TMI Blog2020 (2) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... EVAN, VICE PRESIDENT This is an appeal by the assessee against the final order of assessment dated 25.9.2018 passed by the DCIT, Circle 2(1)(1), Bangalore u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [the Act]. 2. The assessee is engaged in the business of rendering software development services [hereinafter referred to as the SWD services ] and Information Technology enabled Services [ITES]. During the previous year relevant to AY 2014-15, the assessee rendered SWD services and ITeS to its Non-Resident, Associated Enterprise (AE) and was therefore an international transaction. In terms of section 92 of the Act, income arising from an international transaction has to be determined having regard to Arm s Length Price [ALP]. In this appeal, we are concerned with determination of ALP in respect of international transaction of rendering SWD services and ITeS. 3. We shall first take up for consideration determination of ALP in respect of provision of SWD services. As far as provision of SWD services is concerned, the Transaction Net Margin Method (TNMM) was adopted as the Most Appropriate Method (MAP) for determining the ALP. The Profit Level Indicator [PLI] cho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thirdware Solution Ltd. 19,883 13,742 6,140 44.68% Average 29.40% 5. The TPO applying the aforesaid average arithmetic mean profit margin of the comparable companies, determined the ALP in the SWD services as follows:- 15.4. Computation of Arm's Length Price: 15.4.1 The arithmetic mean of the Profit Level Indicators is taken as the arm's length margin. Please see Annexure 'A' for details of computation of PLI of the comparable. Based on this, the Arm's Length Price of the services rendered by the Taxpayer to its AE(s) is computed as under: SWD Segment Arm's Length Mean Margin on cost 29.40% Operating Cost 259,15,79,890 Arm's Length Price(ALP) @ 129.40% of Operating Cost 335,35,04,378 Price Received 294,79,88,656 Variation in Price 40,55,15,722 3% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal:- 6. We notice that the co-ordinate bench has excluded M/s Infosys Ltd in AY 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd (ITA No.1054/Bang/2011) was followed and it was held that M/s Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions, we direct exclusion of M/s L T Infotech Ltd. 10. In the light of the aforesaid judicial pronouncements on the aforesaid issue which remain uncontroverted, we are of the view that the aforesaid four companies should be excluded from the list of comparable companies. We hold and direct accordingly. 11. The ld. counsel for the assessee sought inclusion of comparable companies viz., (i) CG-VAK Software Exports Ltd., (ii) I2T2 India Ltd. and (iii) Evoke Technologies P. Ltd. 12. As far as CG Vak Software Exports Ltd. is concerned, the TPO excluded the aforesaid company for the reason that this company was engaged in both SWD services and ITeS and no segmental details were available. Before the DRP, the assessee did not challenge the exclusion of this company from the list of comparable companies by the TPO. However, before the Tribunal, the assessee has sought inclusion of this company in the final list of comparables on the ground that segmental details between SWD services and ITeS is available in the public domain and 98.12% of income of this company is from rendering SWD services. In this regard, our attention was drawn to PB page 1646 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arability of this company afresh, after opportunity to the assessee in the light of facts brought to our notice after due opportunity to the Assessee. 15. The assessee seeks inclusion of Evoke Technologies Pvt. Ltd. which was rejected by the TPO as a comparable company for the reason that data relating to this company was not available in the public domain and that it had a different financial year ending. Before the DRP also, the assessee did not challenge the action of the TPO in excluding the aforesaid company because the assessee did not have a data relating to this company. The assessee is now seeking inclusion of this company on the basis of decision rendered by the Hyderabad Bench of ITAT in the case of Infor (India) Pvt. Ltd. ITA No.2307/Hyd/2018 for AY 2014-15. In the aforesaid decision, the Hyderabad Bench took the following view :- 3. As regards Evoke Technologies is concerned, the contentions of the assessee are that this company is functionally similar to the assessee, whereas the TPO DRP have held that the financials of this company include the revenue of one branch outside India which are unaudited and hence are not reliable. The learned Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er it arises from transaction elating to Revenue Account or Capital Account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, we also note that the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, we are inclined to uphold the TPO's reasoning and reject the assessee's claim for working capital adjustment. 18. The ld. counsel for the assessee submitted that a co-ordinate Bench of ITAT Bangalore in the case of Huawei Technologies India Pvt. Ltd. IT(TP)A No.1939/Bang/2017 has dealt with the issue of granting of working capital adjustment. The Tribunal held that a reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly show that the net profit margin arising in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has, on the other hand powers, to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Tribunal in the decision cited by the learned counsel for the Assessee before us, relied on the decision of the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195 (Del-Trib) wherein it was held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t:- Average ITES Segment Amounts in Rs.Lakh Sl No. Company Name OR/Sales OC OP OP/OC (in %) 1 Infosys B P O Ltd. 2,30,900.00 1,81,200.00 49,700.00 27.43% 2 Microgenetic Systems Ltd. 225.97 191.41 34.56 18.06% 3 Microland Ltd. 34,471.00 28,709.00 5,762.00 20.07% 4 B N R Udyog Ltd. (Seg) 142.59 114.00 28.59 25.08% 5 Crossdomain Solutions Pvt Ltd.. 7,462.75 6,164.00 1,298.76 21.07% 27. The TPO ultimately computed the ALP as follows:- ITES ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in the assessee's own case for the earlier A.Y 2011-12 and also in 2013-14. In A.Y 2011-12, the Tribunal had directed its exclusion while in 2013- 14, the DRP itself had directed its exclusion and the Revenue has not filed any appeal as against the same. He placed reliance upon the decision of the Hon'ble Delhi High Court in the case of Aginity India Ltd. ( supra ) wherein the said company has been directed to be excluded. Microland Ltd. 60. As regards Microland Ltd is concerned, the case of the assessee is that it is into business of rendering hybrid IT Infrastructure and it also undertakes R D activities and has achieved abnormal growth of 149% during the current A.Y. Without prejudice to the above, the assessee also submitted that the correct margin of this company should be considered. 61. The learned DR, however, submitted that this company was taken up by the Assessee itself as comparable before the TPO and further that in the earlier A.Y.2013-14 this company has been accepted as a comparable. Therefore, he submitted that it should be retained as a comparable. 62. Having regard to the rival contentions and the material on record, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of this company to the TPO/AO for fresh consideration with a direction to get the required information u/s. 133(6) of the Act and thereafter decide the issue afresh in accordance with law, after opportunity to the assessee. 33. As far as Informed Technologies (I) Ltd. is concerned, it is the contention of the assessee that this company was functionally comparable as it was rendering BPO services, but the TPO held that it was functionally different. When the details of functional comparability were pointed out to the DRP, the DRP held that this company fails service income filter of more than 75% of the total income. It is the plea of assessee that while applying this filter, the other income portion was also considered which is incorrect. It was submitted that there was only one reportable segment for this company viz., BPO services and hence this company should have been taken as a comparable. We are of the view that based on these submissions, the TPO/AO should be asked to look into the issue afresh, after due opportunity to the assessee. We set aside this issue to the TPO/AO for fresh consideration. 34. The next company which the assessee seeks inclusion is Jin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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