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आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M. : This appeal is filed by M/s. Gainsight Software Pvt. Ltd. (“the assessee”), feeling aggrieved with the final assessment order of Learned Assessing Officer ("Ld. AO") passed u/s.143(3) r.w.s. 144C(13),143(3A) & 143(3B) of the Income Tax Act, 1961 ('the Act'), as per the direction of Learned Dispute Resolution Panel-1, Bangalore (“Ld. DRP”) on 30.03.2021 for A.Y. 2016-17.
The assessee has raised the following grounds of appeal :
2.1 The assessee has also raised the following additional grounds of appeal :
The facts of the case are that the assessee is a company engaged in the business of providing Software Development Services (“SDS”), filed its Return of Income (“ROI”) for A.Y. 2016-17 declaring total income at Rs.3,84,65,350/- on 01.10.2016. In view of the international transactions involved during the year under consideration, for determination of Arm’s Length Price (“ALP”), the case was referred to Learned Transfer Pricing Officer (“TPO”). The Ld. TPO vide his order dated 26.10.2019 suggested upward adjustment of Rs.2,89,98,656/- on account of provision of SDS and Rs.10,57,723/- on account of interest on trade receivables. Accordingly, the Ld. AO passed the draft assessment order on 04.11.2019.
Aggrieved with the draft assessment order passed by the Ld. AO, the assessee preferred objection before the Ld. DRP. In pursuance to the directions of Ld. DRP dated 24.02.2021, the Ld. AO finalized the assessment on 30.03.2021 by making total addition of Rs.2,71,60,259/- on account of upward adjustment of ALP.
Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before us. At the outset, the Learned Authorised Representative (“Ld.
AR”) submitted that, ground no.1 is general in nature, ground no.9 is consequential in nature and they are not pressing ground nos.2,3,5,6,7,8(b), 10, 11 and additional ground. Accordingly, ground nos. 1, 2,3,5,6,7,8(b), 9, 10, 11 and additional ground are dismissed being not pressed.
Under ground no.4, the assessee is seeking for exclusion of 11 companies from the list of comparables. However, the Ld. AR submitted that they are pressing for exclusion of 7 companies only. The Ld. AR further submitted that, they are seeking exclusion of (i) Tata Elxsi Limited (“Tata Elxsi”), (ii) Larsen & Toubro Infotech Limited (“L & T”), (iii) Persistent Systems Limited (“Persistent Systems”), (iv) Infosys Limited (“Infosys”) and (v) Cybage Software Private Limited (“Cybage”) on the basis of turnover filter and they are seeking exclusion of Infobeans Technologies Limited (“Infobean”) and Thirdware Solutions Limited (“Thirdware”) on the basis of functional dissimilarity.
With regards to exclusion of (i) Tata Elxsi, (ii) L & T, (iii) Persistent Systems, (iv) Infosys and (v) Cybage, the Ld. AR has submitted that these comparables are liable to be excluded from the list of comparables as their turnover is significantly higher than that of the assessee. He further submitted that, the turnover of the assessee is Rs.29.35 Crores, however, the turnover of (i) Tata Elxsi, (ii) L & T, (iii) Persistent Systems, (iv) Infosys and (v) Cybage are Rs.1,075 Crores; Rs.5569 Crores; Rs.1,447 Crores; Rs.53,983 Crores and Rs.722 Crores respectively, which is more than 10 times of the turnover of the assessee. The Ld. AR placed reliance on the decision of this Tribunal in the case of iMedX Information Services (P.) Ltd Vs. DCIT (ITA-TP No.1755/Hyd/2019 dated 10.05.2023) and Benu Networks Packet Switch Pvt. Ltd. Vs. DCIT (ITA No.86/Hyd/2022 dated 25.11.2024), wherein this Tribunal has held that the turnover filter of 10 times (both upward and downward) is a valid filter to determine the comparability. Therefore, the Ld. AR contended that (i) Tata Elxsi, (ii) L & T, (iii) Persistent Systems, (iv) Infosys and (v) Cybage should be excluded from the list of comparables as their turnover exceeds the threshold determined by this Tribunal.
