2017-VIL-1525-ITAT-DEL

Income Tax Appellate Tribunal DELHI

I.T.A .No. 555/DEL/2017

Date: 15.11.2017

AGILIS INFORMATION TECHNOLOGIES INDIA PVT. LTD. (NOW KNOWN AS INFOGIX INTERNATIONAL PVT. LTD.)

Vs

ACIT CIRLC-12 (1) , NEW DELHI

For The Appellant : Sh. Neeraj Jain, Adv, Ms. Dipika Agarwal, Adv.
For The Respondent : Sh. H. K. Choudhary, CIT DR

BENCH

SHRI R. S. SYAL, VICE PRESIDENT AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER

JUDGMENT

PER SUCHITRA KAMBLE, JM

This appeal has been filed by the assessee against the Assessment Order dated 29.12.2016 passed by ACIT, Circle-12(1), New Delhi u/s 143(3) read with Section 144C of Income Tax Act, 1961 in Assessment Year 2012-13.

2. Agilis Information Technologies International (I) Ltd. is established in India to undertake software development and installation of computerized systems, conduct feasibility studies, systems analysis and design as well as design of special software and system and application of software. It is also engaged in the business of rendering technical services related to tabulation, coding and software development. It is established to undertake and engaged in export of software, computer skilled manpower and other computer related activities to carry out development in the area of information technology, computer systems, software, application software, integrated tolls for computer systems and application development, data communication and network. During the year under consideration, the assessee entered into international transaction of Rs. 20,61,19,812 regarding rendering of services i.e. “Software Development Services”. The assessee used TNMM as the method and OP/TC as the PLI. The assessee arrived at a set of 9 companies with an average margin of 7.64%. The assessee used multiple year data. The assessee’s own margin worked out to be 13.48%. Based on this analysis, the assessee concluded that its international transactions are at arm’s length. A show cause notice dated 07.12.2015 was issued to the assessee. The assessee filed reply dated 28.12.2015 in response to the show cause notice and the personal hearing was conducted on the same day. The TPO rejected the objections raised by the Assessee by rejecting the economic analysis of the assessee. Foreign exchange fluctuation was also treated as non operating income of the taxpayer and also in the case of comparables by the TPO.

3. The TPO applied the following quantitative and qualitative filters for the purpose of benchmarking analysis.

(i) Use of current year data

(ii) Companies having different financial year ending were rejected

(iii) Companies having sales less than 1 crores were rejected

(iv) Companies undertaking significantly different functions compared to applicant

(v) Income from export sales at least 75% of the total sales from Software Development services income

(vi) Companies having service income at-least 75% to total operating income

(vii) Companies having employee cost to operating cost ratio more than 25% were selected

(viii) Companies having RPT more than 25% of total sales were rejected

(ix) Companies incurring persistent losses for the last three years upto and including FY 2011-12 were rejected

(x) Companies that are affected by some peculiar economic circumstances

Accordingly, the TPO arrived at the comparable companies with an average operating profit to operation cost ratio of 21.65%. The comparables are as follows:

S. No.	Name of the Company	OP/OC (%)
1	Acropetal Technologies Ltd. (seg)	65.92
2	Akshay Software Technologies Ltd.	7.77
3	Celstream Technologies Pvt. Ltd.	11.34
4	Cigniti Technologies Ltd.	8.28
5	Infosys Ltd.	42.15
6	Sasken Communication Technologies Ltd.	14.58
7	Lucid Software Ltd.	11.10
8	Larsen & Toubro Infotech Ltd. (Industrial Cluster)	27.16
9	Persistent Systems Ltd.	26.92
10	R S Software (India) Ltd.	15.43
11	Sankhya Infotech Ltd.	5.68
12	Mindtree Ltd. (IT Service Segment)	19.19
13	Spry Resources Pvt. Ltd.	33.59
14	Tata Elxsi Ltd.	14.32
15	Thirdware Solutions Ltd. (Overseas segment)	11.10
16	Zylog Systems	32.01
	Average	21.65

