order on this count.
20.2. After considering the rival submissions and perusing the
relevant material on record, we find this company to be
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comparable to that of the assessee company, because it is also
engaged in rendering software development services to outsiders.
The ld. AR needlessly tried to distinguish this company by
contending that the services rendered by it were different from
that of the assessee. We do not find any force in this submission.
The comparability of a company is tested on various parameters
and a view is taken as to its comparability or otherwise by
considering the entirety of the facts and circumstances. Simply
because the nature of software development services provided by
a company is different from those provided by the assessee, the
same does not become incomparable. Here is a case in which
this company is also providing software development services as
is done by the assessee on contract basis for others without
having any intellectual property rights in them. A small variation
in the nature of services does not make a company incomparable.
It is not a case that the TPO has considered a company rendering
managerial or engineering services and treated it as comparable
to the assessee rendering software development services. Merely
because the nature of service rendered by this company within
the overall software development services, is not identical, will
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not make it incomparable, when it is otherwise similar to that of
the assessee on all other scores. As such, we hold that this
company was rightly included by the TPO in the list of
comparables. The assessee fails.
Flextronics Software Systems Limited (Products and Services
segment):
21.1. This company was finding place in the accept/reject matrix
of the assessee, but was rejected in the TP study report because
it failed R&D spend filter. The TPO noticed that the "Products
and service segment" of this company was comparable to that of
the assessee. As the product revenue was ` 92.1 crore out of the
total product and service segment revenue of ` 847.2 crore, the
TPO held this company to be comparable. The assessee's
objection that this company had incurred huge R & D expenses
and, hence, should be ignored, did not find favour with the TPO.
The DRP approved the view taken by the authorities below on the
comparability of this case.
21.2. After considering the rival submissions and perusing the
relevant material on record, we find this company to be not
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comparable to that of the assessee. The reason for our this
decision is that the TPO has taken segmental data of `Product and
service segment' of this company which has Product revenue of `
92.1 crore. In contrast to it, the instant assessee is not selling
any software products, but, is doing the job assigned to it on cost
plus basis. The contention of the ld. DR that since the majority of
the revenue from `Product and services segment' was from the
services segment and, hence, this company should be considered
as comparable, is bereft of any force. When figures of Products
and services are combined, it cannot be ascertained as to how
much contribution was made by the product division or the
service division to the overall revenue of the Product and services
segment. As the assessee is admittedly not engaged in selling its
software products, such a company cannot be considered as
comparable. It can be seen from the annual report of this
company, a copy of which is available on page 88 of the paper
book, that it consolidated its existing product portfolio and took
steps to expand into further technologies by increasing the
momentum in key initiatives in WIMAX, IMS, SIP & ISS/ESS
domains. This company has its own products such as ASN,
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WIMAX, Gateway Product with ASN Light. It is further relevant to
note that the year ending of this company is not coinciding with
that of the assessee and it is not known as to how the TPO has
adopted the relevant figures for comparison. In view of the
foregoing discussion, we hold this company to be not comparable
and direct its exclusion from the list of comparables. The
assessee succeeds.
Geometric Limited (Segmental):
22. The assessee has no objection to the inclusion of this
company in the list of comparables.
Helios & Matheson Information Technology Limited:
23.1. The TPO noticed from the annual accounts of this company
that it was engaged in the software development services and
also qualified employee cost filter. The assessee objected to its
inclusion by, inter alia, contending that the PLI of this company
was incorrectly worked out by the TPO. Correcting this mistake in
calculation part, the TPO held this company to be comparable and
determined its revised PLI at 36.63%. The DRP upheld the
inclusion of this company in the list of comparables.
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ITA No.5645/Del/2011
23.2. After considering the rival submissions and perusing the
relevant material on record, we find from the annual accounts of
this company that it is engaged in rendering ITES BPO services,
Application management services, Offshore delivery, Project
management services, Public sector services, Maritime practice
and Executive education information systems, etc. From the
above narration of the nature of services rendered by this
company, it can be seen that the same is not at all comparable to
that of the assessee. It can further be noticed that the TPO has
taken the figures of this company which represent `Income from
software sales and services'. Obviously, the assessee is not
engaged in software sales. In view of our above discussion while
dealing with the comparability of Flextronics Software Systems
Limited, we are satisfied that this company cannot be considered
as comparable and is, hence, directed to be excluded from the list
of comparables. The assessee succeeds.
