Case Law Details
Brief of the Case
In the present case the Hon’ble Tribunal held that assessee can’t be compared with other companies when they are totally different in functions. Also, the Intellectual property Rights, Brand Value have to be seen while making comparisons under “Transfer Pricing”.
Facts of the Case
Assessee company is a private limited company which is a wholly owned subsidiary of Convergys Information management Group Inc., USA. The assessee company has been registered as a 100% EOU under the software technology parks of India (STPI) Scheme. It is engaged in providing software development and support services for which it is being compensated. The assessee company filed its return of income for the A.Y. 2008-09 on 23.09.2008 declaring the total income of Rs.41,412 after claiming deduction under section 10A of Rs.27,74,72,754 under normal provisions. The assessee company paid tax on book profit of Rs.22,72,37,501 under section 115JB of the I.T. Act, 1961. A reference under section 92CA was made to the ACIT to determine the Arms Length Price of the international transactions of the assessee reported in Form 3CEB. The A.O. passed a draft assessment order dated 28.12.2011 under section 143(3) read with section 144C of the Act for arriving at a total income of Rs.186,344,463 as against Rs.41,412 as declared in the return of income.
Contention of the Assessee
Assessee was having objections with respect to comparison made with the six companies.
Regarding company no.1, assessee contended that this company as a comparable on the ground that this company is not functionally comparable to assessee as it is into software products whereas assessee offers software development services to its AEs.
Regarding company no.2 Assessee contended that this company is functionally different to assessee. It is submitted that this company is engaged in ‘e- Business Consulting Services’, which are like KPO services and are not comparable to software development services.
While objecting the comparison with the Company No.3, Assessee contended that this company (Company No. 3) commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas assessee is merely a software service provider and does not possess either any brand value or own any intangible or intellectual property rights (IPRs).
While objecting to Company No. 4 the Assessee contended that (i) This company is functionally different from the software activity of assessee as it is into software products. This company is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008.
Regarding Company No.5 the assessee contended that this company performs a variety of functions under software development and services segment namely – a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company.
Regarding company no. 6 the assessee contended that this company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles.
Contention of the Revenue
- Regarding Company No. 1 the Revenue relied on the order of TPO where it was held that this comparable company has categorized itself as a pure software developer, just like assessee, and hence selected this company as a comparable.
- Regarding Company No.2 the Revenue supported the order passed by TPO in which it was mentioned that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters.
- Regarding Company No.3, the Revenue contended that comparability cannot be decided merely on the basis of scale of operations and the brand as profit margins of this company have not been extraordinary.
- Regarding company No. 4, the TPO observed that the software products and training of comparable constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08. The contentions were supported by the Revenue.
- Regarding Company No. 5 and 6 the observations which were made by the ld. TPO regarding selecting these companies as comparable was supported by the Revenue in its contentions.
Held by the Tribunal
Regarding Company No. 1 it was held by the Hon’ble ITAT that The TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. Also, the Hon’ble ITAT placed reliance on the submissions of Assessee that the comparable is different in functions and held that the Comparison could not be made.
Regarding Company No. 2 it was held by the Hon’ble ITAT that it appears that while assessee is into software development services, this comparable is rendering product development services and high end technical services which come under the category of KPO services. KPO services are not comparable to software development services and are therefore not comparable.
Regarding Company No. 3 it was held by the Hon’ble Tribunal that this Company is not functionally comparable with the assessee since it owns significant intangibles and has huge revenues from software products. It is also seen that the break-up of revenue from software services and software products is not available. Therefore, the comparison can’t be made.
Regarding Company No.4, the Hon’ble Tribunal held that this company was developing software products and was not purely or mainly a software service provider and they also relied on the details in the Annual Report which reveals that the Company is functionally dissimilar to the assessee. Hence, the decision was in the favour of Assessee on this issue.
Regarding Company No.5, the Hon’ble Tribunal held that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by assessee. Hence, not comparable.
Regarding Company No.6, the Hon’ble Tribunal held that this company is engaged both in software development and product development services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Also, this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. A company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. The, assessee in the case on hand does not own any intangibles. Hence, there can be no comparison.
By giving the observations on all the six companies, the Hon’ble Tribunal finally directed the Ld. TPO to exclude the above six companies and rework out the Arms length price accordingly. Also, the provisions of Provisions of Section 92C(2) may also be considered while determining the ALP. Accordingly, the appeal of the assessee was allowed.
