TMI Blog2017 (4) TMI 1511X X X X Extracts X X X X X X X X Extracts X X X X ..... the functions of group companies of M/s.Mindtree with that of the company itself to arrive at its conclusion of functional difference. Considering above, the objection of the assessee in relation to this comparable is not accepted. M/s.L T Infotech - reliance on information from the website for showing different functions performed by the company, the same is misplaced as the same represent the state of affairs at the time when website is accessed and not the past years - details in the website are only indicative of the functions which the company is ready to perform but may not have been necessarily performed by it in some earlier years. So the annual report and not the website needs to be relied upon for the actual functions performed by the company. The objections of the assessee have also been dealt in detail by the TPO in his order, which cannot be faulted with. Considering above, the objection of the assessee in relation to this comparable is not accepted. Persistent Systems Ltd is in software product development, it is observed that the company is developing software for its customers whom turn are in business of software product development and outsourcing the work o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s.KALS Information Systems company is functionally not comparable and we do not find any infirmity in the direction of the DRP and the same is upheld. M/s.Goldstone Technologies Ltd - functions of the company were dissimilar and it is only engaged in the IT segment not in software development - this company should not have been taken as a comparable by the TPO. So the TPO is directed to exclude this company from the list of comparables. Exclusion of companies making persistent losses - When the assessee himself has accepted that companies making persistent losses as not good comparables in its transfer documentation, we do not find any reason to dispute with the assessee s stand and to include the same as comparable since the company is incurring persistent losses. Therefore, the assessee s request to include M/s.CG-VAK software Systems Ltd., in the list of comparables is rejected. M/s.Avani Cimcon Technologies Ltd - AR argued that the assessee company is engaged in the low end software services and comparable company is also engaged in software development services as evidenced from the Annual Report. Neither the TPO nor the DRP has gone in to the details as to why the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Rectification u/s 154 - HELD THAT:- The appeal against the order u/s.154 is a separate appeal which cannot be decided in this appeal. The Ld.AR also has not brought on record any evidence to controvert the observations made by DRP. Therefore, this ground is dismissed. - ITA No.3404/Mds/2016 - - - Dated:- 28-4-2017 - SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER For the Appellant : Mr.Vikram Vijayaraghavan, Adv. For the Respondent : Mr.Pathlavath Peerya, CIT ORDER PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the Order passed u/s 143(3) r.w.s.144C(13) dated 25.10.2016 by the Dy. Commissioner of Income Tax, Corporate Circle 6(1), Chennai for the AY 2012-13 and raised the following grounds: Grounds of appeal: 1. The order of the Learned AO read with the directions of the DRP are erroneous in law and opposed to facts and circumstances of the case. Erroneous Comparability Analysis carried out by LTPO/Hon ble DRP 2. Non-exclusion of comparables whose turnover exceeded 500 Crores 2.1 The LTPO/Hon ble DRP ought to have appreciated that the total turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant for differences in Return on Net worth of comparable companies. 9.2 Non-acceptance of adopting CPM (Gross Profit Margin) as a supplementary method: The Hon ble DRP erred in not accepting the justification of ALP by CPM as a supplementary method of justification. 9.3 Non-provision of Risk adjustment: The Hon ble DRP erred in not providing for risk adjustment as sought by the Appellant. 10. Issues for Rectification (Without prejudice) The Learned TPO erred in finalizing the order while giving effect to the directions of the Hon ble DRP 10.1 Non-Inclusion of Sasken Limited by the TPO while giving effect to the DRP directions. 10.2 Erroneous computation of PLI of CTIL Limited as contained in the TPO s order. The Appellant craves leave to file additional grounds at the time of hearing for these and other reason to be adduced at the time of hearing the appellant s favorable order. 2.0 ShipNet Software Services India Pvt. Ltd. (herein after referred to as the assessee or SSSIPL) is a subsidiary of the ISS Group and its nominees since 2007 and engaged in design and development of the software used in rendering the services to the Shipping Industry by the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 Designing Architecture (Minimal) Designing Architecture (Some extent) 4 Coding (Major) -- 5 Testing (Some extent) Testing (Some extent) 6 -- Implementation (Major) 7 Maintenance (Major) -- 8 Support (Major) Support (Some extent) 9 IT Infrastructure (Minimal) IT infrastructure (Major) The assessee company performed all the functions of a contract service provider. 4.2 The assets and the risks assumed by the assessee: Computer system, office equipment, Furniture fitting, Motor Vehide and Software are used in development of software by Assessee Company. Limited product development risk, attrition risk and foreign exchange risk are carried by the assessee company. 