TMI Blog2022 (5) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... deration. Companies functionally dissimilar with that of assessee need to be deselected from final list of comparability. Negative working capital adjustment - HELD THAT:- As the assessee is a captive service provider entirely funded by its AE and has no working capital contingent, we accept the contention of the assessee and allow ground and hold that adjustment on account of negative working capital does not arise in the present case. Exclusion of operating expenses while computing the operating margin - Assessee filed application to file additional evidence before the Tribunaln - HELD THAT:- We find that on this issue, the DRP has merely observed that no submissions were made on the above ground of appeal. Assessee has however pointed out that in Annexure 1.26 of the objections filed by the assessee before the DRP, the submissions have been made with regard to the computation of operating margin. Since this issue has not been adjudicated by the DRP, we are of the view that it would be just and appropriate to remand this issue to the TPO/AO for consideration afresh with liberty to the assessee to file additional evidence before AO/TPO. The issue was not raised before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE). 4. The assessee is the subsidiary of Core Objects Software Inc., USA ( Core US ), which in turn is held by Symphony Services Corp., US. The assessee was incorporated under the provisions of the Companies Act, 1956 and is engaged in the provision of software development and related services. During the previous year relevant to the assessment year 2011-12, one of the international transactions that took place between the assessee and its AEs was the provision of software development services by the assessee for Rs. 15,83,77,318/-. On a reference being made by the Assessing Officer, the TPO passed an order dated 08.12.2014 u/s.92CA of the Act, determining TP adjustment of Rs. 10,44,44,180/-. The Assessing Officer passed a draft assessment order dated 30.03.2015, incorporating the above adjustment and proposing to disallow (i) provision for rent claimed by the assessee; and (ii) depreciation on computer software claimed by the assessee, for non deduction of tax at source. Aggrieved, the assessee filed its objections before the Dispute Resolution Panel (DRP), which, vide its directions dated 28.12.2015 granted marginal relief to the assessee in respect of the TP adjustment, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not much of a difference between the approach of the assessee as well as the TPO, except the choice of companies chosen for the purpose of comparison of profit margin. The following chart would show the position of the approach adopted by the assessee and the TPO: Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/OC Database used PROWESS CAPITALINE PLUS PROWESS CAPITALINE PLUS Comparables selected for software development services 9 13 Period for which data used FYs ending during the period April 1, 2008 and March 31, 2011. FY 2010-11 (i.e., April 1, 2010 to March 31, 2011) 7. The Filters applied by the TPO for the purpose of inclusion and exclusion of comparable companies was as follows: Step Description 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.83 21.32 8 Mindtree Ltd. (seg) 10.66 10.69 9 Persistent Systems Solutions Ltd. 22.12 22.63 10 Persistent Systems Ltd. 22.84 23.07 11 R S Software (India) Ltd. 16.37 17.66 12 Sasken Communication Technologies Ltd. 24.13 25.97 13 Tata Elxsi Ltd. (seg) 20.91 20.39 AVERAGE MARGIN 24.82 25.46 9. The Computation of arm s length price by the TPO and the adjustment made was as follows: Arm s Length Mean Margin 24.82% Less: Working Capital Adjustment -0.64% Adjusted mean margin of the comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ground No12 with regard to inclusion of certain comparable companies. The assessee has filed 3 applications for admission of additional grounds 15 to 18. As far as ground No.15 is concerned, it seeks exclusion of 1 comparable company that remains after the order of the DRP. As far as ground No.16 is concerned, the said ground is nothing but an expanded version of the assessee s grievances which has already been projected in ground No.13 viz., with regard to the computation of operating margin of the assessee for the purpose of comparison with a comparable company. Grounds 13 and 16 have to be therefore adjudicated together. As far as Grounds 17 and 18 is concerned, these grounds are with reference to taxation of same income in two Assessment Years. The assessee has also filed application for admission of addition evidence in so far as Grounds 13 and 16 and Grd. No. 17 and 18 are concerned. 13. The additional ground sought to be raised by the assessee arises out of the order of the CIT(A). In so far as additional ground Nos.17 and 18 raised by the assessee are concerned, the assessee should have ideally filed rectification application for Assessment Year 2010-11 but has chose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka in ITA No. 481/2017 vide order dated 05.07.2018; (vi) FNF India (P.) Ltd. v. ACIT (Order dated 03.07.2019 passed by this Hon ble Tribunal in IT(TP)A Nos. 195/Bang/2016 and 459/Bang/2017); (vii) Tivo Tech Pvt. Ltd. v. DCIT (Order dated 12.06.2020 passed by this Hon ble Tribunal in IT(TP)A No. 1619/Bang/2017) 16. After considering the submissions, we are of the view that in the light of the judicial precedents brought to our notice and in the light of the fact that the assessee is a captive service provider entirely funded by its AE and has no working capital contingent, we accept the contention of the assessee and allow ground No.9(a) and hold that adjustment on account of negative working capital does not arise in the present case. 17. The next ground to be adjudicated is ground No.11 which reads as follows: 11. The learned TPO/ learned AO/ Hon'ble DRP erred in accepting companies that ought to have been rejected as comparable: Persistent Systems Solutions Ltd. Persistent Systems Ltd. Sasken Communication Technologies Ltd. 18. As far as Ground 11 is concerned, the assessee seeks exclusion of 3 comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale 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. (4) Persistent Systems Ltd. 24. We have heard the Id. DR as well as Id. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration. 