TaxTMI 
TaxTMI 
2016 (7) TMI 1318
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....Tax Act, 1961 ('the Act'), by holding that the international related party transaction of the Appellant with respect to the provision of software development services do not satisfy the arm's length principle envisaged under the Act. In doing so the Ld.CIT(A) has erred:- ............................... 2.7. by including certain companies in the final set of comparables which are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.9 by denying the benefit of a working capital adjustment while computing the ALP and thereby disregarding the law, international guidance and judicial precedents in this regard; 2.10 by ignoring the business/commercial reality that since the Appellant (vis-a-vis its software development services) is remunerated on an arm's length cost plus basis, undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact." 2. The assessee in the year under consideration returned an income of Rs. 47,11,359/-. In computing such income, a sum of Rs. 1,54,91,436/- was claimed as a....
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....rkup of 15% on the direct and indirect costs incurred by it for the software development activity. 2.6. As per its reporting in Form No.3CEB the assessee in the year under consideration undertook the following international transactions with its AE's:- Name of International Transaction Value of International Transaction (INR) Provision of software development services 180,582,716 2.7. For the purposes of comparability analysis the assessee in its TP study selected TNMM as the most appropriate method and operating profit / total cost (OP/TC) as the Profit Level Indicator (PLI). Benchmarking analysis was made using multiple year data and 13 comparables were selected. The transaction was claimed to be at arm's length as the average OP/TC of the 13 comparables at 4.07% was lower than 6.95% OP/TC margin of the assessee. 3. The use of multiple year data resorted to by the assessee was objected to by the TPO. He was of the view that in the absence of any justification for multiple year data the resort to the same was in violation of Rule 10B(4) of the Income Tax Rules, 1962. The filters selected by the assessee also did not meet with the approval of the TPO for reason....
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.... the basis of facts and judicial precedent qua each of these comparables. PERSISTENT SYSTEMS LTD. 5.1. The exclusion of Persistent Systems Ltd it was submitted was sought on the ground that it is functionally different. The said company it was submitted derives its income from the sale of software services as well as products. The annual report of the said company it was submitted does not provide any further break-up of income into products and services. Accordingly referring to pages 154, 200, 204, 218 & 226 of the annual report compendium it was submitted that the Company cannot be treated as functionally comparable to the assessee. 5.2. During the year under consideration it was further submitted that there had been several significant events namely Persistent System Ltd. formed a wholly owned subsidiary in Singapore; acquired physical assets and human resources of another company. The company had also converted itself into a public company (evident from pages 156, 166, 168 of Annual Report). All these facts it was submitted have been consistently argued before the tax authorities. By way of the synopsis, we find reliance has been placed on the following judicial prece....
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.... ITO in ITA No.1453/Del/2014 and M/s Mindteck (India) Private Limited vs DICT [IT(TP)] No.70/Bang/2014 were relied upon for the proposition that the company should be excluded as its Revenue recognition policy was on a different basis. KALS Information Systems (Seg.) 5.4. The exclusion of KALS Information Systems (Seg.) was sought on the ground that it was functionally different. Referring to the information provided in the Annual Report it was submitted that the company is engaged in the business of software services and software products which were functionally different. The absence of segmental data, it was submitted takes the said comparable outside the purview of acceptable comparables. Bindview India P.Ltd. vs DCIT [2013] 145 ITD 436/34 taxmann.com 164 (Pune.-Trib) was relied upon for the proposition that the said comparable has been held to be different from a software development company. Income from software developed it was submitted has been accounted for on the basis of software developed and billed to its clients on acceptance thus financial information was stated to be unreliable. Reliance was placed on Cienna India pvt. Ltd. vs ITO (ITA No.1453/Del/2014) and M....
