Income Tax Appellate Tribunal - Cochin
M/S.Zafin Software Centre Of ... vs The Acit, Circle-1(1), Trivandrum, ... on 16 May, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., JM
IT(TP)A No. 331/Coch/2017
Assessment Year : 2013-14
M/s. Zafin Software Centre of Vs. The Assistant Commissioner of
Excellence Pvt. Ltd., Income-tax, Circle-1(1),
G4, Thejaswini Building, Trivandrum
Technopark Campus,
Karyavattom PO,
Trivandrum-695 581.
[PAN:AAACZ 2840G]
(Assessee-Appellant) (Revenue-Respondent)
Assessee by Shri Raghunathan S., Adv.
Revenue by Shri Shantham Bose CIT(DR)
Date of hearing 18/04/2018
Date of pronouncement 16/05/2018
ORDER
Per CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order of the Assessing Officer passed u/s. 143(3) r.w.s. 92CA r.w.s. 144C of the I.T. Act dated 08/05/2017 which was passed in consequence to the directions of the DRP dated 03/04/2017.
IT(TP).A. No.331/C/2017
2. The assessee has raised the following grounds of appeal:
1 Assessment and Reference to Transfer Pricing Officer are bad in law 1.1 The Assistant Commissioner of Income Tax - Circle- 1(1) ('AO') erred in making a reference to the Deputy Commissioner of Income Tax, (Transfer Pricing) ('TPO'), without recording an opinion that any of the conditions in section 92C(3) of the Income Tax Act, 1961('the Act') were satisfied in the instant case.
1.2 On the facts and in the circumstances of the case and in law, the TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act.
1.3 The order passed by the AO is without jurisdiction, inter alia, insofar as it purports to give effect to an invalid order of the TPO.
2 Determination of arm's length by the TPO/AO in relation to the 'Software development Services' segment 2.1 The TPO/AO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmark analysis conducted by the learned TPO is liable to be quashed. The Ld. DRP erred in upholding the actions of TPO/AO.
2.2 The TPO/AO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. The Ld. DRP erred in upholding the actions of the TPO/AO.
2.3 The TPO/AO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2013). The Ld. DRP erred in upholding the actions of the/ TPO/AO.
2.4 The TPO/ AO grossly erred on facts in benchmarking the transactions of the captive software development services of the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-a-vis comparable companies. The Ld. DRP erred in upholding the actions of the TPO/AO.2
IT(TP).A. No.331/C/2017 2.5 The TPO/AO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparable to the Appellant, without establishing functional comparability. The Ld. DRP erred in upholding the actions of the TPO/AO.
2.6 The TPO/AO erred in retaining the comparable companies without providing a cogent reason any reliable information to justification in connection with the rebuttals submitted by the Appellant in the response to show cause notice. The Ld. DRP erred in upholding the actions of the TPO/AO and failed to consider in completeness, the grounds of objections filed by the Appellant regarding the functional comparability of companies selected by the TPO.
2.7 The TPO/AO erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. DRP erred in upholding the actions of the TPO/AO.
2.8 The Ld. TPO/AO erred using information obtained by exercising powers under section 133(6). The Ld. DRP erred in upholding the actions of the TPO/AO.
2.9 The Ld. TPO/AO erred on facts in wrongly computing the operating margin of certain companies identified as comparable by the TPO. The Ld. DRP erred in upholding the actions of the TPO/AO.
2.10 The Ld. TPO/ AO erred on facts in wrongly considering provision for bad and doubtful debts as non-operating while computing the margin of certain comparable companies. The Ld. DRP erred in upholding the actions of the TPO/AO.
3 Erroneous data used by the TPO/AO 3.1 The TPO/AO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. The Ld. DRP erred in upholding the actions of the TPO/AO.
4 To provide appropriate adjustments to the comparable companies 4.1 The Ld. DRP erred in disallowing the working capital adjustments under Rule 10B of the Income Tax Rules, 1962 provided by the Ld. TPO which is in line with the OECD guidelines. Additionally, the Ld. DRP erred in not considering various Tribunal judgments which provide guidance on (a) the requirement to grant the benefit of working capital adjustment and (b) the 3 IT(TP).A. No.331/C/2017 need for adopting certain assumptions while computing the said adjustment for the purpose of transfer pricing.
