Income Tax Appellate Tribunal - Panji
Starent Networks (India) Pvt. Ltd.,, ... vs Acit, Circle-6,, Pune on 9 February, 2018
आयकर अपीऱीय अधिकरण पण
ु े न्यायपीठ "बी" पण
ु े में
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
सुश्री सुषमा चावऱा, न्याययक सदस्य एवं श्री अयिऱ चतुवेदी, ऱेखा सदस्य के समक्ष
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपीऱ सं. / ITA No.164/PUN/2013
यििाारण वषा / Assessment Year : 2008-09
Starent Networks (India) Pvt. Ltd.,
Plot No.P-17,
Rajiv Gandhi Infotech Park,
Phase I, Hinjewadi,
Pune - 411057 .... अऩीऱाथी/Appellant
PAN:AAACN5937G
Vs.
The Asst. Commissioner of Income Tax,
Circle 6, Pune .... प्रत्यथी / Respondent
अऩीऱाथी की ओर से / Appellant by : Shri Rajendra Agiwal
प्रत्यथी की ओर से / Respondent by : Ms. Nirupama Kotru, CIT
सन
ु वाई की तारीख / घोषणा की तारीख /
Date of Hearing : 25.01.2018 Date of Pronouncement: 09.02.2018
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by the assessee is against order of ACIT, Circle 6, Pune, dated 31.10.2012 relating to assessment year 2008-09 passed under section 144C(13) r.w.s. 143(3) of the Income Tax Act 1961 (in short the 'Act').
2. The assessee has raised the following grounds of appeal:-
On the facts and in the circumstances of the case and in law, the Honorable DRP and consequentially the learned AO have:2 ITA No.164/PUN/2013
Starent Networks India Ltd.
Ground No.1 - Transfer pricing adjustment Erred in making transfer pricing adjustment by rejecting the analysis undertaken by the Appellant to determine arm's length price for its international transactions pertaining to provision of software development services to the AE Ground No.2 - Use of single year data Erred in not considering multiple year data for determining the arm's length price Ground No.3 - Use of additional filters/ modification of filters Erred in inappropriately introducing additional filters (selection criterias) and modifying the filters adopted by the Appellant and therefore, inappropriately rejecting certain comparable companies and determining inappropriate companies as comparables to the Appellant Ground No.4 - Comparison with companies having supernormal profits Erred in selecting the companies having super normal profits as comparables to the Appellant, it being a captive service provider Ground No.5 - Rejection of certain comparable companies Erred in rejecting comparable companies from the set of comparable companies identified by the Appellant in respect of international transaction pertaining to provision of software development services Ground No.6 - Determining inappropriate companies as comparables to the Appellant Erred in considering dissimilar companies as comparable companies to the Appellant for determining the arm's length price of the international transaction Ground No.7 - Adopting inappropriate approach of selection of companies as comparables Erred in adopting inappropriate approach of selecting certain additional companies (discussed in Ground 6 above) as comparable to the Appellant and ignoring companies which could also be considered as comparable to the Appellant on the same basis Ground No.8 - Adjustment for risk differences Erred in comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies considered as comparable vis-a-vis the risk profile of the Appellant Ground No.9 - Applicability of 5 percent variation from mean of comparable margins Erred in computing the arm's length price of software development services as the mean arm's length price determined, without taking into account the lower 5 percent variation from the mean arm's length price determined 3 ITA No.164/PUN/2013 Starent Networks India Ltd.
Ground No.10 - Eligibility under section 10A of the Act Erred in ignoring the fact that since Appellant is availing tax holiday under section 10A of the Act, there is no intention to shift the profit base out of India, which is one of the basic intentions of the introduction of transfer pricing provisions.
Ground No.11 - Penalty proceedings and levy of interest Erred in initiating penalty proceeding under section 271 (1)(c) of the Act and levying interest under sections 234A, 234B, 234C and 234D of the Act.
