TMI Blog2016 (2) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, we direct the Assessing Officer to exclude Goldstone Technologies Ltd. Working capital adjustment - Held that:- We direct the Assessing Officer to re-compute the working capital adjustment in the hands of assessee in line with the directions given by the Tribunal in assessment year 2007-08 wherein have given directions for allowing working capital adjustment as per OECD guidelines. - IT Appeal No.436 (PN.) of 2013 - - - Dated:- 29-2-2016 - Ms. Sushma Chowla, JUDICIAL MEMBER AND Pradip Kumar Kedia, ACCOUNTANT MEMBER For the Appellant : Nikhil Pathak For the Respondent : Smt. Divya Bajpai ORDER Ms. Sushma Chowla, Judicial Member - This appeal filed by the assessee is against the order of Dy. CIT, Circle-1(2), Pune, dated 27.11.2012 relating to assessment year 2008-09 against order passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short 'the Act'). 2. The assessee has raised the following grounds of appeal:- '1.1 The learned Assessing Officer erred in law and on facts in making an addition of ₹ 1,62,50,500 to the total income of the Appellant on account of adjustment to the arm's length price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciating that when direct comparables were available, it was not necessary to consider segmental results as in such segmental results generally common expenses are not correctly allocated and also certain assets and liabilities are not identifiable between business segments. 3.6 The learned AO / DRP erred in not appreciating that some of the companies additionally included in the list of comparables showed fluctuating operating margins in the earlier 2 - 3 years and therefore the operating results of such companies could not be relied upon and considered for the purposes of comparison. 3.7 The learned AO / DRP erred in not appreciating that some of the above six companies additionally included as comparable have shown more than ordinary profits (exceeding 30%) and it is not appropriate to compare such companies having higher than ordinary profits with Cost protected captive service provider entity (like the Appellant Company) which cannot be expected to make such margins especially in view of lower risks borne by such entities. 3.8 The learned AO / DRP erred in not following the ratio of various judgements relied upon by the Appellant Company. 4. The learned AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned AO / DRP erred in not following the ratio of various judgements relied upon by the Appellant company. 8. The learned AO / DRP erred in not appreciating that in the case of the Appellant Company, such a high margin was not at all comparable as the Appellant Company is engaged in rendering low-end software development and support services; is not at all involved in basic product designing and architecture; had started operations only 2-3 years ago and was in the process of stabilizing its operations and growth with a lot of staff on bench during the financial year 2007-08 does not bear any risk and also does not own any intangibles, and is not required to undertake some functions such as marketing etc which any normal business entity would undertake; 9. The learned AO / DRP erred in not appreciating that for the purposes of bench-marking, profit after tax should have been considered and tax cost should have been considered as a part of operating costs as the Appellant Company was eligible to claim benefit of deduction u/s.10A and the basic nature of such benefits / incentives is to help the software companies compete globally. 10.1 The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in providing software development services to its associate enterprises. A reference was made under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for the computation of arm's length price in relation to international transactions entered into by the assessee with its associate enterprises. The TPO noted that the international transaction undertaken by the assessee during the year under consideration, as per TP report and Form No.3CEB was Automated Database creation and building Software Products to the tune of ₹ 20,85,85,805/-. For benchmarking the said international transaction, the assessee had adopted TNMM method as most appropriate method. For the purpose of analysis of international transaction, entity level Operating Profit over Operating Cost i.e. OP over OC was taken as Profit Level Indicator (PLI) by the assessee. A set of 15 external comparables were taken and the average operating margins was adopted as PLI for the set of comparables. The PLI in the case of assessee company was computed at 13.46% and the mean PLI of the comparables were worked out at 5.81%. The assessee claimed that its international transaction relating to IT enable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to it, which was also rejected in view of various decisions of the Tribunal in this regard. Accordingly, the TPO proposed an adjustment of ₹ 2,29,68,091/- on account of arm's length price of international transactions undertaken by the assessee with its associate enterprises. The Assessing Officer in the draft assessment order proposed the said adjustment, against which the assessee filed the objections before the DRP, who in turn, gave directions against the objections filed by the assessee as per its order. The Assessing Officer in the final order of assessment passed under section 143(3) r.w.s. 144C(13) of the Act excluded FCS Software Solution Ltd. from the final set of comparables and also allowed working capital adjustment. In this regard, reference again was made to the TPO, who in turn, furnished its reply and proposed an adjustment of ₹ 1,62,50,500/-. The said adjustment was adopted by the Assessing Officer while completing assessment in the hands of assessee, against which the assessee is in appeal. 