TMI Blog2018 (5) TMI 2146X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems Limited - Revenue has not brought out any difference in the functional profile of the assessee for the year under consideration with that of the assessee for those assessment years. Hence, the Tribunal in assessee s own case [ 2015 (11) TMI 1582 - ITAT MUMBAI] has accepted that a software product company is not comparable to assessee company which is into software development services. Accordingly, respectfully following the above precedent, we hold that this comparable has to be excluded from the final list of the comparables. Aspire Systems (India) Private Limited - assessee submitted that this company is into IT Consultancy and Software Product Development and it is not Software Service Company - DRP has held that it was the assessee s submissions that this comparable is into varied activities, the same argument has been placed before us. The Dispute Resolution Panel has held that this company is into Development and Software. Dispute Resolution Panel has held that merely because this company is having IPs R D centre, one cannot reject the comparable. We find that the ld. Counsel of the assessee has not been able to cogently rebut the findings of the authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e final software prior to providing the same to the AE. Hence, we are in agreement that the TPO has correctly considered the outsourcing cost as operating expense of the assessee. Assessee appeal is partly allowed. - I.T.A. No. 7304/Mum/2017 - - - Dated:- 21-5-2018 - SHRI SHAMIM YAHYA, AM AND SHRI RAVISH SOOOD, JM For the Appellant : Ms. Karishma R. Phatarphekar, Ms. Keerthiga Sharma Shri Paras S. Savla For the Respondent : Shri Saurabh Deshpande/Ms. Abha Kala Chandra ORDER Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order of the Assessing Officer passed u/s. 144C of the Income Tax Act, 1961 pursuant to direction by the Dispute Resolution Panel (Dispute Resolution Panel) u/s. 144C(5) of the I. T. Act dated 28.09.2017. 2. The grounds of appeal read as under: 1. On the facts and in the circumstances of the case and in taw, the learned Transfer Pricing Officer ('TPO') and the learned Assessing Officer ('AO') under the directions of the Hon'ble Dispute Resolution Panel ('DRP') erred in making an adjustment of INR 8,32,28,304 under Chapter X of the Income-tax Act, 1961 ('the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various submissions made by the Appellant; 10. On the facts and in the circumstances of the case and in law, the learned AO erred in referring the matter to the TPO and the learned AO / TPO and the Hon DRP further erred in disregarding the benchmarking analysis undertaken by the Appellant without recording any reasons to show that the conditions mentioned in section 92C(3) of the Act have been satisfied; 11. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in rejecting the plea for use of multiple year data as specified in Proviso to rule 10B(4) of the Income Tax Rules, 1962; 12. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of Hon'ble DRP erred in denying the benefit of + / - 3 percent range as envisaged by the provisions of Section 92C(2) of the Act; 13. On the facts and in the circumstances of the case and in law, the learned AO erred in not allowing credit of tax under section 115JAA of the Act; 14. On the facts and in the circumstances of the case and in law, the learned AO erred in levying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name Weighted Average 1 Accentia Technologies Ltd. 16.85% 2 CG-VAK Software Exports Limited 0.15% 3 Cosmic Global Ltd. 27.63% 4 Kellton Tech Solutions Ltd. 9.56% 5 Prism Informatics Ltd. 16.16% 6 R Systems International Limited 7.33% 7 Virinchi Technologies Ltd. 12.36% Arithmetic Mean 12.86% As per the TP report, the arithmetic mean of the OP/TP of the comparables was 12.86%. During the course of TP proceedings, the assessee was required to submit the updated OP/TC for comparable companies using data for the financial year 2012-13. According to this working, the summary of the arithmetic mean came to 16.38%. The search criteria and the acceptance/rejection matrix adopted by the assessee and the Transfer Pricing Officer s remark in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and Infrastructure Application Support Oracle Services Assessee's contentions are rejected and company is accepted as comparable due to the fact that it is engaged in providing software development solutions . Hence it is functionally comparable. 