KAPLAN INDIA PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

PER SUDHANSHU SRIVASTAVA, J.M.

This appeal has been preferred by the assessee against

the order of the Ld. CIT (Appeals)-XX, New Delhi vide order dated

28.02.2014 and pertains to assessment year 2007-08.

2.0 The brief facts of the case are that the assessee

‘Kaplan India Private Limited’ (KIPL) was incorporated in April

2005 as a subsidiary of Kaplan Mexico Holdings LLC. KIPL is

engaged in providing software development and maintenance

services to its Associated Enterprise (AE). During the Assessment

ITA No. 2907/Del/2014 Assessment year 2007-08

Year (AY) 2007-08, the assessee entered into international

transaction of provision of software development services for Rs.

8,80,32,063/- which were explained as follows:

“Undertaking coding and documentation that enhance the functionality of existing software applications being used by the AEs. Also undertakes database cleanup and software maintenance services, supporting applications and platforms within Kaplan businesses, bug fixing and maintenance etc., and Undertaking functional test and other test for various software development activities performed by Kaplan India Private limited (KIPL). Also undertake testing of the work done by the AE.”

2.1 The return of income was filed declaring an income of

Rs. 28,03,0238/-. The case was selected for scrutiny and during

the course of scrutiny assessment proceedings, a reference was

made to the Transfer Pricing Officer (TPO) under section 92 CA of

the Income Tax Act, 1961 (hereinafter called ‘the Act’). The TPO

rejected the Transfer Pricing (TP) analysis undertaken by the

assessee and made adjustment of Rs. 92,77,646/-. The Assessing

Officer (AO) also made certain other additions to the declared

income. The Transfer pricing adjustment to software

ITA No. 2907/Del/2014 Assessment year 2007-08 development services segment and disallowance of expenditure

incurred towards group medical insurance made by the AO are

now being contested in the present appeal by the assessee. The

following grounds have been raised:

“On the facts and circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the assessment order passed under section 143(3) of the Income-tax Act, 1961 (‘the Act’) by the learned Assessing Officer (‘AO’) (after considering the adjustments proposed by the learned Transfer Pricing Officer (‘TPO’) in his order passed under section 92CA(3) of the Act) and in pursuance of the order passed by the Hon’ble Commissioner of Income-tax (Appeals) (‘CIT(A)’) under section 250(6) of the Act on the following grounds: Each of the ground is referred to separately, which may kindly be considered independent of each other. That on the facts and circumstances of the case and in law, 1. The order passed by the Assistant Commissioner of Income Tax, Circle 5(1), New Delhi (“AO”) / Commissioner of Income Tax (Appeals)-XX, New Delhi [“CIT(A)”] is based on incorrect interpretation of law and therefore is bad in law and without jurisdiction. 2. The reference made to the Transfer Pricing Officer (TPO) and the order passed by the TPO u/s 92CA by the TPO is illegal, bad in law and without jurisdiction. 3. The TPO / AO / CIT (A) has erred, in law and on facts and circumstances of the case, by rejecting/disregarding the documentation filed by the appellant. The adjustment has been wrongly and illegally made and the additions made are unjust, unlawful, arbitrary and are also highly excessive. 4. The TPO / AO / CIT(A) has erred, by not accepting the economic analysis undertaken by the Appellant in

ITA No. 2907/Del/2014 Assessment year 2007-08 accordance with the provisions of the Act read with the Income Tax Rules, 1962 (“the Rules”). 5. The TPO / AO / CIT (A) has erred, by rejecting the filters applied by the Appellant, and applying additional filters which are incorrect, wrong and baseless. 6. The learned TPO/ Assessing Officer/ CIT (A) have erred in selecting certain companies (which are earning super normal profits) as comparable to the Appellant.

ITA No. 2907/Del/2014 Assessment year 2007-08

The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.”

