Income Tax Appellate Tribunal - Bangalore
M/S Metric Stream Infotech (India) Pvt. ... vs Asst.C.I.T., Bangalore on 20 July, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
IT(TP)A No. 493/Bang/2016
Assessment year : 2011-12
M/s. MetricStream Infotech (India) Vs. The Assistant Commissioner of
Pvt. Ltd., Income Tax,
AMR Tech Park - 4B, No.23 & 24, Circle 4(1)(2),
Hongasandra Village, Begur Hobli, Bengaluru.
Bengaluru South Taluk,
Bengaluru - 560 068.
PAN: AACCM 4991K
APPELLANT RESPONDENT
Appellant by : Shri Narendra Kumar J Jain, Advocate
Respondent by : Shri C.H. Sundar Rao, CIT(DR-I)(ITAT), Bengaluru.
Date of hearing : 11.06.2018
Date of Pronouncement : 20.07.2018
ORDER
Per N.V. Vasudevan, Judicial Member
This is an appeal by the assessee against the final order of assessment dated 19.01.2016 of the ACIT, Circle 4(1)(2), Bangalore passed u/s. 143(3) r.w.s. 144C of the Income-Tax Act, 1961 ["the Act"] relating to assessment year 2011-12.
2. The only ground of challenge in this appeal is with regard to determination of Arm's Length Price (ALP) in respect of an international transaction entered into by the assessee with its Associated Enterprise (AE). The assessee is a wholly owned subsidiary of MetricStream Inc., IT(TP)A No. 493/Bang/2016.
Page 2 of 7California, USA. The assessee is engaged in the business of providing software development services to its parent company. It is not in dispute that the transaction of providing software development services to its holding company, there was international transactions and the income from such transactions had to be determined having regard to the arm's length price (ALP) as laid down in section 92 of the Income-Tax Act, 1961 ["the Act"].
3. It is not in dispute between the assessee and the revenue that Transactional Net Margin Method (TNMM) was the most appropriate method and the Profit Level Indicator (PLI) for the purpose of comparison of the profit margin with the profit margin of the comparable companies was Operating Profit to Operating Cost (OP/OC). The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO u/s.92CA of the Act, selected a list of 13 comparable companies and arrived at the arithmetic mean of the profit margin of those companies before and after working capital adjustment and determined the ALP and consequent addition to the made to the total income consequently as follows:-
Margins as computed by the TPO Operating Adjusted Margin SI.No. Name of the Company Margin on Cost on Cost 1 Acropetal Technologies Ltd (seg) 31.98% 26.90% 2 E-Zest Solutions Ltd 21.03% 17.31% 3 E-Infochips Ltd 56.44% 53.93% 4 Evoke Technologies Pvt Ltd 8.11% 6.48% 5 I C R A Techno Analytics Ltd. 24.83% 21.10% 6 Infosys Technologies Ltd. 43.39% 41.45% 7 Larsen Et Toubro Infotech Ltd. 19.83% 18.16% 8 Mindtree Ltd.(seg) 10.66% 7.72% 9 Persistent Systems & Solutions Ltd. 22.12% 19.48% IT(TP)A No. 493/Bang/2016.
Page 3 of 7
10 Persistent Systems Ltd. 22.84% 19.92%
11 R S Software (India) Ltd. 16.37% 14.59%
12 Sasken Communication Technologies 24.13% 22.75%
13 Tata Elxsi (seg) 20.91% 17.27%
Arithmetic. Mean 24.82% 21.68%
Computation of arm's length price by the AO/TPO and the adjustment made:
Arm's length mean margin 24.82%
Less: Working capital adjustment 1.63%
Adjusted mean margin after working capital adjustment 23.19%
Operating Cost (A)* 24,05,28,396
Arm's length price - 123.19% of operating cost (B) 29,63,06,931
Total Operating Revenue (C) 27,63,36,605
Short fall being Adjustment u/s 92CA (B - C) 1,99,70,326
4. Aggrieved by the directions of the TPO directing the shortfall in the price charged by the Assessee to its AE at a sum of Rs.1,99,70,326/- and suggesting an addition to the total income of the Assessee, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP gave directions to exclude the comparables selected by the TPO having turnover of more than Rs.200 crores. Accordingly, Infosys Technologies Ltd, Larsen & Toubro Infotech Ltd, Mindtree Ltd, Persistent Systems & Solutions Ltd, Persistent Systems Ltd, Sasken Communication Technologies and Tata Elxsi were excluded from the list of comparable companies chosen by the TPO. Further, the DRP has also rejected E-Zest Solutions Ltd on the ground that it is functionally different and the Department has not filed an appeal against this directions of the DRP.
5. In pursuance to DRP direction, the AO passed final order of assessment giving effect to the directions of the DRP, wherein the TP IT(TP)A No. 493/Bang/2016.Page 4 of 7
addition was enhanced to Rs.2,17,02,130/- from Rs.1,99,70,326/- in the Software segment.
6. Aggrieved by the directions of the DRP which was incorporated in the final order of assessment by the AO, the assessee has preferred the present appeal before the Tribunal.
7. We have heard the rival submissions. The ld. counsel for the assessee submitted before that 4 out of 6 comparables that remained after the order of DRP have to be excluded from the list of comparable companies. The 4 companies which the assessee seeks exclusion are;
(i) Acropetal Technologies Ltd., (ii) E-Infochips Ltd., (iii) ICRA Techno Analytics Ltd. & (iv) Persistent Systems & Solutions Ltd.
8. At the time of hearing, the ld. counsel for the assessee brought to our notice the decision of ITAT Bangalore pertaining to AY 2011-12 rendered in the case of software development service provider such as the assessee viz., M/s. Electronic Imaging India Pvt. Ltd. v. DCIT, IT(TP)A No.1506/Bang/2015, order dated 14.05.2017. In the aforesaid order, the aforesaid 4 companies were excluded from the list of comparable companies. It is not in dispute that the functional profile of assessee in the decision cited by the ld. counsel for the assessee and in the present case are identical. It was also brought to our notice that the comparables chosen by the TPO in the present case and in the case of M/s. Electronic Imaging India Pvt. Ltd. (supra) are identical. In these circumstances, we are of the view that the decision rendered by the Tribunal in the aforesaid case would be equally applicable in the present case also. The Tribunal in the aforesaid decision held that Acropetal Technologies Ltd. cannot be functionally compared with a software development service provider and that it was a software product company. In the case of Microsoft Research IT(TP)A No. 493/Bang/2016.
Page 5 of 7Lab India Pvt. Ltd. v. ACIT in IT(TP)A No.115/Bang/2015 for AY 2011-12, order dated 16.08.2017, vide para 7.1 & 7.3, the Tribunal has held that the income from software development service of this company was less than 75% of the total revenue and therefore this company cannot be regarded as a company comparable with a software service provider such as the Assessee.
9. As far as E-Infochips Ltd. is concerned, this Tribunal in the case of M/s. Electronic Imaging India Pvt. Ltd. (supra) vide para 9 of its order had held that this company was a software development and ITeS providing company and software development product company. The Tribunal held that no segmental data of this company was available and therefore it is difficult to compute the operating margin from software development services and therefore this company should be excluded from the list of comparable companies.
10. As far as ICRA Techno Analytics Ltd. is concerned, the Tribunal in the case of M/s. Electronic Imaging India Pvt. Ltd. (supra) vide para 10 of its order held that this company is not functionally comparable with a company providing software development service.
11. As far as Persistent Systems & Solutions Ltd. is concerned, this Tribunal in the case of M/s. Electronic Imaging India Pvt. Ltd. (supra) held that this company was not functionally comparable and is also engaged in development of software products vide para 8 of its order.
12. In view of the aforesaid decisions on the comparability of the aforesaid 4 companies, we hold and direct exclusion of the aforesaid 4 companies from the list of comparable companies. The TPO is directed to compute the arithmetic mean of comparable companies after excluding the 4 companies.
IT(TP)A No. 493/Bang/2016.
Page 6 of 713. The other issue which was argued before us by the ld. counsel for the assessee is the issue with regard to computation of working capital adjustment. In this regard, it is seen that the TPO in his order at page 16 in para 10 computed the adjustment on account of working capital at 2.54%. He, however, restricted working capital adjustment only to a sum of 1.63%.
14. The submission of the assessee before the DRP was that working capital adjustment ought to have been allowed at the actual figures worked out by the TPO and the same should not have been restricted to 1.63% from 2.54%. This submission did not find favour with the DRP.
15. Before us, the ld. counsel for the assessee placed reliance on the decision of ITAT Bangalore in the case of M/s. Zyme Solutions P. Ltd. v. ITO in MP No.36/Bang/2016 in IT(TP)A No.465/Bang/2015 for AY 2010-11, order dated 03.06.2016. The following were the relevant observations of the Tribunal:-
"It is clear from the above that Tribunal had allowed the ground of the assessee, though second part of the ground was not specifically dealt with. Not dealing with second part of the ground regarding incorrect computation of working capital is a mistake apparent on record. There can be no dispute that working capital adjustment has to be calculated from the final list of comparables and cannot be restricted. We therefore modify para 43 of the order and direct the AO/TPO to give working capital adjustment based on actual figures computed from the final list of comparables."
16. Respectfully following the aforesaid decision, we hold that working capital adjustment has to be allowed at 2.54% as computed by the TPO and cannot be restricted to 1.63% as done by the TPO.
17. The other grounds of appeal were not pressed for adjudication.
IT(TP)A No. 493/Bang/2016.
Page 7 of 718. The ld. counsel for the assessee submitted that originally in Form 36B (Form in which the appeal was to be filed) which was filed in time was signed by authorized signatory. Later on it was noticed that Form 36B was to be signed by director of the company and therefore a revised Form 36B was filed. The revised Form 36B was filed at a much later date to avoid any technical objection. The ld. counsel for the assessee prayed that it might be recorded that there is no delay in filing the appeal and that it was only a technical mistake on the part of the assessee. In our view, this is purely a technical defect and there cannot be any adverse inference drawn against the assessee.
19. In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 20th day of July, 2018.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN)
Accountant Member Judicial Member
Bangalore,
Dated, the 20th July, 2018.
/ Desai Smurthy /
Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore. 6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.