4.2 The Ld. DRP, by denying on flimsy grounds the benefit of working capital adjustment to the Appellant granted by the TPO, has ignored the principles of computation of the working capital adjustment that has been accepted by various Tribunals till date.
4.3 The Ld. DRP erred in relying on M/s Mobis India Limited in ITA No. 2112/Mds/2011 (A Y: 2007-08) [2013] 38 taxmann.com 231 to reject the benefit working capital adjustment to the Appellant which was granted by the TPO. The Ld. DRP conveniently ignored the arguments placed by the Appellant during the DRP proceedings to differentiate its own case (a services company) from that of Mobis India Limited which is a manufacturing entity in the initial year of operations.
5 Variation of 3% from the arithmetic mean 5.1 The Ld. AO/ Ld. TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. The Ld. DRP has upheld the action of the TPO.
6 Initiation of penalty proceedings 6.1 The Appellant submits that, based on the facts and circumstances of the case, there was no basis for the Ld. AO to initiate proceedings under section 274 read with section 271 of the Act.
7 The learned AO has erred in levying interest under Section 234B of the Act 7.1 The learned AO has erred in levying interest under Section 234B of the Act of INR. 23,73,650.
8 The learned AO has erred in levying interest under Section 234C of the Act 8.1 The learned AO has erred in levying interest under Section 234C of the Act of INR. 61,428.
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IT(TP).A. No.331/C/2017 9 Relief 9.1 The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. 9.2 The Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing of the Appeal.
9.3 Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/ TPO and upheld by the Ld. Panel is bad in law and liable to be deleted.
The Appellant submits that the above grounds are independent and without prejudice to one another.
2.1 However, at the time of hearing, the Ld. AR has pressed only Ground Nos. 2.2, 2.7 and 4 of the appeal. The Ld. AR has made an endorsement to the effect that the assessee is not interested to pursue the other grounds of appeal raised by it. Accordingly, we proceed to adjudicate only Ground Nos. 2.2, 2.7 and 4 and other grounds of appeal are dismissed as not pressed.
3. The first ground, Ground No. 2.2 is with regard to determination of arm's length price by the TPO/AO in relation to the 'software development services' segment.
3.1 The facts of the case are that the assessee was incorporated as a private limited company under the provisions of Companies Act, 1956 on 26 September 2006. It is a fully owned subsidiary of Zafin BVI. The Company provides banking 5 IT(TP).A. No.331/C/2017 software solutions to financial service providers, globally. As per the assessee it had entered into agreements with Zafin BVI for the provision of software development services and has rendered software development services to its AE and it is remunerated for the services provided by it on the cost-plus basis. In this case, transfer pricing adjustment of Rs.90,40,492/- was made in respect of international transactions with its AEs.
3.2. The DRP considered the submissions of the assessee against the exclusion of Akshay Software Technologies Limited from the final list of comparables. The TPO rejected this company as a comparable by stating that the company was engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services. The assessee argued that the company is functionally similar to it. The DRP found that the functions of this company is a mix of different types of services which may or may not include software development. According to the DRP, in its reply to 133(6) notice issued by TPO, it was stated that it is in 'provision of support services', which cannot be interpreted as software development activities of this company anywhere in the annual report although the profit and loss account refers to income from software services, without indicating the nature of such software services. The DRP found that there is no reference to software development activities of this company anywhere in the annual report although the profit and loss account refers to income from software services, without 6 IT(TP).A. No.331/C/2017 indicating the nature of such software services. Thus, according to the DRP, no data was available to support the claim of the assessee that this company is only in software development activities and no segmental data relating to these multiple segments was available in the financials of this company. Therefore in the absence of the same, the DRP held that the company cannot be considered as a proper comparable. Further, the DRP found that as per its website, it is reseller of ERP products and for determining the functionality of a company, it needs to be determined as to what is the exact nature of functions. According to the DRP in case a company is in software development, it would not matter as to what kind of customer it serves as the broad range of services remain the same and that is the development of software. Further it was observed that it will not matter whether the company develops complete software for its clients e.g. develops a final product as per demand of the client or develops only some software modules, as per the requirements of its client and the function remains the same. However, according to the DRP, a company can be considered in the business of software products, if it is itself developing and selling the products developed by it as then it owns the IPR of the product and exploits it by selling the product/software license to different customers. It was found that this company was operating in multiple segments including software products as well as reselling of ERP products, however segmental data of the same was not available.
