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TMI Blog2020 (3) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... anted, it is assessable in that year itself and if it is adjusted with any prior tax liability of earlier years and such interest is in turn paid to the Government Account that also is payment of interest to the assessee, in such case, there is no need for any intimation separately. Hence, this ground of appeal raised by the assessee is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of the assessee in AY 2008-09. However, as noted by the TPO, the entire revenue as per details is from software services only. Inventory is nil. Looking to the facts, therefore, this objection is dismissed." 6. The Ld. Counsel for the assessee submitted that for the very fact of relevant assessment year 2014-15, in the case of Symantec Software India Private Limited. Vs. DCIT (2020) 114 taxmann.com 435 (Pune-Trib), the question of comparability of this company i.e. Persistent Systems Limited was considered and it was held by the Tribunal as follows: "11. We have perused the case records and heard the rival contentions. We observe that the company i.e. Persistent Systems Limited is functionally different as it is engaged in rendering IT services and in the development of software products without there being support segmental information. During the year the company made acquisitions. We observe that the Hon‟ble Delhi High Court in the case of Pr. CIT Vs. Saxo India Pvt. Ltd. ITA No.682/2016 has held as follows: "10. On a comparison with the data available and made available undoubtedly, the object of the statute is to "pull in transactions which otherwise es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement Consultants Pvt. Ltd.(supra) at paras 28 to 30 as under : We rely on judicial decisions and facts in respect of comparable Persistent Systems Ltd. and direct the Assessing Officer to exclude from the final list of comparable for determination of ALP." 13. The Co-ordinate Bench of the Tribunal, Cochin in the case of US Technology International Private Limited Vs. ACIT in ITA No.592/Coch/2018 has held as follows: "10. Persistent Systems Ltd. The TPO obtained information u/s. 133(6) based on which it was concluded that the comparable is predominantly engaged in the business of rendering software development to various customers world wide. The TPO observed that the company is engaged in developing products which have been outsourced by clients and the company does not own IP to these products and the product development is nothing but software development services. With respect to the intangibles of the comparable company, it was found that overseas subsidiary companies have acquired certain IP products and that the comparable is predominantly engaged in the software development services. Further, the intangibles with the comparable are in the nature of software license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -08, it is mainly a software development company and as per the details furnished in reply to the notice u/s. 133(6) of the Act, software development constitutes 90% of its revenue. In this view of the matter, the Assessing Officer included this company, i.e., Persistent Systems Ltd. in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the ld. Authorised Representative submitted that: i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company is predominantly engaged in "Outsourced Software Product Development Service‟ for independent software vendors and enterprises. iii) Website extracts indicate that the company is in the business of product design services. iv) The I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P)A No. 1444/Bang/2012 dated 31/07/2015 wherein it was held as follows: "13.2 We have considered the rival submissions as well as the relevant material on record. As pointed out by the learned AR of the assessee that the functional comparability of the company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions (Supra) in para 17.3 as under: "17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company, i.e., Persistent Systems Ltd., is engaged in product development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the case of Telecordia Technologies India Pvt. Ltd.(supra) that in the absence of segmental details/information a company cannot be taken into account for comparable analysis, we hold that this company, i.e., Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly." 13.3 It is clear from the finding of this Tribunal that this company is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lization, legacy modernization, rapid development & photo-typing and service enabling the enterprise. Thirdware serves various industries and verticals as Manufacturing, Automotive, Industrial Electronics, Pharmaceuticals, Consumer Packaged Goods (CPG), Chemicals, BFSI, Public Sector Units (PSUs), Retail and Travel. The company is engaged in diversified business activity as per website and separate business segments are not reported in the financials". Thereafter, the TPO at Para (vii) of his order held that revenue of this company is mainly from software services and hence, assessee‟s contention is not acceptable and this company is retained in the final list of comparables. 9. Similarly, the Ld. DRP at running Pages 42 to 45 of its order had upheld the findings of the TPO while rejecting the objection raised by the assessee. 