TMI Blog2017 (6) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... unsuccessful in seeking the desired relief. Before Tribunal the ld. AR of the assessee has reiterated the submissions made before the authorities below. The ld. AR of the assessee has not been able to show as to how the findings of authorities below on this issue are bad. We find no merit in the ground raised by the assessee, accordingly, the same is dismissed. Benefit of ± 5% as per the provisions of section 92C(2) - Held that:- The assessee has prayed for granting the benefit of ± 5% as per the provisions of section 92C(2) of the Act. The ld. AR has submitted that if Ancent Software International Limited and Quintegra Solutions Limited are included in the list of comparables; and Acropetal Technologies Ltd. and Thirdware Solutions Limited are excluded from the list of comparables, the average margins of the assessee will fit within ± 5% range. However, before us no working has been furnished by the ld. AR to substantiate his point. Accordingly, we remit this issue back to the file of TPO to consider the contentions of the assessee and decide this issue, in accordance with law. Thus, ground raised by assessee allowed for statistical purpose. TPA - Comparable selection - Held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the Appellant, disregarding the fact that the company is also engaged in product development activities in addition to software services and hence is functionally different from the Appellant; 8. Erred in considering Thirdware Solutions Limited as a comparable, disregarding the fact that the company is engaged in product development services in addition to software services and does not report separate segmental accounts for the same and hence is functionally different from the Appellant; Working capital adjustment 12. Erred in not granting the benefit of working capital adjustment to the Appellant while determining the margins of comparable companies; Risk adjustment 13. Erred in not granting risk adjustments while comparing the margins of comparable companies with that of the Appellant; Benefit of +/-5% 14. Should have appreciated that benefit of +/-5% under proviso to Section 92C(2) of the Act be granted to the Appellant if the adjustment under transfer pricing falls within the range specified therein; Non Transfer pricing grounds Computational error 15. Erred in inadvertently considering the total income of the Appellant at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the said draft assessment order, the assessee filed objections before the DRP. The DRP applied turnover filter and rejected six companies from the list of comparables made by the TPO. Further, the DRP rejected On-site filter applied by the TPO. The DRP added two companies in the list of comparables and thus, made list of 10 companies as the final list of comparables. The same is reproduced here-in-under : Sr. No. Name of Comparables PLI F.Y. 2009-10 1 Akshay Software Technologies Limited -1.07% 2 CG-VAK Software Exports Limited (Segmental) -10.59% 3 Goldstone Technologies Limited 20.35% 4 Indium Software (India) Limited 7.16% 5 Persistent Systems Private Limited 30.50% 6 R S Software (India) Limited 9.53% 7 Thinksoft Global Services Limited 17.05% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench of the Tribunal in the case of M/s. Carraro Technologies India Pvt. Ltd. Vs. Income Tax Officer in ITA No. 2189/PN/2013 for assessment year 2010-11 decided on 30-11-2016. 2.3 In respect of ground Nos. 7 and 8 wherein the assessee has prayed for exclusion of Acropetal Technologies Limited and Thirdware Solutions Limited. The ld. AR submitted that both the companies should be excluded from the list of comparables as they are functionally different and have different business model. The ld. AR contended that Acropetal Technologies Limited is a product company and is performing activities onsite. The TPO applied on-site filter, however, the DRP rejected the said filter. The ld. AR contended that a perusal of the Annual Report of Acropetal Technologies Limited would show that for the Financial Year 2009-10 segmental bifurcation of revenue is given, but, there is no segmental bifurcation of revenue from IT service and IT product. The bifurcation is between Engineering Design Services, Information Technology Service and Healthcare. The ld. AR placed reliance on the decision of Mumbai Bench of the Tribunal in the case of QAD India Pvt. Ltd. Vs. Dy. Commissioner of Income Tax in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 decided on 17-04- 2017. 2.4 The ld. AR submitted that in ground No. 12 the assessee has assailed the findings of DRP in not granting the benefit of working capital adjustment while determining margin of comparable companies. The ld. AR submitted that working capital adjustment should have been given by the authorities below while determining the margin of comparable companies. In support of his submissions the ld. AR placed reliance on the following decisions : i. Demang Cranes Components (India) Private Limited in ITA No. 32/PN/2014 for assessment year 2009-10 decided on 19-10-2016; ii. Starnet Networks India Pvt. Ltd. in ITA No. 812/PN/2013 for assessment year 2005-06 decided on 27-04-2016; iii. Demang Cranes Components (India) Private Limited in ITA No. 120/PN/2011 for assessment year 2006-07 decided on 04-01-2012. 3. On the other hand Smt. Reena Jha Tripathi representing the Department vehemently supported the findings of DRP/Assessing Officer against which the assessee is in appeal. 4. We have heard the extensive submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be consistent loss making when the company has incurred losses in the three consecutive financial years including the financial year in which the international transactions have been made. In the instant case Financial Year 2009-10 is relevant to the assessment year under appeal. Thus, the financial years to be considered for determining whether the company is consistent loss making are financial years 2007-08, 2008-09 and 2009-10. A perusal of the profit and loss account of Onward Technologies Ltd. placed on record shows that the said company has suffered losses in financial years 2007-08, 2008-09 and 2009-10. The profits/(losses) before tax of the company in the relevant three financial years are as under : Financial Year Profit/(Loss) before tax (in `) 2007-08 (1,65,87,281) 2008-09 (8,89,22,096) 2009-10 (5,18,75,427) Thus, it is evident from the perusal of the financial results of Onward Technologies Ltd. that Onward Technologies Ltd. is consistent loss making company, therefore, the said company cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val submissions. Factually speaking, Akshy Software Technologies Limited was found by the TPO to be predominantly engaged in rendering services to its client s on on-site basis. As per the TPO, Akshy Software Technologies Limited rendered services at client s site unlike the services being provided by the assessee through offshore sites. The difference in operating mechanism of two business models is starkly evident. While under the on-site business model, the service provider positions its personnel on the client s site and on the other hand, in the off-shore