7.1 Per contra, the Learned Department Representative (“Ld. DR”) objected the exclusion of (i) Tata Elxsi, (ii) L & T, (iii) Persistent Systems, (iv) Infosys and (v) Cybage and submitted that the turnover filter should not be considered in the selection of comparables provided the functional comparability is established. The Ld. DR further argued that, the assessee as well as comparable companies are operating in the field of human sources intensive industry, wherein increase in turnover is accompanied by a corresponding increase in the expenditure. Therefore, mere turnover difference should not be a ground for exclusion, if the core business function remains the same.
Finally, the Ld. DR prayed that (i) Tata Elxsi, (ii) L & T, (iii) Persistent Systems, (iv) Infosys and (v) Cybage should not be excluded from the list of comparables merely on the ground of significant difference in turnover.
7.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. The primary dispute before us is to decide whether (i) Tata Elxsi, (ii) L & T, (iii) Persistent Systems, (iv)
Infosys and (v) Cybage should be excluded only on the basis of their significantly higher turnover or not. It is well settled by various decision of co- ordinate benches of ITAT, including in the case of iMedX Information Services (P.)
Ltd. Vs. DCIT (supra) that the turnover filter of 10 times (both upward and downward) is a valid criteria for determining the comparability. Under the similar issue before us, this Tribunal in the case of iMedX Information Services (P.) Ltd. Vs. DCIT (supra) at para no. 11 to 17 of its order has held as under :
“11. On a careful consideration of the matter, we find that in the case of CIT vs. Pentair Water India (P) Ltd. [2016] 69 taxmann.com 180, the Hon'ble Bombay High Court while placing reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies (P) Ltd. [2013] 36 taxmann.com 289 held that turnover is obviously a relevant factor to be considered for comparability and the large and bigger company in the area of development of software cannot be benchmarked or equated with little size companies; whereas the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. (supra) held that turnover filter is an inappropriate filter and when once the company is found functionally comparable, it cannot be rejected from the set of comparables on the ground of the turnover.
In this situation, the Co-ordinate Bench of this Tribunal took a view in the case of M/s. Galax E Solutions India Pvt. Ltd. vs. ACIT, (2022) 192 ITD 326 (Bang.)(Trib.) took a view that where two views are available on an issue, the issue favourable to the assessee has to be adopted and, therefore, followed the decisions of the Hon'ble High Court.
Even the ICAI TP guidance note on transfer pricing clearly lays down that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company and two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. Under these circumstances, while respectfully following the decision of the Hon'ble Bombay High Court, we hold that for a proper TP analysis, we need to apply the turnover filter. Now the question arises as to what should be the appropriate turnover filter. This question also has come up for a consideration of Co-ordinate Benches of this Tribunal earlier. In the case of M/s Genisys Integrating Systems (India) Pvt. Ltd, vs. DCIT in dated 05/08/2011 an argument was advanced basing on the Dun and Bradstreet’s analysis which has classified the software companies into categories like large size firms of Rs. 2,000 crores, medium size firms of Rs. 200 and 2000 crores and little size firms below Rs. 200 crores. The bench find it to be a reasonable classification and taking the Indian scenario into consideration, it was found that the classification made by Dun and Bradstreet’s analysis was more suitable and reasonable. With that view of the matter, it was held that the turnover filter is very important and companies having turnover of Rs. 1 crore to Rs. 200 crores have to be taken as a particular range.
This turnover filter of the company between Rs. 1 crore to Rs. 200 crores is followed in some cases, but in the case of ITO vs. M/s. Maxim India Integrated Circuit Design Pvt. Ltd. in IT(TP)A No. 28/Bang/2012, dated 31/03/2016 while considering this aspect it was found that this approach has an inherent difficulty in applying such a turnover slab of Rs. 1 crore to Rs. 200 crore and the observations of the Bench are that,- “12. It is pertinent to note that the CIT(A) has applied turnover slab of Rs.1 crore to Rs.200 crores for excluding these companies, whereas there is an inherent difficulty in applying such a turnover slab of Rs.1 crore to Rs.200 crores because the said classification on the basis of slab of the turnover gives unrealistic results, as an entity having Rs.1 crore turnover can be compared with any entity having Rs.200 crores turnover, but at the same time an entity having Rs.200 crores turnover cannot be compared with an entity having Rs.201 crores turnover. Thus, as it is clear from the above illustration that it gives ambiguous result as two entities having difference of Rs.1 crore cannot be considered as comparable, whereas on the other hand difference of Rs.199 crores can be considered as comparable company. Therefore, such classification of comparables on the basis of companies selected on turnover basis is not appropriate and acceptable. The turnover, no doubt, is a relevant factor to be taken into account, but there should be some proper and reasonable parameter to apply the difference of turnover between the assessee and the comparable which may be a multiple in the range of 2 times, 3 times, X times or any other number of times which should be applied to all the comparable companies, instead of taking a slab from Rs.1 crore to Rs.200 crores….”