5. The learned Authorized Representative for the assessee pointed out that in the final analysis, the margins of 11 companies were selected as final set o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entre India (P.) Ltd. v. Asstt. CIT [2015] 56 taxmann.com 386, copy of which is placed in Paper Book. The learned Authorized Representative for the assessee pointed out that the year under appeal was also assessment year 2008-09 and the Tribunal had also taken same view and the same may be adopted for excluding KALS Information Systems Ltd., then eZest Solutions Ltd. and Bodhtree Consluting Ltd. In respect of Genesys International Corporation Ltd., the learned Authorized Representative for the assessee pointed out that the functions were totally different and before the DRP, the objections were raised, but the same have not been dealt upon. The learned Authorized Representative for the assessee referred to the functions of the said company and pointed out that it was providing high end project mapping activities employing scientists, etc. and its functions were not comparable to the activities of the assessee company. He further pointed out that the said company was selected as comparable by the TPO on the basis of turnover. Reference was made to the order of TPO in this regard. The learned Authorized Representative for the assessee made reference to various decisions of Hyderabad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer re-worked the adjustment at ₹ 1,62,50,500/-, and added the same to the income of the assessee, against which assessee is in appeal. The TPO had selected the following set of comparables :- Sr. No. Name of the company TPO 1 Binary Semantics Ltd. 15.48% 2 Chakkilam Infotech Ltd. 7.36% 3 Genesys International Corporation Ltd. 48.12% 4 ICRA Techno Analytics Ltd. 7.69% 5 IKF Techno Analytics Ltd. 11.72% 6 Powersoft Global Solutions Ltd. 14.56% 7 Valuemart Info Technologies Ltd. 26.13% 8 Bodhtree Consulting Ltd. 19.14% 9 eZest Solutions Ltd. 28.58% 10 FCS Software Solution Ltd. 57.02 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Symphony Services (supra), M/s. Kals Information Systems Ltd. was excluded from the list of comparables on the ground that the said concern was involved not only in the activity of providing of software development services but also in selling of software products. Symphony Services Pune Pvt. Ltd. was only engaged in providing software services. In the case of Symphony Services Pune Pvt. Ltd. (supra) as well as in the present case also, the TPO did not accept the plea for exclusion of KALS Information System Ltd. primarily on the ground that the financial statements of the said concern did not reflect any sale of software products. Quite clearly the stand of the Revenue in the present case as well in the case of Symphony Services Pune Pvt. Ltd. (supra) is similar. It is also quite clear that the nature of service being rendered by the assessee and Symphony Services Pune Pvt. Ltd. (supra) are similar, namely rendering of software development services to its affiliates. The following discussion in the order of the Tribunal in case of Symphony Services dated 30-04-2014 (supra) brings out the salient features of the controversy : 13. The second point raised by the assessee is wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the Tribunal in the case of Bindview India Pvt. Ltd. v. Dy. CIT vide ITA No.1 386/PN/2010 dated 30.11.2011, which was also a concern engaged in rendering software development services for its parent company. The action of the TPO of selecting Kals Information Systems Limited as a comparable concern while applying the TNM method was rejected by the Tribunal on the basis that the said concern was engaged in development of software products and sale, which was functionally dissimilar to the software development services undertaken by the Bindview India Pvt. Ltd. (supra). The learned counsel pointed out that the said decision is fully applicable to the facts of the present case inasmuch as similar functions were undertaken by Bindview India Pvt. Ltd. and therefore Kals Information Systems Limited is liable to be excluded from the lists of comparables. 15. A reference has also been made to the decision of the Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. v. DCIT vide IT(TP)A No.1303/Bang/2012 dated 28.11.2013 wherein also the said concern, namely, Kals Information Systems Limited was not considered as a comparable on account of functional dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas the present case of the assessee for assessment year 2008-09 yet there is no material on record suggest that the activities carried out by Kals Information Systems Limited in the current assessment year are different from those noted by the Tribunal in the case of Bindview India (P.) Ltd. (supra) for assessment year 2006-07. 18. Considering the aforesaid discussion, in our view, the concern i.e. Kals Information Systems Limited is liable to be excluded from the list of comparables for the purposes of benchmarking international transactions of provision of software development services. We hold so. Thus, on this aspect assessee succeeds.' 12. The second objection raised by the assessee was against inclusion of eZest Solutions Ltd. This concern was also excluded by the Tribunal in Barclays Technology Centre India (P.) Ltd.'s case (supra) for the proposition that the said concern was in the business of providing e-business services, which were in the nature of Information Technology enabled Services (ITES) and not comparable to the functions performed by the assessee. The relevant findings of the Tribunal are as under:- '15. The second concern which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concern do not pertain to software development services but are ITES services. Assessee also submitted before the TPO that the said concern does not provide any segmental data and being a highly diversified company, it is not possible to segregate data relating to the segment of software development services being undertaken by the said concern. 20. The TPO has considered the submissions of the assessee as per his discussion in para 16.3 of the order. The TPO referred to the Profit Loss Account of the concern and noted that it was a typical softwar developing company and rejected the plea of the assessee for excluding the same for the list of the comparables. 21. Before us, the learned counsel for the assessee submitted that the said concern was functionally dissimilar and its services can be considered as Knowledge Process Outsourcing (KPO), which is quite distinct from that of the assessee. It is further pointed out that the said distinction has been appreciated by the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) whereby the said concern has been held to be functionally dissimilar to a concern which was undertaking functions simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted is liable to be excluded from the list of comparables for the period under consideration. We hold so. Thus, on this aspect assessee succeeds. 