ITA No. 2907/Del/2014 Assessment year 2007-08

3.0 The learned counsel for the assessee (AR) made

submissions in support of Grounds of Appeal nos. 7, 8 and 9

objecting to the inclusion and exclusion of companies as

comparable and contested the transfer pricing adjustment made

by the TPO as also in support of Ground of Appeal no 13 relating

to the disallowance of expenditure towards group medical

insurance.

3.1 The other grounds of appeal viz., Ground nos. 1 to 6,

11, 14 and 15 are general in nature and do not require any

separate adjudication.

3.2 Ground nos. 10 and 12 were not pressed by the Ld. AR

and Ground no 16 is consequential.

3.3 Ground no 17 objecting initiation of penalty

proceedings is premature at this stage.

3.4 The Ld. AR submitted that the assessee is a captive

software developer providing computer programming,

applications, development and other support and technical

services. DF Institute Inc. is a group subsidiary of the company

and provides high-end customized education training solutions

for the institutional and corporate customers in finance,

ITA No. 2907/Del/2014 Assessment year 2007-08

technical product knowledge and consultative selling courses. It

was submitted by the Ld. AR that the assessee was compensated

on cost plus 10 per cent basis for the international transaction of

provision of development, production and maintenance of

computer software, support centre and other services. It was

submitted that after carrying out the Functions Assets and Risk

(FAR) analysis in paragraph 4.2 to 4.4 of the TP study, the

international transaction of provisions of software development

services were considered to be at Arm’s Length Price (ALP) at Para

5.5.4 of the TP study, by comparing it with 32 companies

identified by the assessee at Para 5.4.6. The Ld. AR submitted

that, although, in the transfer pricing study the method adopted

was labelled as Cost Plus Method (CPM), it is a common ground

of the assessee and the TPO that Transactional Net Margin

Method (TNMM) is the Most Appropriate Method (MAM) and

OP/OC is the Profit Level Indicator (PLI).

3.5 The Ld. AR further submitted that vide his order dated

29th October 2010, the TPO accepted that the international

transactions are to be characterized as software development

services. It was submitted by the Ld. AR that after

modification/addition of the filters adopted in the TP study,

ITA No. 2907/Del/2014 Assessment year 2007-08

collecting information under section 133(6) of the Act and

accepting the tested party margin at 17.04%, at paragraph 15 of

the TP order, the TPO selected a new set of 26 companies as

comparable for the purposes of determination of arm’s length

price after rejecting all the 32 companies selected by the assessee

in its TP study. The Ld. AR elaborated that the TPO determined

the arithmetic mean PLI of the new comparable set at 25% and

after allowing the working capital adjustment of 1.74%,

determined the adjusted arithmetic mean PLI at 23.26%. Thus,

the TPO proceeded to make an adjustment of Rs 92,77,646/-.

3.6 The Ld. AR further submitted that vide draft

assessment order dated 25.2.2011 passed under section 144C

r.w.s. 143(3) of the Act, the Assessing officer disallowed

deduction claimed of Rs. 2,78,185/- towards Group medical

insurance expenditure for the employees on the ground that no

evidence was submitted to support that ICICI Lombard general

insurance is approved as per section 36(1)(ib) of the Act.

3.7 Continuing with a brief back ground on the factual

aspect, the Ld. AR submitted that being aggrieved by the Draft

Assessment Order, the assessee filed Appeal before the Ld.

Commissioner of Income Tax (Appeals) {CIT (A)} inter alia 8

ITA No. 2907/Del/2014 Assessment year 2007-08

challenging the rejection of the Transfer pricing study, rejection

of all the comparables, selection of new set of comparables, use of

information obtained under section 133(6) and disallowance of

expenditure towards Group insurance of employees. The Ld. AR

submitted that the Ld. CIT (A) upheld the rejection of the TP

study and its comparables, directed exclusion of the comparable

Celestial Labs from set of comparables chosen by the TPO on the

ground that it is engaged in development and sale of products

AND directed exclusion of the comparables Infosys Limited and

Wipro Limited from set of comparables chosen by the TPO relying

on decision of the Hon’ble Delhi High Court in the case of Agnity

India. The Ld. AR further elaborated that the Ld. CIT(A) upheld

all other conclusions of the TPO as also the disallowance made by

the AO towards Group insurance on the ground that no evidence

was produced to show that the scheme of insurance issued by

ICICI Lombard is approved under section 36(1)(ib).

