TMI Blog2021 (4) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... Member ( A ) And Beena Pillai , Member ( J ) For the Appellant : Tanmayee Rajkumar , Advocate For the Respondents : Muzaffar Hussain , CIT ( DR ) ORDER Per Beena Pillai , Judicial Member Present appeal has been filed by assessee against the final assessment order dated 23/12/2015 passed by Ld. ITO Ward 4(1)(3), Bangalore for assessment year 2011-12 on following grounds of appeal: I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1. The learned Assessing Officer ( learned AO ), learned Transfer Pricing Officer ( learned TPO ) and the Honourable Dispute Resolution Panel ( Hon'ble DRP ) grossly erred in adjusting the transfer price by INR 2,02,90,530/- of the Appellant's international transactions with its Associated Enterprises ( AEs ) with respect to the Software Development Services ( IT ) rendered by the tax payer u/s. 92CA of the Income-tax Act, 1961. 2. The learned AO/learned TPO/Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of Sub-section (3) of 92C of the Act. 3. The learned AO/learned TPO/Hon'ble DRP erred in reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed AO/learned TPO/Hon'ble DRP erred in levying interest under Section 23413 of the Income-tax Act, 1961. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 2. The Ld. AR submitted that assessee has raised additional ground vide application dated 09/01/2020, wherein following grounds have been raised: Ground No. 9: The learned AO/learned TPO/Hon'ble DRP erred in not excluding Persistent Systems Solutions Ltd. from the list of comparable companies. 3. The Ld. AR submitted that comparable Persistent Systems And Solutions Ltd. was selected by the Ld. TPO during the transfer pricing assessment proceedings. Assessee also included this comparable in the TP study. The Ld. AR submitted that based on judicial pronouncements by coordinate benches of this Tribunal, in Genesis Integrating Systems (India) Pvt. vs. DCIT reported in [2012] 20 taxmann.com 715, Mobility Infotech India (P.) Ltd. v. Dy. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details as called for. 11. The Ld. AO observed that, assessee had international transaction with its associated enterprise exceeding ₹ 15 crores, and accordingly, reference was made to the Ld. TPO under section 92CA of the Act. 12. Upon receipt of reference, the Ld. TPO called for economic details of international transaction between assessee and associated enterprise in Form 3 CEB. The Ld. TPO noted that, assessee had following international transaction with its AE: Particulars Amount in Rs. Software development services 15,40,36,635/- Total 15,40,36,635/- 13. The Ld. TPO observed that, assessee used TNMM as most appropriate method, and PLI as OP/OC and computed its margin at 10.05%. He noted that, assessee selected following 8 comparables having average margin of 13.88%. Name of the company Markup on Total Cost (without adjustment) A B M Knowledgeware Ltd. 40.35 C G- VAK Software Exports Lrd. 5.44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 E-Infochips Ltd 56.44% 4 Evoke 8.11% 5 ICRA Techno Analytics Ltd. 24.83% 6 Infosys Ltd 43.39% 7 Larsen Toubro Infotech Ltd 19.83% 8 Mindtree Ltd.(Seg.) 10.66% 9 Persistent Systems Solutions Ltd. 22.12% 10 Persistent Systems Ltd. 22.84% 11 R S Software (India) Ltd. 16.37% 12 Sasken Communication Technologies Ltd. 24.13% 13 Tata Elxsi Ltd.(Seg.) 20.91% Average 24.82% 16. He proposed an adjustment of ₹ 1,95,06,722/- being shortfall. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 employees, including a country manager and an administrative staff, directors of various projects (e.g. software development, improvements to existing software, testing and validation of software, and document writing), and system engineers providing technical support to the sales team. Mavenir India does not sell products or provide similar contract R D and support services to third party customers. 25. Asset Owned: 26. Risks Assumed: 27. Ground No. 7 Assessee is seeking exclusion following comparable Acropatel Technologies Ltd.: It is submitted that this comparable is functionally not similar with assessee. It has been submitted that this comparables carries out diversified activities without segmental information. 28. The Ld. AR relied on decision of coordinate bench of this Tribunal in case of Electronics for Imaging India Pvt. Ltd., vs. DCIT for assessment year 2011-12 reported in [2017] 85 taxmann.com 124, wherein these comparables have been held to be functionally different with a contract service provider like assessee. 29. On the contrary, Ld. CIT. DR relied on observations of authorities below. 30. We also not that this comparable, was directed to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect of comparability. The learned counsel for the Assessee made submissions before us that this company was rightly directed to be excluded by the DRP on the above basis and further contended that even otherwise, this company is not functionally comparable to the Assessee. As already stated, we do not wish to go into this aspect as this company goes out of comparability on other reasons. 