TMI Blog2020 (12) TMI 928X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment year 2012-13 as per the following grounds of appeal on record. 1. Ground no. 1 : Addition on account of transfer pricing adjustment. 1.1. The learned Commissioner of Income Tax (Appeals) [' Ld. CIT(A) ) grossly erred, in facts and in law, in upholding the order of learned Transfer Pricing Officer ('Ld. TPO') u/s 92CA(3) of the Income Tax Act,1961 ('Act') and consequential assessment order of learned Assessing Officer ('Ld. AO') which is bad in law and void ab initio as the same is in breach of principle of natural justice and is without complying with the mandatory conditions of Section 92CA(3) r.w.s. 92C(3) of the Act. 1.2 The learned CIT(A) grossly erred, in facts and In law,: 1.2.1 in upholding Ld. TPO/AO's action of rejecting following companies taken by the appellant as comparables: i. Akshay Software Technologies Ltd. ii. Cat Technologies Ltd. iii. C G-V A K Software Exports Ltd. iv. Cherrytec Intelisolve Ltd. v. Infotech Enterprises Information Technology Services Pvt. Ltd. vi. NUCSOFT Ltd. vii. Winfoware Technologies Ltd. 1.2.2 in computing export turnover ratio o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 008) 23 SOT 385, Pune. 1.2.10 in upholding the action of Ld. TPO/AO of not granting appellant's claim for adjustment for material differences in the risk / functional profile of the appellant via-a-vis companies selected as comparable companies, though the Act read with Rule 10B(1)(e)(iii) and 10B(3) provide for carrying out such comparability adjustments and such adjustment was also approved by Hon'ble ITAT in appellant's own case viz. E-gain Communication (P) Ltd. v. ITO (2008) 23 SOT 385, Pune. 1.3 The appellant craves leave to contend that the following additional nine (9) companies identified by the appellant applying the same search filters/criteria as adopted by Ld. TPO in his show cause notice dated 06.01.2016, are comparable to the appellant and shall be taken as comparable in case the Ld. TPO upon their examination concludes that all or some of the aforesaid companies are not comparable to the appellant. i. Ace Software Exports Ltd. ii. C T I L Ltd. iii. Celstream Technoloqies Pvt. Ltd. iv. F C S Software Solutions Ltd. v. Goldstone Technologies Ltd. vi. Kals Information Systems Ltd. (Segmental) vii. R Systems Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment of the company is mainly into design engineering services which are functionally different than software development service business. Thus, this segment of Vama Industries Ltd. is not functionally comparable to software development service business of the assessee. 4. Your good self has applied filter of R D expenses to sales 3% while selecting the comparable companies. However, as evident from page 22 of AR this company has spent more than 3% ( 3.67% to be precise) on R D. Thus, the company fails the criterion applied by your good self and required to be dropped from the list of comparable companies. 4. The assessee had further submitted as follows : 1. Ld. TPO's sweeping observation that comparable passes all the filters without examining the detailed submission made by the Appellant is factually incorrect. The Appellant vide Annexure # D to its reply dated 14.01.2016 to show cause notice which is placed as Annexure # 5 in PB has brought out the fact that this company did not pass R D filter applied by the Ld. TPO. As evident from page # 22 (relevant extract is reproduced below) of AR, this company has spent more than 3% (3.67% to be precise) on R D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in stating that the Appellant has overlooked the segmental information. On the contrary, the Appellant himself has drawn attention to note # 31 regarding segmental information in its show cause reply which is placed as Annexure # 5 in PB. 5. What is really contended by the Appellant is that within software service segment, the majority of the revenue is derived from engineering services which is not really comparable with the Appellant's business. The Software development service segment of this company which the Ld.TPO is trying to compare with Appellant's business is functionally different from that of Appellant's business as evident from the submission in the ensuing paragraphs. 6. The income from software service segment of this company mainly consists of income from Software Development Services and Engineering Services as it is apparent from Note no. 31 -Segment Reporting' at Page # 50 of AR read with Note no. 33 -Eaming in Foreign Currency' appearing on page # 51 of AR . As evident, the income from engineering service of RsJ,22,64,105 constitute 98.17% of the total revenue (₹ 3,28,66,174) from software service segment. The engine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. 6. We have perused the relevant documents placed on record, specifically the Annual Report and the statement of accounts of VAMA Industrial Ltd., and we concur with the submission of the assessee based on the evidences filed before us. We therefore, direct the AO/TPO to drop this company from the list of comparable companies in respect of the assessee. 