Income Tax Appellate Tribunal – Pune
Bmc Software India Private Ltd.,, … vs Deputy Commissioner Of … on 18 January, 2021 IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH “C”, PUNE – VIRTUAL COURT
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER
आयकर अपील सं. / ITA No.219/PUN/2015
िनधा रण वष / Assessment Year : 2010-11
BMC Software India Private Limited, Vs. DCIT, Circle-1(1),
Business Bay, Wing 1, Pune
Tower B, 9th Floor, Survey No.103,
Hissa No.2, Airport Road,
Yerwada, Pune – 411 016
PAN : AABCB6110E
Appellant Respondent
आयकर अपील सं. / ITA No.209/PUN/2015
िनधा रण वष / Assessment Year : 2010-11
DCIT, Circle-1(1), Vs. BMC Software India Private Limited,
Pune Business Bay, Wing 1,
Tower B, 9th Floor, Survey No.103,
Hissa No.2, Airport Road,
Yerwada, Pune – 411 016
PAN : AABCB6110E
Appellant Respondent
Assessee by Shri Madhur Agarwal
Revenue by Shri Shivraj More and
Shri Mahadevan A.M. Krishnan
Date of hearing 15-01-2021
Date of pronouncement 18-01-2021
आदेश / ORDER
PER R.S.SYAL, VP :
These two cross appeals – one by the assessee and other by
the Revenue – arise out of the final assessment order dated
31-12-2014 passed by the Assessing Officer (AO) u/s.143(3)
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r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter called
‘the Act’) in relation to the assessment year 2010-11.
2. Briefly stated, the facts of the case are that the assessee is a
domestic company engaged in providing Software Development
services and Sales support services to BMC, US and BMC
Software, Inc., which is a company based in Houston, Texas, US.
The assessee is solely engaged in providing such services to BMC
group entities. Return was filed declaring total income of Rs.3.02
crore. Certain international transactions were reported in Form
No. 3CEB. The AO made a reference to the Transfer Pricing
Officer (TPO) for determining the Arm’s Length Price (ALP) of
the international transactions.
I. PROVISION OF SOFTWARE DEVELOPMENT SERVICES
3. The first issue raised in this appeal is against the transfer
pricing addition of Rs.15,11,98,577/- made by the AO in the
international transaction of “Software Development services”.
The facts anent to this are that the assessee declared value of the
international transaction of `Provision of Software Development
services’ at Rs.2,49,14,47,288/-. The assessee applied
Transactional Net Margin Method (TNMM) as the most
appropriate method for showing the international transaction at
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ALP. The assessee initially selected 9 comparables on the basis
of three years’ data. On being pointed out by the TPO for
considering data for the current year alone, the assessee excluded
3 companies from the existing list and also included fresh 3
companies thereby making a list of 9 comparables on the basis of
single year data. The TPO retained 2 companies from the
assessee’s list and included 7 fresh companies. He, accordingly,
determined the ALP of the international transaction of providing
“Software Development services” at Rs.2,77,77,86,057/- by
taking mean margin of comparables at 26.51%. This resulted into
proposing a transfer pricing adjustment of Rs.28,46,97,425/-. The
assessee assailed before the Dispute Resolution Panel (DRP)
various aspects of the ALP determination by the TPO as
incorporated by the AO in the draft order. The DRP excluded one
company and inducted fresh 3 companies thereby making tally of
comparables companies at 11. The AO, in the final assessment
order, recomputed the amount of transfer pricing adjustment in
Software Development services segment at Rs.15,11,98,577/-.
Both the sides have come up in appeal on their respective stands.
4. We have heard the rival submissions through Virtual Court
and gone through the relevant material on record. Admittedly, the
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assessee applied the TNM method on transactional level which
got accepted by the TPO. The dispute in the determination of the
ALP in Software Development services segment is confined only
to the comparability or otherwise of certain companies finally
included or excluded by the DRP. In order to properly appreciate
the comparability of a company, it is significant to first
understand the functional profile of the assessee company under
the Software Development services segment. The assessee
provides Software Development services to its AEs which include
new product development; and upgradation and modification of
existing products. The assessee is required to provide the above
software services in accordance with the specifications provided
by BMC overseas entities from time to time. The IPRs in all the
deliverables remain with BMC overseas entities.
