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TMI Blog2017 (12) TMI 1728X X X X Extracts X X X X X X X X Extracts X X X X ..... e return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In view of the international transactions entered into by the assessee in the year under consideration, as reported in Form 3CEB, the Assessing Officer made a reference to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of the international transactions entered into with its AEs. The TPO passed an order under Section 92CA of the Act dt.28.1.2013 proposing the following TP Adjustments :- i) SWD Segment : Rs. 1,50,87,408. ii) ITES Segment : Rs. 1,23,13,265. Total Transfer Pricing Adjustment u/s.92CA : Rs. 2,74,00,673. The Assessing Officer concluded the assessment under Section 143(3) r.w.s. 92CA of the Act vide order dt.2.4.2013 wherein the assessee's income was determined at Rs. 2,78,40,699, which inter alia, included the aforesaid Transfer Pricing Adjustment of Rs. 2,74,00,673. 2.2 Aggrieved by the order of assessment dt.2.4.2013 for Assessment Year 2009-10, the assessee filed an appeal before the CIT (Appeals). The learned CIT (Appeals) disposed off the appeal vide order dt.5.8.2014 allowing the assessee pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited iii. Accentia Technologies Limited iv. Cosmic Global Limited v. EClerxServices Limited 4. The learned CIT(A) erred in law and on facts in ignoring the limited risk profile of Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO and in not allowing appropriate adjustments under Rule 10B of the Rules to account for differences between the Appellant and comparable companies. The Appellant submits that each of the above grounds is independent and without prejudice to one another." 4. Revised Ground Nos. 1 to 3(a) to 3(c) and 4. 4.1 At the outset, the learned Authorised Representative for the assessee submitted that the assessee is not pressing the revised grounds raised at S.Nos.1 to 3(a) to 3(c) and 4 in this appeal, but will be only urging revised Ground 3(d) for exclusion / inclusion of comparables in the software development /information technology services segment and exclusion of comparables in the ITES Segment. In view of this the revised grounds raised by the assessee at S.Nos.1, 3(a) to 3(c) and 4 are rendered infructuous and are accordingly dismissed as not pressed. Ground No. 3(d) : Transfer Pricing Is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies form the TPO's final set of comparables, the learned Authorised Representative placed reliance , inter alia, on the following judicial pronouncements of the co-ordinate bench of this Tribunal for the same assessment year 2009-10, and the facts of which; it is submitted would go to show are engaged in similar activities as the assessee in the case on hand :- (i) Cisco Systems India Pvt. Ltd. in IT(TP)A No.271/Bang/2014 for A.Y. 2009-10, and (ii) VMware Software India Pvt. Ltd. in IT(TP)A No.1311/Bang/2014 dt.6.1.2017. 7. KALS Information Systems Ltd. (KALS) 7.1 This company 'KALS' was selected as a comparable by the TPO in spite of the objections of the assessee to its inclusion on grounds of being functionally dissimilar to the assessee as it was engaged in development and sale of software products and has substantial inventory in this regard; whereas the assessee in the case on hand is merely providing software development services to its AEs. The TPO's action was upheld by the learned CIT (Appeals). Before us, it is submitted that for the very same Assessment Year 2009-10, the co-ordinate bench of this Tribunal in its order in the case of Cisco Systems (Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia) Pvt. Ltd. for Assessment Year 2009-10 (supra) has excluded this company 'Bodhtree' from the final set of comparables, holding as under at para 26.1 thereof :- " 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice 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 & de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2009-10 (supra). 9.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company, 'Tata' in the final set of comparables. 9.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. for Assessment Year 2009-10 (supra) has excluded this company 'Tata' from the final set of comparables, holding as under at para 26.4 and 26.5 thereof :- " 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including 'Infosys' as a comparable to the assessee. 10.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra) has directed exclusion of this company 'Infosys' from the final list of comparables to a mere provider of software development services, for reasons that it owns significant intangibles and is functionally different as it generates huge revenues from software products. In this regard, at para 26.2 of its order, the co-ordinate bench of this Tribunal has held as under :- " 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd. for Assessment Year 2009-10 (supra). 11.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including 'Persistent' in the final set of comparables. 11.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd., also for Assessment Year 2009-10 (supra) at paras 15 and 16 thereof, observing that 'Persistent' is engaged in software product development and product design services, has excluded this company as one cannot be considered as comparable to a company which is merely providing software development services to its AE's ; as is the assessee in the case on hand. At paras 15 & 16 of its order (supra) the co-ordinate bench of this Tribunal has held as under :- " 15. Since ld. DR of the revenue could not point out any difference in facts, respectfully following these Tribunal orders, we direct the AO/TPO to exclude this company also from the list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the decision of the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that this company, Persistent Systems Ltd., is to be excluded from the list of comparables, it being functionally dissimilar to the assessee in the case on hand, who is merely providing software development services to its AEs. 12. Larsen & Toubro Infotech Ltd. ('L & T') 12.1 This company, 'L & T' was included by the TPO in the final list of comparables, rejecting the assessee's objections to its inclusion on grounds of scale of operations, etc. The TPO held that this company 'L & T' was functionally comparable to the assessee as it was engaged in providing software development services. The learned CIT (Appeals) upheld the action of the TPO. Before us, the learned Authorised Representative reiterated the arguments put forth before the authorities below and further submitted that this company is to be excluded as it has RPT in excess of 15%. In support of the assessee's contention on RPT, reliance was, inter alia, placed on the decision of the co-ordinate bench of this Tribunal in the case of Novell Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables, but had thereafter came to the view that the working capital adjustment for both these companies exceeded 4% of profits and therefore these two companies could not be taken as proper comparables. At para 13.1 (b), the TPO has rendered the following reasoning for excluding these two companies as under :- "13.1 (b) Two companies proposed in the show cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin get distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly form 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. 1. Thinksoft Global Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.6.5.1, of her order which reads as under : b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chip Technologies (India) P. Ltd v. DCIT [IT(TP)A.23/Ban/2015, dt.22.07.2015. Coordinate bench had held as under at para 13 and 14 of its order : 13. As regards ground No.3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled comparables selected by the TPO. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He submitted that the CIT(A) also has not applied his mind to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside. 14. On going through the TPO's order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjustment to 1.71%. In all the cases relating to transfer pricing adjustment, this Tribunal has been directing to give working capital adjustment on actual basis and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey were functionally dissimilar to the assessee in the case on hand. The TPO's action was upheld by the learned CIT (Appeals). Before us, the learned Authorised Representative of the assessee reiterated the objections to their inclusion as comparables raised before the authorities below that they were, inter alia, functionally dissimilar from the assessee in the case on hand. It is contended that the comparability of these companies with an ITES company was considered by a co-ordinate bench of this Tribunal in the case of Novo Nordisk India Pvt. Ltd. for Assessment Year 2009-10 (supra) after which they were directed to be excluded from the final list of comparables in the ITES Segment. It was therefore prayed that these companies be excluded from the final set of comparables. 15.2 Per contra, the learned Departmental Representative for Revenue supported the orders of the authorities below in including the aforesaid 4 companies in the final set of comparables. 15.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that comparability of the above 4 companies (supra) with an ITES comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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