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Income Tax Appellate Tribunal, ‘J ‘ BENCH
Before: SHRI M.BALAGANESH & MS. KAVITHA RAJAGOPAL&
आदेश / O R D E R PER M. BALAGANESH (A.M): These appeals in 7271/Mum/2017 for A.Yrs.2012-13 & 2013-14 preferred by the order against the final assessment order passed by the Assessing Officer dated 30/01/2017 & 26/10/2017 u/s.143(3) r.w.s. 144C(13) of the Income Tax Act, hereinafter referred to as Act, pursuant to the directions of the ld. Dispute Resolution Panel (DRP in short) u/s.144C(5) of the Act dated 21/11/2016 & 25/09/2017 respectively for the A.Y.2012-13 & 2013-14 respectively.
At the outset, we find that both these appeals were already disposed of by this Tribunal in & 7271/Mum/2017 dated 10/04/2019 by passing an elaborate order. Later, a Miscellaneous Application was filed by the assessee on the ground that ground Nos. 18 & 19 for A.Y.2012-13 and ground Nos. 5-10, 11-17,23,24 and 26 for A.Y.2013-14 were not adjudicated by this Tribunal. Accordingly, the Miscellaneous Applications preferred by the assessee were disposed of in M.A. No.364/Mum/2019 for A.Y.2012-13 and M.A. No.412/Mum/2019 for A.Y.2013-14 dated 13/12/2019. In the said Miscellaneous Application order, this Tribunal recalled its order only for the limited purpose of adjudicating the ground Nos. 18 & 19 for A.Y. 2012-13 and ground Nos. 5-10 for A.Y.2013-14.
First let us take up the appeal for A.Y.2012-13. For this assessment year as stated supra only ground Nos. 18 & 19 are to be adjudicated. The ld. AR before us stated that ground No.19 seeking for risk adjustment in respect of transfer pricing adjustment is not pressed by him. The same is reckoned as a statement made from the Bar and accordingly, ground No.19 is hereby dismissed as not pressed.
The ground No.18 raised by the assessee for A.Y.2012-13 is seeking working capital adjustment to be considered for the difference in working capital levels between the comparable companies and the assessee. With regard to international transaction of provision of marketing services to Red Hat US, the assessee is seeking for working capital adjustment. We find that the Co-ordinate Bench of this Tribunal in assessee’s own case for A.Y.2016-17 in dated 25/02/2022 had indeed accepted to the plea that working capital adjustment shall be eligible to the assessee and the same shall be reckoned for the difference in working capital levels between the comparable companies and the assessee. Admittedly, the assessee had indeed furnished the workings for working capital adjustments before the ld. TPO as is evident in page 297 of the paper book-1 filed. Respectfully following the aforesaid decision of this Tribunal in assessee’s own case for A.Y.2016-17, we direct the ld. TPO to grant working capital adjustment while determining the ALP of provision of marketing support related services to Red Hat US. The ground No.18 raised by the assessee for A.Y.2012-13 is allowed for statistical purposes.
Let us now take up the appeal for A.Y.2013-14. The ground Nos. 5-10 are to be adjudicated as stated supra.
The ground No.10 raised by the assessee is seeking working capital adjustment in respect of provision of software development services. This issue is already been decided by us in A.Y.2013-14. We find that assessee had furnished the workings for working capital adjustments before the ld. TPO vide page Nos.371 and page 518 of paper book-2. Accordingly, we direct the ld. TPO to grant working capital adjustment to account for the difference in levels between the comparable companies and the assessee. Accordingly, the ground No.10 raised by the assessee is allowed for statistical purposes in respect of working capital adjustment.
The ground Nos. 8 & 9 raised by the assessee is with regard to inclusion and exclusion of certain comparables. The ld. AR before us stated that if two comparables namely Infobeans Technologies Ltd., and Ingenuinity Gaming Pvt. Ltd., alone are excluded from the final list of comparables, then the margins determined by the ld. TPO after this exclusion and after granting working capital adjustment as stated in aforesaid ground, the assessee would be well within the tolerance range of +/-5% and there would be no requirement for making any transfer pricing adjustment in the hands of the assessee. With the consent of both the parties, we deem it fit to address this issue of exclusion of these two comparables alone.
