APPROVA SYSTEMS PVT. LTD.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,, PUNE

आदेश / ORDER

PER R.S.SYAL, VP : This appeal by the assessee is directed against the order passed by the CIT(A)-13, Pune on 28-07-2016 in relation to the Assessment Year 2012-13.

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captive unit. The assessee filed its return declaring total income of

Rs.2.26 crore. The income-tax return was accompanied by the

Audit Report in Form No.3CEB detailing its international

transaction of providing software services. The assessee received

revenue of Rs.14.45 crore from rendering software development

services. The Transactional Net Marginal Method (TNMM) was

applied as the most appropriate method for benchmarking the

international transaction with Profit Level Indicator (PLI) of

Operating Profit to Total Cost (OP/TC). Such profit rate of the

assessee was 14.72%. Certain comparables were chosen with

average PLI of 15.03%. This is how, the assessee showed that its

international transaction was at ALP. The Assessing Officer (AO)

took up the benchmarking analysis at his own. He rejected certain

companies from the assessee’s list of comparables and introduced

certain fresh companies. In this manner, he shortlisted 4

companies with their average operating profit margin at 22.18%.

By applying this profit rate as arm’s length margin to the

assessee’s international transaction, the AO made transfer pricing

addition amounting to Rs.1,26,92,794/-. In the first appeal, the ld.

CIT(A) made certain adjustments to the average profit margin of

comparables. On the basis of the findings given by the ld. CIT(A),

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the AO passed a consequential order computing average profit

margin of comparables at 19.48%. By applying such a profit rate

as arm’s length margin, the AO has computed transfer pricing

addition of Rs.88,48,944/-. The assessee is aggrieved by

sustenance of such an addition.

material on record. The first issue taken up by the ld. AR is

against the inclusion of Vama Industries Ltd. in the final set of

comparables. In fact, the assessee chose this company as

comparable. However, during the course of proceedings before the

AO, it was contended that the same should be excluded. This

contention did not find favour with the AO. The ld. CIT(A) upheld

the inclusion of this company in the final set of comparables. The

ld. AR submitted that this company should be excluded from the

list of comparables on several reasons including different

functional profile. The ld. DR raised a preliminary objection for

non-exclusion of this company putting forth that it was a

comparable chosen by the assessee itself and hence it cannot be

allowed to resile from its own stand.

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taken by the ld. DR that the assessee should be prohibited from

taking a stand contrary to the one which was taken at the stage of

the T.P. study or during the course of proceedings before the

AO/TPO. It goes without saying that the object of assessment is to

determine the income in respect of which the assessee is rightly

chargeable to tax. As the income not originally offered for

taxation, if otherwise chargeable, is required to be included in the

total income, in the same breath, any income wrongly included in

the total income, which is otherwise not chargeable, should be

excluded. There can be no estoppel against the provisions of the

Act. Extending this proposition further to the context of the

transfer pricing, if an assessee fails to report an otherwise

comparable case, then the TPO is obliged to include it in the list of

comparables, and in the same manner, if the assessee wrongly

reported an incomparable case as comparable in its TP

documentation and then later on claims that it should be excluded,

then, there should be nothing to forbid it from claiming so,

provided the company so originally reported as comparable is, in

fact, not comparable. Simply because a company was wrongly

chosen by the assessee as comparable, cannot tie its hands in

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contending before the Tribunal that such a company was wrongly

chosen as comparable which, in fact, is not. There is no qualitative

difference in a situation where the assessee claims that a wrong

company inadvertently included for the purpose of comparison

should be excluded and the situation in which the Revenue does

not accept a particular company chosen by the assessee as

comparable. The underlying object of the entire exercise is to

determine the arm’s length price of an international transaction.

Simply because a company was wrongly considered by the

assessee as comparable cannot act as a deterrent from challenging

the fact that such a company is actually not comparable.

including CIT Vs. Tata Power Solar Systems Ltd. (2017) 298 CTR

0197 (Bom) has held that a party is not barred in law from

withdrawing from its list of comparables, a company included on

account of mistake. Similar view has been taken by the Hon'ble

Delhi High Court in Xchanging Technology Services India Pvt

Ltd [TS-446-HC-2016(DEL)-TP] and the Hon’ble Punjab &

Haryana High Court in CIT VS. Mercer Consulting (India) P. Ltd.

(2017) 390 ITR 615 (P&H). In view of the foregoing discussion,

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we do not find any substance in the preliminary objection taken by

the ld. DR.

