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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Per N.V. Vasudevan, Judicial Member
This is an appeal by the assessee against the order dated 15.9.2014 of CIT(Appeals)-III, Bangalore passed against the order dated 28.2.2013 of DCIT, Circle 11(5), Bangalore u/s. 143(3) r.w.s. 144C r.w.s. 254 of the Act.
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2. The brief background and facts & circumstances under which this appeal arises for consideration are as follows.
The assessee is a company which is engaged in the business of providing software development and IT enabled services. The assessee extends software development services and also extends information technology enabled services (ITES) to M/s Kodiak Networks Inc. USA.
Software Development Services Segment: In order to arrive at 4. the Arm’s Length Price (ALP) in respect of the international transaction of rendering software development services to its Associated Enterprise (AE), the assessee, after making the search on the prowess and capitaline data bases, has selected 49 comparables for the software development services and had adopted the TNMM (Transactional Net Margin Method) as the most appropriate method for arriving at the Arms Length Price (ALP).
The TPO rejected many of the comparables adopted by the assessee and made his own search of the database. He arrived at a set of 20 comparable companies, the list of which is annexed to this order as ANNEXURE-I. The profit margin of comparables so chosen by the TPO was 20.68. After giving risk adjustments, the TPO determined the arm's length price (ALP) as follows:-
“18.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms
IT(TP)A No.1348/Bang/14 Page 3 of 22 length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmetic mean PLI 20.68% Less: Working capital Adjustment (Annexure-C) 1.55% Adj. Arithmetic mean PLI 19.13% Arm’s Length Price: Operating Cost Rs. 21,67,21,274 Arms Length Margin 19.130% of the Operating Cost Arms Length Price (ALP) Rs.29,81,80,054 At 119.80% of operating cost
18.7 Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) Rs.25,81,80,054 At 119.80% of operating cost Price shown in the international Rs.24,06,82,087 transactions Shortfall being adjustment Rs. 1,74,97,967 u/s.92CA
The above shortfall of Rs.1,74,97,967 is treated as transfer pricing adjustment u/s 92CA.”
The above adjustment after the directions of the DRP was considered by this Tribunal in in an order dated 27.1.2012. As far as software development services are concerned, the Tribunal set aside the order of the TPO/AO and gave the following directions to be carried out by the AO/TPO:-
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“7.8 In these circumstances, we are of the considered view that this issue requires to be remitted back to the file of the TPO for fresh consideration with the following directions:- (i) The operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; (ii) the comparables having the turnover of morethan 1.00 crore but less than 200.00 crores only shall be taken into consideration; (iii) all the information relating to comparables which were sought to be used against the appellant shall be furnished to the assessee; (iv) the appellant shall also be extended an opportunity to cross examine the parties whose replies are sought to be used against the appellant; (v) to consider the objections of the appellant that relate to additional comparables sought to be adopted by the TPO and pass a detailed order and f) to give the standard deduction of 5% under the proviso to sec.92C(2) of the Act.”
The present proceedings arise out of the order passed by the AO giving effect to the directions of the Tribunal in (supra).
Though the assessee's grievance is with regard to the selection of comparables, even in the set aside proceedings, the ld. counsel for the assessee at the time of hearing pointed out that in the order giving effect to the directions of the Tribunal, the AO has incorrectly computed the ALP and if the inaccuracy is rectified, then the profit margin of the assessee
IT(TP)A No.1348/Bang/14 Page 5 of 22 would be within the +/- 5% range of the arithmetic mean of the comparables chosen by the TPO. According to the ld. counsel for the assessee, the provisions of second proviso to section 92C of the Act have not been properly applied by the TPO.
In the set aside proceedings, the TPO had chosen 14 comparables.
