TaxTMI 
TaxTMI 
2018 (4) TMI 32
X X X X Extracts X X X X
X X X X Extracts X X X X
....th price Ground No.3 - Use of additional filters/ modification of filters Erred in inappropriately introducing additional filters (selection criterias) and modifying the filters adopted by the Appellant and therefore, inappropriately rejecting certain comparable companies and determining inappropriate companies as comparables to the Appellant Ground No.4 - Comparison with companies having supernormal profits Erred in selecting the companies having super normal profits as comparables to the Appellant, it being a captive service provider Ground No.5 - Rejection of certain comparable companies Erred in rejecting comparable companies from the set of comparable companies identified by the Appellant in respect of international transaction pertaining to provision of software development services Ground No.6 - Determining inappropriate companies as comparables to the Appellant Erred in considering dissimilar companies as comparable companies to the Appellant for determining the arm's length price of the international transaction Ground No.7 - Adopting inappropriate approach of selection of companies as comparables Erred in adopting inappropriate approach of selectin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al Ltd. and Softsol India Ltd. However, the assessee is aggrieved by inclusion of following concerns:- i) Bodhtree Consulting Ltd. ii) E-infochip Ltd. iii) eZest Solutions Ltd. iv) Helios & Matheson Information Technology Ltd. v) KALS Information Systems Ltd. (application software seg). 5. The learned Authorized Representative for the assessee further pointed out that the following concerns need to be included in the final list of comparables:- i) Thinksoft Global Services Ltd. ii) CG Vak Software & Exports Ltd. (Seg) iii) SIP Technologies & Exports Ltd. 6. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the order of Assessing Officer/DRP and pointed out that the upward adjustment made in the hands of assessee needs to be upheld. 7. In respect of second issue of risk adjustment, the learned Authorized Representative for the assessee pointed out that the said issue stands covered by the order of the Pune Bench of Tribunal in DCIT Vs. Applied Micro Circuits India Pvt. Ltd. in ITA No.1250/PUN/2015 along with CO No.43/PUN/2017, relating to assessment year 2010-11, order dated 24.11.2017, wherein the principle laid down by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....justment has to be made in the hands of assessee to the extent of Rs. 7,64,94,655/-. The Assessing Officer in the draft assessment order passed has made above said adjustment of Rs. 7.64 crores on account of transfer pricing provisions. The DRP gave certain directions and following the directions of DRP, final set of comparables were as under:- Sr. No. Name of comparable Working capital adjusted margin (%) 1 Bodhtree Consulting Ltd. 15.49% 2 E-infochip Ltd. 25.07% 3 eZest Solutions Ltd. 26.45% 4 Goldstone Technologies Ltd. 19.66% 5 Helios & Matheson Information Technology Ltd. 30.23% 6 KALS Information Systems Ltd. (application software seg) 26.15% 7 L G S Global Ltd. 21.84% 8 Softsol India Ltd. 10.94% Arithmetic Mean 25.64% 10. The assessee before us has raised the issue in respect of selection of comparables and is aggrieved by selection of certain comparables and exclusion of certain comparables which he pleaded to be included in view of its comparability. The learned Authorized Representative for the assessee pointed out that the issue raised in respect of inclusion / exclusion of comparables is squarely covered....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngineering services, then the same is comparable to Bodhtree Consulting Ltd. Reliance placed upon by the assessee on the ratio laid down by the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT in ITA No.2236/PN/2012, relating to assessment year 2008-09, vide order dated 18.11.2015, it was held to be distinguishable since Bodhtree Consulting Ltd. was not providing data cleaning services. 12. On perusal of record, we find that the concern Bodhtree Consulting Ltd. was considered by the TPO to be functionally comparable despite the submissions of assessee that it was functionally different, wherein the said concern was also engaged in software products. Since no segmental details were available and the concern Bodhtree Consulting Ltd. being software product development company as well as providing services, can the same be held to be functionally comparable with the assessee which is providing software development services to its associate enterprises. While benchmarking any international transactions undertaken by the assessee, the endeavour should be made to compare the results shown by the assessee with such concerns which are functionally comparable. Where the margins....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was engaged in embedded software development services. He further pointed out that the quantum of hardware sale had to be seen. Since the assessee and also the Assessing Officer / TPO had selected the companies with filter of 75%, then the concern E-Infochips Ltd. is to be included in the final set of comparables. He referred to the decision of Hon‟ble High Court of Gujarat in the case of Allscripts (India) (P.) Ltd. (2016) 72 taxmann.com 305 (Guj) had reversed the decision of Tribunal to exclude E-Infochips Bangalore Ltd. He stressed that where the assessee was also engaged in sale of software products and ITES, then the assessee was functionally comparable to E-Infochips Ltd. The assessee while carrying out its transfer pricing analysis had applied certain filters to select the concern by applying the filter of accept / reject matrix, the concerns which they do not have significant (less than 25%) foreign exchange earning were held to be reason for rejection of companies as comparable. 