Income Tax Appellate Tribunal - Bangalore
Wm Global Technology Services (India) ... vs Deputy Commissioner Of Income Tax, ... on 28 February, 2018
IT(TP)A.1963/Bang/2017 Page - 1
IN THE INCOME TAX APPELLATE TRIBUNAL
BENGALURU BENCH 'C', BENGALURU
BEFORE SHRI. JASON P. BOAZ, ACCOUNTANT MEMBER
AND
SHRI. LALIET KUMAR, JUDICIAL MEMBER
I.T(TP).A No.1963/Bang/2017)
(Assessment Year : 2013-14)
M/s. WM Global Technology Services (India) P. Ltd,
3rd floor, Block B, Salarpuria Touchstone,
15/1A, 14P7, Kadubeesanahalli, Outer Ring Road,
Bengaluru .. Appellant
PAN : AABCW1354K
v.
Asst. Commissioner of Income-tax,
Circle -7(1)(2), Bengaluru .. Respondent
Assessee by : Shri. Pravin Kishore Prasad and Shri. Uma Shankar
Gautam, Advocates
Revenue by : Shri. Arun Kumar- CIT - DR
Heard on : 07.02.2018
Pronounced on : 28.02.2018
ORDER
PER LALIET KUMAR, JUDICIAL MEMBER :
The present appeal is directed against the order u/s.143(3) r.w.s.144C (13) of the IT Act, 1961, passed by the ACIT, Circle - 7(1)(2), Bengaluru, dt.28.04.2017, in pursuance to the directions of the DRP, for the assessment year 2013-14, on the following grounds:
IT(TP)A.1963/Bang/2017 Page - 2 IT(TP)A.1963/Bang/2017 Page - 3
02. The assessee has assailed the addition of Rs.11,68,65,282/- on account of transfer pricing adjustment. The assessee is a group company of Walmart Discount Store in Rogers, Ark, USA. The assessee entered into the following international transactions :
The assessee has submitted that the operating profit / operating cost of the assessee was 10% and operating profit / operating revenue IT(TP)A.1963/Bang/2017 Page - 4 was 9.09%. After receiving reference from the AO, the TPO asked the assessee to submit the statutory document maintained by it u/s.92D(3) of the Act. It was the case of the assessee that the international transactions have been classified into software development segments in the TP document and the search and comparability analysis was done using the software development services as the primary function. As a result of the search process the assessee had adopted 26 companies in respect of software development activities as comparables for bench marking analysis and has adopted the TNMM as the most appropriate method.
03. The TPO was not convinced with the TP document maintained by the assessee and has pointed out various defects in the TP study prepared by the assessee, as succinctly mentioned by the TPO in para 4.1 of his order. Thereafter the TPO has rejected the TP study of the assessee. It is mentioned at bar by the Ld. AR that the TPO has considered and shortlisted six comparables and has calculated the arithmetic mean of the operating profit / OC of these companies at 21.53%. The TPO at page 27 has arrived at the final set of comparables, which are the following six companies :
1. CGVAK Software & Exports Ltd
2. Larsen & Toubro Infotech Ltd
3. Mindtree Ltd (seg)
4. Persistent Systems Ltd (seg)
5. R. S. Software (India) Ltd
6. Tech Mahindra Ltd (seg) The TPO issued a show-cause notice to the assessee by applying various filters as mentioned in para 5 of the show-cause notice at IT(TP)A.1963/Bang/2017 Page - 5 page 48 of the paper book. The TPO has used the following filters / identical criteria for the purpose of selecting the proper comparables:
i) Companies having different financial year ending or data of the company which does not fall within 12-month period
ii) Companies whose income was less than Rs.1 Crore
iii) Companies whose software development service income is less than 75% of its total operating revenues
iv) Companies having more than 25% related party transactions of the sales.