25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own at page 70 of the report is very negligible. The product launched is for future period and not generated any revenue during the year under consideration. He has relied upon the orders of authorities below. 9.3.3 We have considered the rival submissions as well as the relevant material on record. The co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in paras 27 to 29 as under : (5) Sasken Communication Technologies Ltd. 27. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables. 1. We have heard the Id. DR as well as Id. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... averic Software Ltd. Thinksoft Global Services Ltd. Silverline Technologies Ltd. Evoke Technologies Ltd R S Software India Ltd 21. At the time of hearing, learned Counsel for the assessee submitted that he wants to press for adjudication of inclusion of only 5 companies out of the companies set out in ground No.12 viz., Akshay Software Technologies Ltd., LGS Global Ltd., Thinksoft Global Services Ltd., Evoke Technologies and RS Software India Ltd. 22. As far as inclusion of Akshay Software Technologies Ltd., is concerned, it was the case of the DRP that this company was predominantly engaged in onsite development of software and therefore not comparable with a company like the assessee which was primarily engaged in offshore software development services. As far as the ground on which this company was excluded by the DRP is concerned, it is not in dispute that this Tribunal in the case of Applied Materials India Pvt. Ltd., (supra) for Assessment Year 2011-12 has excluded this company from the list of comparable companies on the ground that this company was predominantly engaged in onsite development of software. Learned Counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are development services. In this regard, it has been the contention of the learned Counsel for the assessee that the conclusion of the DRP that this company derives revenue from onsite is erroneous and is based only on the existence of foreign branch expenses which cannot be sustained. In this regard, reliance was placed by the learned in the decision of the ITAT, Bengaluru Bench, in the case of Applied Materials India Pvt. Ltd., (supra). 26. The learned DR submitted that these facts and contentions require examination by the TPO as these issues were not raise by the assessee before the DRP and therefore the question of comparability has to be set aside to the TPO/AO for fresh consideration. 27. We have considered the rival submissions. We find that the comparability of LGS Global Ltd., was contested by the assessee before the DRP whereas the companies Evoke Technologies and R S Software India Ltd., were not contested by the assessee before the DRP but the DRP suo moto excluded these 2 companies from the list of comparable companies. As far as inclusion of LGS Global Ltd., is concerned, this Tribunal in the case of Applied Materials India Pvt. Ltd., (supra) has remande ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those facts decide the comparability of this company. We are of the view that since Evoke Technologies Ltd., and R S Software India Ltd., were excluded by the DRP suo moto , the issue has to be remanded to the TPO/AO for fresh consideration to decide the comparability of these 2 companies also. We hold and direct accordingly. 29. The other company which was sought to be included by the assessee is Thinksoft Global Ltd. The comparability of this company can be conveniently decided together with ground No.16 in which the assessee seeks inclusion of FCS Software Solutions Ltd., and this ground reads as follows: 16.The Hon'ble DRP has erred in rejecting the objection raised by the Petitioner in relation to computation of the operating margin of the Petitioner, by stating that no submissions were made. 30. This company was also excluded suo moto by the DRP on the ground of existence of onsite revenue and this Tribunal in the case of Finestra Software Solutions India Pvt. Ltd., (2018) 93 taxmann.com 460 (Bangalore Tribunal) upheld the inclusion of this company. Similarly, even inclusion of FCS Software Ltd., was upheld in the aforesaid decision. The following w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Bangalore facility which was debonded post acquisition Rs. 2,70,00,000/- (c) Employee severance costs arising post-acquisition due to termination of the employees Rs. 1,30,00,000/- (d) Costs relating to post-acquisition period (September 2010 to March 2011) in respect of which there were no corresponding revenues Rs. 1,45,17,296/- Total Rs. 7,33,39,296/- Despite the assessee having filed submissions before the DRP, it erroneously rejected the objections on holding hat the assessee had not made any submissions. It was submitted that the above expenses were incurred by the assessee post-acquisition and are in the nature of one-time extraordinary expenses. Details in this regard were furnished vide the petition for additional evidence filed on 18.07.2018. It was submitted that while computing the operating margin for the purposes of determination of ALP of the transaction, extraordinary expenses ought not to be included, as they are not operating in nature. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decide the issue after affording assessee opportunity of being heard. 35. As far as ground Nos.17 and 18 raised by the assessee are concerned, the same reads as follows: 17. The Learned Assessing Officer [ Learned AO] and Hon'ble Dispute Resolution Panel [ Hon'ble DRP ], while assessing the total income of the Appellant for the year under consideration, ought to have allowed deduction of ALP adjustment amounting to INR 1,20,30,164 inadvertently offered to tax by the Appellant twice i.e. in AY 2010-11 and AY 2011-12. 18. On the facts and circumstances of the case and in law, the Learned AO and Hon'ble DRP ought to have allowed deduction for the ALP adjustment offered to tax twice, though not claimed as a deduction by the Appellant while filing its return of income for AY 2011-12 under consideration. 36. As can be seen from the grounds of appeal, the issue arises owing to developments that took place after filing of return of income for AY 2011- 12 by the assessee. We are of the view that it would be just and appropriate that the AO/TPO should be directed to consider this issue after affording opportunity of being heard to the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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