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TMI Blog2018 (6) TMI 1628X X X X Extracts X X X X X X X X Extracts X X X X ..... er and ordered to exclude the same on the ground that it is providing high end technical services and as such, is a KPO and not a software development company. So, in view of the matter, we order to exclude E-Zest from final set of comparables. Working capital adjustment denied - HELD THAT:- The taxpayer has filed detailed working capital computation and has also filed submissions on working capital adjustment as per OECD Guidelines. It is also an uncontroverted fact that the working capital adjustment has been allowed to the taxpayer by the TPO in AY 2012-13 and business model of the taxpayer has not undergone any change. In these circumstances, we are of the considered view that the issue is required to be sent back to AO/TPO to decide allowability of working capital adjustment in view of the settled principle of law applied by the Revenue itself in taxpayer s own case for AY 2012-13 after providing an opportunity of being heard to the taxpayer. Computing correct margins of the comparables - HELD THAT:- We are of the considered view that when the taxpayer has argued its case on the basis of facts and figures brought on record by way of evidence as well as submissions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned order dated 08.04.2015, passed by the AO under section 144C read with section 143 (3) of the Income-tax Act, 1961 (for short the Act ) qua the assessment year 2011-12 in consonance with the orders passed by the ld. CIT (A)/TPO on the grounds inter alia that :- 1. That on the facts and in the circumstances of the case, the order passed by the Learned Assessing Officer ( Ld. AO ) is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in assessment order based on which he reached the conclusion that it was expedient and necessary to refer the matter to the Ld. Transfer Pricing Officer ( Ld. TPO ) for computation of the arm's length price, as is required under section 92CA (1) of the Income Tax Act, 1961 ( Act ). 3. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble Commissioner of Income Tax (Appeals) ( CIT(A) ) erred in making an addition to the returned income of the Appellant by re-computing the arm's length price of the international transactions un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the ld. CIT (A)/TPO on the grounds inter alia that:- 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in rejecting the comparable viz. 1. Larsen Turbo InfoTech Ltd. 2. Persistent Systems Ltd, 3.Sasken Communication Technologies Ltd., 4. Zylog Systems Ltd., 5. Wipro Technologies Ltd., 6. Infosys Ltd. by ignoring the facts and without passing a speaking order. 4. Appellant, M/s. Clear 2 Pay India Pvt. Ltd. (for short the taxpayer ), by filing the present appeal (ITA No.594/Del/2017 AY 2012-13) sought to set aside the impugned order dated 30.11.2016, passed by the AO under section 144C read with section 143 (3) of the Income-tax Act, 1961 (for short the Act ) qua the assessment year 2012-13 in consonance with the orders passed by the ld. CIT (A)/TPO on the grounds inter alia that :- 1. That on the facts and in the circumstances of the case, the order passed by the Learned Assessing Officer ( Ld. AO ) is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Technology Park Unit (STPI) under Software Technologies Park Scheme of Government of India. The taxpayer is engaged in providing routine software development and getting services to ISTS and is also providing services to unrelated parties customers overseas. During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AE) as under :- Sl.No. Nature of Transactions Value Rs. 1 Provision of Software Development Services 150818592 6. The taxpayer in its TP analysis applied Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) with Operating Profit / Operating Cost (OP/OC) as Profit Level Indicator (PLI) and used multiple years data in order to benchmark its international transactions. The taxpayer computed its own OP/OC at 8.30% as against 7.21% of the comparable company and found its international transactions at arm s length. 7. TPO rejected the TP analysis made by the taxpayer being based on multiple years data and com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems Ltd. 23.08% 11. R.S. Software (India) Ltd. 16.20% 12. Sankhya Infotech Limited 26.20% 13. Sasken Communication Technologies Ltd. 24.36% 14. Tata Elxsi Ltd. (segment) 13.00% 15. Thirdware Solutions 16.19% 16. Wipro Technologies Ltd. 54.42% 17. Zylog Systems Ltd. 28.74% Average 20.28% 11. AO on the basis of his TP analysis computed the PLI of comparables at 20.28% as against 8.3% of the taxpayer and thereby proposed the TP adjustment of ₹ 1,63,95,979/-. 12. Undisputedly, the taxpayer has entered into only one transaction relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solutions as per their specific requirement. Perusal of Profit Loss account, available at page 495 of Paper Book I, shows that Persistent has sale of software services and products with no segmental data. The ld. DR for the Revenue contended that the taxpayer has failed to point out as to which product has been developed. But this contention is not tenable in the face of the P L account which shows the income jointly from sale of software services and product. 