TaxTMI 
TaxTMI 
2018 (4) TMI 429
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....ncome-tax Act, 1961 (the Act') read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'). 3. That the learned DRP erred both in facts and law in confirming the action of the learned AO/TPO by making an adjustment to the price charged by the Appellant in respect of software development services ('SWD') provided to its associated enterprises by INR 116,865,282, holding that the international transaction does not satisfy the arm's length principle envisaged under the Act and in doing so, the learned DRP grossly erred in; (a) Upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis based on the application of additional filters performed by the learned TPO in the TP Order. (b) Upholding the learned TPO's action in disregarding application of multiple year/prior year data as used by the Appellant in the TP documentation and in holding that current year (i.e. Financial Year 2012-13) data alone should be used for comparability. (c) Upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that avai....
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....and Akshay Software Technologies Limited. (j) Upholding the learned TPO's action in rejecting the Appellant's contention against the use of information u/s. 133(6) of the Act and stating that since section 133(6) is used to verify the information given in the Annual Report and such information supports the information available in the Annual Report, in such circumstances the use of information collected under section 133(6) is appropriate. (k) Upholding the learned TPO's approach of not providing risk adjustment and in thus ignoring the risk insulated nature of the services provided by the Appellant and the fact that full-fledged entrepreneurial companies are selected as comparables. (l) Upholding the learned TPO's approach in concluding that there is no correlation between the operating mark-up on cost earned and the turnover of a company and in thereby failing to appreciate that the learned TPO erred in failing to reject companies which have a large scale of operations when compared to the Appellant. (m) Upholding the learned TPO's approach in not accepting the Net Fixed Asset to Sales filter of 15% applied by the Appellant ....
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....92D(3) of the Act. It was the case of the assessee that the international transactions have been classified into software development segments in the TP document and the search and comparability analysis was done using the software development services as the primary function. As a result of the search process the assessee had adopted 26 companies in respect of software development activities as comparables for benchmarking analysis and has adopted the TNMM as the most appropriate method. 3. The TPO was not convinced with the TP document maintained by the assessee and has pointed out various defects in the TP study prepared by the assessee, as succinctly mentioned by the TPO in para 4.1 of his order. Thereafter the TPO has rejected the TP study of the assessee. It is mentioned at bar by the Ld. AR that the TPO has considered and shortlisted six comparables and has calculated the arithmetic mean of the operating profit/OC of these companies at 21.53%. The TPO at page 27 has arrived at the final set of comparables, which are the following six companies : 1. CGVAK Software & Exports Ltd. 2. Larsen & Toubro Infotech Ltd. 3. Mindtree Ltd. (seg) 4. ....
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....sis. The TPO arrived at the conclusion of keeping the following seven comparables for the purpose of computing the ALP of the assessee, as under : Sl. No. Name of the comparable OP/OC 1 CG-VAK Software Exports Ltd. 20.45% 2 ICRA Techno Aalytics Ltd. 17.10% 3 Larsen & Toubro Infotech Ltd. 26.06% 4 Mindtree Ltd. (seg) 20.23% 5 Persistent Systems Ltd. 28.27% 6 R S Software (India) P. Ltd. 17.41% 7 Tech Mahindra Ltd. (seg) 21.18% Unadjusted average margin 21.18% The assessee had filed a reply to the show cause notice and had objected to the inclusion of CG-VAK Software Exports Ltd., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. The TPO has considered the objections raised by the assessee with respect to exclusion of these three companies. However, the TPO was not convinced and therefore has rejected the contention of the assessee and has proposed a TP adjustment to the tune of Rs. 92,119,614/-. Feeling aggrieved by the above addition, the assessee filed objections before the DRP. At the time of filing the objections, the assessee also sought inclusion of the following four c....
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.... furnish these documents before the TPO, the same cannot, be remitted at this stage. The ITAT, Bangalore in case of Anupam Kothari, ITA No. 837 (Bang) 2012 held that for admission of additional evidence, it is required for the assessee to show that authorities had decided its grounds without giving sufficient opportunity to adduce evidence. Considering the above the request of assessee for admission of additional evidence is not accepted. Thus the objection of the assessee in relation to these comparables is not accepted. Thus the assessee is aggrieved and is in appeal before this Tribunal, on various grounds mentioned herein-above. 4. For the purposes of purpose of adjudicating the appeal, we will be dealing with each comparable separately/collectively in the following paragraphs. CG-VAK Software Exports Ltd : 5. First of all the Ld. AR has drawn our attention for exclusion of M/s. CG-VAK Software Exports Ltd. In this regard it was the contention of the assessee that it is seeking exclusion of the said company as it cannot be compared with the assessee for the following reasons : (i) That M/s. CG - VAK Software Exports Ltd. is engaged in product development (ii) ....
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....ecord. The activities mentioned hereinabove in the annual report and pointed out by the Ld. AR during the course of argument clearly shows that CG - VAK Software Exports Ltd. is a software development company and not a product company. For the purposes of branding CG - VAK Software Exports Ltd. as a software product development company, it was incumbent upon the assessee, to prove that CG - VAK Software Exports Ltd. is having its own software products, over which it has proprietary right or any other right. From the bare perusal of the annual report and the financials it is clear that CG - VAK Software Exports Ltd. is not having any products in its inventory and there is no mention of any work-in-progress in respect of software products. In fact from the paragraph cited herein above at page 698 of the paper book, it is clear that CG - VAK Software Exports Ltd. is a software development company and is doing the work of integration, assimilation or patch work for its client and for that purposes is also rendering some services on-site. Therefore it cannot be urged that it was a product company. In other words, the profile of CG - VAK Software Exports Ltd. matches with the profile of ....
