AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (8) TMI 1193
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.... * Aspire Systems (India) Pvt. Ltd. * Cybage Software Private Ltd. 17. The Learned AO/Learned TPO/Hon'ble DRP has erred in not allowing appropriate adjustment towards working capital between the appellant vis-à-vis the comparable companies." 3. Facts of the case are that the assessee is a wholly owned subsidiary of LG Electronics and provides software development services in the areas such as mobile application development, digital video broadcast and biometrics software etc. 3.1 During AY. 2016-17, the international transactions with its AE are as follows:- International transaction Value (INR) Provision of software development services 3,185,967,639/- The OP/OC as per TPO is 15.59%. TPO's Comparables 3.2 The TPO rejected the TP study done by the appellant, conducted his own TP analysis and selected the following set of comparables SI. No. Company Name Average of 3 years 1 Kals Information Systems 8.60% 2 Rheal Software Pvt. 14.50% 3 Sybrant Technologies Pvt. 14.74% 4 CG-Vak Software & Exports Ltd. 18.50% 5 R S software India Ltd. 20.87% 6 Larsen & Toubro Infotech Ltd. 24.83% 7 Nihilent Ltd. 26.36% 8 Inteq Software Pvt. Ltd. 28.2....
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....le. It was contended that L&T Infotech is a brand across globe which has impacted the margins of the company. It was further argued that the company is engaged in trading of goods which is evident from page 1364 of the annual report for FY 2014-15. It was also argued by the Ld. A.R. that because of investment in technology absorption and R&D, it should not be considered as comparable. 9.2 Ld. DRP observed that, at the outset, the assessee had selected this company as functionally comparable in its TP study giving the following reasons, "Larsen & Toubro Infotech Limited is an IT service company. The company is engaged in providing Application Maintenance and Development, Enterprise Resource Planning and specialized services like Data Warehousing and Business Intelligence, Testing Services and Infrastructure Management Services. The services offerings are focussed mainly towards four verticals namely manufacturing, utilities, financial services and telecom. For the period ended March 31, 2015, March 31, 201,4 and March 31, 2013. 100% of the operating revenues respectively were derived from software development services". However, without giving reasons, it has raised a plea that i....
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....fits, Ld. DRP observed that turnover does not influence the margins in the service sector and held that turnover cannot be a criteria for selection of comparables. Hence, these pleas of assessee were rejected by Ld. DRP. 9.5 Further, Ld. DRP observed that this company was upheld to be functionally comparable to as software service provider company, by the coordinate bench of Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of this comparable. 9.6 Against this assessee is in appeal before us. 9.7 We have heard the rival submissions and perused the materials available on record. This company is considered as not a comparable in the case of LG Soft Pvt. Ltd. cited (supra) wherein it was held as under:- "38. As far as L&T Infotech Ltd. is concerned, the ld. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, ITA No.6148/Del/2015 for AY 2011- 12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also tr....
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....any has diversified activities and it has no segmental information and hence cannot be considered as comparable. It was also submitted that it has significant onsite expenses and RPT transactions. It was also argued that it has made certain acquisition and therefore, on account of such peculiar economic circumstances Ld. A.R. requested that it has to be excluded as a comparable. 6.1 Ld. DRP observed that the company's core activity was rendering product development services i.e. providing services to business enterprise to develop software products. As per the information at page 211 of the annual report, it has reported income from software services of Rs.12,353.53/- million and software licenses of Rs.71.45/- million aggregating to Rs.12,424.98/- million. Thus, the income from software licences constitute a meagre 0.58% of its operating revenue. It is also noted by Ld. DRP that this company in response to the notice u/s 133(6) of the Act had given details of such licence income as under:- Software product Category Revenue as per books of accounts (INR) eMee Internally developed 20,525,798 Radia Acquired for Distribution activity 3,421,402 GEMS Reselli....
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.... the P&L account of the consolidated financial statement expenses were debited towards Royalty expenses of Rs.176.73 million (refer page 169) and such a debit is not to be noted in the P&L account of M/s. Persistent Systems Limited. 6.5 Further, as per information at page 88 of the annual report for FY 2012-13 it was stated in the notes to the consolidated results that the increase of intangible block of assets during the year (2012-13), of Rs.262.84 million, was mainly on account of acquisition of various IPs during the year and the same is shown in the intangible Asset Schedule of the consolidated financial statement at page115 as under:- Intangible Assets of Group 2012-13 (in Rs.Millions) Software Acquired contractual rights Total Gross block (At cost) As at April 1, 2012 1,287.49 281.63 1569.12 Additions 94.03 261.23 355.26 Disposals 116.10 -- 116.10 Other adjustments Exchange differences 23.86 (0.18) 23.68 As at March 31, 2013 1,289.28 542.68 1,831.96 6.6 All these clearly show that the IP related and product revenue pertain to other group entities and does not pertain to M/s Persistent Sy....
