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2021 (1) TMI 908 - AT - Income TaxTP Adjustment - comparable selection - Software Development services - HELD THAT - Kals Information Technology System Ltd - Revenue from sale of products and development of software is concerned, the same has been combined under the segment Application Software . The above discussion deciphers that this company is engaged in software products as well as Software Development services, income from both of which streams has been clubbed under the segment of Application Software . Since the assessee in the instant case is involved only in rendering Software Development services to its AEs and is not into any software products, we hold that this company cannot be considered as a comparable. We, therefore, direct to exclude it from the list of comparables. Acropetal (Segmental) - It goes without saying that on-site services business model entails its own risks and rewards, which are incomparable to the services rendered from the business model of rendering services from own premises. One cannot construe both as one and the same. The assessee under consideration is not rendering on-site services - this company is also into Products, which is borne out from its balance sheet showing value of Inventories and work in progress at ₹ 3.37 crore. - This company has clubbed both the Product Development services and on-site services in one overall segment of Information Technology services . Thus, it is overt that the IT services segment of this company, which has been construed by the TPO as comparable, cannot be so held as the assessee is neither rendering on-site services nor engaged in software products. We, therefore, direct to exclude this company from the list of comparables. Thirdware Solution Ltd. - this company, apart from rendering software services, is also engaged in software products. Segmental information has been given on the basis of geographical segments. Thus, it becomes crystal clear that no information regarding revenue from software services distinct from other activities is available on record. As the assessee is engaged only in rendering software development services, this company on the basis of figures available on record, cannot be considered as comparable. We, therefore, direct to exclude it from the list of comparables. Persistent Systems Private Ltd - Since the assessee has abandoned before the Tribunal the basis of turnover filter as was originally taken and harped on a new base of functional differences for exclusion of this company for the first time, we, being an appellate authority, cannot straight away accept or reject such contention unless the authorities below apply their mind to the functional differences as has been sought by the assessee. Without going into the merits, we set aside the impugned order and remit the matter to the file of AO/TPO with a direction to examine the assessee's contention on functional dissimilarities and then decide the question of its inclusion. Maveric Systems Ltd. - The assessee has placed on record a copy of the Annual report of the company for the year under consideration by claiming that the same is now available in the public domain. As regards the TPO's contention that the foreign exchange earnings of this company were less than 75%, we find from the Schedule 9 that it earned revenues from overseas at ₹ 34.86 crore as against Domestic revenue at ₹ 11.61 crore. Thus, it is evident that foreign exchange revenue of this company is more than 75%. Since the comparability or otherwise of this company has not been examined on merits because of the non-availability of the Annual report for the year under consideration, which has now been placed on record, we direct the AO/TPO to examine whether this company is comparable on merits. Quintegra Solutions Ltd.- except for incurring expenses in foreign currency, there is no mention of rendering on-site services. This company has also branches in certain countries outside India and the expenses in foreign currency were incurred by such branches. The Ld. DR also could not point out from the Annual report of this company that it rendered any on-site services. In such circumstances, we direct to include this company in the list of comparables. Silverline Technologies Ltd. - Since the expenses in foreign currency constitute a substantial percentage of its revenue and there is no reference to any foreign branch, it becomes evident that this company is engaged in rendering on-site services and the major component of its revenue is from such on-site services only. That being the position, this company loses its comparability tag with the assessee company. We, therefore, reverse the view of the DRP and direct to exclude it from the list of comparables. Thinksoft Global Services Pvt. Ltd. be excluded from the list of comparables and consequently reverse the view taken by the DRP on this issue. Accentia Technologies Ltd directed to exclude this company from the list of comparables. Coral Hubs Ltd. (Vishal Technologies Ltd.) this company is mainly engaged in outsourcing its business activities which is further proved from the fact that the Personnel cost is only ₹ 1.89 crore as against outsourcing cost of ₹ 54.47 crore. It goes without saying that outsourcing services is an altogether different business model vis-a-vis rendering services by engaging one's own employees and facilities - we direct to exclude this company from the list of comparables. Jeevan Softech (BPO segment) - The view point of the assessee that ITES segment is not comparable because of the inclusion of ERP revenue is, therefore, not sustainable because the figures of revenue and profit from the BPO segment is separately available and the nature of work admittedly matches with that of the assessee. The Directors' report unequivocally divulges that the nature of work under the ERP division is all in all different. It has been mentioned that 'Your ERP division has also successfully completed the project implementation for various clients. For the current financial year, ERP division has chalked out new marketing strategies with a focused approach developing specialized vertical solutions for the prospects across India, standard horizontal markets and foray into the professional services segment for overseas clients'. Thus, it is palpable that the ERP division is not engaged in rendering any ITES. The same, therefore, cannot be clubbed with the BPO revenues of this company, for which separate figures are available in the Segmental reporting'. We, therefore, countenance the inclusion of the BPO segment of this company with Revenue of ₹ 141.10 lakh and income of ₹ 52.99 lakh. Informed Technologies Ltd - assessee has challenged the inclusion of this company with the help of an additional ground - Several orders have been passed by various Benches of the Tribunal holding that an assessee is entitled to challenge a comparable for the first time before the Tribunal notwithstanding the fact that it remained uncontested before the TPO or the DPO. In view of the fact that the comparability of this company has not been examined by the authorities below, we direct the AO/TPO to scrutinize the comparability of Informed Technology and then decide on its inclusion or otherwise in the final tally of comparables. Not allowing working capital adjustment - not allowing working capital adjustment - HELD THAT - We find from directions given by the DRP that the AO was directed to examine the computation of working capital adjustment worked out by the assessee - while giving effect to the directions of the DRP, this direction remained to be complied with. We, therefore, direct the AO/TPO to give effect to the direction given by the DRP . Risk adjustment - We remit the matter to the file of AO/TPO for computing the risk adjustment in the light of the directions given for earlier years.