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....of the following three activities:- * Product Design services (design and development of hardware and software); * Innovation Design Engineering (Mechanical design with a focus on Industrial design); and * Visual Computing Labs Design (Animation and special effects). 5.6.1. Reliance was placed on the Telcordia Technologies India Private Limited (page 99 of the Paper Book) wherein the Mumbai Bench of the Tribunal has rejected the said comparable for benchmarking software development services. Lucid Software Ltd 5.7. The exclusion of Lucid Software Ltd was sought on the ground that the said company was a product company focusing on Advanced Non-destructive Testing (NDT) Technologies. The company it was submitted was actively involved in the Research & Development activities with leading scientific and educational institutions as such it could not be considering to be a comparable. Reliance was placed upon ITO, Bangalore vs Infinera India Ltd [2016] 67 taxmann.com 8 (Banglore-Trib.) wherein Lucid Software ltd. has been held to be non-comparable to a company providing software development services. Acropetal Technologies Ltd 5.8. The exclusion of Acropetal Techn....
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....bmission that the Revenue would be heavily relying upon these findings of the CIT(A) and the TPO. 6.2. Attention was invited to internal pages 10 to 12 where the TPO conveys his views qua these comparables and requires the assessee to address them. Inviting further attention to internal pages 21 to 23 it was submitted that the very same arguments have been considered and rejected these giving specific reasons which remain unassailed. Heavy reliance was placed on the same. For ready-reference, the same are reproduced hereunder:- 4. "The assessee has raised objections against certain comparables. These specific objections are discussed below. 4.1. Persistent System Ltd. The assessee has claimed that the company is engaged in sale of software products. The assessee has also claimed that the company owns various IP rights. The annual report of the company shows there is no expense on account of software product development. The conclusion that one can reach is that either the revenue form software product is too less or absent completely. If it would have been substantial, the company would have maintained segmental accounts. Therefore, on this account this company cannot b....
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....ge of completion method, under which the contract performance is determined by relating the actual work performed to date to the estimated total work for each contract. Any anticipated losses expected upon contract completion are recognized immediately. Changes in job performance, conditions and estimated profitability may result in. revisions and corresponding revenues and costs are recognized in the period in which the changes are identified. (iii) Other Contracts Revenue from contracts with amounts to be billed on monthly basis is recognized on rendering of services as per the terms of the contracts. Revenue from unit priced contracts is recognized on rendering of the services as per the terms of the contracts. Unbilled receivables represent amounts recognized as revenues for the periods presented based on services performed in accordance with the terms of contracts that will be billed in subsequent periods. Deferred revenue represents amounts billed in excess of revenue earned for which related services are expected to be performed in the next operation cycle. It can be seen that the assessee is engaged in contracts that are in the nature of development contracts, Therefo....
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....mpany was engaged in niche services were not assailed. 6.7. The retention of Lucid software Ltd was justified on the ground that there was no functional dissimilarity and in fact it is a good comparable as considered by the TPO and the CIT(A). The argument that there is a deviation in the accounting policy, it was submitted was considered by the TPO and rejected. It was his submission that it was for the assessee to show the so-called difference in accounting which was stated to be causing any abnormality and despite an opportunity nothing has been shown by the assessee. Heavy reliance was placed on the para 4.2 of the TPO's order and page 23 para H (ii) of the CIT(A)'s order and page 136 of the Paper Book of Annual Report compendium filed by the assessee. 6.8. Accropetal Technologies Ltd. it was submitted deserves to be retained as a comparables as the argument of the assessee that it failed the employee cost filter is incorrect on facts as discussed by the TPO in para 4.5 of his order, it was his submission that the Annual Report of the said comparable disclosed that the expenditure under the head "employee head expenditure" considering the on-site development expenses was ....
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....ental exercise which is the foundation on which the case for either side is to be build is unfortunately an exercise which is attempted without adequate care and attention either by the tax payers or by the tax authorities who both rush through this fundamental exercise at the initial stages in undue haste satisfied easily as long as their respective stand appears to be reflected. The selection when challenged at the appellate stage often results in a situation where the entire edifice crumbles despite a valiant patch work attempt to uphold the edifice and the entire selection process offered and considered stands wiped out. Though, we note that the tax payer at the stage of the TP study no doubt may be handicapped by the insufficiency of data in the public domain as it may not be sufficiently robust and readily available completely. Reverting to the facts of the present case, we note that the year under consideration is 2008-09 AY and an argument may be capable of being advanced that due to lack of exposure, expertise and experience of the litigants on the issue there may be justifiable reasons for the inadequacies in the TP study and the TP Report. Addressing the departmental sta....