4.3 The assessee has adopted itself as the tested party and has carried out an economic analysis which is summarized as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sankhya Infotech 5.59 Kals Information 7.05 Average 15.20 Average mean of the comparable companies was worked out to 15.20%. The assessee has claimed economic adjustment towards unutilized premises amounting to ₹ 1,41,92,554/-, adjustment towards depreciation and working capital. After careful study of the objections raised by the assessee, the TPO rejected the objections of the assessee and calculated the PLI of the assessee @8.35% as against the average mean margin of comparables @15.20% and accordingly determined the ALP of international transaction at ₹ 23.73 Cr. against the operating revenue of the assessee at ₹ 22.32 cr. and suggested for upward adjustment of ₹ 1.41 crores as under: 8. PLI Calculation: The PLI calculation of the assessee is as follows: Description (Rs. in Cr.) Operating Revenue 22.32 Operating cost 20.60 Operating Profit 1.72 OP/OC (%) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnover filter. Therefore, the Ld.DR vehemently opposed the exclusion of the above comparables from the list of comparables. 8.1 We heard the rival submissions and perused the material placed before us. Admittedly, the turnover of the assessee companies is ₹ 22 Crrores and the turnover of the comparable companies selected by the TPO/AO was more than ₹ 800 Cr. The Ld DRP considered the issue of high turnover and relied on the decision of ITAT Bangalore Bench in the case of Society General Global solution Centre (P) Ltd v. DCIT (2016) 69 taxmann.com 336 and Symantec Software Solutions (P)Ltd v ACIT (2011) 11 taxmann.com 264(Mum) and held that the assessee has not made out a case as to how the high turnover has impacted the margins and accordingly rejected the assessee s objection to exclude the above three companies from the list of comparables. As per Rule 10B, for selection of a comparable, Turnover and brand value are not the criteria. The criteria is Functions, Assets and Risks involved. The Ld.TPO in her order observed that the companies have been identified as comparable companies on the basis of FAR and no serious FAR based divergences have been brought by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3 As regards assessee s claim that M/s.Mindtree is functionally different, from the annual report of this company it is evident that it is operating in two segments and segmental details are available and the same have been used by the TPO. In fact, the assessee has wrongly mixed up the functions of group companies of M/s.Mindtree with that of the company itself to arrive at its conclusion of functional difference. Considering above, the objection of the assessee in relation to this comparable is not accepted. 4.4 The assessee has also objected to inclusion of M/s.L T Infotech as comparable by claiming that the same is involved in other segments of business and that segmental details are not available. However, on examining the annual report of the company it is observed that there is some resale of products, however the cost of bought out items for resale is only ₹ 22.82 crore as against total operating expenditure of ₹ 2358.85 crore i.e. a meagre 0.97%. Thus the effect of such sale would hardly be there in the case of this comparable. As regards assessee s reliance on information from the website for showing different functions performed by the company, the same i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plementation, support and IT infrastructure which are major functions of the assessee company. As per the TP document, the assessee company provides software design, development, support maintenance data processing services to its parent company. Whereas the functions of the comparable companies selected by the TPO in the case of the above three companies are not similar to that of the assessee company and having diverse nature functions. The objections raised by the Ld.AR for each company has been examined by us and the decision of this Tribunal is as under: 9.2 M/s.Thirdware Solutions Ltd: The TPO has selected the M/s.Third Ware Solutions Ltd., with 28.18% of PLI and ₹ 105.68 Cr. turnover as comparable. The Ld.AR objected for selection of this comparable. According to the Ld.AR, the assessee s company is engaged in development, consulting and related space, major alliances such as Salesforce, oracle, Birst, SAP, Informatica and CXO, cockpit. According to the Ld.AR, the companies are functionally dissimilar which required to be excluded from the list of comparables. The assessee raised the objections before the TPO as well as the DRP and brought out the functional dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s.Symphony Marketing Solutions India Pvt. Ltd., as under: M/s.Acropetal Technologies Ltd. (Seq.) On a perusal of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the assessee. The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the assessee are routine low end ITES- functions. Therefore, this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPOJ. Respectfully following the decision of ITAT Bangalore, we direct the AO/TPO to exclude the M/s.Acropetal Technologies Ltd., from the list of comparables. 9.5 M/s.Spry Resources Pvt. Ltd: The TPO selected M/s.Spry Resources Ltd., as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALS Information Systems Goldstone Technologies Ltd. The Ld.AR submitted that the above three companies were selected by the TPO holding that the companies are functionally comparable but the DRP has removed the above companies from the list of comparables on its own accord. Since the functions of the companies and the turnover of the company are comparable, the same should be included in the list of comparables. 10.1 We heard the rival submissions and perused the material placed before us and deal with the companies removed by the DRP independently as under: 10.2 M/s.Sankya Infotech Ltd: The DRP has found from the Annual Report of the company that it is engaged in-house research and development centre involved in the development activities of new products in the field of simulation and training. During the year the company has debited an amount of ₹ 4.94 crores as R D expenditure and of this ₹ 4.83 crores was employee cost. That the company is in research and development and thus developing its own intangibles also becomes evident from the fact that intangible fixed assets are only ₹ 78.27 lakhs against intangible assets of ₹ 42.46 Cr. Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP has removed M/s.KALS as comparable though it was selected by the TPO. No other details were furnished controverting the findings given by the DRP by the Ld.A.R. From the findings of the DRP it is established that the company is functionally not comparable and we do not find any infirmity in the direction of the DRP and the same is upheld. 10.4 M/s.Goldstone Technologies Ltd: With respect to the M/s.Gold Stone Technologies Ltd., also the DRP observed that the functions of the company were dissimilar and it is only engaged in the IT segment not in software development. The findings of the DRP are made available in Para No.4.14 to 4.16 which are extracted hereunder for the sake of convenience: 4.14 While examining the annual report (Page 11 of the report) of M/s. Goldstone Technologies Ltd, this was observed by the Panel that the company is not engaged at all in the development of Software. The report of the company reads as follows: One area where Goldstone has succeeded is with the Business intelligence ( BI ) platform, which is a Top Driver for the organizations in 2012-2013. BI is a strong decision making platform and shows a positive growth curve in interacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that the rejection by the TPO of this company as a comparable is on sound basis and the same is upheld. 4.16 The functional profile of this company remains the same during the year under consideration. Considering above, this company should not have been taken as a comparable by the TPO. So the TPO is directed to exclude this company from the list of comparables. The Ld.AR of the assessee failed to rebut the findings of the DRP. The DRP relied on the decision of ITAT Bangalore in M/s. Trilogy EBusiness Software v. DCIT ITAT No.1054/Bang/2011 AY 2007-08. Therefore, we do not find any reason to interfere with the directions of the DRP and the same is upheld. 11.0 Ground No.5 is related to the inclusion of the following comparable selected by the assessee which were rejected by the TPO: CG-VAK Software Exports Avani Cimcon Technologies 11.1 M/s.CG-VAK Software Systems Ltd.: Both TPO DRP have rejected the assessee s request for inclusion of the above two companies as comparables. The assessee relied on the decision of TIBCO Software India Pvt. Ltd. V. DCIT in ITA No.2536 (PN) of 2012 and argued that Persistence Loss making company is not a reason for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm s length price of the international transaction is upheld. [Para 29]. From the decision of the Hon ble ITAT, it is also observed that the Hon ble ITAT directed to include the company in the list of comparables for the reasons that the company is not making consistent losses. In the case of comparable company, the company is making persistent losses right from 2008-09 onwards. The assessee in its transfer document in Page No.267 of Paper Book has excluded the companies making persistent lossess from the list of comparables. When the assessee himself has accepted that companies making persistent losses as not good comparables in its transfer documentation, we do not find any reason to dispute with the assessee s stand and to include the same as comparable since the company is incurring persistent losses. Therefore, the assessee s request to include M/s.CG-VAK software Systems Ltd., in the list of comparables is rejected. 11.2 M/s.Avani Cimcon Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnish the pricing model of the AE as well as the tested party to verify whether the working capital margin of interest is included in the sales price of the product. The AO is directed to examine the above issues and allow the suitable working capital adjustment while determining the ALP. 14.0 Ground No.7 is related to depreciation adjustment charged in excess of Schedule-4 of Companies Act: The DRP has rejected the assessee s request for adjustment of excess Depreciation placing reliance on the decision of Lason India Pvt. Ltd. V. ACIT [2012] 50 SOT 583/19.Taxmann.com 323 (Chennai). The Tribunal rejected the claim of the assessee with the following observations: The assessee provided depreciation on assets under SLM at the rates higher than those provided in Schedule XIV, whereas the comparables provided for depreciation as per Income tax Rules on written down value method The assessee claimed before the Tribunal that if depreciation of the assessee is also brought to the w.d.v. method, then its operating profit would be more. The Tribunal rejected this claim of the assessee. So following the decision of jurisdictional Bench the objection of the assessee cannot be acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that it was providing services to any independent party apart from AE. The assessee has not controverted the findings of the TPO. The assessee s claim that it tried to let out the premises would not change the position. During hearings before this Panel, the assessee was asked to provide the details of capacity utilization of other comparables, however it could not provide any data for the same also. Since assessee has not provided any data to show that the other comparables were working at 100% capacity of all their resources and only it was at disadvantage due to underutilization of capacity, so in absence of similar comparables, adjustment cannot be considered in the case of the assessee. Under similar circumstances, the issue was decided in favour of revenue in ITO v. CRM Services India (P) Ltd. [2011] 14 taxmann.com 96 (Delhi). Considering above, the objection of the assessee cannot be accepted. 15.2 The assessee not a start up company and it has commenced its operations way back in 2008. The adjustments relating to unutilised capacity are allowed in the case of start up companies to cover the initial deficiencies and the financial implications. Since the company is e ..... 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