3 Indium Software (India) Limited Functionally not comparable - engaged in providing software development lifecycle solutions, such as developing test plan, test planning, test case development, preparation of test data, regression testing, test execution, defect reporting, test automation, regression testing, load testing, and performance tuning. Significant related party transactions i.e. 39.22% (Precedence by Hon'ble ITATin Assessee's own case for AY 2009-10 and AY 2010- 11 wherein RPT filter of 25% is adopted) RPT exceeds 25% thus rejected 4 Infobeans Technologies Limited Functionally not comparable - engaged in the business of software development but 100% revenue generated from sale of software Product company is different from a service company Peculia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserving as under: Sr. No. Name of the Company Reasons for rejecting 1 Cosmic Global Ltd. Export Turnover to total sales is 56.01% which is less than 75% 2 Kelton Tech Solutions Different accounting period. The company s year ended on 30 June 2013 3 Prism Informatics Export Turnover to total sales is 49.31% which is less than 75% 4 R Systems International Ltd. Different accounting period. The company s year ended on 31 December, 2012 5 Virinchi Technologies Limited Low employee cost of 18.88% being less than 20% employee cost filter 9. In view of the above, the final sets of comparables chosen by the Transfer Pricing Officer were as under: Sr. No. Company Name OP/TC for FY 2012-13 (%) Assessee s comparables 1 Accentia Technologie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 56.01% which is less than 75%. Since the company fells the export filter, hence it is held that the TPO had rightly rejected the comparable. Kelton Tech Solutions The TPO had rejected the comparables as the company has different accounting period. The Company's year ended on June 30, 2013. We find from the submission of the assessee that though the company is into software, but it follows different accounting period. The company with different financial year was rightly rejected by the TPO. Prism Informatics The TPO had rejected the comparable of Prism Informatics on the ground that it has less than 75% export turnover. We have gone through the submission of the assessee and have observed that the export turnover is just below 75%. Hence, the TPO was right in rejecting the comparable. R Systems International Limited The TPO rejected the comparable as the company follows different accounting year ending December, 30 2012. Since the company does not follow the same accounting year as the assessee does and as there are other similar comparables available, the said comparable was rightly rejeaed by the TPO. Virinchi Technologies Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the company is functionally not comparable as it is providing diversified services. From the submission of the assessee it is seen that the company Infobeans Technology Ltd is into development of software and its sale hence, the claim of the assessee that company is not functionally similar to the business of the assessee is rejected. Merely because the company has shown sale of software in profit and loss acount, one cannot reject the comparable. Hence, the claim of the assessee U rejected. (d) Persistent Systems Limited The assessee objects to the selection of the company as comparable because it is not functionally similar to the business of the assessee which has IP's in the name of the company and in house R D centre. From the submission of the assessee it is seen that the company Persistent is into development of software hence, the claim of the assessee that company is not functionally similar to the business of the assessee is rejected. Merely because the company has IP's and R D centre in its own name, one cannot reject the comparable. Hence, the claim of the assessee is rejected. (e) Thirdware Solution limited The assessee objects t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PRP: 6.2.1 We have considered the facts of the case and submissions made by the assessee. Ground No. 7 relates to re-computation PLI of the assessee. The assessee has raised objection that the TPO has recomputed the PLI by considering the outsourcing cost of INR 160,880,492/- as operating cost where as the assessee had treated the same as pass through cost and adjusted the same in indirect expenses. 6.2.2 We have gone through the objections of the assessee and have also seen the T P Order. It is noted that the entire outsourcing cost has been treated as operating cost by the TPO on the ground that the outsourcing cost is directly related to software development and services and the assessee has merely developed a part of the software through outsourcing instead of in-house development. It is not a case where AE has directly given contract to other parties rather it is the assessee, who has subcontracted its part of work. Therefore, the TPO has correctly considered the outsourcing cost as operating expenses of the assessee. Hence, the claim of the assessee in the said ground is rejected. 