Software developer cannot be compared with service provider
Transfer Pricing: Companies in software development services not comparable with those in development of software products and services
Brief of the Case
ITAT Bangalore held in the case of GXS India Technology Center Pvt. Ltd. vs. ITO that a company which is engaged in development of software products and services cannot be compared to a company which is purely software development services provider. Also, company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. and no sub-services break up /information provided in the annual report or the databases based on which the margin from software services activity only could be computed, it cannot be considered as comparable to any other software services company because of its complex nature.
Facts of the Case
The assesses is a company incorporated in India and was established as 100% EOU registered under Software Technological Parks of India (SWTPI) at Bangalore. The assesses is a company primarily engaged in designing and development of software for its parent company. The assesses reported international transactions with its AE on account of provision of software development services of Rs.27,42,51,262/-. The assesses has reported profit before tax on cost at 10.28%. The assesses selected 18 comparable in its TP study report to bench mark its international transactions and arrived at 10.98% of mean margin in comparison to the assessee’s operating margin at 10.28%. Out of the 18 comparable selected by the assesses 14 were rejected by the TPO. The TPO finally selected 20 companies as comparables including 4 companies from the list of assessee’s comparable.
Thus, the TPO arrived at a arithmetic mean of 23.65% in comparison to assessee’s operating margin of 10.28% and accordingly, proposed an upward adjustment of Rs.3,42,18,209. Also DRP DRP did not accept objections raised by the assesses and confirmed the proposed adjustment.
Contention of the Assessee
The ld counsel of the assesses submitted that the assesses raised the objection against 13 companies selected by the TPO, out of the set of comparable which are functionally dissimilar to that of the assesses. Out of these companies, company named Avani Cimcon is engaged in in the development of software products as well as software services. However, there are no segmental details available in the financial account of this company. Therefore, this company cannot be considered as a good comparable of the assessee company which is purely a software development company and not in software product. In support of his contention he has relied upon the decisions of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd., in IT (TP) A No. 1303(B)/2012. Further in case of company named Bodhtree Ltd., he submitted that this company is in the business of software products and engaged in providing open and end to end as well as software consultancy and design, development and software. He has referred and relied upon the decisions of the co-ordinate bench of this Tribunal in case of M/s CISCO Systems India Pvt. Ltd., dated 14-08-2014 in ITA No. 271(B)/2014 and submitted that this company was found to be not comparable to a software development company.
Also company named Kals Information Systems Ltd., it was submitted that this company is engaged in the business of development of software and software products. This company is also engaged in the provision of training services and software services. So, functionally not comparable with the business of the assessee. Further company named Persistent Systems Ltd. it was submitted that this company is engaged in the software development and analytics services. Since the segmental information was not available, therefore, the results of the company cannot be compared with the assessee. In case of Quintegra Solutions Limited, it was submitted that this company is engaged in product engineering services and this is not purely a software development service provider. He has further pointed out that this company is also engaged in research and development activity which resulted in creation of intellectual property rights (IPR). This company has also experienced an abnormal economic event.
In respect of Tata Elxsi Ltd., it was submitted that software segment of this company comprises the activity of product designing services and therefore, this company is not purely software development service provider. He has further submitted that this company had significant intangible and R & D expenditure and also fails on site filter of more than 75%. Also in the case of Thirdware Solutions Ltd., it was submitted that this company is engaged in the software development products as well as software development. However, no segmental information is available on this company. Further this company acquired intangible assets and derived revenue based on sales of licences. So, this company was found to be functionally dissimilar to that of pure software development service provider.
Held by ITAT
Avani Cimcon
ITAT held that in the case of 3DPLM Software Solutions Ltd. IT (TP) A No. 1303(B)/2012 while examine the functional comparability of this company with that of a software development company, it was held that the extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas and also the Website of this company evidences that this company develops and sells customizable software solutions. Thus, the said company is primarily engaged in the development of software products and particularly in customized software solution. Hence, this is not comparable.
Bodhtree Ltd.
ITAT held that in the case of M/s CISCO Systems India Pvt. Ltd., while examine the functional comparability of this company; it was held that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company.
Kals Information Systems Ltd.
ITAT held that functional comparability of this company has been examined by this co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd. and also in case of M/s Cisco Systems India Pvt. Ltd. It was held that it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. In this case, it was held that company is engaged in development of software products and services and is not comparable to software development services provided by the assessee.
Quintegra Solutions Limited
ITAT held that functional comparability of this company has been examined in the case of 3DPLM Software Solutions Ltd. It was held that Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assesses in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparable. Thus, it is clear from the finding of this Tribunal that this company is engaged in the product engineering services and also owns intangible/intellectual property rights. Hence this company is not comparable with assessee.
Tata Elxsi Ltd
The functional comparability of this company has been examined by this co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd.(Supra) and also in case of M/s Cisco Systems India Pvt. Ltd. It was held thatit is not in dispute before us that in assessee’s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. It was held that the company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparable.
Thirdware Solutions Ltd
ITAT held that functional comparability of this company has been examined in the case of 3DPLM Software Solutions Ltd. It was held that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. In the case on hand, the assesses is rendering software development services. In this factual view of the matter, we direct that this company be omitted from the list of comparable. Following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this from the list of comparable.
Accordingly appeal disposed of.
