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TMI Blog2020 (12) TMI 928X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.01.2017 for the assessment year 2012-13 as per the following grounds of appeal on record. "1. Ground no. 1 : Addition on account of transfer pricing adjustment. 1.1. The learned Commissioner of Income Tax (Appeals) [' Ld. CIT(A)') grossly erred, in facts and in law, in upholding the order of learned Transfer Pricing Officer ('Ld. TPO') u/s 92CA(3) of the Income Tax Act,1961 ('Act') and consequential assessment order of learned Assessing Officer ('Ld. AO') which is bad in law and void ab initio as the same is in breach of principle of natural justice and is without complying with the mandatory conditions of Section 92CA(3) r.w.s. 92C(3) of the Act. 1.2 The learned CIT(A) grossly erred, in facts and In law,: 1.2.1 in upholding Ld. TPO/AO's action of rejecting following companies taken by the appellant as comparables: i. Akshay Software Technologies Ltd. ii. Cat Technologies Ltd. iii. C G-V A K Software & Exports Ltd. iv. Cherrytec Intelisolve Ltd. v. Infotech Enterprises Information Technology Services Pvt. Ltd. vi. NUCSOFT Ltd. vii. Winfoware Technologies Ltd. 1.2.2 in computing export turnover ratio of Infotech Enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of Ld. TPO/AO of not granting appellant's claim for adjustment for material differences in the risk / functional profile of the appellant via-a-vis companies selected as comparable companies, though the Act read with Rule 10B(1)(e)(iii) and 10B(3) provide for carrying out such comparability adjustments and such adjustment was also approved by Hon'ble ITAT in appellant's own case viz. E-gain Communication (P) Ltd. v. ITO (2008) 23 SOT 385, Pune. 1.3 The appellant craves leave to contend that the following additional nine (9) companies identified by the appellant applying the same search filters/criteria as adopted by Ld. TPO in his show cause notice dated 06.01.2016, are comparable to the appellant and shall be taken as comparable in case the Ld. TPO upon their examination concludes that all or some of the aforesaid companies are not comparable to the appellant. i. Ace Software Exports Ltd. ii. C T I L Ltd. iii. Celstream Technoloqies Pvt. Ltd. iv. F C S Software Solutions Ltd. v. Goldstone Technologies Ltd. vi. Kals Information Systems Ltd. (Segmental) vii. R Systems International Ltd (Segmental) viii. S Q S India 8 F S I Ltd. (Formerly known as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware development service business. Thus, this segment of Vama Industries Ltd. is not functionally comparable to software development service business of the assessee. 4. Your good self has applied filter of R&D expenses to sales < 3% while selecting the comparable companies. However, as evident from page 22 of AR this company has spent more than 3% ( 3.67% to be precise) on R& D. Thus, the company fails the criterion applied by your good self and required to be dropped from the list of comparable companies." 4. The assessee had further submitted as follows : "1. Ld. TPO's sweeping observation that comparable passes all the filters without examining the detailed submission made by the Appellant is factually incorrect. The Appellant vide Annexure # D to its reply dated 14.01.2016 to show cause notice which is placed as Annexure # 5 in PB has brought out the fact that this company did not pass R&D filter applied by the Ld. TPO. As evident from page # 22 (relevant extract is reproduced below) of AR, this company has spent more than 3% (3.67% to be precise) on R&D. (Rs. in lakhs) Expenditure on R & D 2011-12 2010-11 Capital 51.39 Nil Recurring Nil 43.95 Total 51.39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submission in the ensuing paragraphs. 6. The income from software service segment of this company mainly consists of income from Software Development Services and Engineering Services as it is apparent from Note no. 31 -Segment Reporting' at Page # 50 of AR read with Note no. 33 -Eaming in Foreign Currency' appearing on page # 51 of AR . As evident, the income from engineering service of RsJ,22,64,105 constitute 98.17% of the total revenue (₹ 3,28,66,174) from software service segment. The engineering services are in the nature of product design services with the help of computer software specially for automotive sector (see page # 9 of AR). such engineering services are not at all software development services. Thus, this segment of the company is mainly into design engineering services which are functionally different than software development service business. Thus, this segment of Varna Industries Ltd. is not functionally comparable to software development service business of the Appellant. 7. The total turnover of the software development service which may be compared with Appellant's business is meagre ₹ 6,02,069/-and this amount is included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware product company (see pg 13 of AR). It is into software product selling and not in software development services. The same is evident from page # 13 of AR where various products in which company is dealing in are listed. This clearly shows that the company develops its products and sells them. 2. Note no. 21 as appearing on page # 38 of AR where inventory of work in progress at the beginning and close of the year are shown further confirms the fact that it's a software product company. 