With this premise, the Co-ordinate Bench of this Tribunal in the case of M/s. Maxim India Integrated Circuit Design Pvt. Ltd. (supra) held that the turnover filter upto ten times can be applied.
Hon'ble Karnataka High Court in the case of Acusis Software India (P) Ltd. vs. ITO [2018] 98 taxmann.com 183 (Karnataka) approved the approach of the Tribunal in applying tolerance range of turnover of ten times on both sides of the turnover of the assessee to fix the turnover filter. In the case on hand, it could be seen from the order of the learned TPO that the learned TPO accepted the turnover filter selected by the assessee with companies, whose net sales are more than Rs. 1 crore, but failed to notice that without fixing the upper limit of such filter, it would lead to the insertion of certain entities, who operate on different scales and economies and render themselves as unsuitable for comparison. Though we agree with the counsel that certain comparables have to be deleted for their operation in relation with the assessee’s operation is huge in scale and economies. We, therefore, find it desirable on this aspect to restore the issue to the file of the learned Assessing Officer/learned TPO to take the range of turnover at ten times at both the ends and to conduct survey afresh. It is clear that since the assessee’s turnover is Rs. 5.17 crore in the software development services, the range could be Rs. 52 lakhs to Rs. 52 crores, which will satisfy the test approved and referred to by the Tribunal in the case of M/s. Maxim India Integrated Circuit Design Pvt. Ltd. (supra) and also in the case of Acusis Software India (P) Ltd. (supra). As a matter of fact, the view taken by the Tribunal in the case of Acusis Software India (P) Ltd. (supra) is approved by the Hon'ble Karnataka High Court.
We accordingly set aside the findings of the authorities and direct the learned Assessing Officer/learned TPO to take the range of turnover filter at ten times on both the ends and conduct search afresh to take a plausible view. These grounds are accordingly treated as allowed for statistical purposes.”
7.3 On perusal of above, we found that, as far as the applicability of the turnover filter is concerned, this Tribunal at para no.13 of its order has held that, the application of turnover filter is needed for a proper Transfer Pricing analysis. Further, as far as the appropriate turnover filter is concerned, this Tribunal has categorically held that, the application of tolerance range of turnover of ten times on both sides of assessee’s turnover is proper and accordingly, this Tribunal directed the Ld. AO to take range of turnover filter at ten times on both the ends and conduct search afresh to take a plausible view.
Therefore, respectfully following the decision of this Tribunal(supra), we hold that, turnover filter is inevitable for a proper Transfer Pricing analysis. Further, there is no dispute about the fact that the turnover of (i) Tata Elxsi, (ii) L & T, (iii) Persistent Systems, (iv) Infosys and (v) Cybage are more than 10 times than the turnover of the assessee, which clearly breaches the threshold set by this Tribunal in the case of iMedX Information Services (P.) Ltd. Vs. DCIT (supra).
Therefore, respectfully following the decision of this Tribunal in the case of iMedX Information Services (P.) Ltd. Vs. DCIT (supra), we hold that, as the turnover of (i) Tata Elxsi, (ii) L & T, (iii) Persistent Systems, (iv) Infosys and (v)
Cybage are more than 10 times than the turnover of the assessee, which clearly breaches the threshold of ten times on both the ends, cannot be considered as good comparable companies.
7.4 Further, we observe that, the Ld. TPO did not apply the turnover filter of 10 times (both upward and downward) to other comparables as well.
Therefore, in the interest of justice, we deem it appropriate to remand the issue back to Ld. TPO, granting liberty to the Ld. TPO to apply the turnover filter uniformly to all the comparables and carryout the necessary verification.
