DCIT10(2), MUMBAI vs. DELMIA SOLUTIONS P.LTD, MUMBAI

Though, the assessee has raised various issues in the grounds, however, they basically relate to the addition made on account of transfer pricing adjustment made to the arm's length price of software development services provided to the overseas Associated Enterprises (AEs). Notably, subsequently, the assessee has filed amended grounds of appeal and as per the said amended grounds, the dispute has been narrowed down to selection of seven comparables. Therefore, we will restrict our finding to the aforesaid issue alone.

The learned Commissioner (Appeals), after considering the submissions of the assessee removed four out of the seventeen comparables selected by the Transfer Pricing Officer. Still, aggrieved with the order of learned Commissioner (Appeals), the assessee has filed the present appeal.

Before us, the assessee is objecting to the selection of the following comparables:–

Objecting to the selection of this company, the learned Authorised Representative submitted, the company is engaged in multiple activities, such as, software development services, sale of 5 3DPLM Software Solutions Ltd. products and related service. He submitted, the company has earned substantial revenue from product license and has earned extra ordinary profit due to intangible owned by it. Thus, he submitted, the company being functionally different from the assessee cannot be treated as comparable. He submitted, for the aforesaid reasons, the company was not considered as a comparable by the Tribunal in assessee’s own case in assessment year 2008–09. In this context, he drew our attention to the relevant observations of the Tribunal. Further, he submitted, the Tribunal in Saplabs India Pvt. Ltd. v/s ADIT, [2017] 87 taxmann.com 316, while considering the issue relating to comparability of this company with a software development service provider for the very same assessment year, has held that this company cannot be treated as comparable. Thus, he submitted, this company should be excluded as a comparable.

The learned Departmental Representative submitted, the assessee cannot selectively seek exclusion of certain comparables by raising the issue of functional dissimilarity. He submitted, when the assessee is not objecting to some other comparables selected with same functions, it cannot object to specific comparables. He submitted, since the other companies not objected by the assessee stand on same footing they should also have to be excluded on account of functional dissimilarity and the matter should be restored to 6 3DPLM Software Solutions Ltd. the Assessing Officer/Transfer Pricing Officer for selecting fresh comparables.

We have considered rival submissions and perused the material on record. We have also examined the judicial precedents cited before us. The main objection of the assessee is, this comparable is functionally different from the assessee. It is observed, in assessee’s own case for the assessment year 2008–09, the Tribunal having examined the financials of the company has found that it is engaged in product development and earns revenue from sale of license and subscriptions which could be a reason for earning high profit. Accordingly, the company was excluded from the list of comparables. It is also relevant to observe, the Tribunal in Saplabs India Pvt. Ltd. (supra), while examining the comparability issue of this company in the very same assessment year has held that the company cannot be treated as comparable as it is engaged in sale of products, license, and owns intangibles. No contrary decision has been brought to our notice by the Revenue. Therefore, taking note of the observations made by the Bench in the aforesaid judicial precedents, we hold that this company cannot be treated as comparable.

Objecting to selection of this company, the learned Authorised Representative submitted, the company is engaged in various

The learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals) / Transfer Pricing Officer.

We have considered rival submissions and perused the material on record. From the facts placed on record, it appears that this company has more than one segment and further, the software

Objecting to selection of this company, the learned Authorised Representative submitted, related party transaction (RPT) as a percentage of total turnover works out to 19.9%. Thus, it exceeds the RPT filter of 15%. He submitted, in assessee’s own case in assessment years 2006–07 and 2007–08, the Tribunal has applied RPT filter of 15%. In this context, he relied upon the orders passed by the Tribunal in ITA no.1109/Bang./2010, dated 10th May 2031 and ITA no. 845/Bang./2011, dated 22nd February 2013. Further, he submitted, the company is functionally different from the assessee as it is developing software products. Thus, he submitted, the company cannot be treated as comparable. In support, he relied upon the following decisions:–

The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned Commissioner (Appeals).