32. Further, Ld. AR alleged that, Acropetal is functionally not similar with a contract service provider like assessee. This observation could not be dislodged by Ld. CIT. DR. We also note that, Acropetal Technologies has been held to be into products by this Tribunal, in case of Electronics for Imaging India Pvt. Ltd. (supra). We therefore are of the opinion that this comparables cannot be included in the final list of comparables. Respectfully following the aforesaid decisions, we direct exclusion of Acropetal Technologies. Ground No. 8 33. The Ld. AR submitted that E-zest Solution Ltd., is having software development services as well as product and also shown closing stock in the financials. It was also submitted that this company has on-site services and significant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and (ii) nature of the activity is KPO. It is pertinent to note that the question of BPO and KPO is relevant only in ITES segment and not for software development services segment. 39. Accordingly, we set aside this issue of comparability of E-Jest Solutions Ltd. to the record of the Assessing Officer/TPO for deciding the same after verification of the relevant facts as well as considering the objections of the assessee. 40. Ground No. 9 is against inclusion of M/s. E-Infochips, by authorities below. 41. Ld. AR placed reliance upon decision of coordinate bench of this Tribunal in case of Electronics for Imaging India Pvt. Ltd. (supra) wherein, E-Infochips Ltd. is excluded for failing in service income filter. We have perused submissions advanced by both sides in light of records placed before us. 42. The Ld. CIT DR submitted that Ld. TPO while analysing comparables observed that, this company has revenue from software development up to 88%. 43. We have perused submissions advanced by both sides in light of records placed before us. 44. It is observed that this Tribunal in case of Autodesk India Pvt. Ltd. vs. ACIT (supra) excluded E-Infochips Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of this Tribunal in DCIT vs. M/s. CGI Information Systems and Management consultations Pvt. Ltd. (supra), we direct Ld. TPO to exclude this company. Accordingly this ground raised by revenue stands dismissed. Ground No. 10 46. ICRA Technology Analytics Ltd. is not functionally comparable with a captive service provider like assessee. It is submitted that this company has significant RPT of 24.81% with margin of 24.83% and predominantly into Software Development Services and which is engaged in diversified activities and no segmental details are available and further concentrated in niche area of business intelligence and analytics space and has revenue from licensing activities. It has been submitted that coordinate bench of this Tribunal has held this comparable to be functionally not comparable with assessee in case of Applied Materials India Pvt. Ltd. v. ACIT reported in IT(TP) Appeal Nos. 17 39/Bang/2016, dt. 21.09.2016] for the Assessment Year 2011-12. It has been submitted that this Tribunal found this company not functionally comparable to the software development captive services provider. 47. It is also submitted that this company has significant g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. Nothing has been brought before us to show that the facts recorded by the DRP as well as by the co-ordinate bench of this Tribunal are not correct. Accordingly, in view of the decision of the co-ordinate bench of this Tribunal in the case of Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in the order of the DRP on this issue. Based on the above we direct this comparable to be excluded from the final list. Additional Ground : In the additional ground assessee is seekin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. This ground of CO is dismissed. 53. It has been submitted that the above observation was followed by coordinate bench of this Tribunal in case of Electronics for Imaging vs. DCIT reported in 85 taxmann.com 124 for assessment year 2011-12 and had excluded this comparable as not comparable with a captive service provider. 54. We further find from the annual report placed at page 1167-1168 that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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. 60. Respectfully following the consistent view taken by this tribunal, we direct Ld. AO/TPO to recompute the working capital adjustment in the case of comparables in actual. We note that in all the transfer pricing cases this Tribunal has been directing the Ld. AO/TPO to grant working capital on actual. Present assessee being a captive service provider there is minimal risk undertaken and therefore there is a necessity to provide adjustment to the margins of comparables in the final list to set apart the differences. Accordingly, this ground raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands allowed as indicated hereinab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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