TMI Blog2019 (9) TMI 1664X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore respectfully following aforestated view in case of Genesis Integrating Systems India Pvt. Ltd., [ 2011 (8) TMI 952 - ITAT BANGALORE] these comparables are to be excluded on both the counts of functionally not being similar with that of assessee and also because they have a high turnover of more than 200 crore. For assessment year 2009-10, excluded these companies following Genesis Integrating systems Indi Pvt. Ltd vs. DCIT [ 2011 (8) TMI 952 - ITAT BANGALORE] Reliance has been placed on decision of this Tribunal in case of Autodesk India Pvt.Ltd. [ 2018 (7) TMI 1862 - ITAT BANGALORE] followed similar view to exclude identical comparables by applying turnover filter, wherein all the decisions relied upon by Ld. CIT DR has been considered and dealt with. Therefore, respectfully following above decisions, we uphold exclusion of Infosys Ltd, Larsen Toubro Infotech Ltd., and Persistent Systems Ltd., by Ld. CIT (A) from final list. Now coming to Zylog Systems Ltd., Mindtree Ltd. held that, turnover is a relevant criteria for choosing companies as comparables for determining ALP of international transaction. Even otherwise, all above referred comparables are fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding the comparables Persistent Systems Ltd., Zylog Systems Ltd., Mindtree Ltd, L T Infotech, Infosys Ltd., in software development segment without appreciating that economies of scale is not relevant in the software industry and turnover criterion is not prescribed in Rule 10B of IT Rules. 3. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to provide for depreciation adjustment without appreciating the fact that such criterion is not prescribed in Rule 10B of IT Rules. 4.On the facts and in the circumstances of the case the learned CIT(A) erred in law in deleting the disallowance u/s 40(a)(ia) without appreciating the fact that the assessee had purchased software which is in nature of a license paid for usage of the software and the consideration for such licenses would fall within the definition of the royalty defined in Explanation 9(1)(iv) and hence deduction of tax at source under Section 194J should have been done by the assessee. 5. On the facts and in the circumstances of the case the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price a) The Ld. CIT(A) and Ld. AO erred in upholding the actions of the Ld. TPO in rejecting the value of international transactions as recorded in the books of accounts, as the arm's length price. b) The Ld. CIT(A) erred in upholding the action of the Ld. AO/ Ld. TPO on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Respondent's analysis with fresh benchmarking analysis on his own conjectures and surmises and in doing so determined a new arm's length price. Thus, the Respondent prays that the fresh benchmarking analysis conducted by the Ld. AO/ Ld. TPO is liable to be quashed. 3 Comparability Analysis adopted by the TPO for determination of arm's length price. a) The Ld CIT(A) erred in confirming the action of the Ld. AO/ Ld. TPO who erred in comparing the benchmarking of the Respondent's international transaction (i.e., software development services) with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Respondent vis- -vis comparable companies identified. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eous data used by the AO/TPO a) The Ld. CIT(A) erred in confirming the action of the Ld. AO/ Ld. TPO in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Respondent. b) The ld.CIT(A) also erred in confirming the action of Ld.AO/TPO in rejecting application of multiple year data while computing the margin of alleged comparable companies as such data had an influence in determining the transfer pricing policy of the Respondent. 5. Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO. The Ld. CIT(A) erred in upholding the action of the Ld. AO/the Ld. TPO in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) marketing expenditure adjustment, (b) research and development expenditure adjustment, (c) risk profile between the Respondent and the comparable companies; and (d) working capital adjustment. Further, the Ld. TPO erred in restricting the working capital adjustment in the case of the Company to 1.71%. The Ld. AO / the Ld. CIT(A) erred in upholding the same. 6. Variation of 5% fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Services 114,64,39,408 Reimbursement of expenses paid 64,07,771 Recovery of expenses received 73,96,565 3. Ld.TPO accepted arms length price, computed by assessee in respect of reimbursement of expenses paid and recovery of expenses received. The only segment disputed by the ld.TPO was in respect of Software Development Services. It is observed that assessee used TNMM as most appropriate method and computed its margin by using OP/TC as PLI and computed its margin at 16.61%. Assessee selected following 17 comparables with an average margin of 12.66%: Company Name Prowess, Capitaline, Segmental Markup on Total cost Akshay Software Technologies Ltd. 6.17% Aztecsoft Ltd. 8.38% Birla Technologies Ltd. -1.77% CG Vak Software Exports Ltd. 5.73% Computech International Ltd. 1.94% Helios Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21.61 Ld.TPO thus proposed adjustment of Rs.5,89,73,015/-. 4. Aggrieved by order of Ld. AO/ TPO assessee preferred appeal before Ld. CIT(A). Ld. CIT(A) on considering submissions by assessee, excluded 5 comparables from list, thereby retaining total 6 comparables in final list, which are as under: i. Bodhtree Consulting Ltd. ii. Akshay software Technologies Ltd. iii. RS Software (I)Ltd. iv. KALS Information Systems Ltd. v. Sasken Communication Technologies Ltd. vi. at Elxsi Ltd., (seg. 5. Ld. CIT(A)upheld TPO s action and applying an upper limit of working capital adjustment at 1.71%, although it was worked out to be at 2.71%. Regarding corporate tax issues, Ld. CIT (A) followed order passed by his predecessor dated 09/08/12 in assessee s own case for assessment year 2002-03, wherein Ld.AO was directed to recompute adjustment under section 92C of the Act, if any, after excluding depreciation from operating costs of comparables and also from operating cost of assessee. 6. Aggrieved by order of Ld. CIT (A), revenue is in appeal before us against which assessee has filed cross objection. 