3. The ground of appeal No.1 raised by the assessee is general in nature. The issue in ground of appeal No.2 is not pressed. The issue vide grounds of appeal No.3 to 7 is against selection of comparables for benchmarking the international transactions of assessee. The ground of appeal No.8 is against the claim of risk adjustment for difference between functional and risk profile of the comparables vis-à-vis risk profile of the assessee. The issue in ground of appeal No.9 is limited to the application of +/- 5% range. The issue in ground of appeal No.10 is not pressed and the issue in ground of appeal No.11 is premature. In view thereof, we dismiss the grounds of appeal No.1, 2, 10 and 11.
4. Now, coming to the issue raised vide ground of appeal Nos.3 to 7. The learned Authorized Representative for the assessee pointed out that the Transfer Pricing Officer (TPO) at page 45 had drawn final list of comparables, out of which there is no dispute vis-à-vis selection of Goldstone Technologies Ltd., L G S Global Ltd. and Softsol India Ltd. However, the assessee is aggrieved by inclusion of following concerns:-
i) Bodhtree Consulting Ltd.
ii) E-infochip Ltd.
iii) eZest Solutions Ltd.
iv) Helios & Matheson Information Technology Ltd.
v) KALS Information Systems Ltd. (application software seg).
4
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Starent Networks India Ltd.
5. The learned Authorized Representative for the assessee further pointed out that the following concerns need to be included in the final list of comparables:-
i) Thinksoft Global Services Ltd.
ii) CG Vak Software & Exports Ltd. (Seg)
iii) SIP Technologies & Exports Ltd.
6. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the order of Assessing Officer/DRP and pointed out that the upward adjustment made in the hands of assessee needs to be upheld.
7. In respect of second issue of risk adjustment, the learned Authorized Representative for the assessee pointed out that the said issue stands covered by the order of the Pune Bench of Tribunal in DCIT Vs. Applied Micro Circuits India Pvt. Ltd. in ITA No.1250/PUN/2015 along with CO No.43/PUN/2017, relating to assessment year 2010-11, order dated 24.11.2017, wherein the principle laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448, has been applied.
8. We have heard the rival contentions and perused the record. Briefly, in the facts of the case, the assessee was engaged in the business of software development and exports. The assessee was a subsidiary of Starent Networks Corporation (SNC), USA. It had exported software services to SNC. The assessee also owned three separate undertakings engaged in the business of software development and export activities. The assessee for the year under consideration had filed the return of income declaring total income of ₹ 19,64,622/- after claiming income exempt under section 10A of the Act at 5 ITA No.164/PUN/2013 Starent Networks India Ltd.
₹ 4.02 crores. The Assessing Officer made reference under section 92CA(1) of the Act to the TPO to benchmark the international transactions undertaken by the assessee and reported in the audit report under prescribed form No.3CEB. The assessee had selected TNMM method as the most appropriate method and had applied PBIT to cost ratio as Profit Level Indicator (PLI) in the TNMM analysis. The assessee was remunerated at cost plus margin basis of 10%. The PLI of assessee was arrived at 10.74%, whereas the average PLI of comparables was arrived at 10.57%. The TPO did not accept the filters applied by the assessee and also did not accept PLI of the comparables which was arrived at by considering the weighted average margins of three years data for financial years 2005-06 to 2007-08. The TPO applied TNMM method to be most appropriate method but selected another set of comparables, for which show cause notice was given to the assessee and after considering the submissions of assessee, final set of comparables which were selected by the TPO were as under:-
Sr. No. Name of the comparable OP/OC (%) Working capital adjusted margin (%) 1 Bodhtree Consulting Ltd. 19.14 15.49 2 E-infochip Ltd. 30.32 25.07 3 eZest Solutions Ltd. 28.58 26.45 4 F C S Software Solution Ltd. 57.02 50.66 5 Goldstone Technologies Ltd. 27.06 19.66 6 Helios & Matheson Information 36.05 30.23 Technology Ltd.
