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TMI Blog2018 (9) TMI 1943X X X X Extracts X X X X X X X X Extracts X X X X ..... gn implementation, maintenance/ software development services: 2. That the Ld. TPO/ Hon'ble DRP/ Ld. AO erred on facts and in law in:- 2.1 rejecting the arm's length price ("ALP") determined by the Appellant and in conducting a fresh economic analysis by applying inappropriate filters; 2.2 the Ld. TPO erred in law in applying certain filters for selecting/ excluding comparables; 2.3 excluding companies selected by the Appellant as comparables (such as Cignity Technologies Limited, Caliber Point Systems solutions Limited, R Systems International Limited (Seg), etc.); 2.4 ignoring the information contained in respective annual reports and decisions of the Hon'ble Tribunal and High Court for selecting inappropriate comparables (such as Persistent Systems Ltd, Thirdware Solutions Ltd, etc.); 2.5 computing the operating profit margins of the comparables finally selected for benchmarking the international transaction; 2.5.1 by treating provision for bad and doubtful debts charged to Profit & Loss account as non-operating in nature; 2.6 not accepting the risk adjustment carried out by the Appellant despite the fact that the UL'TPO had proposed to grant the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of fixed assets 1,39,04,893 1,39,04,893 1,39,04,893 Gain on cancellation of lease 1,77,606 1,77,606 1,77,606 Miscellaneous Income 7,18,360 7,18,360 7,18,360 Consideration of Transfer of Assembled work force 2,01,17,159 2,01,17,159 2,01,17,159 Total operating Income 2,36,67,32,82 3,50,71,096 2,40,18,03,922 2,40,18,03,922 Expenditure Personnel Expenses 1,28,36,25,72 1,28,36,25,728 1,28,36,25,728 Administrative and general expenses 76,83,61,456 76,83,61,456 76,83,61,456 Depreciation 11,69,28,189 82,15,593 12,51,43,782 12,51,43,782 Total operating Cost 2,16,89,15,37 82,15,593 2,17,71,30,966 2,17,71,30,966 Operating/Net Profit 19,78,17,453 22,46,72,956 Operatinq Profit/Operating Revenue Operatinq Profit/Operating Cost 9.12% 7. The assessee used 25 comparables and the margin summary of comparable companies is as under: Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 7 R S Software (India) Ltd. 17.48% 16.96% 8 Sasken Communication Technologies 11.82% 11.02% 9 Thirdware Solution Ltd. (Overseas 33.47% 32.17% Average 19.05% 16.74% 10. As can be seen from the above, adjusted OP/OC was taken at 16.74%. Accordingly, ALP of the international transactions was computed by the TPO as under: Particulars Amount (in Operating Cost (A) 2,168,915,373 Arm's Length Margin (OP/OC) (%) (B) 16.74% Arm's Length Operating Profit (C=A*B) 363,076,433 Arm's Length Operating Revenue (D=A+C) 2,531,991,806 Actual Operating Revenue of the Assessee 2,329,404,391 Difference (D-E) 202,587,415 Proposed Adjustment u/s 92CA 202,587,415 11. The assessee objected to the comparables before the DRP but without any success. However, the DRP directed the TPO to treat the foreign exchange loss/gain as operating income. 12. The final set of comparables as per the directions issued by the DRP were taken as under: Sr. No Company Name OP/OC (%) Adj. OP/OC 1. Acropetal Technologies Ltd. 14.02 7.07 2. CG VAK Software & Exports Ltd. 20.75 19.10 3, E-Zest Solutions Ltd. 10.93 9.37 4. ICRA Techno Analytics Ltd. 17.30 12.75 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces Private Limited Vs. DCIT in ITA No. 1064 & 1083 of 2017. The reasons for exclusion were functional dissimilarities and that segmental data was unavailable. We find that there is no change in the facts of this company for assessment year 2013-14 as well. 19. We further find that under the head 'Revenue Recognition', which is at page 959 of the paper book, the Revenue from services consists of revenue earned from services performed for software development and consultancy, licensing and sub-licensing fee, annual maintenance charges for software support, web development and hosting which is recognised to the extent services are performed and revenue from sales is recognised as and when delivery of the branded software is made and is booked after a discount. Considering the functional profile of this company and in the absence of segmental data, we are of the considered opinion that this company is not a good comparable and accordingly, direct for exclusion of this company. The assessee succeeds on this count. Persistent Systems Ltd 20. The Annual Report of this company is exhibited at pages 607 to 810 of the paper book Volume -II. We find that this company also operates as ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognition Revenue is recognised to the extent it is probable that the economic benefits will flow to the Company an revenue can be reliably measured. I. Income from software services Revenue from time and material engagements is recognised on time basis in accordance with the terms contracts. In case of fixed price contracts, revenue is recognised based on the milestones achieved as specified in the contracts on proportionate completion basis. Revenue from licensing of products is recognised on delivery of products. Revenue from royalty is recognised on sale of products in accordance with the terms of the relevant agreement. Revenue from maintenance contracts are recognised on a pro- rata basis over the period of the contract as and services are rendered. Unbilled revenue represents revenue recognised in relation to work done on time and material projects and price projects until the balance sheet date for which billing has not taken place. Unearned revenue represents the billing in respect of contracts for which the revenue is not recognised as per the terms of contract." 