TaxTMI 
TaxTMI 
2021 (11) TMI 32
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....arm's length, and consequently, completing the assessment at Rs. 16,09,84,540 as against the returned income of Rs. 14,22,25,857. 2. That on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("Rules") for determination of the arm's length price ("ALP") of the international transactions pertaining to IT, ITeS and BSS segments. Without prejudice, the AO/DRP/TPO also erred in rejecting the fresh search conducted by the Appellant, using current single year data. 3. That on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in rejecting / arbitrarily modifying the search process and filters adopted by the Appellant for the purpose of benchmarking its international transactions pertaining to IT, ITeS and BSS segments. 4. That on the facts and circumstances of the case and in law, the AO /DRP / TPO erred in making an upward TP adjustment of Rs. 1,49,86,139, in respect of the international transaction pertaining to IT segment alleging the same to be not at arm's length in terms of the ....
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.... of the Appellant's IT, ITes and BSS segments. The AO/TPO, in spite of specific directions of the DRP, further erred in incorrectly computing profit margin of the following companies selected as comparables for IT, ITes and BSS segments : * Goldstone Technologies Limited and Thirdware Limited for IT segment * Cosmic Global Limited for ITes segment * Future Capital Investment Advisors Limited for BSS segment. 11. That on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in not providing appropriate economic adjustments as required under Rule 10B(1)(iii) of the Rules. 12. That on facts and circumstances of the case and in law, the AO/DRP/TPO have erred in ignoring the provisions of Rule 10B(4) of the Rules and judicial pronouncements, which advocate usage of multiple year data of comparable companies for the purpose of determination of the ALP. 13. That on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in not providing the Appellant the benefit of 5% range as provided by the proviso to section 92C(2) of the Act. 14. That on the facts and circumstances of the case and in law, the AO has erred in not giving full credit for ....
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....software products. Further, no separate revenue break up is available for sale of services and sale of products. (ii) Error in segmental reporting-Inconsistency in the profit number as reported in the profit and loss account as well as segmental reporting. 5.1 The TPO in his findings has observed that there is no evidence on record to show that KALS Information Systems Ltd. has actually earned any revenue from sale of such software products. The TPO was also opined that many software service provider companies call their services as a product but because of such claims they do not cease to be a service provider. KALS Information Systems Ltd. was, therefore, held to be functionally comparable with that of the assessee company. 6. The Ld. DRP at Para 3.1 has discussed this issue and given their findings at Para 3.1.5 onwards. The Ld. DRP observed at Para 3.1.5 that the jurisdictional Tribunal has excluded KALS Information Systems Ltd. on the ground that it is a software product company and therefore, it cannot be compared with the software service company. Thereafter, the Ld. DRP at Para 3.1.14 tried to analyze the question whether the difference between the IT product companies ....
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....n his comparability analysis . The grievance of the respondent assessee before the Tribunal was that both are functionally different from the respondent assessee and, therefore could not be used 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 c....
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....hich is indicative of the fact that it has also significant onsite revenue. Accordingly, considering the onsite revenue filter applied by the TPO, this comparable should be rejected. 10. The TPO has considered the Annual Report of this company and observed that it is an Indian based software service provider primarily delivering software validation and verification services to the banking and financial services industry worldwide. The TPO had also considered the segmental figures and has included this company in the final set of comparables. 11. The Ld. DRP on the issue has given their findings from Para 3.3.6 onwards. The DRP on this issue has held and observed as follows: * The assessee has not established that higher AMD expenditure by Acropetal has led to its increased profitability. * In software sector, there is no linkage between AMD expenditure and profitability as seen from the number of advertisements seen in electronic media and print media from the IT sector companies. Further, the assessee is getting all its business from AEs and works as a captive service provider, it does not need to spend on AMP. Even if this filter is appropriate, there is no basis for consid....
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....gaged in providing on-site services cannot be compared with a company providing similar services from its own premises (in-house) due to several significant differences in operating costs and also the revenues apart from vital differences in the level of assets employed and risks undertaken. In view of the foregoing, we are satisfied that this company cannot be considered as comparable as it is not only engaged in the business of Software products but is also providing on-site services, which make it distinguishable from the assessee company. We, therefore, order to exclude this company from the list of comparables." 13. The Ld. DR has relied on the findings of the Ld. DRP but principally agreed that on the similar set of facts and circumstances prevailing in assessment year 2010-11 which is also same in assessment year involved in the case of John Deere India (P.) Ltd. Vs. Assistant Commissioner of Income Tax (supra.) and therefore, the said decision may be followed. 14. That on analyzing the legal proposition and the facts involved in the assessment year 2010-11, following the same parity of reasoning given in the case of John Deere India (P.) Ltd. Vs. Assistant Commissioner of....
