DEPUTY COMMISSIONER OF INCOME-TAX vs. AMBER POINT TECHNOLOGY INDIA P. LTD.,,

The two cross appeals filed by the Revenue and the assessee relating to assessment years 2008-09 and 2009-10 on similar issues were heard together and are being disposed of by this consolidated order for the sake of convenience. However, in order to adjudicate the issues, we make reference to the facts in ITA Nos.756/PUN/2014 and 761/PUN/2014. First, we take up the cross appeal filed by the Revenue and the assessee relating to assessment year 2008-09.

The Revenue in ITA No.756/PUN/2014 relating to assessment year 2008-09 has raised the following grounds of appeal:-

The assessee in ITA No.761/PUN/2014, relating to assessment year 2008-09 has raised the following grounds of appeal:- The grounds hereinafter taken by the Appellant are without prejudice to one another. 1. That the order passed by the learned Commissioner of Income Tax (Appeals) - IT/TP, Pune ['CIT (Appeals)'], to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2. That the learned CIT (Appeals) erred in upholding the rejection of Transfer Pricing ('TP') documentation by the learned Assessing Officer ('AO')/leamed Transfer Pricing Officer (TPO) and erred in arriving at adjustment in computation of arms length price in respect of software development services of the Appellant. 3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in; (a) Upholding the rejection of comparability analysis of the Appellant in the TP documentation and partially confirming the comparability analysis as adopted by the learned TPO in the Transfer Pricing Order. (b) Upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm's length price; (c) Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2007-08) data for companies should be used for comparability; (d) Arriving at a set of companies as comparable to the software development services of the Appellant, by rejecting companies that are otherwise functionally comparable to the Appellant and by inclusion of companies that otherwise fail the test of comparability. (e) Ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned AO/learned TPO that no adjustment on account of risk differential is required while determining the Arm's Length Price of the international transactions of the Appellant. (f) That the learned AO erred in initiating the penalty proceeding and issued a notice under section 274 read with section 271(1)(c) of the income tax Act 4. The learned CIT (Appeals) erred in upholding the charging of interest under section 234B and 2340 of the Act.

The assessee has also raised additional ground of appeal which reads as under:-

Briefly, in the facts of the case, the assessee for the year under consideration had entered into international transactions of provision of software development services to its associated enterprises amounting to Rs.5,47,85,158/-. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) to benchmark the arm's length price of international transactions of assessee. The assessee had applied TNMM method and selected certain companies as comparables. The arithmetic mean margin of said concerns was 5.33%, whereas the margin of assessee was 11.50%. The TPO however, rejected all the comparables selected by the assessee in its TP study report and selected fresh set of comparables to benchmark the international transactions of provision of software development services by the assessee to its associated enterprises. The final set of comparables which were selected by the TPO were numbering ten and the arithmetic mean of margins of said concerns was determined at 27.83%. The said comparables are enlisted at pages 25 and 26 of the order of TPO. The TPO thus, computed the TP adjustment of Rs.80,23,137/- for software development services. The Assessing Officer in the draft assessment order incorporated the said adjustment made by the TPO.

Before the CIT(A), the assessee raised objections for exclusion of certain comparables and for inclusion of certain comparables. The CIT(A) in final analysis directed the Assessing Officer to exclude KALS Information Systems Ltd. (hereinafter referred to as KALS) from the final set of comparables and include Akshay Software Technologies India Ltd. (hereinafter referred to as („Akshay‟) in the final set of comparables. The CIT(A) also gave directions to the Assessing Officer / TPO to include certain comparables, provided if they fit into the filters applied by the TPO. There is no dispute by the assessee or the Revenue with regard to the above said directions of CIT(A). However, the assessee is aggrieved by inclusion of Helios & Matherson Information Technology Ltd. (hereinafter referred to as „Helios‟), FCS Software Ltd. (hereinafter referred to as „FCS‟) and e-Zest Solutions Ltd. (hereinafter referred to as (e-Zest) in the final set of comparables. The assessee is also aggrieved by non-inclusion of CG-VAK Software & Exports Ltd. (hereinafter referred to as „CG-VAK‟). On the other hand, the Revenue is in appeal against the order of CIT(A) in excluding KALS and including Akshay.

We proceed to take up the appeals of assessee and the Revenue after hearing both the learned Authorized Representatives, wherein the issue raised was only in respect of selection or rejection of comparables.

On perusal of record, we find that the assessee is a wholly owned subsidiary of Amberpoint Technology Mauritius Pvt. Ltd., which in turn, was held by Amberpoint. The unit of assessee is registered under the scheme of Software Technology Park of India (STPI) of Govt. of India. The assessee has expertise in software development, installation and implementation, system

The arithmetic mean of margins of comparables was 27.83% as against margins of assessee at 11.50% and hence, an upward adjustment of Rs.80,23,137/- was made by the TPO. The CIT(A) excluded KALS and included

Now, we proceed to take the case of comparables whether the same are to be included or excluded from the final set of comparables.

Coming to the appeal of assessee, the first comparable which has been sought to be excluded from final list of comparables by the assessee is Helios. The assessee claims that the TPO had adopted turnover filter of Rs.1 to 200 crores. However, the concern Helios had turnover of Rs.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 Rs.5.47 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 (2017) 80 taxmann.com 55 (Pune-Trib).

The learned Departmental Representative for the Revenue on the other hand, pointed out that the CIT(A) at page 19 vide para 2.7.5.2 has observed that though the turnover of Rs.213 crores exceeds upper filter of Rs.200 crores, applied by the TPO. However, the said turnover falls within +/- 10% of upper filter applied by the TPO and hence was within acceptable variation of turnover filter.

We find no merit in the stand of authorities below. The TPO himself has adopted a filter range of Rs.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 Rs.5.47 crores and the concern selected had turnover of Rs.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 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 is to be excluded from final list of comparables as it does not fulfill the turnover filter applied by the TPO.

Now, coming to the next concern FCS. The learned Authorized Representative for the assessee in this regard pointed out that the TPO had applied the filter of rejecting the concerns which were in software development services but less than 75% of total turnover. The learned Authorized Representative for the assessee in this regard has pointed out that the said filter

The learned Departmental Representative for the Revenue however, placed reliance on the observations of CIT(A) at pages 12 and 13 of the order, wherein the issue was the high profitability earned by the said concern. The learned Departmental Representative for the Revenue pointed out that no such issue was raised by the assessee before the Assessing Officer or the CIT(A).

We have heard the rival contentions and perused the record. The first step which needs to be seen while benchmarking international transactions applying the TNMM method is that the said concern should be functionally comparable and the second step is whether it falls within the filters applied for

It may be pointed out herein itself that the application support, infrastructure management services are in relation to ITES services. Further, E- learning and Digital consulting are not in relation to software development services. Therefore, total revenue in relation to software development activity was only 41% of total turnover. Further, in respect of different segments of said concern, no segmental profits were available. The relevant portion of Balance Sheet and Profit and Loss Account are placed at pages 953 and 954 of Paper Book. In view thereof, where the assessee before us is only engaged in providing software development services to its associated enterprises, then the margins of a concern whose total revenue in relation to software development activity was only 41% of total revenue could not be included as comparable and the same needs to be excluded from final set of comparables. Accordingly, we hold so.

Further, we also find that the Pune Bench of Tribunal in the case of TIBCO Software India Pvt. Ltd. Vs. DCIT (supra) on similar basis of product description had excluded the said concern while benchmarking international transactions of a concern providing software development services. The relevant findings of the Tribunal are vide paras 11 and 12, which read as under:-

Accordingly, we direct the Assessing Officer to exclude FCS from final list of comparables.

The third concern whose inclusion has been objected to by the assessee is e-Zest. 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 excluded because of its being a product company. The relevant findings of the Tribunal are in para 18, which read as under:-

In view of similarity of reasoning, we hold that the said concern e-Zest 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 Revenue is in appeal against exclusion of KALS which was also a product company. The reasoning as for exclusion of e-Zest is to be applied for KALS 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 on similar basis. Accordingly, we find no merit in the stand of Revenue in this regard and hold that KALS not to be excluded from the final list of comparables.

The next concern which the Revenue is aggrieved upon is the inclusion of Akshay. The learned Authorized Representative for the assessee in this regard fairly pointed out that the issue is against the assessee and Akshay has to be included in the final set of comparables. In this regard, he again placed reliance on the order of Tribunal in MSC Software Corporation (P.) Ltd. Vs. ACIT (supra) at page 14, para 23, which reads as under:- “23. Now, coming to the second argument of the assessee i.e. exclusion of concerns which were selected by the assessee in its TP analysis. The first concern is Akshay Software Technologies Ltd., which as per the assessee is functionally comparable to the assessee. However, the said concern is engaged in on-site development and hence, the margins of said concern are not comparable to the assessee which is off-site developer. The Pune Bench of Tribunal in TIBCO Software (India) Pvt. Ltd. Vs. DCIT in ITA No.2536/PN/2012 relating to assessment year 2008-09, order dated 11.02.2015 had held that both

In view of the concession of assessee, we hold that Akshay is to be included in the final list of comparables. Accordingly, the second issue raised by the Revenue stands allowed.

Now, coming to the last concern CG-VAK, which was excluded from the list of comparables on the ground that it was a loss making concern. The learned Authorized Representative for the assessee pointed out that it was not persistent loss making concern. In this regard, he pointed out that the margins of said concern in the early two years was positive and only in the year under consideration, there was loss of 1.97%. He further stressed that segmental details were available in respect of revenue from software development and revenue from BPO service. The assessee pointed out that the Tribunal in TIBCO software India Pvt. Ltd. Vs. DCIT (supra) at page 13 vide paras 26 and 29 had considered the plea of assessee and held the said concern to be included in the final list of comparables as it was not a consistent loss making company. He further placed reliance on the ratio laid down by the Hon‟ble Bombay High Court in CIT Vs. Welspun Zucchi Textiles (2017) 77 taxmann.com 137 (Bom).

The learned Departmental Representative for the Revenue here pointed out that inclusion of CG-VAK has been raised by way of additional ground of appeal and there is no finding of CIT(A) in this regard. He further referred to the order of TPO at page 23, wherein the conclusion was that financial data was not available and also on the ground that it was a loss making concern.

We find no merit in the plea of Revenue in this regard. The reason for exclusion of CG-VAK 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 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 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 of 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 this 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

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

Now, coming to the additional ground of appeal raised by the assessee, wherein it has asked adjustment on account of working capital.

The learned Authorized Representative for the assessee pointed out that in all the earlier years, working capital adjustment was allowed to the assessee. However, it was denied during the year. He fairly agreed that the issue may be sent back to the file of Assessing Officer and the actual may be computed. We find merit in the plea of assessee in this regard, where similar issue of working capital adjustment has been allowed in the hands of assessee and there is no finding of TPO why the same is being denied during the year under consideration. However, in order to compute the said economic adjustment, we remit this issue back to the file of Assessing Officer, who shall afford reasonable opportunity of hearing to the assessee and allow the working capital adjustment as per law. In final analysis, the grounds of appeal No.3a and 3d are allowed and the additional ground of appeal raised by the assessee is allowed. The grounds of appeal No.1 and 2 are general in nature and the balance grounds of appeal have not been pressed by the assessee and hence, the same are dismissed.

Now, coming to the appeal in assessment year 2009-10, wherein the learned Authorized Representative for the assessee has only stressed for

Now, we come to the appeal filed by the Revenue, which is against exclusion of KALS and inclusion of CG-VAK. We have in the paras hereinabove already dealt with the exclusion of KALS from the final list of comparables on the ground that it is a product company. Following the same parity of reasoning, we uphold the order of CIT(A) and dismiss the first issue raised by the Revenue.

The second issue is with regard to inclusion of CG-VAK. We have already held that the said concern is not persistent loss making concern and hence, the same is to be included in the final set of comparables. Accordingly, we dismiss the grounds of appeal raised by the Revenue.

The appeal of assessee is decided on the limited issue of correct of margins of Goldstone Technologies Ltd. and all the other grounds of appeal

In the result, appeals of assessee for both the years are partly allowed and appeals of Revenue in assessment year 2008-09 is partly allowed and in assessment year 2009-10 is dismissed.