7.1. Exclusion of Infobeans Technologies Ltd., We find that the ld. TPO had considered this company as a comparable on the basis that it is engaged in provision of software development services. The assessee drew our attention to the annual reports of the said comparable company from where it is observed that the annual report does not provide any detailed description about the company and it merely specifies that the company has revenue from sale of software and details regarding the nature of services rendered from which revenue has earned is not available in the annual report. The assessee is purely into software development for its AEs, Whereas from the website of Infobeans Technologies Ltd., it is observed that the said comparable company is engaged in developing business applications for web and mobile and further engaged in automation engineering and big data analytics. Accordingly, it was pleaded that the said company is functionally dissimilar with that of the assessee. Further, it was also brought to our attention that during the year, demerger of the business of the assessee company has been approved and sanctioned by the Hon’ble Madhya Pradesh High Court vide order dated 26/09/2012 w.e.f. 01/04/2011 which would fall within the ambit of an exceptional item during the year under consideration. On this count also, the said comparable company cannot be treated as a good comparable with that of the assessee. We find that the very same comparable i.e. Infobeans Technologies Ltd., was said to be excluded in the order of this Tribunal in assessee’s own case for A.Y.2016-17 in dated 25/02/2022 by observing as under:-
“49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA).
Perusal of financial available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee.”
7.2. In view of the above reasoning and respectfully following the judicial precedent hereinabove, we direct the ld. TPO to exclude Infobeans Technologies Ltd., from the final list of comparables.
7.3. Exclusion of Ingenuinity Gaming Solutions: We find that the ld. TPO had considered this company as a good comparable on the basis that it is engaged in provision of software development services. The ld. AR before us submitted that on perusal of the annual report of the said comparable company, it is not clear as to what kind of software development services are performed by this comparable company and from the perusal of the website of the said comparable company, it was observed that the said company is mainly engaged in providing complete software solutions to the gaming industry; it develops customized gaming software under the Turnkey project model and also provides comprehensive suite of testing and quality assurance services. Hence, it was clear that the said comparable company provides array of services apart from software development and hence not functionally comparable with that of the assessee. It was also pleaded that during the year, the company had shown extraordinary growth in terms of its revenue and profits as compared to last year. Since the year under consideration becomes an extraordinary year of operation for the said comparable company, the same shall not be treated as a good comparable. We find that exclusion of Ingenuinity Gaming Solutions with a software development company was considered by this Tribunal in the case of Emerson Electric (India) P. Ltd., vs. ACIT reported in 116 taxmann.com 640(Mumbai Trib.) dated 14/06/2019 and was directed to be excluded and was held as not a good comparable with the assessee engaged in software development services. The relative operative portion of the said order is reproduced hereinbelow:-
“13.3 Exclusion of Ingenuity Gaming Pvt. Ltd., - Margin of 24.42% We find that the assessee had submitted before the ld. TPO that this company is functionally not comparable on the ground that it is a technology company and a design studio rolled into one. They were closely involved with the leading land based online and mobile gaming companies worldwide, delivering games to all major platforms and operators. Accordingly, it was pleaded that the said company is engaged in diversified activities in the IT gaming space whereas assessee is into routine software development services thereby making it functionally not comparable. It was pleaded that the said company also deals in inventories which indicates that the said companies revenue stream includes sale of products even though it is not mentioned specifically in the financial statements. The ld. TP however, did not heed to the contentions of the assessee and included the same in the list of comparables. The ld. DRP while upholding the action of the ld. TPO observed that the said company is engaged only in software development and the outcome is in terms of games. The said company is not deriving any income from sales of goods other than software development. The ld. DRP also observed that the allegation that the said company has inventories is misplaced. 13.3.1 We find that the said company is engaged into gaming business and from the perusal of the profit and loss account of the said comparable it had reflected export revenue from software development services to the tune of Rs. 10,80,37,386/- and also as inventories of Rs. 11,59,834/-. We also find from the profit and loss account that the sum of Rs. 3,28,274/- has been reflected as income towards changes in inventories of finished goods, work in progress and stock in trade. All these points collectively go to prove that the said company is also engaged in the sale of products apart from software development. From the perusal of the entire annual report of the said company, we find that there is no segmental data available for the revenue stream in respect of revenue from software development and revenue from sale of products. Hence, in the absence of segmental data for the software development segment alone, the same cannot be held to be comparable with the assessee in IT segment. Accordingly, we direct the ld. TPO to exclude the same from the list of comparables.”
7.4. Further the segmental data for software development services segment alone also was not available in respect of this comparable. Hence, we direct the ld. TPO to exclude this company from the final list of comparables. As stated earlier, once the aforesaid two comparables are excluded and working capital adjustments are given, the ld. AR submitted that it would not be required to go into other grounds as the assessee would be well within the tolerance band of +/-5% range. Hence, the ground Nos.5-7 are not hereby adjudicated and they are left open. Similarly, the other comparables listed in ground Nos. 8 & 9 are also not adjudicated and they are left open. Accordingly, the ground Nos. 5-10 raised by the assessee for A.Y.2013-14 are disposed off in the above mentioned terms.
In the result, both the appeals of the assessee are allowed for statistical purposes.
Order pronounced on 29/04/2022 by way of proper mentioning in the notice board.