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....business transactions or-likely to materially affect the profit arising from such transactions in the open market. The said company also clarified u/s 133(6) that its intangible assets are in the nature of software licenses acquired for use in the operation of the company and are not in the nature of inbuilt software product generating revenue for the company. Further, the assessee also performs R&D functions. Hence, these pleas were rejected by Ld. DRP. 6.9. Further, as per Ld. DRP's report, this company was held to be engaged in software development and not a product company and hence functionally comparable to a software service provider company, by the coordinate bench of ITAT Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of this comparable. 6.10 Ld. DRP observed that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. Further, the RPT filter was adopted by the TPO was with the above conditi....
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....y Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the showcause notice is reproduced below for ease of reference: e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'b....
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....ing ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs. 65. The next objection of the Assessee ....
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....ified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly." 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO's order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between pr....
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....rom software services, Ld. DRP was of the considered view that this company can be considered as functionally comparable to the assessee. Accordingly, the plea that the company is engaged in diversified activities was rejected by Ld. DRP. 7.2 A plea was raised before Ld. DRP by the assessee that this company also provides data analytic services which is high end and hence, cannot be compared to the assessee. Ld. DRP did not find merit in the plea, as undoubtedly, provision of data analytic services is not functionally different from software development activity. The data analytic services also use only certain software and tools, write codes to perform certain tasks. Like any other software application, these tools also facilitate and enables business enterprises for informed management and decision. Therefore, Ld. DRP did not find merit in the plea. Further, there cannot be any distinction between high end software activity and low end activity, so long as it falls within the purview of software development services. Besides, under the TNMM, such differences are tolerable and there is no requirement that the services / activities performed are identical. It is enough that that....
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.... the assessee has failed to establish that such differences, if any, on account of brand and intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Further, as discussed in para 2.6.2.3 above, the assessee also performs R&D functions. Hence, these pleas were rejected by Ld. DRP. 7.5 On the plea as to difference in the scale & size of operations and consequent abnormal profits, Ld. DRP noted that turnover does not influence the margins in the service sector: Ld. DRP already held that turnover cannot be a criteria for selection of comparables. In this regard it is relevant to note that the coordinate bench of Bangalore in the case Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14) rejected the plea of the assessee to exclude a company comparable on the gr....
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....ompany from the list of comparables. Thirdware Solutions Ltd. 8. The Ld. A.R. submitted that similar comparable was considered in earlier assessment year 2015-16 in assessee's own case cited (supra). 8.1 We have heard the rival submissions and perused the materials available on record. As rightly pointed out by the Ld. A.R., this comparable has been considered by the Tribunal on the earlier occasion and directed the AO/TPO to exclude this comparable from the list of comparables by observing as under:- "8. The Ld. A.R. submitted that this company has to be excluded from the list of comparables on the following reasons:- * Thirdware is functionally dissimilar and ought to be rejected. * No segmental details are available in the annual report and hence the company should be rejected. * Thirdware has incurred brand promotion expense. 8.1 The Ld. A.R. for the assessee argued that this company is engaged in sale of products and diversified activities. It was also argued that there is no segmental information for the product and services business and hence cannot be taken as comparable. It was also contended that the company has intangibles and deriving revenue from lice....
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....ted that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09 in IT(TP)A No.1673/Bang/2012 , we direct exclusion of M/s Thirdware Solutions Ltd." 8.4 In view of the above order of the Tribunal cited (supra) we direct the AO to exclude this company from the list of comparables." 8.2 In view of the above order, we direct the AO/TPO to exclude this company from the list of comparables. Ground No.17:- 9. Facts of the case are that the TPO did not allow any working capital adjustment and the Ld. DRP also confirmed the order of the TPO. 9.1 We have heard the rival submissions and perused the materials available on record. The similar issue came for consideration before this Tribunal in the case of Huawei Technologies Ltd. reported in 101 Taxmann.com 313 (Bang Trib) (IT (TP)A No.1939/Bang/2017 dated 31.10.2018), wherein held as under:- 10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT (A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparabilit....
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....ontractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences. if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, wo....
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....ble, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collec....
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....) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT 120131 38 taxmann.com 231/120141 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparab....