Income Tax Appellate Tribunal - Pune
Sas Research And Development (India) ... vs Acit, Circle-6,, Pune on 13 April, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, PUNE
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BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.254/PUN/2013
%नधा(रण वष( / Assessment Year : 2008-09
SAS Research and Development
(India) Private Limited,
2nd and 3rd Floor, Tower 5,
Cyber City, Magarpatta,
Hadapsar, Pune - 411013
PAN : AAECS8099L
.......अपीलाथ / Appellant
बनाम / V/s.
Assistant Commissioner of Income Tax,
Circle - 6, Pune
...... यथ / Respondent
Assessee by : S/Shri M.P. Lohia & Rajendra Agiwal
Revenue by : Shri Rajeev Kumar
सन
ु वाई क तार ख / Date of Hearing : 15-01-2018
घोषणा क तार ख / Date of Pronouncement : 13-04-2018
आदे श / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the assessee is directed against the assessment order dated 30-11-2012 passed u/s. 144C r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for the assessment year 2008-09. 2 ITA No. 254/PUN/2013, A.Y. 2008-09
2. The brief facts of the case as emanating from records are: The assessee company is a wholly owned subsidiary of SAS Institute Inc. US. The assessee is primarily engaged in providing software development services and onsite services to SAS Group companies. The assessee has set up a unit in an area registered as Software Technology Park and is enjoying tax holiday u/s. 10A of the Act. During the period relevant to the assessment year under appeal, the assessee entered into following international transactions with its Associated Enterprises (AEs) :
Sr. No. Nature of Transaction Amount (Rs.)
1 Provision of Software Development and 46,87,45,153
consultancy Services
2 Receipt of software development services from AE 1,60,28,419
3 Payment of training fees to AE 2,02,002
4 Subscription Expenses paid to AE 62,456
5 Insurance Expenses paid to AE 51,642
6 Reimbursement of expenses to AE 9,78,488
7 Recovery of expenses from AE 17,78,066
TOTAL 48,78,46,226
2.1 The assessee applied Transactional Net Margin Method (TNMM) as the
most appropriate method for benchmarking its international transactions. The Profit Level Indicator (PLI) of the assessee was arrived at 7.66% (net profit to total cost ratio). The assessee selected 5 companies as comparables and determined PLI of the comparable after working capital adjustments at 7.47%. The Transfer Pricing Officer (TPO) accepted TNMM as the most appropriate method. However, the TPO rejected the comparables selected by assessee for the reasons : companies are functionally different/difference in 3 ITA No. 254/PUN/2013, A.Y. 2008-09 the business model of the comparables. Thereafter, the TPO introduced new companies to make the list of comparables. The TPO further applied following filters for selection of comparables.
i. Export filter of 75% exports.
ii. Turnover filter (Rs.1 crore to Rs.200 crores).
iii. Companies with different accounting years to be rejected.
iv. Companies having losses to be rejected.
v. Use of single Financial Year data.
2.2 The TPO finally selected 10 comparables which are as under :
Sr. Name of the comparable OP/OC Working capital
No. (%) adjusted margin
(%)
1 Bodhtree Consulting Ltd. 19.14 16.18
2 E-infochip Ltd. 30.32 25.83
3 eZest Solutions Ltd. 28.58 27.23
4 F C S Software Solution Ltd. 57.02 51.61
5 Goldstone Technologies Ltd. 27.06 20.41
6 Helios & Matheson information 36.05 31.03
Technology Ltd.
7 KALS Information Systems Ltd. 30.92 27.00
(application software seg)
8 L G S Global Ltd. 26.33 22.59
9 R S Software (India) Ltd. 6.86 6.86
10 Softsol India Ltd. 15.18 15.18
Arithmetic Mean 27.75 24.39
2.3 The TPO determine ALP of the software services rendered by assessee
to its AE as under :
4
ITA No. 254/PUN/2013, A.Y. 2008-09
Rs.
Operating revenue of the assessee [B] 469,400,097
Operating Cost (OC) 434,051,857
Arms Length Mean Margin (OP/OC) [D] 24.39%
Arm's Length Price (ALP) of the international transaction 539,921,445
[A] (ALP=OC*(1+D))
Adjustment over operating income [A-B] (Shortfall being 70,525,689
adjustment u/s 92CA)
2.4 On the basis of adjustment proposed by TPO, the Assessing Officer passed the draft assessment order dated on 23-12-2011. The assessee filed objections before the Dispute Resolution Panel (DRP) inter alia assailing inclusion/exclusion of some companies in the final list of comparables. The DRP vide directions dated 05-09-2012 excluded F C S Software Solution Ltd. from the final list of comparables and determined average arithmetic mean of comparables after granting working capital adjustment at 20.94%. In accordance with the directions of DRP, the Assessing Officer passed impugned assessment order making transfer pricing adjustment of Rs.58,078,453/-. Against the addition, the assessee is in appeal before the Tribunal.
3. Shri M.P. Lohia appearing on behalf of the assessee at the outset stated at the Bar that he is not pressing grounds Nos. 2, 3, 5, 6, 8 and 11 of the appeal. Thus, the grounds to be adjudicated by the Tribunal are as under :
"Rejection of loss making companies
4. Erred by rejecting certain companies merely on the fact that they are incurring losses.
Determining inappropriate companies as comparables to the Appellant 5 ITA No. 254/PUN/2013, A.Y. 2008-09
7. Erred in identifying certain non-comparable companies as comparable companies to the Appellant on ad-hoc basis (Cherry picking). Adjustment for risk differences
9. 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 or comparable companies considered as comparable vis-à-vis the risk profile of the Appellant. Applicability of 5% variation from mean of comparable margins
10. 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% variation from the mean arm's length price determined.
Penalty proceedings and levy of interest
12. Erred in initiating penalty proceeding under sections 271(1)(c) of the Act and levying interest under section 234A and 234C of the Act." 3.1 The ld. AR of the assessee submitted that in ground No. 4 of the appeal, the assessee has assailed the action of lower authorities in excluding SIP Technologies & Exports Limited ('SIP') from the list of comparables on the ground that it is a loss making company. The ld. AR submitted that a company cannot be rejected as a comparable just because it has declining revenue. Fluctuations in the revenues and profits of companies indicate the risks of an industry. If all the companies grow, then the industry trend of software industry would be abnormally high considering the approximate rate at which the top software companies are growing. The ld. AR referred to the annual report of SIP for Financial Year 2007-08 at pages 125 to 134 of the paper book. The ld. AR submitted that the said company has suffered losses in the Financial Year 2007-08 only. Prior to that the company was having profits. The Tribunal have repeatedly held that only consistent loss making companies should be excluded from the list of comparables. In support of his submissions the ld. AR placed reliance on the following decisions :
i. John Deere India Pvt. Ltd. Vs. ACIT in ITA No. 2236/PN/2012 decided on 18-11-2015;
ii. SunGard Solutions (India) Pvt. Ltd. in ITA No. 370/PN/2013;6 ITA No. 254/PUN/2013, A.Y. 2008-09
iii. M/s. Welspun Zucchi Textiles Ltd. in ITA No. 587/MUM/2013 and ITA No. 891/MUM/2012;
iv. M/s. Welspun Zucchi Textiles Ltd. in Income Tax Appeal No. 1286 of 2014 decided by Hon'ble Bombay High Court.
3.2 In respect of ground No. 7 the ld. AR submitted that the TPO has cherry picked companies for inclusion in final list of comparables. The TPO apart from other companies has included Bodhtree Consulting Limited ('Bodhtree'), E-Zest Solutions Limited (É-Zest'), Helios & Matheson Information Technology Limited ('Helios and Matheson') and KALS Information Systems Limited ('KALS') as comparable entities. All these companies have to be rejected as they are functionally different or they failed to qualify turnover filter set by the TPO.
3.3 The ld. AR submitted that Bodhtree is mainly into software product development. The company is also engaged in providing ITES. A visit to the official website of Bodhtree would show that the company is engaged in Product Engineering, Business intelligence, Data management, SOA Consulting, CRM Consulting, Analytics, Data Warehousing, Sharepoint Consulting. A perusal of financials of the company would show that there is no breakup of the respective business activities carried out by the company.
Therefore, the said company is not a good comparable being functionally different. The ld. AR submitted that the Co-ordinate Bench of the Tribunal in the case of John Deere India Pvt. Ltd. Vs. ACIT (supra) has held that Bodhtree is not a good comparable with company engaged in software development services.
7ITA No. 254/PUN/2013, A.Y. 2008-09 3.4 In respect of E-Zest Solutions Limited the ld. AR pointed that the said company is engaged in software services, as well as, sale of software products. There is no separate revenue breakup for services and sale of software. Annual report of the company for Financial Year 2007-08 at pages 155 to 171 of the paper book does not give descriptive information on the business of the company. As per information available, the said company is functionally different. The ld. AR pointed that in the case of John Deere India Pvt. Ltd. Vs. ACIT (supra) the Tribunal has held E-Zest as not good comparable with software solution company.
3.5 In respect of Helios & Matheson Information Technology Limited. the ld. AR submitted that the TPO has applied turnover filter of Rs.1 crore to Rs.200 crores. The turnover of the company is Rs.213.37 crores in the Financial Year ending on 31-03-2008. The ld. AR referred to the annual report of company at pages 172 to 183 of the paper book. The ld. AR pointed that in the case of John Deere India Pvt. Ltd. Vs. ACIT (supra) the Pune Bench of Tribunal excluded Helios and Matheson from the list of final comparable being outside the range of turnover filter. 3.6 In respect of KALS Information Systems Limited the ld. AR submitted that the company is engaged in software services as well as product development. A perusal of annual report of the company for the Financial Year 2007-08 at pages 184 to 194 of the paper book would show that no separate breakup of the revenue in respect of software services and the products is available. The company in its annual report has shown inventory and work-in-progress this clearly indicates that the company is engaged in product development. A visit to official website of KALS would show that the company had developed various products. Therefore, KALS earn revenue 8 ITA No. 254/PUN/2013, A.Y. 2008-09 from the development of software products as well and is functionality different. Hence, the said company is not a good comparable. The ld. AR further submitted that in case of John Deere India Pvt. Ltd. Vs. ACIT (supra) the Tribunal has excluded KALS from the list of comparables on account of functional disparity.
3.7 The ld. AR submitted that if ground Nos. 4 and 7 raised in the appeal are allowed the issue of risk adjustment raised in ground No. 9 would become infructuous.
4. On the other hand Shri Rajeev Kumar representing the Department vehemently supported the order of DRP/Assessing Officer and prayed for rejecting assessee's appeal. The ld. DR submitted that the assessee is providing onsite services to its AE. While selecting comparables it is not clearly evident whether this fact has been taken into consideration or not.
5. We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. We have also considered the decisions on which the ld. AR of the assessee has placed reliance. In present appeal the ld. AR has restricted his submissions only in respect of inclusion/exclusion of certain companies in the final list of comparables. In so far as selection of TNMM as the most appropriate method for determining ALP is concerned, there is no dispute. The TPO had selected 10 companies as comparables in its final list. The DRP vide directions dated 05-09-2012 excluded FCS Software Solutions Ltd. from the list of comparables on account of functional disparity.
9ITA No. 254/PUN/2013, A.Y. 2008-09
6. The assessee before us has assailed exclusion of SIP from the list of comparable companies being a loss making entity. A perusal of annual report of the company for the Financial Year 2007-08, it emerges that the said company has suffered loss in the financial year ending on 31-03-2008, prior to that the company had earned profits. We find that the Co-ordinate Bench of the Tribunal in the case of John Deere India Pvt. Ltd. Vs. ACIT (supra) has considered the issue of exclusion of SIP form the list of comparables for the similar reasons. The Tribunal held that exclusion of SIP is not warranted as the company is not a persistent loss making company. The relevant extract of the findings of the Tribunal are as under:
"21.2 SIP Technologies and Exports Ltd. : The said company has been excluded from the list of comparable by the TPO on the ground that it is a loss making company. The assessee has brought on record the operating margin of the three preceding assessment year of the said company. The same are as under:
F.Y. 2005-06 21.09%
F.Y. 2006-07 10.12%
F.Y. 2007-08 -33.20%
The contention of the assessee is that the said company is not a persistent loss making company. Only for the reason that the comparable has suffered loss in one year the same should not be rejected. We find merit in the submission of the Ld. A.R. In the case of Bobst India Pvt. Ltd. Vs. DCIT in ITA No.1380/PN/2010 for A.Y. 2006-07 the Tribunal has observed that only persistent loss making companies should be held as not good comparable. The Tribunal held that the 'persistent loss' means, continuous loss for more than 3 years. Thus, where the comparable entity is not under persistent loss, the same should not be rejected as comparable. Similar view has been taken in the case of Goldman Sachs (India) Securities Pvt. Ltd. Vs. ACIT, ITA No.7724/Mum/2011, and Brigade Global Vs. ITO, ITA No.1494/Hyd/2010. In the present case, the comparable entity SIP Technologies & Exports Ltd. has suffered loss in F.Y. 2007-08 only. Therefore, it cannot be said to be a persistent loss making company. The authorities below have thus erred in excluding the same from the list of comparable entities. We direct the TPO/AO to include the aforesaid company as comparable entity.
7. Nothing has been brought before us by the Revenue to show that SIP is a persistent loss making company. Since, SIP has suffered loss only in one of 10 ITA No. 254/PUN/2013, A.Y. 2008-09 the financial years (i.e. the period of three years to be reckoned for determining persistent losses), it cannot be said to be a persistent loss making company. Thus, in the light of decision of Co-ordinate Bench we find merit in the submissions of the assessee and direct the Assessing Officer/TPO to include the company in the list of comparables. Accordingly, ground No. 4 raised in the appeal by the assessee is allowed.
8. In ground No. 7 of the appeal the assessee has assailed inclusion of Bodhtree Consulting Limited, E-Zest Solutions Limited, Helios & Matheson Information Technology Limited and KALS Information Systems Limited in the list of comparables. We find that exclusion of aforesaid companies was sought by the assessee in the case of John Deere India Pvt. Ltd. Vs. ACIT (supra) on similar grounds in assessment year 2008-09. The Tribunal after considering the submissions of assessee and various decisions held that these companies are not good comparables and directed to exclude the same from the list of comparable entities. The findings of Tribunal in respect of aforesaid companies is as under:
"20.1 Bodhtree Consulting Ltd. : The assessee had initially selected Bodhtree Consulting Ltd. in its list of comparable. Subsequently, the same was taken out from the list of comparable as the said company is not exclusively engaged in software development services. The TPO again included the company in the list of comparable entity. The Ld. Counsel in support of his submissions that, Bodhtree Consulting Ltd. is not a good comparable placed reliance on the decision in the case of Barclays Technology Centre India (P) Ltd. Vs. ACIT (supra). The Co-ordinate Bench of the Tribunal in the case of Barclays Technology Centre India (P) Ltd. Vs. ACIT (supra) rejected Bodhtree Consulting Ltd. as comparable by placing reliance on the decision of Bangalore Bench of the Tribunal in the case of M/s. Mindteck (India) Ltd. in I.T.(TP).A.No.70/Bang/2014 decided on 21-08-2014 in the case of NetHawk Networks India Pvt. Ltd. in ITA No. 7633/M/2012 decided on 06-11-2013 for the assessment year 2008-09. The relevant extract of the order of Tribunal is as under:
"20. The next point raised by the assessee is for exclusion of Bodhtree Consulting Ltd., from the final set of comparables. The main plea of the assessee is that the said concern is engaged in development and sale of software products and therefore it is not functionally comparable to the 11 ITA No. 254/PUN/2013, A.Y. 2008-09 assessee. It is also pointed out that the said concern is engaged in product engineering and content engineering services which are in the nature of ITES services, and are not comparable with the assessee's activities. At the time of hearing, it was also pointed out that the said concern operates under a different pricing model, i.e. fixed price project method, whereby revenues from software development is recognized based on software developed and billed to the clients. It has been explained that in such a situation, expenditure for developing software would be billed in an earlier year but the income would be recognized in a subsequent year. This business model results in fluctuation in margins over the years. The counsel for the assessee submitted that the Pune Bench of the Tribunal in the case of QLogic (India) Private Limited vs. DCIT (ITA No.227/PN/2014) for assessment year 2009-10 dated 21.10.2014 has excluded the said concern from the list of comparables in a similar situation by following the decision of the Bangalore Bench of the Tribunal in the case of M/s. Mindteck (India) Ltd., vide I.T.(TP).A.No.70/Bang/2014 dated 21-08-2014. The decision of the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. vide ITA No.7633/M/2012 dated 06-11-2013 for assessment year 2008-09 has also been relied upon for excluding the said concern from the final set of comparables.