The TPO made an adjustment of Rs. 2,61,31,755/- on account of the difference in the arm’s length price of the international transaction of provision of software development services, as under:-

Operating Cost	19,12,33,941
Arm’s Length Margin(%)	21.65
Arm’s length price (ALP)	23,26.36,089
Price received	20,65,04,334
Proposed Adjustment u/s 92CA	2,61,31,755

A draft order u/s. 143(3) r.w.s. 144C of Income Tax Act, 1961 was passed by the then Assessing Officer on 15.03.2013 while making adjustment of Rs. 2,61,32,755/- on account of TP adjustment. The assessee company filed objection before the Dispute Resolution Panel (DRP) and DRP issued certain directions to the TPO vide order dated 18.11.2016. The TPO followed the DRP directions as follows:

S. No.	Name of the Company	OP/OC (%)	DRP directed to consider forex as operating OP/OC (%)
1	Acropetal Technologies Ltd. (seg)	65.92	65.92
2	Akshay Software Technologies Ltd.	7.77	9.87
3	Celstream Technologies Pvt. Ltd.	11.34	7.13
4	Cigniti Technologies Ltd.	8.28	9.08
5	Infosys Ltd.	42.15	42.15
6	Sasken Communication Technologies Ltd.	14.58	14.58
7	Lucid Software Ltd.	11.10	11.64
8	Larsen & Toubro Infotech Ltd. (Industrial Cluster)	27.16	16.06
9	Persistent Systems Ltd.	26.92	26.27
10	R S Software (India) Ltd.	15.43	15.43
11	Sankhya Infotech Ltd.	5.68	6.27
12	Mindtree Ltd. (IT Service Segment)	19.19	15.01
13	Spry Resources Pvt. Ltd.	33.59	33.59
14	Tata Elxsi Ltd.	14.32	15.17
15	Thirdware Solutions Ltd. (Overseas segment)	11.10	11.10
16	Zylog Systems	32.01	28.38
	Average	21.65	20.48

Thus, the Assessing Officer vide order dated 29.12.2016 assessed total income at Rs. 3,55,88,710/-. The computation of income as per Assessing Officer is as follows:

Total income as per Return of Income	Rs.1,16,94,390
Add Addition on account of ALP	Rs.2,38,94,318
Total Assessed income	Rs.3,55,88,708

4. The Ld. AR submits that the assessee is praying for exclusion of following comparables:-

(1) Acropetal Technologies Limited

(2) Infosys Ltd.

(3) Larsen & Toubro Infotech Ltd.

(4) Mindtree Limited

(5) Persistent Systems Ltd.

(6) Spry Resources Pvt. Ltd.

(7) Zylog Systems Ltd.

The Ld. AR submitted that these 7 companies considered by the DRP/TPO in the final set of comparable companies are not comparable to the assessee and does not satisfy the criteria of functional comparability laid down under Rule 10B(2) of the Income Tax Rules, 1962.

4.1 Acropetal Technologies Ltd.

The Ld. AR submitted that this company is functionally different from the assessee company. This company is engaged in provision of high end healthcare services and develops & owns related intellectual property providing a substantial competitive advantage to this company, leading to higher profitability. As per the annual report, the company is engaged in the sale of software products. The Ld. AR submitted that from page 6 of the annual report it is evident that within the healthcare segment, the company is operating as a KPO service provider and is engaged in building Electronic Medical Record (‘EMR’). Further, the company integrated such EMRs with other aspects of patient life cycle such as Drug and Disease management, Clinical Life Cycle Management and prescriptive & Specialty medicine. The Ld. AR submitted that these activities are knowledge intensive activities requiring high level of skill and application of intellectual property. The Ld. AR further submitted that from the profit and loss account, it is evident that the company is earning revenue from sale of products, namely, product hardware and product software. As on 31st March 2012, the company held inventories amounting to Rs. 21,01,502, which clearly establishes the fact that the company is engaged in the business of sale of software product. Thus, the company is engaged in two business segments, i.e., sale of products and sale of services but segmental profitability is not available in the audited financial statements. The TPO rejected the contentions of the assessee company during the TP proceedings and held that Information Technology segment providing outsourced SWD services has been considered. The Ld. AR submitted that operating expenses and operating income are not allocated in the segmental details provided in the financial statements. Accordingly, correct and accurate operating profit margin of the IT segment cannot be computed. The Ld. AR further submits that the company acquired two US based companies, namely, Line Beyond Inc, and Optech Consulting Inc. The company acquired 100% stake in Line Beyond Inc. and 70% stake in Optech Consulting Inc. Further, the company also acquired two domestic companies, viz., Mind River Information Technologies Ltd. and Kinfotech Pvt. Ltd. Thus, the Ld. AR submits that it is an extra-ordinary event which the TPO has overlooked while selecting this as comparable.

