TMI Blog2023 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... sistent Systems Limited cannot be taken as a comparable and therefore, the same is excluded from the final set of comparables. iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited - CIT(A) has not dealt with the objections raised by the Appellant while the Assessing Officer had included the same given the reasoning that the primary source of income is from software development. Therefore, we deem it appropriate to remand the issue of exclusion of the aforesaid comparable back to the file of the AO. Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited Aricent Technology excluded on account of high turnover - CIT(A) had observed that Sonata Software Limited was a giant company having turnover of INR 1,380 Crores. Before the Tribunal, the Appellant had contended that 11 companies having high turnover be excluded from the list of comparables. As already directed exclusion of 3 companies (i.e. Infosys Technology, Wipro Limited and Persistent Systems Limited), though for different reasons. Out of the balance 8 companies, the issue related to exclusion of 3 companies (namely iGate Global Solutions Ltd., Tata Elxsi Ltd, LGS Global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MI 97 - ITAT PUNE ] pertaining to the Assessment Year 2010-11 wherein it was held that even if the segmental accounts are taken into consideration this company would still not qualify as a comparable. Softsol India Limited - As entire income has been recorded under the head software exports and no bifurcation or details of the same have been provided. It is stated therein that the company does not have separate reportable segments - we find merit in the contention advanced on behalf of the Appellant that Softsol India Ltd. cannot be selected as a comparable on account of functional dissimilarly and lack of segmental data. Working Capital Adjustment - We grant the Appellant an opportunity to establish before the Assessing Officer that the Appellant is entitled to working capital adjustment in respect of the comparables finally selected. The Assessing Officer is directed to decide the claim for working capital adjustment, if any made by the Appellant before the Assessing Officer as per law. Thus, in accordance with the above, the Assessing Officer is directed to determine the final set of comparables; re-compute arm s length price; and transfer pricing adjustment, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the course of audit: 2.3.4 Selecting companies which are larger in size as compared to the Appellant and companies that are earning super normal profits; 2.3.5 In not appreciating the fact that the profit margins of large Indian Software companies would be largely influenced by its goodwill/brand name and other intellectual property and such companies ought to be rejected, and 2.3.6 Rejecting comparable companies selected in the TP documentation on arbitrary reasons. 3. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in considering financial data of only the current year (FY 2009-10) of the comparable companies instead of multiple year data to be used for benchmarking the Appellant's international transaction. 4. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in not granting working capital and risk adjustment. 5. On the facts and circumstances of the case and in law, the Hon'ble CTT(A) erred in upholding the decision of the Learned AO in not allowing the Appellant the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at a set of 21 comparables. The Assessing Officer computed NCP of the 21 comparables at 26.21 percent and proposed upward transfer pricing adjustment of INR 2,21,07,342/- vide order dated 26/03/2013. Thus, the Assessing Officer assessed total income of the Appellant as under: Particulars Amount (INR) Total Income before as per computation filed 1,96,83,199 Add: Transfer Pricing Adjustment 2,21,07,342 Assessed Income 4,17,90,540 3.3. Being aggrieved, the Appellant preferred appeal before the CIT(A) challenging the rejection of the comparables selected by the Appellant and selection of new set of 21 comparables. It was contended on behalf of the Appellant that the nature of software developed by the Appellant was related to ERP Software. Appellant was a low risk captive software service provider providing services to its affiliates around the globe as per the terms of Inter-Company Agreements between Appellants and its Associates, and that the Appellant was remunerated on a cost plus 10% mark up for provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT Vs. Pentair Wat India (Pvt.) Ltd.: 381 ITR 216 while in response, the Learned Departmental Representative placed reliance on the judgment of the Hon ble Madras High Court in the case of Commissioner of Income Tax, Chennai Vs. Same Deutz-Fahr India (Pvt.) Ltd. : [2018] 89 taxmann.com 47 (Madras). 5.1. On perusal of the judgment of the Hon ble Bombay High Court in the case of Pentair Wat India (Pvt.) Ltd. (supra), we find that the Hon ble High Court had confirmed the order passed by the Tribunal whereby the Tribunal had concluded that three companies were not comparable to the Appellant in the that case as the said companies failed to pass the turnover the filter. In view of concurrent finding of CIT(A) and the Tribunal the High Court declined to frame substantial question of law and rejected the appeal preferred by the Revenue. On the other hand, in the case of Same Deutz-Fahr India (Pvt.) Ltd. (supra), the Hon ble Madras High Court has, while declining to frame substantial question of law in the appeal of the Revenue, had confirmed the order passed by the Tribunal wherein it was held that functionally similar company cannot be excluded as a comparable only on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the company is engaged in three distinct activities, but for the purpose of reporting the financials, the company does not disclose the segmental account for IT Services. Different scale of operation the company is a giant in software industry with a turnover of INR 932 crores pertaining to the relevant year. 7 Infosys Technologies Limited The company has major income from software services and products Abnormally high margin Different scale of operation , the turnover of the company is more than 1400 times of the appellant. Reliance can be place on the following case laws: Mercedes Benz Research and Development India Private Limited (2012 TII 69) We would also like to highlight that the company has also developed proprietary products Further, It may be pertinent to note that Infosys has been rejected by the Ld Commissioner of Income Tax (Appeals)- 15 on the same issue for the last assessment year. 8 xx xx Xx 9 LGS Global Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 xx xx Xx 14 Wipro Limited The primary source of income is from IT services The Company is operating under three segments during the year, namely, Global IT services and products, (comprising of IT services and products and BPO services segment). However, the IT services segment selected by the Ld AO also includes BPO services, research services for hardware design. The company owns significant brand intangible that has contributed to the immense growth of the company. Further, it may be pertinent to note that Wipro has been rejected by the Ld Commissioner of Income Tax (Appeals)- 15 on the ground that the company has a different functional profile and enjoys far greater market