We have considered rival submissions and perused the material on record. We have also taken note of the decisions relied upon. The contention of the learned Authorised Representative for removal of the company on account of RPT is unacceptable. It is noticed that the assessee did not apply RPT filter while selecting comparable. The Transfer Pricing Officer has applied RPT filter of more than 25% for rejecting companies. In our view, the RPT filter of more than 25% applied by the Transfer Pricing Officer is consistent with the view taken by the Tribunal in many cases. Though, it may be a fact that in assessee’s own case in some other assessment years, RPT filter of more than 15% was applied but that cannot be considered as the yardstick in every assessment year. Be that as it may, on factual examination of the functionality of this comparable, it is noticed that the company is engaged in product development. That being the case, it is functionally dissimilar to the assessee. Considering the fact that this company is a product development company, the Co–ordinate

Objecting to the selection of this company, the learned Authorised Representative submitted, the company is functionally dissimilar to the assessee as it is engaged in multiple activity including software product development. He submitted, the business of the company is primarily related to ERP Suite of products owned by it. He submitted, the company owned significant intangible including marketing intangible consisting 60% of its gross assets. He submitted, the company is involved in complex operations of developing proprietary technologies and marketing the same. Further, he submitted, during the year there was a amalgamation of another company by name Holool India Ltd. with this company. Therefore, the year under consideration being an exceptional year of operation, the company cannot be considered as a comparable. In support of his contention, the learned Authorised Representative relied upon the decision of the Tribunal, Bangalore Bench, in Saplabs India Pvt. Ltd. (supra).

The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned Commissioner (Appeals).

We have considered rival submissions and perused the material on record. From the facts on record, it is noticed that this company is engaged in various activities including development of software products. The company owns a product in the name of ERP Suite. Further, it owns significant intangible which provides that it is a product company. Further, during the year under consideration, the another company, namely, Holool India Ltd. has merged with this company. Thus, extraordinary event of merger / amalgamation might have impacted the profitability of the company. Considering the aforesaid facts, the Co–ordinate Bench in Saplabs India Pvt. Ltd. excluded this company as a comparable. Subscribing to the view expressed by the Co–ordinate Bench in the aforesaid decision, we exclude this company from the list of comparable.

Objecting to the selection of this company, the learned Authorised Representative submitted, the company is functionally different form the assessee as it is engaged in development of niche software product and training. He submitted, the company focuses on 12 3DPLM Software Solutions Ltd. development of niche products for the transport and aviation industries. Whereas, segmental information in relation to the aforesaid activities is not available in public domain. Thus, he submitted, the company cannot be selected as a comparable. In support, he relied upon the decision of the Tribunal in Saplabs India Pvt. Ltd. (supra) and Google India Pvt. Ltd. (supra).

The learned Departmental Representative strongly relied upon the observations of the Transfer Pricing Officer and the learned Commissioner (Appeals).

We have considered rival submissions and perused the material on record. From the facts on record, it is noticed that apart from providing software development service, the company is also engaged in development of software products and training. However, segmental details relating to all its activities are not available in public domain. Considering the above, the Co–ordinate Bench in Saplabs India Pvt. Ltd. (supra) and Google India Pvt. Ltd. (supra) has excluded these companies as comparable. No contrary facts or material has been brought to our notice by the Revenue to take a different view other than the view taken by the Bench in the decisions referred to above. Accordingly, we direct the exclusion of this company from the list of comparables.

Objecting to the selection of this company, the learned Authorised Representative submitted, the company is functionally different from the assessee as it is engaged in the development of software product and segmental details of software service and software product segments are not available. Thus, he submitted, the company cannot be treated as comparable. In support, he relied upon the decision of the Tribunal in Saplabs India Pvt. Ltd. (supra) and Google India Pvt. Ltd. (supra).

The learned Departmental Representative strongly relied upon the observations of the Transfer Pricing Officer and learned Commissioner (Appeals).

We have considered rival submissions and perused the material on record. From the materials available on record, it is noticed that apart from providing software development services, the company is also engaged in developing software products. Whereas, segmental details relating to the aforesaid activities are not available. Considering the above, the Co–ordinate Bench in Saplabs India Pvt. Ltd. and Google India Pvt. Ltd. (supra) has excluded this company as a comparable. Nothing contrary has been brought to our notice by the Revenue to deviate from the view taken by the Co–ordinate Bench in 14 3DPLM Software Solutions Ltd. the decisions referred to above. Therefore, we direct the exclusion of this company from the list of comparables.

Objecting to the selection of this company as a comparable, the learned Authorised Representative submitted, though, the Transfer Pricing Officer has mentioned that the company does not have any RPT, however, in reality RPT of this company exceeds more than 25% RPT filter applied by the Transfer Pricing Officer. He submitted, the RPT of this company constitutes 34.68% of the total turnover. Further, he submitted, there is extreme fluctuation in margin of the company over the years reflects that the revenue recognition policy followed by the company is improper and is resulting in consistent change in margin. He submitted, the growth rate over the years is also fluctuating to extreme and the growth in revenue is not supported by growth in expenditure. Thus, he submitted, due to huge fluctuation in the margin of the company, it cannot be regarded as a comparable without properly analyzing the reasons leading to such fluctuations. In support of his contention, he relied upon the decision of the Tribunal in his own case in assessment year 2006–07 and 2007–08 as well as the decisions of the Tribunal in case of Saplabs India Pvt. Ltd. (supra) and Google India Pvt. Ltd. (supra).