3.8 Before us, the learned counsel for the assessee mainly

sought exclusion of the following companies: (1) Avani Cincom

Technologies Limited; (2)Helios & Matheson Limited; (3) Ishir

Infotech Limited; (4) Megasoft Limited; (5) Tata Elxsi Limited; and

inclusion of following companies: (1) Indium Software (India) Ltd;

ITA No. 2907/Del/2014 Assessment year 2007-08

(2) VMF soft Tech Limited from/to the final set of the 26

comparables chosen by the TPO.

3.9 During the course of hearing, the learned counsel filed

a detailed chart containing list of decisions of the coordinate

benches of this Tribunal (ITAT) in relation to AY 07-08, wherein

the above companies were claimed to have been directed to be

excluded or included on similar grounds as in the present case. It

was contended by the Ld. AR that as these decisions are in

context of the TP adjustment/s made to the Software

Development services segment for very same Assessment Year

and, therefore, the conclusions reached by the coordinate

benches should be followed.

3.10 The Learned counsel also invited our attention to the

information claimed to be in public realm by way of Directors’

Report to support the claim of the assessee that group medical

insurance scheme issued by ICICI Lombard General Insurance

Co. is approved under section 36 (1)(ib) of the Act and requested

allowance of expenditure.

4.0 The Learned Senior Departmental Representative (Sr.

DR) supported the conclusions reached by the TPO. Ld. Sr. DR

submitted that the final list of comparables was selected on the 10

ITA No. 2907/Del/2014 Assessment year 2007-08

basis of FAR analysis. By referring and relying on the judgment of

the Hon’ble Delhi High Court dated 30.10.2017 in ST Micro in

ITA 913/2017, the Ld. Sr. DR contended that comparables

cannot be included or excluded by relying on decisions of

coordinate benches. The Ld. Sr. DR contended that the earlier

rulings should not be blindly followed. The Ld. Sr. DR also

contended that the information obtained under section 133 (6) of

the Act was made available to the assessee and, therefore, the

same was validly used while deciding the comparability. The Ld.

Sr. DR clarified that while in the TP study, the assessee had

wrongly described the most appropriate method adopted as cost

plus, in substance both the TPO and the TP study applied TNMM

as the most appropriate method. In the context of disallowance of

expenditure towards Group medical insurance, the Ld. Sr. DR

contented that the information available does not clearly show

that ICCICI Lombard scheme is approved under section 36 (1) (ib)

of the Act.

5.0 We have considered the rival contentions and have

also perused the orders of the TPO and the Ld. CIT (A). In the

context of the transfer pricing adjustment, dispute is mainly

centred around the exclusion and inclusion of some companies

ITA No. 2907/Del/2014 Assessment year 2007-08

as comparables. While prima facie, the Ld. Sr. DR’s contention

that coordinate bench decisions should not be blindly followed

cannot be faulted, well-reasoned orders of coordinate benches of

the Tribunal for very same assessment year 07-08, more so

dealing with Software development services segment deserve

respectful consideration and cannot be lightly ignored unless

factual differences or developments in law which have a bearing

on the issue in dispute are pointed out. This is more so when in

the present case, broad characterisation of international

transactions as Software development services and application of

TNMM as the most appropriate method is not disputed by both

the parties. As rightly pointed out by the Ld. Counsel for the

assessee, the decisions of the coordinate benches have

considered issues arising from the very same set of 26

comparables in AY 07-08. In such factual background decisions,

excluding or including companies on basis of generic

disqualifications like software product revenue being earned in

case of certain companies and segmental data not being available

or conclusion that a certain company fails identical filter in such

decided case, deserve to be followed. Further, provisions of

Chapter X of the Act are meant for compliance by the taxpayers

ITA No. 2907/Del/2014 Assessment year 2007-08

and penal consequences get attracted for any non-compliance.