The arithmetic mean of the profit margin of 14 comparables chosen after working the capital adjustment was 18.63%. Based on the above, the TPO computed the adjustment on account of ALP as follows:-
Particulars Amount (Rs.) Operating Cost post capacity adjustment 21,67,21,274 Arm’s Length Margin 18.63% Arm’s Length Margin Price @ 122.28% of Operating Cost 1.55% Price shown in International Transaction 25,37,37,268 Difference being shortfall 24,06,82,087 Difference being shortfall 1,30,55,180
As far as IT segment is concerned, the TPO in the set aside proceedings gave effect to the directions of the Tribunal insofar as it relates to applying the turnover filter and also the directions of the Tribunal to apply the arithmetic mean of the comparables chosen by the assessee on the transactions by the assessee with its Associated Enterprise (AE). As we have already seen, one of the directions in the order of Tribunal was that the TPO had obtained information while choosing the final set of comparable companies by seeking information u/s. 133(6) of the Act. The Tribunal, after noticing the argument of the ld. counsel for the assessee
IT(TP)A No.1348/Bang/14 Page 6 of 22 that the TPO did not confront the assessee with the information obtained by issue of notice u/s. 133(6), directed the TPO in the set aside proceedings to furnish the information so obtained and also afford the assessee opportunity to cross-examine the parties, whose comparables were used against the assessee by the TPO. On the above directions, the TPO was of the view that the same is not capable of compliance for the following reasons:-
““3. Furnishing of information Cross examination for u/s. 133(6) of the IT Act: The Hon’ble tribunal has directed the TPO to furnish information collected u/s 133(6) to the taxpayer according to the principles of natural justice. The Tribunal has further directed that the taxpayer be provided an opportunity to cross examine the party from whom the information has been gathered and used against the assessee. Accordingly the taxpayer has been furnished with the information gathered by the TPO by exercising of powers u/s 133(6) once again. This information had already been given to the taxpayer along with time show cause notice issued. The directions of the Hon’ble tribunal in respect of opportunity for cross examination to the taxpayer cannot be complied by the TPO for the following reasons.
The Hon’ble ITAT in the above mentioned case has directed the AO/TPO to give an opportunity of cross examination to the assessee in relation to information collected using powers u/s. 133(6) of the I.T. Act. In this regard it is submitted that, u/s. 133(6) of the Income-tax Act, 1961, the information is collected under verification. Therefore, it does not involve examination of parties. It involves only collection of information. Collection of information cannot be equated with examination of parties. Therefore, no cross-examination is possible so long as examination of parties has not been done.
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Further, the assessee is declaring the information collected u/s. 133(6) as not reliable on the basis of data available in electronic media such as PROWESS and CAPITALINE databases. It is relevant to submit that the data-base do not claim absolute authenticity. Therefore, how can assessee challenge the authenticity of information collected u/s. 133(6) of IT Act received under verification on the basis of database which is not fully reliable? Therefore, the direction given by the ITAT cannot be compiled with. This has been brought to the notice of the Hon’ble tribunal by way of Miscellaneous petition filed vide dated:10.08.2012. Order of the Tribunal has not been received by the TPO as on date. Further, the assessee had filed with the TPO a list of questions for which the replies had to be sought from the third parties. The questions were forwarded to Kals Information Systems, Megasoft Pvt Ltd, Accel Transmatic Pvt Ltd. The reply sought for has not been provided by Megasoft Pvt Ltd till date. The other two parties Accel Transmatic Pvt Ltd and Kals Information Systems Pvt Ltd had replied which is enclosed as annexure-A to the order for the taxpayer’s reference. I propose to pass the order subject to amendment to the Hon’ble ITAT’s order on the miscellaneous application.”
At the time of hearing of the appeal, the ld. counsel for the assessee submitted before us that out of 20 comparables finally chosen by the TPO, 6 comparables have already been excluded by the TPO in the set aside proceedings, leaving only 14 final comparable companies. It was the submission of the ld. counsel for the assessee that out of 14 comparables that remain for consideration, 5 companies have already been rejected as comparables as they are not IT software development service providers in various decisions rendered by this Tribunal in the case of IT software
IT(TP)A No.1348/Bang/14 Page 8 of 22 development service providers and are therefore functionally dissimilar to an IT software service provider such as the assessee. In this regard, our attention was drawn to several decisions of the Tribunal on the comparable companies, in which the following 5 comparable companies were held to be functionally dissimilar to a company engaged in software development services viz.,
(1) KALS Infosystems Ltd. (2) Tata Elxsi Ltd. (3) Lucid Software Ltd. (4) Accel Transmatics Ltd. (5) Megasoft Ltd.
As far as Megasoft Ltd. is concerned, it was also pointed out that said company was accepted as a comparable for software service development companies, but only in respect of segmental operating margins of software development services rendered by such companies and not margins of the entity as a whole. The decisions relied on by the ld. counsel for the assessee in this regard will be dealt with in the subsequent paragraphs.
