MISYS SOFTWARE SOLUTIONS (INDIA) PRIVATE LIMITED,BANGALORE vs. ASST.C.I.T., BANGALORE

The TPO selected 10 comparable companies as under :

After allowing the working capital adjustment of 1.56%, the TPO has computed the adjusted mean margin at 21.43%. Accordingly, the TPO

On the other hand, the assessee has challenged the functional comparability of 4 companies which are as under :

The learned Authorised Representative of the assessee has submitted that though the DRP has applied turnover filter of Rs.200 Crores however even if a filter of 10 times of the assessee's turnover is applied on both sides 2 companies namely Infosys Ltd. and KALS Information System Ltd. are required to be excluded as breaching the turnover filter of 10 times of the assessee's turnover on the higher side

On the other hand, the learned Authorised Representative has not disputed the fact of the turnover of these two companies however she has contended that the turnover is not a relevant factor for deciding the comparability of the companies in the software development services activity. She has relied upon the order of the TPO/A.O.

We have considered the rival submissions as well as the relevant material on record. The turnover of the assessee is in the software development services segment is Rs.151.08 Crores therefore considering the tolerance range of the turnover to the extent of 10 times of the assessee's turnover on both sides, the companies which are having the turnover of less than Rs.15.1 Crores and more than Rs.1,510 Crores would be excluded from the set of comparables. Applying this criteria of 10 IT(T.P)A Nos.491 & 174/Bang/2015 10 times tolerance range of assessee's turnover, we find that the following companies are breaching this tolerance range of filter :

Though the assessee is not seeking exclusion of L&T Infotech Ltd. however once a filter is applied it has to be applied uniformly and therefore the companies having turnover of more than 10 times of the assessee's turnover and less than 1/10 th of the assessee's turnover are required to be excluded. We direct the TPO/A.O. to exclude these three companies from the set of comparables.

The learned Authorised Representative of the assessee has submitted that though the DRP excluded this company by applying the turnover filter however this company is otherwise functionally dissimilar to that of the assessee. This company is engaged in outsource software product development which is different from assessee's software development services provided to Associated Enterprise (AE). He has referred to the Annual Report of this company to show the income

On the other hand, the learned Departmental Representative has submitted that when the nature of activity is identical and similar to the assessee in providing software development services then the minor variation in the nature is not relevant. She has relied upon the order of the TPO/A.O.

The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us.

This company was excluded by the DRP by applying the turnover filter of Rs.200 Crores.

The learned Authorised Representative of the assessee has submitted that this company is functionally dissimilar as indulged in the 13 IT(T.P)A Nos.491 & 174/Bang/2015 product design service, innovation design, engineering services and visual computing lab, special effects and animation. He has referred to the Annual Report of this company and submitted that the software development services segment of this company includes these functional activity which are entirely different from the functions of the assessee.

On the other hand, the learned Departmental Representative has relied upon the order of the TPO/A.O. and submitted that the TPO found this company as functionally comparable and also satisfied all the filters then there cannot be a vertical bifurcation in the segment of software development services.

The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra).

We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies India (P.) Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:— "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We 15 IT(T.P)A Nos.491 & 174/Bang/2015 agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties."

No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra), we do not find any reason to interfere with the finding of the DRP.”

As regards revenue’s grievance against the DRP the remaining companies which were excluded by the DRP by applying the turnover filter and RPT filter stand restored to the set of comparables. Needless to say the benefit under Section 92CA be given to the assessee.

Since we have directed the TPO/A.O. for exclusion of certain companies from the set of comparables, accordingly, the TPO/A.O. is directed to recompute the ALP on the basis of remaining comparables.

The assessee is providing finance back office support service to its AE. The TPO selected 9 comparable companies to determine the ALP of international transactions in ITES segment as under :

The TPO has allowed the working capital adjustment of 0.47% and calculated the adjusted mean margin at 25.22%. Accordingly, the TPO has proposed an adjustment under Section 92CA of Rs.74,69,292. The assessee challenged the action of the TPO before the DRP. The DRP applied the turnover filter of Rs.200 Crores and RPT at 0% and accordingly excluded 7 companies from the set of comparables. Thus both the assessee as well as revenue have challenged the order of the DRP. The assessee is now seeking exclusion of 5 companies from the set

At the time of hearing, the learned Authorised Representative has stated that the assessee does not press the exclusion of Informed Technologies India Ltd. therefore the same may be retained in the set of comparables. The learned Departmental Representative has no objection if this company is retained in the set of comparables.

We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The assessee's turnover in the ITES segment Rs.9.06 Crores. Applying the filter of 10 times on both sides the companies which - 18 IT(T.P)A Nos.491 & 174/Bang/2015 are having more than Rs.90.6 Crores and less than Rs.0.90 Crores are to be excluded. The company Accentia Technology India Ltd. is having turnover of Rs.92.76 Crores therefore this company breach the turnover tolerance range of 10 times of the assessee's turnover. Further the learned Authorised Representative of the assessee has relied upon the decision of the co-ordinate bench of this Tribunal dt.6.1.2017 in the case of Goldman Sachs Services Pvt. Ltd. Vs. DCIT in IT(TP)A No.267/Bang/2015 and 222/Bang/2015. We find that in the said case, the Tribunal has considered the functional comparability of this company in paras 8 & 9 as under :

We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The DRP excluded this company by applying the RPT filter of 0%. The TPO applied the RPT filter of 25%. Thus this issue has come up in revenue’s appeal regarding proper RPT filter for selection of comparables.

This company is having turnover of Rs1,126.63 Crores in comparison to the assessee's turnover of Rs.9.06 Crores therefore the turnover of this company is many times more than the upper limit of 10 times of the assessee's turnover. Hence by applying this criteria of 10 times of the assessee's turnover this company is required to be excluded

The learned Authorised Representative of the assessee has submitted that this company is functionally not comparable with the assessee. He has submitted that the TPO has not included this company in the show cause notice proposing the set of comparables however without giving an opportunity to the assessee, the TPO has included in the final set of comparables. The DRP has not examined the functional comparability of this company and excluded the same on RPT filer.

On the other hand, the learned Departmental Representative has submitted that when the TPO has examined the functional comparability of this company then this company should be retained in the set of comparables.

We have considered the rival submissions as well as the relevant material on record. We find that this company was not part of the initial proposal of the TPO as per the show cause notice. Therefore the assessee was not given an opportunity of hearing to raise its objections against inclusion of this company in the set of comparables. The 23 IT(T.P)A Nos.491 & 174/Bang/2015 assessee raised the objection against the inclusion of this company before the DRP however the DRP has not examined the functional comparability of this company and excluded the same by applying 0% RPT filter. In view of the fact that the TPO has not given an opportunity to the assessee to point out the functional dissimilarity and raise the objection, we set aside this issue to the record of the TPO for reconsideration of the functional comparability of this company after considering the objections raised by the assessee.

The grievance of the revenue regarding exclusion of the companies by the DRP by applying turnover and RPT filters stand addressed when we have applied the turnover filter of 10 times of the assessee's turnover and RPT tolerance range of 15%. Thus the remaining companies which were excluded on turnover filter and RPT filter by the DRP will be restored to the set of comparables. Since we have directed the exclusion of certain companies form the set of comparables and reconsideration therefore the TPO/A.O. has to recompute the ALP on the basis of the remaining comparables. Needless to say the benefit of proviso to section 92C(2) be considered.