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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER
IT(TP)A Nos.1418 & 2735/Bang/2017 Assessment year : 2013-14
M/s. MetricStream Infotech (India) Vs. The Deputy Commissioner of Pvt. Ltd., Income Tax, AMR Tech Park, 4B, Circle 4(1)(2), No.23 & 24, Hongassandra Village, Bangalore. Begur Hobli, Bengaluru South Taluk, Bengaluru – 560 068. PAN: AACCM 4991K APPELLANT RESPONDENT
Appellant by : Shri Narendra Jain, Advocate Respondent by : Shri Pradeep Kumar, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 29.01.2019 Date of Pronouncement : 27.02.2019
O R D E R Per N.V. Vasudevan, Vice President Both these are appeals by the assessee against the final order of assessment dated 21.04.2017 of the Dy. Commissioner of Income-tax I/c, Circle 4(1)(2), Bengaluru passed u/s. 143(3) r.w.s. 144C(13) of the Act.
The appeal in ITA No.1418/Bang/2017 was filed by the assessee against the order referred to in the earlier para on 19.06.2017 wherein Form 36 and Grounds of Appeal was signed by the Country Controller of
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Finance & Administrative Operations of the assessee. Later on, the assessee realised that before the Tribunal Form 36B and grounds of appeal should be signed by the Director where there is no Managing Director. Accordingly, another appeal was filed in Form 36B with grounds of appeal on 15.12.2017. The assessee has also filed an application for condonation of delay in filing the appeal. It has been mentioned by the assessee that the second appeal filed by the assessee on 15.12.2017 was the same as the first appeal and the only difference was that the Director of assessee signed the second appeal and therefore strictly speaking, there is no delay, but nevertheless by way of abundant caution, an application for condonation of delay is being filed supported by an affidavit of the Director of the assessee.
We have considered the submissions of the assessee and we find that identical issue had come up for consideration before the Tribunal in assessee’s own case for AY 2012-13 and this Tribunal condoned the delay in filing the appeal observing as follows:-
“6. Originally this appeal was filed on 1.3.2017 along with appeal memo - in Form No.36, grounds of appeal and other documents which were signed, by authorized signatory of the pee. The appeal so filed was well within the time. Later on it was noticed by the assessee that Form 36, grounds of appeal and other documents have to be signed by the Director of the company. Accordingly, the revised Form No.36, grounds of appeal and other documents were filed duly signed by the Director of the Company. Registry has not raised any objection in this regard that there is a delay in filing the appeal. The assessee, however, on its own has filed petition for condonation of delay, in the event the revised Form No.36, Memor of grounds etc., filed on 1.3.2017 is treated as not proper and the time of filing the appeal is to be reckoned only from the date on which Form '36, grounds of appeal and other
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documents singed by the Director is considered as the date, of filing of the appeal. There will be a delay of 130 days in filing the appeal if it is construed that Form 36, grounds of appeal and other documents signed by the Director of the Company alone is considered as proper filing of the appeal. It has been explained in the petition of condonation of delay that the Directors controlling the affairs of the assessee was outside India and therefore they could not sign the same. It has also been submitted that there was no deliberate or intentional reason for the defective filing of the appeal, if any. 6. Though the learned Departmental Representative has prayed and submitted that the delay if any should not be condoned, we are of the view that the question of delay is only a technical as the assessee has filed the appeal within the time on 1.3.2017 though the same was defective. Accordingly, we hold that the appeal filed is within time and in any event there was a reasonable cause for the delay in filing the appeal.” 4. In view of the above conclusion, we are of the view that the appeal which requires adjudication is IT(TP)A No.2735/Bang/2017 and therefore the appeal in ITA No.1418/Bang/2017 is dismissed as superfluous and infructuous.
As far as the merits of the appeal filed by the assessee is concerned, the issue raised therein is with regard to determination of arm’s length price (ALP) in respect of international transaction of rendering software development services by the assessee to its Associated Enterprise (AE) u/s. 92 of the Income-tax Act, 1961 ["the Act"]. As far as determination of ALP of international transaction is concerned, it is not in dispute that TNMM is the most appropriate method of determination of ALP and that the Profit Level Indicator (PLI) chosen for the purpose of comparison was profit margins of the assessee and that of the comparable companies was Operating Profit (OP) to Operating Cost (OC). The OP to
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OC of assessee was 13.01%. The assessee had chosen 26 comparable companies and arithmetic mean of profit margin of those comparable companies was 11.83%. The assessee claimed that since its margin was more than the comparable companies chosen, the price received in the international transaction was at arm’s length.
The TPO to whom a reference was made by the AO for determination of ALP u/s. 92CA of the Act, accepted some of the comparable companies chosen by the assessee and finally chose 7 companies as comparables and based on the arithmetic mean of the profit margin of those companies after giving allowance for working capital adjustment, determined the ALP and addition to be made to the total income as follows:-
Sl. Name of the Company Operating Woking Capital No. Margin on Adjusted Margin Cost (OP/OPC) 1 CG-VAK Software & Exports 14.31% 13.12% Limited (Segment) 2 I C R A Techno Analytics Ltd. 17.10% 12.15% 3 Larsen & Toubro Infotech Ltd. 26.06% 24.70% 4 Mindtree Ltd. (Seg) 18.19% 16.51% 5 Persistent Systems Ltd. 28.27% 26.04% 6 R S Software (India) Ltd. 17.41% 17.52% 7 Tech Mahindra Ltd. (Segmental) 18.72% 17.24% Arithmetic Mean 20.01% 18.18%
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Computation of arm’s length price by the AO/TPO and the adjustment made:
Arm's length mean margin 20.01% Less: Working capital adjustment 1.83% Adjusted mean margin after working capital adjustment 18.18% Operating Cost (A)* 81,90,91,343 Arm's length price - 119.05% of operating cost (B) 97,50,88,448 Total Operating Revenue (C) 92,56,57,818 Short fall being Adjustment u/s 92CA (B - C) 4,94,30,630
Consequently, a sum of Rs.4,94,30,630 was added to the total income of the assessee on account of shortfall in the price charges in the international transaction.
The assessee filed objections before the DRP. The DRP excluded ICRA Techno Analytics from the 7 comparable companies chosen by the TPO and retained the other comparable companies chosen by the TPO.
In this appeal, the assessee has prayed for exclusion of 3 more comparable companies out of 6 companies retained after the order of DRP. The 3 companies which the assessee seeks to exclude are L&T Infotech Ltd., Persistent Systems Ltd. and Tech Mahindra Ltd.
The ld. Counsel for the assessee submitted before us that in the case of software development services provided by the assessees such as the assessee in the present case, the exclusion of aforesaid 3 companies
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have been considered and decided by this Tribunal in several decisions for the very same Assessment Year viz., AY 2013-14.
As far as L&T Infotech Ltd. and Persistent Systems Ltd. are concerned, our attention was drawn to the decision of ITAT Hyderabad Bench in the case of M/s. EPAM Systems (I) P. Ltd. v. ACIT, ITA No.2122/Hyd/2017 for AY 2013-14, order dated 20.11.2017. Vide para 12 of the decision, the Tribunal took the view that Persistent Systems Ltd. was into software products and software solutions and no segmental details were available and therefore the profit margin in the software development services segment could not be compared with the assessee’s profit margin. As far as L&T Infotech Ltd. is concerned, the Tribunal vide para 17 of the aforesaid order came to a similar conclusion to hold that L&T Infotech should not be regarded as a comparable company. In the light of judicial precedents which remain uncontroverted, we are of the view that the aforesaid two comparable companies should be excluded from the list of comparable companies.
As far as Tech Mahindra Ltd. is concerned, the assessee made a specific prayer before the DRP that the related party transaction (RPT) of this company was more than 25%. Our attention was drawn to page 641 of the assessee’s PB, which is objections filed by the assessee before the DRP wherein the following submission was made:-
“The assessee would like to submit that Tech Mahindra fails the RPT filter applied by your good self. The working for the same is provided below for your reference:
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Related Party Net Sales Related Party Transaction Transaction /Net Sales 25,739,000,000 60,019,000,000 42.88% (Source: AR 2012-13 0 pg. 69, 70 & 71) Hence, the company fails the RPT filter applied by the TPO and hence should be rejected.” 13. The DRP, however, has not considered this submission, but has confirmed the order of TPO. We are of the view that it would be just and proper to set aside the order of DRP on this issue and remand the issue to AO/TPO for consideration of the contention of the assessee with regard to the exclusion of this company by application of RPT filter.
The ld. Counsel for the assessee drew our attention to ground No.13 of the grounds of appeal of the assessee as follows:-
“The ld. AO/learned TPO/Hon’ble DRP has grossly erred in rejecting companies that ought to have been included as comparable to the Appellant: - Akshay Software Technologies Pvt. Ltd. - CAT Technologies Ltd. - Cigniti Technologies Ltd. - Sasken Communication Technologies Ltd. - FCS Software Solutions Ltd. - Lucid Software Ltd. - Maveric Systems Ltd. - Thinksoft Global Services Ltd. - Ybrant Digital Ltd. 15. It was submitted that the assessee seeks to include the following 3 companies viz., Lucid Software Ltd., Maverick Systems Ltd. and Thinksoft Global Services Ltd. These companies were regarded as not comparable by the TPO for the reason that no data relating to results of these
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companies were available in the public domain. Our attention was drawn by the ld. Counsel for the assessee to page Nos. 764 to 828 of the assessee’s PB which gives the financial results of these companies as available in the public domain. The limited request of the ld. Counsel for the assessee was to remand to the TPO the issue of considering these companies as comparable companies
Apart from the above, the assessee also seeks to include Akshay Software Technologies Ltd. in the list of comparable companies. As far as this company is concerned, our attention was drawn to the annual accounts of this company which is at pages 742-753 of assessee’s PB. This company was excluded on the ground that in response to notice u/s. 133(6) of the Act, this company had mentioned that it was engaged in providing professional services, procurement, installation, implementation, support & maintenance of ERP products and services. Since the above services were not in the nature of software development, the TPO considered this company as not comparable. The ld. Counsel for the assessee drew our attention to pages 742 to 743 of the assessee’s PB which contains the financial statements of this company. Our attention was drawn to Note No.20 to the financial statements wherein income from software services forms more than 98% of assessee’s total revenue. Further in Note 29 to the financial statements, export of software services is shown at Rs.18.65 crores out of the total revenue from operations of Rs.19.94 crores. Pointing out to the above details, the ld. Counsel for the assessee submitted that this company is actually in software development services. It was submitted that in AY 2009-10 in assessee’s own case, this company was accepted as a comparable.
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The ld. DR, on the other hand, had pointed out that when the company itself has accepted that it is providing ERP products and services, it cannot be said that this company was in software development services. He relied on para 15.3 of the DRP’s order in which the DRP has given the following findings:- “15.3 As regards assessee's argument that ERP systems are software systems and as such the same should be considered as software development, the same is devoid of any merit. For determining the functionality of a company, it needs to be determined as to what is the exact nature of functions. In case a company is in Software Development, it would not matter as to what kind of customer it serves as the broad range of services remain the same and that is the development of software. Further, it will not matter whether the company develops complete software for its client e.g. develops a final product as per demand of the client or develops only some software modules, as per the requirements of its client, the function remains same. However, a company needs to be considered in the business of Software Products, if it is itself developing and selling the products developed by it as then it owns the TPR of the product and exploits it by selling the product/software license to different customers. In the case of M/s. Akshay, as discussed supra, it is operating in multiple segments including software products, however segmental data of the same is not available. For ERP products, its annual report refers to 'support and maintenance' and there isn't any detail about the nature of this activity as to whether the assessee is into software development activities relating to ERP or just offering IT enabled services in relation to the said product. The reliance of the assessee on "Rangachary Report" is also misplaced as the issue under consideration is "Software Development services" and the same has not been defined therein. Further purpose of the said report was to 'Review Taxation of Development Center and the IT Sector' and not to define 'Software Development', `IT enabled services', other IT services etc. for the purposes of defining the functionality for carrying out TP studies. The report discusses entire IT sector and the services which would come within its
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purview rather than what is software development services and what is not. So, these objections of the assessee do not have any merit. Considering above, the objection of the assessee is not accepted.” 18. In the rejoinder, the ld. Counsel for the assessee submitted that every implementation of ERP also includes development of ERP for a client and has to be regarded as software development services.
We have considered the rival submissions and we are of the view that the reasons assigned by the DRP for regarding this company as not comparable are correct and does not call for any interference. When the nature of services are doubtful, it is always better to exclude a company from the list of comparable companies. In that view of the matter, we uphold the order of DRP and dismiss the relevant ground of appeal of the assessee.
The last submission of the ld. Counsel for the assessee was that the TPO while concluding his order u/s.92CA of the Act, allowed adjustment on account of working capital at 1.85% but the DRP in its order held that working capital adjustment need not be given. On this aspect, the ld. Counsel for the assessee drew our attention to a decision of ITAT Bangalore Bench in the case of Microsoft Research Cable P. Ltd. v. DCIT, IT(TP)A No.1276/Bang/2017 for AY 2013-14, order dated 3.11.2017, wherein on identical reasoning of DRP, this Tribunal held as follows:- “8.2 We have heard the rival contentions, perused and carefully considered the material on record. It is settled principle by a plethora of judicial pronouncements by various benches of the Tribunals that the taxpayer shall be granted working capital adjustment in order to bring the assessee on par with the comparable companies selected. After perusal of the DRP's order,
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we are of the view that the statement of the DRP in its order that the Tribunals have not examined the issues highlighted in its order is a general sweeping statement bereft of any basis. How to compute the working capital adjustment and the extent of adjustment to be granted to a particular assessee would depend on the facts of each individual case. We, however, observe that the factors mentioned by the DRP in its order could be of relevance only in deciding the quantum of working capital adjustment. We, therefore, set aside the finding of the DRP that the assessee is not to be granted working capital adjustment and in the interest of justice, we direct the TPO to examine, recompute and grant the assessee's working capital adjustment as per law after affording the assessee adequate opportunity of being heard in the matter and to file details / submissions required. Consequently Ground No.8 of assessee's appeal is allowed for statistical purposes.” 21. In the light of the aforesaid decision of the Tribunal rendered against a similar order of the DRP, we are of the view that it would be just and proper to direct the TPO to allow working capital adjustment. We hold and direct accordingly.
All other grounds relating to transfer pricing was not pressed for adjudication and accordingly those grounds are dismissed as not pressed.
In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this 27th day of February, 2019.
Sd/- Sd/- ( B.R. BASKARAN ) ( N.V. VASUDEVAN) Accountant Member VICE PRESIDENT
Bangalore, Dated, the 27th February, 2019. / Desai Smurthy /
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.