7. The 2nd company which the assessee wants to exclude from the final list of comparables is Cybermate Infotek Limited. It is the contention of the assessee that the business activities of this company cannot be compared with the assessee s Software Development Services because of the following reasons : 1. The company is a software product company (see pg 13 of AR). It is into software product selling and not in software development services. The same is evident from page # 13 of AR where various products in which company is dealing in are listed. This clearly shows that the company develops its products and sells them. 2. Note no. 21 as appearing on page # 38 of AR where inventory of work in progress at the beginning and close of the year are shown further confirms the fact that it's a software product compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that the company develops its products and sells them. Apart from HEALSOFT your company has about 38 products out of which the following 12 products are receiving higher traction. Asset Management Human Resources Management Recruitment Management Customer Relationship Management Contract Management Food Court Management Inventory Management Pharmacy Management Corporate Information Management Online Billing Purchase Management ERP for Small Business ii. Note no. 21 as appearing on page # 38 of AR where inventory of work in progress at the beginning and close of the year are shown further confirms the fact that it's a software product company. The relevant extract is given below: Note No.21 Change in inventories WIP S. No. Particulars 31.03.2012 (Rs) 31.03.2011 (Rs) 1 Work in Progress Work in progress at the beginning of the year 30,28,58,856 26,78,86,500 29,83,56,503 30,28,58,856 Less: Work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t quoted by the Ld. TPO of GE India Technology Center Private 141 ITD 245 (Bang.), emphasis is laid not only on broad product comparability but also on functional comparability. Hence, the Ld, TPO's view is not supported by even judicial decision cited by him. 4. If the Ld. TPO's view that under TNMM strict comparability is not required, is to be accepted then all software product company shall be taken as comparable including Akshay Software Technologies Ltd even if it is considered as a reseller of ERP software. 9. We have perused the Annual Report of the said company along with related Notes on account. The business activities of this company cannot be compared with that of the assessee s Software Development Services and we agree with the contentions raised by the assessee and prima facie this company is in Software Product Services and not in Software Development Services. This is evident from Page No.13 of the Annual Report where various products in which company is dealing are listed and it clearly shows that the company develops and produces and sells them. That further the Note No.21 appearing at Page No.38 of the Annual Report where inventory of Wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th retrospective effect from 1st April 2011 (Appointed Date), The Scheme had accordingly been given effect to the Financial Statement. We state that Software Business of the InfoBeans Systems India Pvt. Ltd. (Currently known as Seed Enterprises Private Limited) is demerged and transferred to the Company in pursuance to the Scheme of Arrangement as approved by the hon'ble Madhya Pradesh High Court dated 26109/2012 vide Appointed dated 1st April 2011. Accordingly these are the Revised financial statements including the Financial Statements of the said Software Business of Demerged Company. 4. The Ld. TPO is placing reliance on the judgment of Google (I) Pvt. Ltd for the proposition that company cannot be rejected as comparable merely because of extra ordinary event without demonstrating how extra ordinary event has influenced the profit margin of the comparable company. In this context, it is submitted that the Appellant also agree on 'this proposition that mere presence of extra ordinary event does not call for rejection of comparable. However, in the same judgment the Hon'ble ITAT further laid down that adjustments for such extra ordinary event have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack to the assessing officer for further examination. Even if this proposition is accepted ,it is be noted that in various other decisions cited by the Ld. TPO himself it was held that unless event of extraordinary nature does not affect the profitability of the company, the comparable cannot be considered. We submit that an event of merger or demerger is undertaken to reap the benefits of integration and thereby improve the profitability. Such events/ arrangements are also made to rationalise and benefit from the operating cost. All these have direct influence on the profitability. For these economic reasons, a company having such event of extraordinary nature is not taken as comparable in the year in which such extra ordinary event occurs. As already mentioned, the Ld. TPO did not bring material on record to substantiate that profitability is not affected by this extra ordinary event. In the absence of such substantiation by the Ld. TPO, this company cannot be selected as comparable. 