v) Companies who have export service income less than 75% of the sales
vi) Companies with employee cost less than 25% of turnover On the basis of these filters, the TPO had analysed the five comparable companies selected by the assessee and accepted only the two companies, namely Mindtree Ltd and R S Software (India) P. Ltd. Thus the TPO has rejected the remaining three companies namely, Akshay Software Technologies Ltd, Thinksoft Global services Ltd and IDBI Intech Ltd. At this stage we would like to reproduce the remarks of the TPO in respect of Akshay Software Technologies Ltd and Thinksoft Global Services Ltd (as the assessee had filed the ground for inclusion of these two companies along with other four companies), which is as follows :
1. Akshay Software Technologies Ltd : in response to the notice u/s.133(6), the company vide its reply dt.06/03/2016 has stated that the company is engaged in providing professional services, procurement, installation, IT(TP)A.1963/Bang/2017 Page - 6 implementation, support and maintenance of ERP products and services in India & Overseas. Thus, the functional profile of the company is different from that of a software.
2. Thinksoft Global services Ltd : Thinksoft Global Services is primarily engaged in software testing services focussing on banking, financial and insurance services industry. Thus it is functionally different and hence rejected.
On the basis of application of filters mentioned above, the TPO has selected various companies and thereafter for better clarity regarding the FAR analysis, the TPO issued notice u/s.133(6) calling for further details for functional analysis. The TPO arrived at the conclusion of keeping the following seven comparables for the purpose of computing the ALP of the assessee, as under :
Sl Name of the comparable OP/OC
No
1 CG-VAK Software Exports Ltd 20.45%
2 ICRA Techno Aalytics Ltd 17.10%
3 Larsen & Toubro Infotech Ltd 26.06%
4 Mindtree Ltd (seg) 20.23%
5 Persistent Systems Ltd 28.27%
6 R S Software (India) P. Ltd 17.41%
7 Tech Mahindra Ltd (seg) 21.18%
Unadjusted average margin 21.18%
The assessee had filed a reply to the show cause notice and had objected to the inclusion of CG-VAK Software Exports Ltd, Larsen & Toubro Infotech Ltd and Persistent Systems Ltd. The TPO has considered the objections raised by the assessee with respect to exclusion of these three companies. However, the TPO was not IT(TP)A.1963/Bang/2017 Page - 7 convinced and therefore has rejected the contention of the assessee and has proposed a TP adjustment to the tune of Rs.92,119,614/-. Feeling aggrieved by the above addition, the assessee filed objections before the DRP. At the time of filing the objections, the assessee also sought inclusion of the following four companies before the DRP :
i. Acropetal Technologies Ltd ii. Cigniti Technologies Ltd iii. Sasken Communications Ltd iv. Spry Resources India P. Ltd It was the contention of the assessee that these companies are functionally similar to that of the assessee and therefore these companies should be included in the list of comparables. Thus the assessee had effectively sought inclusion of four companies before the DRP. However the request of the assessee for inclusion of these four companies was not acceded by the DRP and a speaking order as mentioned in para 10.3 which is reproduced below, rejected the inclusion :
10.3 Besides, the assessee has challenged the rejection of following companies by the TPO in its submission and has also filed their annual reports:
Acropetal Technologies Lid.
CignitiTechnologies Lid.
Sasken communications Lid.
Spry Resources India Pvt Ltd.
However, it is found that these companies were not part of the comparables selected by the assessee. Neither assessee has taken them up before the TPO as additional comparablcs. This IT(TP)A.1963/Bang/2017 Page - 8 was confronted to the assessee during the hearing on 09-03- 2017 and could not be controverted by the ARs of the assessee. Hence, the details submitted by the assessee in regard to these companies are in nature of additional evidence, as the issues were never raised before the TPO. However, the assessee has not given any justification for admission of these additional evidences at this stage. The assessee has not given any reason for not taking up these objections and not furnishing these documents before the TP() to support its case. The assessee has not given any explanation as to what prevented it from producing such documents or making such claim before the TPO at the time of transfer pricing proceedings before the TPO, especially when sufficient opportunity of being heard was given to it by the TPO. The assessee has not brought anything on record to show that the details/documents could not have been produced by it before TPO despite its best efforts. Admission of the additional evidence cannot be claimed as a matter of right and it is the duty of the assessee to explain the circumstances which prevented it from submitting such documents before the lower authorities. Since the assessee WW to provide sufficient cause to furnish these documents before the TPO, the same cannot ,be rnitted at this stage. The ITAT. Bangalore in case of Anupam Kothari, ITA No 837 (Bang)2012 held that for admission of additional evidence, it is required for the assesse to show that authorities had decided its grounds without giving sufficient opportunity to adduce evidence. Considering the above the request of assessee for admission of additional evidence is not accepted. Thus the objection of the assessee in relation to these comparables is not accepted.
Thus the assessee is aggrieved and is in appeal before this Tribunal, on various grounds mentioned herein above.
04. For the purposes of purpose of adjudicating the appeal, we will be dealing with each comparable separately / collectively in the following paragraphs.
IT(TP)A.1963/Bang/2017 Page - 9 CG -VAK Software Exports Ltd :
05. First of all the Ld. AR has drawn our attention for exclusion of M/s. CG -VAK Software Exports Ltd. In this regard it was the contention of the assessee that it is seeking exclusion of the said company as it cannot be compared with the assessee for the following reasons :
i) That M/s. CG - VAK Software Exports Ltd is engaged in product development
ii) That the comparable in its annual report at page 698 of the paper book under the head 'Future Plans' has mentioned as under :
FUTURE PLANS The global market for IT services is expected to expand and corporations are increasingly using the offshore service providers like us. The company has been growing positively in the offshore software services business and this momentum is likely to continue this year.
Our client retention and client satisfaction levels have been growing steadily. W e h a v e r e c e i v e d m a n y client appreciations and significant a m o u n t o f repeat business, in addition to North America , our business and customer base from Australia and Europe is also expending as planned.
Our mobility practice has been growing significantly and we expect a good growth in this offering. The company will continue its focus on the OPD (Outsourced Product Development) market space where it has achieved significant success. Geographically the company is planning to strengthen its presence at the markets it is operating. We expect to continue on positive growth this year and the Company should perform better in the ensuing year FY 2013-14.
IT(TP)A.1963/Bang/2017 Page - 10 On the basis of the above it was submitted that as per the annual report, CG - VAK Software Exports Ltd is a product company and is therefore cannot be compared with the assessee.
iii) CG - VAK Software Exports Ltd is engaged in ITES activities (BPO) as is clear from page 721, where the BPO revenue has mentioned as Rs.14,43,421/- and the software services revenue is mentioned as Rs.8,54,77,282/-. It was submitted that as CG - VAK Software Exports Ltd is into BPO business also this company is required to be excluded
iv) That there was an exceptional rise in the profit of the assessee in comparison to the previous year and this is also relatable to OPD activities of the assessee.
On the basis of the above it was submitted that CG - VAK Software Exports Ltd being a product company is not comparable with the assessee company and it should be excluded.
06. On the other hand, the Ld. DR has supported the order of the lower authorities and has submitted that CG - VAK Software Exports Ltd is not a product company and is into software development and therefore the same is required to be retained as comparable.
07. We have heard the rival contention and perused the record. The activities mentioned herein above in the annual report and pointed out by the Ld. AR during the course of argument clearly shows that CG - VAK Software Exports Ltd is a software development company and not a product company. For the IT(TP)A.1963/Bang/2017 Page - 11 purposes of branding CG - VAK Software Exports Ltd as a software product development company, it was incumbent upon the assessee, to prove that CG - VAK Software Exports Ltd is having its own software products, over which it has proprietary right or any other right. From the bare perusal of the annual report and the financials it is clear that CG - VAK Software Exports Ltd is not having any products in its inventory and there is no mention of any work-in-progress in respect of software products. In fact from the paragraph cited herein above at page 698 of the paper book, it is clear that CG - VAK Software Exports Ltd is a software development company and is doing the work of integration, assimilation or patch work for its client and for that purposes is also rendering some services on-site. Therefore it cannot be urged that it was a product company. In other words, the profile of CG - VAK Software Exports Ltd matches with the profile of the assessee company. Therefore we find no infirmity in the order passed by the authorities below. Accordingly the ground raised by the assessee for exclusion of CG - VAK Software Exports Ltd is devoid of any merit. We dismiss the same.