21. On the other hand the Ld. CIT-DR appearing for the Revenue has defended the inclusion of Bodhtree Consulting Ltd., by referring to the discussion in para 14.1 of the order of TPO. As per the TPO, the material on record does not justify the assertions of the assessee that the said concern was engaged in development and sale of software products. The Ld. CIT-DR has opposed the plea of the assessee by referring to the stand of the TPO as contained in his order.
22. We have carefully considered the rival submissions with respect to Bodhtree Consulting Limited. The plea of the assessee is that the said concern is engaged in the sale of software products, apart from considering software services, and that no segmental data is available in this context; thus, it is functionally not comparable with the assessee's activities. In this regard, we have perused the discussion made by our Coordinate Bench in the case of NetHawk Networks India Pvt. Ltd. (supra) wherein the said concern has been found to be not exclusively engaged in rendering software development services. The relevant discussion in the case of NetHawk Networks India Pvt. Ltd. (supra) is as under :
"C. Bodhtree Consulting Limited
21. On this comparable, case of the assessee is that the company is not a good comparable in view of the Software Products produced by the company. As such, no segmental data is adequately available too.
Accordingly, we dismiss the argument of the Ld. DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean.
22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the 12 ITA No. 254/PUN/2013, A.Y. 2008-09 software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of the Tribunal in the case of M/s. Wills Processing Services (I) P Ltd (supra) wherein it was mentioned that the TPO described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under:
"29.1 The Ld Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables.
29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity.
29.3.........
30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application........."
23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO."
23. There is no material placed before us which would require us to deviate from the conclusion drawn by the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. (supra) in the context of 13 ITA No. 254/PUN/2013, A.Y. 2008-09 the exclusion of Bodhtree Consulting Ltd. from the final set of comparables."
Thus, in view of the detailed discussion in the aforesaid order, we are of the view that Bodhtree Consulting Ltd. is not functionally comparable to the services rendered by the assessee. The Ld. DR has not placed on record any material to distinguish the aforesaid decision. Accordingly, Bodhtree Consulting Ltd. has to be excluded from the final set of comparables. 20.2 E-Zest Solutions Ltd. : The objection of the assessee is that the said company is functionally different from the assessee company. The E-Zest Solutions Ltd. is engaged more in Information Technology Enabled Services (ITES) and that too in the nature of KPO services, whereas, the assessee is in the business of software development and related services. The Tribunal in the case of Symphony Services Pune (P) Ltd. Vs. ITO in ITA No.257/PN/2013 for A.Y. 2008-09 decided on 30-04-2014 has held as under :
"23. We have carefully considered the rival submissions. In this context, we find that before the TPO relied upon the information available on the website of the said concern and submitted that the said concern was engaged in e-business consultancy services, consisting of web strategy services, ITES services, and in technology consultancy services including portal development services, etc.. It is sought to be explained that such kind of services are ITES services which are understood as KPO services. It was also pointed out that the said concern has not provided any segmental data in its Annual Report. Before us, it is sought to be contended that the KPO services are not comparable to the software development services being rendered by the assessee and therefore concerns which render KPO services cannot be considered as functionally comparable to the concerns who render software development services. For the said p1ro3position, reliance has been placed on the decision of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) which has indeed been rendered in the context of the same comparable, which is the subject- matter of consideration before us, i.e. E-Zest Solutions Limited.