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IT(TP).A. No.331/C/2017 3.3 The assessee relied on the decision of the ITAT, Bangalore Bench in the case of Metric Stream Infotech (2017) (78 taxman.com 87) to support its case. But according to the DRP, the decision of the Tribunal in the case of Cisco Systems Ltd. (2014) (50 taxman.com 280), it was held that the company M/s. Akshay Software Technologies Limited was involved in procurement, installation, implementation, support and maintenance of ERP products and services and providing professional services and so the same is a proper comparable for management services segment. Thus it was differed in its decision in respect of a company considered as a comparable for same assessment year in two different cases. The DRP relied on the decision of the ITAT, Delhi Benches in the case of Agnity India Technologies (P.) Ltd. vs. DCIT (73 taxman.com 102) wherein it was held as under:
"Whether a particular company is a comparable or not is an exercise which has to be carried out every year in case of an assessee considering facts of that specific year and not blindly following precedent which has been laid down in earlier or subsequent year." "
3.4 Thus, considering the facts as brought out by the TPO and those discussed above, the DRP held that the company cannot be considered as functionally similar to the assessee as although it is operating in multiple segments but segmental data was not available and hence, rejected the objection of the assessee on this count.
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IT(TP).A. No.331/C/2017 3.5 Against this the assessee is in appeal before us. 3.6 The Ld. AR submitted that the revenue of Akshay Software Technologies Limited for the assessment year 2013-14 is as follows:
Note 20: Revenue from operations Rs.
Income from Software Services (Refer Note 29) 19,83,23,358
Commission Received 5,68,690
Sale of software licences 5,21,730
19,94,13,787
3.7. He drew our attention to the financials of the assessee which is as follows:
Statement of Profit and Loss as for the year ended 31st March, 2013 Particulars Note No. AY 2012-13 AY 2011-12 INCOME:
Revenue from operations 17 263,027,908 159,849,060 Other income 18 1,576,266 838,010 Total Revenue 264,604,174 160,687,070 3.8 Accordingly, the revenue earned by Akshay Software Technologies Limited from other than software is very less and it is very marginal. As such, it cannot be rejected as comparable to the assessee's case. We find force in the argument of the Ld. AR. Akshay Software Technologies Limited was considered as valid comparable by the ITAT, Bangalore Bench in the case of Metric Stream Infotech vs. DCIT (78 taxman. Com 87) wherein it was held as under:
"15. With respect to Akshay Software Technologies Ltd. we find that it offers software services and products. The sale of products is only 4% of the total revenue. Vertical of this company is financial services. Major assets undertaken by this Company are manpower and computers. This company 9 IT(TP).A. No.331/C/2017 also passes all filters applied by the TPO. We direct the retention of Akshay Software Technologies in the list of comparables." 3.9 The decision of the ITAT, Bangalore Bench in the case of Cisco Systems (India) (P.) Ltd. vs. DCIT (50 taxman.com 280) relied upon by the DRP was passed on 14/08/2014. However, it was overlooked by the ITAT, Bangalore Bench while passing the order in the case of Metric Stream Infotech vs. DCIT (2017) (78 taxman. Com 87) which was passed on 09/12/2016. Hence, we are of the opinion that Akshay Software Technologies Limited is to be considered as comparable while determining the ALP of the international transactions of the assessee with its AEs. Accordingly, this ground of appeal of the assessee is allowed.
4 The next ground, Ground No. 2.7 is with regard to arbitrarily accepting the companies without considering the turnover and size of the assessee and comparables.
4.1 In this ground, the assessee objected to the selection of the following comparables in view of the huge turnover:
a) Larsen & Toubro Infotech Rs.3613.42 crores
b) Mindtree Ltd. Rs.2361.80 crores
c) Persistent Systems Ltd. Rs. 996.75 crores
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IT(TP).A. No.331/C/2017
4.2 The Ld. AR submitted that the turnover of the assessee for the assessment year under consideration was Rs.26.46 crores. He submitted that the turnover of the companies mentioned hereinbelow is very huge and cannot be compared with that of the assessee. Being so, it should be excluded. 4.3 He also relied on the following case laws:
1) XM Software Solution (P.) Ltd. vs. ACIT (2018) 90 taxman.com 318 (Cochin- Trib.)
