2016 (12) TMI 1755

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....'ble "ITAT") under section 253(l)(d) against the order passed by the learned AO in pursuance of the directions of the Hon'ble DRP A Software services - Transfer Pricing: The grounds mentioned hereinafter are with without prejudice to one another. 1. The learned DRP and the learned TPO grossly erred in law and facts of the case determining the ALP of the international transaction of the Appellant on account of provision of software services and proposing a transfer pricing adjustment of Rs. 18,601,980. 2. That on the facts and circumstances of the case, the learned DRP and the learned AO erred in upholding the rejection of Transfer Pricing ('TP') documentation by the learned TPO without appreciating the contentions, arguments, and evidentiary data put forward by the Appellant during the course of the proceedings before them, and in doing so have grossly erred: a. in upholding the rejection of comparability analysis carried in the TP documentation and conducting a fresh comparability analysis for determining the arm's length price by the learned TPO. b. in adopting the arm's length mark up to be 26.29% [wor....

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....egasoft Limited, Flextronics Software Systems Limited, KALS Information Systems Limited, AvaniCimcon Technologies Limited. Lucid Software Limited, Ishirmfotech Limited, E-zest Solutions Limited, Persistent Systems Limited and R Systems International Limited which are functionally not comparable to the assessee's business. k. in upholding the actions of the learned TPO in accepting Celestial Labs Limited as a comparable company even though it is a contract research company which also engaged in bio-informatics and hence functionally dissimilar to the assessee. 1. in upholding the actions of the learned TPO in accepting companies like Megasoft Limited. Flextronics Software Systems Limited and Helios & Matheson Information Technology Limited which have abnormal/fluctuating profit margins. In doing so the learned DRP and learned AO have disregarded the jurisdictional ITAT ruling in the case of SAP LABS India Pvt, Ltd. Vs. ACIT (reference ITA No. 398/Bang/2008) and E-Gain Communication Private Limited (reference: ITA No. 11685/PN/07 - Pune). m. in upholding the actions of the learned TPO in rejecting Thinksoft Global Services Limited by stating that it is ....

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....Services India Private Limited and Others (ITA No. 70/2009) wherein it has been held that what is excluded from 'export turnover' must necessarily be excluded from 'total turnover'. C. Interest under section 234B & 234D of the Act. The assessing officer has erred in levying interest under section 234B & 234D of the Act which is consequential in nature. The appellant craves leave to add, alter and modify the above groundg during the course of the appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that the order of the Assessing Officer be set aside." 3. The facts in brief are as follows: Capco IT Services India Pvt. Ltd. ("Capco IT") is engaged in the business of rendering software development services to its Associated Enterprises ("AE"). Capco IT is remunerated on a cost plus basis for the services rendered. 4. The margins of Capco IT as compared by TPO are as follows: Particulars Amount (in INR) Operating income 12,58,41,547 Operating Costs 11,43,74,477 Operating Profit (Op. Income -Op. expenses) 1,14,67,070 Operating/Net margin (OP/TC) 10.02% ....

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....ent) Reject 1. Functionally dissimilar 2. Abnormally high growth rates 3. Fluctuating margins from 5.68% in 2004 to a loss of (18.73%) in 2005 To a profit of 40.75% in 2006 and 21.11% in 2007 4.Revenue from the software services is 27.60% of the total operating revenue which is much less than the 75% threshold   Infineon Technologies India (P.) Ltd v. Dy.CIT [IT(TP)A No. 1068/Bang/2011] 2 Avani Cimcon Technologies Ltd. Reject Functionally dissimilar Infineon Technologies India (P.) Ltd. (supra) 3 Ceiestial Labs Ltd. Reject Functionally dissimilar Infineon Technologies India Pvt. Ltd. (supra) 4 Datamatics Ltd. Accept     5 E Zest Solutions Ltd. Reject Functionally dissimilar Infineon Technologies India Pvt. Ltd. (supra) 6 Flextronics Software Systems Ltd. (Segment) Reject 1. Functionally dissimilar 2. Upper limit of turnover filter   Infineon Technologies India Pvt. Ltd. (supra) 7 Geometic Software Ltd. (Segment) Accept     8 Helios & Matheson Information Technology Ltd., Reject 1. Functionally dissimilar 2. Abnormal Margin....

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.... TPO Ld.DRP's grounds For exclusion Appellant's arguments 1. Akshay Software Technologies Ltd. Predominantly Onsite Onsite filter is not a valid Offer. 2. Maars Software International Ltd. Functionally not Comparable The company is functionally comparable 3. VJIL Consulting Ltd. Predominantly onsite Onsite filter is not a valid filter 10. We direct the TPO to include Akshay Software Technologies Ltd., (2) Maars Software International Ltd. and (3) VJIL Consulting Ltd., for the reasons by the Assessee. 11. Further the Assessee has raised a ground that the learned AO/DRP erred in not providing appropriate risk adjustment. 12. The facts are that during the year under consideration, the Appellant is a captive contract IT enabled service provider to its AEs. Being a captive service provider, the Appellant is devoid of any significant risks relating to its business operations. Further, the Appellant submitted that the significant business and entrepreneurial risks are borne by the AE as it owns all the valuable intellectual property rights (know-how, copyrights etc.) and other commercial or marketing intangibles (brand names, trad....

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....e international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. It is submitted that working capital adjustment is made for the time value of money lost when credit time is provided to the customers. It was submitted that the assessee is not an entrepreneur but a captive service provider and its entire funding needs are provided by the A.E. This being so, the assessee does not stand to lose anything as it is compensated on a total cost plus basis. It was further submitted that the assessee is running its business without any working capital adjustment is to be made to this situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the assessee. 18. We heard both parties. Reliance on the ruling of the Hyderabad Bench of Hon'ble Tribunal in the case of Adaptec (India) (P.) Ltd. v. Asstt. CIT [2015] 57 taxmann.com 307, wherein it was held that there is no need for making any negative working capital adjustment assessee does not carry any working capital risk. The relevant extract of the aforementione....