Conceptualization of the required software products is done by
BMC overseas entity. The assessee, on the basis of the
requirements of the clients and market, works on designing of the
product in consultation with BMC overseas entities. Functional
specification and requirement analysis for the Software
Development is jointly undertaken by the assessee and BMC
overseas entity. However, the assessee undertakes coding and
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development of the software modules as per the functional
specifications and requirement analysis. Thereafter, testing is
done by the assessee. The overseas entities undertake coding and
testing of the software in respect of modules which are not
developed by the assessee. In certain cases, the assessee
undertakes modifications of existing products on the basis of
customized requirements. At times, the assessee directly liaises
with the customers to understand their exact requirements.
5. The assessee entered into an Agreement with BMC,
Houston; BMC, Singapore; and BMC, Netherlands effective from
01-04-2009 for rendering all the services, including the software
development services. A copy of the Agreement has been placed
at page 1812 onwards of the paper book. Nature of services to be
provided by the assessee has been set out in clause 2.1 of the
Agreement, which states that the assessee shall render some of the
services to Users (i.e. BMC overseas entities) as listed in
Appendix. Appendix-A to the Agreement sets out the services to
be rendered by the assessee to BMC overseas entities. Insofar as
the Software Development services are concerned, the relevant
clauses in Appendix-A are (a) and (f). Clause (a) refers to
“Production of computer software by way of architecturing,
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engineering, design, development, testing and support of
software”. Clause (f) talks of `Website services’. Compensation
has been fixed at certain mark up. On going through the relevant
clauses of the Agreement and other attending details, it becomes
apparent that the nature of services rendered by the assessee under
this Agreement comprises of product development on the basis of
specifications given by BMC overseas entities and also
upgradation and modification of existing products. With the
above understanding of the nature of services, we now proceed to
determine the comparability or otherwise of certain companies
challenged by both the sides before the Tribunal.
6. Before embarking upon the comparability analysis, it would
be apt to take note of the final set of comparables under the
Software Development services segment which has resulted after
giving effect to the directions of the DRP, as under :
Sr.No. Name of the comparable PLI
margin
OP/OC
(%)
1 Persistent Systems Private Ltd. 29.51
2 Sasken Communication Technologies Ltd. 17.54
3 Mindtree Ltd. 16.69
4 Kals Information Technology System Ltd. 24.56
5 Acropetal (Segmental) 40.07
6 Thirdware Solution Ltd. 32.63
7 Goldstone Technologies Ltd. 20.15
8 LGS Global Systems Ltd. 11.95
9 R.S. Software India Ltd. 10.21
10 Thinksoft Global Services Ltd. 14.71
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11 Silverline Technologies 6.71
Arithmetical Mean 20.43
7. Whereas the assessee has challenged inclusion of Kals
Information Technology System Ltd; Acropetal (Segment);
Thirdware Solution Ltd; and Persistent Systems Private Ltd; the
Revenue has challenged the inclusion of R.S. Software India Ltd.;
Thinksoft Global Services Ltd.; and Silverline Technologies.
8. We will first deal with the companies challenged by the
assessee.
(a) Kals Information Technology System Ltd.:
9. The TPO included this company in the list of comparables
despite the assessee’s objections, inter alia, that the company was
also a Software company since its inception. The assessee could
not get any succor from the DRP on this count.
