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TMI Blog2020 (3) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... four comparables i.e. (i) Persistent Systems Ltd. (ii) Thirdware Solutions Ltd. (iii) Cigniti Technologies Pvt. Ltd. & (iv) Mindtree Ltd. taken by the Ld. Transfer Pricing Officer (TPO) which the assessee pleads that they should be excluded from the final list of comparable since they are functionally or segmental wise not comparable company. That apart, the assessee has also prayed for inclusion of one company i.e. Akshay Software Technologies Ltd. With regard to the company i.e. R.S. Software Ltd., the Ld. Counsel for the assessee submitted that this company was initially taken by the assessee as comparable company which is accepted by the TPO but now, the assessee wants this company to be excluded from the final list of comparable and therefore, this issue also will be adjudicated. First, we would take up "Transfer Pricing Adjustment" ground regarding exclusion of certain comparable companies i.e. (i) Persistent Systems Ltd. (ii) Thirdware Solutions Ltd. (iii) Cigniti Technologies Pvt. Ltd. & (iv) Mindtree Ltd. EXCLUSION OF COMPANIES AS COMPARABLES TO SOFTWARE DEVELOPMENT SERVICE SEGMENT (A) Persistent Systems Limited:- 4. The TPO has applied the modified filter of 1/10th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing methodology-shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ". The TNMM method depends on accurate data with respect to all the three elements- wherever they apply. In the Comparable Uncontrolled Price (CUP) method-which is premised upon the elements in Rule 10B(1)(a), the methodology adopted in the price charged or paid for property transfer or services provided in the Comparable uncontrolled transaction. Therefore, the nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to be applied. From this perspective, the revenue‟s contention that segmental data was available cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot lead to an assumption that segmental data for relevant fats was available to deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware products generating revenue. The disclosure in the annual report regarding the acquisition of the products relate to the group as a whole and not to the stand alone as entity whose financials are compared. The R&D expenditure of the comparable relates to cross improvements and not to innovate on new products or earning additional revenue. Hence, the R&D is not affecting the margin of the company. The TPO had applied related party filter of greater than 25% and clearly this company passed the filters. Hence, the TPO rejected the contentions of the assessee and held the company as comparable. The DRP held that the company is functionally similar to the assessee. 10.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that it was not functionally comparable as it was engaged in significant product development. The Ld. AR relied on the order of the ITAT, Chennai in the case of Symantec Software & Services India (P) Ltd. vs. DCIT 79 taxmann. com (Chennai-Trib.) wherein it was held as follows: "10. We heard the rival submissions, perused the material on record. We found that the company is engaged in product development and cannot be comparable to the soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) while discussing the comparability of another company namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, the company, i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e., Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the software development services provided by the assessee. Accordingly, following the decision of the co-ordinate bench of this Tribunal (supra) we direct the TPO/A.O. to exclude this company from the list of comparables." 10.4 The Ld. AR relied on the order of the ITAT, Bangalore in the case of MetricStream Infotech (India) Pvt. Ltd. vs. DCIT in IT(TP)A Nos. 1418 & 2735/Bang/2017 dated 27/02/2019 which we have discussed in earlier para. 10.5 We have heard the rival submissions and perused the material on record. In view of the above orders of the ITAT cited in para 10.1 to 10.4 of this order, we direct the AO/TPO to exclude this company from the list of comparables on the same reason given by the co-ordinate Bench of Bangalore." 14. In view of the matter and following the decisions of the Hon'ble Delhi High Court as well as various Tribunals, Persistent Systems Limited cannot be treated as comparable company and the AO/TPO is directed to exclude Persistent Systems Limited from final list of comparable companies with regard to its software development service segment." 7. We observe that the findings of the Pune Bench of the Tribunal pertains to the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses. Further, the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. We find in the case of M/s. EMC Software and Services India Pvt. Ltd. Vs. JCIT (supra.), the Co-ordinate Bench of the Tribunal, Bangalore exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows: "(iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... `Export from STPI units‟ do not show as to whether these were exports of Software products or Software Services. In the absence of the availability of any concrete information in respect of Software Services, we fail to comprehend as to how this company, also having software products in its portfolio, can be construed as comparable. The same is accordingly directed to be excluded." 