51. It is also proved that Persistent is having huge intangible in the nature of software licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue from Subscription contract is recognised on acceptance or renewal of the contract and is accrued over the period of the contract. Revenue from sale of user licenses for software applications is recognised on e-delivery of Software Licence Key to end user. This company has intangibles worth Rs. 108.22 crores. 25. We further find that this comparable has been rejected by the Tribunal in assessee's own case in assessment year 2010-11 in ITA No. 609/DEL/2015 and the relevant finding is given at page 1644 Volume IV. Considering the functional profile of this company in the light of the finding of the co-ordinate bench [supra], we direct for exclusion of this company from the final list of comparables. 26. Second bone of contention relates to the following comparables which were included by the assessee and excluded by the TPO: a. Cigniti Technologies Ltd. b. Caliber Point Business Solutions Ltd c. R. Systems International Ltd. 27. The ld. counsel for the assessee pointed out that these companies are good comparables and have been wrongly rejected by the TPO. It is the say of the ld. counsel for the assessee that these companies are functionally comparable and should be inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs :- "27. The TPO excluded the case of R. Systems International Limited from the list of comparables. The ITAT included the same. The TPO excluded the case of R. Systems International Limited on the ground that it follows the calendar year i.e. Ist January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The TPO followed an order passed by the Mumbai Bench of the Tribunal in ACIT v. Hapag Lloyd Global Services Ltd. 2013-TII-68-ITATMUM-TP in which it had been held that a ITA No.168/Del./2015 company with a different financial year ending cannot be compared. 28. We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely on the ground that financial year followed is different. So, this issue is remitted back to the TPO to decide afresh in the light of the judgment in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. (supra) by providing an opportunity of being heard to the taxpayer. CG VAK SOFTWARE & EXPORTS LTD. (CG VAK) 32. Respectfully following the same, we direct accordingly. R. Systems International Ltd. 33. In the very same order [supra], the co-ordinate bench has given similar direction for this company also. For similar reasons, as given for comparable Caliber Point Business Solutions Limited, we direct accordingly. 34. The next grievance relates to the rejection of the appellant's claim for risk adjustment. 35. We find that similar dispute arose in assessment year 2010-11 also and the Tribunal in ITA No. 609/DEL/2015 has considered the same vide Ground No. 12 which is as under: "17. Assessee claimed risk adjustment on account of differences between the assessee and comparable companies which has been denied by TPO/DRP on the ground that the assessee has only a single customer risk. Assessee claimed risk adjustment of 13.89% to be applied to the margin of the comparable comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in 114 ITD 448 has allowed 20% risk adjustment considering the fact that it may not be possible to quantify risk adjustments. The assessee applying the said ratio in the case of Sony India Pvt. Ltd. (supra) has worked out the risk adjustment on the operating margins of comparables to be allowed when computed @ 20%. We direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee." 19. Similar view has been taken by the coordinate Bench of the Tribunal in case of ITO vs. M/s. Supportsoft India Pvt. Ltd. in IT (TP) A.No.1372/Bang/2011 order dated 28.03.2013 by returning following findings :- "27. Having heard both the parties and having considered the rival contentions, we find that the Tribunal in the case of M/s. Intellinet Technologies India Pvt. Ltd. vs. ITO in ITA 1237/Bang/2007 dated 30-3-2012 has considered this contention of the assessee and has held that the single customer risk attributable to the assessee is only an anticipated risk whereas the risk attributed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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