As far as the exclusion of Thirdware from the list of comparable is concerned, the Ld. AR invited our attention to para nos.2.4.5.1 to 2.4.5.4 of the order of Ld. DRP and submitted that, at para no.2.4.5.2, the Ld. DRP has categorically given its findings that the Related Party Transactions (“RPT”) filter of Thirdware exceeds 25%, which exceeds the limit adopted by the Ld. TPO and Ld. DRP directed the Ld. TPO to exclude Thirdware. However, while making direction at para no.2.4.5.4, the Ld. DRP inadvertently uphold the selection made by the Ld. TPO, which is contrary to the observation made by the Ld. DRP at para no.2.4.5.2. The Ld. AR also invited our attention to the working of RPT percentage done by the assessee in Form no.35A placed at page no.84 of the paper book, wherein at note no.279, the RPT percentage has been worked out at 25.35%. Accordingly, the Ld. AR submitted that, Thirdware fails the RPT filter of 25% adopted by the Ld. TPO and accordingly should be excluded from the set of comaprables.
8.1 In their alternate argument, the Ld. AR submitted that, Thirdware is also not comparable on the basis of functionality also. In support of their submission, the Ld. AR invited our attention to para no.38 of the decision of this Tribunal in the case of ADP (P.) Ltd. Vs. DCIT 135 taxmann.com 44 (Hyd Trib) placed at page no.54 of the paper book, wherein Thirdware has been excluded by this Tribunal from the list of comparables for the same A.Y. i.e. 2016-17 on the ground that it was engaged in product development and no segmental information was available for the said company. The Ld. AR further submitted that, functional profile of the assessee is similar to ADP (P.) Ltd., therefore, the decision of ADP (P.) Ltd. Vs. DCIT (supra) shall apply squarely to the assessee, warranting the exclusion of Thirdware on functional ground as well. Finally, the Ld. AR prayed before the bench to exclude Thirdware form the set of comparables.
8.2 Per contra, the Ld. DR opposed the request of Ld. AR for exclusion of Thirdware from the list of comaprables. The Ld. DR invited our attention to page no.30 of the order of Ld. TPO and submitted that, the assessee has incorrectly computed the RPT percentage by aggregating related party sale and purchases and dividing the same only by total sales. The Ld. DR further clarified that the correct method of computation of RPT percentage requires related party sales to be divided by total sales and related party expenses to be divided by total expenses separately. The Ld. DR further submitted that, by applying the correct method of RPT computation, the RPT of Thirdware comes below 25% and hence, does not breach the RPT threshold taken by the Ld. TPO. The Ld. DR also invited our attention to Form no.35A placed at page no.84 of the paper book, wherein the assessee has given the working of RPT percentage and demonstrated that the assessee has incorrectly computed the RPT percentage. Accordingly, the Ld. DR submitted that, the request of Ld. AR for exclusion of Thirdware on the basis of RPT filter is liable to be rejected.
8.3 As far as the functional profile of Thirdware is concerned, the Ld. DR submitted that, the decision of this Tribunal relied on by the Ld. AR in the case of ADP (P.) Ltd. Vs. DCIT (supra) was based on different facts. In that case, the Tribunal had observed that Thirdware was involved in product development and no segmental result was available. However, in the present case, the Ld. TPO has analysed this issue in detail at page nos.28 & 29 of its order and stated that the revenue from the sources other than SDS is only Rs.41.36 lakhs, which constitutes only 0.18% of total operational revenue of Rs.22,136.09 lakhs. Accordingly, the Ld. DR contended that, the detail of revenue other than SDS were available before the Ld. TPO. Accordingly, it is abundantly clear that the dominant activity of Thirdware is SDS and other activity is insignificant. Finally, the Ld. DR submitted that Thirdware is functionally comparable and the objection of the assessee is liable to be rejected.