4.2 The Ld. AR relied upon the decision of Hon’ble Delhi High Court in case of Rampgreen Solutions Pvt. Ltd. vs. CIT (377 ITR 533), wherein there is a clear distinction between BPO and KPO companies and it was held that a company engaged in provision of KPO services cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transaction of provision of BPO services. The Ld. AR further relied upon the decision of Hyderabad Bench of the Tribunal in the case of TNS India Pvt. Ltd. vs. DCIT (ITA No. 1875/Hyd/2012) wherein the Tribunal directed to exclude Acropetal Technologies Ltd. holding that the services provided by the company are in the nature of high end services coming within the category of knowledge process outsourcing (KPO) and the company cannot be compared with a low end service provider. The Ld. AR relied upon the following decisions, wherein, Acropetal Technologies Ltd. has been excluded on account of functional dissimilarity:

• Symphony Marketing Solutions India Private limited vs. ITO (ITA No 1316/Bang/2012)

• Market Tools Research Private Limited vs. DCIT (ITA No. 1811/Hyd,/2012)

• HSBC Electronic Data India Private Limited vs. DCIT (ITA No. 1647/Hyd/2012)

• Mindcrest (India) Pvt. Ltd. Vs. DCIT (ITA No. 7289/Mu m/2012)

• M/s Capital IQ Information Systems (India) Pvt. Ltd. (ITA No. 124/Hyd/14)

• Visteon Engineering Centre (India) (P.) Ltd. Vs. ACIT (2016) 70 taxmann.com 248 (Pune - Trib.)

• ITO vs. Systime Global Solutions Ltd. (ITA No. 336/Pun/2015)

• Siemens Technology & Services Pvt. Ltd. vs. ACIT (ITA No. 1601/Bang/2012

• ADP Pvt. Ltd. vs. DCIT (ITA No. 191/Hyd/2014)

• S&P Capital IQ (India) Private Limited vs. DCIT (ITA No. 22/Hyd/2016.

• Excellence Data Research P. Ltd. Vs ITO (ITA No. 159/Hyd/2014)

• Swiss Re Shared Services (India ) P. Ltd. Vs. ACIT (ITA No. 380/Bang/2016)

The Ld. AR also relied upon the following decisions wherein, a company is directed to be excluded on account of non-availability of segmental data:

• Macquarie Global Services (P.) Ltd (ITA 6803/Delhi/2013)

• Vodafone India Services vs. DCIT

The Ld. AR relied upon the following decisions wherein consistently a view taken to exclude companies having extra-ordinary event during the year under consideration:

• Stream International (ITA No.8997/Mum/2010)

• CRM Services ITA No. 4068/Del/2009

• Toluna India Pvt. Ltd. Vs. ACIT (ITA No. 5645/Del/2011.

• Lear Automotive India P. Ltd, Vs, ACIT (ITA No, 5612/Del/2011) and

• Global Logic India Pvt. Ltd. vs ACIT (ITA No. 5809/Del/2011)

• Bechtel India Pvt. Ltd. vs. DCIT (ITA No. 1478/Del/2015)

• Equant Solutions India (P.) Ltd, vs. DCIT (ITA No. 1202/Del/2015)

4.3 The Ld. DR submits that the segment is of IT service only and there is no product included in the same. The Ld. DR further submits that % is very less so hardly it will make any difference. The Ld. DR relied upon the orders of the TPO and the DRP.

