Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI VIKAS AWASTHY & SHRI RAJESH KUMAR
This appeal by the assessee is directed against assessment order dated 31/01/2017 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( in short ‘the Act’) for assessment year 2012-13.
2 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13)
The brief facts of the case as emanating from records are: The assessee is inter-alia engaged in the business of IT Support services and Software Development services. Though, the assessee is carrying out other business activities also, in the present appeal since, the assessee has assailed Transfer Pricing(T.P) adjustment in respect of aforesaid two activities, we are confining our focus to the said activities only. The assessee in order to benchmark its international transactions with Associated Enterprises(AE) in respect of provision of IT Support Services and Software Development services applied Transactional Net Margin Method (TNMM) as the most appropriate method. The Transfer Pricing Officer(TPO) accepted TNMM but raised objections to the companies selected by the assessee as comparables to bench mark Arm’s Length Price (ALP) of the transactions under the said segment. The TPO made fresh list of comparables in both the segments and proposed following adjustments:
Adjustment on account of provision of Rs.2,98,49,466.00 Software Development Services 2. Adjustment on account of provisions IT Rs.2,74,60,456.00 support services Total Rs.5,73,09,922.00 The Assessing Officer passed the draft assessment order dated 29/02/2016 on the basis of adjustments proposed by the TPO. The assessee filed objections before the Dispute Resolution Panel(DRP) assailing the comparables selected by the TPO. The DRP partly accepted the submissions of assessee and directed to exclude some of the companies objected by the assessee in the list of comparables. Still aggrieved, the assessee is in appeal before the Tribunal. The assessee is further seeking exclusion of companies from the list of comparables for determining ALP with the AEs.
Shri Dhanesh Bafna appearing on behalf of the assessee stated at the outset that he would be pressing only ground No.1.2.6 and 1.2.10 in respect of provisions of Software Development Services and ground No.2.2.6 and 2.2.9 assailing
3 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13) adjustment against provision of IT support related services. The other grounds/sub- grounds raised in the appeal are not pressed.
The ld.Authorized Representative of the assessee submitted that in respect of provision of Software Development Services, the assessee is seeking exclusion of Thirdware Solutions Ltd.( in short ‘Thirdware’) on account of functional disparity. The ld.Authorized Representative of the assessee explained that the assessee is engaged in Software Development Services, whereas Thirdware is a product company. The TPO has erred in including Thirdware in the list of comparables on the premise that IT Product Company and IT Software Development company are same. The ld.Authorized Representative of the assessee submitted that the Tribunal in assessee’s own case in for assessment year 2010-11 in appeal by the Revenue has upheld exclusion of Thirdware. Thereafter, in A.Y 2011- 12 in ITA NO.345/Mum/2017 and in assessment year 2013-14 in ITA No.531/Mum/2018 the Tribunal has upheld the exclusion of Thirdware from the list of comparables being functionally different.
On the other hand, Shri Anand Mohan representing the Department vehemently supported the assessment order and the directions of DRP in upholding inclusion of Thirdware in the list of comparables. The ld.Departmental Representative referred to the observations made by DRP at page 59 of the directions to contend that Thirdware is maintaining segmental accounts. The revenue of Thirdware from Software Development services is approximately 95% of the total revenue and only miniscule part of the total revenue i.e. approximately 5% of the total revenue is from sale of licences, subscription and web training. The ld.Departmental Representative further referred to page 546 to 548 of the Paper Book to contend that from the financials of Thirdware furnished by the assessee it is evident that revenue from sale of products for Financial Year 2011-12 is Nil. whereas
4 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13)
The entire revenue declared by Thirdware is from sale of services. The ld.Departmental Representative pointed that on page 548 of the Paper Book is the footnote , wherein bifurcation from different segments viz. revenue from sale of licences, export of Software Development services is given. Thus, it is evident from the documents on record that during the period relevant to assessment year 2012- 13, Thirdware is having no revenue from sale of products. The ld.Departmental Representative further placed reliance on the decision of Hon'ble Delhi High Court in the case of Steria (India) Ltd. vs. DCIT reported a s 92 taxamann.com 120(Del) to contend that Thirdware was held to be comparable to a company engaged in export of Software Development services.
Controverting the submissions advanced by ld.Departmental Representative, the ld.Authorized Representative of the assessee submitted that the Tribunal in various decisions including decision in assessee’s own case has held that Thirdware being product company is functionally incomparable to company engaged in Software Development services. The ld.Authorized Representative of the assessee referred to page 545 of the Paper Book to contend that the product includes services. The ld.Authorized Representative of the assessee further pointed that decision rendered in the case of Steria (India) Ltd. (supra) is distinguishable, as in the said case the TPO has considered the geographical segment and not the segment at functional level. The ld.Authorized Representative of the assessee submitted that the TPO in the present case has considered entity level margin of Thirdware . The TPO followed similar approach in assessment year 2010-11, 2011-12 and 2013-14 for inclusion of Thirdware at entity level. The Tribunal by placing reliance on the decision rendered in the case of CIT vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014 decided on 26/09/2016 by Hon'ble Bombay High Court held that sale of software products and software development services are separate and distinct.
5 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13)
The ld.Authorized Representative of the assessee contended that without prejudice to the primary submissions made for exclusion of Thirdware, if only overseas segment of Thirdware with a margin of 11.10% is accepted in the final set of comparable and working capital adjustment is allowed, the Arithmetical Mean of the final set of comparables would be 6.38%. Since, the margin would be within +/- 5% arm’s length range, therefore, no adjustment would be required under Software Development segment.
We have heard the submissions made by rival sides on exclusion of Thirdware from the final set of comparables for the purpose of benchmarking Software Development segment. The assessee is seeking exclusion of Thirdware on the ground that the said company is engaged in product development and earned revenue from sale of licences, subscription of products, Software Development services, etc. Whereas, the assessee is purely Software Development services provider. The Revenue has vehemently opposed exclusion of Thirdware. The ld.Departmental Representative has pointed that the company has reported revenue from sale of services only in F.Y 2011-12 relevant to A.Y.2012-13 and there is no revenue/ turnover from sale of products. Although in statement of Profit and Loss no Revenue from sale of products has been reported during F.Y 2011-12 but on perusal of footnote at the end of the statement of profit and loss account at page 548 of the Paper Book it transpires that the Revenue from operations include: Export of Software Development services, Sale of Licences, Revenue from subscription and training and Software services. Thus, the company has reported revenue from different activities under the head ‘Revenue from Sale of Services’. Therefore, the said company not only generates revenue from services alone but from other activities as well. We further observe that Thirdware has been excluded from the list of comparables in assessee’s own case in assessment year 2010-11, 2011-12 and 2013-14 on the ground that the activities of the assessee and that of 6 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13)
Thirdware are at variance. In other words, there is difference in functionality of both the companies.
We observe that one of the argument raised by the Department before the Tribunal in assessment year 2011-12 was that software development and software products are one and the same and cannot be construed as separate and distinct activity per se. The Co-ordinate Bench rejected the arguments advanced by the Revenue in support of inclusion of Thirdware in the list of comparables by holding as under:
“9. With regard to exclusion of comparables i.e. Thirdware Solutions Ltd, Persistent Systems Ltd, Tata Elxsi Ltd and Kals Information Systems Ltd. from the final set of comparables as directed by the ld. CIT(A) on the ground of functional dissimilarities, the ld. DR argued that anything related to automizing the operations in digital format tantamount to software development and accordingly, non-availability of break-up of revenue from software services and sale of software products does not affect comparability. We find that main crux of the argument of the ld. DR is that software development and sale of software products are both one and the same and cannot be construed as separate and distinct activity per se. We find that the ld DR argued admitted the fact that there is no segmental break up of revenue in respect of sale of software products and revenue derived from software development in respect of the aforesaid comparables in the annual reports of the respective comparables, but nevertheless, the same would not affect the comparability with the assessee , as according to him, both the software development and sale of software products are one and the same activity. We are unable to persuade ourselves to accept this argument of the ld. DR that there is no difference between company engaged in software development and company engaged in sale of software products. We find that the Hon’ble Jurisdictional High Court in the case of CIT vs. PTC Software (I) Pvt.Ltd. in Income Tax Appeal No.732 of 2014 dated 26/09/2016 had addressed this issue in the context of exclusion of Kals Information Systems Ltd. and Helios and Matheson Information Technology Ltd. Specific question raised before the Hon’ble Jurisdictional High Court in this regard is as under:-