10. The Ld. Counsel for the assessee invited our attention again to the decision of the Co-ordinate Bench of the Tribunal, Pune in the case of Symantec Software India Private Limited. Vs. DCIT (supra.), wherein the Tribunal regarding this company has held as follows: "16. We have perused the case records and heard the rival contentions. We obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparables for determining the ALP." 17. We further find the same view has been taken by the Co-ordinate Bench of the Tribunal, Pune in the case of M/s. John Deere India Pvt. Ltd. Cybercity Vs. ACIT (supra.) wherein the Co-ordinate Bench of the Tribunal has exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows: "10. We have heard the rival submissions and gone through the relevant material on record. The Annual report of this company is available at page 415 onwards of the paper book. Profit and loss account of this company shows `Sales‟ of ₹ 67,56,06,505/-. Break-up of such sale has been given in Schedule 12, which records `Export from SEZ units‟ - ₹ 47,58,40,447/-; `Export from STPI units‟ - ₹ 11,20,90,633; `Revenue from subscription‟ - ₹ 1,53,13,736/-; `Sale of licence‟ - ₹ 1,51,38,618/-; and `Software Services‟ - ₹ 5,72,23,072/-. This company has segments only on geographical basis and not on functional level. As such, there is no bifurcation of operating profit from Software Services and others including Sale of licence and Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing objections stating that this company i.e. Cigniti Technolgies Limited is functionally not comparable and the same is extracted as follows: "The company is engaged in providing Independent Software Testing Servies. Cigniti‟s test offering include Quality Engineering, Advisory & Transformation, Digital Assurance and Quality Assurance solutions. The review of the Annual Report of Cigniti Technologies Ltd. shows that no segmental data is available pertaining to the software development activity due to which the margins cannot be drawn up." Thereafter, the TPO vide Para (ii) of his order has rejected the contentions of the assessee by observing as follows: "The assessee has requested for rejection of Cigniti from the final set of comparable on the basis that the company is engaged in providing Independent Software Testing Services. Cigniti‟s test offerings include Quality Engineering, Advisory & Transformation, Digital Assurance and Quality Assurance solutions. However, the assessee has not provided any material impact in support of its claim and therefore, the contention of the assessee is rejected. Furthermore, the company was upheld as comparable by the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration, we direct the Ld. AO/TPO to exclude the company from the set of the comparables." 14.1 The Ld. Counsel for the assessee further placed reliance on the decision of the Co-ordinate Bench of the Tribunal, Bangalore in the case of M/s. Mircrosoft Research Lab India Pvt. Ltd. Vs. DCIT in ITA (TP) A No.3131/Bang/2018 for assessment year 2014-15 decided on 05.02.2020 wherein the Tribunal has held as follows: "(vi) Cignity Technologies Limited, the comparable is engaged in Software Development Services and is a captive service provider to its AEs on Cost Plus IT(TP)A No.3131/Bang/2018 basis. Further company has applied for global patents for its igenerate Test, Scenarios Tool part which is a part of SMART Tools Portfolio and has specialized services in the field of software testing. We found this comparable was excluded by the co-ordinate Bench of the Tribunal in the case of Marwell India Pvt. Ltd. Vs. DCIT (supra) at page 18 para 4.2 (a) of the order as under : 4.2 (a). Cignity Technologies Ltd: Ld.TPO held this company to be comparable as it is engaged in software development services. Ld. Counsel submitted that Ld.TPO treated this company to be comparable asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he annual reports of this company and the specialised services provided by this company to its own clients in the field of software testing as against captive service provided by assessee exclusively to its AE, we are of considered opinion that this company cannot be held as a good comparable with that of assessee. Therefore we direct Ld. AO/TPO to exclude this company from the final list of comparables. Following the judicial precedence, we found the company is in specialized area and has to be excluded. Accordingly, we direct the TPO/A.O. to exclude from the final list of comparables." 15. We have heard the rival contentions and perused the case records. We have also analyzed the facts and circumstances in this case. We find that this company i.e. Cignity Technologies Ltd. has been directed to be excluded from the final list of comparables by our decisions of the Co-ordinate Bench of the Tribunal, Delhi/Bangalore pertaining to the assessment year 2014-15 which is relevant assessment year under consideration before us. Respectfully following the decisions of the Co-ordinate Bench of the Tribunal referred hereinabove, we direct the TPO/AO to exclude this company i.e. Cignity Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n business is remained the same i.e. software development. The relevant portion in the annual report is reproduced as under:- "Background Mindtree Limited ( "Mindtree‟ or "the Company‟) together with its subsidiary Mindtree Software ( Shanghai) Co. Ltd. collectively referred to as "the Group‟ is an International Information Technology consulting and implementation Group that delivers business solutions through global software development. The Group is structured into five verticals- Manufacturing, BFSI Hitech, Travel & transportation and Others. It offers services in the areas of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. Further from the notes to account, the details of revenue recognition are as under: Revenue recognition 2.8.1 The