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TMI Blog2017 (6) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... jected the same. The assessee has also raised objection before the DRP against rejection of risk adjustment, wherein the assessee was unsuccessful in seeking the desired relief. Before Tribunal the ld. AR of the assessee has reiterated the submissions made before the authorities below. The ld. AR of the assessee has not been able to show as to how the findings of authorities below on this issue are bad. We find no merit in the ground raised by the assessee, accordingly, the same is dismissed. Benefit of ± 5% as per the provisions of section 92C(2) - Held that:- The assessee has prayed for granting the benefit of ± 5% as per the provisions of section 92C(2) of the Act. The ld. AR has submitted that if Ancent Software International Limited and Quintegra Solutions Limited are included in the list of comparables; and Acropetal Technologies Ltd. and Thirdware Solutions Limited are excluded from the list of comparables, the average margins of the assessee will fit within ± 5% range. However, before us no working has been furnished by the ld. AR to substantiate his point. Accordingly, we remit this issue back to the file of TPO to consider the contentions of the assessee and decide this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, disregarding the fact that the company is also engaged in product development activities in addition to software services and hence is functionally different from the Appellant; 8. Erred in considering Thirdware Solutions Limited as a comparable, disregarding the fact that the company is engaged in product development services in addition to software services and does not report separate segmental accounts for the same and hence is functionally different from the Appellant; Working capital adjustment 12. Erred in not granting the benefit of working capital adjustment to the Appellant while determining the margins of comparable companies; Risk adjustment 13. Erred in not granting risk adjustments while comparing the margins of comparable companies with that of the Appellant; Benefit of +/-5% 14. Should have appreciated that benefit of +/-5% under proviso to Section 92C(2) of the Act be granted to the Appellant if the adjustment under transfer pricing falls within the range specified therein; Non Transfer pricing grounds Computational error 15. Erred in inadvertently considering the total income of the Appellant at ₹ 4,44,13,971 in the final assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions before the DRP. The DRP applied turnover filter and rejected six companies from the list of comparables made by the TPO. Further, the DRP rejected On-site filter applied by the TPO. The DRP added two companies in the list of comparables and thus, made list of 10 companies as the final list of comparables. The same is reproduced here-in-under : Sr. No. Name of Comparables PLI F.Y. 2009-10 1 Akshay Software Technologies Limited -1.07% 2 CG-VAK Software & Exports Limited (Segmental) -10.59% 3 Goldstone Technologies Limited 20.35% 4 Indium Software (India) Limited 7.16% 5 Persistent Systems Private Limited 30.50% 6 R S Software (India) Limited 9.53% 7 Thinksoft Global Services Limited 17.05% 8 Zylog Systems Limited 25.07% 9 Acropetal Technologies Ltd. (Seg.) 51.97% 10 Thirdware Solutions Limited 33.59 Arithmetic mean 18.36% 2.2 After the directions of the DRP, the TP adjustment was reduced to ₹ 1,19,53,508/-. The ld. AR submitted that in ground No. 5 of the appeal the assessee has assailed exclusion of 4 companies from list of comparables stated to be loss making companies. The companies excluded by the TPO are Ancent Software Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. AR contended that a perusal of the Annual Report of Acropetal Technologies Limited would show that for the Financial Year 2009-10 segmental bifurcation of revenue is given, but, there is no segmental bifurcation of revenue from IT service and IT product. The bifurcation is between Engineering Design Services, Information Technology Service and Healthcare. The ld. AR placed reliance on the decision of Mumbai Bench of the Tribunal in the case of QAD India Pvt. Ltd. Vs. Dy. Commissioner of Income Tax in ITA No. 1685/Mum/2013 for assessment year 2009-10 decided on 30-09-2016 to contend that Acropetal Technologies Limited is a product company and is not functionally comparable with company engaged in Software Development Services. To further buttress his submissions, the ld. AR placed reliance on the decision of Hyderabad Bench of the Tribunal in the case of Intoto Software India Private Ltd. Vs. ACIT in ITA No. 1196/Hyd/2010 for assessment year 2005-06 decided on 24-05-2013 which has been upheld by the Hon‟ble Andhra Pradesh High Court in ITA No. 233 of 2014 decided on 27-03-2014. The ld. AR submitted that the company engaged in providing on-site services has to be rejected f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided on 27-04-2016; iii. Demang Cranes & Components (India) Private Limited in ITA No. 120/PN/2011 for assessment year 2006-07 decided on 04-01-2012. 