leadership with huge marketing spends. . (Emphasis Supplied) 5.2. We note that the CIT(A) has dealt with the objections of the Appellant in paragraph 4.15 of the order impugned which reads as under: 4.15 The contention of the appellant that Acropetal Technologies Ltd. having OP/TC @58.14% is not comparable because that compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly, LGS also engaged in technology enabled services which dependent upon product Systems be compared extent as this company is also engaged in support services software products . Of course Softsol India Ltd. is having business of sale of software, hence to some extent, the case not comparable, but the fact that this company has also earned income for providing related services, hence same cannot be ignored to review that profit margin such business cannot be as low shown by the appellant. Similar is fact the case of Tata Elxi Ltd. and Thirdware Solutions Ltd. Both these companies are also doing software related services. The case of Wipro Ltd. may be slightly different but one cannot afford ignore that profit such line of business cannot be low shown by the appellant. Infosys Technology Wipro Limited 5.3. On perusal of the above, we note that the CIT(A) had concluded that that Infosys Technology could not be compared while in the case of Wipro Limited the CIT(A) had observed that it was slightly different. The Revenue has not opposed/challenged the findings given by the CIT(A). The fact that the aforesaid two comparables were excluded by the CIT(A) in appeal for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal set of comparables. iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited 5.5. As regards, iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited we note that the CIT(A) has not dealt with the objections raised by the Appellant while the Assessing Officer had included the same given the reasoning that the primary source of income is from software development. Therefore, we deem it appropriate to remand the issue of exclusion of the aforesaid comparable back to the file of the Assessing Officer. Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited Aricent Technology 5.6. As regards, balance 5 comparables (namely Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited Aricent Technology Limited) we find that the Appellant had not raised objections to their inclusion in the ground of functional dissimilarity. The contention of the Appellant before the Tribunal is that the aforesaid 5 comparables be excluded on account of high turnover. We note that the CIT(A) had in paragraph 4.16 of the order impugned observed that Sonata Software Limited was a giant company having turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under Schedule 18, it has been stated that the company derives its revenue from software services and software products, whereas, on a perusal of the Profit Loss account for financial year 2008 09, we do not find any segmental details of the revenue earned from software services and software products. Thus, in absence of segmental details of the revenue earned, the company cannot be treated as comparable to the assessee. For these reasons also, the Co ordinate Bench of the Tribunal in the decisions cited by the learned Authorised Representative have rejected this company as a comparable. As these decisions are for the very same assessment year and the learned Departmental Representative has not brought to our notice any material difference in factual position, we are inclined to follow the Co ordinate Bench decisions referred to above and exclude this company from the list of comparables. 6.2. On perusal of the financial statements forming part of Annual Report 2009-10 of Kals Information Systems Limited (placed at page 830 to 857 of the paper-book), we find that there is no change in the manner of disclosure of revenues by this company. We do not find any segmental deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company as a comparable. 6.5. On perusal of the financial statements of the relevant previous year (placed at page 431 to 501 of the paper-book) we find that there is no change in the segmental reporting made by this company for the relevant previous year the company is stated to be operational in only one segment namely software development, which involves providing open and end-to-end web solutions, Off-shore Data Management, Data Warehousing, software consultancy, design and development of solutions, using the latest technologies. Concurring with the reasoning given by the Tribunal for excluding this company as a comparable in the case of the Appellant for the Assessment Year 2009-10, we direct the Assessing Officer to exclude Bodhtree Consulting Ltd. from the list of final set of comparable. Acropetal Technologies Limited 6.6. As regards Acropetal Technologies Limited, the Tribunal has, vide order dated 30/09/2016 passed in ITA No. 1685/Mum/2013 pertaining to Assessment Year 2009-10, held as under: 11. We have considered the submissions of the parties and perused the material available on record. On a perusal of the audited Balance Sheet of this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP incorporated in the final assessment order. 12. Having heard both the sides and gone through the relevant material on record, we find that the Annual report of this company is available at page 353 onwards of the paper book. Information regarding segmental reporting has been given at pages 376 and 377 of the paper book. There are only three segments, namely, (a) Engineering Design Services, (b) Information Technology Services and (c) Health care. Pursuant to the direction of the DRP, the TPO has included only Information Technology Services segment in the final set of comparables. Directors report of this company records that the company is uniquely placed with readymade Software products to cater to the needs of Hospitals and Healthcare Centres both in India and abroad especially in the USA . Profit and Loss account of this company appears at page 367 of the paper book, which records `Decrease in Inventories by (Rs.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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of E- commerce, network technology, internet infrastructure and other special technology areas. Its IT services include application development, system integration, IT consulting and staffing, IT project management, domestic and offshore outsourcing. SoftSol has diverse client-based ranging from large customers to small high-tech start-up companies. The Company's vision is to create a global enterprise by taking a leading role in the revolution in Information Technology to provide highly competent and innovative software solutions. 6.11. Further, on perusal of consolidated Profit Loss Account, we find that entire income has been recorded under the head software exports and no bifurcation or details of the same have been provided. It is stated therein that the company does not have separate reportable segments. 6.12. In view of the above, we find merit in the contention advanced on behalf of the Appellant that Softsol India Ltd. cannot be selected as a comparable on account of functional dissimilarly and lack of segmental data. Working Capital Adjustment 7. As regards contention of the Appellants for seeking working capital adjustment, we grant the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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