10. We have examined the Annual report of this company,
whose copy has been placed at page 565 onwards of the paper
book. Profit and Loss account is available at page 582 which
shows “Sales, Servicing and Training” revenue at
Rs.2,30,45,144/- besides “Other income”. Schedule-10 gives
break up of sales revenue. It comprises of `Income from Software
Development – Export’ at Rs.2,16,92,935/-; `Translation &
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Interpretation’ at Rs.10,84,248/; and `Training receipts’ at
Rs.2,67,961/-. Notes to the Financial statements indicate that:
“The company is engaged in development of Software and
Software Products since its inception’. The fact that the company
is into Software products is further evidenced from the figure of
“Inventories” in its balance sheet. Further, the list of operating
expenses includes an item of “Software consumption from
inventory” at Rs.11.00 lakh. The `Segmental revenue’ of this
company has bifurcated total operational revenue into two parts,
namely, `Application Software’ – Rs.2,16,92,935/- and `Training’
– Rs.13,52,209/-, which matches with the total revenue from
operations. Thus it is manifest that insofar as the revenue from
sale of products and development of software is concerned, the
same has been combined under the segment “Application
Software”. The above discussion deciphers that this company is
engaged in software products as well as Software Development
services, income from both of which streams has been clubbed
under the segment of “Application Software”. Since the assessee
in the instant case is involved only in rendering Software
Development services to its AEs and is not into any software
products, we hold that this company cannot be considered as a
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comparable. We, therefore, direct to exclude it from the list of
comparables.
(b) Acropetal (Segmental) :
11. The TPO included this company in the list of comparables
despite the assessee’s objections of the same being functionally
different and also rendering on-site services. The TPO negated
such objections by holding that on-site development expenses
were less than 50% of total expenses and therefore, on-site
expenditure was not a significant factor. The assessee remained
unsuccessful before the DRP.
12. Having heard both the sides and gone through the relevant
material on record, we find from the Annual report of the
company, a copy of which has been provided at page 593
onwards of the paper book, that this company is rendering on-site
development services to a greater extent. Out of total expenses of
Rs.87.26 crore including operating and non-operating, this
company incurred employees related on-site development
expenses to the tune of Rs.55.85 crore, which includes a sum of
Rs.42.32 crore towards on-site development expenses only. Thus,
it emerges that roughly 50% of the total expenses incurred by this
company are towards on-site development costs. As against that,
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the assessee is not rendering any on-site development services. It
goes without saying that on-site services business model entails
its own risks and rewards, which are incomparable to the services
rendered from the business model of rendering services from own
premises. One cannot construe both as one and the same. The
assessee under consideration is not rendering on-site services.
Notwithstanding that, it is further seen that this company is also
into Products, which is borne out from its balance sheet showing
value of “Inventories and work in progress” at Rs.3.37 crore. It is
still further noted that the company has clubbed both the Product
Development services and on-site services in one overall segment
of “Information Technology services”. Thus, it is overt that the
IT services segment of this company, which has been construed
by the TPO as comparable, cannot be so held as the assessee is
neither rendering on-site services nor engaged in software
products. We, therefore, direct to exclude this company from the
list of comparables.
(c) Thirdware Solution Ltd.:
13. The TPO proposed to include this company in the list of
comparables which was objected to by the assessee for functional
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differences. The TPO did not accept the assessee’s contention.
No relief was allowed by the DRP as well.
14. After considering the rival submissions and perusing the
relevant material on record, we find from the Annual report of
this company, whose copy has been placed from page 1752
onwards of the paper book, that it has Sales revenue of Rs.67.56
crore. Break-up of such revenue is available at Schedule-12,
giving figures of Exports from SEZ and STPI units; Revenue
from subscription; Sale of license; and Software services. This
indicates that this company, apart from rendering software
services, is also engaged in software products. Segmental
information has been given on the basis of geographical
segments. Thus, it becomes crystal clear that no information
regarding revenue from software services distinct from other
activities is available on record. As the assessee is engaged only
in rendering software development services, this company on the
basis of figures available on record, cannot be considered as
comparable. We, therefore, direct to exclude it from the list of
comparables.
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(d) Persistent Systems Private Ltd.:
15. The assessee included this company on the basis of three
years’ data. However, on single year data basis, the assessee
excluded it on the basis of turnover filter, which did not find
favour with the TPO, who continued with its inclusion without
making any separate discussion in his order passed u/s.92CA(3)
of the Act. The DRP also did not change the fortune of the
assessee by observing that its turnover was only Rs.504 crore
which was not materially different from that of the assessee.
