2018 (1) TMI 1318 - AT - Income Tax

TPO - comparable selection criteria - functional similarity - Held that - The assessee was engaged in providing software development services thus companies functionally dissimilar with that of assessee need to be deselected from final list. Adjustment on account of working capital - Held that - As the assessee pointed out that in all the earlier years working capital adjustment was allowed to the assessee. However it was denied during the year. He fairly agreed that the issue may be sent back to the file of Assessing Officer and the actual may be computed. We find merit in the plea of assessee in this regard where similar issue of working capital adjustment has been allowed in the hands of assessee and there is no finding of TPO why the same is being denied during the year under consideration - we remit this issue back to the file of Assessing Officer who shall afford reasonable opportunity of hearing to the assessee and allow the working capital adjustment as per law

Summary

Issues Involved:
1. Exclusion of KALS Information Systems Ltd. from the list of comparable companies.
2. Inclusion of Akshay Software Technologies Ltd. as a comparable company.
3. Inclusion of Helios & Matherson Information Technology Ltd., FCS Software Ltd., and e-Zest Solutions Ltd. in the final set of comparables.
4. Non-inclusion of CG-VAK Software & Exports Ltd. in the final set of comparables.
5. Working capital adjustment while computing the arm's length mark-up of software development services.

Detailed Analysis:

1. Exclusion of KALS Information Systems Ltd. from the list of comparable companies:
The CIT(A) directed the exclusion of KALS Information Systems Ltd. from the final set of comparables. The Tribunal upheld this decision, noting that KALS is a product company and does not fit the functional profile of the assessee, which is engaged in providing software development services. The Tribunal referred to a similar decision in MSC Software Corporation India (P.) Ltd. Vs. ACIT, where KALS was excluded on the same basis. Thus, the Revenue's appeal on this ground was dismissed.

2. Inclusion of Akshay Software Technologies Ltd. as a comparable company:
The CIT(A) included Akshay Software Technologies Ltd. in the final set of comparables. The Tribunal noted that Akshay is engaged in on-site development, whereas the assessee is an off-site developer. Referring to prior decisions, the Tribunal held that on-site developers are not comparable to off-site developers. The Tribunal, however, noted the assessee's concession and included Akshay in the final set of comparables, allowing the Revenue's appeal on this ground.

3. Inclusion of Helios & Matherson Information Technology Ltd., FCS Software Ltd., and e-Zest Solutions Ltd. in the final set of comparables:
- Helios & Matherson Information Technology Ltd.: The Tribunal excluded Helios from the final list of comparables, as its turnover of Rs. 213 crores exceeded the upper filter of Rs. 200 crores applied by the TPO. The Tribunal emphasized that once a filter range is applied, there should be no deviation from it.
- FCS Software Ltd.: The Tribunal excluded FCS from the final set of comparables, noting that it was engaged in diverse activities such as IT consulting, application support, infrastructure management services, and e-learning & digital consulting. As the revenue from software development was only 41% of its total turnover, and no segmental profits were available, FCS was not functionally comparable to the assessee.
- e-Zest Solutions Ltd.: The Tribunal excluded e-Zest from the final set of comparables, as it is a product company engaged in both software services and product sales. The Tribunal referred to a prior decision in MSC Software Corporation India (P.) Ltd. Vs. ACIT, where e-Zest was excluded on similar grounds.

4. Non-inclusion of CG-VAK Software & Exports Ltd. in the final set of comparables:
The Tribunal included CG-VAK in the final set of comparables, rejecting the TPO's conclusion that it was a persistent loss-making concern. The Tribunal noted that CG-VAK had positive margins in the prior two years and only a minor loss in the year under consideration. The Tribunal referred to the decision in TIBCO Software India Pvt. Ltd. Vs. DCIT and the Hon'ble Bombay High Court's ruling in CIT Vs. Welspun Zucchi Textiles, which supported the inclusion of CG-VAK as it was not consistently loss-making.

5. Working capital adjustment while computing the arm's length mark-up of software development services:
The Tribunal allowed the assessee's request for a working capital adjustment, noting that it had been allowed in previous years. The issue was remitted back to the Assessing Officer to compute the adjustment, with instructions to afford the assessee a reasonable opportunity of hearing.

Conclusion:
The appeals of the assessee for both years were partly allowed, and the appeals of the Revenue were partly allowed for the assessment year 2008-09 and dismissed for the assessment year 2009-10. The Tribunal directed the exclusion of Helios, FCS, and e-Zest from the final set of comparables, included CG-VAK, and allowed the working capital adjustment. The Tribunal upheld the inclusion of Akshay in the final set of comparables based on the assessee's concession.