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2021 (7) TMI 319 - AT - Income TaxTP Adjustment - Comparable selection - exclusion of Thirdware from the final set of comparables for the purpose of benchmarking Software Development segment - HELD THAT - A close examination of decision in the said case reveals that the said company was accepted as comparable to a Software Development service provider on the basis of geographical segment reporting, i.e. domestic vis- -vis overseas. The issue was not examined with regard to segment reporting of the services and functional analysis - Hon'ble Jurisdictional High Court in the case of PTC Software (I) Pvt. Ltd. 2016 (9) TMI 1282 - BOMBAY HIGH COURT has held that Software Product and Software Development services are functionally different. The company engaged in selling of software product is incomparable to company rendering Software Development services. Thus, in view of the above, we hold that the decision rendered in the case of Steria (India) Ltd 2018 (4) TMI 578 - DELHI HIGH COURT is distinguishable, hence, the same does not support the case of Revenue. We hold that Thirdware being a product company is not a good comparable to a company engaged in software development services, therefore, the Assessing Officer is directed to exclude Thirdware from the final set of comparables. Working capital adjustment - HELD THAT - We find that in assessment year 2010-11 the CIT(A) had allowed working capital adjustment on final set of comparables. The Revenue challenged the same before the Tribunal 2019 (10) TMI 1241 - ITAT MUMBAI . The Coordinate Bench upheld the finding of CIT(A) in allowing working capital adjustment and rejected the ground raised by the Revenue. Similarly, in assessment year 2011-12 and 2013-14 the Tribunal allowed the benefit of working capital adjustment to the assessee following the order in assessment year 2010-11. No contrary material has been placed before us by the Revenue. Respectfully following the decision of Coordinate Bench in assessee's own case in the preceding assessment years and immediately succeeding assessment year, we direct the Assessing Officer to allow the benefit of working capital adjustment to the assessee. Consequently, ground No. 1.2.10 is allowed. Transfer Pricing (TP) adjustment made on account of provision of IT support and related services - Excel was excluded from list of comparables on account of abnormally fluctuating revenue. Similar view has been taken by the Tribunal in the case of M. Model Global Services 2019 (10) TMI 1439 - ITAT MUMBAI for exclusion of Excel from the final set of comparables. Respectfully following the decision of Co-ordinate Bench in the case of Banc Tec TPS India Pvt. Ltd. 2020 (7) TMI 367 - ITAT MUMBAI AO is directed to exclude Excel from the list of comparables for parity of reasons.
Issues Involved:
1. Transfer Pricing (TP) adjustment for Software Development Services. 2. Transfer Pricing (TP) adjustment for IT Support Services. 3. Working Capital Adjustment. Detailed Analysis: 1. Transfer Pricing Adjustment for Software Development Services: The primary issue here was the inclusion of Thirdware Solutions Ltd. ("Thirdware") as a comparable company for benchmarking the Arm's Length Price (ALP) of the assessee's Software Development Services. The assessee argued for the exclusion of Thirdware due to functional disparity, stating that Thirdware is a product company while the assessee is purely a Software Development services provider. The Tribunal had previously upheld the exclusion of Thirdware in the assessee's own cases for assessment years 2010-11, 2011-12, and 2013-14 on similar grounds. The Department contended that Thirdware should be included as it reported revenue primarily from Software Development services, with no revenue from product sales for the relevant financial year. However, the Tribunal noted that Thirdware's revenue included various activities, making it functionally different from the assessee. The Tribunal reiterated that software products and software development services are distinct activities, referencing the Bombay High Court's decision in CIT vs. PTC Software (I) Pvt. Ltd. Judgment: The Tribunal directed the exclusion of Thirdware from the list of comparables for Software Development services, allowing the assessee's ground No. 1.2.6. 2. Transfer Pricing Adjustment for IT Support Services: The assessee sought the exclusion of Excel Infoways Ltd. ("Excel") from the list of comparables for IT Support Services, citing fluctuating margins and the closure of its ITES segment. The Tribunal noted that Excel had been excluded in similar cases due to its fluctuating margins and diminishing revenue. The Department argued that segmental results were available, and diversification into Real Estate was not relevant. Judgment: The Tribunal directed the exclusion of Excel from the list of comparables, referencing previous decisions where Excel was excluded due to abnormal revenue fluctuations. The assessee's ground No. 2.2.6 was allowed. 3. Working Capital Adjustment: The assessee requested a working capital adjustment for both Software Development and IT Support services, arguing that differences in working capital should be adjusted for proper comparability analysis. The Tribunal had previously allowed such adjustments in the assessee's own cases for assessment years 2010-11, 2011-12, and 2013-14. Judgment: The Tribunal directed the Assessing Officer to allow the working capital adjustment for both Software Development and IT Support services, following the precedent set in previous years. Consequently, ground Nos. 1.2.10 and 2.2.9 were allowed. Conclusion: The appeal by the assessee was partly allowed. The Tribunal directed the exclusion of Thirdware and Excel from the list of comparables and allowed the working capital adjustment for both Software Development and IT Support services. The other grounds raised by the assessee were dismissed as not pressed. The order was pronounced in the open court on June 29, 2021.
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