“(ii) Whether on the facts and circumstances of the case, the Tribunal erred in excluding KALS Information Solutions Ltd. and M/s. Helios & Matherson Information Technology Ltd. from the list of cmoparables on the basis of previous years documentations of the assessee without verifying the functions performed by the comparables in the year under consideration ?” 9.1. The Hon’ble Jurisdictional High Court addressed the aforesaid question by observing as under:- “10. Re. Question (ii) : a) M/s. KALS Information Solutions Ltd. (KALS Ltd.) and Helios & Matheson Information Technology Ltd. (Helios & Matheson Ltd.) were included by the TPO in his comparability analysis. The grievance of the respondent assessee before the Tribunal was that both are functionally different from the respondent assessee and, therefore, could not be used as comparables. The respondent assessee pointed out
7 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13) that KALS Ltd and Helios & Matheson Ltd. are engaged in the business of selling of software products while the respondent assessee renders software services to its holding company. (b) The Tribunal in the impugned order records that for the preceding assessment year i.e. A.Y. 2006-07,the TPO had found that KALS Ltd. and Helios & Matheson Ltd. were functionally not comparable with the respondent assessee. In the subject assessment year also, on the basis of Annual Report, it was noted that the KALS was engaged in selling of software products which is different from the activity undertaken by the respondent assessee, namely, rendering of software service to its holding company. Further, the impugned order also records that no attempt was even made by the Revenue before it to bring on record any change in the nature of activities carried out by KALS Ltd. and Helios & Matheson Ltd. in the subject assessment year, making them functionally comparable to the respondent assessee. In the aforesaid facts, the Tribunal rendered a finding of fact that KALS Ltd. and Helios & Matheson Ltd. are not comparable with the respondent assessee. (c) Even before us, no submissions were advanced justifying the order of the Assessing Officer that the services rendered by KALS Ltd. and Helios & Matheson Ltd. are comparable for the subject assessment year with that of the respondent assessee. (d) In the above view, as the findings of the Tribunal being one of the fact which has not been shown to be perverse, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.”
9.2. Respectfully following the aforesaid decision of Hon’ble Jurisdictional High Court, we hold that sale of software products and software development services are separate and distinct and accordingly, the arguments advanced by the ld. DR are rejected in this regard. Accordingly, the aforesaid comparables i.e Thirdware Solutions Ltd, Persistent Systems Ltd, and Kals Information Systems Ltd. deserves to be excluded from the list of comparables which had been rightly directed by the ld. CIT(A) for exclusion. With regard to exclusion of Tata Elxsi Ltd, we find from 895 to 898 of the paper book, there is no segmental data available in the annual report of the said comparable and we also find that they have got their own research and development which makes it functionally uncomparable with that of the assessee, among others, in as much as the assessee herein before us believes on research and development supplied by AE, which fact is not in dispute before us.”
The ld.Departmental Representative in support of inclusion of Thirdware placed reliance on the decision rendered in the case of Steria (India) Ltd.(supra). A close examination of decision in the said case reveals that the said company was accepted as comparable to a Software Development service provider on the basis of geographical segment reporting, i.e. domestic vis-a-vis overseas. The issue was not examined with regard to segment reporting of the services and functional analysis The Hon'ble Jurisdictional High Court in the case of PTC Software (I) Pvt. Ltd.(supra)
8 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13) has held that Software Product and Software Development services are functionally different. Therefore, the company engaged in selling of software product is incomparable to company rendering Software Development services. Thus, in view of the above, we hold that the decision rendered in the case of Steria (India) Ltd.(supra) is distinguishable, hence, the same does not support the case of Revenue.
In view of our above findings, we hold that Thirdware being a product company is not a good comparable to a company engaged in software development services, therefore, the Assessing Officer is directed to exclude Thirdware from the final set of comparables. The ground No.1.2.6 raised in the appeal is allowed.
