TaxTMI 
TaxTMI 
2018 (1) TMI 1318
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....09. 3. The Revenue in ITA No.756/PUN/2014 relating to assessment year 2008-09 has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case, the Learned Commissioner of Income -tax (Appeals) erred in directing the Assessing Officer to exclude KALS Information Systems Ltd. from the list of comparable companies ignoring the fact that KALS Information Systems Ltd. has major turnover from software development services and qualifies all the filters applied by the TPO. 2. On the facts and in the circumstances of the case the Learned Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to include Akshay Software Technologies Ltd. as comparable company ignoring the fact that Akshay Software Technologies Ltd. has an altogether different business model and that functions, assets and risks were incomparable. 3. The appellant craves leave to add, alter or amend any or all the grounds of appeal. 4. The assessee in ITA No.761/PUN/2014, relating to assessment year 2008-09 has raised the following grounds of appeal:- The grounds hereinafter taken by the Appellant are without prejudice to one another. 1. That the order passe....
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....le 1(1), Pune („Assessing Officer‟ or „AO') and learned Deputy Commissioner of Income Tax - Transfer Pricing - III, Pune („Transfer Pricing Officer‟ or „TPO‟) have erred in not providing working capital adjustment while computing the arm's length mark-up of software development services provided by the Appellant to its Associated enterprises. 6. Briefly, in the facts of the case, the assessee for the year under consideration had entered into international transactions of provision of software development services to its associated enterprises amounting to Rs. 5,47,85,158/-. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) to benchmark the arm's length price of international transactions of assessee. The assessee had applied TNMM method and selected certain companies as comparables. The arithmetic mean margin of said concerns was 5.33%, whereas the margin of assessee was 11.50%. The TPO however, rejected all the comparables selected by the assessee in its TP study report and selected fresh set of comparables to benchmark the international transactions of provision....
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....ming. The assessee undertakes development of functional specifications and requirement analysis for software modules as well as coding of the software for Amberpoint. During the year under consideration, the assessee had rendered software development services to the tune of Rs. 5,47,85,158/- to its associated enterprises. The issue which arises in the cross appeals filed by the assessee and the Revenue is the benchmarking of said rendering of software development services by the assessee to its associated enterprises being international transaction. The assessee had applied TNMM method to benchmark its international transactions and had selected eight concerns to be functionally comparable. The PLI of assessee i.e. OP/OC was worked out to 11.50%, as against which the PLI arithmetic mean of comparables worked out was 5.33%. However, the TPO undertook fresh study and selected another set of comparables than the one selected by the assessee. The dispute which arises in the present cross appeals is final selection of comparables. The TPO had found the following comparables to be functionally comparable:- S.No. Name of Comparable Company OP/TC 1 Bodhtree Consulting Ltd. 19.14% 2 ....
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....o 200 crores. Once a range has been applied, then there is no question of holding the same to be within +/- 10% of upper filter applied by the TPO. The total turnover of the assessee for the year under consideration was only Rs. 5.47 crores and the concern selected had turnover of Rs. 213 crores. Even if functionally comparable, then the margins could not be applied as it does not fit into filters applied by the TPO, against which the assessee has no dispute. 15. We find similar issue of exclusion of the concern Helios arose before the Tribunal in the case of MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra) and the Tribunal vide para 6 at page 7 held as under:- "6. The issue in ground of appeal No.3 raised by the assessee is the application of turnover filter of Rs. 1 to Rs. 200 crores as comparables selection criteria, as against the turnover filter up to Rs. 100 crores applied by the assessee for identifying the comparable companies. The first part of the issue raised by way of ground of appeal No.3 is against the application of turnover filter of Rs. 1 to Rs. 200 crores and not Rs. 100 crores as applied by the assessee. The learned Authorized Representat....
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....ethod is that the said concern should be functionally comparable and the second step is whether it falls within the filters applied for benchmarking. The concern FCS was engaged in IT and ITES segment. The functional profile of the said concern is placed at page 908 onwards of the Paper Book. The annual report of the said concern reflects the said company to be engaged in different fields and the percentage of revenue from each segment was as under:- IT consulting - 44% Application support - 11% Infrastructure Management Services - 15% E-learning and Digital Consulting - 30% 20. It may be pointed out herein itself that the application support, infrastructure management services are in relation to ITES services. Further, E-learning and Digital consulting are not in relation to software development services. Therefore, total revenue in relation to software development activity was only 41% of total turnover. Further, in respect of different segments of said concern, no segmental profits were available. The relevant portion of Balance Sheet and Profit and Loss Account are placed at pages 953 and 954 of Paper Book. In view thereof, where the asse....
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....or the purposes of comparability analysis. Apart therefrom, it has been pointed out that the said concern vide a communication dated 13.01.2009 addressed to the Addl.CIT (TP), Hyderabad confirmed that its core business was that of software development service provider. Further, according to the learned CIT-DR even the error in the segmental reporting by the said concern would not alter the bigger picture that it was deriving income mainly from software development service. Accordingly, inclusion of the said concern in the final set of comparables is sought to be defended." 22. Accordingly, we direct the Assessing Officer to exclude FCS from final list of comparables. 23. The third concern whose inclusion has been objected to by the assessee is e-Zest. The case of assessee is that the said concern is engaged in diversified activity and is a product company. The learned Authorized Representative for the assessee referred to the decision of Pune Bench of Tribunal in MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra) relating to the year under appeal and pointed out that the said concern was excluded because of its being a product company. The relevant findings o....
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....15 had held that both Akshay Software Technologies Ltd. and Maars Software International Ltd. were to be rejected being on-site developers while comparing the margins with off-site developers. The said proposition was again applied by the Pune Bench of Tribunal in BMC Software India Pvt. Ltd. Vs. DCIT in ITA No.1425/PN/2010, relating to assessment year 2006-07, order dated 16.03.2016. Applying the said principle, we hold that Akshay Software Technologies Ltd. is to be excluded from the final list of comparables as done by the TPO. Applying the said principle, we further hold that the concern at serial No.3 i.e. Maars Software International Ltd. being on-site developer is also to be excluded from the final set of comparables. Similarly, the concern at serial No.6 i.e. R S Software (India) Ltd. is on-site developer and the same is to be excluded from the final list of comparables." 27. In view of the concession of assessee, we hold that Akshay is to be included in the final list of comparables. Accordingly, the second issue raised by the Revenue stands allowed. 28. Now, coming to the last concern CG-VAK, which was excluded from the list of comparables on the ground th....
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....rmining its arm's length price. Ostensibly, the whole objective of the transfer pricing proceeding is that the contours of an un-controlled transaction shall reflect a measure of arm's length price of the tested international transaction. The un-controlled transaction, if it reflects a loss, would not normally be excludible unless any peculiarity in such un-controlled transaction is brought out. For instance, the un-controlled transaction is of an entity which is consistently loss making or that the loss has arisen in the un-controlled transaction on account of an abnormal fact-situation, etc. In such situations, ostensibly, the un-controlled transaction 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 l....