17. Notably, Symphony Services Pune (P.) Ltd. (supra) was also a concern which was engaged in provision of software development and related services to its associated enterprises on cost plus markup basis. The Tribunal vide its order dated 30-04-2014 (supra) considered the inclusion of E-Zest Solutions Ltd. for the purpose of comparability analysis of the transaction of development services for the very same assessment year, i.e. 2008-09, which is also the year before us. Following the aforesaid discussion which squarely covers the controversy in the present case, we direct that E-Zest Solutions be excluded from the final set of comparables.' 13. The third comparable which was directed to be excluded from the final set of comparables by the Tribunal in the case of Barclays Technology Centre India (P.) Ltd. (supra) was Bodhtree Consulting Ltd. The Tribunal noted that the said concern was engaged in the product engineering and content engineering services, which were in the nature of ITES services and were not comparable to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee by referring to the stand of the TPO as contained in his order. 22. We have carefully considered the rival submissions with respect to Bodhtree Consulting Limited. The plea of the assessee is that the said concern is engaged in the sale of software products, apart from considering software services, and that no segmental data is available in this context; thus, it is functionally not comparable with the assessee's activities. In this regard, we have perused the discussion made by our Coordinate Bench in the case of NetHawk Networks India Pvt. Ltd. (supra) wherein the said concern has been found to be not exclusively engaged in rendering software development services. The relevant discussion in the case of NetHawk Networks India Pvt. Ltd. (supra) is as under : C. Bodhtree Consulting Limited 21. On this comparable, case of the assessee is that the company is not a good comparable in view of the Software Products produced by the company. As such, no segmental data is adequately available too. Accordingly, we dismiss the argument of the Ld. DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application 23. Considering the above, we are of the opinion that Bodhtree Consulting Ltd. is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO. 23. There is no material placed before us which would require us to deviate from the conclusion drawn by the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. (supra) in the context of the exclusion of Bodhtree Consulting Ltd. from the final set of comparables. Moreover, the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. (supra) also considered the efficacy of inclusion of Bodhtree Consulting Ltd. on the basis of comparability analysis in the case of an assessee which was engaged in similar activities as the appellant before us. The following di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this entity can be seen from the annual report as below : 3. Revenue Recognition : Revenue from software development is recognized based on software developed and billed to clients. From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Product mode. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year for which the revenue may have been recognized in the earlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the profitability margin of such entity. Merely because of such fluctuation, an entity engaged in the development of software, being functionally comparable to the assessee, cannot be rejected only on this ground . 14. The learned counsel for the assessee drew our attention to the fact that Bodhtree Consulting admittedly follows a fixed price project model whereby revenues from software development is recognized based on software and billed to clients. In such business model expenditure for developing software would be billed in an earlier year but the revenue would be recognized in a subsequent year. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce project method whereby revenue from software development services was being recognized based on the software developed and billed to the clients. In such a business model, the possibility of the expenditure not being booked on the basis of the matching principle cannot be ruled out, which would impart fluctuation in the margins over the years. In contrast, in the present case, the revenue is being recognized based on the cost plus markup basis. Clearly, the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the model being pursued by assessee and such distinction prevailed with the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. (supra) to exclude Bodhtree Consulting Ltd. from the list of comparables. Considering such difference, in our view, assessee is justified in asserting that the said concern be excluded from the list of comparables. We hold so.' 14. Admittedly, the facts of the present case are identical to the facts of Barclays Technology Centre India (P.) Ltd. v. ACIT (supra), where both the assessee and Barclays Technology Centre India (P.) Ltd . were engaged in providing software development services. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TV and further, the company had carried inventory of set top boxes and movie rights in its Balance Sheet for the previous year. In addition, the said company had some income from sale of industrial material. Looking at the services provided by the said concern, it is clear that the same are functionally dissimilar to the services provided by the assessee and there is no merit in comparing the results of the said concern while benchmarking the international transaction of the assessee. Accordingly, we direct the Assessing Officer to exclude Goldstone Technologies Ltd. 18. Now, coming to the next plea of the assessee with regard to working capital adjustment. 19. The claim of the assessee before us was that though the DRP had directed the TPO to allow working capital adjustment, but the same was not allowed as per OECD guidelines. However, the learned Authorized Representative for the assessee pointed out that the Tribunal in assessee's own case relating to assessment year 2007-08 have given directions for allowing working capital adjustment as per OECD guidelines. The relevant findings of the Tribunal vide para 11, which read as under:- 11. On perusal of the record an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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