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TMI Blog2023 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... tent Systems Limited cannot be taken as a comparable and therefore, the same is excluded from the final set of comparables. iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited - CIT(A) has not dealt with the objections raised by the Appellant while the Assessing Officer had included the same given the reasoning that the primary source of income is from software development. Therefore, we deem it appropriate to remand the issue of exclusion of the aforesaid comparable back to the file of the AO. Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited Aricent Technology excluded on account of high turnover - CIT(A) had observed that Sonata Software Limited was a giant company having turnover of INR 1,380 Crores. Before the Tribunal, the Appellant had contended that 11 companies having high turnover be excluded from the list of comparables. As already directed exclusion of 3 companies (i.e. Infosys Technology, Wipro Limited and Persistent Systems Limited), though for different reasons. Out of the balance 8 companies, the issue related to exclusion of 3 companies (namely iGate Global Solutions Ltd., Tata Elxsi Ltd, LGS Global Limited) has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessment Year 2010-11 wherein it was held that even if the segmental accounts are taken into consideration this company would still not qualify as a comparable. Softsol India Limited - As entire income has been recorded under the head software exports and no bifurcation or details of the same have been provided. It is stated therein that the company does not have separate reportable segments - we find merit in the contention advanced on behalf of the Appellant that Softsol India Ltd. cannot be selected as a comparable on account of functional dissimilarly and lack of segmental data. Working Capital Adjustment - We grant the Appellant an opportunity to establish before the Assessing Officer that the Appellant is entitled to working capital adjustment in respect of the comparables finally selected. The Assessing Officer is directed to decide the claim for working capital adjustment, if any made by the Appellant before the Assessing Officer as per law. Thus, in accordance with the above, the Assessing Officer is directed to determine the final set of comparables; re-compute arm s length price; and transfer pricing adjustment, if any, after giving the Appellant a reasonable opportuni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant and companies that are earning super normal profits; 2.3.5 In not appreciating the fact that the profit margins of large Indian Software companies would be largely influenced by its goodwill/brand name and other intellectual property and such companies ought to be rejected, and 2.3.6 Rejecting comparable companies selected in the TP documentation on arbitrary reasons. 3. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in considering financial data of only the current year (FY 2009-10) of the comparable companies instead of multiple year data to be used for benchmarking the Appellant's international transaction. 4. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in not granting working capital and risk adjustment. 5. On the facts and circumstances of the case and in law, the Hon'ble CTT(A) erred in upholding the decision of the Learned AO in not allowing the Appellant the benefit of 5 percent range as provided by the proviso to section 92C(2) of the Act. 6. On the facts and circumstances of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing adjustment of INR 2,21,07,342/- vide order dated 26/03/2013. Thus, the Assessing Officer assessed total income of the Appellant as under: Particulars Amount (INR) Total Income before as per computation filed 1,96,83,199 Add: Transfer Pricing Adjustment 2,21,07,342 Assessed Income 4,17,90,540 3.3. Being aggrieved, the Appellant preferred appeal before the CIT(A) challenging the rejection of the comparables selected by the Appellant and selection of new set of 21 comparables. It was contended on behalf of the Appellant that the nature of software developed by the Appellant was related to ERP Software. Appellant was a low risk captive software service provider providing services to its affiliates around the globe as per the terms of Inter-Company Agreements between Appellants and its Associates, and that the Appellant was remunerated on a cost plus 10% mark up for provisions of services. On the basis of the aforesaid the Appellant sought rejection of the most of the comparables selected by the Assessing Officer, inter alia, on the ground that the same were not functionally comparable. The CIT(A) rejected the contentions raised by the Appellant and dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (Madras). 5.1. On perusal of the judgment of the Hon'ble Bombay High Court in the case of Pentair Wat India (Pvt.) Ltd. (supra), we find that the Hon'ble High Court had confirmed the order passed by the Tribunal whereby the Tribunal had concluded that three companies were not comparable to the Appellant in the that case as the said companies failed to pass the turnover the filter. In view of concurrent finding of CIT(A) and the Tribunal the High Court declined to frame substantial question of law and rejected the appeal preferred by the Revenue. On the other hand, in the case of Same Deutz-Fahr India (Pvt.) Ltd. (supra), the Hon'ble Madras High Court has, while declining to frame substantial question of law in the appeal of the Revenue, had confirmed the order passed by the Tribunal wherein it was held that functionally similar company cannot be excluded as a comparable only on the ground that the company has high turnover. A company with high turnover can be excluded from the list of comparables in case such turnover results in differences which cannot be eliminated [Chryscapital Investment Advisors (India) (Pvt.) Ltd. Vs Deputy Commissioner of Income-tax: [2015] 376 ITR 183 (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant. Reliance can be place on the following case laws: Mercedes Benz Research and Development India Private Limited (2012 TII 69) We would also like to highlight that the company has also developed proprietary products Further, It may be pertinent to note that Infosys has been rejected by the Ld Commissioner of Income Tax (Appeals)- 15 on the same issue for the last assessment year. 8 xx xx Xx 9 LGS Global Limited The primary source of income is from software development Page 14 and 15 of the annual report mentions the range of activities the company is engaged in services which constitute as information technology enabled services The company is engaged in provision of high end IT related services which are functionally dissimilar from those of the Appellant 10 Persistent Systems Limited The primary source of income is from sale of software services and products Engaged in providing outsourced software product development activities for different industries and in addition to software development, the company also offers services such as prototyping, porting, SaaS-enablement, usability engineering enterprise mobility competency centers in telecom and wireles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce there high margin. This argument cannot help to the appellant because this comparable reveals that company has also involved in information Services related to software, its development and support services. The higher margin profit of this company reveals the fact that in line up such business, barring exceptional cases of loss due to some peculiar reason, there is substantial profit, therefore, the profit margin shown by the appellant @9.99 cannot be presumed to be in commensurate with profit margin earned by such companies. As regards, counter arguments against the comparable of Aricent Technology, counter arguments of the appellant has also not convincing one because that company is also engaged in giving support services. Of course profit margin is on higher side that 32.58% which also suggest that profit margin in such business cannot be low shown by the appellant @9.99 %. This company is engaged software development providing services and also performing consultancy which similar to the activities of the appellant, hence cannot be argued that this case is not at all comparable. Similarly, the case Bodhtree Consulting Ltd., arguments of appellant is not convincing one as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer to exclude Infosys Technologies and Wipro Limited from the final set of comparables. Persistent Systems Limited 5.4. As regards Persistent Systems Limited, we note that the Mumbai Bench of the Tribunal had, in the case of Sybase Software (India) Private Limited Vs. DCIT - Range 14(3)(1) [ITA No. 2658/Mum/2015, Assessment Year 2010-11] relied upon by the Ld. Authorised Representative for the Appellant, held as under: "4.1.2 Persistent Systems Ltd. Similar argument of functional non- comparability has been raised for this entity and it has been submitted that this entity was providing software development services and engaged in development of software products. However, segmental results were not available to facilitate desired comparison. Further, the revenue of this entity include revenue from licensing of products & royalty which are in the nature of R & D services and therefore, this entity could not be held to be comparable entity. Reliance has been placed on following decisions in support of submissions: - (i) CIT v/s Cashedge India P. Ltd. (Hon'ble Delhi High Court ITA No. 279 of 2016, AY 2010-11) (ii) Lionbridge Technologies Pvt. Ltd. V/s ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 4.1. to 4.6. above, we have already directed exclusion of 3 companies (i.e. Infosys Technology, Wipro Limited and Persistent Systems Limited), though for different reasons. Out of the balance 8 companies, the issue related to exclusion of 3 companies (namely iGate Global Solutions Ltd., Tata Elxsi Ltd, & LGS Global Limited) has been remanded back to the file of the Assessing Officer in paragraph 4.7 above. Therefore, we permit the Appellant to also raise contention of high turnover for seeking exclusion of the aforesaid 3 comparables before the Assessing Officer. As regards the balance 5 comparables (i.e.Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited & Aricent Technology), in view of paragraph 4.3 above, we grant the Appellant an opportunity to establish before the Assessing Officer that the aforesaid 5 comparables should be excluded on account of high turnover as the high turnover would result in a material difference which cannot be eliminated and direct the Assessing Officer to decide the issue keeping in view the ratio of the said judgments of the Hon'ble High Courts. Accordingly, the issue of inclusion/exclusion of the aforesaid 5 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT, Circle 14, Pune [ITA No. 518 & 575/PUN/2015, Assessment Year 2010-11, dated 25/04/2019] the Tribunal had concluded that during the relevant previous year Kals Information Technology Systems was not only engaged in providing software development services but was also dealing in software products under the relevant segment. Since the company was engaged in selling software products which was different from the activity undertaken by the Appellant in that case, namely, rendering of software service to its holding company, the company was excluded from the list of comparables. 6.3. Accordingly, consistent with the view taken by the Tribunal in the above decisions, we direct the Assessing Officer to exclude Kals Information Systems Limited from the final set of comparables on account of non-availability of segmental data. Bodhtree Consulting Ltd 6.4. As regards Bodhtree Consulting Ltd, the Tribunal has, vide order dated 30/09/2016 passed in ITA No. 1685/Mum/2013, pertaining to Assessment Year 2009-10, held as under: "14. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny is into manufacturing activities. We have also noted, considering the fact that this company is a product company; the Hon'ble Andhra Pradesh High Court in Intoto Software India Pvt. Ltd. (supra) has upheld the decision of the Tribunal in rejecting this company. It is also a fact that the Tribunal, Mumbai Bench, in Ness Technologies India Pvt. Ltd. (supra) has rejected this company as a comparable as it is not functionally similar to the assessee. Therefore, on over all consideration of facts and materials on record, we are of the view that Acropetal Technologies Ltd. cannot be treated as a comparable to the assessee." (Emphasis Supplied) 6.7. On perusal of the financial statements of this company for the relevant previous year (placed at page 320 to 367 of the paper- book), we find that there is no change in the facts circumstances as compared to the immediately preceding year. This company continues to show 'inventories' under the head 'Current Assets' & 'Loans and Advances' suggesting that this company is engaged in manufacturing. Further, during the course of hearing, the Learned Authorised Representative had relied upon the decision of the Tribunal in the case of M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which transpires that employees related costs incurred by the company on on-site development is roughly at 75% of total employees related costs. As against this, the assessee is not engaged in rendering any on-site services. A company engaged in providing on-site services cannot be compared with a company providing similar services from its own premises (in-house) due to several significant differences in operating costs and also the revenues apart from vital differences in the level of assets employed and risks undertaken. In view of the foregoing, we are satisfied that this company cannot be considered as comparable as it is not only engaged in the business of Software products but is also providing on-site services, which make it distinguishable from the assessee company. We, therefore, order to exclude this company from the list of comparables." 6.8. Accordingly, consistent with the view taken by the Tribunal in the above decisions, we direct the Assessing Officer to exclude Acropetal Technologies Limited from the final set of comparables on account of non-availability of segmental data. Softsol India Limited 6.9. As regards Softsol India Limited, we note that before the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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