13. The ld. counsel for the assessee submitted before us that he does not want to press for adjudication before the Tribunal the issue with regard to the TPO not having afforded opportunity to the assessee to cross- examine the persons who have information u/s. 133(6) of the Act, in view of the subsequent decision of the Tribunal on functional comparability of the 5 comparables set out above. It is the further plea of the ld. counsel for the IT(TP)A No.1348/Bang/14 Page 9 of 22 assessee that if the 4 comparables out of 5 referred to above are excluded and segmental data of Megasoft (software segment) alone is considered, then the operating margin of the assessee will be +/- 5% range of the operating margins of the remaining comparables. Consequently, there could be no additions to the total income on account of adjustment consequent to determination of ALP. The chart filed by the assessee in this regard has already been extracted at para 13 hereinabove.
14. In the above circumstances, the ld. counsel for the assessee has given up the assessee's right to agitate the issue with regard to the TPO not having afforded the opportunity to the assessee of cross-examining all the persons from whom TPO obtained information u/s. 133(6) of the Act.
The ld. DR, placing reliance on the order of the TPO, submitted that the comparability of 4 companies out of 5 companies pointed out by the ld. counsel for the assessee, has already been adjudicated by this Tribunal. The 5th company viz., Megasoft Ltd. was considered as a comparable to software development service provider, but only segmental data was directed to be considered.
We have considered the rival submissions. In the light of the submissions made by the ld. counsel for the assessee, we are of the view that it is no longer necessary for us to go into question regarding affording the assessee opportunity to cross-examine all the persons who have information in response to TPO's notice u/s. 133(6) of the Act. We are IT(TP)A No.1348/Bang/14 Page 10 of 22 also of the view that 4 out of the 5 comparable companies pointed out by the ld. counsel for the assessee before us, have already been held to be not comparable with a company engaged in the provision of software development services such as the assessee. Following were the relevant observations of the Tribunal in this regard (in respect of comparable companies viz., Kals Information Systems Ltd., Accel Transmatics Ltd., Lucid Software Ltd. and Tata Elxsi Ltd.) in the case of M/S. Sys Arris Software Pvt. Ltd. VS. DCIT IT (TP) A.No.1621/Bang/2012 dated 16.5.2014 for AY 06-07:-
“11. As far as comparables at Sl.Nos.4 & 13 of the list of comparables chosen by the TPO are concerned, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies. The following are the relevant observations of the Tribunal in this regard:- “(d) KALS Information Systems Ltd.
As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs.45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different
IT(TP)A No.1348/Bang/14 Page 11 of 22 from software companies. The relevant extract are as follows: “16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.”
Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.
We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly
IT(TP)A No.1348/Bang/14 Page 12 of 22 software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.
(e) Accel Transmatic Ltd.
With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: “In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company
IT(TP)A No.1348/Bang/14 Page 13 of 22 was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee’s claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin.”
Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO.
We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables.”
12. In view of the aforesaid decision of the Tribunal, comparables at Sl.Nos.4 & 13 of the list of comparables chosen by the TPO have to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal.
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As far as comparable at Sl.No.9 viz., Lucid Software Ltd. from the list of comparables chosen by the TPO is concerned, we find that the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Pvt. Ltd. (supra) while dealing with the case of software services provider like the assessee, considered the comparability of Lucid Software Ltd. with similar software services provider and the Tribunal held as follows:- “7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as “Muulam” which is used for civil engineering structures and the product development expenditure itself is substantial vis- a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company
IT(TP)A No.1348/Bang/14 Page 15 of 22 cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee.”
In view of the aforesaid decision of the Mumbai Bench of the Tribunal, which is in relation to A.Y. 2007-08, we are of the view that the said company Sl.No.9 of the list of comparable listed by the TPO is to be excluded as a comparable while determining the ALP of the international transaction impugned in this appeal.” ………. 17. We are now left with only one comparable company chosen by the TPO viz., TATA Elxsi which is at Sl.No.8 of the list of comparable companies chosen by the TPO. This Tribunal in the case of Yodlee Infotech Pvt. Ltd. Vs. ITO in by its order dated 30.8.2013 held that this company is not functionally comparable with a software development service provider. The following were the relevant observations of the Tribunal in this regard. “15. Tata Elxsi Limited. 15.1.1 This company was selected by the TPO for inclusion in the set of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables for various reasons such as functional dis-similarity significant R & D activity, brand value, size, etc. The TPO, however, rejected the assessee's objections and included the company in the set of comparables. Before us, in this appeal the learned Authorised Representative reiterated that this company is not functionally comparable to the assessee as it performs a variety of IT(TP)A No.1348/Bang/14 Page 16 of 22
activities and functions under the software development and services segment and has drawn our attention to and quoted from the Annual Report of the company.