3. On the other hand Smt. Reena Jha Tripathi representing the Department vehemently supported the findings of DRP/Assessing Officer against which the assessee is in appeal. 4. We have heard the extensive submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered various decisions and the documents on which both the sides have placed reliance during the course of making submissions. The assessee in its appeal has primarily assailed the findings of authorities below in selecting/rejecting some of the comparables. 5. The assessee has raised 19 grounds in its appeal. The ground Nos. 1 and 2 are general in nature, hence, require no adjudication. 6. The ld. AR of the assessee stated at the Bar that he is not pressing ground Nos. 3, 4, 6, 9, 10 and 11. Accordingly, the aforesaid grounds are dismissed as not pressed. 7. In ground No. 5 the assessee has assailed the rejection of Ancent Software International Limited and Quintegra Solutions Limited on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are as under : Financial Year Profit/(Loss) before tax (in `) 2007-08 (1,65,87,281) 2008-09 (8,89,22,096) 2009-10 (5,18,75,427) Thus, it is evident from the perusal of the financial results of Onward Technologies Ltd. that Onward Technologies Ltd. is consistent loss making company, therefore, the said company cannot be considered as a good comparable." A perusal of order of the authorities below show that they have not examined the facts of the case in the light of earlier decision of the Tribunal and has excluded Ancent Software International Limited and Quintegra Solutions Limited merely on the basis of performance in single year. The findings of authorities below appear to be against the facts. Accordingly, we deem it appropriate to remit this issue back to the file of TPO to verify the financial results of both the said companies. The aforesaid companies should be excluded from the list of comparables only if they are consistent loss making companies as has been elucidate in the order of Tribunal in the case of M/s. Carraro Technologies India Pvt. Ltd. (supra). The assessee in ground No. 5 has also assailed the rejection of SIP Technologies and Exports Limited a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also referred to an extract from McKinsey's research on Indian software industry competitiveness to say that because of the differences in costs between a developed country and India, it acts as motivator for the companies located in developed countries to increase its offshore sourcing of services. In our considered opinion, whether on-site business model provides higher or lower margins in comparison with offshore development work, is not the issue of consideration. The important point is that the business models are quite different. Ostensibly, the logistics and other aspects of the two business models cannot be treated on par and certainly it would impact the relative margins of the two business models. Therefore, in our considered opinion, the business model of the assessee i.e. provision of off-shore services to its associated enterprise stands on a different footing than the on-site services being rendered by Akshy Software Technologies Limited. The assertions of the assessee that its arrangement with associated enterprise does not rule out provision of on-site services does not distract from the fact that the tested transactions undertaken by the assessee involve off-shor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We find that the Tribunal noted that the TPO had selected KALS Information System Ltd. and Thirdware Solution Ltd. as being comparable, whereas the case of assessee was that both the said concerns were functionally different. With regard to KALS Information System Ltd., it was pointed out that the said company was earning income from sale of application software and segmental information with respect to software services were available. In respect of Thirdware Solution Ltd., it was pointed out that the said concern was engaged in software development, trading of software licences and training implementation activities apart from software development. Another contention was raised that Thirdware Solution Ltd. was super profit earning company and was also engaged in the business of software licences and trading of implementation activities. The Tribunal taking note of the Special Bench decision in the case of Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT vide ITA No.7466/M/2012 in respect of super profits and inclusion of concern Thirdware Solution Ltd., held that the said concern was not comparable and observed as under:- "29. We have considered the rival