IN INCOME TAX APPELLATE TRIBUNAL, BENCH- A, BANGALORE BEFORE SHRI AK GARODIA, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER IT(TP)A No.1300 /Bang/2011 (Asst. Year 2007-08) M/s Support.com India Pvt. Ltd., (previously known as SupportSoft India Pvt. Ltd., 3rd Floor, Salarpuria Senate, 4th Cross, 5th Block, Kormangala Indl. Layout, Bangalore-560 095. . Appellant Vs. Dy. Commissioner of Income-tax, Circle-12(3), Bangalore. . Respondent Appellant by : Shri Padam Chand Khincha, CA Respondent by : Shri GR Reddy, CIT Date of Hearing : 11-07-2016 Date of Pronouncement : 30-09-2016 ORDER PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER This appeal by assessee is directed against order of Dy. Commissioner of Income-tax, Bengaluru dated 30/9/2011 and it pertains to assessment year 2007-08. IT(TP)A No.1300/B/11 2 2. assessee is private ltd., company incorporated on August 14, 2003 under provisions of Companies Act, 1956 with liability limited by shares. It has its registered office at #003, Classique Mansion, 6th Cross, Off Airport Road, HAL 2nd Stage, Bangalore-560 008. It is 100% export oriented unit registered under aegis of Software Technology Park of India and eligible for deduction specified u/s 10A of Act. It is wholly owned subsidiary of Supportsoft Inc. and provides software development services exclusively to its parent. company has entered into software development services agreement with Supportsoft Inc. Company s operations form strategic part of Supportsot Inc s global operations. Since Supportsoft India is engaged in business of providing software development services, it can be broadly classified as engaged in business of providing Information Technology (hereinafter referred as IT) services and thereby falling under Information Technology Services Industry. It is also engaged in business of providing sales and marketing services exclusively to Supportsoft Inc. IT(TP)A No.1300/B/11 3 3. adjustment to Arms Length Price International transaction dealt in by assessee company with its AE to extent of Rs.2,14,56,38/- was brought to tax by DCIT, Circle 12(3) Bangalore. 4. assessee is appeal before us. 5. facts are that methodology employed is external TNMM. assessee selected comparables. following is Computation of arm s length price by AO/TPO and adjustment made: Arm s length mean margin 25.14% Less: Working capital adjustment 1.99% Adjusted mean margin after working capital adjustment23.15% Operating Cost 14,21,11,466 Arm s length price 121.87% of operating cost 17,50,10,246 Price received for international transaction 15,35,53,859 Short fall being Adjustment u/s 92CA 2,14,56,387 IT(TP)A No.1300/B/11 4 Comparables Selected by TPO Sl.No. Company Name Operating WC Margin on ci Adjusted cost margins as per TPO 1 Accel Transmatic Ltd (Seg.) 21.11% 20.10% 2 Avani C 52.59% 51.29% 3 Celestial Labs Ltd 58.35% 54.40% 554 Datamatics Ltd 1.38% -0.73% 5 E-Zest Solutions Ltd 36.12% 36.10% 6 Flextronics Software Systems Ltd 25.31% \25.05% 7 Geometric Ltd (seg) 10.71% 9.55% 8 Helios & Matheson Information Technology 36.63% 34.48% Ltd 9 iGate Global Solutions Ltd 7.49% 5.53% 10 Infosys Technologies Ltd 40.30% 39.03% 11 Ishir Infotech Ltd 30.12% 30.43% 12 KALS Information Systems Ltd (Seg.) 30.55% 23.42% 13 LGS Global Ltd (Lanco Global Solutions 15.75% 15.12% Ltd) 14 Lucid Software Ltd 19.37% 17.01% 15 Mediasoft Solutions Pvt Ltd 3.66% 1.47% 16 Megasoft Ltd (Seg.) 60.23% 51.44% 17 Mindtree Ltd 16.90% 15.32% 18 Persistent Systems Ltd 24.52% 23.42% 19 Quintegra Solutions Ltd 12.56% 9.16% 20 RS Software (India) Ltd 13.47% 13.08% 21 R Systems International Ltd (Seg.) 15.07% 13.19% 22 Sasken Communication Technologies Ltd 22.17% 21.06% (Seg.) 23 SIP Technologies & Exports Ltd 13.90% 10.64% 24 Tata Elexi Ltd (Seg.) 26.51% 26.18% 25 Thirdware Solutions Ltd (Seg) 25.12% 21.51% 26 Wipro Ltd (Seg.) 33.65% 34.53% Arithmetic Mean 25.14% 23.15% IT(TP)A No.1300/B/11 5 6. assessee has given following chart expressing his opinion that certain companies have to be rejected while some are to be selected. 7. ld. counsel for assessee pointed out that 4 of comparables selected by appellant were also selected by TPO which are as follows: 1) Helios and Metherson Information Technology Ltd., 2) LGS Global Ltd., , 3) RS software (India) Ltd., 4) SIP Technologies and Exports Ltd., Helios & Matheson Information Technology Ltd., Before TPO, it was submitted that 4.60 In preceding assessment year, this company had been rejected as comparable applying onsite revenue filter. In order under Section 92CA for preceding year, it is stated that this company has 100% onsite revenues. For year under consideration, you have stated that this company passes all filters. IT(TP)A No.1300/B/11 6 4.61 As per reply received under Section 133(6), this company has 73% revenues from onsite operation. On what basis ratio is fixed at 75% is not clear from Notice. How 73% onsite revenue company is different than 75% onsite revenue company has not been demonstrated. This represents arbitrariness in application of filter. Based on above, assessee submits that this company should not be selected as comparable. 