Reference to Income Tax Rules 10 B, 10 C and 10 D indicate that

such compliance has to be made by considering material

available in the public domain. The power vested in authorities to

obtain information under 133 (6) of the Act for the purposes of

proceedings under the Act, in the context of transfer pricing

provisions, require a carefully balanced approach with the above

compliance requirement expected from taxpayers. Accordingly,

we note that while the information/s obtained by the TPO under

section 133(6) of the Act cannot form the sole basis for FAR

analysis, as that would make the requirement of compliance an

impossibility and cast an onerous burden on the taxpayer which

may be difficult to discharge, use of information obtained under

section 133 (6), in cases wherein rules of natural justice are

followed and such information is shared with the taxpayer, as

supportive or circumstantial evidence for clarifying information

gaps in comparability exercise cannot be disapproved. Rival

contentions in the context of specific comparables are dealt with

in greater detail in the following paragraphs.

5.1 Avani Cincom Technologies Ltd: 13

ITA No. 2907/Del/2014 Assessment year 2007-08

The Ld. Counsel for the assessee sought exclusion of

Avani Cincom Technologies Limited from the final set of

comparable companies. It was pointed out that the TPO

rejected similar objections to comparability of this company at

paragraph 13.2 of his order. The TPO included this company

on the ground that it qualified all the filters applied by the TPO

and further on the ground that the taxpayer did not object to

the inclusion of this company in its reply to show cause notice.

The TPO noted that while the Annual Report and the Related

Party transaction details of the company are not available,

information obtained under section 133 (6) was considered.

The Ld. Counsel pointed out that such an approach was at

variance from the approach adopted while rejecting the

comparable companies chosen by the assessee in its TP study

wherein such comparables were rejected on the ground of

insufficient information. The Ld. Counsel further contended

that before the Ld. CIT (A) it was pointed out that this

company earned revenue from software product sale (software

named D Xchange). However, the Ld. CIT (A) rejected the

objections at Para 4.7 by holding that the case laws relied on

by the assessee are not applicable. The Ld. Counsel invited

ITA No. 2907/Del/2014 Assessment year 2007-08

out attention to Para 90 of the decision in case of Motorola

Solutions India Private Limited ( ITA no 5637/Del/2011) and

Para 18-19 of decision in NXP Semi Conductors India Private

Limited ( ITA 1174/Bang/2011).

In response, by reference to the Annual report of this

company, which was filed at the time of hearing at pages 1 to

17 of the paper book containing annual reports, the Ld. Sr. DR

contended that there is nothing in the financials of the

company to indicate that the company has earned any revenue

from sale of products. The Ld. Sr. DR also contended that this

company was included on the basis of section 133 (6)

information.