16. The ld. AR contended that though the assessee initially did
not include this company on the basis of turnover filter, however,
later on it was realized that this company was not functionally
similar. He did not emphasize on the turnover filter for the
exclusion of this company before the Tribunal but submitted that
his entire focus was on functional differences warranting
exclusion from the list of comparables.
17. We observe from the material on record, as has also been
accepted by the ld. AR, that the contention about the functional
dissimilarity between the assessee and Persistent Systems Pvt.
Ltd. was never raised before the authorities below. As such,
neither the TPO nor the DRP could examine such a contention.
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Since the assessee has abandoned before the Tribunal the basis of
turnover filter as was originally taken and harped on a new base
of functional differences for exclusion of this company for the
first time, we, being an appellate authority, cannot straight away
accept or reject such contention unless the authorities below apply
their mind to the functional differences as has been sought by the
assessee. Without going into the merits, we set aside the
impugned order and remit the matter to the file of AO/TPO with a
direction to examine the assessee’s contention on functional
dissimilarities and then decide the question of its inclusion.
18. Apart from the above exclusions, the assessee has also
agitated the non-inclusion of two companies in the list of
comparables. The first is Maveric Systems Limited and the
second is Quintegra Solutions Limited.
(i) Maveric Systems Ltd.:
19. The TPO rejected this company from the list of comparables
on the ground that its Annual report for the relevant financial year
was not available in the public domain. In addition, the TPO also
noticed that foreign exchange earnings of this company were less
than 75%. The assessee submitted Annual report of the company
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for the next year, which also contained figures for the year under
consideration. The DRP echoed the order of the AO excluding
Maveric Systems Ltd. from the list of comparables by noticing
that not only the quantitative information but the qualitative
information for the year was also required, which could depict
business activities of the company for deciding the functional
profile comparability, Related party transactions, happening of
extraordinary events, reasons for high loss or profits and
segmental working etc. In the absence of the availability of the
Annual report of this company for the year under consideration,
the DRP did not consider it appropriate to include the same in the
list of comparables.
20. We have heard the rival submissions and gone through the
relevant material on record. The assessee has placed on record a
copy of the Annual report of the company for the year under
consideration by claiming that the same is now available in the
public domain. As regards the TPO’s contention that the foreign
exchange earnings of this company were less than 75%, we find
from the Schedule 9 that it earned revenues from overseas at
Rs.34.86 crore as against Domestic revenue at Rs.11.61 crore.
Thus, it is evident that foreign exchange revenue of this company
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is more than 75%. Since the comparability or otherwise of this
company has not been examined on merits because of the non-
availability of the Annual report for the year under consideration,
which has now been placed on record, we direct the AO/TPO to
examine whether this company is comparable on merits.
(ii) Quintegra Solutions Ltd.:
21. The TPO did not include this company in the list of
comparables on the ground that it was engaged in rendering on-
site activities. The DRP approved the exclusion of this company
by also noticing that it was a loss making company and hence,
could not be included in the list of comparables.
22. The reason given by the TPO for excluding this company is
its engagement in rendering on-site activities. We are unable to
corroborate this version from the material on record. We have
examined the Annual report of this company which has been
placed at 1335 onwards of the paper book. Page 1361 contains
the details of `Expenditure in foreign currency’. It enlists `Travel
Foreign’ of Rs.13.31 lakh and `Expenditure met by Branch
offices’ amounting to Rs.24.38 crore. It is this detail of the
incurring of expenditure by foreign branches, which seems to
have prompted the TPO to infer that the company earned on-site
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revenue. In our view incurring of expenses in foreign currency by
foreign branches cannot be equated with the rendering of on-site
services. Moreover, the ld. DR also failed to point out anywhere
from the Annual report of this company that it rendered any on-
site services.
23. The DRP assigned another reason for its exclusion, being,
loss incurred by this company for the year under consideration
vis-a-vis the assessee’s work on cost plus business model. In this
regard, it is overt that no company can be excluded simply on the
basis of loss or low profit margin registered in a year. When
average of the profit margins of the otherwise functionally
comparable companies is taken, differences due to a particular
higher or lower profit margin are ironed out. This proposition is
borne out from the judgment of the Hon’ble Delhi High Court in
ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT
(2015) 376 ITR 183 (Del).