arguments made by bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale-cum-licence of software which is available from the audited accounts, the details of which are as under : Schedule : Sales As on 31-03-2009 As on 31-03-2008 Sale of Licence 22,237,588 3,916,427 Software Services 89,177,023 76,724,371 Export from SEZ unit 478,572,420 263,971,033 Export from STPI unit 162,900,630 168,863,049 Revenue from Subscription 16,433,714 9,293,874 770,321,376 522,768,754 Apart from the above the company is also having dividend income, interest income and profit on sale of investment as well as premium of software contract totalling to ₹ 2,30,48,603/- which is as per Schedule-13 "other sources". From the various decisions relied on by the Ld. Counsel for the assessee we find Thirdware Solutions Ltd. has been rejected on the ground that it is functionally dissimilar. The Hyderabad Bench of the Tribunal in the case of Intoto Software India Pvt. Ltd. Vs. ACIT and Viceversa in consolidated order dated 24-05- 2013 for A.Y. 2005-06 and 2007-08 at para 26 of the order has observed as under : "26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be excluded from the final list of comparables. Accordingly, ground No. 8 raised in the appeal by the assessee is allowed. 10. In ground No. 12 the assessee has prayed for granting working capital adjustment while determining the margins of comparable companies. The ld. AR submitted that the working capital adjustment has to be allowed in view of various decisions of the Tribunal. Reliance has been placed on the decision of Tribunal in the case of Demag Cranes & Components (India) Private Limited Vs. Deputy Commissioner of Income Tax (supra) and ACIT Vs. Starnet Networks India Pvt. Ltd. (supra). In both the above cases the Tribunal granted working capital adjustment to the assessee by following earlier order of the Tribunal in their respective cases. The concept of granting working capital adjustment is not an alien concept, however, the assessee has to show legitimacy for grant of working capital adjustment in its case. The assessee has also placed reliance on the decision of Demag Cranes & Components (India) Pvt. Limited Vs. DCIT in ITA No. 120/PN/2011 for assessment year 2006-07 decided on 04-01-2012 wherein the detailed discussion has been made for granting working capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order instead of ₹ 1,21,75,260/-. The Assessing Officer is directed to verify the claim of assessee and rectify the same, if there is any error. Accordingly, ground No. 15 raised in the appeal by the assessee is allowed for statistical purpose. 14. In ground Nos. 16 to 18, the assessee has prayed for deleting the levy of interest u/s. 234B and 234D of the Act. Since, charging of interest u/s. 234B and 234D is mandatory and consequential, therefore, ground Nos. 16 to 18 raised in the appeal is dismissed. 15. In ground No. 19, the assessee has assailed initiation of penalty u/s. 271(1)(c) of the Act. Assailing recording of satisfaction for levy of penalty in assessment proceedings at this stage is pre-mature. Accordingly, ground No. 19 is dismissed. 16. In the result, the appeal of the assessee is partly allowed in the aforesaid terms. ITA No. 552/PUN/2015 (Revenue's Appeal) 17. The Department in its appeal has raised three grounds. The same are reproduced as under : "1. On the facts and in the circumstances of the case, whether the learned DRP was right in law and on facts in directing the exclusion of companies having turnover above 200 cores without appreciating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite services and off-site services have different business model. Therefore, the companies carrying on activities on-site cannot be compared with companies performing activities off-site. 19. Controverting the submissions made on behalf of the Department the ld. AR submitted that the turnover filter is applied to draw a realistic result from the selected comparable companies. It is important to have comparison between the two companies working on the same scale. The companies having very high turnover enjoy economics of large scale operations, therefore, turnover filter should be applied to remove companies having very high or low turnover. The application of turnover filter has legal backing. The Tribunal in catena of judgments have approved application of turnover filter. 20. The first ground raised in the appeal by the Department is against application of turnover filter for rejecting the comparables. The Tribunal in catena of judgments has held the turnover filter has to be applied to remove aberrations in comparative analysis and to rationalize the comparables with the assessee company. The Special Bench of the Tribunal in the case of Dy. Commissioner of Income Tax Vs. Qurar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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