TMI Blog2021 (11) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal on record : 1. That on the facts and circumstances of the case and in law, the AO/Transfer Pricing Officer ( TPO ) have erred in making an upward adjustment of ₹ 1,87,58,681 in respect of the international transactions pertaining to Information Technology ( IT ), Information Technology Enabled Services ( ITeS ) and Business Support Service ( BSS ) segments, pursuant to the directions of the DRP, alleging that the same were not at arm's length, and consequently, completing the assessment at ₹ 16,09,84,540 as against the returned income of ₹ 14,22,25,857. 2. That on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ( Rules ) for determination of the arm's length price ( ALP ) of the international transactions pertaining to IT, ITeS and BSS segments. Without prejudice, the AO/DRP/TPO also erred in rejecting the fresh search conducted by the Appellant, using current single year data. 3. That on the facts and circumstances of the case and in law, the AO/DRP/TPO err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP/TPO erred in arbitrarily selecting/retaining Future Capital Investment Advisors Limited and Future Capital Holdings Ltd. (Investment Advisory segment) for benchmarking the BSS Segment, without appreciating that they had re-aligned (sold) their business operations and accordingly failed the peculiar circumstances filter applied by the AO / TPO. 10. Without prejudice and notwithstanding to the above, on the facts and circumstances of the case and in law, the AO/TPO erred in computing the operating margins of the Appellant s IT, ITes and BSS segments. The AO/TPO, in spite of specific directions of the DRP, further erred in incorrectly computing profit margin of the following companies selected as comparables for IT, ITes and BSS segments : Goldstone Technologies Limited and Thirdware Limited for IT segment Cosmic Global Limited for ITes segment Future Capital Investment Advisors Limited for BSS segment. 11. That on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in not providing appropriate economic adjustments as required under Rule 10B(1)(iii) of the Rules. 12. That on facts and circumstances of the case and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnologies Ltd. C. Thirdware Solutions Ltd. D. Goldstone Technologies Ltd. EXCLUSION OF THE COMPANIES ON INFORMATION TECHNOLOGY SEGMENT (A) KALS Information Systems Ltd. 4. The contention of the assessee is that KALS Information Systems Ltd. was engaged in selling of software products which is different from the activities undertaken by the assessee namely rendering of software services to its holding company. 5. That before the Transfer Pricing Officer (TPO), the objections raised by the assessee were: (i) The company is engaged into provision of software development services as well as sale of software products. Further, no separate revenue break up is available for sale of services and sale of products. (ii) Error in segmental reporting-Inconsistency in the profit number as reported in the profit and loss account as well as segmental reporting. 5.1 The TPO in his findings has observed that there is no evidence on record to show that KALS Information Systems Ltd. has actually earned any revenue from sale of such software products. The TPO was also opined that many software service provider companies call their services as a pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay High Court) wherein, it had been held by the Hon‟ble Jurisdictional High Court that on account of functionally not comparable, KALS Information Systems Ltd. should be excluded from the list of comparable companies. The Pune Bench of the Tribunal in the said case has held as follows : 5.1 ... That on perusal of the order of the Hon'ble Jurisdictional High Court in the case of CIT Vs. PTC Software India (Pvt.) Ltd. (supra.) wherein the Hon'ble High Court has held as under: (a) M/s. KALS Information Solutions Ltd. (KALS Ltd.) and Helios Matheson Information Technology Ltd. (Helios Matheson Ltd.) were included by the TPO in his comparability analysis . The grievance of the respondent assessee before the Tribunal was that both are functionally different from the respondent assessee and, therefore could not be used as comparables. The respondent assessee pointed out that KALS Ltd and Helios Matheson Ltd. are engaged in the business of selling of software products while the respondent assessee renders software services to its holding company. (b) The Tribunal in the impugned order records that for the preceding assessment year i.e. A.Y. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration are absolutely identical with regard to the previous assessment year i.e.2009-10 and therefore, respectfully following the decision of the Hon‟ble Bombay High Court in the case of the CIT Vs. PTC Software India (Pvt.) Ltd. (supra.) which was relied on by the Pune Bench of the Tribunal in assessee‟s own case (supra.), we direct the TPO to exclude KALS Information Systems Ltd. from the final list of comparables companies with regard to IT segment. Thus, this part of the ground is allowed. (B) Acropetal Technologies Ltd : 9. The assessee had submitted that Acropetal Technologies Ltd. has significant onsite development expenses (approx. 55% of the total operating cost) which is indicative of the fact that it has also significant onsite revenue. Accordingly, considering the onsite revenue filter applied by the TPO, this comparable should be rejected. 10. The TPO has considered the Annual Report of this company and observed that it is an Indian based software service provider primarily delivering software validation and verification services to the banking and financial services industry worldwide. The TPO had also considered the segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich records `Decrease in Inventories by (₹ 1,50,80,060/-) under the head Expenditure . Balance sheet of this company also has a figure of `Inventories . Apart from this company being engaged in Software products also, it is pertinent to note that it has rendered on-site services of a greater magnitude. It can be seen from expenses of ₹ 55,85,57,169/- incurred under the head Employee related and onsite Development Charges , this company incurred on-site Development Expenses at ₹ 42,32,55,491/-, which transpires that employees related costs incurred by the company on on-site development is roughly at 75% of total employees related costs. As against this, the assessee is not engaged in rendering any on-site services. A company engaged in providing on-site services cannot be compared with a company providing similar services from its own premises (in-house) due to several significant differences in operating costs and also the revenues apart from vital differences in the level of assets employed and risks undertaken. In view of the foregoing, we are satisfied that this company cannot be considered as comparable as it is not only engaged in the business of Softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee took us to the notes on account in respect of Thirdware Solutions Ltd. at Page 107 of the Paper book, Para 3 in the Column-Quantitative Details wherein it has been mentioned that the company is engaged in implementation and consulting services of software based on ERP and Business Intelligence. The implementation and consulting services of developed and traded software cannot be expressed in any generic unit. Hence, it is not possible to give quantitative details of sales and certain information as required under Paragraph 3, 4C, 4D of Part II of schedule VI of the Companies Act, 1956. 