QAD INDIA P.LTD,MUMBAI vs. DCIT CIR 9(3), MUMBAI

That on facts and circumstances of the case and in law, Learned CIT(A) erred in confirming / upholding the comparable set selected by the Learned AC while conducting the benchmarking analysis. Learned CIT(A) ought to have appreciated that the Learned AO erred:  By identifying fresh comparable companies and rejecting the search process carried out by the Appellant, without giving adequate reasons for the rejection.  By rejecting certain functionally similar comparables considered by the Appellant.

Grounds no.1, 2 and 3, being general in nature, do not require any specific adjudication.

At the outset, the learned Authorised Representative, submitted on the instructions of the assessee, he does not want to press grounds no.5, 7, 8, 9 and 10. Consequently, these grounds are dismissed as “not pressed”.

Brief facts are, the assessee an Indian company is engaged in providing software development service to its Associate Enterprises (A.E). For the assessment year under consideration assessee filed its return of income on 30th September 2009, declaring total income of ` 2,72,98,249. During the assessment proceedings, the Assessing Officer on verifying return of income filed by the assessee along with audit report in Form no.3CEB found during the relevant previous year assessee had earned revenue of ` 16,80,40,486 from international transaction in the nature of provisions of software development service to its A.E. He further found that the assessee has bench marked its international transaction with its A.E. by applying Transactional Net Margin Method (TNMM) as the most appropriate method with Operating Profit / Operating Cost as Profit Level Indicator (PLI). For comparative analysis, assessee had used 13 companies as comparables on the basis of multiple year data and the average margin of the comparable companies being 7.43% as against the margin of 8.64% shown by the assessee, the price charged for international transaction was claimed to be at arm’s length. The Assessing Officer, however, did not accept the claim of the assessee. The Assessing Officer in the course of proceedings before him, selected 20 companies as comparableS which also included some of the 5 QAD India Pvt. Ltd. companies selected by the assessee. Though, the assessee objected to some of the companies proposed by the Assessing Officer, however, rejecting the objections of the assessee, Assessing Officer treated the 20 companies proposed by him as comparables and by applying the arithmetic mean of 25.62% of the comparables selected by him, the Transfer Pricing Officer worked out the arm's length price. The short fall of ` 2,66,82,392, being the difference between the arm's length price determined by the Assessing Officer and arm's length price shown by the assessee, was treated as transfer pricing adjustment. Being aggrieved of such disallowance, assessee preferred appeal before the learned Commissioner (Appeals).

The learned Commissioner (Appeals) after considering the submissions of the assessee was convinced that three of the companies selected by the Assessing Officer viz. Celestial Biolabs Ltd., Infosys Technologies Ltd. and Wipro Ltd., are not comparable to the assessee. Accordingly, he excluded them. In addition, the learned Commissioner (Appeals) suo–motu excluded three more companies not objected to by the assessee on the ground that either they are consistent loss making companies or have incurred loss in the impugned assessment year. These companies are as under:–

In respect of Soft Sol Ltd., the learned Commissioner (Appeals) after considering the submissions of the assessee that related party transaction of the company is about 61% of the total revenue, directed the Assessing Officer to verify this aspect and decide accordingly. As far as other comparables objected to by the assessee are concerned, the learned Commissioner (Appeals) did not find merit in the same and accordingly, upheld the selection of those comparables. Of–course, the learned Commissioner (Appeals) also rejected assessee’s claim in relation to certain adjustment claimed by the assessee vis–a–vis computation of margin. Being aggrieved of the aforesaid decision of the learned Commissioner (Appeals), assessee is in appeal before the Tribunal.

Learned Authorised Representative, Shri Ajit Jain, appearing for the assessee confined his argument to selection / rejection of certain comparables by the learned Commissioner (Appeals). Herein after we will deal with each of the comparables objected to by the assessee.

The learned Authorised Representative objecting to selection of this company submitted, the company is involved in development of product, hence, cannot be considered as comparable. In this context, the learned Authorised Representative referring to the audited

The learned Departmental Representative on the other hand relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

We have considered the submissions of the parties and perused the material available on record. On a perusal of the audited Balance Sheet of this company, a copy of which is placed at Page–558 of the paper book. We have noted that under the head “Current Assets” & “Loans and Advances” assessee has shown inventories which pre– supposes that the company is into manufacturing activities. We have 8 QAD India Pvt. Ltd. also noted, considering the fact that this company is a product company; the Hon'ble Andhra Pradesh High Court in Intoto Software India Pvt. Ltd. (supra) has upheld the decision of the Tribunal in rejecting this company. It is also a fact that the Tribunal, Mumbai Bench, in Ness Technologies India Pvt. Ltd. (supra) has rejected this company as a comparable as it is not functionally similar to the assessee. Therefore, on over all consideration of facts and materials on record, we are of the view that Acropetal Technologies Ltd. cannot be treated as a comparable to the assessee.

Objecting to this company, the learned Authorised Representative submitted that it is involved not only in development of product but various other activities. In this context, the learned Authorised Representative drew our attention to the annual report of the company for the relevant financial year. He submitted, no segmental accounting for different activities have been made. Therefore, it cannot be treated as comparable. In support of such contention, the learned Authorised Representative relied upon the following decisions:–

The learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the annual report of this company for the financial year 2008–09, we have noted that as per director’s report of the company, it is engaged in providing open and end to end web solution, off–shoring data management, data warehousing, software consultancy, design and development of solution, using the latest technologies. Thus, looking at the activities carried on by this company, it is evident, though, it has reported only one segment, namely, software development but it is involved in various activities including product development. However, it has not done segmental accounting for each of the activities. We have further noted that for the reason that the aforesaid company is involved in product development the Tribunal in the decisions relied upon by the learned Authorised Representative has excluded this company as a comparable. As these decisions of the Tribunal are for the very same

Objecting to this company, learned Authorised Representative submitted that the company is involved in product development and no segmental accounting is available. To demonstrate this fact, learned Authorised Representative drew our attention to the annual report of the company for the financial year 2008–09. He, therefore, submitted that the company cannot be treated as a comparable. In support of his contention, the learned Authorised Representative relied upon the following decisions:–

The learned Departmental Representative on the other hand relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).