4.4 We have heard both the parties and perused the records available before us. This company is engaged in provision of high end healthcare services and develops & owns related intellectual property providing a substantial competitive advantage to this company, leading to higher profitability. As per the annual report, the company is engaged in the sale of software products. In assessee’s case, the company is undertaking software development which is more of an event constituting a new stage in a changing situation, than a complete product. Therefore, Acropetal Technologies Limited is functionally different from the assessee company and should have been excluded by the TPO. Further, the segmental data was not available for the assessment year under question of this company. The company is engaged in two business segments, i.e., sale of products and sale of services but segmental profitability is not available in the audited financial statements. The assessee company cannot be compared with this company as segmental data is not available. Besides, this there was extra-ordinary events occurred during the year as the company acquired 100% stake in Line Beyond Inc. and 70% stake in Optech Consulting Inc. Further, the company also acquired two domestic companies, viz., Mind River Information Technologies Ltd. and Kinfotech Pvt. Ltd. Thus, as held by the Hon’ble Delhi High Court & this Tribunal in various decisions companies having extra-ordinary event has to be excluded. Therefore, we direct TPO to exclude this company from comparables.

4.5. Infosys Ltd.

The Ld. AR submitted that as per page 9 of the annual report, the company has set up a network of research labs and during the relevant previous year 143 unique patent applications were filed by the company. The Ld. AR further submitted that the company has been granted 47 patents out of which 46 are in USA and one in Luxemburg. At page 26 of the annual report it is also stated that the company recognizes it’s strong brand as one of it’s competitive strengths. In this regard the Ld. AR submitted that the Hon’ble Delhi High Court in the case of Agnity India Technologies (ITA 1204/2011 dated 10.07.2013) directed for exclusion of Infosys Ltd. from the list of comparable companies not merely on the basis of high turnover but on the basis that Infosys Ltd is a full risk bearing entrepreneur whereas the assessee therein is a captive software service provider. The Ld. AR further submitted that Infosys Ltd apart from being a giant in the field of software product, also owns various unique intangibles in the form of proprietary products, patents, brands etc which leads to creation of significant competitive advantage resulting high operating margins which are valuable intangibles due to which it is earning exceptionally high operating margins. The Ld. AR submitted that since Infosys Ltd is engaged in development and sale of software products. The software products developed by the company includes Finacle TM, Finacle core banking solution, Finacle digital commerce solution, Finacle WatchWiz, Infosys Health Benefit Exchange, etc. Thus, this company is functionally different from the assessee company. The Ld. AR relied upon the order of Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT (ITA No, 5645/del/2011) wherein the Tribunal directed to exclude Infosys holding that the company is a giant risk taking company and cannot be compared with a captive service provider. Delhi Bench of the Tribunal in the case of Ut Starcom Inc. (India Branch) vs. DDIT (ITA No. 5848/Del/2011), also directed to exclude Infosys holding that the company is a giant risk taking company and cannot be compared with a captive service provider. Delhi Bench of the Tribunal in the case of Avaya India Pvt. Ltd. vs. DCIT (ITA No. 146/Del/2013) directed to exclude Infosys on account of being a giant company. Delhi Bench of the Tribunal in the case of AVL India Software Pvt. Ltd. vs. DCIT (ITA No, 6454/Del/2012) directed to exclude Infosys holding that the assessee providing services to its AE on a cost plus basis without having any intangible assets cannot be compared with a giant company like Infosys. The Ld. AR relied upon the following decisions, wherein, Infosys Technologies Ltd, was directed to be excluded holding that the company is a giant company having significant intangibles:

i. Nokia Siemens Networks India Pvt Ltd vs. ACIT (ITA No. 5837/Del/2011)

i. FIL India Business Services Pvt. Ltd. vs. DCIT (ITA No. 6867/Del/2014)

