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TMI Blog2018 (4) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Rules, 1962 ('the Rules'). 3. That the learned DRP erred both in facts and law in confirming the action of the learned AO/TPO by making an adjustment to the price charged by the Appellant in respect of software development services ('SWD') provided to its associated enterprises by INR 116,865,282, holding that the international transaction does not satisfy the arm's length principle envisaged under the Act and in doing so, the learned DRP grossly erred in; (a) Upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis based on the application of additional filters performed by the learned TPO in the TP Order. (b) Upholding the learned TPO's action in disregarding application of multiple year/prior year data as used by the Appellant in the TP documentation and in holding that current year (i.e. Financial Year 2012-13) data alone should be used for comparability. (c) Upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion against the use of information u/s. 133(6) of the Act and stating that since section 133(6) is used to verify the information given in the Annual Report and such information supports the information available in the Annual Report, in such circumstances the use of information collected under section 133(6) is appropriate. (k) Upholding the learned TPO's approach of not providing risk adjustment and in thus ignoring the risk insulated nature of the services provided by the Appellant and the fact that full-fledged entrepreneurial companies are selected as comparables. (l) Upholding the learned TPO's approach in concluding that there is no correlation between the operating mark-up on cost earned and the turnover of a company and in thereby failing to appreciate that the learned TPO erred in failing to reject companies which have a large scale of operations when compared to the Appellant. (m) Upholding the learned TPO's approach in not accepting the Net Fixed Asset to Sales filter of 15% applied by the Appellant in the TP documentation and accordingly not including the comparable companies selected by the Appellant like Acropetal Technologies Limited, Cigniti Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e software development services as the primary function. As a result of the search process the assessee had adopted 26 companies in respect of software development activities as comparables for benchmarking analysis and has adopted the TNMM as the most appropriate method. 3. The TPO was not convinced with the TP document maintained by the assessee and has pointed out various defects in the TP study prepared by the assessee, as succinctly mentioned by the TPO in para 4.1 of his order. Thereafter the TPO has rejected the TP study of the assessee. It is mentioned at bar by the Ld. AR that the TPO has considered and shortlisted six comparables and has calculated the arithmetic mean of the operating profit/OC of these companies at 21.53%. The TPO at page 27 has arrived at the final set of comparables, which are the following six companies : 1. CGVAK Software & Exports Ltd. 2. Larsen & Toubro Infotech Ltd. 3. Mindtree Ltd. (seg) 4. Persistent Systems Ltd. (seg) 5. R. S. Software (India) Ltd. 6. Tech Mahindra Ltd. (seg) The TPO issued a show-cause notice to the assessee by applying various filters as mentioned in para 5 of the show-cause notice at page 48 of the paper book. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otech Ltd. 26.06% 4 Mindtree Ltd. (seg) 20.23% 5 Persistent Systems Ltd. 28.27% 6 R S Software (India) P. Ltd. 17.41% 7 Tech Mahindra Ltd. (seg) 21.18% Unadjusted average margin 21.18% The assessee had filed a reply to the show cause notice and had objected to the inclusion of CG-VAK Software Exports Ltd., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. The TPO has considered the objections raised by the assessee with respect to exclusion of these three companies. However, the TPO was not convinced and therefore has rejected the contention of the assessee and has proposed a TP adjustment to the tune of Rs. 92,119,614/-. Feeling aggrieved by the above addition, the assessee filed objections before the DRP. At the time of filing the objections, the assessee also sought inclusion of the following four companies before the DRP : i. Acropetal Technologies Ltd. ii. Cigniti Technologies Ltd. iii. Sasken Communications Ltd. iv. Spry Resources India P. Ltd. It was the contention of the assessee that these companies are functionally similar to that of the assessee and therefore these companies should be included in the list of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional evidence is not accepted. Thus the objection of the assessee in relation to these comparables is not accepted. Thus the assessee is aggrieved and is in appeal before this Tribunal, on various grounds mentioned herein-above. 