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

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 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 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 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.

7. The TPO/AO/CIT (A) has erred, in law by exercising his powers under section 133(6)/131 to obtain selective information which was not available in the public domain and relying on the same for comparability analysis. Without Prejudice to the above, the information collected by the AO/TPO U/s 133(6) or U/s 131 has not been provided to the appellant although the same has been used against the appellant, hence the addition I adjustment made on that basis is illegal and bad in law.

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.”

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, 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, 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 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; (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 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 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 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

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

Solutions India Private Limited ( 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 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 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 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 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

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 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 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 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 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 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 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 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.

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 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 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 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 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 (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.

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