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....d there is no element of distinction between the profile of those two companies. However at this stage we do not wish to examine the profile of the assessee company as well as the profile of Microsoft Research Lab India (P.) Ltd. (supra) as we are remitting back the matter and we leave it to the wisdom of the TPO to consider the facts of the present case (assessee) with that of Microsoft Research Lab India (P.) Ltd. (supra), and apply the decision of Microsoft Research Lab India (P.) Ltd. (supra). 11. Following the above order of the coordinate bench, these two comparables namely LARSEN & TOUBRO INFOTECH Ltd. & PERSISTENT SYSTEMS Ltd. are restored back to the file of the TPO to decide afresh in terms of the observations made hereinabove. 12. Now we are left with the following six comparables : (i) Akshay Software Technologies Ltd. (ii) Thinksoft Global services Ltd. (iii) Acropetal Technologies Ltd. (iv) Cigniti Technologies Ltd. (v) Sasken communications Ltd. (vi) Spry Resources India Pvt. Ltd. i) Akshay Software Technologies Ltd. : 13. It was submitted by the assessee that Akshay Software Technologies Ltd. is engag....
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....tted that no segmental information with respect to the various activities were available and only information available is with respect to separate revenue for commission received and sale of software services. But other aspects were not available. Therefore it was submitted that Akshay Software Technologies Ltd. is required to be excluded from the list of comparables. 15. We have heard the rival contentions and perused the record. At page 576 of the annual report, fixed assets have been mentioned as under : Fixed assets : Fixed assets are recorded at cost of acquisition or construction. They are stated at historical cost less accumulated depreciation, amortization and impairment loss, if any. Product development costs are recognised as fixed assets, when feasibility has been established, the company has committed technical, financial and other resources to complete the development and it is probable that asset will generate probable future benefits. From a perusal of the above, it is clear that the company is incurring cost for product development and had recognised it as fixed assets. Therefore the company is required to be considered as a company....
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....oncern The testing process is believed to consume between one third and one hall of all software development budgets, so it is crucial that its efforts are a success. In art industry in which only 32% of projects are successful and half of all development efforts are wasted, there is little margin for error Most importantly of all however, the growing importance of applications to modern society is driving the growth of testing Increased levels of demand for applications, particularly Web 2.0 and online applications, has made their value to the business even greater yet it has also made the cost of their failure all the more tangible. Every software application requires testing in one form or another Iron a simple Web 2.0 widget through to a major enterprise system. With both consumers and businesses demanding smarter, faster and ever more sophisticated applications and the cost of application failure becoming ever greater the need for testing solutions and services which can ensure this is achieved is mere pressing Over the last 5-6 years India has become one of the leading destinations for outsourcing of Software resting Services accounting for....
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....mation across the test value chain and also entering into partnerships with toots/solution providers to offer maximum business value to our customers. Thinksofts has put the right engines in place to drive growth and we believe our domain focus and our niche service offerings places in a very good pedestal to grow at a much faster pace than the industry in the future. Further out attention is also drawn to page 647 where in the notes to financial statement for the year ended 31.03.2013, it is mentioned as under : "..... The company is an India based software service provider primarily delivering software validation and verification services to the banking and financial services industry worldwide. The company has invested in five wholly-owned subsidiaries in Singapore, USA, Germany, UK and UAE for market development and service delivery in the respective regions." On the basis of the above it was submitted the predominant character of Thinksoft Global Services Ltd. is of software development and the hair-split approach treating a company into software development and software testing cannot be classified differently. It was submitted that testing of the soft....
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....various languages, skills and experience is required to development a software and customise it for the requirement of the customer. For the purpose of testing the software the requirements of tools and skills are different. Therefore the assets employed in the form of expertise of the employees in the form of testing the software will be quite different and therefore in our considered opinion, both the companies cannot be compared and therefore, we have no other option but to reject the contention of the Ld. AR. The Bangalore bench of the Tribunal in various matters including Trilogy E Business Software Ltd. v. Dy. CIT [2013] 29 taxmann.com 310.), had considered the exclusion of Thinksoft Global Services Ltd. for the AY 2010-11, as the DRP has applied the on-site filter. Similarly in the matter of Kodiak Net Works India (P.) Ltd. v. Dy. CIT [2017] 87 taxmann.com 2 (Bang. - Trib.), the Tribunal has not agreed with the contention of the Ld. DR for excluding this company on the premise of revenue earned by it on account of foreign exchange gains. However the argument of a testing company was not raised in any of the matters cited before us. No other decision was cited before us by bo....
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.... assessment proceedings and the purpose of providing the proceedings before the DRP is to ensure due and fair adjudication of the ALP by comparing the operating profit/operating cost of the assessee with that of the functionally comparable companies. Firstly it is the duty of the TPO to bring on record the functionally comparable companies and in case both the parties failed to bring on record at the TPO level, then for that purposes even the DRP can also bring in companies which are functionally comparable with that of the assessee with a small caveat that in case the assessee is bringing in a new comparable then in both the cases the TPO/DRP should be given opportunity to deal with those comparables. In the present case needful has not been done, therefore in the considered opinion of the bench these aspects of examining the functional profile of these four companies, namely, Acropetal Technologies Ltd., Cigniti Technologies Ltd., Sasken communications Ltd. and Spry Resources India Pvt Ltd., is required to be remanded back to the file of the TPO for examining afresh. In any case, we are remitting back the two companies, namely Persistent Systems Ltd. (seg) and Larsen & Toubro Inf....