LARSEN & TOUBRO INFOTECH Ltd & PERSISTENT SYSTEMS Ltd :
08. In this regard the Ld. AR has submitted that L & T Infotech Ltd is engaged in software product development and is having substantial amount of intangibles assets. Further it also has a significant brand value and is engaged in diversities including IP Led business activities. It was also the case of the assessee that segmental information is not available and therefore cannot be IT(TP)A.1963/Bang/2017 Page - 12 compared with the assessee. Similar argument was submitted before us in respect of Persistent Systems Ltd, wherein the assessee has submitted that the comparable is engaged in software product development and further engaged in diversified business in IP Led and therefore the segmental information is not available and therefore has sought the exclusion of these two companies. Further it was submitted by the Ld. AR that the facts of the present case are similar to that of Microsoft Research Lab India P. Ltd [TS-994- ITAT-2017(Bang)], wherein the coordinate bench, in which one of us i.e., the Accountant Member was a party to the order, remanded the matter back to the file of the TPO for examining afresh the contention of the assessee as well as with respect to the functionality of these two comparables.
09. On the other hand the Ld. DR has submitted that in terms of the decision of the Tribunal in Microsoft Research Lab India P. Ltd (supra), the matter may be remitted back to the file of the TPO for examining afresh in the light of the observations made by the Tribunal in the said matter.
10. We have heard the rival contention and perused the record. In the light of the reliance by both parties on Microsoft Research Lab India P. Ltd (supra), we would like to remand the matter to the file of TPO to the similar effect as done in the matter of Microsoft (supra) however we would like to add a word of caution that it will be unsafe to follow one decision passed by the Tribunal in any other case unless the assessee demonstrates that the profile of the assessee company as well as the assessee in other case are IT(TP)A.1963/Bang/2017 Page - 13 materially comparable with each other and there is no element of distinction between the profile of those two companies. However at this stage we do not wish to examine the profile of the assessee company as well as the profile of Microsoft Research Lab India P. Ltd(supra) as we are remitting back the matter and we leave it to the wisdom of the TPO to consider the facts of the present case (assessee) with that of Microsoft Research Lab India P. Ltd, and apply the decision of Microsoft Research Lab India Ltd (supra).
11. Following the above order of the coordinate bench, these two comparables namely LARSEN & TOUBRO INFOTECH Ltd & PERSISTENT SYSTEMS Ltd are restored back to the file of the TPO to decide afresh in terms of the observations made hereinabove.
12. Now we are left with the following six comparables :
i) Akshay Software Technologies Ltd,
ii) Thinksoft Global services Ltd
iii) Acropetai Technologies Lid.
iv) CignitiTechnologies Lid.
v) Sasken communications Lid.
vi) Spry Resources India Pvt Ltd.
i) Akshay Software Technologies Ltd :
13. It was submitted by the assessee that Akshay Software Technologies Ltd is engaged in IT services which is in the nature of software development and the income earned by this company from commission and sale of licence is miniscule and therefore this company is functionally comparable with that of the assessee. Our attention was drawn to the order passed by the TPO at page 7, IT(TP)A.1963/Bang/2017 Page - 14 where the AO has rejected this company on the premise that in response to notice u/s.133(6) of the Act, it was stated by Akshay Software Technologies Ltd that it is engaged in procuring, installation, implementation, support and maintenance of ARP services in India and other areas and therefore the profile of the company is different from that of the assessee.
The assessee has drawn our attention to the Annual Report at page 576 of the paper book, where it is mentioned that the revenue recognition, as under :
Revenue Recognition Revenues from contracts priced on a time and material basis are recognized when services are rendered and related costs are incurred. Revenues from time bound fixed price Contracts, arc recognised over the life of the contract using the proportionate of completion method, with contract costs determining the degree of completion. Foreseeable losses on such contracts are recognized when probable. Revenues from maintenance contracts are recognized prorata over the period of the contract Revenues from sale of software licenses, net of discounts are recognized upon delivery of goods to customers. Dividend income is accounted when the right to receive it is established. Interest income is accounted on accrual basis.
