TaxTMI 
TaxTMI 
2018 (3) TMI 1932
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....ereunder : Additional grounds : a) Akshay Software Technologies Ltd, c) Evoke Technologies Ltd, g) Sankhya Infotech Ltd, j) R System International Ltd 03. Assessee is engaged in the provision of software development services to its associated enterprises. It is the case of the assessee that it acts as a captive service provider and is remunerated by its AEs on a cost plus basis. 04. As per TP order during the Financial Year ('FY') 2012-13, Assessee has entered into the following international transactions with its Associated Enterprises ('AEs'): International Transactions Value (INR) Purchase of Software Development services 527,130,186 Reimbursement of expenses paid 21,974,895 05. The assessee has selected the following comparables in its TP study and has worked out the OP/OC margins of Assesseestood at 12.09% (considering foreign exchange as non operating item) as against 7.03% of comparable companies. SI. No. Company Name 1 Helios & Matheson Information Technology Ltd. 2 Mindtree Ltd. 3 Evoke Technologies Ltd. 4 R S Software (India) Limited 5 Cat Technologies Ltd. 6 Akshay Software Technologies Ltd. 7 Maveric Systems Ltd. 8 Silverline T....
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....of Significant R & D expenses and strong IP portfolio. Further the DRP has excluded ICRA Techno Analytics Ltd. - Absence of segmental information. The TP adjustment post the DRP Directions was re-worked and a Final Assessment Order was passed wherein the total adjustment stood at Rs. 34,096,113/-. After the DRP direction the final set of comparables remained were as under : Sl. No. Company Name OP/OC 1 CG-VAK Software & Exports Ltd. 20.54% 2 Larsen & Toubro Infotech Ltd. 26.06% 3 Mindtree Ltd. (Seg.) 18.19% 4 R S Software (India) Ltd. 17.41% Average 20.55% Less: Working Capital Adjustment -1.98% Working Capital adjusted Margin 18.57% 11. Aggrieved by the order of the DRP the Assessee filed the present appeal before us on various grounds. However during the course of argument the assessee has restricted to the grounds of appeal reproduced above. We may mention here that the assessee had filed an application for additional Rule 11 of the ITAT Rules and sought admission of the additional grounds. In this regard, we observe that the additional grounds raised before us are having the factual basis and foundation before the lower authorities and no additional ....
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....s full-fledged risk taking entrepreneur having subsidiaries, Joint ventures and Investments in other financial instruments. Operate at limited risk Organizational Change Management, SAP, Smart Devices & Channels, System Integration etc. Revenue INR 3,613 crores INR 52.71 crores Ownership of branded / proprietary products Develops/owns proprietary products and services. The Assessee is a captive service provider and does not have any brand name, Intellectual Property (IP) or intangibles. Other Economies of scale NA Investments (including 100% subsidiaries) INR 401.92 Cr INR 0.00Cr Intangibles INR 63.72 Cr INR 0.00 Cr. Other L & T also involved in resale of software products and during FY 2012-13 cost of bought out goods were INR 27.10 Cr No resale of products, only operates as a captive service provider b) Scale of operations - The total operating income of L&T Infotech is 3613.42 crores. It is 68 times more than the turnover of the Assessee which clearly indicates that L&T Infotech has larger scale of operations. c) Presence of intangibles - L&T Infotech has intangibles worth INR 637,290,322 during FY 2012-13. The segmental breakup of....
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.... T' has significantly large scale operations. In support of its contentions, the assessee has submitted copy of the Annual Report of' L & T' (at pages 766 to 799 of the paper book filed) and took us through various pages therein, as mentioned in the chart (viz. pages 766 - 768, 776, 779, 785, 78-8, 793, 796 to 798 etc.). It was prayed that this company ' L & T ' be excluded from the list of com parables. 6.3 Per contra, the learned Departmental Representative for Revenue supported the orders of the authorities below in retaining this company L& T in the final list of comparables; which was in fact the original choice of the assessee itself in its TP Study. 6.4.1 We have heard the rival contentions and perused and carefuUy considered the material on record. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on the following grounds, as mentioned in page 17 of the TPO's order under Section 92CA of the Act :- (i) 'L & T' functionally different; (ii) insufficient segmental information (iii) it owns significant intangibles; (iv) it has large scale of operations. 6.4.2 From a perusal of the TPO's o....
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....-out items of sale'. It is not clear whether this item of expense is related to the earning of income from services or these are related to any buying and selling of products. This issue was raised by the assessee for the first time before us and does not appear to have been raised before the authorities below. Therefore, this issue has neither been examined by the TPO nor the DRP. 6.4.6 Sub-contracting Expenses. At page 793 of the Annual Report of' L & T' under the head "Income / Expenditure in foreign currency", we find that this company has shown substantial "sub-contracting expenses". It is not clear whether these expenses are related to the services rendered by the company, indicating a different business model to that of the assessee in the case on hand. This issue also appears to have been raised for the first time before us and has not been raised before the authorities below. Therefore, it is evident this issue has neither been examined by either the TPO or the DRP. 6.4.7 The above three highlighted issues of; 'different segments'. 'cost of bought-out items for sale' and 'subcontracting expenses' ; are critical issues that would have a....