In ground No.1.2.10 the assessee has prayed for granting working capital adjustment. The ld.Authorized Representative of the assessee has contended that difference in working capital of the assessee and the comparable company ought to be adjusted for appropriate comparability analysis. The assessee has furnished calculations for adjusted margin before the TPO. The same are at page 437 and 442 of the Paper Book. It has been further pointed that in assessment year 2010-11, 2011-12 and 2013-14 the benefit of working capital adjustment has been allowed to the assessee by the Tribunal. We find that in assessment year 2010-11 the CIT(A) had allowed working capital adjustment on final set of comparables. The Revenue challenged the same before the Tribunal in ITA No.344/Mum/2017(supra). The Co- ordinate Bench upheld the finding of CIT(A) in allowing working capital adjustment and rejected the ground raised by the Revenue. Similarly, in assessment year 2011- 12 and 2013-14 the Tribunal allowed the benefit of working capital adjustment to the assessee following the order in assessment year 2010-11. No contrary material has been placed before us by the Revenue. Respectfully following the decision of Co- ordinate Bench in assessee’s own case in the preceding assessment years and immediately succeeding assessment year, we direct the Assessing Officer to allow
9 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13) the benefit of working capital adjustment to the assessee. Consequently, ground No.1.2.10 is allowed. 12. The other sub grounds raised in ground No.1 of the appeal are dismissed as not pressed.
In ground No.2 of appeal, the assessee has assailed Transfer Pricing (TP) adjustment made on account of provision of IT support and related services.The assessee is seeking exclusion of Excel Infoways Ltd.(Segmental).(in short ‘Excel’) The ld.Authorized Representative of the assessee submitted that assessee is providing IT Help Desk and Database Administration Related Services(ITES) to its AEs. The appellant’s margin is 15.72%. The average margin of comparable companies as per TPO’s final set of comparables is 24.09%. The inclusion of fresh comparables by the TPO to benchmark transaction has resulted in TP adjustment. The assessee is seeking exclusion of Excel on the ground that operating margin of said company in preceding assessment year is abnormally fluctuating. Further, the said company has closed its ITES segment and diversified into Real Estate business. The ld.Authorized Representative of the assessee pointed that in assessee’s own case in for assessment year 2014-15 the Tribunal has directed to exclude Excel from the list of comparables as it fails to qualify turnover filter. The ld.Authorized Representative of the assessee further placed reliance on the decision in the case of Banc Tec TPS India Pvt. Ltd vs. ACIT in ITA No.2074/Mum/2017 for assessment year 2012-13 decided on 12/06/2020, wherein Excel was excluded from the list of comparables on account of fluctuating margin and closure of ITES segment in financial year 2011-12. To support his contention further the ld.Authorized Representative of the assessee placed reliance on the decision of M.Model Global Services Pvt. Ltd. vs. ACIT in ITA No.970/Mum/2017 assessment year 2012-13 decided on 16/10/2019, wherein Excel was excluded on the ground of fluctuating margins and diminishing revenue.
10 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13)
On the contrary, the ld.Departmental Representative vehemently opposed exclusion of Excel. The ld.Departmental Representative submitted that only segmental results i.e. BPO/ITES segment was considered. Since segmental data of the said company is available no prejudice is caused to the assessee. Diversification into Real Estate business is not relevant as segmental results are available. The ld.Departmental Representative further referred to Annual Report of Excel for Financial Year 2011-12 at page 1257 of the Paper Book. The ld.Departmental Representative pointed that the said company has decided to diversify into Real Estate business in future after closure of IT and BPO business. The ld.Departmental Representative further pointed that in the financial statement for the year ended 31/03/2012 , at page 1291 of the Paper Book the said company has shown revenue from information technology/BPO related services. Therefore, it is wrong to say that the BPO business of the assessee has shut down during the Financial Year 2011-12 relevant to assessment year 2012-13. The ld.Departmental Representative pointed that the Tribunal in assessment year 2013-14 has excluded Excel on the basis of turnover filter and not for the reasons raised by the assessee in the present assessment year. The ld.Departmental Representative in support of his submissions placed reliance on the decision of Bangalore Bench of Tribunal in the case of Zyme Solutions Pvt. Ltd. vs. ACIT in IT(TP) No.1661/Bang/2015 for assessment year 2012-13 decided on 16/11/2018. The ld.Departmental Representative vehemently supported the findings of Assessing Officer /DRP for inclusion of Excel in the final set of comparables.
Rebutting the submissions made on behalf of the Revenue, the ld.Authorized Representative of the assessee submitted that the decision rendered in the case of Zyme Solutions Pvt. Ltd (supra) with regard to Excel being a good comparable has been recalled by the Tribunal in M.P.No.16/Bang/2019 vide order dated 05/04/2019.