24. We find that the factual assertions made by the assessee before the TPO as well as before us with regard to the functions being performed by EZest Solutions Limited have not been controverted by the Revenue. Ostensibly, E-Zest Solutions Limited is rendering product development services and technology services, and the latter falls in the category of KPO services and the same have not been held by the Bangalore Bench of the Tribunal to be similar to a concern engaged in rendering of software development services, as is the assessee before us. Following the ratio of the decision of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) we hold that E-Zest Solutions Limited is liable to be excluded from the list of comparables for the period under consideration. We hold so. Thus, on this aspect assessee succeeds."
Thus, in view of aforesaid findings of the Co-ordinate Bench in respect of functional difference between the activities of E-Zest Solutions Ltd. and the companies engaged in software development activities (assessee being one of such software development companies), we are of the considered view that the 14 ITA No. 254/PUN/2013, A.Y. 2008-09 said company has to be excluded from the list of comparables in the present case.
20.3 Helios & Matheson Information Tech.: The company was selected as comparable by the assessee in the first instance in TP study. A perusal of the TPO order shows that no objection was filed by the assessee against this comparable. Before us the Ld. Counsel submitted that this comparable was rejected by the Tribunal in assessee's own case for assessment year 2007-08 on the ground that it is functionally different. The relevant extract of the order of the Tribunal in ITA No. 1319/PN/2011 for the assessment year 2007-08 decided on 10-10-2014 is reproduced here-in-under:
"36. So far as Helios and Matherson Information Technology Ltd., is concerned, we find the Pune Bench of the Tribunal in the case of PTC Software Ltd., has excluded the same from the list of comparables by observing as under :
"20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables."
36.1 Since the Pune Bench of the Tribunal in the case of PTC Software Ltd., (Supra) has already taken a view that Helios and Matherson Information Ltd., is not a comparable and is functionally different, therefore, we direct the TPO/AO to exclude the same from the list of comparables." In view of the fact that the Co-ordinate Bench of the Tribunal in assessee's own case for A.Y. 2007-08 has held that Helios & Matheson Information Tech. is functionally different and there is no material change in the activities of the assessee and the functions of the comparable entity during the impugned assessment year, therefore, we do not find any reason to take a different view. Accordingly, we direct the TPO/Assessing Officer to exclude the same from the list of comparables.
20.4 xxxxxxxxxxxxx 20.5 Kals Information System : The assessee has objected to inclusion of the said company in the list of comparable on the ground of difference in functionality. The Tribunal in assessee's own case for the assessment year 2007-08 excluded the said company from the list of comparables on account of functional difference. The relevant extract of the order of Tribunal is as under: 15 ITA No. 254/PUN/2013, A.Y. 2008-09
"37. So far as the fresh addition of 2 companies, namely Kals Information System Ltd., and Compucom Software Ltd., are concerned, we find the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd., has observed as under :
"16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals' Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds."
37.1 Similarly, we find the Pune Bench of the Tribunal in the case of PTC Software Ltd., (Supra) has observed as under :
"16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment.
17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F. Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software 16 ITA No. 254/PUN/2013, A.Y. 2008-09 segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services.
18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year.
19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year.
Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services."
37.2 xxxxxxxxxx 37.3 In view of the decision of the Pune Bench of the Tribunal giving reasons for exclusion of Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables because of different functions, we find merit in the submission of the Ld. Counsel for the assessee that the 17 ITA No. 254/PUN/2013, A.Y. 2008-09 above two companies cannot be included in the list of comparables. We accordingly direct the TPO/AO to exclude Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables." In the assessment year under consideration, no material change has been pointed out by the Revenue in the facts or functions/activities of the assessee. Therefore, for the similar reasons, we direct the TPO/Assessing Officer to exclude Kals Information System Ltd. from the list of comparables."