business model, the service provider positions its personnel on its own site i.e. away from the site of the clients. The TPO in terms of his discussion in the order has attempted to deduce that the margins from onsite consultancy are lower when compared with margins from off-shore development work. He has also referred to an extract from McKinsey s research on Indian software industry competitiveness to say that because of the differences in costs between a developed country and India, it acts as motivator for the companies located in developed countries to increase its offshore sourcing of services. In our considered opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has developed software PAPA‟. The financial results of the said company further show that the company is having income from sale of licenses, revenue from subscription, etc. It has also been pointed that Thirdware has outsourced substantial portion of work to third parties and has paid ₹ 11.42 crores towards outsourcing charges during the financial year 2009-10. The Coordinate Bench of the Tribunal in the case of Approva Systems Pvt. Ltd. Vs. DCIT in ITA No. 1921/PUN/2014 for assessment year 2010-11 decided on 25-01-2017 excluded Thirdware from the final list of comparables in assessment year 2010-11 on the ground that the said company is super profit earning company and is engaged in the business of software licenses and trading of implementation activities. The relevant extract of the findings of Tribunal are as under : 11. We find that the Tribunal noted that the TPO had selected KALS Information System Ltd. and Thirdware Solution Ltd. as being comparable, whereas the case of assessee was that both the said concerns were functionally different. With regard to KALS Information System Ltd., it was pointed out that the said company was earning income from sale of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm s length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin. Question No. 2 referred to this special bench is answered accordingly . 29.1 We find from the details furnished by the assessee that the assessee is a software developer whereas Thirdware Solutions Ltd. is engaged in the business of sale-cum-licence of software which is available from the audited accounts, the details of which are as under : Schedule : Sales As on 31-03-2009 As on 31-03-2008 Sale of Licence 22,237,588 3,916,427 Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. ITO reported as 70 taxmann.com 349 has excluded Thirdware from the list of comparables in assessment year 2010-11 on account of outsourcing of its work to third parties and income from diversified activities. The relevant extract of the findings of Tribunal in the said case are as under: 56. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the functions of Thirdware are in contrast with the assessee which only provides software development in the finance domain as per the instruction of its AE. Also, Thirdware has incurred expenses towards import of software services, evidencing outsourcing of software services unlike the assessee. Since, it is also engaged in outsourcing its activities as it has incurred expenses towards imports of software services, evidencing outsourcing of software services unlike the appellant company. Hence, it is functionally not comparable and cannot be treated as a comparable to assessee. We order accordingly. Thus, in view of the aforesaid facts and the decisions discussed above, we are of considered view that Thirdware is not a good comparable being func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he authorities below. The ld. AR of the assessee has not been able to show as to how the findings of authorities below on this issue are bad. We find no merit in the ground raised by the assessee, accordingly, the same is dismissed. 12. In ground No. 14, the assessee has prayed for granting the benefit of 5% as per the provisions of section 92C(2) of the Act. The ld. AR has submitted that if Ancent Software International Limited and Quintegra Solutions Limited are included in the list of comparables; and Acropetal Technologies Ltd. and Thirdware Solutions Limited are excluded from the list of comparables, the average margins of the assessee will fit within 5% range. However, before us no working has been furnished by the ld. AR to substantiate his point. Accordingly, we remit this issue back to the file of TPO to consider the contentions of the assessee and decide this issue, in accordance with law. Thus, ground No. 14 raised in the appeal is allowed for statistical purpose. 13. In ground No. 15, the assessee has prayed for directions to rectify the computational error. The ld. AR submitted that the Assessing Officer has determined total income of the assessee at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y analysis. No reason whatsoever has been given by the assessee to explain as to why turnover was not initially applied at the time of TP study. (ii) Selective use of turnover filter : After having applied turnover filter, the DRP has directed to include Zylog Systems Limited and Persistent Systems Private Limited in the list of final comparables. Both these companies should have been removed from the list of comparables as both the companies have turnover of more than ₹ 200 crores in the period relevant for comparison. The ld. DR submitted that a perusal of Profit and Loss account of Zylog Systems Limited for the period ending 31-03-2010 would show that the turnover of the said company from software development services and products is ₹ 7,78,12,93,691/-. Similarly, in the case of Persistent Systems Private Limited the overseas turnover of the company from the sale of software services and products for the financial year ending on 31-03-2010 is ₹ 4,73,98,20,000/-. Thus, both these companies fall outside the purview of comparison, if turnover filter is applied. (iii) On-site revenue filter : The DRP has erred in directing to reject onsite revenue filter appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis. After having applied turnover filter, both these companies have been included in the list of comparables. We find merit in the ground raised by the Department. Once, having applied turnover filter there cannot be arbitrary selection of the companies ignoring the turnover. The DRP has drawn our attention to the financial results of both the aforesaid companies. A perusal of profit and loss accounts of the said companies for the financial year ending 31- 03-2010 reveal that both these companies have turnover much more than ₹ 200 crores. Accordingly, both these companies have to be excluded from the list of comparables. Accordingly, ground No. 2 raised by the Department in appeal is allowed. 22. In ground No. 3, the Department has assailed the findings of DRP in rejecting On-site revenue filter‟ applied by the TPO. This issue we have already dealt in detail deciding the appeal of the assessee. We have reversed the findings of DRP in rejecting On-site revenue filter‟. For the detailed reasons given in para 8 above, we allow ground No. 3 raised by the Department. 23. In the result, the appeal of the Department is partly allowed. CO No. 30/PUN/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