IGate Global Solutions Limited:
24. The assessee has no objection to the inclusion of this
company in the list of comparables.
28
ITA No.5645/Del/2011
Infosys Technologies Limited:
25. From the nature of services rendered by the assessee to its
AE on a cost plus basis without having any intangible assets or
retaining any intellectual property in the work done by it, we find
that Infosys Technologies Ltd., which is a giant company in terms
of risk profile, scale, nature of services, revenue ownership of
branded/proprietary products, onsite and offshore services, etc.,
cannot be compared with the assessee. Our view is fortified by
the judgment of the Hon'ble jurisdictional High Court in the case
of CIT vs. Agnity India Technologies Pvt. Ltd. [(2013) 219 Taxman
26 (Del)] in which Infosys Ltd. has been held to be not
comparable to a company that was engaged in the business of
development of software for parent company. We, therefore,
direct the exclusion of this case from the list of comparables. The
assessee succeeds.
Ishir Infotech Limited:
26.1. The AO included this company in the list of comparables by
observing that it qualified 25% employee cost filter and all other
filters on the basis of information received u/s 133(6). The
29
ITA No.5645/Del/2011
assessee objected to the inclusion of this company by contending
that its related party transactions were more than 15% and
employees cost was only 4%. The TPO rejected both the
contentions by noticing that the employees cost was, in fact,
more than 25% as was apparent from the information received
u/s 133(6) and, further, the RPTs also did not exceed 25%.
26.2. Having heard both the sides and perused the relevant
material on record, we find this company to be comparable to
that of the assessee. The assessee's objection that employee
cost of this company was 4% only, is not correct because of the
exercise carried out by the TPO indicating that the employees
cost was more than 25%. The ld. DR has taken us through the
Annual accounts of this company which show that some part of
the employees cost was also included in `Administrative
expenses' apart from direct Establishment expenses. It can be
seen that the company has included Professional fees of ` 3.41
crore along with Director's salary, etc., under the head
`Administrative expenses'. When this objection was taken by the
assessee before the TPO that the employee cost was only 4%
viewing only the `Establishment expenses' in isolation without
30
ITA No.5645/Del/2011
considering the employee cost included under the head
`Administrative expenses', the TPO corrected the position by
observing that the employee cost was more than 25% by
impliedly including the personnel cost included under the head
`Administrative expenses'. The assessee did not challenge the
TPO's calculation before the DRP on this issue. As such, it
becomes apparent that there is no merit in this objection again
taken up before us which has already been successfully dealt with
by the TPO. Insofar as the assessee's objection about the related
party transactions is concerned, we have discussed this issue
thoroughly while dealing with the comparable case of Accel
Transmatics Ltd. (supra) in which it has been held that filter of
25% of RPT is good enough to make a controlled transaction and
thus expunging it from the list of comparables, which can only be
uncontrolled transactions. The ld. AR failed to point out any
functional difference of this company vis-a-vis the assessee. As
such, we approve the view taken by the TPO in including this case
in the list of comparables. The assessee fails.
31
ITA No.5645/Del/2011
KALS Information Systems Limited (Segmental):
27.1. The TPO observed that this company was engaged in
Software development and training. As the software products
constituted only 3% of its revenue and training revenue
constituted 8.56%, the TPO held that this segment of KALS
Information Systems Limited was rightly includible.
27.2. After considering the rival submissions and perusing the
relevant material on record, it is an admitted position that the
TPO adopted Software development segment of this company by
noticing that this segment also included revenues from software
products and training. In view of the fact that the assessee is not
engaged in imparting any training on commercial basis or selling
its software products, we hold that the financials of this company
under this segment cannot be compared with the assessee. The
contribution by the sale of software products or training to the
overall revenue of this segment cannot be precisely ascertained
to determine the question of its comparability. As such, this case
is directed to be excluded. The assessee succeeds.
32
ITA No.5645/Del/2011
LGS Global Limited (Lanco Global Solutions Limited):
28. The assessee has no objection to the inclusion of this
company in the list of comparables.
