M/S SOFTWARE PARADIGMS INFOTECH PRIVATE LIMITED,MYSORE vs. ASST.C.I.T., MYSORE

This is an appeal by the assessee against the order dated 21/1/2016 of ACIT, Circle-1(1), Mysore passed u/s 144C(13) r.w.s 143(3) of the Income-tax Act 1961 (‘Act’) in relation to the asst. year 2011-12.

In this appeal, the issue to be decided is with regard to correctness of determination of arms length price in respect of international transaction of rendering software development services and information technology enabled services (ITES) by the assessee to its associated enterprise. The addition made on determination of ALP in the Software Development Segment (SWD) was sum of Rs.2,68,45,350/- and in ITES segment sum of Rs.51,36,018/-. The Most Appropriate Method (MAM) chosen by the Assessee and accepted by the TPO was Transactional Net Margin Method (TNMM). The profit level indicator chosen for the purpose of comparison was Operating profit to Operating Cost (OP/OC).

As far as determination of ALP in Software Development Segment is concerned, the ld counsel for the assessee submitted before us that he seeks to exclude some of the comparable companies chosen by the TPO and confirmed by the DRP. In so far as determination of ALP in SWD segment is concerned, the TPO had chosen 13 comparables companies in the following margins.

The TPO determined the addition to the total income on determination of ALP as follows:-

On objection by the assessee to the proposal of the TPO, the DRP excluded 6 comparable companies namely 1) Infosys Ltd., 2) Larsen & Toubro Infotech Ltd. 3) Mindtree Ltd., 4) Persistent Systems Ltd., 5) Sasken Communication Technologies Ltd., 6) Tata Elxsi Ltd.,

As a result of DRP’s order, only 7 comparable companies out of the total 13 comparable companies chosen by the TPO remained for the purpose of comparison of profit margin. In this appeal, assessee seeks to exclude the 3 companies out of 7 companies that remain after the order of the DRP. The 3 comparable companies which the assessee seeks to exclude are: 1) Acropetal Technologies 2) E-Infochips Ltd., 3) ICRA Techno Analytics Ltd.,

The ld counsel for the assessee brought to our notice that in respect of companies engaged in software development such as the assessee, comparability of these 3 companies has already been considered by this Tribunal in relation to Assessment year 2011-12. Our attention was drawn to the decision of ITAT Bangalore Bench in the case of M/s Applied Materials India Pvt. Ltd., Vs. ACIT, IT(TP)A No.17 & 39/Bang/2016 order dated 21/9/2016, wherein this Tribunal held on comparability of Acropetal Technologies that the income of this company from software development was less than 75% of its total revenue and therefore the basic criteria for comparability of company viz., existence of more than 75% revenue or software development services was absent.

As far as E-Infochips Ltd., is concerned our attention was drawn to decision of the Delhi ITAT in the case of Saxo India Pvt. Ltd., Vs. ACIT 67 taxmann.com 155 wherein the Delhi Tribunal took note of the fact that the operating revenue of this company was from software development, hardware maintenance, information technology, consultancy etc. The Tribunal found that 15% of the total revenue was from hardware maintenance. The other segmental information was not available. Since

As far as ICRA Techno Analytics Ltd., is concerned, this Tribunal in the case of Applied Materials India Pvt. Ltd., (Supra) took the view that this company was engaged in diversified activities like software development, consultancy engineering services, web development and hosting and substantially diversified itself into domain of business analysis and business process out sourcing. Therefore, it was held that this company is functionally not comparable with a software development services provider.

The ld DR relied on the order of DRP. We are of the view that in the light of judicial precedence cited by the ld counsel for the assessee, the above 3 companies namely Acropetal Technologies Ltd. (seg.), E-infochips and ICRA Techno Analytics Ltd. are directed to be excluded from the list of comparable companies. The AO is directed to compute the ALP after excluding the aforesaid in the software development segment.

As far as ITES segment is concerned, the TPO had chosen the following set of 10 comparable companies whose arithmetic mean of profit margin was as follows:-

The TPO computed ALP and consequent addition to the total income as follows:-

The above shortfall of Rs. 41,73,731/- is treated as transfer pricing adjustment u/s 92CA in respect of IT enabled services segment of the taxpayer's international transactions.