Further our attention was drawn to page 582 to Note 20 - Revenue from Operations, where income from software services was Rs.19,83,23,358; Commission received was Rs.5,68,690 and Sale of software licences was shown at Rs.5,91,780/-. It was the case that Akshay Software Technologies Ltd is covered by the decision of Kolkata Tribunal in the matter of Labvantage Solution P. Ltd v.
IT(TP)A.1963/Bang/2017 Page - 15 DCIT [ITA.617/Kol/2015, dt.19.10.2016], at page 2008 of the paper book where the Tribunal in para 8.5 has directed for inclusion of Akshay Software Technologies Ltd in the list of comparables.
14. On the other hand the Ld. DR has mentioned that Akshay Software Technologies Ltd is dealing in procurement, installation, implementation, support and maintenance of ARP products and services and it was submitted that no segmental information with respect to the various activities were available and only information available is with respect to separate revenue for commission received and sale of software services. But other aspects were not available. Therefore it was submitted that Akshay Software Technologies Ltd is required to be excluded from the list of comparables.
15. We have heard the rival contentions and perused the record.
At page 576 of the annual report, fixed assets have been mentioned as under :
Fixed assets :
Fixed assets are recorded at cost of acquisition or construction. They are stated at historical cost less accumulated depreciation, amortization and impairment loss, if any.
Product development costs are recognised as fixed assets, when feasibility has been established, the company has committed technical, financial and other resources to complete the development and it is probable that asset will generate probable future benefits.
From a perusal of the above, it is clear that the company is incurring cost for product development and had recognised it as fixed assets.
IT(TP)A.1963/Bang/2017 Page - 16 Therefore the company is required to be considered as a company dealing in software products and is into developing and selling the products developed by it. Therefore we do not find any error in the finding of the CIT (A). If we go through the decision cited by the Ld.AR in the matter of Labvantage Solution P. Ltd (supra), wherein the Tribunal considered Qualcomm India P. Ltd v. ACIT [ITA 5239/Del/2010, dt.10.06.2013] wherein the functions of Akshay Software Technologies Ltd is mentioned as engaged in SAO and remote infrastructure management software applications, as against design work on embodied software, DSP an integrated circuit. The functions as per the submission of the assessee as well as the annual report is, Akshay Software Technologies Ltd is engaged in providing professional services, procurement, installation and support of ARP products and services in India. Therefore the function as performed by the assessee as mentioned in the decision of Labvantage (supra) for AY 2009-10 cannot be compared with that of the functions performed by Akshay Software Technologies Ltd in the AY 2013-14. Moreover the direction for inclusion of Akshay Software Technologies Ltd was also rendered in the context that in that case the TPO has included Akshay Software Technologies Ltd as comparable in the AY 2007-08. In our considered opinion the facts of the present case are different than the facts narrated herein above in the matter of Labvantage (supra). Therefore this company cannot be included in the list of comparables. Accordingly this ground is rejected.
IT(TP)A.1963/Bang/2017 Page - 17
ii) Thinksoft Global services Ltd :
16. In respect to Thinksoft Global Services Ltd, the assessee has urged before us for inclusion of this company as according to the assessee, it is functionally comparable company as it is engaged in software testing. Our attention was drawn by the Ld. AR to pages 627 & 628 which as under :
Further out attention is also drawn to page 647 where in the notes to financial statement for the year ended 31.03.2013, it is mentioned as under :
IT(TP)A.1963/Bang/2017 Page - 18 "..... The company is an India based software service provider primarily delivering software validation and verification services to the banking and financial services industry worldwide. The company has invested in five wholly owned subsidiaries in Singapore, USA, Germany, UK and UAE for market development and service delivery in the respective regions."
On the basis of the above it was submitted the predominant character of Thinksoft Global Services Ltd is of software development and the hair-split approach treating a company into software development and software testing cannot be classified differently. It was submitted that testing of the software is a part and parcel of software development because without testing of the software, it cannot be said to be developed and therefore it was submitted that the company is required to be included.
