TaxTMI 
TaxTMI 
2017 (6) TMI 1280
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.... making comparables 5. Erred in rejecting Ancent Software International Limited, Quintegra Solutions Limited, SIP Technologies and Exports Limited and TVS Infotech Limited on the ground that they are loss making in the year under consideration; Introduction of functionally different comparables by the TPO 7. Erred in considering Acropetal Technologies Limited to be comparable to the Appellant, disregarding the fact that the company is also engaged in product development activities in addition to software services and hence is functionally different from the Appellant; 8. Erred in considering Thirdware Solutions Limited as a comparable, disregarding the fact that the company is engaged in product development services in addition to software services and does not report separate segmental accounts for the same and hence is functionally different from the Appellant; Working capital adjustment 12. Erred in not granting the benefit of working capital adjustment to the Appellant while determining the margins of comparable companies; Risk adjustment 13. Erred in not granting risk adjustments while comparing the margins of comp....
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....ed „On-site revenue‟ filter. The assessee requested for applying turnover filter, but the request of the assessee was declined. The assessee further prayed for giving risk adjustment. The said request of the assessee was also rejected by the TPO. The TPO made TP adjustment of Rs. 2,01,14,892/-. Based on the order dated 28-01-2014 u/s. 92CA(3) of the Act by the TPO, the Assessing Officer passed draft assessment order on 05-03-2014. Against the said draft assessment order, the assessee filed objections before the DRP. The DRP applied turnover filter and rejected six companies from the list of comparables made by the TPO. Further, the DRP rejected On-site filter applied by the TPO. The DRP added two companies in the list of comparables and thus, made list of 10 companies as the final list of comparables. The same is reproduced here-in-under : Sr. No. Name of Comparables PLI F.Y. 2009-10 1 Akshay Software Technologies Limited -1.07% 2 CG-VAK Software & Exports Limited (Segmental) -10.59% 3 Goldstone Technologies Limited 20.35% 4 Indium Software (India) Limited 7.16% 5 Persistent Systems Private Limited 30.50% 6 ....
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..... Vs. Income Tax Officer in ITA No. 2189/PN/2013 for assessment year 2010-11 decided on 30-11-2016. 2.3 In respect of ground Nos. 7 and 8 wherein the assessee has prayed for exclusion of Acropetal Technologies Limited and Thirdware Solutions Limited. The ld. AR submitted that both the companies should be excluded from the list of comparables as they are functionally different and have different business model. The ld. AR contended that Acropetal Technologies Limited is a product company and is performing activities onsite. The TPO applied on-site filter, however, the DRP rejected the said filter. The ld. AR contended that a perusal of the Annual Report of Acropetal Technologies Limited would show that for the Financial Year 2009-10 segmental bifurcation of revenue is given, but, there is no segmental bifurcation of revenue from IT service and IT product. The bifurcation is between Engineering Design Services, Information Technology Service and Healthcare. The ld. AR placed reliance on the decision of Mumbai Bench of the Tribunal in the case of QAD India Pvt. Ltd. Vs. Dy. Commissioner of Income Tax in ITA No. 1685/Mum/2013 for assessment year 2009-10 decided on 30-09-2016 to cont....
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.... 2.4 The ld. AR submitted that in ground No. 12 the assessee has assailed the findings of DRP in not granting the benefit of working capital adjustment while determining margin of comparable companies. The ld. AR submitted that working capital adjustment should have been given by the authorities below while determining the margin of comparable companies. In support of his submissions the ld. AR placed reliance on the following decisions : i. Demang Cranes & Components (India) Private Limited in ITA No. 32/PN/2014 for assessment year 2009-10 decided on 19-10-2016; ii. Starnet Networks India Pvt. Ltd. in ITA No. 812/PN/2013 for assessment year 2005-06 decided on 27-04-2016; iii. Demang Cranes & Components (India) Private Limited in ITA No. 120/PN/2011 for assessment year 2006-07 decided on 04-01-2012. 3. On the other hand Smt. Reena Jha Tripathi representing the Department vehemently supported the findings of DRP/Assessing Officer against which the assessee is in appeal. 4. We have heard the extensive submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered various decisions ....
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....d to be consistent loss making when the company has incurred losses in the three consecutive financial years including the financial year in which the international transactions have been made. In the instant case Financial Year 2009-10 is relevant to the assessment year under appeal. Thus, the financial years to be considered for determining whether the company is consistent loss making are financial years 2007-08, 2008-09 and 2009-10. A perusal of the profit and loss account of Onward Technologies Ltd. placed on record shows that the said company has suffered losses in financial years 2007-08, 2008-09 and 2009-10. The profits/(losses) before tax of the company in the relevant three financial years are as under : Financial Year Profit/(Loss) before tax (in `) 2007-08 (1,65,87,281) 2008-09 (8,89,22,096) 2009-10 (5,18,75,427) Thus, it is evident from the perusal of the financial results of Onward Technologies Ltd. that Onward Technologies Ltd. is consistent loss making company, therefore, the said company cannot be considered as a good comparable." A perusal of order of the authorities below show that they have not examined the f....