14. As regards the assessee s objection, the use of the single year data the Dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfluence on the setting of transfer price of international transaction either at the time of setting of transfer price of international transaction either at the time of setting them or by way of adjusting them subsequent to entering into the international transaction to align them to the arm's length price. This is a condition precedent for user of the multiple year financial data. Reliance is placed on various decisions in this regard including (i) AZTEC Software 107 ITD (AT) 141 (SB) (Bang), (ii) Mentor Graphic 109 ITD 101 (Del) and (iii) Honeywell Ltd. 209-TIOL-104 (AT) (Pune) and (iv) Chrys Capital Investments Advisors India Private Limited ITA 417/2014 dated 27.04.2015. In view of the same, the assessee's contention is rejected. 15. Finally, the Dispute Resolution Panel summarized its discussion on risk adjustment as under: 12.2.8 The discussion on the risk adjustment is summarized as under: a. As discussed above, the assessee has also undertaken several risks. Therefore, it is not correct to say that it is a risk mitigated entity. b. The assessee is totally dependent on the AE for business. Thus the assessee takes the risks associated with heavy dependenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monstrated that is leading to better comparability and only when a credible methodology is adopted for calculating a reasonably accurate adjustment. The methodology used by the assessee does not have any application in the area of transfer pricing i. In the various decisions of the ITATs as referred to above no risk adjustment has been allowed in such cases in absence of any credible methodology to grant risk adjustment. 12.2.9 In view of above, the claim of assessee about risk adjustment is hereby rejected. 16. Against the assessment order pursuant to the direction of the Dispute Resolution Panel, the assessee has finally appealed before us. 17. We have heard both the counsel and perused the records. The ld. Counsel of the assessee made submissions in support of some of the comparables selected by the assessee and rejected by the Transfer Pricing Officer. She further made submissions against some of the comparable selected by the Transfer Pricing Officer. 18. Per contra, the ld. Departmental Representative relied upon the orders of the Transfer Pricing Officer. He also made submissions regarding mistakes committed by the Transfer Pricing Officer. R Systems Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut any difference in the functional profile of the assessee for the year under consideration with that of the assessee for those assessment years. Hence, the Tribunal in assessee s own case has accepted that a software product company is not comparable to assessee company which is into software development services. Accordingly, respectfully following the above precedent, we hold that this comparable has to be excluded from the final list of the comparables. Aspire Systems (India) Private Limited: 23. This comparable was selected by the Transfer Pricing Officer but has been objected by the assessee. In this regard, the ld. Counsel of the assessee submitted that this company is into IT Consultancy and Software Product Development and it is not Software Service Company. In this regard, we note that the Transfer Pricing Officer has held that this company as well as the assessee are broadly engage into same services. This proposition has also been accepted by the Dispute Resolution Panel. We find that this plea of the assessee has been rejected by the Dispute Resolution Panel. The Dispute Resolution Panel has held that it was the assessee s submissions that this comparable is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to software development, implementation and support services. It has been claimed that it earned income from products and services. While the assessee on the other hand is not into product activity and is solely into software services. It has been further submitted that in several case laws, Thirdware Solutions Ltd., has been held to be a company not engaged in software development services. In the ITAT Delhi Bench decision in the case of St-Ericsson India (P.) Ltd. vs. Asst. CIT [2017] 79 taxmann.com 207 (Delhi - Trib.) it was held that the substantial revenue of this company is from sales and operating sales of licence; software services, export from SEZ unit, export from STPI unit and revenue from subscription. So, when this company's substantial revenue is from other various business segments like sale of licence, software services and segmental results are not available, this company cannot be a valid comparable for benchmarking the international transaction. This decision of the ITAT had been upheld by the Hon'ble Delhi High Court in ITA No. 821 of 2017 vide order dated 31.01.2018. For similar proposition, the ld. Counsel of the assessee cited CIT vs. IVY Computech Lt ..... 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