TMI Blog2018 (1) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... ./1670/Mum/2015 - - - Dated:- 24-1-2018 - Sh. Rajendra, Accountant Member And Amarjit Singh, Judicial Member For The Revenue : Shri V.Jenardhanan For The Assessee : Shri H.P.Mahajani Order u/s. 254(1)of the Income- tax Act, 1961(Act) PER RAJENDRA, AM Challenging the order of the assessing officer (AO), dated 20. 01. 2015, passed u/s. 143(3) r. w. s 144C(13)of the Act, the assessee has filed the present appeal. Assessee-Company, engaged in rendering software services, filed its original return on 29. 09. 2010, declaring total income of ₹ 72. 92 lakhs. Later on, a revised return was filed on 17. 03. 2011. The AO completed the assessment, determining its income at ₹ 5. 84 crores. 2. Effective ground of appeal is about transfer pricing adjustment of ₹ 4. 81 crores During the assessment proceedings, the AO found that the assessee has entered into International Transactions (IT. s) with its Associated Enterprises(AE). He made a reference to the Transfer Pricing Officer(TPO)to determine arm s length price(ALP) of the IT. s for the year under consideration. After receiving the order of the TPO the AO issued a draft order proposing upward a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables and RSL had different year ending, hat data for ASPL and CSL for the FY. 2009-10 were not available, that in the case of SIPL the RPT were less than 25%. He directed the assessee to show cause as to why following ten(10)companies should not be considered for benchmarking as follows : 1. FCS Software Solutions Ltd. (FSSL) 2. Infosys Technologies Ltd. (Infosys) 3. KALS Information Systems Ltd . (KALS) 4. Larsen and Toubro Infotech Ltd. (L T) 5. Persistent Systems Ltd. (PSL) 6. Sasken Communication Technologies Ltd. (SCTL) 7. Sonata Software Ltd. (SSL) 8. Thirdware Solutions Ltd. (TSL) 9. Wipro Ltd. (Wipro) 10. Bodhtree consulting Ltd. (BCL) 4. After considering the submission of the assessee, he analysed the functions of the above mentioned comparable vis- -vis the filters applied by him. He rejected Wipro and considered the balance nine comparable companies along with the remaining six comparables of the assessee to arrive at the arithmetic mean of 20. 30%. Accordingly, he computed the ALP of the IT. s @ ₹ 45. 33 crores for the year under consideration and suggested an upward adjustment of ₹ 4. 81 crores. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to implement them once the client would decides to obtain a license for any given product, that it would give pre-sale advice to the clients on which product would suit his requirements, that thereafter it would be involved in post-buy discussion for planning and custo - misation and implementation of licensed software, that the companies developing software products could not be considered valid comparables. The AR further stated that that the assessee inadvertently had not provided for the working capital adjustment during the course of assessment proceedings, that the DRP failed in not directing the TPO/AO to provide working capital adjustments, that working capital adjustment could not be denied to the assessee only on the ground that it had not made any claim in the TP study. The working capital adjustment for the comparable companies is required, as it impact the profitability of the companies. The AR relied upon the cased of Barclays Technology Centre India P. Ltd. (ITA 2279/PN/2012- A. Y. 2008-09);3DPLM Software Solutions Ltd. (ITA/1303/Bang/2012-AY. 08-09);PTC Software India Pvt. Ltd. (ITA 336/PN/2014)(A. Y. 09-10);Equant solutions Private Ltd. (ITA/1202/Del/ 2015 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt), that it had huge intangible value of ₹ 92, 85, 323/-and computer product value of ₹ 9, 09, 57, 100/- in India, that it had intangibles of ₹ 17, 21, 62, 190/- in USA(Schedule 5 of Pg. 43 of the Annual report). Referring to RSIL , the DR stated that it was engaged in Research Development (R D)and Innovation, that it owned Security IP Protection, that it was in software products also, (Pg. 9 and 12 of the Annual report). About ASTL , he contended that it was engaged in software product(Pg. 2 of the Annual report), that it was engaged in SAP-B1 a software product(Pg. 3 of the Annual report), that it had huge fluctuating margin between the last 3 FY. s including the FY. 2009-10. He relied upon the cases of M/s. Panasonic AVC Networks India Co Ltd. (ITA/4620/Del/2011-AY. 2004-05 and M/s. All scripts India Private Ltd. (ITA/240l/Ahd/2013. AY. 2008-09. ) The DR also referred to the sections on Business Review and Capabilities Overview at Paras 2. 3. 1 and 2. 3. 2 of the TP Study report and canvassed the view that the assessee was also in the business of product development and not only rendering software services. He relied upon the cases of Internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andate in Chapter X of the Income-tax Act, 1961, whereunder transfer pricing adjustment done was only to redetermine the consideration received or given to arrive at the income arising from the international transactions with associated enterprises. From the above, it is clear that the chapter X of the Act stipulates that adjustments can be made to determine the fair market value of the good sold or purchased or services offered or availed. If the price paid/charged to/from the AE. s is equal to the price paid or charged to/from Non-AE entities, then the transactions have to be considered at arm s length. Keeping these broad parameters in mind, we will now proceed further. 