TMI Blog2021 (9) TMI 1445X X X X Extracts X X X X X X X X Extracts X X X X ..... J) and B.R. Baskaran, Member (A) For the Appellant: Padamchand Khincha For the Respondent: Muzaffar Hussain, CIT-DR ORDER B.R. Baskaran, Member (A) 1. This appeal filed by the assessee is directed against final assessment order dated 10.10.2019 passed u/s. 143(3) r.w.s. 144C(13) of the I.T. Act for assessment year 2015-16 in pursuance of directions given by Ld. Dispute Resolution panel (DRP). 2. Several grounds are raised with regard to Transfer Pricing Adjustment, both with regard to software development segment and I.T. enabled services. The learned AR, during the course of hearing, submitted that as regards I.T. enabled services, revised order u/s. 92CA of the I.T. Act has been passed accepting the international transactions to be at Arm's Length. As regards software development segment is concerned, the learned AR confined his submission to the exclusion of four comparable companies and inclusion of three comparable companies, which were urged in the grounds of appeal. The learned AR also pressed ground No. 6.a. with regard to the grant of working capital adjustment. The assessee has also filed an additional ground contending that the transfer pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables selected by the TPO and affirmed by the DRP and inclusion of three comparables. The details of the companies sought to be excluded are (i) Larsen Toubro Infotech Limited, (ii) Infobeans Technologies Limited, (iii) Persistent Systems Limited, and (iv) Infosys Limited. The details of the companies sought to be included by the assessee in the comparable list are (i) I2T2 India Limited, (ii) Evoke Technologies Limited, and (iii) Melstar Information Technologies Limited. 6. We have heard rival submissions and perused the material on record. Before us the Ld. A.R. placed his reliance on the order dated 28.2.2020 passed by the coordinate bench in the case of M/s. Yahoo Software Development India Pvt. Ltd. (IT(TP)A No. 2365/Bang/2018) relating to assessment year 2015-16, wherein M/s. Persistent Systems Ltd., L T Infotech Ltd. and Infosys Ltd. have been held to be not good comparable companies. He submitted that M/s. Info Beans Technologies Ltd. has been held to be not a good comparable in the case of Metric Stream Infotech (India) Pvt. Ltd. in ITA No. 2347/Bang/2019 dated 24.4.2020. 7. We notice that the coordinate bench in the case of Yahoo Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al professional 1,339.1 Commission paid on sales 111.79 Traveling and conveyance 19.27 Total related party transactions (A) 3,891.93 Total Sales (B) 12,424.98 RPT % of Sales (A/B) 31.32% From the above computation, it is clear that the controlled transactions of Persistent constitutes 31.32% of sales. Based on the above, it can be seen that Persistent fails the 'RPT to sales ratio' filter applied by the learned TPO and should therefore not be considered as a comparable. 34. This argument has been addressed by the DRP in its order as follows:- 4.4.9 We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that ons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been quoted out of context by the Assessee. 66. The next argument of the Assessee is that TPO has held that margins are lower in onsite software services and that margin is not a criteria to select or reject a comparable under Rule 10B(2) of the I.T. Rules. We are of the view that this argument again ignores the fact that the approach of the TPO has been to highlight the fact that there can be no functional comparability, if the assets employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins. 67. The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 6148/Del/2015 for AY 2011-12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The company was excluded from the list of comparable companies with reference to SWD services provider such as the assessee. The ld. Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee's PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee's PB that this company as part of its operating profit in Schedule-O of profit loss account contains expenditure for 'cost of bought out items for resale' and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit loss account, there is no break-up of the revenue with regard to software se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is operating at CMMI Level 3 and-is a software service company specialising in business application development for web and mobile. In the company overview this company has been stated to be primarily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld. AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd. services to its associated enterprises. 14.3.1. On the contrary Ld. CIT DR, referring observations of DRP in para 3.6.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133(6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to learnt AO/TPO for verification. 14.3.2. We have perused submissions advanced by both sides in light of records placed before us. It is observed that the annual report of this company categorises the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development services and implement services. The Ld. AR has supported his arguments with the Paper Book at page No. 2452 and Profit and Loss Account. Whereas the DRP has commented that unaudited accounts cannot be relied. The learned Authorized Representative relied on the decision of Nokia Seimens Networks India (P) Ltd. Vs. ACIT 70 taxmann.com 236 (Del), with observations at page 5 as under: Considering the facts and submissions, we restore the comparable to the file of Assessing Officer for examination and verification of the facts and material. (iii) Mel star Information Technology Limited margin is 5.29%. The company has made profit in the current year and not a loss making company. Whereas the DRP has rejected the company, which has incurred loss in two years out of three years. But for all the past years, the TPO had applied benchmark of rejecting companies with loses for all three years. 11. The learned Authorised Representative relied on the decision of CIT Vs. Goldman Sachs (2016) 69 Taxmann.com 19 and Star International Limited Vs. DCIT : (2019) 112 Taxman.com 258. In the case of CIT Vs. Goldman Sachs India Securities (P) Limited (Supra) in paras ..... X X X X Extracts X X X X X X X X Extracts X X X X
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