AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (3) TMI 575
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....Ld. Counsel for the assessee is that there are four comparables i.e. (i) Persistent Systems Ltd. (ii) Thirdware Solutions Ltd. (iii) Cigniti Technologies Pvt. Ltd. & (iv) Mindtree Ltd. taken by the Ld. Transfer Pricing Officer (TPO) which the assessee pleads that they should be excluded from the final list of comparable since they are functionally or segmental wise not comparable company. That apart, the assessee has also prayed for inclusion of one company i.e. Akshay Software Technologies Ltd. With regard to the company i.e. R.S. Software Ltd., the Ld. Counsel for the assessee submitted that this company was initially taken by the assessee as comparable company which is accepted by the TPO but now, the assessee wants this company to be excluded from the final list of comparable and therefore, this issue also will be adjudicated. First, we would take up "Transfer Pricing Adjustment" ground regarding exclusion of certain comparable companies i.e. (i) Persistent Systems Ltd. (ii) Thirdware Solutions Ltd. (iii) Cigniti Technologies Pvt. Ltd. & (iv) Mindtree Ltd. EXCLUSION OF COMPANIES AS COMPARABLES TO SOFTWARE DEVELOPMENT SERVICE SEGMENT (A) Persistent Systems Limited:- ....
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....erwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology-shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ". The TNMM method depends on accurate data with respect to all the three elements- wherever they apply. In the Comparable Uncontrolled Price (CUP) method-which is premised upon the elements in Rule 10B(1)(a), the methodology adopted in the price charged or paid for property transfer or services provided in the Comparable uncontrolled transaction. Therefore, the nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to be applied. From this perspective, the revenue‟s contention that segmental data was available cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot l....
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....rable are in the nature of software license acquired for use in the operation of the company and they are not the software products generating revenue. The disclosure in the annual report regarding the acquisition of the products relate to the group as a whole and not to the stand alone as entity whose financials are compared. The R&D expenditure of the comparable relates to cross improvements and not to innovate on new products or earning additional revenue. Hence, the R&D is not affecting the margin of the company. The TPO had applied related party filter of greater than 25% and clearly this company passed the filters. Hence, the TPO rejected the contentions of the assessee and held the company as comparable. The DRP held that the company is functionally similar to the assessee. 10.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that it was not functionally comparable as it was engaged in significant product development. The Ld. AR relied on the order of the ITAT, Chennai in the case of Symantec Software & Services India (P) Ltd. vs. DCIT 79 taxmann. com (Chennai-Trib.) wherein it was held as follows: "10. We heard the rival submissions....
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....ebsite extracts indicate that the company is in the business of product design services. iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, the company, i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e., Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software....
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....from the set of comparables for the year under consideration. It is ordered accordingly." 13.3 It is clear from the finding of this Tribunal that this company is engaged in the product developing and product design services which is similar with the software development services provided by the assessee. Accordingly, following the decision of the co-ordinate bench of this Tribunal (supra) we direct the TPO/A.O. to exclude this company from the list of comparables." 10.4 The Ld. AR relied on the order of the ITAT, Bangalore in the case of MetricStream Infotech (India) Pvt. Ltd. vs. DCIT in IT(TP)A Nos. 1418 & 2735/Bang/2017 dated 27/02/2019 which we have discussed in earlier para. 10.5 We have heard the rival submissions and perused the material on record. In view of the above orders of the ITAT cited in para 10.1 to 10.4 of this order, we direct the AO/TPO to exclude this company from the list of comparables on the same reason given by the co-ordinate Bench of Bangalore." 14. In view of the matter and following the decisions of the Hon'ble Delhi High Court as well as various Tribunals, Persistent Systems Limited cannot be treated as ....
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....ch of the Tribunal, Pune in the case of Symantec Software India Private Limited. Vs. DCIT (supra.), wherein the Tribunal regarding this company has held as follows: "16. We have perused the case records and heard the rival contentions. We observe that Thirdware Solutions Limited is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses. Further, the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. We find in the case of M/s. EMC Software and Services India Pvt. Ltd. Vs. JCIT (supra.), the Co-ordinate Bench of the Tribunal, Bangalore exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows: "(iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and ha....