7.2. We are of the opinion that two basic question to be decided by as us are as to i)whether the comparables selected by the TPO can be used for determining the ALP of the IT. s. and ii)as to whether the four comparables namely, QSL, RSIL, LGL and ASTL can be excluded from the list of valid comparables, if 8 of the comparables, selected by the TPO, are to be rejected, as they are also suffering from the same deficiencies as that of the four comparables. We find that the assessee had agreed to treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reporting has to in a particular format for all the corporate entities. So, the terminology used in the Annual Report is not enough to prove or disprove the existence or absence of a fact-it is mere a format. So, in our opinion, what has to be seen is as to whether the comparable companies were actually engaged in R D in a particular year. The whole exercise of determining the ALP of the IT. s is to find suitable comparables, if TNMM has to be applied, for that year. It may be possible that in earlier or subsequent years the assessee may carry out a particular activity or discontinue it. But, that should not and cannot be basis for deciding the issue for the particular year. Facts of each AY. s. have to be compared independently and for that matter financials of only that year have to be examined. 7.4. Companies(Disclosure of Particular in the Report of Board of Directors)Rules, 1988 prescribe various norms to be included in the report. As per rule 2 of the above Rules, the Companies are required to furnish form B. The form reads as under: Research and Development(R D). 1. Specific areas in which R D carried out by the company . 2. Benefits derived as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year under appeal. 8. Now, we would like to refer to the pages relied upon by the DR to support the view that QSS, LGL and RSIL should be excluded from the final list of valid comparables. Pgs. 8, 19, 22 and 26 of the annual report of QSS do not suggest that the assessee was manufacturing software products. Pg. 8 talks of QSS being a leading IT services and consulting company delivering services through innovative and customized services. It also mentions that the assessee was offering software services . Pg. 19 and 22 suggest that it was into software services. Quantitative details at Pg. 26 mentions that QSS was engaged in development and maintenance of computer software . P L Account for the year shows income from software service of ₹ 37, 38, 47, 298/-. It does not show any income under the head software product. Schedule 12 talks of overseas and domestic income from software services only. We find that in the earlier two AY. s. the TPO had accepted QSS as a valid comparable. In the case of LGL we do not find any mention of company being involved in manufacturing of software products. As stated earlier, in the financials of any of the three companies, inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under consideration(Pg. 84). As per Report on Corporate Governance, it spent a lot lime in brand building(Pg. 85). No segmental information for the year is available(Pg. 87). Clearly, FCS is engaged in to product development and therefore it cannot be held to be a valid comparable. As far as Infosys is concerned, we want to mention that it owned proprietary software(Page 94) and was carrying out R D activities. It had also filed patent application. The turnover of Infosys was 216 times of the turnover of the assessee. After excluding Wipro Ltd. from the list of the comparables why did the TPO included Infosys in the final list of comparables is beyond comprehension. Both are in the same league. He should have either included or excluded both the companies for benchmarking purposes. Considering the factors like significant presence of brand, expenditure incurred on advertising and brand building as well as on R D, we hold that Infosys should have been treated as an invalid comparable for the year under appeal. KALS is engaged in development of software products and providing related services(Pg. 104- 107). Besides, perusal of Pg. 107-108 reveals presence of signifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one comparable and that is BCL and the AR had stated that he had no objection if BCL was included in the list of the valid comparables. 9. We find that if the comparables selected by the assessee and approved by us and BCL are considered for benchmarking, the arithmetic average mean would be within the plus/minus 5% limit. In other words, the IT. s entered into by the assessee for the year under appeal would be at Arm s length. Therefore, we can say that no TP adjustment was required. 9.1. We also find that the assessee was not given benefit of working capital adjustment. In the case of Capgemini India (P. )Ltd. (3 Taxmann. com. 5), it was held that working capital adjustment cannot be denied to the assessee only on the ground that the assessee had not made any claim in the TP study if it is possible to make such adjustment as working capital adjustment will improve the comparability. In our opinion, the claim made by the assessee should have been considered. In view of the above, we decide the effective ground of appeal in favour of the assessee. As a result, appeal filed by the assessee stands allowed. . Order pronounced in the open court on 24th January, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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