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.... companies selected by the Assessee in the TP documentation. It was further submitted that The Ld. TPO rejected Akshay as a comparable on the ground of functional dissimilarity saying that the company is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas on the basis of reply to notice u/s 133(6) received by Ld. TPO from Akshay Software. The submitted that the services rendered by Akshay were forming part of the subset of software development services and all the functions mentioned in Annual Report such as installation, support and maintenance of ERP products and services are with regard to software services. Similarly it was submitted Enterprise resource planning or ERP systems are software systems that are used for operations planning, administration and for optimizing internal business processes. A typical ERP software helps in integrating all data and processes of an organization into a single unified system. ERP is a category of business-management software and the installation/maintenance/support would come under the purview of software development activities. The a....
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....ing it comparable with the assessee company. Further the assessee was shared with the response received by the TPO from the comparable u/s.133(6) of the Act and the assessee was given the opportunity. Further in our considered opinion, the financial of the comparable clearly shows that Akshay Software Technologies Ltd is primarily earning its revenue from onsite services as mentioned at page 86 of the DRP order and Note 28 of the P & L account. Thus in the considered opinion of the Bench, Akshay Software Technologies Ltd is not comparable with the assessee. The reliance on the decision of the Tribunal in the matter of the assessee for AY 2007- 08 is unfounded as the decision was for the earlier year and no reasoning was given by the Tribunal while directing the TPO to include Akshay Software Technologies as comparable. Further in the matter of Arowana Consulting P. Ltd (supra), the Tribunal in para 9 has mentioned that the DRP has not given any independent finding for arriving at the conclusion that this company is not comparable with the assessee. In the light of the above, we restore the matter back to the file of TPO for examining afresh. EVOKE TECHNOLOGIES LTD ( EVOKE ) 20. E....
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....ere the same is not comparable. However in the considered view of the Tribunal all these aspects are required to be examined by the TPO at the first instance and the assessee should be given a chance to explain the same. In the light of the above, we remand the matter for a fresh examination to the file of the TPO with a direction to decide the inclusion of Evoke Technologies Ltd after giving due opportunity to the assessee. Sankhya Infotech Ltd. ("Sankhya") : 23. Sankhya is one of the comparable companies selected by the Assessee in the fresh search given during TP Assessment proceedings. The Ld. TPO has rejected Sankhya on "segmental not available". The relevant extract of the TP order is as below: Assessee's contentions: 23.1 As per the annual report of Sankhya Infotech Ltd for FY 2012- 13, Sankhya is engaged in provision of IT services to customers globally in transportation segment. (Page 32 of Annual report for FY 2012-13) As can be seen from above extract from annual report, the company provides software development services to its customers. As per the segment information, during FY 2012-13, the entire revenue was from software services and no revenue was earned from ....
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....one of FAR with the assessee. Accordingly, the inclusion of Sankhya Infotech Ltd is remanded back to the file of TPO for examining afresh. R Systems International Ltd. ("R Systems") : 24. R Systems is one of the comparable companies selected by the Assessee in the fresh search given during TP Assessment proceedings. The Ld. TPO has rejected R Systems on the ground of "different financial year no data available". The relevant extract of the TP order is as below: Assessee's contentions: 24.1 The Assessee's contentions against the different financial year no data available filter are set out in the section 5.3 (III) above. The Assessee submits that R Systems is engaged in two segments namely software development services and business process outsourcing services (BPO). The software development services segment is functionally comparable to the Assessee. Also, the Ld. TPO has not objected to the functional comparability of R Systems. Without prejudice, audited quarterly results are available in public domain. Hence, for the purpose of comparability analysis, 12 months (March ending) results of software development segment for March 2013 year end has been considered. Therefore, R ....
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....able. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into". 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assesse....
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....i) extent of transactions with overseas entities, ii) Geographical location of the transacting entities (The market and price dynamics differ for same services/ same products in different economies and geographies) and iii) the respective hedging policies adopted by respective companies. Further for the purposes of provision for bad and doubtful debts the Ld. AR relied upon Outsource Partners International (P.) Ltd. [2017] 79 taxmann.com 74 (Bengaluru - Trib), wherein the coordinate bench held as under : 6. The next ground pertains to ground no 7 ie the AO/DRP not considering provision for bad and doubtful debts as non-operating in nature. In this regard, it is submitted that the provision for doubtful debts fit the description of "operating items" associated with the rendering of services and should be considered as part of the operating costs and relied in case of Techbooks International (P.) Ltd. v. Dy. CIT [2015] 63 taxmann.com 114 (Delhi - Trib.). In this regard, relevant extract of said judgment is provided below: "Both the provision for bad debts as well as doubtful advances are in the realm of the operations of the business. It is not the case of the either side that t....
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....dgment relied upon by the assessee on Outsource Partners International (P.) Ltd. (supra), clearly lays down that if the provision for doubtful debts is closely linked with the business operations of the assessee then the same is required to be treated as operational in nature. As the needful has not been done therefore the bench did not agree with the contention of the assessee and accordingly the ground for treating the provision for doubtful debts as operational in nature is rejected. Further there is one more reason for rejecting the contention of the assessee i.e., the TPO has not considered the provision for doubtful debts both for the assessee as well as for the comparable and hence they are both treated at par, therefore assessee cannot be aggrieved by the inclusion / exclusion of the comparables as both have been treated in the same yard stick. There is no merit in the contention of the assessee and accordingly the same rejected. Hence ground 8 of the assessee's appeal is rejected. 26. The last ground 6.1 relates to Market risk adjustment .The Assessee submits that it is essential to perform a risk adjustment to bridge the disparities in risk profile between a risk free ....