4.62 Further while computing margins of this company, you have included other income of Rs.4,22,41,177 and dividend income of Rs.64,73,573 as part of operating income. Other incomes have been excluded in all other cases while computing operating margins. same approach had to be adopted for this company also. When same is excluded from operating income, operating revenue stands at Rs. 1,78,63,80,304 and operating profits at Rs 47,88,93,794. revised margins would therefore be 36.63%. 8. Before DRP, it was submitted that 7.55 With respect to this company, assessee had submitted that assuming that onsite revenue filter IT(TP)A No.1300/B/11 7 should be applied, as per reply received under Section 133(6), this company has 73% revenues from onsite operations. learned TPO has rejected companies having more than 75% revenues from onsite operation. On what basis ratio is fixed at 75% is not clear. How 73% onsite revenue company is different from 75% onsite revenue company has not been demonstrated. This represents arbitrariness in application of filter. Based on above, assessee submits that this company should not be selected as comparable. 7.56 TPO has contended that issue of onsite revenue filter has been discussed. Since this company passes onsite revenue filter, it should be selected as comparable. Additional submission of Assessee 7.57 assessee submits that TPO has not demonstrated rationale for fixing onsite revenue filter at 75%. same is arbitrary in nature and liable to be rejected. IT(TP)A No.1300/B/11 8 9. assessee has filed additional grounds, which are as follows:- In order passed, transfer pricing additions were made to total income of appellant for transactions with associated enterprises. additional grounds of appeal (enclosed herewith) relate to rejection of Helios & Matheson Information Technology Ltd. as comparable. Both appellant and TPO had selected company as comparable in TP study and in TP order, respectively. With respect to rejection of comparable, ground pertains to question of facts. All necessary facts for adjudicating this ground are already on record. appellant humbly prays that additional ground be admitted and adjudicated along with other grounds of appeal in course of hearing of appeal. 10. We admit additional grounds and following decision of Quark System, we set aside this issue to file of TPO and direct him to give opportunity to assessee to submit his contentions with respect to rejection of this comparable. IT(TP)A No.1300/B/11 9 11. With respect to LGS Global Ltd., RS Software (India) Ltd., and SIP Technologies and Exports Ltd., learned counsel for assessee accepted above three comparables to be included by TPO. 12. assessee has further accepted 1) Datamatics Ltd., 2) Mediasoft Solutions Pvt. Ltd 3) Megasoft Ltd (Seg. 4) Quintegra Solutions Ltd., 5) R Systems International Ltd (Seg.). 13. Megasoft Ltd. : learned counsel for assessee submitted that Megasoft Ltd., margin of 23.11% should be considered for computing ALP in view of decision of Bangalore Tribunal in case of M/s Novell software Vs IT(TP) 1287/Bang/2011 for Assessment year 2008, wherein it is held as under:- 24. This company was chosen as comparable by TPO. objection of assessee is that there are two segments in this company viz., (i) software development segment, and (ii) software product segment. Assessee IT(TP)A No.1300/B/11 10 is pure software services provider and not software product developer. According to Assessee there is no break up of revenue between software products and software services business on standalone basis of this comparable. 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 business of product software. This company develops packaged products for wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request company to customize products or reconfigure products to fit into their business environment. Thereupon company takes up job of customizing packaged software. company also explained that 30 to 40% of product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on above reply, TPO proceeded to hold that comparable company was mainly into customization of software products developed (which was akin to product software) internally and that portion of revenue from development of software IT(TP)A No.1300/B/11 11 sold and used for customization was less than 25% of overall revenues. TPO therefore held that less than 25% of revenues of comparable are from software products and therefore comparable satisfied TPO s filter of IT(TP)A.1287/Bang/2011 Page 39 more than 75% of revenues from software development services. basis on which TPO arrived at PLI of 60.23% is given at page-115 and 116 of order of TPO. It is clear from perusal of same that TPO has proceeded to determine PLI at entity level and not on basis of segmental data. 25. In order of TPO, operating margin was computed for this company at 60.23%. It is complaint of assessee that operating margins have been computed at entity level combining software services and software product segments. It was submitted that product segment of Megasoft is substantially different from its software service segment. product segment has employee cost of 27.65% whereas software service segment has employee cost of 50%. Similarly, profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both segments are substantially different and therefore comparison at entity level is without basis and would vitiate comparability (submissions on page 381 to IT(TP)A No.1300/B/11 12 383 of PB-I). It was further submitted that Megasoft Limited has provided segmental break-up between software services segment and software product segment (page 68 of PB-II), which was also adopted by TPO in his show cause notice (Page 84 of PB-I). segmental results i.e., results pertaining to software services segment of this company was: Segmental Operating Revenues Rs.63,71,32,544Segmental Operating Expenses Rs.51,75,13,211Operating Profit Rs.11,96,19,333 OP/TC (PLI) 23.11% 26. It was reiterated that in given circumstances only PLI of software service segment viz., 23.11% ought to have been selected for comparison. 