7 KALS Information Systems Ltd. 30.92 26.15
(application software seg)
8 L G S Global Ltd. 26.33 21.84
9 Softsol India Ltd. 15.18 15.18
Arithmetic Mean 30.07 25.64
9. The TPO accordingly, held that an upward adjustment has to be made in the hands of assessee to the extent of ₹ 7,64,94,655/-. The Assessing Officer in the draft assessment order passed has made above said adjustment of ₹ 7.64 6 ITA No.164/PUN/2013 Starent Networks India Ltd.
crores on account of transfer pricing provisions. The DRP gave certain directions and following the directions of DRP, final set of comparables were as under:-
Sr. No. Name of comparable Working capital
adjusted margin (%)
1 Bodhtree Consulting Ltd. 15.49%
2 E-infochip Ltd. 25.07%
3 eZest Solutions Ltd. 26.45%
4 Goldstone Technologies Ltd. 19.66%
5 Helios & Matheson Information 30.23%
Technology Ltd.
6 KALS Information Systems Ltd. 26.15%
(application software seg)
7 L G S Global Ltd. 21.84%
8 Softsol India Ltd. 10.94%
Arithmetic Mean 25.64%
10. The assessee before us has raised the issue in respect of selection of comparables and is aggrieved by selection of certain comparables and exclusion of certain comparables which he pleaded to be included in view of its comparability. The learned Authorized Representative for the assessee pointed out that the issue raised in respect of inclusion / exclusion of comparables is squarely covered by the orders of Tribunal with special reference to the ratio laid down in MSC Software Corporation India (P.) Ltd. Vs. ACIT in ITA No.46/PUN/2013, relating to assessment year 2008-09, order dated 22.03.2017. He also pointed out that there is no grievance against selection of Goldstone Technologies Ltd., Softsol India Ltd. and L G S Global Ltd. The assessee is aggrieved by inclusion of Bodhtree Consulting Ltd. In this regard, the learned Authorized Representative for the assessee pointed out that the said concern was functionally different as it was also engaged in software products. Further, during financial year 2007-08, the company had hived off its e-paper business and hence, was an exceptional year of operation and hence, not comparable. In this regard, he pointed out that the issue for assessment year 2008-09 i.e. the 7 ITA No.164/PUN/2013 Starent Networks India Ltd.
year under appeal of assessee has been considered in John Deere India Pvt. Ltd. Vs. ACIT in ITA No.2236/PN/2012, relating to assessment year 2008-09, order dated 18.11.2015 and in MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra) and the same has been directed to be excluded from the final set of comparables in the case of concern, which is also engaged in providing software services to its associated enterprises as in the case of assessee.
11. We find that the issue of exclusion of Bodhtree Consulting Ltd. has been adjudicated by the Tribunal in MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra). The relevant findings are as under:-
"10. First, we shall take up the objections of assessee and the submissions of the learned Departmental Representative for the Revenue in respect of companies which were finally selected by the Assessing Officer / TPO / DRP in the final set of comparables. The first concern is Bodhree Consulting Ltd. The learned Authorized Representative for the assessee pointed out that the said concern merits to excluded from the final list of comparables as the said concern was product company and was also engaged in ITES segment. Further, there was re-structuring during the year and the year under consideration was an exceptional year.
11. The learned Departmental Representative for the Revenue on the other hand, pointed out that the assessee was engaged in engineering and product development, which was more akin to ITES segment. Where the assessee was providing mixed set of services i.e. product and engineering services, then the same is comparable to Bodhtree Consulting Ltd. Reliance placed upon by the assessee on the ratio laid down by the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT in ITA No.2236/PN/2012, relating to assessment year 2008-09, vide order dated 18.11.2015, it was held to be distinguishable since Bodhtree Consulting Ltd. was not providing data cleaning services.
12. On perusal of record, we find that the concern Bodhtree Consulting Ltd. was considered by the TPO to be functionally comparable despite the submissions of assessee that it was functionally different, wherein the said concern was also engaged in software products. Since no segmental details were available and the concern Bodhtree Consulting Ltd. being software product development company as well as providing services, can the same be held to be functionally comparable with the assessee which is providing software development services to its associate enterprises. While benchmarking any international transactions undertaken by the assessee, the endeavour should be made to compare the results shown by the assessee with such concerns which are functionally comparable. Where the margins of concerns picked up are from different segments of operation i.e. software development product as well as ITES services and in the absence of any segmental details available, then such concern cannot be treated as comparable. Another aspect is the year of 8 ITA No.164/PUN/2013 Starent Networks India Ltd.
operation being an exception year, wherein Bodhtree Consulting Ltd. had undertaken major business re-structuring i.e. hiring of e-paper business to another concern."