3.Ratio of employee cost to total operating cost of this company is only 10.67% (i.e. ₹ 86,16,000/ ₹ 8,07,55,388). So low and negligible ratio of employee cost to total cost clearly indicates that it is a software product company. It is not engaged in man power driven software development services business, wherein generally ratio of employee cost to total cost is generally higher than 50%. In case of assessee, this ratio is 74.95%. 4. The view that it is a software product company is also corroborated and fortified on perusal of composition of fixed asset of the company. On perusal of fixed asset schedule (i.e. Note No.10&11 on Pg 36 of AR), a copy of which is enclosed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the fact that it's a software product company. The relevant extract is given below: Note No.21 Change in inventories & WIP S. No. Particulars 31.03.2012 (Rs) 31.03.2011 (Rs) 1 Work in Progress Work in progress at the beginning of the year 30,28,58,856 26,78,86,500 29,83,56,503 30,28,58,856 Less: Work in progress at the end of year Sub-Total (B) 3,49,72,356 (45,02,353) (Increase)/Decrease Inventories 3,49,72,356 (45,02,353) iii. Ratio of employee cost to total operating cost of this company is only 10.67% (i.e. ₹ 86.16,000/- ₹ 8,07,55,388). So low and negligible ratio of employee cost to total cost clearly indicates that it is a software product company. It is not engaged in manpower d6ven software development services business, wherein generally ratio of employee cost to total cost is generally higher than 50%. In case of Appellant. this ratio is 74.95%. The Ld. TPO did not take cognizance of this submission of the Appellant while passing his order. iv. The view that it is a software product company is also corroborated and fortified on perusal of composition of fixed asset of the company. On perusal of fixed asset schedule (i.e. Note No.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produces and sells them. That further the Note No.21 appearing at Page No.38 of the Annual Report where inventory of Work-in- Progress at the beginning and close of the year are given further confirms that it is a Software Product Company. We therefore, direct the AO/TPO to exclude this company from the list of comparable companies in respect of the assessee. 10. The third company which the assessee wants to exclude from the final list of comparables is Infobeans Systems India Private Limited. The assessee has objected while stating that during the year under consideration, software business of Seeds Enterprises Pvt. Limited is demerged and transferred to Infobeans Systems India Pvt. Ltd. This arrangement has been given effect in the financial statement. In view of this extra-ordinary and peculiar event, the financial statement and profit margin of the company is not comparable to that of the assessee. Therefore, this comparable company deserves to be excluded solely on this ground. The assessee has further submitted as follows : "1. The Ld. TPO is factually erred in stating that the date of the merger is 26/09/2012. The date of merger is 1st April 2011 as evident from page # 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of comparable. However, in the same judgment the Hon'ble ITAT further laid down that adjustments for such extra ordinary event have to be made to the profits of the potential comparable company to bring them on par with tested party before comparing the potential comparable company with tested party. What it essentially mean that even if the company is selected as comparable despite extra ordinary event, adjustment needs to be made in the profit margin for such extra ordinary event for the purpose of benchmarking. In the instant case, even if the Ld. TPO's contention is accepted, in the absence of details of such adjustment it is not possible to make adjustment in profit margin of comparable. Hence, this company cannot be selected in the absence of reliable information on adjustment for extra ordinary event. 5. Based on the above contentions, it is submitted to exclude this company from the list of comparable companies. 6. Similarly, the Ld. TPO is placing reliance on the case of TCL Holdings Pvt. Ltd. for the proposition that company cannot be rejected as comparable merely on the ground that they were loss making and that it was necessary to examine if the loss ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Agilent Technologies International Pvt. Ltd., wherein it was observed that in the event of merger of two functionally similar companies does not call for rejection of the company and the matter was sent back to the AO/TPO for further examination. The strong contention of the assessee is that this company cannot be considered as comparable company because it underwent de-merger which is an extra-ordinary event. 