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.... - Rs. 1,51,38,618/-; and `Software Services‟ - Rs. 5,72,23,072/-. This company has segments only on geographical basis and not on functional level. As such, there is no bifurcation of operating profit from Software Services and others including Sale of licence and Revenue from subscription etc. Even the first two major items of `Exports from SEZ units‟ and `Export from STPI units‟ do not show as to whether these were exports of Software products or Software Services. In the absence of the availability of any concrete information in respect of Software Services, we fail to comprehend as to how this company, also having software products in its portfolio, can be construed as comparable. The same is accordingly directed to be excluded." 18. We also observed in the case of M/s. ION Trading India Private Limited Vs. ITO (supra.) wherein the Co-ordinate Bench of the Tribunal, Delhi has exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows: "56. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the....
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....‟s test offerings include Quality Engineering, Advisory & Transformation, Digital Assurance and Quality Assurance solutions. However, the assessee has not provided any material impact in support of its claim and therefore, the contention of the assessee is rejected. Furthermore, the company was upheld as comparable by the Ld. CIT(A) for AY 2012-13 also. Thus, the company stands selected for comparable set." 13. The Ld. DRP similarly at running pages 39 to 40 as per reasons appearing in that order upheld the findings of the TPO and rejected the objection raised by the assessee. 14. The Ld. Counsel for the assessee submitted that this issue is also decided in favour of the assessee by the Co-ordinate Bench of the Tribunal, Delhi in the case of Avaya India (P) Ltd. Vs. ACIT, (2019) 112 taxmann.com 301 ( Delhi-Trib) wherein, the Tribunal has held and observed as follows: "11. Cigniti Technologies Ltd. 11.1 The learned DRP observed that the company was included by the DRP in assessment year 2012-30 and, therefore, should be retained in the year under consideration also for the same reasons. The learned counsel of the assessee referred to Page No. 2....
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....his comparable was excluded by the co-ordinate Bench of the Tribunal in the case of Marwell India Pvt. Ltd. Vs. DCIT (supra) at page 18 para 4.2 (a) of the order as under : 4.2 (a). Cignity Technologies Ltd: Ld.TPO held this company to be comparable as it is engaged in software development services. Ld. Counsel submitted that Ld.TPO treated this company to be comparable assessee, irrespective of different verticals of SWD. He submitted that assessee before us was a captive service provider rendering exclusive services to its AE and works on a cost plus markup basis. He submitted that assessee renders services under SWD segment on the basis of specifications provided by the AE. Whereas this comparable for the year under consideration has Ld. counsel placed before us the annual report of this company in support of his submissions to establish that this company has outgrown independently in software testing and has been awarded Automated Software Testing Services by Frost & Sullivan. He also submitted that this company has applied global/U.S. patents for its iGenerate Test Scenarios tool part which is a part of SMART tools portfolio. Whereas assessee before ....
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.... been directed to be excluded from the final list of comparables by our decisions of the Co-ordinate Bench of the Tribunal, Delhi/Bangalore pertaining to the assessment year 2014-15 which is relevant assessment year under consideration before us. Respectfully following the decisions of the Co-ordinate Bench of the Tribunal referred hereinabove, we direct the TPO/AO to exclude this company i.e. Cignity Technologies Ltd. from the final list of comparables. (D) Mindtree Limited :- 16. The assessee has raised following objections stating that the Mindtree Limited is not functionally comparable and the same is extracted as under: "Mindtree Limited is strcuted into five verticals- Manufacturing, BFSI, Hitech, travel and transportation and others. It offers services in the area of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing infrastructure management services, mobility, product engineering and SAP services. Mindtree Limited is engaged in diversified business activities. As per the Annual report, the company operates in f....
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.... technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. Further from the notes to account, the details of revenue recognition are as under: Revenue recognition 2.8.1 The company derives its revenues primarily from software services. Revenue from software development on time and material basis is recognized as the related services are rendered. Revenue from fixed price contracts is recognized using the proportionate completion method which is determined by relating actual project cost of work performed to date to the estimated total project cost for each contract. Unbilled revenue represents cost and earnings in excess of billings while unearned revenue represents the billing in excess of cost and earnings. Provision for estimated losses, if any, on incomplete contracts are recorded in the period in which such losses become probable based on the current contract estimates. Further it is noticed that the employee cost of this company is 1782.00 crores out of total expenses of Rs. 2502.30 crores. In terms of percentage it comes to 71.21%. ....