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....nantly engaged in rendering services to its client's on on-site basis. As per the TPO, Akshy Software Technologies Limited rendered services at client's site unlike the services being provided by the assessee through offshore sites. The difference in operating mechanism of two business models is starkly evident. While under the on-site business model, the service provider positions its personnel on the client's site and on the other hand, in the off-shore business model, the service provider positions its personnel on its own site i.e. away from the site of the clients. The TPO in terms of his discussion in the order has attempted to deduce that the margins from onsite consultancy are lower when compared with margins from off-shore development work. He has also referred to an extract from McKinsey's research on Indian software industry competitiveness to say that because of the differences in costs between a developed country and India, it acts as motivator for the companies located in developed countries to increase its offshore sourcing of services. In our considered opinion, whether on-site business model provides higher or lower margins in comparison with offshore development w....
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.... said company further show that the company is having income from sale of licenses, revenue from subscription, etc. It has also been pointed that Thirdware has outsourced substantial portion of work to third parties and has paid Rs. 11.42 crores towards outsourcing charges during the financial year 2009-10. The Coordinate Bench of the Tribunal in the case of Approva Systems Pvt. Ltd. Vs. DCIT in ITA No. 1921/PUN/2014 for assessment year 2010-11 decided on 25-01-2017 excluded Thirdware from the final list of comparables in assessment year 2010-11 on the ground that the said company is super profit earning company and is engaged in the business of software licenses and trading of implementation activities. The relevant extract of the findings of Tribunal are as under : "11. We find that the Tribunal noted that the TPO had selected KALS Information System Ltd. and Thirdware Solution Ltd. as being comparable, whereas the case of assessee was that both the said concerns were functionally different. With regard to KALS Information System Ltd., it was pointed out that the said company was earning income from sale of application software and segmental information with respect to s....
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....high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin. Question No. 2 referred to this special bench is answered accordingly". 29.1 We find from the details furnished by the assessee that the assessee is a software developer whereas Thirdware Solutions Ltd. is engaged in the business of sale-cum-licence of software which is available from the audited accounts, the details of which are as under : Schedule : Sales As on 31-03-2009 As on 31-03-2008 Sale of Licence 22,237,588 3,916,427 Software Services 89,177,023 76,724,371 Export from SEZ unit 478,572,420 263,971,033 Export from STPI unit 162,900,630 168,863,049 ....
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.... and perused and carefully considered the material on record. It is seen from the details on record that the functions of Thirdware are in contrast with the assessee which only provides software development in the finance domain as per the instruction of its AE. Also, Thirdware has incurred expenses towards import of software services, evidencing outsourcing of software services unlike the assessee. Since, it is also engaged in outsourcing its activities as it has incurred expenses towards imports of software services, evidencing outsourcing of software services unlike the appellant company. Hence, it is functionally not comparable and cannot be treated as a comparable to assessee. We order accordingly." Thus, in view of the aforesaid facts and the decisions discussed above, we are of considered view that Thirdware is not a good comparable being functionally different. Thus, Thirdware has to be excluded from the final list of comparables. Accordingly, ground No. 8 raised in the appeal by the assessee is allowed. 10. In ground No. 12 the assessee has prayed for granting working capital adjustment while determining the margins of comparable companies. The ld. AR submitted that ....
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....ons of section 92C(2) of the Act. The ld. AR has submitted that if Ancent Software International Limited and Quintegra Solutions Limited are included in the list of comparables; and Acropetal Technologies Ltd. and Thirdware Solutions Limited are excluded from the list of comparables, the average margins of the assessee will fit within +/- 5% range. However, before us no working has been furnished by the ld. AR to substantiate his point. Accordingly, we remit this issue back to the file of TPO to consider the contentions of the assessee and decide this issue, in accordance with law. Thus, ground No. 14 raised in the appeal is allowed for statistical purpose. 13. In ground No. 15, the assessee has prayed for directions to rectify the computational error. The ld. AR submitted that the Assessing Officer has determined total income of the assessee at Rs. 4,44,13,971/- in the final assessment order instead of Rs. 1,21,75,260/-. The Assessing Officer is directed to verify the claim of assessee and rectify the same, if there is any error. Accordingly, ground No. 15 raised in the appeal by the assessee is allowed for statistical purpose. 14. In ground Nos. 16 to 18, the assessee has p....
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....the list of final comparables. Both these companies should have been removed from the list of comparables as both the companies have turnover of more than Rs. 200 crores in the period relevant for comparison. The ld. DR submitted that a perusal of Profit and Loss account of Zylog Systems Limited for the period ending 31-03-2010 would show that the turnover of the said company from software development services and products is Rs. 7,78,12,93,691/-. Similarly, in the case of Persistent Systems Private Limited the overseas turnover of the company from the sale of software services and products for the financial year ending on 31-03-2010 is Rs. 4,73,98,20,000/-. Thus, both these companies fall outside the purview of comparison, if turnover filter is applied. (iii) On-site revenue filter : The DRP has erred in directing to reject onsite revenue filter applied by the TPO. The companies engaged in providing on-site services and off-site services have different business model. Therefore, the companies carrying on activities on-site cannot be compared with companies performing activities off-site. 19. Controverting the submissions made on behalf of the Department the ld. AR subm....