24. However, a company may call for exclusion if it is
consistently posting losses due to exceptional reasons. The
Hon’ble jurisdictional High Court in CIT Vs. Goldman Sachs
(India) Securities (P) Ltd. (2016) 290 CTR 236 (Bom) did not
treat a company as a persistent loss making company qualifying
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for exclusion, which did not incur loss in the year of review and
immediately two earlier years in a row.
25. The ld. AR stated that Quintegra Solutions Ltd. incurred
losses only in this year and in the immediately preceding year. A
year prior to that, it was not a loss making company. This was
fortified by the respective Annual reports of this company. As
this company did not persistently incur losses, we hold that it
cannot be excluded on this criterion. This company is, therefore,
directed to be included in the list of comparables.
26. The Revenue, in its appeal, is aggrieved by the exclusion of
three companies from the list of comparables.
27. The TPO excluded RS Software India Ltd., Thinksoft
Global Services Pvt. Ltd. and Silverline Technologies Ltd. by
holding that they were engaged in rendering on-site services. The
DRP did not find any merit in the view point of the TPO that
rendering on-site services was any different from rendering
services from one’s own facility. On merits also, the DRP held
that these companies were not involved in rendering on-site
services.
28. Having heard the rival submissions, we find that the view
point of the DRP that rendering on-site services does not affect
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comparability with a company rendering services from its own
facility/premises, is not correct. It has been held by the Tribunal
in umpteen decisions that on-site services business model is
altogether different, which distorts comparability with a company
rendering services from its own facilities. We, therefore,
disapprove, in principle, the view point taken by the DRP.
29. The DRP also found on merits that none of these three
companies was actually engaged in rendering on-site services. We
have perused the Annual report of RS Software, which is
available at page 1062 onwards of the paper book. It is seen that
except for incurring expenses in foreign currency, there is no
mention of rendering on-site services. This company has also
branches in certain countries outside India and the expenses in
foreign currency were incurred by such branches. The ld. DR
also could not point out from the Annual report of this company
that it rendered any on-site services. In such circumstances, we
direct to include this company in the list of comparables.
30. Now we turn to Silverline Technologies Ltd. The DRP
gave the same reason that this company was not engaged in
rendering on-site services. We have examined the Annual report
of this company, whose copy is available at page 1270 of the
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paper book. Page 1295 contains the figure of `Expenditure in
foreign currency’ to the tune of Rs.26,13,74,026/-. As against
that, total income from sales and service of this company stands at
Rs.30.88 crore. Thus, it is evident that the expenses in foreign
currency have resulted in earning income. This being a company
chosen by the assessee, the onus is on it to show the
comparability and prove the fact that it was not engaged in
rendering on-site services. Unlike the other company discussed
immediately hereinabove, the ld. AR could not point out from the
Annual report that this company had any branches outside India
and the `Expenditure in foreign currency’ related to such foreign
branches. Since the expenses in foreign currency constitute a
substantial percentage of its revenue and there is no reference to
any foreign branch, it becomes evident that this company is
engaged in rendering on-site services and the major component of
its revenue is from such on-site services only. That being the
position, this company loses its comparability tag with the
assessee company. We, therefore, reverse the view of the DRP
and direct to exclude it from the list of comparables.
31. Somewhat similar is the position regarding Thinksoft Global
Services Pvt. Ltd. We have examined the Annual report of this
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company which has been placed on record. The ld. DR invited our
attention towards page 1147 of the Paper book categorically
indicating that this company earned revenue from on-site services.
The ld. AR accepted this position. We, therefore, direct to
exclude this company also from the list of comparables and
consequently reverse the view taken by the DRP on this issue.