4. For the purposes of purpose of adjudicating the appeal, we will be dealing with each comparable separately/collectively in the following paragraphs. CG-VAK Software Exports Ltd : 5. First of all the Ld. AR has drawn our attention for exclusion of M/s. CG-VAK Software Exports Ltd. In this regard it was the contention of the assessee that it is seeking exclusion of the said company as it cannot be compared with the assessee for the following reasons : (i) That M/s. CG - VAK Software Exports Ltd. is engaged in product development (ii) That the comparable in its annual report at page 698 of the paper book under the head 'Future Plans' has mentioned as under : FUTURE PLANS The global market for IT services is expected to expand and corporations are increasingly using the offshore service providers like us. The company has been growing positively in the offshore software services business and this momentum is likely to continue this year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has proprietary right or any other right. From the bare perusal of the annual report and the financials it is clear that CG - VAK Software Exports Ltd. is not having any products in its inventory and there is no mention of any work-in-progress in respect of software products. In fact from the paragraph cited herein above at page 698 of the paper book, it is clear that CG - VAK Software Exports Ltd. is a software development company and is doing the work of integration, assimilation or patch work for its client and for that purposes is also rendering some services on-site. Therefore it cannot be urged that it was a product company. In other words, the profile of CG - VAK Software Exports Ltd. matches with the profile of the assessee company. Therefore we find no infirmity in the order passed by the authorities below. Accordingly the ground raised by the assessee for exclusion of CG - VAK Software Exports Ltd. is devoid of any merit. We dismiss the same. LARSEN & TOUBRO INFOTECH Ltd. & PERSISTENT SYSTEMS Ltd. : 8. In this regard the Ld. AR has submitted that L & T Infotech Ltd. is engaged in software product development and is having substantial amount of intangibles assets. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ab India (P.) Ltd. (supra). 11. Following the above order of the coordinate bench, these two comparables namely LARSEN & TOUBRO INFOTECH Ltd. & PERSISTENT SYSTEMS Ltd. are restored back to the file of the TPO to decide afresh in terms of the observations made hereinabove. 12. Now we are left with the following six comparables : (i) Akshay Software Technologies Ltd. (ii) Thinksoft Global services Ltd. (iii) Acropetal Technologies Ltd. (iv) Cigniti Technologies Ltd. (v) Sasken communications Ltd. (vi) Spry Resources India Pvt. Ltd. i) Akshay Software Technologies Ltd. : 13. It was submitted by the assessee that Akshay Software Technologies Ltd. is engaged in IT services which is in the nature of software development and the income earned by this company from commission and sale of licence is miniscule and therefore this company is functionally comparable with that of the assessee. Our attention was drawn to the order passed by the TPO at page 7, where the AO has rejected this company on the premise that in response to notice u/s. 133(6) of the Act, it was stated by Akshay Software Technologies Ltd. that it is engaged in procuring, installation, implementation, support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at cost of acquisition or construction. They are stated at historical cost less accumulated depreciation, amortization and impairment loss, if any. Product development costs are recognised as fixed assets, when feasibility has been established, the company has committed technical, financial and other resources to complete the development and it is probable that asset will generate probable future benefits. From a perusal of the above, it is clear that the company is incurring cost for product development and had recognised it as fixed assets. Therefore the company is required to be considered as a company dealing in software products and is into developing and selling the products developed by it. Therefore we do not find any error in the finding of the CIT (A). If we go through the decision cited by the Ld. AR in the matter of Labvantage Solution (P.) Ltd. (supra), wherein the Tribunal considered Qualcomm India (P.) Ltd. v. Asstt. CIT [ITA 5239/Del/2010, dt.10.06.2013] wherein the functions of Akshay Software Technologies Ltd. is mentioned as engaged in SAO and remote infrastructure management software applications, as against design work on embodied software, DSP an integrate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of their failure all the more tangible. Every software application requires testing in one form or another Iron a