6.1 At the outset, Ld.AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... released into the market is performed by the product engineering tam of Novell India in coordination with Novell US. Novell Us is responsible for the launch of the product developed. Novell India also renders third level customer support wherein the product engineering team of Novell India renders technical support to the technical service team of Novell US. Novell US acts as the customer interface, though the support service could be provided by Novell India. Novell India is responsible for providing both technical and user documents for all components, providing communication support, project documentation and web publishing. Assets employed: It has been submitted in TP study that, assessee do not own any non-routine valuable intangible assets. Risks Assumed: It has been submitted that assessee does not assume any significant risks as entire contract is entered into by AE with end customers. Except for foreign exchange fluctuation risk assessee does not bare any other risk with respect to the ultimate success or failure of the activities. Thus from the above assessee has been characterised as back-office service provider in the process of software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only should be taken into consideration for the purpose of making TP study 9. We have perused submissions advanced by both sides in light of records placed before us. It is observed that companies engaged in software development services are treated by both sides as comparables irrespective of various verticals of software. Ld.TPO as well as assessee searched for comparables, which are engaged in software development services, but has not considered verticals/functional or service lines, in which the company is engaged. Thus it is observed that comparables selected are into different verticals and functional lines, though assessee is catering to software development and maintenance needs of the group in the global trade and logistics domain and has been characterized as pure software development service provider. This Tribunal in case of Genesis Integrating Systems India Pvt. Ltd., vs DCIT reported in (2012) 20 taxman.com 715, while considering various filters applied by Ld. TPO observed as under: 6. Functionally different filter; The assessee is engaged in providing the software development services and the software development process is a structure imposed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enthusiastic software users, shifting the training towards the neutral users intermixed with the avid supporters and finally incorporate the rest of the organization into adopting the new software. The next important step is the maintaining and enhancing software to cope with newly discovered problems or new requirements. This can take far more time than the initial development of the software and about 2/3rd software engineering work is maintenance and a small part of it i.e. fixing bugs. The best known and oldest process of software development is the waterfall model which follows all the above processes and after each step is finished, the process proceeds to the next step just as builders do not revise the foundation of a house after framing has been erected. 3. From the above analysis, it can be seen that a company which develops a software product by following all the above steps involved in creating a software is a software development company and in this case, intellectual property generated belongs to the company and the products are generally sold on license basis wherein the right to use the software is transferred without giving the source code. Unlike these softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made by Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 core to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. In facts of present case, assessee is doing part of software development cycle and therefore has been categorised as a captive software development service provider catering to needs of the group. Assessee in TP study held to be comprise of Software Engineers, who develop project based on inputs received from AE. Engineers employed by assessee designs functional specifications for the project identification of interfaces components coding and bug fixing. Ultimate approval and owner of project developed is the AE. In our view, by involving itself in process of Software development for AE, assessee cannot be held to be fulfledged Software Development Company. One has to look into transaction in regards to services rendered and FAR, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exports Ltd., and exclusion of Bodhtree Consulting Ltd., and KALS Information Systems Ltd., as they are functional dissimilar. Further, Sasken Communications Technologies Ltd and Tata Elxsi Ltd., are sought to be excluded on having high turnover. Ld.AR however submitted that in the event, comparables sought for inclusion by revenue are excluded, average margin of comparables is within tolerance limit of +/-5%. As we have dismissed grounds of revenue in respect of comparables alledged for inclusion, cross objection of assessee is dismissed as not pressed. Accordingly this ground raised by revenue and cross objection filed by assessee stands dismissed. 11. Ground No.3 is in respect of disallowing depreciation as an adjustment in comparables. Ld.AR submitted that assessee has a policy of charging higher rate of depreciation as compared to companies selected by Ld.TPO. Assessee placed reliance on the accounting notes wherein policy of depreciation at page15 of paper book, Vol-1 has been encapsulated. She thus submitted that adjustment is to be made to eliminate difference between assessee and comparables. Placing reliance upon decision of this Tribunal as well as P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Ground No. 4 is in respect of disallowance under section 40 (a) (ia) of the Act, is for not deducting tax at source under section 194J at the time of purchase of software. Admittedly, it has been submitted that this issue stands settled against assessee is by decision of this Tribunal in case of DCIT vs WS Atkins India Pvt.Ltd in ITA No. 1467/Bang/2014 and Kawasaki Microelectronics Inc. vs DDIT reported in (2015) 60 Taxmann.com 256. Accordingly this ground raised by revenue stands allowed. 14. Ground No. 5 is in respect of disallowance deleted by Ld. CIT (A) under section 14 A read with Rule 8D of the Act. Is it has been submitted that there is no exempt income earned by assessee during year under consideration. Both parties admittedly submitted that, issue stands squarely covered by decision of Hon able Delhi High Court in case of Cheminvest Ltd vs CIT reported in 378 ITR 33. We therefore do not find any infirmity in the view adopted by Ld. CIT (A). Accordingly the same is upheld. In the result appeal filed by revenue and cross objections filed by assessee stands dismissed. Order pronounced in open court on 04-09-2019 - - TaxTMI - TMITax - Income ..... 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