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....strate effect of the intangibles on the net margin of the comparable. (iii) We have heard the rival submissions and perused the relevant material on record. Inclusion of the comparable was not challenged by the assessee before the learned TPO. The assessee first time challenged the inclusion of the company before the learned DRP. The learned DRP on the grounds, firstly, that there is no effect of intangibles and R&D expenses on the margins of the company, secondly, that the broad nature of TNMM would cover a small variation of functions and, thirdly, that not disputed before the TPO, approved the company as one of the valid comparable. However, we find from the pages 434 of the Annual Report compendium that the company offers services which includes IT strategy consulting, data warehousing, business intelligence, technical support, infrastructure management services etc. The relevant part of the director's report is reproduced as under: "We have developed a comprehensive range of services allowing us to offer end-to-end IT Services to our clients. With delivery centers in India and overseas, we offer IT strategy consulting, application development and maintena....
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....t or management services rendered by the company. As there is no separate segment of software development services available in the financial statement of the company, the company at entity level cannot compare functionally with the CSD Segment of assessee and accordingly, we direct the Ld. AO/TPO to exclude the company from final set of the comparables." 18.1 The Ld. Counsel for the assessee further drew our attention to the another decision of the Co-ordinate Bench of the Tribunal, Delhi in the case of NXP India Private Limited Vs. Asst. Commissioner of Income Tax, ITA No.5140/Del/2018 for the assessment year 2014-15 which is also relevant assessment year under consideration before us wherein regarding the Company i.e. Mindtree Limited, the Tribunal has held as follows: "13.6 We have heard the rival submissions and perused the relevant material on record. The page 90 of the compendium of Annual Reports, which is annexed to the Director's Report, We find that the company along with software development services, carried out research and development in a specific areas viz. social, mobile, analytics and cloud (SMAC) computing. The Company has developed mobile apps f....
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.... Staffing Services by which the company employs IT professionals and provides them to various clients in the IT industry on a contract staffing / permanent staffing basis Hence, it was then held that the revenues of the company derived from Professional Services cannot be categorized as revenue from software services. There is no change in facts for A Y 2014-15 as compared to A Y 2012-13 & 2013-14 and therefore the finding of DRP is applicable to A Y 2014-15 also. Further it is also held by the Hon'ble DRP during TP proceedings for AY 2012-13 & 2013-14 that the business model of the assessee is onsite service provider which is not comparable with off shore software development service provider. There is no change in facts for A Y 2014-15 as compared to A Y 2012-13 & 2013-14 and therefore the finding of DRP is applicable to AY 2014-15 also. Since the directions of the Hon,ble DRP are now binding on the AO/TPO, the contention of the assessee cannot be accepted. Therefore the ASTL is' not considered as comparable" 21. Similarly, the Ld. DRP at running page 34 to 38 of its order upheld the findings of the TPO by holding as follows: "i) Akshay Software Techn....
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.... operations Revenue from services and sale of products on standalone basis grew by 14.12% to Rs. 2275.79 lacs compared to Rs. 1994.14 lacs during the previous year. Like in previous year, export income from professional services business continued to maintain its share of 85 % of operating revenue. During the year, the company however witnessed pricing pressure in export business as billing rates remained stagnant." In the Director's report, the company is stated to be a service provider. Now the question arises as what is the nature of professional services rendered by the assessee. In this connection, the website of the company is also examined. The reporting under Home button is as under: "Akshay's solutions and services are focused on the principle of enabling the customer to focus on core business activities. Thus, for Small & Medium Enterprises, Akshay offers SAP Business One ERP along with the associated services, which will ensure higher growth and profits for these organizations without the need for an in-house software team. Akshay's Staffing Solutions for Organizations across the spectrum, ensure, timely availability of res....
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....0 man-years of services to its various clients in the last 20+ years and many consultants who were on our pay-roll and deputed to client locations on- site were later absorbed by the clients on their payrol/. This is a testimony to the quality of our recruitment process. Presently we have about 200 consultants placed with various prestigious clients in India and UAE. Akshay's services in talent acquisition includes Recruitment Process Out-sourcing, Contract Staffing and Permanent Placement. We Offer.' Contract Staffing & Permanent Staffing When it comes to Staffing needs count on Akshay. Here are a few res sons wily? • 25+ years of experience across diverse technologies and domains • Robust recruitment process leading to identification of appropriate talent • Involvement in Technical Evaluation before CV submission by qualified HR Professionals well trained in various HR skills, recruiting Tools & Techniques • Faster turn-around time • Proven IT staffing methodology • 90% repeat business from prestigious clients who rely on us to deliver top talent and ....
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....taken by the assessee as it is a comparable which was accepted by the TPO. But, now the assessee objected that this company should not be in the list of final comparables company or companies with that of the assessee. (F) R.S. Software Ltd : 24. The observation of the TPO with regard to the company i.e. R.S. Software Limited is as follows: "(a) R.S. Software This comparable company is selected by the assessee and retained by the TPO in the final set of comparable. It is observed from the page 30 of the Annual report of this company for F.Y. 2013-14 as under: Financial institutions, payment network providers, payment processors and software companies providing products to the payment industry need a development partner who understands the complexities of their industry. RS Software is the leading custom software development house for the payments industry. With more than20 years in the payments industry, we have participated in and helped create the products and services that have transformed this marketplace. Our proven RS GEM(tm), comprehensive set of services and continuing innovation are focused specifically on the needs of the....
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....ecision of the Co-ordinate Bench of the Tribunal, Hyderabad in the case of Adaptec (India) P Ltd. Vs. ACIT, ITA No.206/Hyd/2014 for assessment year 2009-10 wherein on the issue, the Tribunal has held as follows: "10. Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under: "14. Ground No.11: Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under: "The l....
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....he assessee. In view of this, we direct the TPO not to make negative working capital adjustment. 12. TPO is directed to examine the comparability of the two companies directed above and delete rest of the companies as objected by the assessee and re-workout the arithmetic mean. He should also consider the proviso to section 92C(2) as per law. For this purpose the orders to that extent are set aside for re- doing the same as per facts and provisions of law." 28.1 This judgment was further relied upon by the Co-ordinate Bench of the Tribunal, Bangalore in the case of Lam Research (India) Private Limited Vs. DCIT, ITA No.1437/Bang/2014 & ITA No.1385/Bang/2014 for assessment year 2009-10 wherein the Tribunal on the issue has held as follows: "26. This Tribunal had held that negative working capital adjustment cannot be carried out where the assessee was a captive service provider. Here also it is an admitted position that assessee was a captive service provider and its services were entirely rendered to its AE abroad. Its share capital was entirely sourced from its AE abroad. Therefore, in our opinion, the view taken by this Tribunal in the case of Adaptec....
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....ompliance with the principles of natural justice. Thus, this ground of appeal raised by the assessee is allowed for statistical purposes. 30. The assessee has also raised ground relating to disallowances /additions other than transfer pricing adjustment which reads as under: "9. The learned DRP erred on facts and in law in directing the Ld. AO in adding amount of INR 25,84,042 appearing in Income Tax System database as interest on income tax refund granted to Appellant and ignoring the Appellant‟s submission that the said amount was not taxable in captioned year since no intimation was received by Appellant qua said refund adjustment and also said amount was not recognized as income in the books of accounts". 31. With regard to this ground, the Ld. Counsel for the assessee contends the direction of the Ld. DRP wherein it had directed the Assessing Officer in adding amount of INR 25,84,042 appearing in Income Tax System database as interest on income tax refund granted to assessee and ignoring the assessee‟s submission that the said amount was not taxable in captioned year since no intimation was received by assessee qua said refund adjustment. The Ld. Cou....
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....sued. In our view, the right to grant interest is absolute since existence of such right is not dependent on any event. For example, assessee is granted interest of Rs. 1,000 on the date of granting refund. Subsequently, under Section 244A(3), it is reduced to Rs. 600 by virtue of assessment under Section 143(3). Can it be said that right to interest did not accrue on the date of refund? In our opinion, the right of interest came into existence on the date of refund by virtue of Section 244A(1) though its quantification may or may not vary depending upon the outcome of assessment." 32.1 The Special Bench of the Tribunal, Bombay has considered the decision of the Hon‟ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT, 1971 AIR 2145, 1972 SCR (1) 277 approving the judgment of the Hon'ble Madras High Court in the case of Pope the King Match Factory v. CIT [1963] 50 ITR 495 and has held as follows: "12. The ratio of the above judgment is clearly applicable to the present case. According to the above judgment, if an enforceable debt is created under a statute then any subsequent event would not affect the existence of such right/obligation despite....
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....ologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen 16 comparable companies out of which 6 companies chosen by the TPO in the case of the Assessee for the purpose of comparability were the same. His submission was that the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR. submitted that the DRP in its directions has merely accepted with the reasoning of the IPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP. 29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said co....