17.1 The Ld. AR further submitted that this company has been excluded from the final set of comparables in the case of John Deere India (P) Ltd. Vs. ACIT (supra.) for the assessment year 2010-11. There also, the Pune Bench of the Tribunal has observed that there is no bifurcation of operating profit from Software Services and others including Sale of Licence and Revenue from subscription etc. The Tribunal also observed that the company has segments only on geographical basis and not on functional level. The relevant Para of the said order is extracted herein below : 10. We have hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s either operating or non-operating, the learned AO is directed to follow the principles laid down in the ‗Safe Harbour Rules released by the CBDT vide Notification dated 18.09.2013. As far as computation of the segmental margin is concerned, the learned AO is directed to allocate unallocated expenses to each segment in proportion to the segmental turnover to total turnover as in transfer pricing, broad comparison should be done by approximation when comparison on the basis of exact data is not possible. The Ld. AR, therefore, submitted that in respect of this company, the Assessing Officer/TPO may be directed that the aforesaid directions of the Ld. DRP given at Para 8.3 of its order may be followed. 20. The Ld. DR conceded to these submissions of the Ld. AR of the assessee. 21. Having heard the parties herein, in the interest of justice, we are of the considered view that the matter should be restored to the file of the Assessing Officer/TPO. It is hereby directed that the Assessing Officer/TPO should follow the directions of the Ld. DRP as contained at Para 8.3 of Ld. DRP‟s order. Thus, this part of the ground is allowed for statistical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Further, the ld. AR placed reliance on the decision of Pune Bench of the Tribunal in the case of Schlumberger India Technology Centre (P.) Ltd. vs. Dy. Director of Income Tax (2018) 90 taxmann.com 19 (Pune-Trib.) wherein at relevant page 170 of the case laws compilation, the Tribunal has held that the Accentia Technologies Ltd. is functionally not comparable to the assessee and Assessing Officer was directed to exclude the said company from the final set of comparables. The relevant para is extracted as follows:- 29. The next concern is Accentia Technologies Ltd., which has been included by the Assessing Officer in the final list of comparables and the assessee wants the same to be excluded being not functionally comparable. The first objection is that the said concern was not functionally comparable and the second objection was extraordinary financial event during the year. 30. Similar issue arose before the Pune Bench of Tribunal in Aptara Technologies (P.) Ltd. (supra), wherein while deciding the appeal for assessment year 2010-11, it was directed to be excluded observing as under:- 15 .. Further, similar proposition has been laid down by di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound is allowed. (ii) Informed Technologies Ltd. : 28. The TPO has discussed this company at page 51 of his order wherein the assessee has objected to the selection of this comparable in ITES segment. The assessee has contended this company should not be selected as comparable because in this case the AMD/sales ratio exceeds 3%. This was however selected as comparable by the TPO. That before the DRP also similar argument were taken by the assessee. The DRP at para 5.7.1 of its order observed that while deciding the comparability of Acropetal Technologies it had been held that filter AMD/sales is not appropriate for the captive companies engaged in the IT/ITES. Therefore, Informed Technologies was treated as functionally comparable with that of the assessee upholding the selection of comparable by the TPO. 29. The ld. AR reiterating the submissions made before the Subordinate Authorities took us through the annual report of the said company annexed at pages 247 to 294 in the Paper Book and at page 252 review of the companies has been dealt with. That at page 263 Balance Sheet and at page 264 P L account has been annexed. Thereafter at page 270 of the Paper Book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les. In view thereof, the grounds of appeal No.12, 14 to 16 are partly allowed. 30. The ld. DR also though relying on the DRP findings principally agreed on the exclusion of this company as decided by the Pune Tribunal (supra). 31. Having heard the parties herein and considering the decision of Pune Tribunal (supra), we direct the Assessing Officer/TPO to exclude Informed Technologies India Ltd. from the final list of comparables in ITES segment in respect of the assessee. (iii) Jeevan Softech Ltd. (Seg) : 32. In respect of this company also, the assessee has contended that the said company should not be selected as comparables because the AMD/sales ratio exceeds 3%. The argument of the assessee did not go well with the TPO nor with the DRP and this company was included in the final list of comparable companies. 33. The ld. AR demonstrated his contention reiterating the submissions made before the Subordinate Authorities and also referring to the annual report of the said company annexed at pages 295 to 332 in the Paper Book. The ld. AR also referred to the Tribunal‟s order in the case of DCIT vs. BNY Mellon International Operations (India) (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TPO i.e. peculiar economic circumstances, these companies should be rejected. 38. That, however for the first time before us the ld. AR has taken a fresh plea of Related Party Transactions (RPT). 39. The ld. DR submitted that this plea was never taken before the Subordinate Authorities wherein the only contention was with regard to the realignment of business activity of company a peculiar event and with the TPO applying the filer of peculiar economic circumstances, this company should be rejected but now the assessee is coming up with new plea of Related Party Transactions which needs to be factually verified at the level of the Assessing Officer/TPO. 40. Having heard the parties herein, in the interest of justice, we are of the considered view that the submission put forth by the ld. DR for factual verification of RPT transactions is a correct analysis and hence we remand this issue to the file of the Assessing Officer/TPO for verification of RPT transactions and thereafter, deciding comparability with respect to the assessee company in this BSS segment. Thus, this part of ground is allowed for statistical purposes. Future Capital Investment Advisors ..... 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