18. We also observed in the case of M/s. ION Trading India Private Limited Vs. ITO (supra.) wherein the Co-ordinate Bench of the Tribunal, Delhi has exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DRP similarly at running pages 39 to 40 as per reasons appearing in that order upheld the findings of the TPO and rejected the objection raised by the assessee. 14. The Ld. Counsel for the assessee submitted that this issue is also decided in favour of the assessee by the Co-ordinate Bench of the Tribunal, Delhi in the case of Avaya India (P) Ltd. Vs. ACIT, (2019) 112 taxmann.com 301 ( Delhi-Trib) wherein, the Tribunal has held and observed as follows: "11. Cigniti Technologies Ltd. 11.1 The learned DRP observed that the company was included by the DRP in assessment year 2012-30 and, therefore, should be retained in the year under consideration also for the same reasons. The learned counsel of the assessee referred to Page No. 293 of the paper-book and submitted that the company has acquired 'Gallop Solutions Inc., USA' during the year under consideration and due to which, total Revenue has increased by 72% by way of addition of more than 50 new clients. He submitted that in view of this extraordinary event, the company is liable to be excluded from the set of the comparables. He also referred to page 295 of the paper book and submitted that the company was engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptive service provider rendering exclusive services to its AE and works on a cost plus markup basis. He submitted that assessee renders services under SWD segment on the basis of specifications provided by the AE. Whereas this comparable for the year under consideration has Ld. counsel placed before us the annual report of this company in support of his submissions to establish that this company has outgrown independently in software testing and has been awarded Automated Software Testing Services by Frost & Sullivan. He also submitted that this company has applied global/U.S. patents for its iGenerate Test Scenarios tool part which is a part of SMART tools portfolio. Whereas assessee before us has been submitted to be providing various services in which testing of integrated circuit is one of the small activity carried out by assessee for its AE. Ld. counsel submitted that from the profile of the comparable in the annual report one can hold this company to be a pioneer in software testing market catering to clients all over the world in different geographies. On the contrary, Ld.CIT DR submitted that this is no different function than what assessee has been carrying out for its AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised following objections stating that the Mindtree Limited is not functionally comparable and the same is extracted as under: "Mindtree Limited is strcuted into five verticals- Manufacturing, BFSI, Hitech, travel and transportation and others. It offers services in the area of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing infrastructure management services, mobility, product engineering and SAP services. Mindtree Limited is engaged in diversified business activities. As per the Annual report, the company operates in four business segments. Further the company has a high turnover of INR 3,031.60 crores which is 8.58 times the turnover of the assessee and companies having varied turnovers cannot be compared to each other as the difference in their size and scale of operations have a direct impact on their profitability." Thereafter, the TPO has given his findings at Para (v) of his order which reads as follows: "v. Mindtree Limited: The assessee has requested for rejection of Mindtree Limited from the final set of comparable on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting actual project cost of work performed to date to the estimated total project cost for each contract. Unbilled revenue represents cost and earnings in excess of billings while unearned revenue represents the billing in excess of cost and earnings. Provision for estimated losses, if any, on incomplete contracts are recorded in the period in which such losses become probable based on the current contract estimates. Further it is noticed that the employee cost of this company is 1782.00 crores out of total expenses of Rs. 2502.30 crores. In terms of percentage it comes to 71.21%. From the above it is clear that this company is engaged in providing software development services the client base of this company has been divided into five verticals which does not mean that this company doing business in those 5 segments. In view of the above, the contention of the assessee is not acceptable." 