2023 (12) TMI 20
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....ing the arm's length mark-up for provision of software support, development and related services at 26.21% and consequently making an addition of Rs. 2,21,07.342/- to the total income of the Appellant as an adjustment to the arm's length price under Section 92CA of the Act. The Appellant prays that the aforesaid adjustment be deleted. 2. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in: 2.1 Rejecting the Transfer Pricing (TP) documentation prepared by the Appellant as required under the provisions of the Act and the Income-tax Rules, 1962 (the Rules): 2.2 Rejecting the methodical search process and comparability analysis carried out by the Appellant in the TP documentation without providing any cogent reasons, 2.3 Arbitrarily including companies in the comparability analysis which are functionally different from the Appellant. Further the Learned ACY's approach is erred on account of following grounds: 2.3.1 Adhoc selection/rejection of comparables based on incorrect interpretation of functions, asset base risk profile 2.3.2 Not sharing the methodology used for arrivin....
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....ricing adjustment made in relation to the provision of software support, development and related services by the Appellant to its Associated Enterprises (AEs). 3.1. During the assessment proceedings, the Assessing Officer noted that in the transfer pricing documentation as maintained by the Appellant, for the international transaction pertaining to provision of software support, development and related services were aggregated together and benchmarked using the Transactional Net Margin Method (TNMM) as the most appropriate method with Net Operating Profit on Cost (for short 'NCP') as the Profit Level Indicator (PLI). As per the search carried out by the Appellant for comparable companies that perform a similar function and carried a risk profile similar to that of the Appellant, arm's length NCP was 6.65%, as against Appellant's NCP of 9.99 percent. Thus, before the Assessing Officer it was contended by the Appellant the international transaction pertaining to provision of software support, development and related services were at arm's length. 3.2. However, the Assessing Officer was of the view that the NCP of the comparables was on a lowers side. The Assessing Offic....
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....ng Adjustment and relied upon the order passed by the Assessing Officer and the CIT(A). 4.1. We note that in paragraph 5.1 of the Assessment Order, the Assessing Officer has tabulated the objections/submissions of the Appellant submitted vide letter dated 20/03/2013. Similarly, in perusal of the order passed by the CIT(A) we note that in paragraph 4.4 of the order impugned, the CIT(A) has recorded the summary of submission made by the Appellant on selection of comparables, the comments received from the Assessing Officer and the conclusion drawn by the CIT(A). We have also taken the same into consideration along with the Appellant's contentions as summarized in the chart submitted and the arguments advanced by both the sides. 5. The Appellant has sought exclusion of 11 comparables on the ground that the same are large turnover companies having turnover much higher in comparison to that of the Appellant which stood at INR 14.98 Crores during the relevant previous year. In support, the Learned Authorised Representative for Appellant relied upon the judgment of the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Wat India (Pvt.) Ltd.: 381 ITR 216 while in response, the Lear....
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....reciated the fact of comparable cases relied upon the appellant where profit margin is only of 6.65% whereas appellant has shown OP @ 9.9% on TNMM method. Assessing Officer had not refer the case to the TPO and has made adjustment on the basis of 21 comparable cases. The written submission of the appellant against the additional comparable selected by the Assessing Officer is as under:- S. No. Name of the Company Reasons given by the AO Summary of Appellant's Arguments 1 - 5 xx xx Xx 6 I-Gate Solutions Limited The company has only one segment namely software development Engaged in a single segment of information technology and IT enabled operations offshore outsourcing solutions and services to large and medium-sized organizations using an offshore/onsite model. Segmental information not available, Page 48 of the Annual Report for the FY 2009- 10 states that the company is engaged in three distinct activities, but for the purpose of reporting the financials, the company does not disclose the segmental account for IT Services. Different scale of operation the company is a giant in software industry with a turnover of INR 932 crores pertaining to the relevant year. 7 ....
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....e in areas such as multimedia, networking, WIMAX, Mobile TV, semiconductors and storage. The ratio of intangibles to total gross fixed assets is 16 percent. The ratio of intangibles to total gross fixed assets is 16 percent. High margin 13 xx xx Xx 14 Wipro Limited The primary source of income is from IT services The Company is operating under three segments during the year, namely, Global IT services and products, (comprising of IT services and products and BPO services segment). However, the IT services segment selected by the Ld AO also includes BPO services, research services for hardware design. The company owns significant brand intangible that has contributed to the immense growth of the company. Further, it may be pertinent to note that Wipro has been rejected by the Ld Commissioner of Income Tax (Appeals)- 15 on the ground that the company has a different functional profile and enjoys far greater market leadership with huge marketing spends. ................" (Emphasis Supplied) 5.2. We note that the CIT(A) has dealt with the objections of the Appellant in paragraph 4.15 of the order impugned which reads as under: "4.15 The contenti....
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....ilar business activities like development of software support services, data management and services. Similarly, LGS also engaged in technology enabled services which dependent upon product Systems be compared extent as this company is also engaged in support services software products. Of course Softsol India Ltd. is having business of sale of software, hence to some extent, the case not comparable, but the fact that this company has also earned income for providing related services, hence same cannot be ignored to review that profit margin such business cannot be as low shown by the appellant. Similar is fact the case of Tata Elxi Ltd. and Thirdware Solutions Ltd. Both these companies are also doing software related services. The case of Wipro Ltd. may be slightly different but one cannot afford ignore that profit such line of business cannot be low shown by the appellant." Infosys Technology & Wipro Limited 5.3. On perusal of the above, we note that the CIT(A) had concluded that that Infosys Technology could not be compared while in the case of Wipro Limited the CIT(A) had observed that it was slightly different. The Revenue has not opposed/challenged the findings given by t....
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....be taken as a comparable and therefore, the same is excluded from the final set of comparables. iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited 5.5. As regards, iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited we note that the CIT(A) has not dealt with the objections raised by the Appellant while the Assessing Officer had included the same given the reasoning that the primary source of income is from software development. Therefore, we deem it appropriate to remand the issue of exclusion of the aforesaid comparable back to the file of the Assessing Officer. Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited & Aricent Technology 5.6. As regards, balance 5 comparables (namely Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited & Aricent Technology Limited) we find that the Appellant had not raised objections to their inclusion in the ground of functional dissimilarity. The contention of the Appellant before the Tribunal is that the aforesaid 5 comparables be excluded on account of high turnover. We note that the CIT(A) had in paragraph 4.16 of the order impugned observed that....
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....available. In the notes to the financial statement under Schedule-18, it has been stated that the company derives its revenue from software services and software products, whereas, on a perusal of the Profit & Loss account for financial year 2008-09, we do not find any segmental details of the revenue earned from software services and software products. Thus, in absence of segmental details of the revenue earned, the company cannot be treated as comparable to the assessee. For these reasons also, the Co-ordinate Bench of the Tribunal in the decisions cited by the learned Authorised Representative have rejected this company as a comparable. As these decisions are for the very same assessment year and the learned Departmental Representative has not brought to our notice any material difference in factual position, we are inclined to follow the Co-ordinate Bench decisions referred to above and exclude this company from the list of comparables." 6.2. On perusal of the financial statements forming part of Annual Report 2009-10 of Kals Information Systems Limited (placed at page 830 to 857 of the paper-book), we find that there is no change in the manner of disclosure of revenues by th....
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.... of other assessees, we exclude this company as a comparable." 6.5. On perusal of the financial statements of the relevant previous year (placed at page 431 to 501 of the paper-book) we find that there is no change in the segmental reporting made by this company for the relevant previous year the company is stated to be operational in only one segment namely software development, which involves providing open and end-to-end web solutions, Off-shore Data Management, Data Warehousing, software consultancy, design and development of solutions, using the latest technologies. Concurring with the reasoning given by the Tribunal for excluding this company as a comparable in the case of the Appellant for the Assessment Year 2009-10, we direct the Assessing Officer to exclude Bodhtree Consulting Ltd. from the list of final set of comparable. Acropetal Technologies Limited 6.6. As regards Acropetal Technologies Limited, the Tribunal has, vide order dated 30/09/2016 passed in ITA No. 1685/Mum/2013 pertaining to Assessment Year 2009-10, held as under: "11. We have considered the submissions of the parties and perused the material available on record. On a perusal of the audited Balance ....
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....ection of the DRP incorporated in the final assessment order. 12. Having heard both the sides and gone through the relevant material on record, we find that the Annual report of this company is available at page 353 onwards of the paper book. Information regarding segmental reporting has been given at pages 376 and 377 of the paper book. There are only three segments, namely, (a) Engineering Design Services, (b) Information Technology Services and (c) Health care. Pursuant to the direction of the DRP, the TPO has included only Information Technology Services segment in the final set of comparables. Directors' report of this company records that "the company is uniquely placed with readymade Software products to cater to the needs of Hospitals and Healthcare Centres both in India and abroad especially in the USA". Profit and Loss account of this company appears at page 367 of the paper book, which records `Decrease in Inventories' by (Rs.1,50,80,060/-) under the head "Expenditure". Balance sheet of this company also has a figure of `Inventories'. Apart from this company being engaged in Software products also, it is pertinent to note that it has rendered on-site services of a gre....
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....e, network technology, internet infrastructure and other special technology areas. Its IT services include application development, system integration, IT consulting and staffing, IT project management, domestic and offshore outsourcing. SoftSol has diverse client-based ranging from large customers to small high-tech start-up companies. The Company's vision is to create a global enterprise by taking a leading role in the revolution in Information Technology to provide highly competent and innovative software solutions." 6.11. Further, on perusal of consolidated Profit & Loss Account, we find that entire income has been recorded under the head software exports and no bifurcation or details of the same have been provided. It is stated therein that the company does not have separate reportable segments. 6.12. In view of the above, we find merit in the contention advanced on behalf of the Appellant that Softsol India Ltd. cannot be selected as a comparable on account of functional dissimilarly and lack of segmental data. Working Capital Adjustment 7. As regards contention of the Appellants for seeking working capital adjustment, we grant the Appellant an opportunity to establ....