Having heard both the parties on this comparable, firstly,

we notice from the order of the TPO that unlike in cases of

Celestia Labs limited at Para 13.4, Megasoft Limited at Para

13.17 and Tata Elxsi Limited at Para 13.25, the TPO has

chosen not to provide details of information obtained under

section 133 (6). Similar extraction of relied upon portion of the

information obtained under section 133 (6) was necessary

considering the reasoning given by the TPO himself at Para

13.2 of his order wherein it is expressly noted that even in the 15

ITA No. 2907/Del/2014 Assessment year 2007-08

absence of financials, inclusion of this company as a

comparable was warranted being based on information

received under section 133 (6). Further, it is also noticed that

objections, similar to ones raised by Ld. Sr. DR in the present

case, were raised by the Ld. departmental representative in the

case of Motorola Solutions India Pvt. Limited, as discussed at

paragraphs 89 and 90 of said order. Relevance of conclusions

reached by the coordinate bench in that case cannot be over

emphasised. In Motorola, the coordinate bench had concluded

that even if one were to accept the argument of the department

that no income is shown to result from sale of software

product named Dxchange, the fact that the revenue and,

therefore, the margin earned by Avani Cincom was impacted

by use of such internally developed and owned software as an

asset justified the exclusion of Avani Cincom from the final set

of comparable companies. Reference to decisions of other

coordinate benches mentioned in the chart submitted by the

Ld. Counsel at the time of hearing, show that similar

consistent reasoning has been adopted for concluding that

Avani Cincom is not comparable in case of software

development services due to presence of software product

ITA No. 2907/Del/2014 Assessment year 2007-08

named D Xchange. Similar reasoning adopted by the

Bangalore bench of Tribunal in case of Softbrands India

Private limited (IT (T.P) A. No 1094/Bang/2011) at paragraph

8.2 now stands approved by the judgment of the Hon’ble

Karnataka High court in ITA nos. 536 and 537 of 2015.

Respectfully following the decisions of coordinate benches it is

directed that Avani Cincom Technologies Limited be excluded

from set of comparable companies in present case also.

5.2 Helios Matheson Limited:

The Ld. Counsel requested for exclusion of Helios

Matheson Limited from the final set of comparable

companies on the ground that this company earned income

from ITES activities and in absence of segmental

information, it cannot be compared with Kaplan India which

earns its revenue purely from software development

services. The Ld. Counsel invited our attention to Schedule I

of the Annual Report at page 83 of the Annual Reports

paper book to contend that the income was earned from

software sales & services, by reference to Scheduled M it

was contended that Helios Matheson incurred

Advertisement expenditure unlike the assessee. By reference 17

ITA No. 2907/Del/2014 Assessment year 2007-08

to page 93 of the Annual report paper book it was submitted

that for Helios Matheson global brand building was a focus

area and that the same impacts the Margin earned by this

company. The Ld. Counsel also drew our attention to

several decisions of the coordinate benches for AY 2007-08,

as listed in the chart submitted at the time of hearing, and

submitted that as this company was found not comparable

in the context of software development services, exclusion of

this company was required in the present case also. The Ld.

Counsel also drew our attention to application dated

30.4.2014 filed before Ld. CIT (A) seeking rectification of the

order on this comparable. It was submitted that such

rectification application was still pending consideration.

The Ld. Sr. DR contended that Helios Matheson was

rightly included as a comparable company based on FAR

analysis and that a ‘google’ search of this company showed

that there is no software product sale revenue.

Having heard the rival contentions, it is seen that

TPO’s order (Para 13.9) shows that this company is included

by the TPO by overruling the objection of the assessee

without citing any reasons. It is also noticed that the Ld. 18

ITA No. 2907/Del/2014 Assessment year 2007-08

CIT (A) has also summarily rejected the contention about

the failure of the employee cost filter and has upheld the

inclusion of this company. It is seen that this company fails

the employee cost filter of 25% as Helios Mathesan’s

employee cost is only 1.07% of sales. We notice that

employee cost filter is one of the filters adopted by the TPO

himself at Para 8 of his order. The totality of above facts and

circumstances as noticed in the above paragraphs clearly

shows that FAR and, therefore, the margin earned by Helios

Mathesan is totally different in comparison to the FAR of the

assessee. It is therefore, directed that Helios Mathesan be

excluded from final list of comparable companies.

5.3 Ishirinfotech Limited:

Ishirinfotech Limited’s inclusion as a comparable is

contested by the assessee. It is seen that the TPO, at Para

13.12, notes that this company failed the 25 % employee

cost filter based on data available in Capitoline database.

However, the TPO decided to include this company as a

comparable on the basis of information obtained under

section 133 (6) of the Act. As already noted by us in the

context of discussion on the comparability of Avani Cincom, 19

ITA No. 2907/Del/2014 Assessment year 2007-08

the TPO has not referred to the information said to have

been obtained under section 133(6) of the Act unlike in the

cases of Celestia Labs Limited (at Para 13.4), Megasoft

Limited (at Para 13.17) and Tata Elxsi Limited (at Para

13.25). The Ld. CIT (A) has also routinely upheld the

inclusion of this comparable without citing any reasons for

rejecting the assessee’s contentions. The Ld. Counsel for the

assessee also drew our attention to the application for

rectification filed before the Ld. CIT (A) setting out the

workings for application of the employee cost filter. It was

submitted that this rectification application is still pending

consideration as on the date of hearing of the present

appeal. The Ld. Counsel for the assessee drew our attention

to Para 20 & 21 of the order of ITAT Bangalore Bench in the

case of NXP Semi Conductors (ITA 1174/Bang/2011),

wherein for this very reason the coordinate bench of the

Tribunal has directed exclusion of this company from the

final set of comparable companies.

