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TMI Blog2018 (4) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed by the ACIT, Circle - 7(1)(2), Bengaluru, dt. 28.04.2017, in pursuance to the directions of the DRP, for the assessment year 2013-14, on the following grounds: ADJUSTMENT UNDER SECTION 92CA TO INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES 2. That the learned AO/Transfer Pricing Officer ('learned TPO') and the learned DRP erred in not appreciating that the Appellant had prepared the transfer pricing documentation bona fide and in good faith in compliance with the provisions of Section 92D of the Income-tax Act, 1961 (the Act') read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'). 3. That the learned DRP erred both in facts and law in confirming the action of the learned AO/TPO by making an adjustment to the price charged by the Appellant in respect of software development services ('SWD') provided to its associated enterprises by INR 116,865,282, holding that the international transaction does not satisfy the arm's length principle envisaged under the Act and in doing so, the learned DRP grossly erred in; (a) Upholding the rejection of comparability analysis of the Appellant in the TP docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout prejudice to the above, confirming the action of the learned TPO of selecting Persistent Systems Ltd. although it is functionally incomparable to the Appellant, engaged in software product development, has extraordinary events, having diversified operations without segmental information, besides otherwise failing the test of comparability. (i) Upholding the action of the learned TPO of rejecting companies that are functionally comparable to the Appellant such as Thinksoft Global Services Limited and Akshay Software Technologies Limited. (j) Upholding the learned TPO's action in rejecting the Appellant's contention against the use of information u/s. 133(6) of the Act and stating that since section 133(6) is used to verify the information given in the Annual Report and such information supports the information available in the Annual Report, in such circumstances the use of information collected under section 133(6) is appropriate. (k) Upholding the learned TPO's approach of not providing risk adjustment and in thus ignoring the risk insulated nature of the services provided by the Appellant and the fact that full-fledged entrepreneurial companies ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt Provision of Software development and maintainence 1,063,290,429 Issue of Shares 92,246,854 Refund of share application money 312 Retention bonus paid to employees on behalf of ultimate holding company 19,469,916 Total 1,175,007,511 The assessee has submitted that the operating profit/operating cost of the assessee was 10% and operating profit/operating revenue was 9.09%. After receiving reference from the AO, the TPO asked the assessee to submit the statutory document maintained by it u/s. 92D(3) of the Act. It was the case of the assessee that the international transactions have been classified into software development segments in the TP document and the search and comparability analysis was done using the software development services as the primary function. As a result of the search process the assessee had adopted 26 companies in respect of software development activities as comparables for benchmarking analysis and has adopted the TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India Overseas. Thus, the functional profile of the company is different from that of a software. 2. Thinksoft Global Services Ltd : Thinksoft Global Services is primarily engaged in software testing services focussing on banking, financial and insurance services industry. Thus it is functionally different and hence rejected. On the basis of application of filters mentioned above, the TPO has selected various companies and thereafter for better clarity regarding the FAR analysis, the TPO issued notice u/s. 133(6) calling for further details for functional analysis. The TPO arrived at the conclusion of keeping the following seven comparables for the purpose of computing the ALP of the assessee, as under : Sl. No. Name of the comparable OP/OC 1 CG-VAK Software Exports Ltd. 20.45% 2 ICRA Techno Aalytics Ltd. 17.10% 3 Larsen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ARs of the assessee. Hence, the details submitted by the assessee in regard to these companies are in nature of additional evidence, as the issues were never raised before the TPO. However, the assessee has not given any justification for admission of these additional evidences at this stage. The assessee has not given any reason for not taking up these objections and not furnishing these documents before the TPO to support its case. The assessee has not given any explanation as to what prevented it from producing such documents or making such claim before the TPO at the time of transfer pricing proceedings before the TPO, especially when sufficient opportunity of being heard was given to it by the TPO. The assessee has not brought anything on record to show that the details/documents could not have been produced by it before TPO despite its best efforts. Admission of the additional evidence cannot be claimed as a matter of right and it is the duty of the assessee to explain the circumstances which prevented it from submitting such documents before the lower authorities. Since the assessee WW to provide sufficient cause to furnish these documents before the TPO, the same cannot, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port, CG - VAK Software Exports Ltd. is a product company and is therefore cannot be compared with the assessee. (iii) CG - VAK Software Exports Ltd. is engaged in ITES activities (BPO) as is clear from page 721, where the BPO revenue has mentioned as ₹ 14,43,421/- and the software services revenue is mentioned as ₹ 8,54,77,282/-. It was submitted that as CG - VAK Software Exports Ltd. is into BPO business also this company is required to be excluded. (iv) That there was an exceptional rise in the profit of the assessee in comparison to the previous year and this is also relatable to OPD activities of the assessee. On the basis of the above it was submitted that CG - VAK Software Exports Ltd. being a product company is not comparable with the assessee company and it should be excluded. 6. On the other hand, the Ld. DR has supported the order of the lower authorities and has submitted that CG - VAK Software Exports Ltd. is not a product company and is into software development and therefore the same is required to be retained as comparable. 7. We have heard the rival contention and perused the record. The activities mentioned hereinabove in the annual repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which one of us i.e., the Accountant Member was a party to the order, remanded the matter back to the file of the TPO for examining afresh the contention of the assessee as well as with respect to the functionality of these two comparables. 9. On the other hand the Ld. DR has submitted that in terms of the decision of the Tribunal in Microsoft Research Lab India (P.) Ltd. (supra), the matter may be remitted back to the file of the TPO for examining afresh in the light of the observations made by the Tribunal in the said matter. 