We have considered the submissions of the parties and perused the material available on record. The primary and fundamental reason for which the assessee seeks exclusion of this companies it is involved in product development and segmental details are not available. In the notes to the financial statement under Schedule–18, it has been stated that the company derives its revenue from software services and software products, whereas, on a perusal of the Profit & Loss account for financial year 2008–09, we do not find any segmental details of the revenue earned from software services and software products. Thus, in absence of segmental details of the revenue earned, the company cannot be treated as comparable to the assessee. For these reasons also, the Co–ordinate Bench of the Tribunal in the decisions cited by the learned Authorised Representative have rejected this company as a comparable. As these decisions are for the very same assessment year and the learned Departmental Representative has not brought to our notice any material difference in factual position, we are inclined to follow the Co–ordinate Bench decisions referred to above and exclude this company from the list of comparables.

Objecting to selection of this company, the learned Authorised Representative submitted that related party transaction of the company for the relevant financial year amounted to 60.93% of the 12 QAD India Pvt. Ltd. total sales. He submitted, though, this fact was demonstrated before the learned Commissioner (Appeals) and the Assessing Officer consequential relief has not been granted to the assessee.

The learned Departmental Representative fairly submitted, if the RPT of the company is more than the threshhold Limit of 25% it cannot be treated as a comparable.

We have considered the submissions of the parties and perused the material available on record. The specific grievance of the assessee even before the Departmental Authorities was, the RPT of this company as a percentage of sale is 61%, hence, it cannot be treated as comparable. Considering this submission of the assessee, the learned Commissioner (Appeals) directed the Assessing Officer to verify this aspect. We have noted, in response to query raised by the Assessing Officer in pursuance to the direction of the learned Commissioner (Appeals) on 1st February 2013, though, the assessee had submitted necessary details in support of its claim, however, the Assessing Officer, we were informed, as yet has not decided the issue. On a perusal of the computation of RPT, submitted before the Assessing Officer, a copy of which is placed at Page–12 of the paper book, prima–facie assessee’s claim appears to be correct as the RPT as a percentage of total sales works out to 60.93%. That being the case, the company under no circumstances can be treated as a comparable

At this stage, it is pertinent to mention that the learned Authorised Representative has objected to exclusion of three companies viz., (i) E–Infochip Ltd., (ii) Quentigra Solutions Ltd. and VGS Soft Ltd., on the ground that they are loss making companies. In fact, the learned Authorised Representative through documentary evidences demonstrated before us that in case of Quentigra Solutions Ltd., the company has incurred loss only in the impugned assessment year, whereas, it has earned profit in the previous assessment year. He submitted, as far as VGS Softech is concerned, facts are identical. However, as far as E–Infochip Ltd. is concerned, the learned Authorised Representative submitted, the company in assessment years 2009–10 and 2008–09 has reported profit. Therefore, the finding of the learned Commissioner (Appeals) that they are persistent loss making companies is factually incorrect. He further submitted, only persistently loss making companies cannot be treated as comparable and further explaining, he submitted, persistent loss making companies are those which have reported loss in previous three assessment years. He, therefore, submitted the exclusion of these companies by the learned Commissioner (Appeals) is not proper. However, in the course of hearing, the learned Authorised

In view of our aforesaid decision, grounds no.6 and 11 having become infructuous need not be adjudicated upon.

In ground no.12, the assessee has challenged disallowance of ` 2,53,936, being provisions of expenditure.

Brief facts are, during the assessment proceedings, the Assessing Officer on verifying the accounts found that the assessee has made provisions of professional fees of ` 2,53,936 and claimed it as 15 QAD India Pvt. Ltd. deduction. The Assessing Officer disallowed assessee’s claim firstly on the ground that it has not been actually paid during the year and secondly the assessee has not deducted tax at source on such payment. The learned Commissioner (Appeals) also sustained the disallowance.

The learned Authorised Representative submitted before us that the assessee has offered the said amount as income in the subsequent assessment year i.e., 2010–11. He, therefore, submitted if the disallowance is sustained in this year, it will amount to addition of same income twice. He, therefore, prayed for deletion of the amount.

The learned Departmental Representative relied upon the observations of the Assessing Officer the learned Commissioner (Appeals).

We have considered the submissions of the parties and perused the material available on record. As could be seen, the Assessing Officer has disallowed assessee’s claim of deduction of professional fees, on the ground that it is in the nature of provision and secondly, the assessee has not deducted tax at source. However, it is the contention of the assessee before us that the amount in question has been offered as income in the subsequent assessment year i.e., A.Y. 2010–11. If the assessee has already offered the amount in dispute as 16 QAD India Pvt. Ltd. income in assessment year 2010–11, it cannot be taxed twice. Therefore, we direct the Assessing Officer to verify assessee’s claim snf if it is found that the amount of ` 2,53,936 has been offered as income by the assessee in assessment year 2010–11 no disallowance of the said amount should be made in the impugned assessment year. This ground is allowed for statistical purposes.

In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 30.09.2016