TMI Blog2015 (8) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. Assessee in its appeal has altogether taken five grounds of which grounds 1, 2 and 5 are general needing no specific adjudication. Grounds 3 and 4 relate to adjustments done on the pricing of the international transactions undertaken by it. 2. Ld. Counsel for the assessee at the outset submitted that if his grounds seeking exclusion of two companies from the list of comparables that are left after considering the directions of the CIT (A) and seeking inclusion of two companies originally proposed by the TPO but later on rejected by him are considered, then other issues raised relating to transfer pricing, except for the one regarding adjustment of working capital could be adjudicated at a later point of time if and when required. Grievance of the assessee regarding working capital adjustment is restriction thereof to 1.71%. 3. Facts apropos are that assessee a company engaged in the business of providing software design and maintenance service and marketing support had operating revenues of ₹ 85,32,91,086/-. Margin of profit of the assessee on its cost for the relevant previous year was as under : Description (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mindtree Ltd 20% P S I Data Systems Ltd 5% SIP Technologies Exports Ltd -9% Synetairos Technologies Ltd 17% eZest Solutions Ltd 33% Persistent Systems Ltd 2% Computech International Ltd 2% HS India Ltd -27% Techprocess Solutions Ltd 26% Mean 13% As per the assessee, above margin was well within +/- 5% of its own margin of 10.02% and there was no necessity for any adjustments for arms length pricing. 6. However TPO applied filters like employee cost less than 25% of sales, export earnings less than 25%, RPT greater than 25% of sales, companies having different accounting year, companies which were functionally dissimilar, companies having insignificant software development income and rejected 12 of the above comparables selected by the assessee. Thereafter, he made his own study of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- Assessment order was completed making addition of ₹ 9,60,59,330/-. 8. Aggrieved assessee moved in appeal before the CIT (A). Assessee sought exclusion of comparable which were having turnover in excess of ₹ 200 crores since its own turnover was way less at about ₹ 85.32 crores. Assessee also sought exclusion of Bodhtree Consulting Ltd and M/s. Kals Information Systems Ltd, arguing that they were functionally dissimilar to the assessee. Assessee also sought inclusion of two comparables namely, Thinksoft Global Services Ltd and FCS Software Solutions Ltd, which were proposed by the TPO but later on rejected by her. As per the assessee, when TPO proposed inclusion of these two companies, it had accepted such proposal, but still she elected to exclude these two companies from the final list of comparables. 9. CIT (A) was partly appreciative of the additions of the assessee. He directed exclusion of those comparables having turnover in excess of ₹ 200 crores. In the result, following comparables went out of the list of comparables : (i) Tata Elxsi Ltd (seg) (ii) Sasken Communication Technologies Ltd (iii) Persistent Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO erroneously concluded that these companies were engaged in financing activities, whereas the records speak otherwise. According to him, profit and loss account of these companies would show that these non-operational income were negligible when compared to the operational income. Thus according to him, citing a wrong reason of extra-ordinary working capital adjustment. TPO had rejected these comparables. As per the Ld. AR if these two comparables were also considered then what would be left would be the following four comparables, giving to an average PLI of 10.23% : Sl. No. Comparables selected by TPO NCP Margins (%) (without WC adjustment) NCP Margins (%) (With WC adjustment) 1 Akshay Software Technologies Ltd 8.11 7.57 2 R S Software (India) Ltd 9.97 9.99 3 Thinksoft Global Services P. Ltd 15.48 10.12 4 FCS Software Solutions P. Ltd 16.27 13.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No. 7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No. 4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open end to end web solutions software consultancy and design development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. The first is the Time and Material (T M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model (FPP). Under the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below: 3. Revenue Recognition : Revenue from software development is recognised 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 Project model. 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 recognised in the earlier or subsequent year. Therefore, it is but natural that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s. 133(6) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded. 21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and Loss account of M/s. Thinksoft Global Solutions for the relevant previous year is placed at paper book page.247. Software service revenues of the said company came to ₹ 920921452/-. Other income of the said company came to ₹ 35,738,801/-. Break-up of the other income as given at schedule 10 placed at paper book page.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.7 Working Capital Adjustment: The working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009. In this case, the average PLR adopted by SBI, the largest scheduled bank, for short term working capital loans for the relevant FY 2008-09 is considered. The average PLR of 12.50% p.a was adopted by the TPO while computing the working capital adjustment. The working capital adjustment is restricted to the average cost of capital computed at 1.71% in the case of the uncontrolled comparables selected by the TPO. Hence, the working capital adjustment in the case of the taxpayer is allowed as per the calculation in annexure-C or the average cost of capital to the comparables whichever is the least. The detailed discussion on this is given in the Annexure-D to the order. The computation of the working capital adjustment is annexed to this order as Annexure C. TPO had restricted the cost of capital to 1.71%. Rationality for such an upper limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of Rambus Chip Technologies (India) (P.) Ltd. v. Dy. CIT [IT (TP) A. 23/Ban/2015, dt. 22.07 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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