TaxTMI 
TaxTMI 
TaxTMI 
2021 (7) TMI 319
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....vision of IT Support Services and Software Development services applied Transactional Net Margin Method (TNMM) as the most appropriate method. The Transfer Pricing Officer(TPO) accepted TNMM but raised objections to the companies selected by the assessee as comparables to bench mark Arm's Length Price (ALP) of the transactions under the said segment. The TPO made fresh list of comparables in both the segments and proposed following adjustments: 1. Adjustment on account of provision of Software Development Services Rs. 2,98,49,466.00 2. Adjustment on account of provisions IT support services Rs. 2,74,60,456.00 Total Rs. 5,73,09,922.00 The Assessing Officer passed the draft assessment order dated 29/02/2016 on the basis of adjustments proposed by the TPO. The assessee filed objections before the Dispute Resolution Panel(DRP) assailing the comparables selected by the TPO. The DRP partly accepted the submissions of assessee and directed to exclude some of the companies objected by the assessee in the list of comparables. Still aggrieved, the assessee is in appeal before the Tribunal. The assessee is further seeking exclusion of companies from the list of compa....
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....n page 548 of the Paper Book is the footnote, wherein bifurcation from different segments viz. revenue from sale of licences, export of Software Development services is given. Thus, it is evident from the documents on record that during the period relevant to assessment year 2012-13, Thirdware is having no revenue from sale of products. The ld. Departmental Representative further placed reliance on the decision of Hon'ble Delhi High Court in the case of Steria (India) Ltd. vs. DCIT reported a s 92 taxamann.com 120(Del) to contend that Thirdware was held to be comparable to a company engaged in export of Software Development services. 6. Controverting the submissions advanced by ld. Departmental Representative, the ld. Authorized Representative of the assessee submitted that the Tribunal in various decisions including decision in assessee's own case has held that Thirdware being product company is functionally incomparable to company engaged in Software Development services. The ld. Authorized Representative of the assessee referred to page 545 of the Paper Book to contend that the product includes services. The ld. Authorized Representative of the assessee further pointed ....
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..... Thus, the company has reported revenue from different activities under the head 'Revenue from Sale of Services'. Therefore, the said company not only generates revenue from services alone but from other activities as well. We further observe that Thirdware has been excluded from the list of comparables in assessee's own case in assessment year 2010-11, 2011-12 and 2013-14 on the ground that the activities of the assessee and that of Thirdware are at variance. In other words, there is difference in functionality of both the companies. 8. We observe that one of the argument raised by the Department before the Tribunal in assessment year 2011-12 was that software development and software products are one and the same and cannot be construed as separate and distinct activity per se. The Co-ordinate Bench rejected the arguments advanced by the Revenue in support of inclusion of Thirdware in the list of comparables by holding as under: "9. With regard to exclusion of comparables i.e. Thirdware Solutions Ltd., Persistent Systems Ltd., Tata Elxsi Ltd. and Kals Information Systems Ltd. from the final set of comparables as directed by the ld. CIT(A) on the ground of function....
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....ed as comparables. The respondent assessee pointed out that KALS Ltd. and Helios & Matheson Ltd. are engaged in the business of selling of software products while the respondent assessee renders software services to its holding company. (b) The Tribunal in the impugned order records that for the preceding assessment year i.e. A.Y. 2006-07, the TPO had found that KALS Ltd. and Helios & Matheson Ltd. were functionally not comparable with the respondent assessee. In the subject assessment year also, on the basis of Annual Report, it was noted that the KALS was engaged in selling of software products which is different from the activity undertaken by the respondent assessee, namely, rendering of software service to its holding company. Further, the impugned order also records that no attempt was even made by the Revenue before it to bring on record any change in the nature of activities carried out by KALS Ltd. and Helios & Matheson Ltd. in the subject assessment year, making them functionally comparable to the respondent assessee. In the aforesaid facts, the Tribunal rendered a finding of fact that KALS Ltd. and Helios & Matheson Ltd. are not comparable with the respondent assessee.....
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....e, the same does not support the case of Revenue. 10. In view of our above findings, we hold that Thirdware being a product company is not a good comparable to a company engaged in software development services, therefore, the Assessing Officer is directed to exclude Thirdware from the final set of comparables. The ground No. 1.2.6 raised in the appeal is allowed. 11. In ground No. 1.2.10 the assessee has prayed for granting working capital adjustment. The ld. Authorized Representative of the assessee has contended that difference in working capital of the assessee and the comparable company ought to be adjusted for appropriate comparability analysis. The assessee has furnished calculations for adjusted margin before the TPO. The same are at page 437 and 442 of the Paper Book. It has been further pointed that in assessment year 2010-11, 2011-12 and 2013-14 the benefit of working capital adjustment has been allowed to the assessee by the Tribunal. We find that in assessment year 2010-11 the CIT(A) had allowed working capital adjustment on final set of comparables. The Revenue challenged the same before the Tribunal in ITA No. 344/Mum/2017(supra). The Coordinate Bench upheld the fi....
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.... Pvt. Ltd. vs. ACIT in ITA No. 970/Mum/2017 assessment year 2012-13 decided on 16/10/2019, wherein Excel was excluded on the ground of fluctuating margins and diminishing revenue. 14. On the contrary, the ld. Departmental Representative vehemently opposed exclusion of Excel. The ld. Departmental Representative submitted that only segmental results i.e. BPO/ITES segment was considered. Since segmental data of the said company is available no prejudice is caused to the assessee. Diversification into Real Estate business is not relevant as segmental results are available. The ld. Departmental Representative further referred to Annual Report of Excel for Financial Year 2011-12 at page 1257 of the Paper Book. The ld. Departmental Representative pointed that the said company has decided to diversify into Real Estate business in future after closure of IT and BPO business. The ld. Departmental Representative further pointed that in the financial statement for the year ended 31/03/2012, at page 1291 of the Paper Book the said company has shown revenue from information technology/BPO related services. Therefore, it is wrong to say that the BPO business of the assessee has shut down during ....
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....47.74% 2009-10 267.31% 2010-11 238.71% 2011-12 41.48% 17. Further, the said concern had closed down its ITES and BPO segment in financial year 2011-12 on account of global recession. We hold that the said concern which is in the process of closing down its ITES segment and also because of the factum of fluctuating margins, could not be selected as functionally comparable to the assessee. In this regard, we find support from the ratio laid down by the Hon'ble High Court of Gujarat in Ld. CIT Vs. Allscripts India Pvt. Ltd. in Income Tax Appeal No. 258 of 2016 and Pune Bench of Tribunal in TIBCO Software India Pvt. Ltd. Vs. DCIT in ITA Nos. 276/PUN/2015 & cross appeal in ITA No. 334/PUN/2015, relating to assessment year 2010-11, order dated 31.01.2017 and Qlogic India Pvt. Ltd. Vs. DCIT in ITA No. 227/PUN/2014, relating to assessment year 2009-10, order dated 21.10.2014." [Emphasised by us] In the case of Baxter India Pvt. Ltd. vs. ACIT (supra), the Tribunal directed to exclude Excel from the list of comparables inter-alia on account of, abnormal volatility in revenue and margins. It is settled legal position that a company having super normal profits or highly unst....