17. Similarly, the Ld. DRP at Page 41 vide Para (iv) of his order as per its findings on record had upheld the decision of the TPO and dismissed the objection raised by the assessee by holding as follows: "iv) Mindtree Ltd. The contents that this entity is structured in 5 different ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find from the pages 434 of the Annual Report compendium that the company offers services which includes IT strategy consulting, data warehousing, business intelligence, technical support, infrastructure management services etc. The relevant part of the director's report is reproduced as under: "We have developed a comprehensive range of services allowing us to offer end-to-end IT Services to our clients. With delivery centers in India and overseas, we offer IT strategy consulting, application development and maintenance, data warehousing and business intelligence, package implementation, product architecture, design and engineering, embedded software, technical support, testing infrastructure management services etc. to our customers. We believe that our comprehensive portfolio of service offerings helps our customers achieve their key business objectives." (iv)Further, on perusal of the page 442 of the Annual Report compendium, we find that the company has used expertise in research and development to provide technology consulting services to its customers. (v) On page, 480 of the Annual Report compendium under significant accounting policies and notes to account for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us wherein regarding the Company i.e. Mindtree Limited, the Tribunal has held as follows: "13.6 We have heard the rival submissions and perused the relevant material on record. The page 90 of the compendium of Annual Reports, which is annexed to the Director's Report, We find that the company along with software development services, carried out research and development in a specific areas viz. social, mobile, analytics and cloud (SMAC) computing. The Company has developed mobile apps for retail/CPG and transport and logistics, which were adjudged the best in their category at the SAP mobile apps challenge at Techd Las Vegas, October 2013. The company achieved capabilities in Hadoop, NoSQL and allied Big Data technologies and also focusing on memory databases. This annexure further mention this focused HANA services offering now will include consulting services to identify HANA use-cases. 13.7 In this Annexure 2 to the Director's report, on page 91 of the Annual Report compilation it is mentioned that in the financial year 2013-14 i.e. previous year corresponding to the assessment year under consideration, the company filed a patent application for integrated radio-f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r A Y 2014-15 as compared to A Y 2012-13 & 2013-14 and therefore the finding of DRP is applicable to AY 2014-15 also. Since the directions of the Hon,ble DRP are now binding on the AO/TPO, the contention of the assessee cannot be accepted. Therefore the ASTL is' not considered as comparable" 21. Similarly, the Ld. DRP at running page 34 to 38 of its order upheld the findings of the TPO by holding as follows: "i) Akshay Software Technologies Ltd. It was noted that there is no change in the functions performed by this entity in AY.2014-15, compared to AYs.2012-13 and 2013-14, wherein the DRP rejected this company as a comparable. It was found that the professional services rendered by the assessee company were definitely not in the nature of software services, as the assessee s basically providing professionals to the clients on contract staffing /permanent staffing basis. Further, the assessee, being an on-site service provider, is not comparable with offshore software development service provider. We have considered the submission and also examined the financials of this entity for AY 2014-15. The P&L account shows that revenue from operations is Rs. 22,75,79,199/- and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomer to focus on core business activities. Thus, for Small & Medium Enterprises, Akshay offers SAP Business One ERP along with the associated services, which will ensure higher growth and profits for these organizations without the need for an in-house software team. Akshay's Staffing Solutions for Organizations across the spectrum, ensure, timely availability of resources, thereby eliminating the need to have in-house recruitment teams." xxxxxxxxxxxxxxxxx In today's rapidly changing times, a key challenge that all organizations face is in building an organization that is 'future-ready'. Such an organization can only be possible through the people who make up the organization - its human capital. Thus talent acquisition becomes one of the most important factors in ensuring enduring success of an organization. And finding the appropriate resource possessing the desired skills at the right time is highly critical. Akshay partners with its clients in this process of building future-ready organizations by facilitating acquisition of talent, which is not only competent to address the present challenges but which will also upgrade its skillsets to address potential c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed HR Professionals well trained in various HR skills, recruiting Tools & Techniques * Faster turn-around time * Proven IT staffing methodology * 90% repeat business from prestigious clients who rely on us to deliver top talent and services * Akshay offers skilled personnel the opportunity to flourish in an open, entrepreneurial culture that encourages teamwork and personal contribution * Low Attrition rate * Objective Yearly Apprisal of depute consultant * Motivation, Mentoring, Training, Empathetic HR Managers who carefully manage the consultants * Financially stable company with adequate reserves ensuring timely payout of salaries. Thus, on detailed examination it appears that the software services is actually out of proving skilled manpower related to software to the clients as per their requirements. Part of this is also for the SAP solution i.e ERP related work. However income out of sale of software licenses is only Rs. 27,28,760/- i.e miniscule compared to professional services. The Director's report also says that about 85% revenue is out of professional services. Therefore, we hold that Akshay Technologies cannot be held as a appropriate comparable i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tplace. Our proven RS GEM(tm), comprehensive set of services and continuing innovation are focused specifically on the needs of the space we have served exclusively since we opened our doors in 1991. No other provider in our space can deliver more industry knowledge and experience. Page-52 of Annual report for FY 2013-14 gives the following description:- Over the years, RS Software has distinguished itself by emerging as one of the specialized payment service providers in the world. This specialization has been derived from the institutionalization of various competencies. This institutionalization, in turn, has been driven by the RS School of Payments (RSSOP) and the RS Payments Lab (RS'PL) with the objective to develop domain-based and technology-based payment solutions. These institutions have strengthened the Company's global brand, not just as a competent service provider but as a thought leader. The above description shows this company also engaged in product and specialized services. However in the profit and loss account the entire revenue is shown under the head software services only. This shows that RS software is engaged in predominantly in software se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital risks. On this issue, the assessee submitted as under: "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as: * The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. * The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : "7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Adaptec (India) P. Ltd. will squarely apply here. We, therefore, direct that no negative working capital adjustment shall be carried forward out on the average PLI of the final set of comparables." 28.2 Further, the Ld. Counsel for the assessee has relied on the decision of the Co-ordinate Bench of the Tribunal, Hyderabad in the case of Intoto Software India P. Ltd. Vs. Income Tax Officer, ITA No.1810/Hyd/2012 for the assessment year 2008-09 wherein the assessee has raised an additional ground to the fact that the TPO has erred in making a negative working capital adjustment of -3.84% while computing the adjustment u/s.92CA of the Act. The contention of the Ld. Counsel for the assessee was as under: "It is the contention of the Ld. Counsel for the assessee that the Tribunal in the case of Adaptec India P. Ltd. has held that negative working capital adjustment should not be made in the case of captive service provider, while computing the adjustment under section 92CA of the Act. The Ld. Counsel for the assessee has filed a copy of the decision of this Tribunal in the case of Adaptec India P. Ltd. wherein at page No.20 at Para 11 of the order such a direction was given b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther submitted that this addition should not stand since there was no intimation regarding adjustment of interest on the refund amount and that the said amount was not taxable in the relevant assessment year under consideration. 32. We have perused the case records and heard the rival contentions. We observe that the interest on refund either it can be directly given by the Department to the assessee or as in the present case, suppose if some tax liability is arising with regard to the assessee in respect of the earlier years then the interest on the refund amount if adjusted vis-à-vis those outstanding tax liability i.e. also deemed payment of interest. It has been held in the case of Avada Trading Co. (P.) Ltd. vs Assistant Commissioner Of Income Tax, (2006) 100 ITD 131 (Mum) that interest on refund under Section 244A(1) would be assessable in the year in which it is granted and not in the year in which proceedings under Section 143(1)(a) attain finality. The Special Bench of the Tribunal in this case on the issue has further held as follows: "9. The main contention of the assessee's counsel is that such right is contingent as the interest so received can be varied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest under Section 244A is not dependent upon any assessment inasmuch as there is no compulsion or obligation upon the Assessing Officer to make an assessment under Section 143(3). The moment the return is processed under Section 143(1)(a) and refund is issued on the basis of intimation under Section 143(1)(a), an enforceable legal right is created in favour of assessee under Section 244A and simultaneously the Assessing Officer is under legal obligation to grant the interest. Merely because quantum of such interest may vary on assessment made under Section 143(3), it cannot be said that legal right was not acquired on the date of refund. The effect of assessment under Section 143(3) would be that interest on refund under Section 244A would get substituted in terms of Sub-section (3) of Section 244A without affecting right already accrued." Therefore, interest on refund whenever it is granted, it is assessable in that year itself and if it is adjusted with any prior tax liability of earlier years and such interest is in turn paid to the Government Account that also is payment of interest to the assessee, in such case, there is no need for any intimation separately. Hence, this gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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