10. We have heard the rival contention and perused the record. In the light of the reliance by both parties on Microsoft Research Lab India (P.) Ltd. (supra), we would like to remand the matter to the file of TPO to the similar effect as done in the matter of Microsoft Research Lab India (P.) Ltd. (supra) however we would like to add a word of caution that it will be unsafe to follow one decision passed by the Tribunal in any other case unless the assessee demonstrates that the profile of the assessee company as well as the assessee in other case are materially comparable with each other and there is no element of distinction between the profile of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts are recognized prorate over the period of the contract. Revenues from sale of software licenses, net of discounts are recognized upon delivery of goods to customers. Dividend income is accounted when the right to receive it is established. Interest income is accounted on accrual basis. Further our attention was drawn to page 582 to Note 20 - Revenue from Operations, where income from software services was ₹ 19,83,23,358; Commission received was ₹ 5,68,690 and Sale of software licences was shown at ₹ 5,91,780/-. It was the case that Akshay Software Technologies Ltd. is covered by the decision of Kolkata Tribunal in the matter of Labvantage Solution (P.) Ltd. v. Dy. CIT [ITA.617/Kol/2015, dt.19.10.2016],, at page 2008 of the paper book where the Tribunal in para 8.5 has directed for inclusion of Akshay Software Technologies Ltd. in the list of comparables. 14. On the other hand the Ld. DR has mentioned that Akshay Software Technologies Ltd. is dealing in procurement, installation, implementation, support and maintenance of ARP products and services and it was submitted that no segmental information with respect to the various activities were availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In our considered opinion the facts of the present case are different than the facts narrated hereinabove in the matter of Labvantage Solution (P.) Ltd. (supra). Therefore this company cannot be included in the list of comparables. Accordingly this ground is rejected. ii) Thinksoft Global services Ltd. : 16. In respect to Thinksoft Global Services Ltd. the assessee has urged before us for inclusion of this company as according to the assessee, it is functionally comparable company as it is engaged in software testing. Our attention was drawn by the Ld. AR to pages 627 628 which as under : Software Testing Market While testing as a practice dales back as far as software development itself, it is only recently that it has become recognized as a distinct expertise and an area which can provide true competitive advantage to a development team and the business as a whole. This change in perception, allied to a growing need for software testing in an increasingly applications-reliant world, has made testing, and the broader process of software quality, a growing concern The testing process is believed to consume between one third and one hall of all software dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombination of client site services and offshore services. Large amount of the work is earned offshore and Thinksoft sets up and operates dedicated India-based testing centers for customers. Thinksofts proven credentials have resulted in us developing deep relationships with Industry leaders in the Banking Financial Services space. Our relationship with every client spans multiple divisions within the client's organization and different geographies covered by the client. For example, with Citibank in the past, we have done testing for various divisions, which include, Private Banking, Credit Cards, Investment Banking Retail Banking, Corporate Banking across India, USA, Spain, Hungary, etc. Business Outlook Given the high level o1 competition among vendors, we believe that that to attain a leadership position among the service providers, new and innovative growth strategies have to be adopted. In our case, this would include leveraging new delivery models, creating our IP to scale up, increasing our IP investment in automation across the test value chain and also entering into partnerships with toots/solution providers to offer maximum business value to our custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he terms of contracts. Interest income Interest on deployment of surplus funds is recognized using the time-proportion method. Further the functions performed by Thinksoft Global Services Ltd. is available from the profile of the company to show that it is into software testing company. In our view for the software developing, different skills are required for the purpose of testing the software, the requirement of the vendors are required to be considered and keeping that requirement in mind the software is required to be tested. In our view the existence of the software is a prerequisite for testing of the software and hence the functions of the assessee were of software development, though after developing it, it may be required to be tested. But for the purposes of comparing the functions profile of the two companies, namely the assessee and Thinksoft Global Services Ltd., they should fall within the broad parameters of functional comparability. In the case of software development, various languages, skills and experience is required to development a software and customise it for the requirement of the customer. For the purpose of testing the software the requirem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conclusion of the DRP in para 10.3 of its order is reproduced elsewhere in this order. 20. On the other hand the Ld. DR has submitted that as the facts were not before the TPO nor raised by the assessee, therefore the assessee cannot be given a second chance to agitate the inclusion of comparables before the DRP because it was for the assessee to raise all its claim before the TPO. 21. We have heard the rival contentions and perused the material. It is an admitted position that the assessee has raised the ground for inclusion of these four companies before the DRP and filed the supporting documents/evidence which show that these four companies are functionally comparable with that of the assessee. However, the DRP has dismissed the contention of the assessee on the ground that these were not raised before the TPO. In our considered opinion approach of the DRP was not correct as is clear from the scheme of Income-tax Act, the proceedings before the DRP is a continuation of the assessment proceedings and the purpose of providing the proceedings before the DRP is to ensure due and fair adjudication of the ALP by comparing the operating profit/operating cost of the assessee wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the working capital position, vis-a-vis the comparables. But the assessee had was not able to demonstrate that the working capital differences had impacted its profits and the detailed submissions were made before the DRP as given in para 12.1 of the DRP order. The Ld. AR has submitted before us that as the Tribunal is remanding six companies to be examined by the TPO, therefore this issue of working capital adjustment also be remanded back to the file of the TPO for examining afresh. 23. On the other hand the Ld. DR opposed the contention of the Ld. AR. 24. We have gone through the records and perused the orders passed by the DRP as well as the TPO. In our view, it is for the assessee to prove as to how the working capital had an impact on its profit and is required to follow the analysis as mentioned in para 12.1 of the DRP order. Needful has not been done despite opportunity granted by the DRP. However considering the totality of the circumstances, we are remitting back six companies for consideration by the TPO. We deem it fit to remand this issue afresh. Needless to say that the TPO shall be bound by the decision of the ITAT, Chennai Benches in Mobis India Ltd. v. Dy. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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