The Ld. Sr. DR contended against exclusion of this

comparable by relying on the coordinate bench decision. It

was contended that NXP was engaged in business of

ITA No. 2907/Del/2014 Assessment year 2007-08

semiconductors and, therefore, the finding of the coordinate

bench was in a different context.

The Ld. counsel for the assessee clarified in this

context that the decision in NXP to exclude Ishirinfotech as

a comparable company was made in the context of

benchmarking their software development services segment

and had nothing to do with the overall business of NXP

being related to Semiconductors. It was, therefore,

contended on behalf of the assessee that the decision was

clearly applicable in the context of software development

services.

We have carefully considered the rival submissions.

Reference to pages 159,165 and 166 of the paper book of

annual reports filed show that the entire income of this

company is from professional receipts. Details of

administrative expenditure marked as Schedule 16 to the

financial statement include brokerage and commission paid

as also professional fees. Employee cost details are shown

separately under schedule 15 to the financials. The

company recognizes income by application of percentage of

completion method unlike cost plus mark-up basis of 21

ITA No. 2907/Del/2014 Assessment year 2007-08

compensation applicable to captive service providers like the

present assessee. Thus, it appears that in addition to this

company not qualifying the employee cost filter applied by

the TPO, the FAR of Ishirinfotech Limited is different

compared to that of Kaplan India Private Limited. Reference

to the chart filed by the Ld. AR during the hearing indicates

that other coordinate benches, details of which are

mentioned in the chart, also concluded that Ishirinfotech

Limited is not a valid comparable for AY 2007-08 for

software development services segment. Accordingly,

respectfully following the decision of the coordinate bench of

Bangalore in the case of NXP Semi Conductors India Pvt.

Ltd. (supra), we direct exclusion of this company from the

final set of comparable companies.

5.4 Megasoft Ltd:

The next comparable argued for exclusion by the Ld.

Counsel for the assessee is Megasoft limited. Our attention

was invited to page 217 of the paper book of annual reports

to show that the revenue recognition policy of the company

clearly sets out revenue recognition from product licenses

and related revenues. Page 220 is pointed out wherein

ITA No. 2907/Del/2014 Assessment year 2007-08

under note 5 to schedule 17 dealing with notes to accounts

it is mentioned that inventories are valued by including

direct expenses incurred for product development. Our

attention was also invited to page 237 of the paper book

containing annual reports wherein under the head

‘quantitative details’ the company has indicated that the

development and sale of such software cannot be expressed

in generic units. Management discussion and analysis at

pages 256 & 258 indicate that this company was focused on

products, innovation and involvement in the invention of

future technologies through two products viz., Xius and

Blueally. It is also noticed from page 256 that during the

year another company by name of Visualsoft was

amalgamated with the assessee. The nature of Xius

products and Blueally are detailed at pages 257 and 258 of

such paper book. The Ld. Counsel further drew our

attention to Para 13.17 of the TPO’s order, wherein the

information obtained under section 133 (6) is extracted. The

Ld. Counsel invited our attention to the reply received from

Megasoft which is dated 14 June 2010 and wherein at

paragraph 2 it is clarified in the context of Xius that the

ITA No. 2907/Del/2014 Assessment year 2007-08

products resulting from the software development are

defined and sold as packaged products to customers. It was

also pointed out that the TPO has expressly noted (just

above Para 13.8) that product revenue constitutes 19% of

overall revenue to the company. The Ld. Counsel, therefore,

urged that this company should be excluded from the final

set of comparables. The Ld. Counsel also relied on Para 22

& 23 of the coordinate bench’s decision in NXP

semiconductors (ITA 1174/Bang/2011) wherein for identical

reasons this comparable was found to be not comparable to

the software development services segment for AY 2007-08.