We have considered rival submissions and perused the material on record. Undisputedly, the Transfer Pricing Officer has applied RPT filter of more than 25% to reject comparables. Though, the Transfer Pricing Officer has taken a RPT of this company as zero percentage, however, it is the contention of the assessee that the RPT of the company is actually 34.68%, hence, it fails the RPT filter applied by the Transfer Pricing Officer. It is noticed that in case of Google India Pvt. Ltd. (supra) which is for the very same assessment year, the Tribunal having factually found that RPT of the company constitutes 34.68% of the total turnover excluded it as a comparable. Moreover, in case of Saplabs India Pvt. Ltd. (supra), the Tribunal excluded it due to extraordinary and extremely fluctuating margins over the years. Since, the aforesaid decisions of the Tribunal are for the very same assessment year and the Revenue has failed to bring to our notice any contrary fact or material to deviate from the view expressed by the Bench in these decisions, respectfully following them, we exclude this company from the list of comparables. Accordingly, we direct the Assessing Officer to compute the arm’s length price afresh after excluding the comparables as directed herein above.

In the result, appeal is partly allowed. ./2013 Appeal by the Revenue

The only ground raised by the Revenue is against application of turnover filter the learned Commissioner (Appeals) while excluding some comparables selected by the Transfer Pricing Officer.

As discussed earlier in this order, out of 17 comparables selected by the Transfer Pricing Officer, learned Commissioner (Appeals) rejected four comparables, namely, Flextronics Software Systems Ltd. (segmental), L&T Infotech Ltd., Satyam Computer Service Ltd. and Infosys Technologies Ltd., due to their high turnover.

The learned Departmental Representative submitted, high turnover is not a criteria to reject comparables if the comparable is otherwise functionally similar to the assessee. He submitted, the companies rejected by learned Commissioner (Appeals) on the ground of high turnover are functionally similar to the assessee. Thus, he submitted, merely because the turnover of the company is high, it cannot be rejected as a comparable.

The learned Authorised Representative strongly relying upon the observations of learned Commissioner (Appeals) submitted, turnover is also a crucial factor in selecting comparables. He submitted, if the 17 3DPLM Software Solutions Ltd. companies having substantially low turnover can be excluded, applying the same logic, companies having substantially high turnover also have to be rejected. He submitted, in assessee’s own case for the assessment years 2005–06 and 2007–08, the Tribunal applying the turnover filter has directed exclusion of companies having turnover of more than ` 200 crore. He submitted, the same principle would also apply to the impugned assessment year.

We have considered rival submissions and perused the material on record. From the facts on record, it is observed that as against the turnover of assessee shown at ` 17.30 crore, the turnover of the companies rejected by learned Commissioner (Appeals) are as under:–

It is relevant to observe, the assessee while selecting comparables had applied both upper and lower turnover filter by fixing range of ` 5 to 250 crore. Whereas, the Transfer Pricing Officer, though, has applied the lower turnover filter by excluding companies having less than ` 1 crore income, however, it did not apply upper turnover filter. This, in our view, is a wholly incorrect approach. Undisputedly, compared to assessee’s turnover of ` 17.30 crore, the 18 3DPLM Software Solutions Ltd. turnover of the excluded companies are substantially higher and far ahead of the assessee. Compared to these companies and more particularly, Infosys Technologies and Satyam Computer Service Ltd., the assessee has to be considered as a pigmy. Further, it cannot be said that the turnover in all cases do not impact the profitability. Pertinently, in assessee’s own case in assessment year 2006–07, the Tribunal in Bang./2010, dated 10th May 2013, has held that upper turnover filter is a crucial factor in selecting comparables. The same view was expressed by the Tribunal while deciding assessee’s appeal for the assessment year 2007–08 in IT(TP)A no.845/Bang./2011, dated 22nd February 2013. In view of the aforesaid, we do not find any infirmity in the decision of learned Commissioner (Appeals) in excluding companies having turnover of more than ` 200 crore. Ground raised is dismissed.

In the result, Revenue’s appeal is dismissed. Order pronounced in the open Court on 19.11.2019