17. Coordinate Bench of the Tribunal in case of Alcatel Lucent India Ltd. vs. DCIT in ITA No.6856/Del/2015 for AY 2011-12 ordered to exclude Persistent being a product company having huge intangibles as a comparable with routine software development services provider. 18. In view of the facts narrated above, we are of the considered view that Persistent being a product development company and into diversified services having no segmental information is not a valid comparable vis- -vis the taxpayer which is a routine software development service provider, so we order to exclude the same from the final set of comparables. SANKHYA INFOTECH LTD. (SANKHYA) 19. The taxpayer raised obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provider. 24. Coordinate Bench of the Tribunal in M/s. Symantec Software and Services India Pvt. Ltd. Vs. DCIT in ITA No.614/Del/2016 for AY 2011-12 examined comparability of the taxpayer with routine software service provider and ordered to exclude the same on the ground that it is providing high end technical services and as such, is a KPO and not a software development company. So, in view of the matter, we order to exclude E-Zest from final set of comparables. WORKING CAPITAL ADJUSTMENT ISSUE 25. The TPO has denied the working capital adjustment to the taxpayer on the ground that the taxpayer has not specifically sought working capital adjustment but has stated that there are differences between itself and the comparables used by the TPO on the ground that the level of inventories, debtors and creditors varies as percentage of total cost. TPO also mentioned that the taxpayer has failed to discharge the primary onus to prove the need for such comparability exercise, hence rejected the claim of the taxpayer for working capital adjustment. 26. The taxpayer has filed detailed working capital computation, available at page 190 of the Pape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Investment Advisors (India) Pvt. Ltd. Versus DCIT (2015) 376 ITR 183 (Del). Ld. DR also relied upon the order passed by the TPO. 33. However, the taxpayer had challenged inclusion of Infosys by the TPO on grounds of functional dissimilarity; non-availability of segmental information; Infosys is a giant company having high brand value; having its own research and development centre; and it is a full-fledged risk bearing company. 34. Perusal of profit loss account of the taxpayer, available at page 393 of the paper book, shows that the taxpayer has never been into development of product rather a pure software development and other services provider as the entire income is from SDOS. 35. Suitability of Infosys vis- -vis a captive software service provider has been examined by the Hon ble Delhi High Court in case cited as CIT vs. Agnity India Technologies Pvt. Ltd. (2013) 36 taxmann.com 289 (Delhi) and found to be an invalid comparable by returning following findings : 5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India) 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondentassessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted. 7. Learned counsel for the appellant Revenue during the course of hearing, drew our attention to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally not comparable being into technology infrastructure; support products; and software related support services activities; that Wipro has generated entire revenue pursuant to the master service agreement between Wipro and Citi Group services; that Wipro has huge scale of operation and without prejudice, correct margin at 52.09% instead of 54.42% be taken; and relied upon Agilis Information Technologies Pvt. Ltd. vs. ITO ITA No.1063/Del/2016. 39. Coordinate Bench of the Tribunal in case cited as Agilis Information Technologies Ltd. (supra) examined the comparability of Wipro vis- -vis Agilis, routine software service provider and ordered to exclude the same on ground of functional dissimilarity being a software product company having launched its product in the name of FLOW for the retail sector users in 2012, which is outcome of research and development. 40. Keeping in view the functional dissimilarity of Wipro vis- vis taxpayer, and the fact that Wipro has generated its entire revenue pursuant to the master service agreement having its huge scale of operation as compared to taxpayer and the fact that the taxpayer is a routine captive service prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Revenue from time-and-material contracts is recognized on the basis of man hours spent and materials utilized for the development of software and billable in accordance with the terms of the contracts with clients. Revenue from fixed price/fixe time contracts are recognized as per the proportionate completion method. Revenue from technical service for software application is recognized on completion of the service. 