The Ld. Sr. DR submitted that Blue ally and Xius were

not products in themselves but were only segments which

engaged in software development service. Further, it was

submitted that the extraordinary event of amalgamation

also cannot be a reason to exclude this company from the

set of comparable companies unless taxpayer could

demonstrate that such amalgamation impacted the margin

earned by the company. Ld. Sr. DR further argued that

consultancy provided by this company for software product

development etc., will have to be considered as part of

ITA No. 2907/Del/2014 Assessment year 2007-08

software development services and absence of segmental

information should not lead to exclusion of this company.

We have carefully considered the rival contentions, the

material available on record and also the decisions of the

coordinate benches for the very same year. We are inclined

to agree with the submissions of the Ld. Counsel for the

assessee as this company is clearly engaged in multifarious

activities including sale of software products. Further, the

impact of the extraordinary event of amalgamation is also

not possible to be quantified and adjusted. We also notice

that the TPO himself has accepted that 19% of the revenue

earned by this company is from software products.

Submissions of the Ld. Sr. DR on this aspect are thus

contrary to findings of the TPO. The Ld. CIT (A) has also not

given any valid reasons for upholding the conclusions

reached by the TPO. Accordingly, respectfully following the

decision of the coordinate bench of Bangalore in the case of

NXP Semi Conductors India Pvt. Ltd. (supra), we direct

exclusion of this company from the final set of comparable

companies.

ITA No. 2907/Del/2014 Assessment year 2007-08

5.5 TATA Elxsi Limited:

The next comparable which the Ld. Counsel for the

assessee requested to be excluded is TATA Elxsi Limited.

By inviting our attention to the Directors report at page 287

of paper book for Annual reports, the Ld. Counsel submitted

that this company was engaged in embedded product design

services (design and development of hardware and software),

industrial design and engineering (mechanical design with a

focus on industrial design) and animation and visual effects

(animation and special effects). It was submitted that the

annual report of the company at page 286 shows that it

earned income of Rs. 307 crores from sales and services.

Our attention was invited to the description of the business

of Tata Elxsi on page 300 of paper book. It was submitted

that Schedule 4 to the Balance sheet shows inventories of

components and spares which are not usually found in a

company engaged in software development services.

Reference was invited to administrative and selling expenses

(schedule 14 to balance sheet) showing that this company

incurred advertising and sales promotion expenses as also

paid commission on sales. According to the Ld. Counsel for

ITA No. 2907/Del/2014 Assessment year 2007-08

the assessee the FAR profile of this company is vastly

different from that of a captive service provider like the

assessee. This is further corroborated by point numbers 6

and 8 under schedule 15, schedule to the financial

statements, wherein the policy for recognizing revenue from

sales and accounting for research and development costs

are set out. The Ld. Counsel drew our attention to the

findings of the coordinate benches in Motorola and NXP

Semiconductor cases (supra) at paragraphs 112, 113 and

Paragraph 24 respectively, wherein the coordinate benches

have concluded that this company is not comparable to

captive software development service segment.

The Ld. Sr. DR argued that incurring of research and

development was common for companies engaged in

software development services and that such research does

not make a company non-comparable to the companies

engaged in software development services. The Ld. Sr. DR

drew our attention to the information collected under

section 133 (6) as extracted in TPO’s order under Para 13.25

and argued that 87.45 % of revenues for AY 2007-08 was

ITA No. 2907/Del/2014 Assessment year 2007-08

stated to be from software development services and hence

Tata Elxsi is comparable to the assessee company.