iii. Sony Mobile Communications International AB (India Branch Office) vs. DDIT (ITA No. 769/Del/2014)

iv. Headstrong Services (India) Pvt. Ltd vs. DCIT (ITA No. 714/Del/2015)

v. Bentley Systems India Pvt. Ltd. vs, ACIT (ITA No. 6161/Del/2013)

vi. Sun Life India Service Centre Pvt. Ltd. vs. DCIT (ITA No. 1489/Del/2014)

vii. Avaya India (P) Ltd. vs. ACIT (ITA No. 5528/Del/2011)

viii. Alcatel-Lucent Technologies vs. DCIT (ITA No, 2298/Del/2008) ‘

ix. DCIT vs. Mentor Graphics (ITA No. 2634/Del/2011)

The Ld. AR also relied upon the following decisions of the various Benches of Tribunal wherein it has been held that companies engaged in sale of software products cannot be regarded as appropriate comparable for the purpose of benchmarking the international transaction of provision of software services:

(i) Connexant Systems India Pvt. Ltd vs. ITO ITA No 1429/Hyd,/2010

(ii) Intoto Software Ltd Pvt Ltd. (ITA No 1196-97/Hyd/2010 & 2102/Hyd /2010)

(iii) NXP Semiconductors India Pvt. Ltd. vs. ACIT (ITA No. 1174/Bang/2011)

(iv) (Sapient Corporation Pvt. Ltd vs. DCIT (ITA No 5263/Del/2010)

(v) Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/10

(vi) Trilogy E-Business Software vs. DCIT : 47 SOT 45(URO)

(vii) Nethawk Networks India Pvt. Limited. Vs. ITO (ITA 7633/Mum/2012)

(viii) Toluna India Pvt. Ltd. vs. ACIT (ITA No.5645/Del/2011)

(ix) Lear Automotive India P. Ltd. Vs. ACIT (ITA No. 5612/Del/2011)

(x) Global Logic India Pvt. Ltd. vs. ACIT (ITA No. 5809/Del/2011)

4.6. The Ld. DR relied upon the orders of the TPO and the DRP.

4.7 We have heard both the parties and perused the records available before us. This company has set up a network of research labs and granted 42 patents. Infosys is a giant risk taking company besides that, it is engaged in development & sale of Software Products and also owns intangible assets. Thus, as held by the Hon’ble High Court and this Tribunal in various decisions, this company has to be excluded. We, therefore, direct TPO to exclude this company from comparable.

4.8. Larsen & Turbo Infotech Ltd.

The Ld. AR submitted that segmental data is not available. As per the annual report, the company is IT BPO service provider. The Ld. AR relied upon the order decision of Delhi Bench of the Tribunal in case of Saxo India Pvt. Ltd. vs. ACIT (ITA No. 6148/Del/2015), wherein, L&T Infotech Ltd. was directed to be excluded holding that the company is also engaged in business of software product and segmental information is not available. The appeal filed by the Revenue was dismissed by the Hon’ble Delhi High Court in ITA No 682/2016. The Ld. AR further submits that Delhi Bench of the Tribunal in the case of Alcatel-Lucent India Ltd, vs. DCIT (ITA No. 6856/Del/2015) directed to exclude Larsen & Toubro on account of functional dissimilarity and unavailability of segmental data. The Ld. AR also relied upon the following decisions, wherein, Larsen & Toubro was directed to be excluded on account of unavailability of segmental data:

• Pegasystems Worldwide India Pvt. Ltd vs. ACIT (ITA No. 1758/Hyd/2014) Cerner Healthcare Solutions P Ltd vs ITO (ITA No, 44/Bang/2015)

• Invensys Dvelopment Centre India Pvt, Ltd. vs DCIT (ITA No 383/Hyd/2014)

• M/s Broadcom India Research Pvt Ltd. vs, DCIT (ITA No, 62/Bang/2014)

4.9 The Ld. DR relied upon the orders of the TPO and DRP

4.10 We have heard both the parties and perused the material available on record. This company is engaged in two business segments, namely, software development services and software products. However, separate segmental data with respect to business segment is not available in the annual report of the company. From the audited financial statement and website, it is evident that the company is earning revenue from two business segments, viz., software development and software product. Therefore, this company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable.

