STARENT NETWORKS (INDIA) PVT. LTD.,,PUNE vs. ACIT, CIRCLE-6,, PUNE

The assessee has raised the following grounds of appeal:- On the facts and in the circumstances of the case and in law, the Honorable DRP and consequentially the learned AO have:

The ground of appeal No.1 raised by the assessee is general in nature. The issue in ground of appeal No.2 is not pressed. The issue vide grounds of appeal No.3 to 7 is against selection of comparables for benchmarking the international transactions of assessee. The ground of appeal No.8 is against the claim of risk adjustment for difference between functional and risk profile of the comparables vis-à-vis risk profile of the assessee. The issue in ground of appeal No.9 is limited to the application of +/- 5% range. The issue in ground of appeal No.10 is not pressed and the issue in ground of appeal No.11 is premature. In view thereof, we dismiss the grounds of appeal No.1, 2, 10 and 11.

Now, coming to the issue raised vide ground of appeal Nos.3 to 7. The learned Authorized Representative for the assessee pointed out that the Transfer Pricing Officer (TPO) at page 45 had drawn final list of comparables, out of which there is no dispute vis-à-vis selection of Goldstone Technologies Ltd., L G S Global Ltd. and Softsol India Ltd. However, the assessee is aggrieved by inclusion of following concerns:- i) Bodhtree Consulting Ltd. ii) E-infochip Ltd. iii) eZest Solutions Ltd. iv) Helios & Matheson Information Technology Ltd. v) KALS Information Systems Ltd. (application software seg).

The learned Authorized Representative for the assessee further pointed out that the following concerns need to be included in the final list of comparables:- i) Thinksoft Global Services Ltd. ii) CG Vak Software & Exports Ltd. (Seg) iii) SIP Technologies & Exports Ltd.

The learned Departmental Representative for the Revenue on the other hand, placed reliance on the order of Assessing Officer/DRP and pointed out that the upward adjustment made in the hands of assessee needs to be upheld.

In respect of second issue of risk adjustment, the learned Authorized Representative for the assessee pointed out that the said issue stands covered by the order of the Pune Bench of Tribunal in DCIT Vs. Applied Micro Circuits India Pvt. Ltd. in ITA No.1250/PUN/2015 along with CO No.43/PUN/2017, relating to assessment year 2010-11, order dated 24.11.2017, wherein the principle laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448, has been applied.

We have heard the rival contentions and perused the record. Briefly, in the facts of the case, the assessee was engaged in the business of software development and exports. The assessee was a subsidiary of Starent Networks Corporation (SNC), USA. It had exported software services to SNC. The assessee also owned three separate undertakings engaged in the business of software development and export activities. The assessee for the year under consideration had filed the return of income declaring total income of ₹ 19,64,622/- after claiming income exempt under section 10A of the Act at

The TPO accordingly, held that an upward adjustment has to be made in the hands of assessee to the extent of ₹ 7,64,94,655/-. The Assessing Officer in the draft assessment order passed has made above said adjustment of ₹ 7.64

The assessee before us has raised the issue in respect of selection of comparables and is aggrieved by selection of certain comparables and exclusion of certain comparables which he pleaded to be included in view of its comparability. The learned Authorized Representative for the assessee pointed out that the issue raised in respect of inclusion / exclusion of comparables is squarely covered by the orders of Tribunal with special reference to the ratio laid down in MSC Software Corporation India (P.) Ltd. Vs. ACIT in ITA No.46/PUN/2013, relating to assessment year 2008-09, order dated 22.03.2017. He also pointed out that there is no grievance against selection of Goldstone Technologies Ltd., Softsol India Ltd. and L G S Global Ltd. The assessee is aggrieved by inclusion of Bodhtree Consulting Ltd. In this regard, the learned Authorized Representative for the assessee pointed out that the said concern was functionally different as it was also engaged in software products. Further, during financial year 2007-08, the company had hived off its e-paper business and hence, was an exceptional year of operation and hence, not comparable. In this regard, he pointed out that the issue for assessment year 2008-09 i.e. the

We find that the issue of exclusion of Bodhtree Consulting Ltd. has been adjudicated by the Tribunal in MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra). The relevant findings are as under:- “10. First, we shall take up the objections of assessee and the submissions of the learned Departmental Representative for the Revenue in respect of companies which were finally selected by the Assessing Officer / TPO / DRP in the final set of comparables. The first concern is Bodhree Consulting Ltd. The learned Authorized Representative for the assessee pointed out that the said concern merits to excluded from the final list of comparables as the said concern was product company and was also engaged in ITES segment. Further, there was re-structuring during the year and the year under consideration was an exceptional year. 11. The learned Departmental Representative for the Revenue on the other hand, pointed out that the assessee was engaged in engineering and product development, which was more akin to ITES segment. Where the assessee was providing mixed set of services i.e. product and engineering services, then the same is comparable to Bodhtree Consulting Ltd. Reliance placed upon by the assessee on the ratio laid down by the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT in ITA No.2236/PN/2012, relating to assessment year 2008-09, vide order dated 18.11.2015, it was held to be distinguishable since Bodhtree Consulting Ltd. was not providing data cleaning services. 12. On perusal of record, we find that the concern Bodhtree Consulting Ltd. was considered by the TPO to be functionally comparable despite the submissions of assessee that it was functionally different, wherein the said concern was also engaged in software products. Since no segmental details were available and the concern Bodhtree Consulting Ltd. being software product development company as well as providing services, can the same be held to be functionally comparable with the assessee which is providing software development services to its associate enterprises. While benchmarking any international transactions undertaken by the assessee, the endeavour should be made to compare the results shown by the assessee with such concerns which are functionally comparable. Where the margins of concerns picked up are from different segments of operation i.e. software development product as well as ITES services and in the absence of any segmental details available, then such concern cannot be treated as comparable. Another aspect is the year of

In the facts of the present case before us the assessee is also engaged in providing software services to its associated enterprises as in the case of MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra) and following the same parity of reasoning, we hold that where Bodhtree Consulting Ltd. was engaged both in software development and product as well as ITES services, then in the absence of segmental details being available, such a concern could not be treated as comparable. Another aspect of the issue is it being exceptional year, where the said concern had hived off its e-paper business to another concern. Accordingly, we hold that Bodhtree Consulting Ltd. is to be excluded from final set of comparables.

The next concern which the assessee wants to be excluded is E-infochips Ltd. on the ground that it is not functionally comparable.

We find that similar plea was raised vis-à-vis exclusion of E-infochips in MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra) and it was held as under:- “14. Now, coming to the next concern E-Infochips Ltd. The plea of the assessee in this regard was that the said concern was a product company and also in ITES segment. Our attention was drawn to the financial statements for the year under consideration placed at pages 618, 619, 625 and 630 of the Paper Book and the learned Authorized Representative for the assessee pointed out that there was decrease in inventories in the case of E-Infochips Ltd. establishing the contention of assessee that it was product company. He stressed that where the assessee was not purely a software development company, the results of such concern could not be compared with the assessee which was purely engaged in the software development. The second issue of it being a super profit making company was not pressed during the course of hearing.

Following the same parity of reasoning, we find no merit in the plea of assessee and hold that E-infochips Ltd. is to be included in the final set of comparables.

The next concern against which the assessee has raised its plea for its exclusion is eZest Solutions Ltd. The case of assessee is that the said concern is engaged in diversified activity and is a product company. The learned Authorized Representative for the assessee referred to the decision of Pune Bench of Tribunal in MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra) relating to the year under appeal and pointed out that the said concern was

In view of similarity of reasoning, we hold that the said concern e-Zest Solutions Ltd. being a product company is not to be included as comparable to the assessee, which is engaged in providing IT services to its associated enterprises, hence the same is to be excluded from final list of comparables.

The next concern which has been selected by the Assessing Officer / DRP but which according to the assessee is not comparable is Helios & Matheson Information Technology Ltd. on the ground of its turnover. The assessee claims that the TPO had adopted turnover filter of ₹ 1 to 200 crores. However, the concern Helios & Matheson Information Technology Ltd. had turnover of ₹ 213 crores and hence, the same was not to be included in the final list of comparables. The TPO had included the said concern to be comparable on the basis of cost of turnover. The learned Authorized Representative for the assessee in this regard pointed out that total turnover of assessee for the year under consideration was ₹ 55.21 crores. He further pointed out that the issue in the present appeal is squarely covered by the order of Tribunal in the case of MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra).

The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below.

We find no merit in the stand of authorities below. The TPO himself has adopted a filter range of ₹ 1 to 200 crores. Once a range has been applied, then there is no question of holding the same to be within +/- 10% of upper filter applied by the TPO. The total turnover of the assessee for the year under consideration was only ₹ 55.21 crores and the concern selected had turnover of ₹ 213 crores. Even if functionally comparable, then the margins could not be applied as it does not fit into filters applied by the TPO, against which the assessee has no dispute.

We find similar issue of exclusion of the concern Helios & Matheson Information Technology Ltd. arose before the Tribunal in the case of MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra) and the Tribunal vide para 6 at page 7 held as under:- “6. The issue in ground of appeal No.3 raised by the assessee is the application of turnover filter of Rs.1 to Rs.200 crores as comparables selection criteria, as against the turnover filter up to Rs.100 crores applied by the assessee for identifying the comparable companies. The first part of the issue raised by way of ground of appeal No.3 is against the application of turnover filter of Rs.1 to Rs.200 crores and not Rs.100 crores as applied by the assessee. The learned Authorized Representative for the assessee pointed out that the first limb of ground of appeal No.3 is not pressed, hence, the same is dismissed as not pressed.”

Following the same parity of reasoning, we hold that the concern Helios & Matheson Information Technology Ltd. is to be excluded from final list of comparables as it does not fulfill the turnover filter applied by the TPO.

Another concern which the assessee claims is not comparable and hence excludable is KALS Information Systems Ltd. being product company. The reasoning as for exclusion of e-Zest is to be applied for KALS Information Systems Ltd. also. We further find that the Tribunal in MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra) in para 21 at page 13 had also excluded KALS Information Systems Ltd. on similar basis. Accordingly, we find no merit in the stand of Revenue in this regard and hold that KALS Information Systems Ltd. is to be excluded from the final list of comparables.

We also find that the Hon’ble Bombay High Court in CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014, judgment dated 26.09.2016 has held that KALS Information Systems Ltd. and Helios & Matheson Information Technology Ltd. are to be excluded being not functionally comparable being engaged in selling software products, which was different from the activity undertaken by the assessee i.e. rendering of software services to its holding company. Following the same parity of reasoning, we hold that KALS Information Systems Ltd. is not to be included in the final set of comparables.

Now, coming to the concern CG VAK Software & Exports Ltd. and SIP Technologies & Exports Ltd. which were excluded on the ground that they were persistent loss making concerns.

The learned Authorized Representative for the assessee pointed out that CG VAK Software & Exports Ltd. was not persistent loss making concern. In this regard, he pointed out that the margins of said concern in the earlier two years was positive and only in the year under consideration, there was loss of 1.97%.

The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.

We find no merit in the plea of Revenue in this regard. The reason for exclusion of CG VAK Software & Exports Ltd. was that the operating margin for the year under consideration was that the concern was showing loss. In the financial year 2005-06, the operating margin i.e. OP/OC was 2.54%, in financial year 2006-07 it was 5.69% and in financial year 2007-08, it was (-) 1.97%. The concern which has been thus, claimed to be persistent loss making by the TPO has only suffered losses in a particular year. Where the concern is not consistent loss making concern, then the same is not to be excluded from list of comparables, is the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Welspun Zucchi Textiles Ltd. (supra). The Tribunal in TIBCO Software India Pvt. Ltd. Vs. DCIT (supra) had also similarly held vide para 29, which reads as under:- “29. We have carefully considered the rival submissions. In our considered opinion, the point sought to be made out by the TPO is quite mis-placed having regard to the purpose and import of the comparability analysis of the international

Accordingly, we allow the ground of appeal raised by the assessee and hold that CG VAK Software & Exports Ltd. is to be included in the final list of comparables.

In respect of SIP Technologies & Exports Ltd., the operating margins for assessment year 2006-07 were 21.09%, for assessment year 2007-08 were 10.12% and for assessment year 2008-09 were (-) 33.20%. Following the same parity of reasoning as in the case of CG VAK Software & Exports Ltd., we hold that the said concern is not persistent loss making concern and applying the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. M/s. Welspun Zucchi Textiles Ltd. (supra), we hold that the said concern is to be included in the final set of comparables.

The last concern which the assessee wants to be included in the final set of comparables is Thinksoft Global Services Ltd. The said concern was excluded

We find that the Tribunal has already considered the issue of functional comparability of the concern Thinksoft Global Services Ltd. in TIBCO software India Pvt. Ltd. Vs. DCIT (supra) and held as under:- “33. We have carefully considered the rival submissions. We have also perused the orders of TPO as well as the DRP in this context. Although, the order of the TPO is quite sketchy on this point, but the DRP has discussed the matter in a slight detail. One of the observations of the DRP is that the “primary activity of the appellant is to carry out part of the process of software development for its parent company and therefore, the finding of the TPO that Thinksoft Global Service Limited, is a functionally different company, appears to be correct”. In our considered opinion, the aforesaid finding of the DRP goes to show, in the context of the fact situation of assessee‟s activities and that of Thinksfot Global Services Limited, that both are engaged in carrying out activities which are parts of the process of software development activities. It is quite justifiable to comprehend that the activity of verification of software and validation of software are activities which are part and parcel of the process of software development. In fact, before the DRP, assessee referred to the Wikipedia meaning of the expression „Verification‟ and „Validation‟ in the context of software. The expression „Verification‟ was explained to be referring to the process of evaluating the software to determine whether the products of a given development phase specified the conditions imposed at the start of that phase. Similarly, the expression „Validation‟ was explained to be the process of evaluating software during or at the end of the development process to determine whether it satisfies specified requirements. In our considered opinion, where it is admitted that the activity being performed by the assessee is also a part of process of software development for its associated enterprise, then the captioned activities being undertaken by Thinksoft Global Services Limited, which ostensibly also are a part of the whole process of software development, would definitely be considered as

The year under appeal before the Tribunal in TIBCO software India Pvt. Ltd. Vs. DCIT (supra) was assessment year 2008-09 and the year under appeal before us is also relates to assessment year 2008-09. In view of the findings of the Tribunal in TIBCO software India Pvt. Ltd. Vs. DCIT (supra), we hold that the concern Thinksoft Global Services Ltd. is functionally comparable and hence needs to be included in the final set of comparables. Accordingly, we direct the Assessing Officer to benchmark the international transactions of providing software services to associated enterprises by drawing final list of comparables as directed above. The case of assessee before us is that no further adjustment would be required to be made in the hands of assessee as the margins shown by the assessee would be within +/-5% range of the mean margins of comparables. The Assessing Officer is directed to verify the stand of assessee and pass an appropriate order.

Now, coming to the last issue in respect of economic adjustment on account of risk differences. The case of the assessee is that the assessee being remunerated on cost plus basis where it is providing services to its associated enterprises, it is risk free and adjustment for differences between functional and risk profile of the comparable companies is to be allowed in the hands of assessee.

We find that similar issue has been raised in DCIT Vs. Applied Micro Circuits India Pvt. Ltd. (supra), wherein it was held as under:- “18. The next issue raised vide ground of objection No.2.2 is against the claim of risk adjustment. The plea of assessee that risk adjustment should have been granted to the assessee for differences between functional and risk profile of comparable companies vis-à-vis assessee. The learned Authorized Representative for the assessee in this regard pointed out that the assessee was risk mitigated entity, whereas the comparables were risk bearing. He further stated that the assessee had furnished the working as per the decision of Bangalore Bench of Tribunal in Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 and the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448. The learned Authorized Representative for the assessee in this regard placed reliance on the ratio laid down by the Pune Bench of Tribunal in MSC Software Corporation India Pvt. Ltd. Vs. ACIT in ITA No.46/PUN/2013, relating to assessment year 2008-09, order dated 22.03.2017. 19. We find that the issue is squarely covered by earlier decisions of the Pune Bench of Tribunal in MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra), wherein the said concern was also captive service provider to its associated enterprises and had claimed to be risk free. It had asked for risk adjustment in the margins of finally selected comparables and the Tribunal vide order dated 22.03.2017 held as under:- “34. Following the said ratio, we direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee. 35. The ground of appeal No.10 raised by the assessee is against applicability of +/- 5% and the benefit can be allowed if the adjustment is within such range and hence, no adjustment is to be made in case it is not more than 5% from the arm's length price. We hold so.” 20. The issue arising before us is similar and following the same parity of reasoning, we direct the Assessing Officer to allow risk adjustment and re-work the margins of comparables, in turn, relying on the ratio laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee. The ground of objection No.2.2 is thus, allowed.”

Following the same parity of reasoning, we direct the Assessing Officer to allow risk adjustment in turn relying on the proposition laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra), wherein it was allowed @ 20%, and compute the TP adjustment, if any, in the hands of assessee. The ground of appeal Nos.3 to 8 are thus, allowed. The issue in

In the result, appeal of assessee is partly allowed.