simple Web 2.0 widget through to a major enterprise system. With both consumers and businesses demanding smarter, faster and ever more sophisticated applications and the cost of application failure becoming ever greater the need for testing solutions and services which can ensure this is achieved is mere pressing Over the last 5-6 years India has become one of the leading destinations for outsourcing of Software resting Services accounting for 32 per cent of the total global outsourcing share Export revenues and the number of employees have doubled over the last four years at a CAGR of 20 per cent Most of the current testing that is outsourced concerns conventional elements of functional testing, primarily systems testing regression testing and integration testing However, current trend shows increased demand on specialised areas in testing such as lest automation non-functional testing and test consulting Services specifically, India's supply base is expanding its independent testing services to offer domain specific niche services, testing services for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial services industry worldwide. The company has invested in five wholly-owned subsidiaries in Singapore, USA, Germany, UK and UAE for market development and service delivery in the respective regions." On the basis of the above it was submitted the predominant character of Thinksoft Global Services Ltd. is of software development and the hair-split approach treating a company into software development and software testing cannot be classified differently. It was submitted that testing of the software is a part and parcel of software development because without testing of the software, it cannot be said to be developed and therefore it was submitted that the company is required to be included. 17. On the other hand the Ld. DR has drawn our attention to page 8 of the TP order where the TPO has dealt with the argument of the assessee and mentioned in tabulation that Thinksoft Global Services Ltd. is primarily engaged in software testing services focussing on insurance and banking industry and thus functionally different. Further at page 10 the DRP has reproduced the same argument and thereafter has rejected the comparable. 18. We have heard the rival contention and perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has applied the on-site filter. Similarly in the matter of Kodiak Net Works India (P.) Ltd. v. Dy. CIT [2017] 87 taxmann.com 2 (Bang. - Trib.), the Tribunal has not agreed with the contention of the Ld. DR for excluding this company on the premise of revenue earned by it on account of foreign exchange gains. However the argument of a testing company was not raised in any of the matters cited before us. No other decision was cited before us by both the parties for AY 2013-14, dealing with the inclusion or exclusion of Thinksoft Global Services Ltd. Therefore in the facts and circumstances of the case, we do not find any merit in the submission of the assessee and accordingly the ground raised by the assessee for inclusion of Thinksoft Global Services Ltd. is rejected. Acropetal Technologies Ltd. Cigniti Technologies Ltd. Sasken Communications Ltd. Spry Resources India Pvt. Ltd. 19. In respect to assessee's ground for inclusion of these four companies, it was fairly conceded by the Ld. AR that these comparables were not part of the TP study of the assessee and it was also conceded before us that even the assessee has not in its reply submitted for inclusion of these comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d opinion of the bench these aspects of examining the functional profile of these four companies, namely, Acropetal Technologies Ltd., Cigniti Technologies Ltd., Sasken communications Ltd. and Spry Resources India Pvt Ltd., is required to be remanded back to the file of the TPO for examining afresh. In any case, we are remitting back the two companies, namely Persistent Systems Ltd. (seg) and Larsen & Toubro Infotech Ltd. to the file of the TPO. Therefore these four companies are also directed to be remanded back to the file of TPO for the purposes of due adjudication. Needless to say that the TPO shall give opportunity to the assessee before finalizing the inclusion/exclusion of these comparables after applying the same filters. Accordingly this ground is allowed for statistical purpose. Summary of the result of TP grounds : i) The assessee ground for exclusion of CG-VAK Software and Exports Ltd., is rejected; ii) Larsen & Toubro Ltd. & Persistent Systems Ltd., are remitted back to the file of TPO to decide afresh; iii) The ground for inclusion of Akshay Software Technologies Ltd. is rejected; iv) The ground for inclusion of Thinksoft Global Services Ltd. is rejected; v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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