4.11. Mindtree Limited:

The Ld. AR submitted that this company is functionally different and engaged in development and sale of Software Products. At page 22 of the annual report, it is stated that the company has developed series of products and technologies such as “Enterprise Collaboration Platform", “CPG- Retail Collaboration Platform”, stock management framework, AppFactory etc. The Ld. AR further submits that Mindtree Ltd undertakes significant research activities leading to creation of valuable intangibles such as proprietary know-how, patents etc. At page 24 of the annual report of this company it is stated that the R&D initiatives undertaken by the company has led to addition of new customers during the relevant year and enables the company to be a preferred technology solution provider. Further, at page 23 of the annual report, the company has provided a list of patents owned by it. The Ld. AR relied upon the decision of the Delhi Bench of the Tribunal in the case of Global Logic India Pvt. Ltd. vs. DCIT (ITA No 122/De!/2013) wherein the Tribunal held that companies undertaking R&D activity and owning IPRs cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transactions undertaken by a captive software service provider.

4.12 The Ld. DR relied upon the orders of the TPO and the DRP.

4.13 We have heard both the parties and perused the records available before us. This company is engaged in development & sale of software product and also owns intangible assets (Patents). In assessee’s case, the company is undertaking software development which is more of an event constituting a new stage in a changing situation, than a complete product. Therefore, Mindtree Limited is functionally different from the assessee company and should have been excluded by the TPO. Thus, as held by the Hon’ble Delhi High Court & this Tribunal in various decisions companies which are functionally different has to be excluded. Therefore, we direct TPO to exclude this company from comparables.

4.14. Persistent Systems Ltd.

The Ld. AR submitted that Persistent Systems Ltd. is engaged in the business of development and sale of software products and therefore, cannot be regarded as comparable to the applicant, a routine software service provider From the annual report of the company, it would be appreciated that during the relevant previous year, the company launched a new product, namely, eMee, an employee engagement platform, targeted towards SME clients. Further, at page 49 of the annual report of the company it is stated that during the relevant previous year, the company has developed and launched two new products namely eMee and KLISMA. The Ld. AR relied on the decision of Delhi Bench of the Tribunal in the case of Cash Edge India (Pvt.) Ltd vs ITO (ITA No. 64/Del/2015), directed to exclude the company on account of functional dissimilarity. Appeal preferred by the Revenue was dismissed by the Hon’ble Delhi High Court vide order dated 04.05.2016 (ITA No, 279/2016). Delhi Bench of the Tribunal in the case of Equant Solutions India Pvt, Ltd. vs. DCIT (ITA No. 1202/Del/2015), directed to exclude Persistent Systems Ltd holding that it is engaged in software product and segmental data is not available. The Ld. AR relied upon the following decisions, wherein, the Benches have specifically held that Persistent Systems Limited is engaged in product development and product design and analysis service is functionally different from a pure software service provider and therefore ought to be excluded:

• Saxo India Pvt. Ltd vs. ACIT (ITA No. 6148/Del/2015) - Appeal filed by the Revenue was dismissed by the Hon’ble Delhi High Court in ITA No. 682/2016

• Delhi Bench of the Tribunal in the case of Alcatel-Lucent India Ltd. vs. DCIT (ITA No. 6856/Del/2015) directed to exclude Persistent Systems Ltd on account of functional dissimilarity and unavailability of segmental data.