Lucid Software Limited:
29.1. The TPO noticed that this company was a pure software
development services company and did not have any related
party transactions. On being called upon to explain as to why this
company be not treated as comparable, the assessee replied that
Lucid Software Limited has developed `Muulam' software, the
details of which were collected from the website of Lucid Software
itself. In view of such details, it was contended that this company
was a software product company having intellectual property
rights. Rejecting the assessee's objections, the TPO included this
company in the list of comparables.
29.2. After considering the rival submissions and perusing the
relevant material on record, it can be seen that the assessee
categorically objected before the TPO to the effect that this
company was mainly into software product business having
license of such products. The TPO ignored the assessee's
33
ITA No.5645/Del/2011
submissions despite the fact that sufficient material taken from
the website of this company was placed before him in support of
the contention. It can be seen from page 192 of the paper book,
being Notes to the balance sheet of Lucid Software Ltd., that this
company developed software products in-house. The expenditure
so incurred on product development has been duly capitalized by
Lucid Software Ltd. These facts amply bring out that Lucid
Software Ltd. cannot be considered as comparable. We,
therefore, direct the exclusion of this case from the list of
comparables. The assessee succeeds.
Mediasoft Solutions Limited:
30. The assessee has no objection to the inclusion of this
company in the list of comparables.
Megasoft Limited (Consulting/Blue Alley Division):
31.1. The TPO, on perusal of data of this company available in
the Prowess and also on consideration of information received u/s
133(6) observed that this company was engaged in software
development services under its Consulting division. The assessee
objected to its inclusion before the TPO on the ground that there
34
ITA No.5645/Del/2011
was restructuring inasmuch as there was acquisition of some
other companies during the year. Not convinced with the
assessee's objection, the TPO included this company in the list of
comparables.
31.2. Having heard the rival submissions and perused the
relevant material on record, we find from the Director's report of
this company, a copy of which is available on page 193 of the
paper book, that the financial results for the year include the
business performance of Visual Soft Technologies Ltd. w.e.f. 1st
October, 2006 consequent to the amalgamation. The Mumbai
Bench of the Tribunal in Petro Araldite (P) Ltd. vs. DCIT [(2013)
154 TTJ (Mum) 176] has held that a company cannot be
considered as comparable because of exceptional financial results
due to mergers/demergers etc. Since the financial results of
Megasoft Ltd. have the impact of the merger of Visual Software
Technologies Ltd., w.e.f. 1st October, 2006, obviously, this
company cannot be considered as comparable. Accordingly, this
company is directed to be excluded. The assessee succeeds.
35
ITA No.5645/Del/2011
Mindtree Limited:
32. The assessee has no objection to the inclusion of this
company in the list of comparables.
Persistent Systems Limited:
33. After considering the rival submissions and perusing the
relevant material on record, we hold that this company also
cannot be considered as comparable because of merger of
another company into it, which fact is evident from page 196 of
the paper book. It can be seen that a subsidiary company was
merged into this company pursuant to judgment of Hon'ble
Bombay High Court w.e.f. 1.4.06. Because of the merger of
subsidiary into this company, we hold that the financial position of
this company cannot be construed as normal capable of a good
comparison. Following the Mumbai Bench decision in Petro
Araldite (P) Ltd. (supra), we direct the exclusion of this company
from the list of comparables. The assessee succeeds.
36
ITA No.5645/Del/2011
Quintegra Solutions Limiteda:
34. The assessee has no objection to the inclusion of this
company in the list of comparables.
R S Software (India) Limited:
35. The assessee has no objection to the inclusion of this
company in the list of comparables.
R Systems International Ltd. (Segmental):
36.1. The TPO included this company in the list of comparables
and determined its OP/OC at 15.07%. The ld. AR has no objection
to the inclusion of this company in the list of comparables. His
only objection was confined to the calculation of OP/OC at
15.07%. He contended that the TPO erred in excluding the
amount of `Provision for doubtful debts' from Operating costs.
36.2. We are not agreeable with the contention advanced on
behalf of the assessee for the reasons set out by the TPO on this
issue at page 126 of his order. It has been mentioned that the
provision for doubtful debts/advances was excluded because
these were not recurring for the last three years and were also
37
ITA No.5645/Del/2011
not at consistent level. We fail to appreciate as to how a
`Provision for doubtful debts' can be considered as a part of
operating cost unless it is shown that the actual expenditure on
account of bad debts was equal to such amount of provision.