II. PROVISION OF I.T.E.S.:
32. The assessee declared an international transaction of
`Provision of IT enabled services’ with transacted value of
Rs.10,21,67,498/-. It applied the Transactional Net Marginal
Method (TNMM) for demonstrating that the international
transaction was at Arm’s Length Price (ALP). The TPO made
certain alterations to the list of comparables drawn by the
assessee. The assessee challenged certain companies before the
DRP. After giving effect to the direction of the DRP, the TPO
drew a final list of comparables consisting of 10 companies vide
his letter dated 31-12-2014 addressed to the AO for passing the
assessment order. The assessee is aggrieved by the inclusion of
four companies in the list of comparables: Accentia Technologies
Ltd.; Coral Hubs Limited (earlier known as Vishal Information
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Technologies Ltd.); Jeevan Softech (Segment); and Informed
Technologies Ltd.
33. In order to appreciate the comparability or otherwise of the
companies challenged by the assessee, it is sine qua non to first
ascertain the true nature of services rendered by the assessee
under the segment of Provision of IT enabled services. We have
gone through the Agreement entered into by the assessee with its
AE, namely, BMC Software Inc., under which the assessee
rendered the services. In fact, it is a composite agreement for
provision of Software Development services; ITES; and Sales
Support services. We have referred to this Agreement in the
earlier part of the order while discussing the nature of Software
Development services. Insofar as the instant international
transaction of the Provision of ITES is concerned, we find from
Appendix-A that the services rendered by the assessee under this
segment include:-
b. Call centre and other support centre services, including
IT support, financial applications support, human resource
applications support, sales applications support and other
internal IT business support applications.
c. Remote maintenance
d. Data processing services
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e. Back-office operations including payroll processing,
receivables, accounting, tracking and general accounting
work etc.
g. Revenue accounting
i. Procurement services
j. Human resource support services
k. Information Technology Enabled Support services
34. Having underscored the nature of services rendered by the
assessee under this segment, we now proceed to examine the
comparability or otherwise of these four companies ad seriatim.
(i) Accentia Technologies Ltd. :
35. This company was chosen by the TPO as comparable. The
assessee objected to its inclusion. The TPO ordered to include it
in the list of comparables by relying on the direction given by the
DRP for the immediately preceding assessment year, 2009-10.
No relief was allowed by the DRP.
36. Having heard the rival submissions and gone through the
relevant material on record, we find that the TPO included this
company in the list of comparables by relying on the direction
given by the DRP for the assessment year 2009-10. The assessee
assailed the final assessment order passed for such assessment
year before the Tribunal. Vide its order dated 22-08-2019, the
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Tribunal in ITA No.189/PUN/2014 has directed to exclude this
company from the list of comparables. The DR fairly conceded
that the facts and circumstances of this company for the extant
year are mutatis mutandis similar to those of the preceding year.
Following the precedent, we direct to exclude this company from
the list of comparables.
(ii) Coral Hubs Ltd. (Vishal Technologies Ltd.) :
37. The assessee disputed the comparability of this company
before the TPO but without success. The DRP also did not
approve the objections of the assessee.
38. The Annual report of this company for the relevant year has
been perused, a copy of which has been paced at page 1550
onwards of the paper book. Its Profit and loss account is available
at page 1614 of the paper book. As against the Sales amounting
to Rs.88.36 crore, this company incurred Operating expenses of
Rs.54.47 crore and Personnel cost at Rs.1.89 crore. Details of
Operating expenses are available at page 1620 of the paper book.
It can be seen from Schedule 15 containing such details, that this
company incurred Data entry charges, Vendor payments and
Expenses on conversion of books into POD titles amounting to
Rs.54.85 crore. After the adjustment of opening and closing work
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in progress of IT enabled services, the net figure of Rs.54.47 has
been ascertained and taken to the Profit and loss account. Thus, it
is apparent that this company is mainly engaged in outsourcing its
business activities which is further proved from the fact that the
Personnel cost is only Rs.1.89 crore as against outsourcing cost of
Rs.54.47 crore. It goes without saying that outsourcing services
is an altogether different business model vis-à-vis rendering
services by engaging one’s own employees and facilities. It is
further noticed that the Hon’ble Bombay High Court in PCIT Vs.