12. In the facts of the present case before us the assessee is also engaged in providing software services to its associated enterprises as in the case of MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra) and following the same parity of reasoning, we hold that where Bodhtree Consulting Ltd. was engaged both in software development and product as well as ITES services, then in the absence of segmental details being available, such a concern could not be treated as comparable. Another aspect of the issue is it being exceptional year, where the said concern had hived off its e-paper business to another concern. Accordingly, we hold that Bodhtree Consulting Ltd. is to be excluded from final set of comparables.
13. The next concern which the assessee wants to be excluded is E-infochips Ltd. on the ground that it is not functionally comparable.
14. We find that similar plea was raised vis-à-vis exclusion of E-infochips in MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra) and it was held as under:-
"14. Now, coming to the next concern E-Infochips Ltd. The plea of the assessee in this regard was that the said concern was a product company and also in ITES segment. Our attention was drawn to the financial statements for the year under consideration placed at pages 618, 619, 625 and 630 of the Paper Book and the learned Authorized Representative for the assessee pointed out that there was decrease in inventories in the case of E-Infochips Ltd. establishing the contention of assessee that it was product company. He stressed that where the assessee was not purely a software development company, the results of such concern could not be compared with the assessee which was purely engaged in the software development. The second issue of it being a super profit making company was not pressed during the course of hearing.9 ITA No.164/PUN/2013
Starent Networks India Ltd.
15. The learned Departmental Representative for the Revenue on the other hand, pointed out that the concern was engaged in embedded software development services. He further pointed out that the quantum of hardware sale had to be seen. Since the assessee and also the Assessing Officer / TPO had selected the companies with filter of 75%, then the concern E-Infochips Ltd. is to be included in the final set of comparables. He referred to the decision of Hon‟ble High Court of Gujarat in the case of Allscripts (India) (P.) Ltd. (2016) 72 taxmann.com 305 (Guj) had reversed the decision of Tribunal to exclude E- Infochips Bangalore Ltd. He stressed that where the assessee was also engaged in sale of software products and ITES, then the assessee was functionally comparable to E-Infochips Ltd. The assessee while carrying out its transfer pricing analysis had applied certain filters to select the concern by applying the filter of accept / reject matrix, the concerns which they do not have significant (less than 25%) foreign exchange earning were held to be reason for rejection of companies as comparable.
16. The perusal of financial reporting of the concern E-Infochips Ltd. at page 625 of the Paper Book reflects that the income from software services at Rs.21.03 crores with consulting services at Rs.2.16 crores and hardware sales at Rs.82.61 lakhs. The consultancy services were linked to the software services provided by the assessee and the hardware sales undertaken by the said concern were less than 4% of the total turnover. Where the assessee had itself applied the filter of 75% of the sales for software development services, then the said concern qualifies the filter as it was predominantly providing software development services. The next objection of the assessee that E-Infochips Ltd. was engaged in sale of software development products and ITES can be applied since the assessee is deriving its revenue purely from the business of computer software development, programming, infrastructure development and related services and there is no sale of products. Further, the Hon‟ble High Court of Gujarat has set aside the issue of exclusion of E-Infochips Bangalore Ltd. on the ground that it was not clear as to whether the said concern was engaged in any services other than software development services.
15. Following the same parity of reasoning, we find no merit in the plea of assessee and hold that E-infochips Ltd. is to be included in the final set of comparables.
16. The next concern against which the assessee has raised its plea for its exclusion is eZest Solutions Ltd. The case of assessee is that the said concern is engaged in diversified activity and is a product company. The learned Authorized Representative for the assessee referred to the decision of Pune Bench of Tribunal in MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra) relating to the year under appeal and pointed out that the said concern was 10 ITA No.164/PUN/2013 Starent Networks India Ltd.
excluded because of its being a product company. The relevant findings of the Tribunal are in para 18, which read as under:-
"18. On perusal of record and the order of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra), we find that the concern E-zest Solutions Ltd. is a product company and is engaged in both the provision of software services and sale of software services. On the other hand assessee is engaged in Software development services where the segmental details are not available, accordingly, E-zest Solutions Ltd. is functionally not comparable. Accordingly, we hold that the said concern is to be excluded from the final set of comparables."