• AT & T Global Business Services India (P.) Ltd ITA 1604/Bang/2012 NXP Semi Conductors India Pvt. Ltd I T. (T.P.)A. No.1634/Bang/2014

• Hewlett- Packard (India) Globalsoft P Ltd I.T(TP).A No.1031/Bang/2011 Pyramid IT Consulting Private vs. ITO (ITA No. 5401/Del/2012)

• Global Logic India Pvt. Ltd. vs. ACIT (ITA No. 122/Del/2013) Lear Automotive India P. Ltd. Vs. ACIT (ITA No. 5612/Del/2011)

• M/s ION Trading India Pvt. Ltd. vs. ITO (ITA No. 1035/Del/2015)

4.15. The Ld. DR relied upon the order of the TPO and the DRP.

4.16. We have heard both the parties and perused the records. Persistent Systems Limited is engaged in product development, product design and analysis service is functionally different from a pure software service provider and therefore ought to be excluded. Thus, this company is functionally different from that of assessee company. As held by the Hon’ble Delhi High Court & this Tribunal in various decisions companies which are functionally different has to be excluded. Therefore, this company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable.

4.17. Spry Resources Pvt. Ltd.

The Ld. AR submitted that the audited financial statement for the Financial Year 2011-12 is not available.

4.18 The Ld. DR relied upon the order of the TPO and the DRP.

4.19. We have heard both the parties and perused the records. Since the audited financial statement for the Financial Year 2011-2 was not available to the assessee. The same can be seen in the TPO’s order para 12 (F) wherein the assessee has asked for annual report of this company which was not given to the assessee. The TPO is directed to consider the objection of the assessee. The TPO is directed to take on record the financial statement and give opportunity to assessee for hearing to that extent. The TPO thereafter should consider whether this comparable is proper or not in assessee’s case.

4.20. Zylog Systems Ltd.

The Ld. AR submitted that this company is engaged in the business of development and sale of software products. At page 21 of the annual report, it is stated that products and solutions offered by the company are it’s main differentiators vis-a- vis the competitors. The company invests heavily in development of new products and also owns IP rights with respect to various software products such as Field Power, Smart Migrator and Bank. Companion. Further, at page 26 & 37 of the annual report, it is stated that the company spends significant resources on the R&D activity for the purpose of development of new products. Further, as on March 31, 2012, the company has capitalized a sum of Rs. 97.72 crore as product development cost under the head intangible assets. (Fixed asset schedule at page 73 of the annual report). The Ld. AR relied on the decisions of Delhi Bench of the Tribunal in the case of Equant Solutions India Pvt. Ltd. vs. DCIT (ITA No. 1202/Del/2015) (Now Known as Orange Business Services India Solutions (P) Ltd.), directed to exclude Zylog Systems Ltd. holding that the company holds intangibles, segmental data is not available and there was a merger during the year. Following the decision for assessment year 2010-11, Delhi Bench of the Tribunal in the case of Orange Business Services India Solutions Pvt Ltd. vs. DCIT (ITA No. 869/Del/2016), directed to exclude Zylog Systems Ltd. on account of unavailability of segmental data and mergers and acquisitions undertaken in the preceding year. The Ld. AR also relied on the decision of Delhi Bench of the Tribunal in the case of Alcatel-Lucent India Ltd. vs. DCIT (ITA No. 6856/Del/2015), wherein, the Tribunal directed to exclude Zylog Systems Ltd. holding that software product company cannot be compared with software development service provider.

4.21 The DR relied upon the order of the TPO and DRP.

4.22. We heard both the parties and perused the records. The company is earning revenue from two business segments, namely, software services and software products. However, separate segmental data with respect to the aforesaid two segments is not available in the financial statement. The assessee company cannot be compare with this company as the functions are different and there is no segmental data available. The company invests heavily in development of new products and also owns IP rights with respect to various software products such as Field Power, Smart Migrator and Bank. Companion. As held by the Hon’ble Delhi High Court & this Tribunal in various decisions companies which are functionally different has to be excluded. Therefore, this company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable.

5. The Ld. AR submitted that Thinksoft Global Services Ltd., Sonata Software Ltd. should have been included as comparable which was rejected by the TPO as these companies are functionally comparable with the assessee company.