15.1.2 The learned Authorised Representative submitted that as per the Annual Report, this company operates in two segments, namely, 1. Systems and Integration Support Services - which caters to the domestic market and offers integrated hardware and packaged software solutions sourced from principals and
2. Software development services.
While the TPO has considered the software development and services segment as comparable to the assessee, the learned Authorised Representative submits that on perusal of the Annual Report of the company, it can be observed that the software development segment cannot be considered for analysis for the following reasons : (i) As per the Directors Report and the Management Discussion and Analysis, the software development and services segment comprises of three sub-services namely : a) Product Design Services i.e. design and development of hardware and software. b) Innovation Design Engineering i.e. Mechanical Design with a focus on Industrial Design; and c) Visual Computing Labs i.e. Animation and Special Effects for Movies and TV.
IT(TP)A No.1348/Bang/14 Page 17 of 22 ii) As the software development and services segment comprises of hardware, software and animation services, there is no sub-services break-up / information provided in the Annual Report OR the Databases, the learned Authorised Representative contends that this company should be rejected as a comparable as it is functionally different from the assessee. 15.2 Per contra, the learned Departmental Representative supported the orders of the authorities below on this issue. 15.3.1 We have heard both parties and perused and carefully considered the material on record including the judicial decisions relied upon. From the record, we find that this company is predominantly engaged in product designing services and not purely software development services. The references made to the Annual Report by the learned Authorised Representative show that the segment “software development and services” relates to design services and are not similar to software support services performed by the assessee in the case on hand. Further, the Mumbai ITAT in the case of Telecordia Technologies India Pvt . Ltd. (ITA No.7821/Mum/2011) has held, that this company, M/s. Tata Elxsi Ltd. is not a software development service provider, at para 7.7 on page 21 of its order which is extracted hereunder :
“ 7.7 …. Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative 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 IT(TP)A No.1348/Bang/14 Page 18 of 22 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 fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties.”
As can be seen from the extracts of the Annual Report of this company, placed before us, this factual position pertaining to Tata Elxsi Ltd., has not changed from Assessment Years 2007-08 to 2008-09. In this view of the matter, we are of the view that this company is not to be considered for inclusion in the set of comparable in the case on hand for the period under consideration and therefore direct the TPO to exclude this company from the final set of comparables for the period under consideration.”
18. In view of the above, the aforesaid comparable at Sl.No.8 of the list of comparable chosen by the TPO should also be excluded for the purpose of comparison while determining the ALP of the international transaction in question.
In view of the aforesaid decisions, we are of the view that the following companies viz., (1) KALS Infosystems Ltd. (2) Tata Elxsi Ltd. (3) Lucid Software Ltd. , and (4) Accel Transmatics Ltd., have to be excluded from the final list of 14 comparables chosen by the TPO for determining the ALP.
As far as the comparable chosen by the TPO viz., Megasoft Ltd. in the list of final comparables chosen by the TPO is concerned, this Tribunal
IT(TP)A No.1348/Bang/14 Page 19 of 22 in the case of Trilogy E-Business Software India Pvt. Ltd.ITA No.1054/Bang/2011 order dated 23.11.2012 has held had held that only segmental data of the said company should be taken for the purpose of comparison. Following are the relevant observations of the Tribunal:-
“37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius- BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75%
IT(TP)A No.1348/Bang/14 Page 20 of 22 of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75% of revenues from software development services.”
In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison.
In the light of discussion above, we are of the view that the adjustment on account of ALP and consequent addition made by the AO to IT(TP)A No.1348/Bang/14 Page 21 of 22 the total income, both in the IT segment with the 10 remaining comparable companies (including segmental margin of Megasoft Ltd.) would be 10.89% after working capital adjustment. The same is given as ANNEXURE-II to this order. The said arithmetic mean of the comparables is within the (+) (-) 5% range contemplated by the second proviso to Sec.92C(2) of the Act and consequently no addition by way of adjustment to ALP can be made. We have already seen that the adjustment to ALP and consequent addition to the total income in ITES segment cannot be sustained.
The appeal of the assessee is accordingly partly allowed.
Pronounced in the open court on this 10th day of April, 2015.