16. The perusal of financial reporting of the concern E-Infochips Ltd. at page 625 of the Paper Book reflects that the income from software services at Rs. 21.03 crores with consulting serv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....concern e-Zest Solutions Ltd. being a product company is not to be included as comparable to the assessee, which is engaged in providing IT services to its associated enterprises, hence the same is to be excluded from final list of comparables. 18. The next concern which has been selected by the Assessing Officer / DRP but which according to the assessee is not comparable is Helios & Matheson Information Technology Ltd. on the ground of its turnover. The assessee claims that the TPO had adopted turnover filter of Rs. 1 to 200 crores. However, the concern Helios & Matheson Information Technology Ltd. had turnover of Rs. 213 crores and hence, the same was not to be included in the final list of comparables. The TPO had included the said concern to be comparable on the basis of cost of turnover. The learned Authorized Representative for the assessee in this regard pointed out that total turnover of assessee for the year under consideration was Rs. 55.21 crores. He further pointed out that the issue in the present appeal is squarely covered by the order of Tribunal in the case of MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra). 19. The learned Departmental Representative fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the Hon'ble Bombay High Court in CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014, judgment dated 26.09.2016 has held that KALS Information Systems Ltd. and Helios & Matheson Information Technology Ltd. are to be excluded being not functionally comparable being engaged in selling software products, which was different from the activity undertaken by the assessee i.e. rendering of software services to its holding company. Following the same parity of reasoning, we hold that KALS Information Systems Ltd. is not to be included in the final set of comparables. 25. Now, coming to the concern CG VAK Software & Exports Ltd. and SIP Technologies & Exports Ltd. which were excluded on the ground that they were persistent loss making concerns. 26. The learned Authorized Representative for the assessee pointed out that CG VAK Software & Exports Ltd. was not persistent loss making concern. In this regard, he pointed out that the margins of said concern in the earlier two years was positive and only in the year under consideration, there was loss of 1.97%. He further stressed that segmental details were available in respect of revenue from software development and reven....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction would not reflect a normal business situation. In the present case, the comparable in question has incurred a loss; notably, incurrence of loss in business operations is a normal incident of business and there is nothing to suggest in the present case that it has been incurred in any abnormal situation. It is also not the case of the Revenue that the said concern is a consistently loss making concern. Therefore, the said concern cannot be excluded merely because of incurrence of loss in this year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. Thus, on this aspect, assessee succeeds." 29. Accordingly, we allow the ground of appeal raised by the assessee and hold that CG VAK Software & Exports Ltd. is to be included in the final list of comparables. 30. In respect of SIP Technologies & Exports Ltd., the operating marg....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... activities which are parts of the process of software development activities. It is quite justifiable to comprehend that the activity of verification of software and validation of software are activities which are part and parcel of the process of software development. In fact, before the DRP, assessee referred to the Wikipedia meaning of the expression „Verification‟ and „Validation‟ in the context of software. The expression „Verification‟ was explained to be referring to the process of evaluating the software to determine whether the products of a given development phase specified the conditions imposed at the start of that phase. Similarly, the expression „Validation‟ was explained to be the process of evaluating software during or at the end of the development process to determine whether it satisfies specified requirements. In our considered opinion, where it is admitted that the activity being performed by the assessee is also a part of process of software development for its associated enterprise, then the captioned activities being undertaken by Thinksoft Global Services Limited, which ostensibly also are a part of the whole....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee for differences between functional and risk profile of comparable companies vis-à-vis assessee. The learned Authorized Representative for the assessee in this regard pointed out that the assessee was risk mitigated entity, whereas the comparables were risk bearing. He further stated that the assessee had furnished the working as per the decision of Bangalore Bench of Tribunal in Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 and the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448. The learned Authorized Representative for the assessee in this regard placed reliance on the ratio laid down by the Pune Bench of Tribunal in MSC Software Corporation India Pvt. Ltd. Vs. ACIT in ITA No.46/PUN/2013, relating to assessment year 2008-09, order dated 22.03.2017. 19. We find that the issue is squarely covered by earlier decisions of the Pune Bench of Tribunal in MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra), wherein the said concern was also captive service provider to its associated enterprises and had claimed to be risk free. It had asked for risk adjustment in the margins of finally selected comparable....