company derives its revenues primarily from software services. Revenue from software development on time and material basis is recognized as the related services are rendered. Revenue from fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He submitted that the company was engaged in research and development activities and owns significant intangibles and has applied for several patents, whereas the assessee is engaged in contract software development at low-level. Accordingly, he submitted that company might be excluded from the set of the final comparables. (ii) The learned DR, on the other hand, relied on the order of the learned DRP and submitted that under TNMM, broad functional similarity should be seen and a small variation should be ignored as it is difficult to find exact replica of the assessee as comparable. He also submitted that the assessee failed to demonstrate effect of the intangibles on the net margin of the comparable. (iii) We have heard the rival submissions and perused the relevant material on record. Inclusion of the comparable was not challenged by the assessee before the learned TPO. The assessee first time challenged the inclusion of the company before the learned DRP. The learned DRP on the grounds, firstly, that there is no effect of intangibles and R&D expenses on the margins of the company, secondly, that the broad nature of TNMM would cover a small variation of functions and, thir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embedded software, middleware and testing and through Mindtree's own IP building blocks in the areas of Bluetoot/VOIP, IVP6, iSCSI and others in datacom, telecom, wireless, storage, industrial automation, avionics, consumer products and computing." (v) In view of the above observation, it is evident that the services rendered by the company are not limited to software development, but also are in the field of consulting and technical support, management etc. In our opinion the software development services rendered by the assessee cannot be compared with a whole basket of services of consulting, technical support or management services rendered by the company. As there is no separate segment of software development services available in the financial statement of the company, the company at entity level cannot compare functionally with the CSD Segment of assessee and accordingly, we direct the Ld. AO/TPO to exclude the company from final set of the comparables." 18.1 The Ld. Counsel for the assessee further drew our attention to the another decision of the Co-ordinate Bench of the Tribunal, Delhi in the case of NXP India Private Limited Vs. Asst. Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erving as follows: "i. Akshay Software Technologies Ltd.: The submission of the assessee is considered but not acceptable. As per the notes to the financial statements it is mentioned that Akshay Softare Solutions Limited ("the Parent') is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas. During the course of TP proceedings for A Y 2012-13 & 2013-14 Hon'ble DRP observed that Professional Services being rendered by the assessee are clearly in the nature of Staffing Services by which the company employs IT professionals and provides them to various clients in the IT industry on a contract staffing / permanent staffing basis Hence, it was then held that the revenues of the company derived from Professional Services cannot be categorized as revenue from software services. There is no change in facts for A Y 2014-15 as compared to A Y 2012-13 & 2013-14 and therefore the finding of DRP is applicable to A Y 2014-15 also. Further it is also held by the Hon'ble DRP during TP proceedings for AY 2012-13 & 2013-14 that the business model of the assessee is onsite s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Business Software vs. DCIT [TS 748 ITAT 2012 (Bang.) TP], the Hon'ble Bangalore ITAT upheld the onsite Revenue Filter adopted by the TPO and held that the said company which had onsite revenue of more than 75% of the total revenue cannot be considered as a comparable with the assessee who was an offshore service provider. However, without prejudice, we have further examined the annual accounts and the website of the company. In this connection, extract of the Director's report is reproduced as under: "Operating Results and Business operations Revenue from services and sale of products on standalone basis grew by 14.12% to ₹ 2275.79 lacs compared to ₹ 1994.14 lacs during the previous year. Like in previous year, export income from professional services business continued to maintain its share of 85 % of operating revenue. During the year, the company however witnessed pricing pressure in export business as billing rates remained stagnant." In the Director's report, the company is stated to be a service provider. Now the question arises as what is the nature of professional services rendered by the assessee. In this connection, the website ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a recruitment message, establishing contact with potential candidates, validation, negotiation and assisting in hiring/deployment formalities. This can also be customized based on the client specific needs. Thus our recruiters are focused and aligned to deliver the best talent to our client organizations. Our track record in this business is evidenced by the long term relationships that we enjoy with our clients whose requirements we have been servicing since the last several years. Akshay has delivered more than 1,000 man-years of services to its various clients in the last 20+ years and many consultants who were on our pay-roll and deputed to client locations on- site were later absorbed by the clients on their payrol/. This is a testimony to the quality of our recruitment process. Presently we have about 200 consultants placed with various prestigious clients in India and UAE. Akshay's services in talent acquisition includes Recruitment Process Out-sourcing, Contract Staffing and Permanent Placement. We Offer.' Contract Staffing & Permanent Staffing When it comes to Staffing needs count on Akshay. Here are a few res sons wily? * 25+ years of experience acro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable and hence, the said company cannot be included in the final list of comparables. We do not find any infirmity with the findings of the Ld. DRP and the same is, therefore, upheld. Thus, this ground of appeal raised by the assessee is dismissed. 