17. On the other hand the Ld. DR has drawn our attention to page 8 of the TP order where the TPO has dealt with the argument of the assessee and mentioned in tabulation that Thinksoft Global Services Ltd is primarily engaged in software testing services focussing on insurance and banking industry and thus functionally different.
Further at page 10 the DRP has reproduced the same argument and thereafter has rejected the comparable.
18. We have heard the rival contention and perused the record. The revenue recognition mentioned in annual report at page 648, is as under :
IT(TP)A.1963/Bang/2017 Page - 19 Further the functions performed by Thinksoft Global Services Ltd is available from the profile of the company to show that it is into software testing company. In our view for the software developing, different skills are required for the purpose of testing the software, the requirement of the vendors are required to be considered and keeping that requirement in mind the software is required to be tested. In our view the existence of the software is a prerequisite for testing of the software and hence the functions of the assessee were of software development, though after developing it, it may be required to be tested. But for the purposes of comparing the functions profile of the two companies, namely the assessee and Thinksoft Global Services Ltd, they should fall within the broad parameters of functional comparability. In the case of software development, various languages, skills and experience is required to development a software and customise it for the requirement of the customer. For the purpose of testing the software the requirements of tools and skills are different. Therefore the assets employed in the form of expertise of the employees in the form of testing the software will be quite different and therefore in our considered opinion, both the companies cannot be compared and therefore, we IT(TP)A.1963/Bang/2017 Page - 20 have no other option but to reject the contention of the Ld. AR. The Bangalore bench of the Tribunal in various matters including Trilogy E Business Software Ltd v. DCIT [(2013) 29 taxmann.com 310], had considered the exclusion of Thinksoft Global Services Ltd for the AY 2010-11, as the DRP has applied the on-site filter. Similarly in the matter of Kodiak Net Works [(2017) 87 taxmann.com 2], the Tribunal has not agreed with the contention of the Ld. DR for excluding this company on the premise of revenue earned by it on account of foreign exchange gains. However the argument of a testing company was not raised in any of the matters cited before us. No other decision was cited before us by both the parties for AY 2013-14, dealing with the inclusion or exclusion of Thinksoft Global Services Ltd. Therefore in the facts and circumstances of the case, we do not find any merit in the submission of the assessee and accordingly the ground raised by the assessee for inclusion of Thinksoft Global Services Ltd is rejected.
Acropetal Technologies Lid.
CignitiTechnologies Lid.
Sasken communications Lid.
Spry Resources India Pvt Ltd.
19. In respect to assessee's ground for inclusion of these four companies, it was fairly conceded by the Ld. AR that these comparables were not part of the TP study of the assessee and it was also conceded before us that even the assessee has not in its reply submitted for inclusion of these comparables being functionally similar to that of the assessee. However the case of the assessee that the assessee has filed the detailed submissions along IT(TP)A.1963/Bang/2017 Page - 21 with the supporting document before the DRP and has submitted that these comparables which were not part of the TP proceedings should be considered and the additional evidence filed by the assessee be also examined which will demonstrate that these comparables are functionally comparable with that of the assessee. However the DRP rejected the contention of the assessee on the pretext that these comparables were not forming part of the proceedings before the TPO. The conclusion of the DRP in para 10.3 of its order is reproduced elsewhere in this order.