On objections by the assessee, the DRP excluded 3 out of 13 comparables chosen by the TPO. In this appeal, the assessee seeks to exclude 4 out of the remaining 10 companies. The 4 companies which the assessee seeks to exclude are - 1)Accentia Technologies Ltd., 2) Acropetal Technologies Ltd., 3) ICRA Online Ltd. 4) Jeevan Scientific Technology Ltd.,

The ld counsel for the assessee submitted before us that in the case of company Providing ITES services such as the assessee, this Tribunal for AY 2011-12 considered and decided the comparability of all the 4 aforesaid companies. The ld counsel for the assesse brought to our notice that Accetia Technologies Ltd., was regarded as not comparable for the reason that there were major acquisitions and mergers during the relevant previous year which impacted its profit margin. Our attention was drawn to the decision of the ITAT Bangalore Bench in the case of Swiss Re Shared Services India Pvt. Ltd., Vs. ACIT (2016) 76 taxmann.com 22 laying the down as above.

As far Acropetal Technologies is concerned this Tribunal in the case of Swiss Re Shared Services India Pvt. Ltd., (Supra) took the view that this company was giving sophisticated set of services involving higher level of skills. It was also held that this company was rendering engineering design and enterprise solution infrastructural and health care etc. Since this company was more into engineering design services, it was held to be not functionally comparable.

As far as ICRA Online Ltd., is concerned, in the case of Swiss Re Shared Services India Pvt. Ltd., (Supra) the Tribunal held that this company was into knowledge process out sourcing and online software. The Tribunal took a view that this company was functionally comparable. However in the case of Zyme Solution Pvt. Ltd., Vs. ACIT, IT(TP)A No.85/Bang/2016 dated 28/4/2017, this Tribunal remanded the issue with regard to existence of related Party Transactions and thereafter directed comparability of this company and exclude this company if the RPT is more than 15% of the total revenue. As far as Jeevan Scientific Technology Ltd., is concerned this Tribunal in the case of Swiss Re Shared Services India Pvt. Ltd., (Supra) set aside and remanded for fresh consideration by the TPO of the comparability of this company with the following observations. “31. We have heard the rival contentions. Audited balance sheet and financial statement of Jeevan Scientific Technologies Ltd, (seg), taken from capitaline data base has been filed before us by the assessee at paper book page.677 to 740. Net revenue of the said company for the relevant previous year from its operation was Rs.2,45,39,23 1/-, as per its income statement at paper book page 725. TPO had considered the revenue as Rs.2,46,75,000/-. However segmental revenue of the said company, as it appear at paper book page 719 show its earnings from BPO operations is Rs.71.219 lakhs. Thus TPO had considered the total revenue instead of the segmental revenue. The turnover of the segment which was being compared was less than Rs.1 crore and by the yardstick applied by the TPO himself, the company ought have been excluded from the list of comparables. Whether the segmental information of the said company given by the assessee at paper book page 719, nevertheless requires a verification. We therefore set aside the comparability of Jeevan Scientific Technologies Ltd, (seg), back to the file of the AO/TPO for consideration afresh. In case the earning of the said company for its BPO operations is less than Rs.1 crore

After considering rival submissions, we are of the view that based with judicial precedent cited by the ld counsel for the assesee, Accentia Technologies Ltd., and Acropetal Technologies Ltd., should be excluded from the list of comparable companies. As far as ICRA Online Ltd. is concerned, the RPT in the case ICRA Online Ltd., needs to be verified by the TPO and if the RPT is more than 15% of the total revenue of this company then the same should be excluded. As far as Jeevan Scientific Technology is concerned, the TPO is directed to examine the comparability of this company as was directed by the Tribunal in the case of Swiss Re Shared Services India Pvt. Ltd., (Supra).

The TPO is directed to compute the ALP as per the directions given above after affording opportunity of being heard to the assessee.

The other grounds of appeal are not pressed for adjudication.

In the result, appeal of the assessee is partly allowed.