BNY Mellon International Operations (India) (P). Ltd. (2018) 255
Taxman 397 (Bom.) has held that an assessee rendering BPO
services cannot be compared with the companies providing KPO
services. Coral Hubs Limited has been considered as non-
comparable on this count also. In view of the foregoing
discussion, we direct to exclude this company from the list of
comparables.
(iii) Jeevan Softech (BPO segment) :
39. The assessee objected to the inclusion of this company
which came to be jettisoned by the TPO. No succor was allowed
by the DRP, against which the assessee has come up in appeal
before the Tribunal.
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40. We have examined the Annual report of this company
whose copy is available at page 1643 onwards of the paper book.
It is pertinent to mention that the TPO has considered only BPO
segment of this company for the purposes of inclusion in the list
of comparables. The Profit and loss account of this company
indicates income under different sub-heads including IT Enabled
Services to the tune of Rs.1,74,43,276/-. The ld. AR initially
contended that ITES segment cannot be considered as comparable
as the same includes not only income from BPO operations but
also from ERP division and later on it was emphasized that if at
all, it inclusion was to be made, then ITES segment as a whole
should be included.
41. The first leg of the objection is not tenable. The break-up of
ITES revenue has been given by the company under `Segmental
reporting’ at page 1674 of the paper book, which has two parts,
namely, BPO operations – Rs.141.10 lakh and ERP – Rs.33.33
lakh. Not only that, profit has also been given separately therein
for both, with the figure of profit from BPO operations at
Rs.52.99 lakh. The view point of the assessee that ITES segment
is not comparable because of the inclusion of ERP revenue is,
therefore, not sustainable because the figures of revenue and
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profit from the BPO segment is separately available and the
nature of work admittedly matches with that of the assessee.
42. The second leg of the ld. AR’s argument that if at all this
company is to be included, then its full ITES segment should be
taken. Again, we do not find any merit in this contention as well.
The Directors’ report unequivocally divulges that the nature of
work under the ERP division is all in all different. It has been
mentioned that: `Your ERP division has also successfully
completed the project implementation for various clients. For the
current financial year, ERP division has chalked out new
marketing strategies with a focused approach developing
specialized vertical solutions for the prospects across India,
standard horizontal markets and foray into the professional
services segment for overseas clients’. Thus, it is palpable that
the ERP division is not engaged in rendering any ITES. The
same, therefore, cannot be clubbed with the BPO revenues of this
company, for which separate figures are available in the
`Segmental reporting’. We, therefore, countenance the inclusion
of the BPO segment of this company with Revenue of Rs.141.10
lakh and income of Rs.52.99 lakh.
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(iv) Informed Technologies Ltd.
43. The assessee has challenged the inclusion of this company
with the help of an additional ground. Inclusion of this company
was not challenged either before the TPO or the DRP and the
same has been assailed before the Tribunal for the first time.
44. Several orders have been passed by various Benches of the
Tribunal holding that an assessee is entitled to challenge a
comparable for the first time before the Tribunal notwithstanding
the fact that it remained uncontested before the TPO or the DPO.
In view of the fact that the comparability of this company has not
been examined by the authorities below, we direct the AO/TPO to
scrutinize the comparability of Informed Technology and then
decide on its inclusion or otherwise in the final tally of
comparables.
III SALES SUPPORT SERVICES :
45. The assessee reported an international transaction of
`Provision of Sales Support services’ with transacted value of
Rs.12,86,10,541/- It applied separate TNMM for showing that
the international transaction was at the ALP. The TPO did not
separately examine the international transaction but considered it
along with the other segment.
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46. Instantly, the assessee has challenged only the inclusion of
ICRA Online Ltd. (Segment). The assessee’s objection about
functional differences was overturned by the TPO observing that
this company was considered as comparable by the Pune Benches
of the Tribunal in Eaton Technologies Pvt. Ltd. Vs. DCIT (ITA
No.1621/PUN/2011) vide its order dated 11-01-2013 for the
assessment year 2007-08. No relief was allowed by the DRP on
the inclusion of ICRA online Ltd. in the list of comparables.
47. Nature of services under this international transaction can
be culled out from the Agreement referred to hereinabove. It has
been stated as “Sales Support services in relation to User’s
products sold in India and the Asia Pacific region either directly
or through channel partners”. Thus, primarily the assessee
rendered Sales Support services to its AE.