44. When we examine the aforesaid recognition in the light of the Profit Loss account, available at page 649 of the paper book, Zylog is having income from software development services and product with no segmental financials available. Similarly, page 665 of the annual report shows that Zylog operates in IT services, there is no other business segment. However, around 98% of the revenue accrues in USA and consequently, there is no other reportable geographical segment. 45. Furthermore, when we examine strength of Zylog explained at page 625 of the paper book, it is given as under :- OUR STRENGTHS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be a valid comparable vis- -vis the taxpayer which is a routine captive software development service provider, hence ld. CIT (A) has rightly excluded Zylog as comparable. LARSEN TOUBRO INFOTECH LIMITED (L T) 48. The ld. DR for the Revenue challenged the exclusion of L T by the ld. CIT (A) on the ground that no income from licence of product has been shown rather 100% income is from the software export. However, when we examine profit loss account of L T at page 238 of the paper book-1, L T has shown this entire income from software development services and products. However, complete segmental financials are not available. Furthermore, the taxpayer is having intangibles of ₹ 37,78,99,720/- during the year under assessment as against nil intangibles with the taxpayer. So, in these circumstances, L T cannot be a valid comparable vis- -vis the taxpayer which is a routine captive software development service provider and ld. CIT (A) has rightly excluded the same. PERSISTENT SYSTEMS LTD. (PERSISTENT) 49. The ld. DR challenged the exclusion of Persistent by contending that no income from licence of product h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled fresh search and updated margin of comparable companies at 7.77% as against its own margin of 9.95% and again found its international transactions at arm s length. 52. TPO accepted the TNMM as the MAM with OP/OC as PLI to benchmark the international transaction but used current year data to compute the margin of comparables. TPO rejected 16 comparable companies out of 25 chosen by the taxpayer and identified six additional companies and finally selected 15 comparables for benchmarking the international transactions having adjusted margin of PLI of comparable at 16.53% which are as under :- Sl.No. Company Long Name WC adjusted OP/OC 1. Akshay Software Technologies Ltd. 8.51% 2. Cigniti Tech 6.68% 3. Celstream Technologies Pvt. Ltd. 10.88% 4. Evoke Tech 11.81% 5. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd. 10.88% 10.68% 3. Cigniti Technologies Ltd. 6.68% 5.97% 4. Evoke Technologies Ltd. 11.81% 11.90% 5. Infosys Ltd. 41.04% 40.55% 6. Larsen Toubro Infotech Ltd. 23.13% 22.45% 7. Lucid Software Ltd. 10.54% 12.49% 8. Mindtree Ltd. (Segment) 18.34% 13.66% 9. Persistent Systems Ltd. 26.13% 24.88% 10. Sankhya Infotech Limited 3.79% -0.08% 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue; having its own research and development centre; and it is a full-fledged risk bearing company. 58. When we examine the contentions raised by the taxpayer suitability of Infosys vis- -vis a captive software service provider has been examined by the Hon ble Delhi High Court in case cited as CIT vs. Agnity India Technologies Pvt. Ltd. (2013) 36 taxmann.com 289 (Delhi) and found to be an invalid comparable by returning the findings, which are reproduced in the preceding para 35 of this order. 59. Perusal of profit loss account of the taxpayer shows that the taxpayer has never been into development of product rather a pure software development and other services provider as the entire income is from SDOS. 60. So, we are of the considered view that keeping in view the functional dissimilarity, scale of operation, high brand value impacting profit, having own research and development centre with capital expenditure of ₹ 5 to ₹ 7 crores and revenue expenditure of ₹ 570 crores, creating huge intangibles for the company and the fact that Infosys is a full-fledged risk bearing company, hence cannot be a valid comparable vis- -vis t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66. Persistent is functionally not comparable being engaged in product development along with software development services. Persistent has undergone extra ordinary events during the year under assessment as it has amalgamated with Persistent eBusiness Solutions Ltd. and Persistent Systems and Solutions Ltd. w.e.f. 01.04.2011, as per detail given at page 212 of the paper book. So, due to merger and demerger financial results of the company have certainly been impacted. 67. Persistent has significant intangibles of ₹ 385 crores comprising of software and acquired rights which is 14% of the net fixed assets whereas the taxpayer does not own any intangibles. Persistent is also incurring significant expenditure on research and development to the tune of ₹ 44.72 crores as against nil expenses of the taxpayer on such research and development activities. 68. Persistent has been ordered to be excluded in Alcatel Lucent India Ltd. vs. DCIT (supra) on the aforesaid ground that it is a product company having no segmental financials and has undergone extra ordinary events impacting profit. So, in view of the matter, we order to exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X
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