9. The ld. DR has not been able to distinguish the findings of Tribunal in the case of John Deere India Pvt. Ltd. Vs. ACIT (supra). Since, the grounds raised by assessee for exclusion of above said four companies in the present case are on similar lines, following the order of Co-ordinate Bench in the case of John Deere India Pvt. Ltd. Vs. ACIT (supra) we direct the Assessing Officer/TPO to exclude the above companies from the list of comparables for the similar reasons. Accordingly, ground No. 7 raised in the appeal by the assessee is allowed.
10. In ground No. 9 of the appeal the assessee has prayed for grant of risk adjustment. The ld. AR has stated at the Bar that if ground Nos. 4 and 7 are allowed, the ground No. 9 will become academic.
The ld. AR has furnished table giving the summary of operating margin of comparables after exclusion of Bodhtree Consulting Limited, E-Zest Solutions Limited, Helios & Matheson Information Technology Limited and KALS Information Systems Limited and after including SIP Technologies & Exports Limited in the final list of comparables.. The same is reproduced here-in-below :
Sr. Name of the company Scenario if Assessee's No. appeal is allowed 1 E-infochips Limited 25.83% 2 Goldstone Technologies Limited 20.41% 18 ITA No. 254/PUN/2013, A.Y. 2008-09 3 Lanco Global Systems Limited (Also 22.59% known as L G S Global Limited) 4 R S Software (India) Limited 6.58% 5 Softsol India Limited 11.60% 6 SIP Technologies and Exports Limited -37.67% Arithmetic mean 8.22% SAS R&D Margin 7.66% Upper 5% Range 13.04% Whether at arm's length? Yes
Thus, in view of the submissions made by ld. AR we are not adjudicating ground No. 9 being academic in nature.
11. In ground No. 10 of the appeal, the assessee has prayed for allowing benefit of ±5% margin. The ground No. 10 is consequential in nature, hence, the same is dismissed.
12. In ground No. 12 of the appeal the assessee has assailed initiation of penalty proceedings u/s. 271(1)(c) of the Act and charging of interest u/s. 234B and 234C of the Act.
13. So far as challenge to penalty proceedings u/s. 271(1)(c) is concerned, it is pre mature at this stage. The charging of interest u/s. 234B and 234C is consequential and mandatory. Hence, ground No. 12 raised in appeal by assessee is dismissed being devoid of any merit.
14. The ground No. 1 raised in the appeal by the assessee is general in nature. Hence, requires no adjudication.
19ITA No. 254/PUN/2013, A.Y. 2008-09
15. The ground Nos. 2, 3, 5, 8 and 11 are not pressed by the ld. AR of the assessee. The same are dismissed as not pressed.
16. In the result, the appeal of assessee is partly allowed in the manner aforesaid.
Order pronounced on Friday, the 13th day of April, 2018.
Sd/- Sd/-
(डी. क णाकरा राव/D. Karunakara Rao) ( वकास अव थी / Vikas Awasthy)
लेखा सद य / ACCOUNTANT MEMBER #या$यक सद य / JUDICIAL MEMBER
पुणे / Pune; %दनांक / Dated : 13th April, 2018
RK/SB
आदे श क, -%त/ल#प अ0े#षत / Copy of the Order forwarded to :
1. अपीलाथ / The Appellant.
2. यथ / The Respondent.
3. The Dispute Resolution Panel, Pune
4. The Director of Income Tax (TP), Pune
5. वभागीय $त$न)ध, आयकर अपील य अ)धकरण, "ए" ब.च, पण ु े / DR, ITAT, "A" Bench, Pune.
6. गाड0 फ़ाइल / Guard File.
//स या पत $त // True Copy// आदे शानस ु ार / BY ORDER, $नजी स)चव / Private Secretary, आयकर अपील य अ)धकरण, पुणे / ITAT, Pune