17. In view of similarity of reasoning, we hold that the said concern e-Zest Solutions Ltd. being a product company is not to be included as comparable to the assessee, which is engaged in providing IT services to its associated enterprises, hence the same is to be excluded from final list of comparables.
18. The next concern which has been selected by the Assessing Officer / DRP but which according to the assessee is not comparable is Helios & Matheson Information Technology Ltd. on the ground of its turnover. The assessee claims that the TPO had adopted turnover filter of ₹ 1 to 200 crores. However, the concern Helios & Matheson Information Technology Ltd. had turnover of ₹ 213 crores and hence, the same was not to be included in the final list of comparables. The TPO had included the said concern to be comparable on the basis of cost of turnover. The learned Authorized Representative for the assessee in this regard pointed out that total turnover of assessee for the year under consideration was ₹ 55.21 crores. He further pointed out that the issue in the present appeal is squarely covered by the order of Tribunal in the case of MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra). 11 ITA No.164/PUN/2013
Starent Networks India Ltd.
19. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below.
20. We find no merit in the stand of authorities below. The TPO himself has adopted a filter range of ₹ 1 to 200 crores. Once a range has been applied, then there is no question of holding the same to be within +/- 10% of upper filter applied by the TPO. The total turnover of the assessee for the year under consideration was only ₹ 55.21 crores and the concern selected had turnover of ₹ 213 crores. Even if functionally comparable, then the margins could not be applied as it does not fit into filters applied by the TPO, against which the assessee has no dispute.
21. We find similar issue of exclusion of the concern Helios & Matheson Information Technology Ltd. arose before the Tribunal in the case of MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra) and the Tribunal vide para 6 at page 7 held as under:-
"6. The issue in ground of appeal No.3 raised by the assessee is the application of turnover filter of Rs.1 to Rs.200 crores as comparables selection criteria, as against the turnover filter up to Rs.100 crores applied by the assessee for identifying the comparable companies. The first part of the issue raised by way of ground of appeal No.3 is against the application of turnover filter of Rs.1 to Rs.200 crores and not Rs.100 crores as applied by the assessee. The learned Authorized Representative for the assessee pointed out that the first limb of ground of appeal No.3 is not pressed, hence, the same is dismissed as not pressed."
22. Following the same parity of reasoning, we hold that the concern Helios & Matheson Information Technology Ltd. is to be excluded from final list of comparables as it does not fulfill the turnover filter applied by the TPO. 12 ITA No.164/PUN/2013
Starent Networks India Ltd.
23. Another concern which the assessee claims is not comparable and hence excludable is KALS Information Systems Ltd. being product company. The reasoning as for exclusion of e-Zest is to be applied for KALS Information Systems Ltd. also. We further find that the Tribunal in MSC Software Corporation India (P.) Ltd. Vs. ACIT (supra) in para 21 at page 13 had also excluded KALS Information Systems Ltd. on similar basis. Accordingly, we find no merit in the stand of Revenue in this regard and hold that KALS Information Systems Ltd. is to be excluded from the final list of comparables.
24. We also find that the Hon'ble Bombay High Court in CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014, judgment dated 26.09.2016 has held that KALS Information Systems Ltd. and Helios & Matheson Information Technology Ltd. are to be excluded being not functionally comparable being engaged in selling software products, which was different from the activity undertaken by the assessee i.e. rendering of software services to its holding company. Following the same parity of reasoning, we hold that KALS Information Systems Ltd. is not to be included in the final set of comparables.
25. Now, coming to the concern CG VAK Software & Exports Ltd. and SIP Technologies & Exports Ltd. which were excluded on the ground that they were persistent loss making concerns.
26. The learned Authorized Representative for the assessee pointed out that CG VAK Software & Exports Ltd. was not persistent loss making concern. In this regard, he pointed out that the margins of said concern in the earlier two years was positive and only in the year under consideration, there was loss of 1.97%. 13 ITA No.164/PUN/2013
Starent Networks India Ltd.
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 (2015) 56 taxmann.com 91 (Pune-Trib) 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).
27. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.
28. We find no merit in the plea of Revenue in this regard. The reason for exclusion of CG VAK Software & Exports Ltd. was that the operating margin for the year under consideration was that the concern was showing loss. In the financial year 2005-06, the operating margin i.e. OP/OC was 2.54%, in financial year 2006-07 it was 5.69% and in financial year 2007-08, it was (-) 1.97%. The concern which has been thus, claimed to be persistent loss making by the TPO has only suffered losses in a particular year. Where the concern is not consistent loss making concern, then the same is not to be excluded from list of comparables, is the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Welspun Zucchi Textiles Ltd. (supra). The Tribunal in TIBCO Software India Pvt. Ltd. Vs. DCIT (supra) had also similarly held vide para 29, which reads as under:-
"29. We have carefully considered the rival submissions. In our considered opinion, the point sought to be made out by the TPO is quite mis-placed having regard to the purpose and import of the comparability analysis of the international 14 ITA No.164/PUN/2013 Starent Networks India Ltd.
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 not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold 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. Thus, on this aspect, assessee succeeds."
29. Accordingly, we allow the ground of appeal raised by the assessee and hold that CG VAK Software & Exports Ltd. is to be included in the final list of comparables.
30. In respect of SIP Technologies & Exports Ltd., the operating margins for assessment year 2006-07 were 21.09%, for assessment year 2007-08 were 10.12% and for assessment year 2008-09 were (-) 33.20%. Following the same parity of reasoning as in the case of CG VAK Software & Exports Ltd., we hold that the said concern is not persistent loss making concern and applying the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. M/s. Welspun Zucchi Textiles Ltd. (supra), we hold that the said concern is to be included in the final set of comparables.
31. The last concern which the assessee wants to be included in the final set of comparables is Thinksoft Global Services Ltd. The said concern was excluded 15 ITA No.164/PUN/2013 Starent Networks India Ltd.
by the TPO on the ground that it was engaged in the software testing, validation and verification services to the banking and financial services industry worldwide. The assessee on the other hand, claims that the said concern was functionally comparable as software testing, validation and verification forms part and parcel of software development. In this regard, our attention was drawn to the profile of the said concern which is placed at pages 864 to 867 of the Paper Book-3. Further, the learned Authorized Representative for the assessee pointed out that the said concern has been held to be functionally comparable to a concern providing software services to its associated enterprises in the case of TIBCO software India Pvt. Ltd. Vs. DCIT (supra).
32. We find that the Tribunal has already considered the issue of functional comparability of the concern Thinksoft Global Services Ltd. in TIBCO software India Pvt. Ltd. Vs. DCIT (supra) and held as under:-
"33. We have carefully considered the rival submissions. We have also perused the orders of TPO as well as the DRP in this context. Although, the order of the TPO is quite sketchy on this point, but the DRP has discussed the matter in a slight detail. One of the observations of the DRP is that the "primary activity of the appellant is to carry out part of the process of software development for its parent company and therefore, the finding of the TPO that Thinksoft Global Service Limited, is a functionally different company, appears to be correct". In our considered opinion, the aforesaid finding of the DRP goes to show, in the context of the fact situation of assessee‟s activities and that of Thinksfot Global Services Limited, that both are engaged in carrying out activities which are parts of the process of software development activities. It is quite justifiable to comprehend that the activity of verification of software and validation of software are activities which are part and parcel of the process of software development. In fact, before the DRP, assessee referred to the Wikipedia meaning of the expression „Verification‟ and „Validation‟ in the context of software. The expression „Verification‟ was explained to be referring to the process of evaluating the software to determine whether the products of a given development phase specified the conditions imposed at the start of that phase. Similarly, the expression „Validation‟ was explained to be the process of evaluating software during or at the end of the development process to determine whether it satisfies specified requirements. In our considered opinion, where it is admitted that the activity being performed by the assessee is also a part of process of software development for its associated enterprise, then the captioned activities being undertaken by Thinksoft Global Services Limited, which ostensibly also are a part of the whole process of software development, would definitely be considered as 16 ITA No.164/PUN/2013 Starent Networks India Ltd.
comparable. The argument being set up by the lower authorities that the „Verification‟ and „Validation‟ are steps to test the efficiency of the software, but not a part of software development, in our view is a hairsplitting argument, which is not justified in the context of the present comparability analysis. Ostensibly, „Verification‟ and „Validation‟ are broadly speaking, a part and parcel of the process of software development. Therefore, on this aspect, we are unable to uphold the action of lower authorities in excluding the said concern from the final set of comparables. We direct, accordingly."