Industries Ltd. Before proceeding to analyze the comparability of

this company, it would be befitting to consider the functional

profile of the assessee. At the cost of repetition, it is noted that the

assessee is engaged in providing software development services

and quality assurance (testing) services and the later are also

admittedly in the nature of software development services. The

nature of services has not been disputed by the AO. We have gone

through the Annual report of Vama Industries Ltd. for the year

under consideration, a copy of which has been placed on record.

Profit and loss account of this company has been set out at page 29

of the Annual report, which indicates revenue from operations at

Rs.14.01 crore. Bifurcation of such revenues is available in Note

no. 20 as Sale of products (Domestic - Rs.9,55,70,528/- & Export -

Rs. Nil) at Rs.9,55,70,528/- and Other operating revenues

(Domestic – Rs.1,17,40,234/- & Export – Rs.3,28,66,174/-) at

Rs.4,46,06,408/-. Further bifurcation of `Other operating

revenues’ from export is given in Note No.33 which shows

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revenue from export of Engineering services at Rs.3.22 crore and

revenues from software development services at Rs.6.02 lakh. The

segmental information of this company has been given at page 50,

which deciphers revenues from `Software development services’

at Rs.3.28 crore, revenue from `Hardware sales and services’ at

Rs.10.21 crore and revenue from `Metals and minerals’ at Rs.51.19

lakh leading to total consolidated revenue of Rs.14.01 crore. Thus,

it is clear that the revenue from `Software development service’

segment, which has been considered for the purposes of

comparison with the assessee’s only international transaction of

rending software development services, stands at Rs.3.28 crore.

On perusal of Note no.33 to the annual accounts of this company

as referred to above containing break-up of revenue from

`Software development services’ segment, it emerges that revenue

from software development services is only a sum of Rs.6.02 lakh

and the entire remaining revenue of Rs.3.22 crore is from

engineering services. There can be no dispute on the proposition

that engineering services are quite distinct from software

development services in terms of skill, effort and expertise etc. An

effective comparison of the assessee’s lone software development

services can be made only with a company which is also either

8 ITA No.2444/PUN/2016 Approva Systems Private Limited

rendering software development services alone or if it is doing

some other activity also, then necessary information for computing

operating profit rate from the software development services, can

be separately identified. If a company is rendering software

development services and also engineering services and further

there is no information available from its Annual report to find out

the operating profit from the software development services, then

such a company cannot be considered as comparable with the

assessee rendering only software development services.

Ltd. (2014) 360 ITR 342 (Delhi) considered a case in which the

assessee was engaged in providing marketing services. The AO

selected certain companies as comparable which were rendering

engineering services. The Tribunal’s view in upholding the

exclusion of such companies rendering engineering services was

upheld by observing that the marketing services cannot be

compared with engineering services. Similar ratio applies to the

facts of the instant case as well. Whereas the assessee in question

is engaged in rendering software development services, it cannot

be compared with a company rendering software and technical

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services, more so, when the percentage of software development

services is minuscule, at just 1.86%.

company contains `Segment-wise performance’ at page 11, which

states that : “As of March 31, 2012 our main reportable segments

are Software Development & Services (IT & ITeS) and

Product/Hardware Sales & Services”. It is, thus overt that the

“Software Development & Services” segment of Vama Industries

Ltd., which has been considered as comparable not only includes

revenues from Software development services but also from I.T.

enabled services as well. It goes without saying that I.T. services

and I.T. enabled services are as distinct in connotation and nature

as north pole is from the south pole. Whereas IT services include

software development services, IT enabled services means services

rendered with the already developed software. As IT and ITeS

services are not comparable, the assessee rendering only IT

services cannot be compared with a company which renders both

IT and ITeS. In view of the foregoing discussion, we are satisfied

that Vama Industries Ltd. is not a functionally comparable

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company and the same should be excluded from the list of

comparables.

excluded then its profit margin would fall within +/-5% range and

there would be no need to examine other comparables challenged

in the instant appeal. In view of our decision on exclusion of

Vama Industries Ltd., we do not deem it appropriate to delve into

other companies from the angle of comparability.

restore the matter to the file of the AO for recomputing the ALP of

the international transaction of the assessee of rendering software

development services by excluding Vama Industries Ltd. from the

final set of comparables.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 07th June, 2019 सतीश

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आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-1, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “C” / DR ‘C’, ITAT, Pune; गाड� फाईल / Guard file. / True copy // 6.

आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार

// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 06-06-2019 Sr.PS 2. Draft placed before author 06-06-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *