SHIPNET SOFTWARE SOLUTIONS INDIA PVT. LTD.,CHENNAI vs. DCIT, CHENNAI

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the Order passed u/s

143(3) r.w.s.144C(13) dated 25.10.2016 by the Dy. Commissioner of

Income Tax, Corporate Circle 6(1), Chennai for the AY 2012-13 and raised

the following grounds:

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Grounds of appeal:

Erroneous Comparability Analysis carried out by LTPO/Hon’ble DRP

2.1 The LTPO/Hon’ble DRP ought to have appreciated that the total turnover of the appellant was only Rs.22.32 Crores in the Financial year 2011-12 and ought to have held that the following companies are not comparable as their turnover was in excess of Rs.500 Crores.

i. Mindtree Limited {segmental} (1255.8 Cr) ii. Larsen & Turbo Infotech Ltd (2959.5 Cr) iii. Persistent Systems Ltd (810.36 Cr)

2.2 The Hon’ble DRP ought to have appreciated that even the Safe Harbour Rules are treating companies with turnover of Rs.500 crores as a separate class.

The LTPO/Hon’ble DRP ought to have appreciated that the following companies having regard to the diverse nature of functions could not be compared to the appellant which renders simple software coding services to its associated enterprise.

i. Thirdware Solutions Limited ii. Acropetal Technologies Limited iii. Spry Limited

The Hon’ble DRP erred in incorrect reasoning and inconsistent positions in regard to their own positions elsewhere in the order and excluding the following comparables which have been accepted by the Learned TPO and the appellant.

i. Sankhya Infotech ii. Kals Information Systems Limited iii. Goldstone Technologies Limited

The Hon’ble DRP erred in confirming the exclusion of the following comparables which were rejected by the TPO

i. CG-VAK ii. Avani Cimcon Technologies

Non-provision of adjustments claimed by the appellant

The Hon’ble DRP has failed to provide Working capital adjustment to the margins of the comparable company’s uncontrolled transactions.

The Hon’ble DRP erred in not providing the adjustments sought by Appellant to the PLI for depreciation charged in excess of Schedule XIV of Companies Act 1956.

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The Hon’ble DRP erred in not providing the adjustments sought by Appellant for its unoccupied capacity during relevant financial year.

9.2 Non-acceptance of adopting CPM (Gross Profit Margin) as a supplementary method: The Hon’ble DRP erred in not accepting the justification of ALP by CPM as a supplementary method of justification. 9.3 Non-provision of Risk adjustment: The Hon’ble DRP erred in not providing for risk adjustment as sought by the Appellant.

The Learned TPO erred in finalizing the order while giving effect to the directions of the Hon’ble DRP 10.1 Non-Inclusion of Sasken Limited by the TPO while giving effect to the DRP directions. 10.2 Erroneous computation of PLI of CTIL Limited as contained in the TPO’s order.

The Appellant craves leave to file additional grounds at the time of hearing for these and other reason to be adduced at the time of hearing the appellant’s favorable order.

2.0 ShipNet Software Services India Pvt. Ltd. (herein after referred to as

the assessee or SSSIPL) is a subsidiary of the ISS Group and its nominees

since 2007 and engaged in design and development of the software used

in rendering the services to the Shipping Industry by the ShipNet and ISS

group. ShipNet has been promoting the integrated solution as the key

value for buying the ShipNet products.

3.0. During the previous year relevant to the AY 2012-13, the assessee

has entered into the international transaction with the AE for an amount of

Rs.22.52 Cr. as under:

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Description of Sl. Name of the Associated enterprise the Amount (In Rs) No. transactions 1 JSS Group Holdings 7,16,13,370 Software Development 2 Shlpnet As, Norwa 15,16,33,240 services 3 ISS Group Holdings, UK Miscellaneous 3,11,454 Expenses 4 Inchcape Shipping Services (Dubai) 62,821 LLC, UAE 5 Inchcape Shipping Services (UK) 3,59,305 Limited 6 ISS UK Hub Office, UK 6,37,081 7 Shipnet Asia Pte Ltd, Singapore Reimbursement 1,06,800 of expenses 8 Shipnet As-Norway 3,46,889 9 ISS Shipping India Pvt. Ltd 1,47,943

10 Inchcape Shipping Services India 3,376 Private Limited Total Rs.22,52,22,278

4.0 The AO has referred the international transaction to the TPO for

determining the ALP of international transaction:

The assessee has adopted the TNMM as most appropriate method

and conducted the TP study and held the international transactions of the

assessee with AE are at Arm’s Length price.

4.1 Functions performed by M/s. Shipnet Software Services India Private

Limited and its AE’s are described as under:

ISS Development Centre (IDC):

Sl.No. Shipnet Software Services AE 1 -- Requirement gathering (Major involvement) 2 Analysis (Minimal involvement) Analysis (Major involvement) 3 Designing & Architecture (Minimal) Designing & Architecture (Some extent) 4 Coding (Major) -- 5 Testing (Some extent) Testing (Some extent) 6 -- Implementation (Major) 7 Maintenance (Major) -- 8 Support (Major) Support (Some extent) 9 IT Infrastructure (Minimal) IT infrastructure (Major)

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The assessee company performed all the functions of a contract service provider.

4.2 The assets and the risks assumed by the assessee: Computer system, office equipment, Furniture & fitting, Motor

Vehide and Software are used in development of software by

Assessee Company. Limited product development risk, attrition risk

and foreign exchange risk are carried by the assessee company.

4.3 The assessee has adopted itself as the tested party and has carried

out an economic analysis which is summarized as under:

Nature of Margin Amount Margin of International MAM PLI of (in Rs.) comparabies Transaction taxpayer Provision of Software Development 22,52,2,278 TNMM OP/OC 4.56% 10.98% and Services Total 22,52,22,278

4.4 Adopting TNMM as most appropriate method the assessee has short-

listed 7 comparable companies after applying certain filters in ACE TP v

6.3 database. The average margin of the comparable companies after

adjustment was 4.56%, As against this, the assessee has determined its

own margin (OP/OC) @ 10.98% after providing adjustment for excess

depreciation and other economic adjustments. Based on the TP study

made above, the taxpayer held that the transaction was within Arm’s

Length Price.

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5.0 The Transfer Pricing Officer (in short ‘TPO’) examined the TP study

of the assessee and being not satisfied with the ALP computed by the

assessee, rejected the TP study of the assessee and made independent

search process and selected the separate set of comparables and issued

show cause notice for adopting the comparables selected by the TPO and

called for the objections of the assessee. The assessee filed objections

and after considering the objections raised by the assessee, the Assessing

Officer (in short ‘AO’) selected the final list of comparables as under:

Name of the Company Margin (OP/OC) Evoke technologies Ltd 11.71 Mindtree Ltd 15.01 R S Software India Ltd 15.31 Larsen & Toubro Infotech 23.82 Persistent Systems Ltd 24.59 Thirdware Solutions Ltd 28.18 Goldstone technologies ltd 10.88 CTIL Umited 15.83 Acropetal technologies ltd 10.87 Spry Resources P Ltd 25.18 NDS Infotech Ltd 3.56 Sankhya Infotech 5.59 Kals Information 7.05 Average 15.20

Average mean of the comparable companies was worked out to

15.20%. The assessee has claimed economic adjustment towards

unutilized premises amounting to Rs.1,41,92,554/-, adjustment towards

depreciation and working capital. After careful study of the objections

raised by the assessee, the TPO rejected the objections of the assessee

and calculated the PLI of the assessee @8.35% as against the average

mean margin of comparables @15.20% and accordingly determined the

ALP of international transaction at Rs.23.73 Cr. against the operating

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revenue of the assessee at Rs.22.32 cr. and suggested for upward

adjustment of Rs.1.41 crores as under:

Description (Rs. in Cr.) Operating Revenue 22.32 Operating cost 20.60 Operating Profit 1.72 OP/OC (%) 8.35%

ALP Calculation: Value of the AE Transaction = Rs.22.32 Cr. Margin of the assessee company = 8.35% Margin of the comparable company = 15.20% If

Cost Markup (%) Sales (%) 100 8.35 108.35 100 15.2 115.2

ALP of the transaction = Rs.22,32 cr x 115.2/108.35 = Rs.23.73 Cr. ± 5% margin of assessee’s transaction of 22.32 cr = Rs.21.20 Cr. to Rs.23.45 cr

6.0 Aggrieved by the order of the TPO, the assessee went on appeal

before the Dispute Resolution Panel (in short ‘’DRP) and the DRP has

directed to remove the M/s.Sankhya Infotech, M/s.KALs Information

Systems and M/s.Goldstone Technologies Ltd., from the list of

comparables. The DRP also rejected the economic adjustments relating to

adjustment sought by the assessee in respect of unoccupied capacity,

working capital and depreciation. The AO has passed the Assessment

Order as per the directions of the DRP u/s.143 r.w.s.144C and made

upward adjustment of Rs.1,30,00,000/- in the Assessment Order against

which the assessee is on appeal before us.

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7.0 Ground No.1 is general in nature which does not require specific

adjudication.

8.0 Ground No.2 is related to the exclusion of comparable cases whose

turnover is very high. The TPO has selected the following comparables for

arriving the margin:

• Mindtree (IT Services segment) - turnover - 1,255.8 Cr. • L&T Infotech Ltd. - turnover - 2,959.50 Cr. • Persistence Systems Ltd. - Turnover - 810.36 Cr.

The Learned Authorized Representative (in short ‘Ld.AR’) argued

that the above three comparables selected by the TPO are with the

turnover of more than Rs.800 Cr., whereas the assessee’s turnover was

Rs.22.32 Cr. which is very small amount and uncomparable. The huge

turnover is one of the vital factors to determine the margins. Both the

TPO and the DRP have not considered the important and vital factor

regarding the turnover. Therefore, the Learned AR (in short ‘Ld.AR’)

argued that the above three companies should be excluded from the list of

the comparables. On the other hand, the Ld.DR argued that the assessee

has adopted the TNMM as most appropriate method and TNMM neutralizes

the deficiencies of turnover filter. Therefore, the Ld.DR vehemently

opposed the exclusion of the above comparables from the list of

comparables.

8.1 We heard the rival submissions and perused the material placed

before us.

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Admittedly, the turnover of the assessee companies is Rs.22 Crrores

and the turnover of the comparable companies selected by the TPO/AO

was more than Rs.800 Cr. The Ld DRP considered the issue of high

turnover and relied on the decision of ITAT Bangalore Bench in the case of

Society General Global solution Centre (P) Ltd v. DCIT (2016) 69

taxmann.com 336 and Symantec Software Solutions (P)Ltd v ACIT (2011)

11 taxmann.com 264(Mum) and held that the assessee has not made out

a case as to how the high turnover has impacted the margins and

accordingly rejected the assessee’s objection to exclude the above three

companies from the list of comparables. As per Rule 10B, for selection of a

comparable, Turnover and brand value are not the criteria. The criteria is

Functions, Assets and Risks involved. The Ld.TPO in her order observed

that the companies have been identified as comparable companies on the

basis of FAR and no serious FAR based divergences have been brought by

the assessee. The assessee is in the service sector where fixed costs are

nominal and cost of service is proportionate to the services rendered by

the assessee. The Ld. AR relied on Hon’ble Bombay High court decision in

Tax Appeal No.18 of 2015 CIT v. M/s.Pentair Water India Pvt. Ltd.,

wherein it was held that the turnover is obviously a relevant factor to

consider the comparable. In the case of M/s Pentair Water India Pvt. Ltd,

the assessee is engaged in the business of manufacture of Fibre glass

pressure vessel used for water treatment, Swimming pool equipment and

the AY involved is AY 2007-08 and the assessee is engaged in service

sector and the AY involved is 2012-13. The manufacturing industry is

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capital intensive for which the volumes and turnover of the business is a

relevant factor to meet the huge capital investment and service charges.

Whereas the assessee company is engaged in the service sector for which

the cost of service is proportionate to the services rendered by the

assessee. The Ld.DR brought to our notice during the course of appeal

hearing that the Hon’ble Bombay High court has not considered Rule

10B(2) in the case law relied up on by the assessee. The Ld.AR did not

controvert the submission made by the DR in respect of Rule 10B(2).

Therefore the case law relied upon by the assessee not applicable in

assessee’s case. Though turnover is a relevant factor the assessee has to

make out case that the huge turnover has materially impacted the

margins of the company. In the instant case the assessee has not

demonstrated that the high or low turnover has influenced the operating

margin of the asseessee company. The Ld.DRP observed that operating

margin has no direct relation between the turnover and the margin. In

TNMM method merely because of high turnover the comparables cannot

be excluded unless the assessee demonstrates that the turnover has

materially impacted the margins in relevant assessment year. Accordingly

we reject the assessee’s contention to exclude the above companies as

comparables on the basis of turnover filter.

8.2 Next contention of the assessee is to exclude the above three

comparables on functional differences. This issue has been considered by

the DRP in its order dated 31/08/2016 in detail in Para No.4.3 to 4.5 of it’s

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direction. For the sake of convenience we extract the relevant paragraphs

of the DRP directions.

4.3 As regards assessee’s claim that M/s.Mindtree is functionally different, from the annual report of this company it is evident that it is operating in two segments and segmental details are available and the same have been used by the TPO. In fact, the assessee has wrongly mixed up the functions of group companies of M/s.Mindtree with that of the company itself to arrive at its conclusion of functional difference. Considering above, the objection of the assessee in relation to this comparable is not accepted.

4.4 The assessee has also objected to inclusion of M/s.L&T Infotech as comparable by claiming that the same is involved in other segments of business and that segmental details are not available. However, on examining the annual report of the company it is observed that there is some resale of products, however the cost of bought out items for resale is only Rs.22.82 crore as against total operating expenditure of Rs.2358.85 crore i.e. a meagre 0.97%. Thus the effect of such sale would hardly be there in the case of this comparable. As regards assessee’s reliance on information from the website for showing different functions performed by the company, the same is misplaced as the same represent the state of affairs at the time when website is accessed and not the past years. Further the details in the website are only indicative of the functions which the company is ready to perform but may not have been necessarily performed by it in some earlier years. So the annual report and not the website needs to be relied upon for the actual functions performed by the company. The objections of the assessee have also been dealt in detail by the TPO in his order, which cannot be faulted with. Considering above, the objection of the assessee in relation to this comparable is not accepted.

4.5 As regards assessee’s claim that Persistent Systems Ltd is in software product development, it is observed that the company is developing software for its customers whom turn are in business of software product development and outsourcing the work of onward development to this company. Thus the assessee has wrongly inferred that the M/s.Persistent Systems Ltd., itself is in software product development. In fact, the assessee itself is similarly placed as it is developing software for its AE, which in turn is finally using it in its software products. Considering above, the objection of the assessee is not accepted.

8.3 Both TPO and the DRP have considered the objections raised by the

assessee with regard to functional differences rejected the assessee’s

objections as discussed above. No fresh material has been brought by the

Ld.AR before us to controvert the findings of the lower authorities.

Therefore, we do not incline to interfere with the directions of the DRP and

the TPO and accordingly we reject the assessee’s contention to exclude

the above three comparables from the list of comparables and dismiss the

assessee ground on this issue.

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9.0 Ground No.3 is related to the exclusion of the companies having

diverse activities as under:

9.1 During the appeal, hearing the Ld.AR argued that all the above three

companies should be excluded from the list of comparables due to

functional dissimilarity and diverse activities. The Ld.AR submitted the

functional dissimilarities of the above companies independently company-

wise. The assessee company is engaged in the functions as per the

functional profile designing, architecture, testing, implementation, support

and IT infrastructure which are major functions of the assessee company.

As per the TP document, the assessee company provides software design,

development, support maintenance data processing services to its parent

company. Whereas the functions of the comparable companies selected

by the TPO in the case of the above three companies are not similar to

that of the assessee company and having diverse nature functions. The

objections raised by the Ld.AR for each company has been examined by

us and the decision of this Tribunal is as under:

9.2 M/s.Thirdware Solutions Ltd:

The TPO has selected the M/s.Third Ware Solutions Ltd., with

28.18% of PLI and Rs.105.68 Cr. turnover as comparable. The Ld.AR

objected for selection of this comparable. According to the Ld.AR, the

assessee’s company is engaged in development, consulting and related

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space, major alliances such as Salesforce, oracle, Birst, SAP, Informatica

and CXO, cockpit. According to the Ld.AR, the companies are functionally

dissimilar which required to be excluded from the list of comparables. The

assessee raised the objections before the TPO as well as the DRP and

brought out the functional dissimilarity of the comparable company as

discussed above. The TPO as well as DRP have summarily rejected the

objections raised by the assessee. The Hon’ble Bangalore Bench in

M/s.SAP Labs India Pvt. Ltd., reported in IT(TP)A No.1006/Bang/2011

dated 30.06.2016 considered the issue on functional dissimilarity and

directed to exclude the company with functional dissimilarity from the list

of comparables.

9.3 The assessee has reiterated the submissions made before the TPO

and DRP and the lower authorities dismissed the assessee’s objection

stating that alliences do not determine the functionality of the company.

However the fact with regard to the functional dissimilarity how the

functions of the assessee company are not similar has not been

demonstrated by the Ld AR and was not verified by the lower authorities.

Therefore, we are of the considered opinion that the issue should be

remitted back to the file of the AO for further verification of the functions

of the comparable company with the tested party and decide the issue

afresh on merits. Accordingly, this issue is remitted back to the file of the

AO.

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9.4 M/s.Acropetal Technologies Ltd:

The Ld.AR argued that M/s.Acropetal Technologies Ltd., is engaged

in product development, whereas the assessee company is only software

services provider. The comparable company also having significant

intangibles. The Ld.AR of the assessee has invited our attention to Page

No.108 of Paper Book wherein intangibles are reported in the financial

statement at Rs.19.05 Cr. The Ld.AR also invited our attention to Page

No.171 of Paper Book where segmental information includes engineering

design, information technology and health care. The Ld.AR argued that

the company is dissimilar in functions as well as non comparable on assets

declared by the company. According to the Ld.AR, the FAR analysis of the

company is completely different from that of the assessee company, the

Ld.AR relied on the decision of ITAT Bangalore ‘C’ Bench in the case of

M/s.Symphony Marketing Solutions India Pvt. Ltd. v. ITO reported in

(2013) 38 Taxmann.com 55. (Bangalore-Trib.) The Hon’ble ITAT

Bangalore given a ruling that this company could not be selected as

comparable in view of functional dissimilarity. We reproduce here under

the relevant part of the decision of the Hon’ble ITAT in respect of

M/s.Acropetal Technologies Ltd. in the case of M/s.Symphony Marketing

Solutions India Pvt. Ltd., as under:

M/s.Acropetal Technologies Ltd. (Seq.) • On a perusal of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the assessee.

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• The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the assessee are routine low end ITES- functions. • Therefore, this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPOJ.

Respectfully following the decision of ITAT Bangalore, we direct the

AO/TPO to exclude the M/s.Acropetal Technologies Ltd., from the list of

comparables.

9.5 M/s.Spry Resources Pvt. Ltd:

The TPO selected M/s.Spry Resources Ltd., as comparable to the

assessee company. The assessee objected before the TPO and the DRP.

Both DRP and TPO have rejected the assessee’s objection to exclude Spry

Resources Ltd. as a comparable. The Ld.AR submitted that the company

is mainly engaged in the government projects and in government projects

the margins are very high. Further the Ld AR also objected relying note

given on revenue recognition. On the other hand, the Ld.DR supported

the orders of the lower authorities.

9.6 We heard the rival submissions and perused the material placed on

record.

The assessee has raised objection of revenue recognition as per the

note on Revenue recognition. This issue has been dealt in the DRP order

as under:

4.11 The objection of the assessee regarding Spry Resources India Pvt. Ltd. that as per revenue recognition method, it is in product development and its, projects are related to e-

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Governance. The objections of the assessee have suitably been dealt by the TPO in her order. Revenue recognition statement in annual report is a general statement, which specifies the treatment, if a particular type of revenue is there in the case of the company. This does not mean that the company has actually earned revenue from that stream. So this argument of the assessee does not have any merit.

Though the assessee has raised objections for Revenue recognition,

we have not come across any objectionable methods which have material

impact on margins or inconsistencies in the note of Revenue recognition.

The Ld.AR of the assessee did not bring any functional dissimilarity, assets

deployed and the impact of margins in relation to note on Revenue

recongnition. The turnover is also comparable to the tested party. Merely

because of the assessee is engaged in the government projects, the

company cannot be excluded from the list of comparables. The assessee’s

argument that in Government projects margins are very high is not well

founded .The Ld.AR has not brought on record any evidence to establish

that the assessee’s margins are less and the margins in government

projects are very high. Therefore, the objection of the assessee to

exclude M/s.Spry Resources Ltd., from the list of comparables is rejected

and the decision of the AO/TPO/DRP is upheld.

10.0 Ground No.4 is related to the exclusion of the following comparables

Suo moto by the DRP:

• M/s.Sankhya Infotech Ltd. • KALS Information Systems • Goldstone Technologies Ltd.

The Ld.AR submitted that the above three companies were selected

by the TPO holding that the companies are functionally comparable but

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the DRP has removed the above companies from the list of comparables

on its own accord. Since the functions of the companies and the turnover

of the company are comparable, the same should be included in the list of

comparables.

10.1 We heard the rival submissions and perused the material placed

before us and deal with the companies removed by the DRP independently

as under:

10.2 M/s.Sankya Infotech Ltd:

The DRP has found from the Annual Report of the company that it is

engaged in-house research and development centre involved in the

development activities of new products in the field of simulation and

training. During the year the company has debited an amount of Rs.4.94

crores as R&D expenditure and of this Rs.4.83 crores was employee cost.

That the company is in research and development and thus developing its

own intangibles also becomes evident from the fact that intangible fixed

assets are only Rs.78.27 lakhs against intangible assets of Rs.42.46 Cr.

These intangibles include learning management products, training

management products, simulator products, knowledge based contents

etc., as against the normal intangible software purchase in case of routine

software developer. From the above information it is clear that the

company is in technical training and R&D in addition to software

development. Complete segmental data relating to revenue from each

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segment and the expenses are not available. DRP was of the view that the

company is functionally dissimilar and the facts were confronted with the

assessee during the hearing by the DRP. The assessee failed controvert

the above findings of the DRP, hence the DRP has directed the AO/TPO to

exclude M/s.Sankhya Infotech Ltd., from the list of comparables. The

Ld.AR while arguing for exclusion of comparable in the case of

M/s.Acropetal Technologies Ltd., assigned the reasoning of significant

intangibles and functional dissimilarity. M/s.Sankya Infotech also having

significant intangibles and functionally dissimilar as observed by the DRP

in it’s directions. The Ld.AR did not bring any evidence to controvert the

findings of the DRP. On the similar facts and circumstances we have

directed to exclude M/s.Acropetal Technologies Ltd., from the list of

comparables. Following the consistency we hold that the Ld.DRP has

rightly directed the AO/TPO to exclude M/s.Sankhya Infotech from the list

of comparables and the assessee’s appeal on this issue is dismissed,

10.3 M/s.KALS Information Systems:

The DRP while examining the annual accounts observed that the

company is engaged in the development of software and software

products. The company is also having a training centre engaged in training

software professionals online projects. Out of the total Revenue of

Rs.2.73 Cr the translation and interpretation fee was Rs.51.67 lakhs. and

no segmental information related to software products training income,

translation and interpretation fee is available. The translation and

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interpretation fee received by the comparable company is functionally

dissimilar from the tested party and there was no segmental information

with regard to the software products, training income, translation fee is

available. The Ld.AR except stating that the M/s.KALS Information

Systems is functionally comparable company, no evidence was placed

before the DRP to controvert the findings, hence DRP has removed

M/s.KALS as comparable though it was selected by the TPO. No other

details were furnished controverting the findings given by the DRP by the

Ld.A.R. From the findings of the DRP it is established that the company is

functionally not comparable and we do not find any infirmity in the

direction of the DRP and the same is upheld.

10.4 M/s.Goldstone Technologies Ltd:

With respect to the M/s.Gold Stone Technologies Ltd., also the DRP

observed that the functions of the company were dissimilar and it is only

engaged in the IT segment not in software development. The findings of

the DRP are made available in Para No.4.14 to 4.16 which are extracted

hereunder for the sake of convenience:

4.14 While examining the annual report (Page 11 of the report) of M/s. Goldstone Technologies Ltd, this was observed by the Panel that the company is not engaged at all in the development of Software. The report of the company reads as follows: ‘One area where Goldstone has succeeded is with the Business intelligence (‘BI’) platform, which is a “Top Driver” for the organizations’ in 2012-2013. BI is a strong decision making platform and shows a positive growth curve in interactive visualization, predictive analysis dashboards and online analytical processing with highest ease of use. Goldstone has a long history and many great resources within the BI segment. Our current BI Practice is geared to provide a next generation feature rich, Low cost solution that can be deployed by both SMB’s as well as large enterprises which do not want to make capex investments. Another growth are within mobility solutions. The evolution of today ‘s mobile workforce is

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complicating the mobile decision for many companies, with new challenges in risk, cost containment; management, rollout logistics, sealability and security. A Goldstone Mobility Roadmap driving tangible ROI. Our roadmap is a custom exploration of client’s current business processes and mobile, strategy. This engagement includes detailed recommendations for using mobile technology to optimize the entire infrastructure for applications, platforms, devises, carriers, wireless, voice and management process”.

4.15 Thus the company is operating totally in the ITES segment and not in software development. During hearings on 30.08.2016, the assessee was confronted with this aspect by the Panel. In its reply, the assessee only stated that the company is functionally similar and so it should not be excluded. Thus assessee failed to controvert the above findings of Panlel. in the case of M/s.Trilogy E-Business Software vs. The Deputy Commissioner of Income Tax ITA No.1054/Bang/2011 Assessment year: 2007-08, the Bangalore Bench of ITAT decided as follows:

“72. With regard to Goldstone Technology Ltd., the same was rejected as a comparable by the TPO for the reason that it was engaged in IT enabled services. It is the claim of the assessee that in the company’s Annual Report, flow of revenue in this company is from software development both, onsite and offshore operations’. On the above, we find that this company has clarified in response to notice of the u/s. 133(6) of the Act that it is not in the business of software development but in ITES. The alternative plea of the Assessee is that it should be allowed opportunity to cross examine this’ company on its reply to the notice of TPO u/s.133(6) of ‘the Act. We have seen the objections of the Assessee which is based only on a reading of the Annual report and the claim of the assessee is not on sound basis and is purely on surmises. We are of the view that the rejection by the TPO of this company as a comparable is on sound basis and the same is upheld.”

4.16 The functional profile of this company remains the same during the year under consideration. Considering above, this company should not have been taken as a comparable by the TPO. So the TPO is directed to exclude this company from the list of comparables.

The Ld.AR of the assessee failed to rebut the findings of the DRP.

The DRP relied on the decision of ITAT Bangalore in M/s. Trilogy E-

Business Software v. DCIT ITAT No.1054/Bang/2011 AY 2007-08.

Therefore, we do not find any reason to interfere with the directions of the

DRP and the same is upheld.

11.0 Ground No.5 is related to the inclusion of the following comparable

selected by the assessee which were rejected by the TPO:

• CG-VAK Software Exports • Avani Cimcon Technologies

ITA No.3404/Mds/2016 :- 21 -:

11.1 M/s.CG-VAK Software Systems Ltd.:

Both TPO & DRP have rejected the assessee’s request for inclusion

of the above two companies as comparables. The assessee relied on the

decision of TIBCO Software India Pvt. Ltd. V. DCIT in ITA No.2536 (PN) of

2012 and argued that Persistence Loss making company is not a reason

for exclusion of the comparable companies.

We heard both the parties and perused the material placed on

record and gone through the decision of Co-ordinate Bench in the case law

cited supra. The Hon’ble ITAT in the case of TIBCO Software India Pvt.

Ltd. V. DCIT in ITA No.2536 (PN) of 2012 [2015] 56 taxmann.com 91

(Pune-Trib.) directed the AO/TPO/DRP to include comparable company

holding that the uncontrolled transaction, if it a reflects loss would be

normal incidence of business loss unless any peculiarity or any abnormal

situation of uncontrolled transaction is brought on record, For ready

reference we extract the gist of the decision from the order of the Hon’ble

coordinate bench as under:

Comparable CG- VAK Software Systems Ltd. • The said concern has been excluded from the list of comparables on the ground that it has incurred a loss, whereas assessee’s business model is cost plus mark up. [Para 26] • 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 transaction being undertaken for determining its arm’s length price. Ostensibly, the whole objective of the transfer pricing proceeding is that the contours of an un- controlled transaction shall reflect a measure of arm’s length price of the tested international transaction. The un-controlled transaction, if it reflects a loss, would not normally be excludible unless any peculiarity in such un-controlled transaction is brought out. For instance, the un-controlled transaction is of an entity which is consistently loss making or that the loss has arisen in the un-controlled transaction on account of an abnormal fact-situation, etc. In such situations, ostensibly, the un-controlled transaction would not reflect a normal business situation. In the present case, the comparable in question has incurred a loss; notably, incurrence of

ITA No.3404/Mds/2016 :- 22 -:

loss in business operations is a normal incident of business and there is nothing to suggest in the present case that it has been incurred in any abnormal situation. It is also not the case the revenue that the said concern is a consistently loss making concern. Therefore, the said concern cannot be excluded merely because of incurrence of loss in relevant year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm’s length price of the international transaction is upheld. [Para 29].

From the decision of the Hon’ble ITAT, it is also observed that the

Hon’ble ITAT directed to include the company in the list of comparables for

the reasons that the company is not making consistent losses. In the case

of comparable company, the company is making persistent losses right

from 2008-09 onwards. The assessee in its transfer document in Page

No.267 of Paper Book has excluded the companies making persistent

lossess from the list of comparables. When the assessee himself has

accepted that companies making persistent losses as not good

comparables in its transfer documentation, we do not find any reason to

dispute with the assessee’s stand and to include the same as comparable

since the company is incurring persistent losses. Therefore, the

assessee’s request to include M/s.CG-VAK software Systems Ltd., in the

list of comparables is rejected.

11.2 M/s.Avani Cimcon Technologies Ltd.:

The assessee’s requested for inclusion of M/s.Avani Cimcon

Technologies Ltd., which was selected by the assessee as comparables.

The TPO excluded the company from the list of comparables since the

company is engaged in products such as dexchange and financials does

ITA No.3404/Mds/2016 :- 23 -:

not give segmental data of software development and sale of software

products. Hence the TPO was of the view that entire operational result of

the company cannot be considered as comparable and accordingly

rejected the assessee’s request. The Ld.AR argued that the assessee

company is engaged in the low end software services and comparable

company is also engaged in software development services as evidenced

from the Annual Report. Neither the TPO nor the DRP has gone in to the

details as to why the company should not be taken as comparable and

how the company is functionally not comparable. Therefore, we are of the

considered opinion that the case should be remitted back to the file of the

AO/TPO to verify the functional similarity and decide the issue afresh on

merits. Accordingly, the inclusion of Avani Cimcon as comparable is

remitted back to the file of the AO to decide the issue a fresh on merits.

12.0 In Ground No.2 to 5 we have directed the AO/TPO to exclude some

comparables and to include some companies in the list of comparables.

AO is free to select new comparables on functional similarities after giving

opportunity to the assessee to determine the ALP. We direct the AO to

make a fresh search process and select the new comparables if necessary

and determine the ALP afresh.

In the light of the above discussion, the entire issue of selection of

comparables is set-aside to the file of the AO.

ITA No.3404/Mds/2016 :- 24 -:

13.0 Ground No.6 is related to the working capital adjustment:

The DRP has rejected the objections raised by the assessee for

giving working capital adjustment since there was no negative working

capital and the assessee could not demonstrate the material impact on the

margins for adjustment of working capital. The Ld.DRP also relied on the

decision of this Tribunal in the case of M/s.Mobis India Ltd., in ITA

No.2112/Mds/2011 AY 2007-08. The issue is set-aside to the file of the

AO to examine the facts with relevance to the observations made by this

Tribunal, in the case cited supra with the facts of the assessee’s case.

Apart from the above, the assessee is required to furnish the pricing

model of the AE as well as the tested party to verify whether the working

capital margin of interest is included in the sales price of the product. The

AO is directed to examine the above issues and allow the suitable working

capital adjustment while determining the ALP.

14.0 Ground No.7 is related to depreciation adjustment charged in excess

of Schedule-4 of Companies Act:

The DRP has rejected the assessee’s request for adjustment of

excess Depreciation placing reliance on the decision of Lason India Pvt.

Ltd. V. ACIT [2012] 50 SOT 583/19.Taxmann.com 323 (Chennai). The

Tribunal rejected the claim of the assessee with the following

observations:

The assessee provided depreciation on assets under SLM at the rates higher than those provided in Schedule XIV, whereas the comparables provided for depreciation as per Income tax Rules on written down value method The assessee claimed before the Tribunal that if depreciation of the assessee is also brought to the w.d.v. method, then its operating

ITA No.3404/Mds/2016 :- 25 -:

profit would be more. The Tribunal rejected this claim of the assessee. So following the decision of jurisdictional Bench the objection of the assessee cannot be accepted.

Since the DRP has rejected the assessee’s request for adjustment of

Depreciation placing reliance on the decision of this tribunal we do not find

any error in the direction of the DRP and the same is upheld. The

assessee’s appeal on this ground is dismissed.

15.0 Ground No.8 unutilized capacity adjustment:

The assessee claimed unutilized capacity adjustment of premises

rent of Rs.1,41,92,551/-. The assessee submitted that the company has

taken lease of two floors in the premises occupied by it. The company

was established as a start up in 2008 by its overseas holding the company with a certain expected level of full occupancy for both the 3rd floor & the

4 floor. However, the assessee could not recruit employees for substantial

capacity and the non recovery of the costs associated with the vacant

capacity should be legitimately borne by the assessee and hence

adjustment for the same is warranted upon analysing the no. of seats that

were vacant during the AY 12-13, it was observed that there was an

utilized capacity to the extent of 46.54%... the unutilized capacity

represents cost incurred for which no commensuration of revenue that

was earned.

15.1 The assessee raised objection before the DRP and the DRP has

rejected the assessee’s claim distinguishing the reliance placed by the

assessee on various case laws as under:

ITA No.3404/Mds/2016 :- 26 -:

6.1 This was submitted by the assessee that the TPO failed to appreciate the fact that 46.54% of the total seats were completely unoccupied and the expenditure incurred for that part of the capacity was unabsorbed and would not have earned any income. Assessee relied upon decisions in case of Ariston Thermo India Limited .vs. DCIT – ITA No.1455/PN/2010-ITAT, Pune for the same. 6.2 The submissions of the assessee have duly been considered. The assessee has relied on some decisions as referred supra. In the case of Arision Thermo india Limited (supra) it was initial year of operation for the assessee. So the facts were different and assessee’s reliance on same is misplaced. The issue has been discussed in detail by the TPO in para 7.3.1 of his order. Assessee was asked to provide details, which it failed to do. Assessee is a captive service provider and getting remunerated on cost plus basis. It has not shown that it could not claim part of the expenditure (due to underutilization of capacity) from AE. It could not show that it was providing services to any independent party apart from AE. The assessee has not controverted the findings of the TPO. The assessee’s claim that it tried to let out the premises would not change the position. During hearings before this Panel, the assessee was asked to provide the details of capacity utilization of other comparables, however it could not provide any data for the same also. Since assessee has not provided any data to show that the other comparables were working at 100% capacity of all their resources and only it was at disadvantage due to underutilization of capacity, so in absence of similar comparables, adjustment cannot be considered in the case of the assessee. Under similar circumstances, the issue was decided in favour of revenue in ITO v. CRM Services India (P) Ltd. [2011] 14 taxmann.com 96 (Delhi). Considering above, the objection of the assessee cannot be accepted.

15.2 The assessee not a start up company and it has commenced its

operations way back in 2008. The adjustments relating to unutilised

capacity are allowed in the case of start up companies to cover the initial

deficiencies and the financial implications. Since the company is

established in 2008 and the Ld.AR did not place any material with regard

to the observations made by the DRP We are unable to accept the

contention of the assessee and the assessee’s appeal on this ground is

dismissed.

16.0 Ground No.9 is related to the adjustment not provided by the

Ld.DRP in respect of Return on net worth, non adoption of CPM as

supplementary method, Non provision of Risk management were

vehemently argued by the Ld.AR but no material placed before us to

ITA No.3404/Mds/2016 :- 27 -:

controvert the observations of the DRP/TPO. Therefore, this ground of appeal is dismissed.

17.0 Ground No.10 is related to the issue for rectification: These issues are discussed in detail by the DRP. The assessee raised issues for rectification against the order passed u/s.154. The appeal against the order u/s.154 is a separate appeal which cannot be decided in this appeal. The Ld.AR also has not brought on record any evidence to controvert the observations made by DRP. Therefore, this ground is dismissed.

18.0 In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Open Court on 28th April, 2017, at Chennai.

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चे�नई/Chennai, 5दनांक/Dated: 28th April, 2017. TLN

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