23. The Ld. Counsel for the assessee further submitted that another company i.e. R.S. Software Ltd. was originally taken by the assessee as it is a comparable which was accepted by the TPO. But, now the assessee objected that this company should not be in the list of final comparables company or companies with that of the assessee. (F) R.S. Software Ltd : 24. The observation of the TPO with regard to the company i.e. R.S. Software Limited is as follows: "(a) R.S. Software This comparable company is selected by the assessee and retained by the TPO in the final set of comparable. It is observed from the page 30 of the Annual report of this company for F.Y. 2013-14 as under: Financial institutions, payment network providers, payment processors and software companies providing products to the payment industry need a development partner who understands the complexities of their industry. RS Software is the leading custom software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains to "Working Capital Adjustment" of comparable companies. 28. The Ld. Counsel for the assessee submitted that this adjustment always has to be positive and working capital adjustment cannot be negative. In support of his contentions, the Ld. Counsel for the assessee relied upon the decision of the Co-ordinate Bench of the Tribunal, Hyderabad in the case of Adaptec (India) P Ltd. Vs. ACIT, ITA No.206/Hyd/2014 for assessment year 2009-10 wherein on the issue, the Tribunal has held as follows: "10. Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment. 12. TPO is directed to examine the comparability of the two companies directed above and delete rest of the companies as objected by the assessee and re-workout the arithmetic mean. He should also consider the proviso to section 92C(2) as per law. For this purpose the orders to that extent are set aside for re- doing the same as per facts and provisions of law." 28.1 This judgment was further relied upon by the Co-ordinate Bench of the Tribunal, Bangalore in the case of Lam Research (India) Private Limited Vs. DCIT, ITA No.1437/Bang/2014 & ITA No.1385/Bang/2014 for assessment year 2009-10 wherein the Tribunal on the issue has held as follows: "26. This Tribunal had held that negative working capital adjustment cannot be carried out where the assessee was a captive service provider. Here also it is an admitted p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per law. In the interest of justice, the matter is restored to the file of the TPO/AO to consider the decisions relied on by the assessee vis-à-vis the facts and circumstances of the case and adjudicate the issue in compliance with the principles of natural justice. Thus, this ground of appeal raised by the assessee is allowed for statistical purposes. 30. The assessee has also raised ground relating to disallowances /additions other than transfer pricing adjustment which reads as under: "9. The learned DRP erred on facts and in law in directing the Ld. AO in adding amount of INR 25,84,042 appearing in Income Tax System database as interest on income tax refund granted to Appellant and ignoring the Appellant‟s submission that the said amount was not taxable in captioned year since no intimation was received by Appellant qua said refund adjustment and also said amount was not recognized as income in the books of accounts". 31. With regard to this ground, the Ld. Counsel for the assessee contends the direction of the Ld. DRP wherein it had directed the Assessing Officer in adding amount of INR 25,84,042 appearing in Income Tax System database as interest on income ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity cannot be said to be contingent merely because it is to be quantified at later date. Under Section 244A, even the interest is quantified immediately whenever a refund is issued. In our view, the right to grant interest is absolute since existence of such right is not dependent on any event. For example, assessee is granted interest of ₹ 1,000 on the date of granting refund. Subsequently, under Section 244A(3), it is reduced to ₹ 600 by virtue of assessment under Section 143(3). Can it be said that right to interest did not accrue on the date of refund? In our opinion, the right of interest came into existence on the date of refund by virtue of Section 244A(1) though its quantification may or may not vary depending upon the outcome of assessment." 32.1 The Special Bench of the Tribunal, Bombay has considered the decision of the Hon‟ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT, 1971 AIR 2145, 1972 SCR (1) 277 approving the judgment of the Hon'ble Madras High Court in the case of Pope the King Match Factory v. CIT [1963] 50 ITR 495 and has held as follows: "12. The ratio of the above judgment is clearly applicable to the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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