12. We have examined the relevant documents placed before us and we find at Page 720 of the Paper Book, the observation made by the Chartered Accountant and therein at Clause 2, it is written as follows : "2. We state that "Software Business" of the InfoBeans Systems India Pvt. ltd. (Currently known as Seed Enterprises Private limited) is demerged and transferred to the Company in pursuance to the Scheme of Arrangement as approved by the Hon'ble Madhya Pradesh High Court dated 26/09/2012 vide Appointed date 1st April 2011. Accordingly these are the Revised financial statements including the Financial Statements of the said "Software Business" of Demerged Company." 13. That further, in the Auditors Report at Page 739 in the Paper Book a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation or collection. Dividend income is recognized when the right to received is established. What is stated above is a policy on how the revenue is recognized for technical and software services. However, nature of these technical and software services are different from the software development services provided by the Appellant as mentioned in para # 1 below. Hence, the Ld. TPO's reliance on revenue recognition policy is misplaced. 3. The Appellant has not taken any such contentions like abnormal trend, low employee cost etc. So, it is not clear why the Ld. TPO is bringing up all these contentions. It seems that the Ld. TPO is generating ideas out of thin air. Further, the Appellant has applied employee cost filter. Thus, the Ld. TPO is factually erred in stating that employee cost filter has not been applied and the Appellant cannot take a different stand following the principle of 'theory of estoppels'. 4. It is not clear why the Ld. TPO is talking about 'theory of estoppel', TNMM, OECD guidelines etc. at this stage when the Appellant has not at all contended on any of these grounds in its reply to show cause notice or otherwise. 5. The Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Paper Book i.e. Notes forming part of the financial statements of this company for the year ending 31.03.2012. Note - 1A - The profile of the company has depicted and therein it is clearly mentioned that the principal object of the company is to act as consulting and advisors on information / internet system and surveyors of information services etc. We have also considered the Profit and Loss account of this company at Page 761 in the Paper Book as well as the Directors Report at Page 742 in the Paper Book. On perusal of the same, we find strength in the argument of the assessee that the business of this company is not at all comparable to the Software Development Services of the assessee. We therefore, direct the AP/TPO to exclude this company from the list of comparables in respect of the assessee. 17. That having observed that the aforesaid companies shall be excluded from the final list of comparables in respect of the assessee, therefore, this matter is remitted back to the file of AO/TPO directing him to exclude the aforesaid companies and freshly determine the assessee's Arms Length Price (A.L.P.). These grounds are allowed for statistical purposes. 18. The next i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed line charges. Accordingly, the Appellant ought to have deducted tax u/s.194J on the payment made for leased line charges." 21. The Ld.A.R. of the assessee placing reliance on the decision in the case of Channel Guide India Limited Vs. ACIT (ITA No.1221/Mum/2006) reported in 139 ITD 49 and also the decision in the case of Gupshup Technology India (P) Ltd., Vs. DCIT (TDS) (ITA No.848 & 850 of 2015) reported in 162 ITD 643 submitted that these payments made for lease line charges were neither comes under professional services nor under technical services u/s 194J of the Act. 22. We find in the decision of Channel Guide India Limited (supra) wherein it was observed and held as follows : "25. In our opinion, the issue involved in the present case however, is relating to disallowance made u/s.40(a)(i) for non-deduction of tax- at source from the payment made by the assessee to SSA and as held by Ahmedabad Bench of this Tribunal in the case of Sterling Abrasives Ltd. by its order dated 23.12.2010 cited by the Ld. Counsel for the assessee, the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tting the messages. The assessee receives the content of the message which required to be sent as bulk SMSs from its client for which assessee used its own software and computer system to convert it in a form that could be transmitted to the customers of the various telecom operators. Once the SMS is ready for transmission, the assessee causes its system to connect with the system of the telecom operators to send the messages in bulk. Hence, the assessee has neither any access nor control over the equipments nor there is usage of any process or equipment which can be said to have been made available to the assessee. It is a kind of a standard connectivity facility which has been provided by the Telecom operator, nothing else. The agreement is more in the nature of works contract with the Telecom Operator for which the assessee has rightly deducted the TDS under section 194C. Even, the assessee from its customers, like Income-tax department for providing such services has received the payment which has been subjected" to TDS under section 194C. Thus, it cannot be held that the assessee is making any payment for use or right to use any equipment. Further, the concept of 'u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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