Nothing of this sort has been proved on behalf of the assessee.
As such, we hold that the TPO was justified in excluding the
`Provision for doubtful debts/advances' from total operating cost.
This contention raised on behalf of the assessee is repelled.
Resultantly, this company is held to be rightly included in the list
of comparables with the correct percentage of OP/OC at 15.07%.
The assessee fails.
Sasken Communication Technologies Limited (Segmental):
37. After considering the rival submissions and perusing the
relevant material on record, we find that this company acquired
Botnia Hitec Oyoy, Finland and its two wholly owned subsidiary
companies during the year, which fact is apparent from the
Director's report of this company available at page 202 of the
paper book. Following the Mumbai Bench decision in Petro
38
ITA No.5645/Del/2011
Araldite (P) Ltd.(supra), we order for the exclusion of this
company from the list of comparables. The assessee succeeds.
SIP Technologies & Exports Limited:
38. The assessee has no objection to the inclusion of this
company in the list of comparables.
Tata Elxsi Ltd. (Software development and services segment):
39.1. The TPO included this company in the list of comparables
by noticing that its `Software development and services segment'
matched with the assessee. On being called upon to explain as to
why this company be not included in the list of comparables, the
assessee stated that the nature of activity done by this company
was different inasmuch as it was engaged in R&D activities also
which resulted in creation of intellectual property. Not convinced
with the assessee's submissions, the TPO included this segment
of the company in the list of comparables.
39.2. After considering the rival submissions and perusing the
material on record, we find from page No.206 of the paper book,
which is Annexure to the Director's report of this company, that
39
ITA No.5645/Del/2011
the nature of its activity is quite distinct from that of the
assessee. It can be seen that this company is into development
of hardware and software for embedded products such as multi-
media and some other electronics, etc. Apart from that, this
company is also engaged in making some programmes
developing technology intellectual property. As the nature of
activity carried out by the assessee in question is nowhere close
to that of Tata Elxsi Ltd., we hold that this company cannot be
included in the list of comparables. Accordingly, this company is
directed to be excluded. The assessee succeeds.
Thirdware Solutions Limited (Segmental):
40. The assessee has no objection to the inclusion of this
company in the list of comparables.
Wipro Limited (IT Services segment):
41. After considering the rival submissions and perusing the
relevant material on record, we have absolutely no doubt in our
mind that this company cannot be considered as comparable to
the assessee inasmuch as it is a giant company in terms of
parameters discussed above while dealing with the case of
40
ITA No.5645/Del/2011
Infosys Ltd. The Hon'ble Delhi High Court in the case of Agnity
India Technologies Pvt. Ltd. (supra) has upheld the exclusion of
this company also from the list of comparables on the basis of
certain parameters, which are fully applicable to the instant
assessee as well. It is, therefore, directed to exclude this company
from the list of comparables. The assessee succeeds.
42. In view of the foregoing discussion, we set aside the
impugned order and remit the matter to the file of TPO/AO for a
fresh determination of ALP of the assessee's international
transactions in consonance with the directions given hereinabove
in the matter of inclusion or exclusion of the 26 comparables
companies taken by the TPO as comparables.
43. Apart from assailing the inclusion or otherwise of the above
referred 26 companies, no argument was advanced by the ld. AR
on any other issue raised through some other grounds. These
grounds, therefore, stand dismissed. It implies that the view
taken by the TPO as approved by the DRP on all other issues in
the computation of ALP is final and does not require any
interference.
41
ITA No.5645/Del/2011
44. In the result, the appeal is partly allowed for statistical
purposes.
The order pronounced in the open court on 26.08.2014.
Sd/- Sd/-
[GEORGE GEORGE K.] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 26th August, 2014.
Dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
Date
1. Draft dictated on 21.8.14
2. Draft placed before the author 22.8.14
3. Approved Draft comes to the
Sr.PS/PS
4. File sent to the Bench Clerk
5. Date on which file goes to the
Head Clerk.
6. Date on which file goes to the
AR
7. Date of dispatch of Order.
*
42
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