20. On the other hand the Ld. DR has submitted that as the facts were not before the TPO nor raised by the assessee, therefore the assessee cannot be given a second chance to agitate the inclusion of comparables before the DRP because it was for the assessee to raise all its claim before the TPO
21. We have heard the rival contentions and perused the material. It is an admitted position that the assessee has raised the ground for inclusion of these four companies before the DRP and filed the supporting documents / evidence which show that these four companies are functionally comparable with that of the assessee. However, the DRP has dismissed the contention of the assessee on the ground that these were not raised before the TPO. In our considered opinion approach of the DRP was not correct as is clear from the scheme of Income-tax Act, the proceedings before the DRP is a continuation of the assessment proceedings and the purpose of providing the proceedings before the DRP is to ensure due and fair adjudication of the ALP by comparing the operating IT(TP)A.1963/Bang/2017 Page - 22 profit / operating cost of the assessee with that of the functionally comparable companies. Firstly it is the duty of the TPO to bring on record the functionally comparable companies and in case both the parties failed to bring on record at the TPO level, then for that purposes even the DRP can also bring in companies which are functionally comparable with that of the assessee with a small caveat that in case the assessee is bringing in a new comparable then in both the cases the TPO / DRP should be given opportunity to deal with those comparables. In the present case needful has not been done, therefore in the considered opinion of the bench these aspects of examining the functional profile of these four companies, namely, Acropetal Technologies Ltd. CignitiTechnologies Ltd, Sasken communications Ltd and Spry Resources India Pvt Ltd, is required to be remanded back to the file of the TPO for examining afresh. In any case, we are remitting back the two companies, namely Persistent Systems Ltd (seg) and Larsen & Toubro Infotech Ltd to the file of the TPO. Therefore these four companies are also directed to be remanded back to the file of TPO for the purposes of due adjudication. Needless to say that the TPO shall give opportunity to the assessee before finalizing the inclusion / exclusion of these comparables after applying the same filters. Accordingly this ground is allowed for statistical purpose. Summary of the result of TP grounds :
i) The assessee ground for exclusion of CG-VAK Software and Exports Ltd, is rejected
ii) Larsen & Toubro Ltd & Persistent Systems Ltd, are remitted back to the file of TPO to decide afresh;
IT(TP)A.1963/Bang/2017 Page - 23
iii) The ground for inclusion of Akshay Software Technologies Ltd is rejected;
iv) The ground for inclusion of Thinksoft Global Services Ltd is rejected
v) The four comparables namely, Acropetal Technologies Ltd, Cigniti Technologies Ltd, Sasken Communications Ltd and Spry Resources India P. Ltd are remitted back to the file of the TPO for fresh examination.
22. The next ground raised by the assessee by way of ground no.5 is in respect to disallowance of working capital adjustment. The Ld. AR has submitted that the TPO has determined the working capital adjustment at 1.94% thereby reducing the ALP mean margin. The DRP has sought the detailed working justifying the allowability of working capital adjustment as to how it had adversely affected the working capital position, vis-a-vis the comparables. But the assessee had was not able to demonstrate that the working capital differences had impacted its profits and the detailed submissions were made before the DRP as given in para 12.1 of the DRP order. The Ld. AR has submitted before us that as the Tribunal is remanding six companies to be examined by the TPO, therefore this issue of working capital adjustment also be remanded back to the file of the TPO for examining afresh.
23. On the other hand the Ld. DR opposed the contention of the Ld. AR.
24. We have gone through the records and perused the orders passed by the DRP as well as the TPO. In our view, it is for the assessee to prove as to how the working capital had an impact on its IT(TP)A.1963/Bang/2017 Page - 24 profit and is required to follow the analysis as mentioned in para 12.1 of the DRP order. Needful has not been done despite opportunity granted by the DRP. However considering the totality of the circumstances, we are remitting back six companies for consideration by the TPO. We deem it fit to remand this issue afresh. Needless to say that the TPO shall be bound by the decision of the ITAT, Chennai Benches in Mobis India Ltd [38 taxmann.com 231]. Accordingly this ground is allowed for statistical purpose.
25. In the ground 3(k) assessee has sought the risk adjustment. We find that the assessee has not given any details or reason for risk adjustment qua comparables and the assessee. It is for the assessee to demonstrate as to how the assessee who is a captive service provider to its AE has more risk in comparison to the other comparables retained by the Tribunal. Since no details and working has been provided, therefore, we do not deem it appropriate to grant any risk adjustment to the assessee. Accordingly this ground is rejected.
26. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 28th day of February, 2018.
Sd/- Sd/-
(JASON P. BOAZ) (LALIET KUMAR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bengaluru
Dated : 28th February, 2018
MCN*
IT(TP)A.1963/Bang/2017 Page - 25
Copy to:
1. The assessee
2. The Assessing Officer
3. The Commissioner of Income-tax
4. Commissioner of Income-tax(A)
5. DR
6. GF, ITAT, Bangalore
By order
Senior Private Secretary,
Income Tax Appellate Tribunal,
Bangalore.