We have considered the rival contentions as also the

factual details. We find that these very contentions were

considered by the coordinate benches of Tribunal in

Motorola and NXP semiconductors at paragraphs pointed

out above. Coordinate benches have come to the conclusion

that the activities carried out under software development

segment by Tata Elxsi are not simply software development

services but are complex in nature. The IPR in the form of

software researched and developed were used as a tool for

further development of software yielding higher margins. It

was rightly concluded in such decisions that the segment of

software development services in Tata Elxsi includes Design

services including hardware design and hence is not

comparable to simple software development services. We

find that these observations are fully applicable in the facts

of present case. Accordingly, respectfully following the

decision of the coordinate bench of Bangalore in the case of

NXP Semi Conductors India Pvt. Ltd. (supra), we direct

ITA No. 2907/Del/2014 Assessment year 2007-08

exclusion of this company from the final set of comparable

companies.

5.6 The Ld. Counsel for the assessee further requested for

inclusion of two companies viz., Indium software (India) Limited

and VMF Soft Tech Limited. By drawing attention to paragraph

10 of the TP order wherein the comparability of companies

chosen by the assessee in the transfer pricing study were

discussed by the TPO, it was submitted that the TPO had wrongly

excluded Indium Software (India) Limited presuming that the

turnover of this company was less than one crore and further

rejected VMF Softech Limited by citing information received

under section 133 (6) of the Act, which according to the TPO’s

order was that the company was functioning on job work basis

and that the predominant part of work was outsourced. The Ld.

Counsel drew our attention to the rectification application filed

under section 154 of the Act explaining how the turnover of

Indium Software (India) Limited was incorrectly considered by the

TPO to be less than Rs. 1 crores when, in fact, it was Rs. 5.39

crores. Similarly, it was the contention of the Ld. Counsel that

the employee cost of VMF Softech Limited was 53 %, which

according to the Ld. Counsel shows that the presumption of the

ITA No. 2907/Del/2014 Assessment year 2007-08

TPO was incorrect. Ld. Counsel relied on Para 37 of the

Coordinate bench’s decision in NXP Semi Conductors (supra)

wherein the coordinate bench had remanded VMF Infotech to the

TPO for fresh consideration taking into account all available

information. The Ld. Counsel prayed for similar relief and for

consideration of these companies for inclusion on merits.

5.7 We notice that the Ld. DRP also upheld the

conclusions of the TPO without citing any reasons. The Ld. Sr.

DR also did not point out any specific reasons to support the

exclusion of these companies from the final list of comparable

companies. Accordingly, it is directed that the TPO/AO will

decide the issue of inclusion of these companies afresh after

giving an opportunity of being heard to the assessee and

considering all material placed before him for consideration.

5.7 Thus, we direct the TPO/AO to re-determine the arm’s

length price of international transaction of software development

services in case of Kaplan India Private limited after excluding

Avanicincom Technologies Limited, Helios & Matheson Limited,

Ishirinfotech Limited, Megasoft Limited and Tata Elxsi Ltd. from

the final list of comparables. The TPO/AO will also decide afresh

the comparability and inclusion or otherwise of Indium Software 30

ITA No. 2907/Del/2014 Assessment year 2007-08

(India) Limited and VMF Softech after affording an opportunity of

being heard as directed above.

5.8 The Ld. Counsel for the assessee contended that the

disallowance of group medical insurance expenditure on the

ground that the scheme of ICICI Lombard is not recognised is

incorrect as the material available in the public domain like

Directors report (copy of which was handed over during the

hearing) clearly indicated that ICICI Lombard offered schemes

which were approved by IRDA. The Ld. Sr. DR contended that no

such material was placed before the lower authorities. We have

considered rival submissions. It appears that the schemes offered

by ICICI Lombard had approval of IRDA on 03.08.2001. In the

interests of justice, we direct the AO to consider afresh all the

relevant material available in public domain. The assessee is

directed to produce the same before the AO, who will decide the

issue afresh after affording suitable opportunity of being heard to

the Assessee.

6.0 In the final result, the appeal of the assessee is partly

allowed.

ITA No. 2907/Del/2014 Assessment year 2007-08

Order pronounced in the open court on 26/03/ 2019.

Sd/- Sd/- (N.S. SAINI) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 26th MARCH, 2019