48. Now we turn to examine the comparability of ICRA
Online Ltd. Annual report of this company has been placed at
page 1732 onwards of the paper book. The TPO has included
Information Services segment of this company for the purpose of
comparability. Nature of operations under this segment have
been discussed at page 1735 by stating that: “The Information
Services LOB reported a robust 42% growth in 2009-10 over the
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ITA Nos.219 & 209/PUN/2015
BMC Software India Private Limited
previous fiscal, driven by the introduction of an upgraded version
of its flagship product MFI Explorer and the launch of a new
product MFI Impact, besides by the sharper focus that was
brought into the domains of data, content and research”.
49. At this stage, it is pertinent to note that the international
transaction under consideration is provision of Sales Support
services. As against that, the selected segment of the company is
Information Services segment, which is deriving revenue from its
flagship product MFI Explorer and MFI Impact. As the revenue
under this segment is from the Software products, the same, in our
considered opinion, cannot be compared with the rendition of
Sales Support services.
50. Qua the observation of the TPO that this company was
considered as comparable by the Pune Benches of the Tribunal in
Eaton Technologies Pvt. Ltd., we find from the copy of such
Tribunal order placed on record that the inclusion of this company
along with three other companies has been restored by the
Tribunal for a fresh consideration by the TPO. As the Directors’
report of this company categorically declares that the income
from the Information services segment pertains to the Software
products, the same ergo does not qualify for inclusion. We,
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therefore, direct to exclude this company from the list of
comparables.
51. Ground No.12 of the assessee’s appeal is against not
allowing working capital adjustment.
52. We find from page 85 of the directions given by the DRP
that the AO was directed to examine the computation of working
capital adjustment worked out by the assessee. However, while
giving effect to the directions of the DRP, this direction remained
to be complied with. We, therefore, direct the AO/TPO to give
effect to the direction given by the DRP as contained in para
2.14.3.
53. The only other ground is against not allowing the Risk
Adjustment.
54. This is a recurring issue. The matter came up for
consideration before the Tribunal in assessee’s own case for the
assessment year 2008-09. Following the order passed by the
Tribunal for the assessment year 2006-07, the Tribunal restored
the matter to the file of AO/TPO for computing risk adjustment
after granting reasonable opportunity of hearing to the assessee.
The relevant discussion has been made at para 15 of its order for
the assessment year 2008-09. Following the consistent view
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BMC Software India Private Limited
taken in assessee’s own case for the earlier years, we remit the
matter to the file of AO/TPO for computing the risk adjustment in
the light of the directions given for earlier years.
55. To sum up, we set-aside the impugned order on the
determination of the ALP in the three segments of the assessee,
viz., Software Development services; IT enabled services; and
Sales Support services and remit the matter to the file of AO/TPO
for fresh determination of the ALP in the light of our observations
made above. Needless to say, the assessee will be allowed
reasonable opportunity of hearing before taken any decision.
56. In the result, both the appeals are partly allowed.
Order pronounced in the Open Court on 18th January,
2021.
Sd/- Sd/-
(S.S.VISWANETHRA RAVI) (R.S.SYAL)
JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; दनांक Dated : 18th January, 2021
सतीश
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आदेश क ितिलिप अ िे षत/Copy
षत of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. यथ / The Respondent;
3. The CIT(A)-13, Pune
4. The Pr.CIT-V, Pune
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे “सी” /
DR ‘C’, ITAT, Pune;
6. गाड फाईल / Guard file.
आदेशानुसार/
ार BY ORDER,
// True Copy //
Senior Private Secretary
आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
Date
1. Draft dictated on 15-01-2021 Sr.PS
2. Draft placed before author 18-01-2021 Sr.PS
3. Draft proposed & placed before JM
the second member
4. Draft discussed/approved by JM
Second Member.
5. Approved Draft comes to the Sr.PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading order Sr.PS
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to the
Head Clerk
10. Date on which file goes to the
A.R.
11. Date of dispatch of Order.
*
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