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....11. There also, the Pune Bench of the Tribunal has observed that there is no bifurcation of operating profit from Software Services and others including Sale of Licence and Revenue from subscription etc. The Tribunal also observed that the company has segments only on geographical basis and not on functional level. The relevant Para of the said order is extracted herein below : "10. We have heard the rival submissions and gone through the relevant material on record. The Annual report of this company is available at page 415 onwards of the paper book. Profit and loss account of this company shows `Sales' of Rs. 67,56,06,505/-. Break-up of such sale has been given in Schedule 12, which records `Export from SEZ units' - Rs. 47,58,40,447/-; `Export from STPI units' - Rs. 11,20,90,633; `Revenue from subscription' - Rs. 1,53,13,736/-; `Sale of licence' - 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....
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....st of justice, we are of the considered view that the matter should be restored to the file of the Assessing Officer/TPO. It is hereby directed that the Assessing Officer/TPO should follow the directions of the Ld. DRP as contained at Para 8.3 of Ld. DRP‟s order. Thus, this part of the ground is allowed for statistical purposes. EXCLUSION OF COMPARABLES ON ITES SEGMENT 22. Now coming to the next segment i.e. ITES segment. The assessee wants exclusion of certain comparables. The TPO at page 10 onwards of its order has discussed the function of ETPL in ITES segment. When we look at the final order of the Assessing Officer at page 67, there are finally 9 comparables selected. Out of which, the assessee has disputed 3 comparables in this ITES segment. (i) Accentia Technologies Ltd. : 23. The assessee submitted that this company is functionally different. This company is doing KPO, Medical transcription, High end software services and Legal process outsourcing, intellectual property rights. The TPO observed that nature of this company is Healthcare BPO services which is admitted by the assessee in its submission. Thus, the company is engaged in BPO services. The DRP had confir....
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....g the year. 30. Similar issue arose before the Pune Bench of Tribunal in Aptara Technologies (P.) Ltd. (supra), wherein while deciding the appeal for assessment year 2010-11, it was directed to be excluded observing as under:- "15..... Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables." 31. The said concern was also directed to be excluded for the extraordinary event of merger of some other equity with the assessee by the Hon'ble High Court of Delhi in the case of Pr. CIT v. Xchanging Technology Services India (P.) Ltd. [IT Appeal No.813 of 2015]. Further, the said concern is not functionally comparable to the assessee as it is engaged in transcription, hoarding and billing as well as software and hardware integration capabilities to larger hospitals. Such was the declaration by Accentia....
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....al report of the said company annexed at pages 247 to 294 in the Paper Book and at page 252 review of the companies has been dealt with. That at page 263 Balance Sheet and at page 264 P&L account has been annexed. Thereafter at page 270 of the Paper Book at Schedule 17 Clause K there is a segment reporting and it is stated therein this company is principally engaged in the business of business process outsourcing which is the only reportable segment as per Accounting Standard 17 issued by the Institute of Chartered Accountants of India on segment reporting. The ld. AR further relied on the decision of the Pune Tribunal in the case of Vishay Components (P.) Ltd. vs. ACIT (2017) 83 taxmann.com 319 (Pune-Trib.) and therein at para 40 the Tribunal has upheld the action of the TPO in correctly excluding Informed Technologies India Ltd. The relevant paras are extracted as follows :- "40. Now, coming to the last two concerns i.e. Aditya Birla Minacs Worldwide Ltd. and Informed Technologies India Ltd., wherein Informed Technologies India Ltd. is providing KPO services. 41. In respect of Aditya Birla Minacs Worldwide Ltd., the learned Departmental Representative for the Revenue has refe....
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.... annual report of the said company annexed at pages 295 to 332 in the Paper Book. The ld. AR also referred to the Tribunal‟s order in the case of DCIT vs. BNY Mellon International Operations (India) (P.) Ltd. (2017) 87 taxmann.com 130 (Pune-Trib.) for A.Y. 2010-11 wherein the Tribunal had referred to another of its decision in the case of Aptara Technologies (P.) Ltd. vs. ACIT (2016) 72 taxmann.com 352 (Pune-Trib.). With the similar parity of reasoning, the Tribunal in BNY Mellon International Operations (India) (P.) Ltd. (supra) at para 16 directed the Assessing Officer/TPO to work out correct margin of the said concern and then determine average margin of comparables and apply the same. It was submitted by the ld. AR that the similar direction may be followed being the same assessment year 2010-11 by the Assessing Officer/TPO and matter may be remanded back for this exercise to the Assessing Officer/TPO following the direction of the Pune Tribunal (supra). 34. The ld. DR conceded to the submissions put forth by the ld. AR of the assessee. 35. We are of the considered view taking the totality of facts and circumstances in respect of this comparable that the matter needs to....