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....many and it is not possible to visualise the multifarious possible options in the ever changing dynamics of the reality where the companies exist and function. However, once inclusion of a comparable is challenged then its comparability must be established on the basis of facts available for the year under consideration even if the facts come to light subsequently. The comparable cannot be allowed to remain included on account of a mistake of the parties. If challenged its justification has to be demonstrated. Accordingly the argument that filters not having been challenged act as an estoppel to the assessee cannot be accepted. We see no bar to the prayer of the assessee to argue for the exclusion of a comparable if facts warranting such a prayer can be demonstrated by the tax payer. The Tribunal being the final fact finding body as conceived by the Statute permits the tax payer to demonstrate if so considered fit by the tax payer to plead for the exclusion of a comparable on the basis of robust facts and evidences which may demonstrate that the comparable was wrongly offered or accepted at the initial stages. Thus, we find no bar to the tax payer for pleading for exclusion of a co....
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....Consulting Ltd. We find that the exclusion of the said comparable was not assailed by the assessee either before the TPO nor before the CIT(A). We further find that the assessee relying upon the precedent of ITA No.5329/Del/2012 in the case of Navisite India Pvt. Ltd. has requested for remand to the TPO to examine the abnormal factors responsible for the high volatility in the margins of the said comparable and make necessary adjustments, if so warranted. We find that in the absence of discussion on the issue by the tax authorities as the issue was not agitated by the assessee and considering the request of the Ld.CIT DR that the issue may in the circumstance be restored, we direct accordingly. The issue is restored the TPO afresh following the precedent cited. (c) KALS Information Systems Ltd. We find that the arguments of the assessee that the said comparable was distinguishable as the said company apart from software services also had software products cannot be accepted. The assessee has failed to address/rebut the consistent finding on record that segmental data has been used. No arguments controverting this fact have been advanced. No fact contrary to this finding ha....
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....s. Wherever the assessee is able to demonstrate impact as net profitability in TNMM the comparable has to be excluded. Prevalence of extra ordinary event can be one factor which may impact net profitability. However, mere existence of extra ordinary event by itself cannot be said to be a ground for exclusion of a comparable. How the events set out in the Directors Report impacted the net profitability of the said comparable has to be established and has not been addressed on facts. We further find that the Revenue has also argued that even existence of extra ordinary events itself was not canvassed before the tax authorities. Accordingly, in view of this factual deficiency the issue is restored back to the TPO. The assessee's directed to support its claim for exclusion of the said comparable on the grounds of extra ordinary event impacting the net profitability of the said company so as to justify its exclusion. (e) TATA ELxsi We find that as per judicial precedent laid down by a Coordinate Bench in the case of Telecordia Technologies Pvt.Ltd. vs ACIT [2012] 22 taxmann.com 96 (Mum) qua the software development related services segment Tata Elxsi has been held to be engaged in....
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....55 taxmann.com 150 (Mum.) has been relied upon for its exclusion. We find that in the face of the clear and consistent findings on record that employee related costs and on site expenses is 80.22% of the total expenses the precedent relied upon is of no value and distinguishable on facts. In the absence of any rebuttal on this fact, the prayer of the assessee is rejected as in the facts as they stand, we find no impediment to the retention of this comparable. 8. Addressing Ground Nos. 2.9 and 2.10, the Ld. AR has submitted that since these were the initial years when the issues were being developed, considered and understood accordingly for working capital adjustments and risk adjustments in the comparables the issues may be restored to the TPO. Inviting attention to page 19 of the impugned order para 9.10.1, it was submitted that it is not a case where the issues had been given up by the assessee as the following submissions qua working capital were advanced on behalf of the assessee:- 9.10. (J) Denying the Appellant the benefit of working capital adjustment 9.10.1. The appellant submitted that working capital adjustment is an adjustment for the opportunity cost of capita....