2) CIT vs. Pentair Water India (P.) Ltd. 69 taxman. Com 180-
(HC Bombay)
3) M/s. Obopay Mobile Technology India Private Limited vs. DCIT- (IT(TP)A No. 469/Bang/2015
4) M/s. Logitech Engineering & Design India Private Ltd. vs. DCIT- IT(TP)A No.287/Bang/2015
5) Dell International Services India Private Ltd. vs. DCIT - IT(TP)A No. 85/Bang/2014 & CO No.21/Bang/2016 in IT(TP)A No. 1838/Bang/2013
6) DCIT vs. Hellosoft India (P) Ltd. - ITA Nos. 645 & 1411/Hyd/2009 and CO No. 40/Hyd/2009.
4.4 We have heard the rival submissions and perused the material on record. In our opinion, there is force in the argument of the assessee. In our opinion the above companies which are having huge turnover cannot be compared with the assessee- 11
IT(TP).A. No.331/C/2017 company which is having only 26.46 crores so as to determine the ALP of the international transactions with its AEs. Hence, in our opinion, it is appropriate to exclude the above three companies as comparables from the list of comparables to determine the ALP of the international transactions with its AEs. Accordingly, this ground of appeal of the assessee is allowed.
5. The next ground, Ground No. 4 is with regard to working capital adjustment. 5.1 The facts of the case are that while computing ALP of the international transactions, the TPO reduced the average margin of the comparables by 2.34% by allowing Working Capital Adjustment.
5.2 The DRP held that the average working capital will not show the actual working capital employed during the year. According to the DRP the adjustment sought by the assessee is for the differences in the working capital levels between the tested party and the comparable companies. However, such difference in working capital levels cannot be measured with reasonable accuracy and what is disclosed in the balance sheet is only the opening and closing figures of debtors and creditors. The DRP observed that these opening and closing figures are the balances as they existed on the opening and closing day of the year respectively and they do not show the movements in their accounts during the year. According to the DRP working capital are not uniform during the entire 12 IT(TP).A. No.331/C/2017 period of the year and they differ with the changes in the working capital cycle and the regularity of sales and purchases and the working capital requirements during the year is influenced by the nature of market in which the company is operating. Considering the above, the DRP directed the TPO to disallow working capital adjustment allowed to the assessee and re-compute the ALP of the international transactions with its AEs.
5.3 We have heard the rival submissions and perused the record. The Ld. AR relied on the decision of the ITAT, Chennai Bench in the case of Foxteq Services India (P) Ltd. vs. ACIT in 74 taxman.com 216 where in it was held as under:
"7. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee objected to the adjustment made by the Transfer Pricing Officer. With regard to working capital adjustment, the assessee claims that the difference in working capital between the assessee and the comparable companies would materially affect the profit determined. Therefore, certain adjustment needs to be made to bring them on equal footing. The assessee also brought to the notice of the DRP that the working capital adjustment, which was to ensure the profit derived by the comparable companies, can be compared with the profit of the assessee. This Tribunal is of the considered opinion that the capital employed by the assessee, including the working capital, and that of comparable companies needs to be taken into consideration. Without comparing the working capital employed by the comparable companies and that of the assessee, this Tribunal is of the considered opinion that there cannot be any transfer pricing adjustment."
5.4 In view of the above order of the Tribunal, we are inclined to direct the Assessing Officer to consider the working capital adjustment as computed by him 13 IT(TP).A. No.331/C/2017 while determining the ALP of international transactions of the assessee with its AEs. Hence, this ground of appeal taken by the assessee is partly allowed.
6. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open Court on this 16th May, 2018.
sd/- sd/-
(GEORGE GEORGE K.) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Place:
Dated: 16th ssMay, 2018
GJ
Copy to:
1. M/s. Zafin Software Centre of Excellence Pvt. Ltd., G4, Thejaswini Building, Technopark Campus, Karyavattom PO, Trivandrum-581.
2. The Assistant Commissioner of Income-tax, Circle-1(1), Trivandrum.
3. The Pr. Commissioner of Income-tax, Trivandrum.
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin 14 IT(TP).A. No.331/C/2017 15