11 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13)
Both sides heard, orders of authorities below examined. The assessee is seeking exclusion of Excel primarily for the reason that the company has fluctuating margin. We find that the Co-ordinate Bench of Tribunal in the case of Banc Tec TPS India Pvt. Ltd. for A.Y.2012-13(supra) has held that Excel is not a good comparable for the following reasons:
“Excel Infoways Limited (Segmental) The assessee is seeking exclusion of Excel from the final list of comparables on the ground that the company is having fluctuating margins and hence, is not a good comparable for assessment year 2012-13. We find that Pune Bench of the Tribunal in the case of Emersion Climate Technologies vs. DCIT (supra) directed to exclude Excel from the list of comparables on account of fluctuating margins. The relevant extract of the finding of the Tribunal read as under:- “16. Coming to the first concern Excel Infoways Ltd., wherein the assessee points out that the said concern was not to be selected as comparable because of its fluctuating margins. The learned Authorized Representative for the assessee has filed tabulated details in this regard, wherein the margins of said concern being drastically dropped from 267.31% in earlier years to 41.48% during the year under consideration. The year-wise margins of said concern are as under:- Financial Year OP/TC Margin 2008-09 247.74% 2009-10 267.31% 2010-11 238.71% 2011-12 41.48%
Further, the said concern had closed down its ITES and BPO segment in financial year 2011-12 on account of global recession. We hold that the said concern which is in the process of closing down its ITES segment and also because of the factum of fluctuating margins, could not be selected as functionally comparable to the assessee. In this regard, we find support from the ratio laid down by the Hon’ble High Court of Gujarat in Pr. CIT Vs. Allscripts India Pvt. Ltd. in Income Tax Appeal No.258 of 2016 and Pune Bench of Tribunal in TIBCO Software India Pvt. Ltd. Vs. DCIT in & cross appeal in ITA No.334/PUN/2015, relating to assessment year 2010-11, order dated 31.01.2017 and Qlogic India Pvt. Ltd. Vs. DCIT in ITA No.227/PUN/2014, relating to assessment year 2009-10, order dated 21.10.2014.” [Emphasised by us] In the case of Baxter India Pvt. Ltd vs. ACIT (supra), the Tribunal directed to exclude Excel from the list of comparables inter-alia on account of, abnormal volatility in revenue and 12 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13)
margins. It is settled legal position that a company having super normal profits or highly unstable margins should not be idly considered as good comparable. Thus, in view of the decisions referred above, we find merit in the contentions of the assessee and direct the Assessing Officer to exclude Excel from the list of comparables.” Excel was excluded from list of comparables on account of abnormally fluctuating revenue. Similar view has been taken by the Tribunal in the case of M. Model Global Services (supra) for exclusion of Excel from the final set of comparables. We find that in the case of Zyme Solutions Pvt. Ltd. (supra) exclusion of Excel was not considered on the ground of abnormal fluctuating margin of the company. Nor this fact was brought to the notice of Bench for consideration. Therefore, the decision in the case of Zyme (supra) is distinguishable on facts. Respectfully following the decision of Co-ordinate Bench in the case of Banc Tec TPS India Pvt. Ltd.(Supra) the Assessing Officer is directed to exclude Excel from the list of comparables for parity of reasons. The assessee succeeds on ground No.2.2.6 of the appeal.
17. In ground No.2.2.9 of the appeal assessee has prayed for allowing working capital adjustment. The ld.Authorized Representative of the assessee pointed that working capital adjustment was allowed to the assessee by the Tribunal in in assessee’s own case for assessment year 2013-14. The ld.Authorized Representative of the assessee further submitted that if Excel (supra) is excluded from the final set of comparables and working capital adjustment is allowed. The arithmetic mean of comparables would be 21.29%, i.e. within +/- 5% margin, hence, no TP adjustment would be required as the transaction under IT support and related services would be at arm’s length. While adjudicating ground No.1.2.10 above we have directed the Assessing Officer to allow working capital adjustment on provision of software development and related services. For parity of reasons the working capital adjustment be allowed to the assessee in respect of provision of IT support services. Consequently, ground No.2.2.9 of the appeal is allowed.
13 आअसं. 1416/मुं/2017 (�न. व.2012-13 ) (A.Y.2012-13)
The other sub-grounds raised in ground No.2 of appeal are dismissed as not pressed.
In the result, appeal by the assessee is partly allowed in the terms aforesaid.
Order pronounced in the open court on Tuesday the 29th day of June, 2021.