Issues Involved:
1. Provision of Software Development Services 2. Provision of IT Enabled Services (ITES) 3. Provision of Sales Support Services 4. Working Capital Adjustment 5. Risk Adjustment I. Provision of Software Development Services: The first issue concerns the transfer pricing addition of ?15,11,98,577/- made by the AO in the international transaction of "Software Development services." The assessee declared the value of the international transaction at ?2,49,14,47,288/- and applied the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO determined the ALP at ?2,77,77,86,057/- leading to a proposed adjustment of ?28,46,97,425/-. After the DRP's intervention, the adjustment was recomputed to ?15,11,98,577/-. Both parties appealed on their respective stands. The Tribunal noted that the dispute was confined to the comparability of certain companies included or excluded by the DRP. The assessee provides Software Development services, including new product development and modifications based on specifications from BMC overseas entities. The Tribunal examined the functional profile of the assessee and the comparables. Comparables Analysis: - Kals Information Technology System Ltd.: Excluded due to involvement in both software products and services, unlike the assessee which only provides software development services. - Acropetal (Segmental): Excluded due to rendering on-site development services and involvement in software products. - Thirdware Solution Ltd.: Excluded due to engagement in software products and lack of segmental information. - Persistent Systems Private Ltd.: Remitted to AO/TPO to examine functional dissimilarities as the issue was raised for the first time before the Tribunal. - Maveric Systems Ltd.: Remitted to AO/TPO to examine comparability on merits as the Annual report is now available. - Quintegra Solutions Ltd.: Included as it did not persistently incur losses and there was no evidence of rendering on-site services. Revenue's Appeal: - RS Software India Ltd.: Included as there was no evidence of rendering on-site services. - Silverline Technologies Ltd.: Excluded due to substantial revenue from on-site services. - Thinksoft Global Services Pvt. Ltd.: Excluded due to revenue from on-site services. II. Provision of IT Enabled Services (ITES): The assessee declared an international transaction of ?10,21,67,498/- and applied TNMM. The TPO made alterations to the list of comparables, and the assessee challenged four companies. Comparables Analysis: - Accentia Technologies Ltd.: Excluded as per the Tribunal's order for the preceding year. - Coral Hubs Ltd. (Vishal Technologies Ltd.): Excluded due to outsourcing business model and involvement in KPO services. - Jeevan Softech (BPO segment): Included only the BPO segment as it matches the assessee's services. - Informed Technologies Ltd.: Remitted to AO/TPO for examination as it was challenged for the first time before the Tribunal. III. Provision of Sales Support Services: The assessee reported an international transaction of ?12,86,10,541/- and applied TNMM. The TPO included ICRA Online Ltd. (Segment), which the assessee challenged. Comparables Analysis: - ICRA Online Ltd.: Excluded as its revenue from the Information Services segment pertains to software products, not comparable to sales support services. IV. Working Capital Adjustment: The DRP directed the AO to examine the computation of working capital adjustment, which was not complied with. The Tribunal directed the AO/TPO to give effect to the DRP's direction. V. Risk Adjustment: The issue was remitted to AO/TPO for computing risk adjustment following the Tribunal's orders in the assessee's own case for earlier years. Conclusion: The Tribunal set aside the impugned order on the determination of ALP in the three segments and remitted the matter to the AO/TPO for fresh determination in light of the observations made. The assessee is to be given a reasonable opportunity of hearing before any decision is taken. Both appeals were partly allowed.
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