5.1 Thinksoft Global Services Ltd.

The Ld. AR submitted that vide show cause notice dated 07.12.2015, TPO rejected Thinksoft Global Services Ltd. holding that the company is functionally not comparable to the assessee without pointing out any specific functional dissimilarity. In response, the assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. However, the TPO failed to adjudicate the aforesaid objection in the Transfer Pricing order. The Ld. AR submitted that the company is engaged in the business of provision of software services such as software validation and verification services. At page 38 of the annual report, it is evident that the business operations of the company predominantly relates to software validation and verification services relating to banking and financial services industry. During the financial year 2011-12, the company earned 100 percent revenue amounting to Rs. 1,118,983,577 from provision of software services. The Ld. AR relied upon the decision of Pune Bench of the Tribunal in the case of TIBCO Software India Pvt. Ltd. vs. DCIT (ITA No. 2536/PN/2012), wherein, the Tribunal directed TPO to include Thinksoft Global Services Ltd holding that verification and validation services provided by the company is similar to software development services.

5.2 The Ld. DR relied upon the orders of the TPO and DRP.

5.3 We have heard both the parties and perused the records. The assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. However, the TPO failed to adjudicate the aforesaid objection in the Transfer Pricing order. Therefore, we direct the TPO to adjudicate the objection of the assessee. The TPO, thereafter, should consider whether this comparable is proper or not in assessee’s case.

5.4. Sonata Software Ltd.

The Ld. AR submitted that vide show cause notice dated 07.12.2015, the TPO rejected Sonata Software Ltd. whereby holding that the company is functionally not comparable to the assessee company. In response, the assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. The Ld. AR submitted that during the year, the company earned 100% of its revenue from export of software development and related services. From revenue recognition policy reported in notes to accounts, it is clearly evident that the company is engaged in the business of providing software services to the clients. During the financial year 2011-12, the company earned foreign exchange amounting to Rs. 2,23,40,17,001 from provision of software services.

5.5. The Ld. DR relied upon the orders of the TPO and DRP.

5.6 We have heard both the parties and perused the records. The TPO rejected Sonata Software Ltd. whereby holding that the company is functionally not comparable to the assessee company. In response, the assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. However, the TPO failed to adjudicate the aforesaid objection in the Transfer Pricing order. Therefore, we direct the TPO to adjudicate the objection of the assessee. The TPO, thereafter, should consider whether this comparable is proper or not in assessee’s case.

6. The Ld. AR submitted the final set of comparable companies for the consideration of the TPO as follows:

S. NO.	Company Name	OP/OC(%)
1	Akshay Software Technologies Ltd.	9.87%
2	Celstream Technologies Pvt. Ltd.	7.13%
3	Cigniti Tech.	9.08%
4	Lucid Software Ltd.	11.64%
5	R S Software (India ) Ltd.	15.43%
6	Sankhya Infotech Ltd.	6.27%
7	Sasken Communication Technologies Ltd.	14.58%
8	Tata Elxsi Ltd. (Segmental)	15.17%
9	Thirdware Solution Ltd. (Overseas Segment)	11.10%
10	Thinksoft Global Services Ltd.	11.08%
11	Sonata Software Ltd.	5.66%
	Average	10.64%
	Appellant’s Margin	7.93%

6.1 The Ld. DR relied upon the order of the TPO and DRP and submitted that the final comparables given by the TPO are the proper comparable.

7. We have heard both the parties and perused the material available on record. Ground No. 1 is general therefore, the same is not adjudicated. Ground No. 2, 2.1, 2.2, 2.3, 2.4 and 2.5 are relating to exclusion and inclusions of the comparables by the TPO. The reasons and directions for each comparables are given hereinabove paras. Hence, the matter is remanded back to Assessing Officer /TPO to decide as per the directions given in the abovementioned paras. Needless to say, the assessee will given full opportunity for hearing. Thus, Ground No. 2, 2.1, 2.2, 2.3, 2.4 and 2.5 are partly allowed for statistical purpose. As relates Ground No. 3, the same is consequential, since the matter is remanded back to the file of TPO/AO, the same do not require adjudication and be decided by the TPO/AO.

8. In result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the Open Court on 15th November 2017.

 

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