33. The year under appeal before the Tribunal in TIBCO software India Pvt. Ltd. Vs. DCIT (supra) was assessment year 2008-09 and the year under appeal before us is also relates to assessment year 2008-09. In view of the findings of the Tribunal in TIBCO software India Pvt. Ltd. Vs. DCIT (supra), we hold that the concern Thinksoft Global Services Ltd. is functionally comparable and hence needs to be included in the final set of comparables. Accordingly, we direct the Assessing Officer to benchmark the international transactions of providing software services to associated enterprises by drawing final list of comparables as directed above. The case of assessee before us is that no further adjustment would be required to be made in the hands of assessee as the margins shown by the assessee would be within +/-5% range of the mean margins of comparables. The Assessing Officer is directed to verify the stand of assessee and pass an appropriate order.
34. Now, coming to the last issue in respect of economic adjustment on account of risk differences. The case of the assessee is that the assessee being remunerated on cost plus basis where it is providing services to its associated enterprises, it is risk free and adjustment for differences between functional and risk profile of the comparable companies is to be allowed in the hands of assessee.
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Starent Networks India Ltd.
35. We find that similar issue has been raised in DCIT Vs. Applied Micro Circuits India Pvt. Ltd. (supra), wherein it was held as under:-
"18. The next issue raised vide ground of objection No.2.2 is against the claim of risk adjustment. The plea of assessee that risk adjustment should have been granted to the assessee for differences between functional and risk profile of comparable companies vis-à-vis assessee. The learned Authorized Representative for the assessee in this regard pointed out that the assessee was risk mitigated entity, whereas the comparables were risk bearing. He further stated that the assessee had furnished the working as per the decision of Bangalore Bench of Tribunal in Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 and the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448. The learned Authorized Representative for the assessee in this regard placed reliance on the ratio laid down by the Pune Bench of Tribunal in MSC Software Corporation India Pvt. Ltd. Vs. ACIT in ITA No.46/PUN/2013, relating to assessment year 2008-09, order dated 22.03.2017.
19. We find that the issue is squarely covered by earlier decisions of the Pune Bench of Tribunal in MSC Software Corporation India Pvt. Ltd. Vs. ACIT (supra), wherein the said concern was also captive service provider to its associated enterprises and had claimed to be risk free. It had asked for risk adjustment in the margins of finally selected comparables and the Tribunal vide order dated 22.03.2017 held as under:-
"34. Following the said ratio, we direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee.
35. The ground of appeal No.10 raised by the assessee is against applicability of +/- 5% and the benefit can be allowed if the adjustment is within such range and hence, no adjustment is to be made in case it is not more than 5% from the arm's length price. We hold so."
20. The issue arising before us is similar and following the same parity of reasoning, we direct the Assessing Officer to allow risk adjustment and re-work the margins of comparables, in turn, relying on the ratio laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee. The ground of objection No.2.2 is thus, allowed."
36. Following the same parity of reasoning, we direct the Assessing Officer to allow risk adjustment in turn relying on the proposition laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra), wherein it was allowed @ 20%, and compute the TP adjustment, if any, in the hands of assessee. The ground of appeal Nos.3 to 8 are thus, allowed. The issue in 18 ITA No.164/PUN/2013 Starent Networks India Ltd.
ground of appeal No.9 is limited to application of +/- 5% range, which is consequential.
37. In the result, appeal of assessee is partly allowed.
Order pronounced on this 9th day of February, 2018.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER
ऩुणे / Pune; ददनाांक Dated : 9th February, 2018.
GCVSR
आदे श की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The DRP, Pune;
4. The DIT (TP/IT), Pune;
5. The DR 'B', ITAT, Pune;
6. Guard file.
आदे शािस ु ार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे / ITAT, Pune