27. It was further submitted that learned TPO in case of other comparable, similarly placed, had adopted margins of only software service segment for comparability purposes. Consistent with such stand, it was submitted that margins of software segment only should be adopted in case of Megasoft also, in contrast to entity level margins. 28. Computation of net margin for Mega Soft Ltd. Is therefore remitted to file of TPO to compute IT(TP)A No.1300/B/11 13 correct margin by following direction of Tribunal in case of Trilogy EBusiness Software India Pvt.Ltd. 23. Respectfully following decision of Tribunal referred to above, we direct AO/TPO to compute correct margin of Mega Soft Ltd., as directed by Tribunal in case of First Advantage Offshore Services Pvt.Ltd. (supra). Accordingly we hold that Megasoft Ltd can be considered as good comparable after segmentation as directed in above order is done. 14. Accordingly we are of opinion that Megasoft Ltd can be considered to be good comparable after segmentation. 15. ld counsel for assessee submitted that following comparables selected by TPO can be accepted. 1. Megasoft 2. Datamatics Ltd. 3. Mediasoft Solution Pvt. Ltd., 4. Quintegra Solutions Ltd. 5. R Systems International Ltd. (Seg) IT(TP)A No.1300/B/11 14 16. learned counsel for assessee submitted that following companies are to be rejected. 1. Accel Transmatic Ltd. (Seg.) 2. Avani C 3. Celestial Labs Ltd 4. E-Zest Solutions Ltd 5. Flextronics Software Systems Ltd 6. Geometric Ltd (seg) 7. Gate Global Solutions Ltd 8. Infosys Technologies Ltd 9. Ishir Infotech Ltd 10. KALS Information Systems Ltd (Seg.) 11. Lucid Software Ltd 12. Mindtree Ltd 13. Persistent Systems Ltd 14. Sasken Communication Technologies Ltd (Seg.) 15. Tata Elexi Ltd (Seg.) 16. Thirdware Solutions Ltd (Seg) 17. Wipro Ltd (Seg.) 17. We are of opinion that above 17 comparables requested to be rejected by assessee are to be restored to file of TPO, who shall decide following ratio of decision in case of McAfee Software (India) Pvt. Ltd., in IT(TP) No.4/Bang/2012. relevant para is reproduced hereunder: IT(TP)A No.1300/B/11 15 However, there cannot be rigid rule or percentage fixed in adopting various filters. Generally, turnover filer is adopted to avoid selection of high end companies (big companies) with that of minnows in similar line of business. How to adopt filter depends on each case. Say for example, in TP analysis of company having 20 crores receipts, company with 2 crores to 200 crores can be stated to be within range ie, factor of ten as upper and lower limits. In certain cases, ITAT also accepted turnover filter of 1 crore to 200 crores. But range cannot be fixed, as facts may vary from case to case. Simply comparable cannot be excluded on upper turnover limit when infact in number of cases assessees did not raise any objection on inclusion of companies with very small turnovers. 200 crores upper limit also cannot be considered in case whose turnover is, say 300 crores. Therefore, instead of fixed 1 cr 200 crore range, what one has to consider is turnover/receipts of assessee and range of upper limit at ten times and lower limits also ten times. i.e, one tenth. Thus for example range of 1 300 crores company can be from 30 crores (1/10th) to 3000 crores (ten times). Even this has some limitations. For example if range is considered say 2 to 200 crores, comparable company cannot be rejected if turnover IT(TP)A No.1300/B/11 16 is 1.99 crores or say 201 crores. There can be margin of variation. These are broad parameters so that no fixed formula can be adopted on uniform basis across all areas of functions. 18. It was further held that he TPO should examine whether comparable company is within range of ten times upper limit. For eg. Assessee s turnover is about 63 crores, turnover of i-gate Global Solutions Ltd., (seg) is above 405 cores and L & T Infotech Ltd., is of 562 crores, then this is within range of ten times upper limit and therefore these two are to be retained. 19. AO shall also analyze functional dissimilarity in certain comparables while deciding matter restored to his file. 20. In result, appeal is set aside for statistical purposes. IT(TP)A No.1300/B/11 17 Order pronounced in open court on 30th September, 2016. Sd/- Sd/- (AK GARODIA) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore Dated : /09/2016 Vms Copy to :1. Assessee 2. Revenue 3.The CIT concerned 4.The CIT(A) concerned 5.DR 6.GF By order Asst. Registrar, ITAT, Bangalore M/s Support.com India Pvt. Ltd., (previously known as SupportSoft India Pvt. Ltd.) v. Dy. Commissioner of Income-tax, Circle-12(3), Bangalore