8.4 We have heard the rival contentions and also gone through the record in the light of the submissions made on either side. We have gone through the para nos.2.4.5.1 to 2.4.5.4 of the order of Ld. DRP, which is to the following effect :
8.5 On perusal of above, we found that, while the Ld. DRP had initially observed that the RPT of Thirdware is 25.53%, but, in final direction the Ld. DRP did not exclude Thirdware. The assessee has relied on this inconsistency of Ld. DRP for exclusion of Thirdware. We have also gone through page no.84 of paper book as referred above, which is to the following effect :
8.6 On perusal of above, we found that, the Ld. TPO has properly analysed the working of RPT and correctly came to the conclusion that the assessee has incorrectly computed the RPT. We also found that, the assessee has calculated the RPT percentage by aggregating related party sales and purchases and dividing the same only by total sales. However, the correct method for computation of RPT percentage requires related party sales to be divided by total sales and related party expenses to be divided by total expenses separately. Therefore, in our considered opinion, the computation of the assessee, which aggregates RPT income and expenses without a proportionate base is not correct. By applying the correct method of RPT computation, the RPT of Thirdware comes below 25% and hence does not breach the RPT threshold taken by the Ld. TPO. Accordingly, we agree with the contention of Ld. DR and hold that Thirdware does not breach the RPT filter and therefore the objection of the assessee on this ground is not tenable.
8.7 As regards the functional comparability of Thirdware, we have gone through page no.29 of the order of Ld. TPO, which is to the following effect :
“ 18) REVENUE FROM OPERATIONS (Rs. In Lakhs) For the year ended 31st March For the year ended 31st March 2016 2015 Export of software Services 19285.11 22473.24 Sale of license 8.77 14.75 Revenue from subscription and 32.59 44.33 training Software services from 2809.62 475.66 domestic market Total 22136.09 23007.98 (Extract from annual report) The combined revenue from sale of license, subscription and training amounts toRs.41.36 lakhs which constitutes to 0.18% of the total operational income of Rs.22136.09 lakhs. Therefore, the taxpayer’s objection that the company is not functionally similar to the taxpayer is not accepted.” 8.8 On perusal of above, we found that, the revenue receipts of Thirdware other than SDS is Rs.41.36 lakhs, which constitute only 0.18% of total operating revenue of the assessee, which is very negligible. No evidence has been placed before us by Ld. AR to demonstrate that the revenue of Thirdware from other than SDS are significant. We have also gone through para no.38 of the decision of this Tribunal in the case of ADP (P.) Ltd. Vs. DCIT (supra), which is to the following effect :
“ 38. We have considered rival submissions and perused materials on record. Though, it may be a fact that the assessee may not have objected to selection of this company before the Transfer Pricing Officer, however, the assessee raised objections against selection of this company before the DRP as well as before us. The grievance of the assessee is, the company being involved in development of products and since no segmental details are available in the annual report, it cannot be treated as comparable. The Co-ordinate Bench in Tech Mahindra Ltd. (supra) having found this company to be involved in development of software product and trading in software licenses has held that it cannot be a comparable to a software development service provider. Similar view has been expressed in the other decisions cited before us by the learned Authorised Representative. Since, many of these decisions relate to very same assessment year, following the ratio laid down in these decisions, we hold that this company cannot be a comparable to the assessee". 8.9 On perusal of above, we found that, the ruling in the case of ADP (P.) Ltd. Vs. DCIT (supra) was based on the facts that no segmental details were available. However, in the present case, the details regarding revenue from other than SDS were available before the Ld. TPO. Accordingly, the decision given in ADP (P.) Ltd. Vs. DCIT (supra) is not applicable to the case on hand. As the revenue of Thirdware other than SDS is only 0.18% of the total operating revenue, this shows that Thirdware is predominantly engaged in SDS and is in line with the assessee’s functional profile. In view of the above, we hold that Thirdware has been rightly included in the final list of comparables.
Accordingly, the request of the assessee for exclusion of Thirdware is rejected.
As far as the exclusion of Infobeans is concerned, the Ld. AR invited our attention to para no.7.4 of the decision of this Tribunal in the case of ADP (P.)
Ltd. Vs. DCIT (supra) placed at page no.43 of the paper book and submitted that, this tribunal in the case of ADP (P.) Ltd. Vs. DCIT (supra) has held that, Infobeans is not a suitable comparable to ADP (P.) Ltd. The Ld. AR further submitted that, the functions of the assessee are similar to the ADP (P.) Ltd., therefore, the decision of this Tribunal in the case of ADP (P.) Ltd. Vs. DCIT (supra), for exclusion of Infobeans is squarely applicable to the assessee.
Accordingly, the Ld. AR prayed before the bench to exclude Infobeans from the set of comaprables.
9.1 Per contra, the Ld. DR opposed the request of Ld. AR and invited our attention to page no.20 of the order of Ld. TPO and submitted that the Ld. TPO has given a clear finding that the function of Infobeans has been gathered by the assessee from the website of Infobeans. However, there is no mention in the Annual Report of the Infobeans regarding engagement of Infobeans into diversified activity like providing software engineering services, contained development services, etc. The Ld. DR further submitted that, the Infobeans in its Annual Report has shown revenue from SDS only and no segment details has been provided in their Annual Report. This means that Infobeans is engaged in only one segment i.e. SDS, hence, no segment details are required to be provided by Infobeans. The Ld. DR further submitted that, this Tribunal in the case of ADP (P.) Ltd. Vs. DCIT (supra) has excluded Infobeans on the ground that no segment details have been provided by the Infobeans.
Therefore, the decision of this Tribunal in the case of ADP (P.) Ltd. Vs. DCIT (supra) is based on different set of facts. Therefore, the same is not applicable to the case of the assessee. Finally, the Ld. DR prayed before the bench to reject the request of assessee regarding exclusion of Infobeans from the set of comparables.
9.2 We have heard the rival contentions and also gone through the record in the light of the submissions made on either side. We have gone through relevant para of page no.20 of the order of Ld. TPO, which is to the following effect :
“ TPO's comments Functionally different The annual report clearly mentions that the company is completely engaged in providing software development services (as seen in the extracts reproduced above). From the information gathered through ARS, it is therefore established that the company is purely into software development. Hence, it is functionally similar to taxpayer's business activities. Diversified activities & no segmental available The taxpayer has gathered information from company's website and submitted that the company is into diversified activities like providing software engineering services primarily in Custom application development (CAD), Content Management Systems (CMS), Enterprise Mobility (EM), Big data analytics (BDA) etc. Since no segmental margins are given for each of these segments the company should be rejected.
Software development segment actually encompasses diversified activities which are essentially in the nature of programming and hence broadly similar for TNMM comparability purpose. A detailed note on this is provided in para 10 (below). Further, the very fact that the company itself has categorized all its activities as software development in its AR clarifies that different activities mentioned by the taxpayer are not actually different business segments. Hence, no segmental are required. Taxpayer's objection is not acceptable.”
9.3 On perusal of above, we found that, the Ld. TPO has categorically given his finding that there is no mention in the Annual Report of the Infobeans regarding engagement of Infobeans into diversified activity like providing software engineering services, contained development services, etc.
The Infobeans in its Annual Report has shown revenue from SDS only and no segment details has been provided in their Annual Report. This means that Infobeans is engaged in only one segment i.e. SDS, hence, no segment details are required to be provided by Infobeans. This Tribunal in the case of ADP (P.)
Ltd. Vs. DCIT (supra) has excluded Infobeans on the ground that no segment details have been provided by the Infobeans. In our view, the decision of this Tribunal in the case of ADP (P.) Ltd. Vs. DCIT (supra) is based on different set of facts. Accordingly, the same is not applicable to the case of the assessee. We have also gone through para no.7.4 of the decision of this tribunal in the case of ADP (P.) Ltd. Vs. DCIT (supra) which is to the following effect :
“ 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee’s own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables.”
9.4 On perusal of above, we found that, this Tribunal has decided regarding the exclusion of Infobeans on the basis of the fact that Infobeans is engaged in more than one segment and no segment details have been provided by Infobeans in their Annual Report. However, in fact, Infobeans is engaged in only one segment i.e. SDS and therefore, no segment details are required. In this regard, we have gone through Note no.1(c) of the notes to accounts placed at page no. 1229 of the paper book, Note no.35 related to “services rendered” placed at page no.1244 of the paper book and Note no.43 related to “quantitative details” placed at page no.1247 of the paper book, all forming part of the financial statements of Infobeans, which is to the following effect :
Note no.1(c) of the notes to accounts: “1(c) Revenue Recognition : Revenue is recognized only when it can be reliably measured and it is reasonable to expect ultimate collection. Revenue includes rendering of services, dividend income is recognised when received.”
Note no.35 related to “services rendered”: “ 35. SERVICES RENDCERED (Amount in Rupees) Particulars 2015-16 2014-15 Indigenous 155,45,046 11,57,826 Exports 60,00,06,600 34,84,79,167 Total 61,55,51,646 34,96,36,993”
Note no.43 related to “quantitative details”: “43. Quantitative Details : The company is primarily engaged in the development and maintenance of computer software. The production and sale of such software cannot be expressed in any generic unit. Hence, it is not possible to give the quantitative details of sales and certain information as required under paragraphs 5(viii)(c) of general instructions for preparation of the Statement of Profit and Loss as per Schedule III to the Companies Act,2013”
9.5 On perusal of Note no.43 related to “Quantitative details” of the financial statements of Infobeans, we found that, Infobeans is primarily engaged in SDS only. Further on perusal of Note no.1(c) of the financial statements of the Infobeans, we found that, Infobeans is engaged in provision of only services and not engaged in other products. Further on perusal of Note. no.35 of the financial statements related to “Services Rendered”, we found that, Infobeans has earned revenue from rendering of services only.
Accordingly, we found that Infobeans is engaged mainly in SDS. Therefore, we hold that Infobeans is a good comparable to the assessee. Therefore, we reject the request of the assessee regarding exclusion of Infobeans from the list of comparables.
Ground no.8(a) of the assessee is related to the denial of working capital adjustment (“WCA”) by the Ld. TPO while determining the ALP. The Ld. AR submitted that the Ld. TPO denied WCA on the ground that only year-end figures were available and the assessee failed to furnish detailed working capital cycle data during the year. The Ld. AR further submitted that the assessee is not in a position to obtain granular or daily/monthly working capital data of the uncontrolled comparable companies, as such data is not available in the public domain, and the assessee has no access or right to call for such internal details from third-party comparables. The Ld. AR also submitted that WCA is a legitimate adjustment intended to neutralize the impact of difference levels of working capital between the tested party and the comparables, which affects the margins and profitability. It was also submitted that the WCA may be computed on the basis of average of opening and closing balances as available from the annual reports of comparables, which is consistent with settled principles laid down in multiple judicial precedents. Finally, the Ld. AR prayed before the Bench that, in order to bring parity in comparison, a working capital adjustment should be granted.
10.1 Per contra, the Ld. DR submitted that the assessee has not furnished the necessary data or workings in support of its claim for working capital adjustment. Specifically, the assessee has not demonstrated whether the comparable companies have met their working capital requirements through borrowed funds or internal sources. The assessee has also failed to establish whether the comparable companies have incurred any actual cost on working capital deployment or the impact of such financing on their profit margins.
Therefore, in the absence of any such supporting material, the assessee’s request for working capital adjustment is required to be rejected.
10.2 We have considered the rival contentions and perused the material available on record in view of the submissions made by either side. The Ld. AR has submitted that the Ld. TPO denied WCA on the ground that only year-end figures were available and the assessee failed to furnish detailed working capital cycle data during the year. The Ld. AR also submitted that the assessee is not in a position to obtain granular or daily/monthly working capital data of the uncontrolled comparable companies, as such data is not available in the public domain, and the assessee has no access or right to call for such internal details from third-party comparables. In terms of Rule 10B(1)(e)(iii) of the Income-tax Rules, 1962, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and comparable uncontrolled transactions which could materially affect the amount of net profit margin. In our view, difference in levels of working capital between the tested party and the comparables have an affects on the margins and profitability. Therefore, the Ld. TPO’s approach in insisting upon daily/monthly working capital cycle data of third-party comparables is, in our considered view, unjustified, particularly when such data is admittedly not available in the public domain. The assessee cannot be expected to obtain information which is beyond its reach. Therefore, we are of the considered opinion that, WCA cannot be denied merely due to the absence of detailed working capital cycle data and the adjustment should be granted based on average of opening and closing balances. Hence, we direct the Ld. TPO to grant appropriate WCA to the assessee while determining the ALP, by adopting the average of opening and closing working capital balances of comparables, as available from their annual reports. Accordingly, the ground No. 8 of the assessee is allowed for statistical purpose.
In the result, the appeal of the assessee is partly allowed for statistical purposes.