DCIT, BANGALORE vs. M/S SLING MEDIA PVT. LTD.,, BANGALORE

The cross appeals filed by the parties and the cross objection filed by the assessee are directed against the order passed by the AO for asst. year 2010-11 in pursuance of directions issued by ld Dispute Resolution Panel (DRP).

At the time of hearing, the ld DR furnished Working sheet computing tax effect involved on the issues contested by the Revenue and submitted that the tax effect involved is only Rs.16.56 lakhs. Accordingly she submitted that the Revenue will not press its appeal, as the tax effect is less than Rs.50.00 lakhs.

The ld AR submitted that the cross-objection field by the assessee was in pursuance of appeal filed by the Revenue. Since the Revenue appeal is not being pressed, the ld AR submitted he will not press cross-objection also.

In view of the above, appeal of the Revenue and cross- objection filed by the assessee are dismissed as not pressed.

In respect of the appeal filed by the assessee, the ld AR advanced his arguments on the following two issues only.

We heard the parties and perused the record. The assessee is engaged in providing software development services to its associated enterprises. It is a captive service provider. The assessee adopted operating profit/operating cost (OP/OC) as Profit Level Indicator and applied TNMM method as most appropriate method. Rejecting the transfer pricing study conducted by the assessee, the TPO selected 11 companies as comparables. However the ld DRP excluded 6 companies and retained 5 comparable companies. In the present appeal the assessee seeks exclusion of following two companies.

The ld AR submitted that both the above said companies were held to be not good comparables for captive Software service providers in the decision rendered by the coordinate bench in the case of M/s Electronics for imaging Pvt. Ltd., Vs. DCIT in IT(TP)A No.212/Bang/2015 dated 24/2/2016. Accordingly the ld AR prayed for exclusion of both the above companies.

The ld DR, on the contrary. placed her reliance on the decision rendered by another coordinate bench in the case of M/s

In the rejoinder, the ld AR submitted that the decision rendered by the Tribunal in the case of M/s Electronics for Imaging India Pvt. Ltd. is later one, i.e., it was rendered subsequent to the decision of M/s Radisys India Pvt. Ltd. He further submitted that there are many other decisions rendered subsequently by the co- ordinate benches, wherein both the above said companies have been held to be not good comparables to a captive service provider. He invited our attention to the following decisions in this regard:-

We heard both the parties on this issue and perused the record. The decision in the case of Radisys India (P) Ltd was rendered on 04-09-2015. Admittedly the decision was rendered by the coordinate bench in the case of Electronics for Imaging India Pvt. Ltd., on 24.02.2016 and the same is later one. Further there are many other decisions wherein the decision rendered on the above said two companies are identical with the view expressed in IT(TP)A No.375, 504/Bang/2015 CO. 125/Bang/2015 the case of Electronics for Imaging India P Ltd. Accordingly we prefer to follow the decision rendered in the case of M/s Electronics for Imaging India Pvt. Ltd.(supra). In the above said case both the companies under consideration have been held to be not good comparables. For the sake of convenience, we extract below the relevant observations made by the coordinate bench in the case of Electronics for Imaging India Pvt. Ltd. (Supra).

In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider.

The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, dated 23.11.2012, this company was found to be not comparable with that of the assessee.

We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs.60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP.

Accordingly following the above said decision, we direct the AO to exclude both the companies referred above.

The next issue contested by the assessee relates to working capital adjustment granted by the TPO. The ld AR submitted that the TPO has given working capital adjustment restricting the same to 1.98% as against the amount computed by the assessee. He submitted that the co-ordinate bench in the case of Cerner Health Care Pvt. Ltd., in IT(TP)A No.44/Bang/2015 dated 16/1/2017 has held that the AO/TPO has to allow working capital adjustment on actual basis without restricting the same.

In the result, the appeal filed by the assessee is treated as allowed. The appeal of the Revenue and the Cross-objection filed by the assessee are dismissed.