11. The assessee had also relied on the decision of ITAT in the case of Agilent Technologies International Pvt. Ltd., wherein it was observed that in the event of merger of two functionally simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the assessee wants to be excluded is Cybercom Datamatics Information Solutions Limited. The assessee has objected for this company to be included as a comparable company to that of assessee because, this company is mainly into the business of providing Technical and Consulting Services rather than Software Development Services. Thus, the business of this company is not at all comparable to Software Development Services of the assessee. The assessee has further submitted as follows : 1. The Ld. TPO's contention that the company is passing all the filters provided in the show cause notice cannot be a reason to dismiss the contentions of the Appellant specifically when, the filters proposed in the show cause notice are challenged by the Appellant. 2. The revenue recognition extract given on page # 8 of AR of the company and also by the Ld. TPO is given below: (c) Revenue recognition Revenue from technical and software services is recognized when no significant uncertainly exists as to its ultimate realization or collection. Dividend income is recognized when the right to received is established. What is stated above is a policy on how the revenue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides product testing services and connected infrastructure. iv. In view of aforesaid, it can be seen that it is a consulting and technical service company, rather than, software development service provider. Thus, the business of this company is not at all comparable to software development service of the Appellant. However, the Ld. TPO did not address any of the contentions of the Appellant raised on functional comparability while passing TP order. 8. Based on the above contentions, it is submitted to exclude this company from the list of comparable companies. 15. The ld.A.R. at the time of hearing before us submitted that this company was independently included by the AO/TPO in the list of comparable companies and that the information available on record about this company in the public domain is not sufficient and prima facie, therefore, should be excluded from the final list of comparable companies. Ld.D.R. also conceded to the submission placed forth before us. 16. We have perused the relevant documents placed on record before us and also page 755 in the Paper Book i.e. Notes forming part of the financial statements of this company for the year end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical consultancy or interior decoration or advertising or such other professions as is notified by the Government for the purpose of Sec.44AA of the Act. 20. The Ld.CIT(A) at Para 2.10.7 of his order while upholding the addition made by the AO/TPO on this issue observed as follows : 2.10.7 I have considered the Appellant s arguments. I do not agree with the Appellant because such payment is considered to have been made towards royalty under the provisions of the Explanation-6 to Section 9(1)(vi). It may be mentioned that the payment of 'royalty' is considered as 'fees for professional or technical services' u/s. 194J(1)(c). The term 'royalty' has the same meaning as provided in the Explanation-2 to section 9(1)(vi) as stated in the clause (ba) of the Explanation to section 194J. Further, Explanation-6 to section 9(1)(vi) clarifies the word 'process' used in the clause (ii) of the Explanation-2 and provides for deeming the payment made for leased line charges as 'royalty'. Therefore, tax should be deducted u/s.194J on royalty paid for leased line charges. Accordingly, the Appellant ought to have deducted tax u/s.194J on the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance made by the AO u/s.40(a)(i) and confirmed by Ld. CIT (A) and allow ground no. 1 of the assessee's appeal. 23. That further in case of Gupshup Technology India (P) Ltd., Vs. DCIT (supra) wherein it was observed and held as follows : 7. The main issue in dispute is that, whether the assessee should have deducted the TDS under section 194C or 194J while making the payment made to Tata Tele Services Ltd. for connectivity charges. The assessee is in the business of sending bulk SMSs and for sending this SMS, it avails the services of Telecom Operators like, Tata Tele Services Ltd. Once the agreement is entered into between the assessee and the Telecom Operator, the telecom operator creates customers account from their end and provides IP address, user name and pass word to the assessee. The assessee then integrate such details in its Application Programming Interface System for transmitting bulk messages to the Telecom Operator without any access or control over any of the connectivity facilities or Tata Tele Services Server or Network which are only used by the Tata Tele Services for transmitting the messages. The assessee receives the content of the message whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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