V2 TECH VENTURES P.LTD, NAVI MUMBAI V. DCIT 15(3)(1), MUMBAI

ITA 1103/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3260 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 23-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: VISPI T PATEL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction
• Section: 143(3); 234B; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K , MUMBAI , , BEFORE SHRI R C SHARMA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JU DICIAL MEMBER ITA NO. : 1 1 03 /MUM/20 1 5 (ASSESSMENT YEAR: 20 1 0 - 11 ) 2 V2 TECH VENTURES PVT LTD. , B D SAWANT MARG, CHAKALA, ANDHERI (EAST), MUMBAI - 400 099 PAN: AABCV 9 79 6 J VS DY . CIT - RANGE - 15 ( 3 ) (1) , MUMBAI (AP PELLANT) (RESPONDENT) APPELLANT BY : SHRI VISPI T PATEL RESPONDENT BY : SHRI N K CHAND /DATE OF HEARING : 16 - 06 - 201 6 / DATE OF PRONOUNCEMENT : 24 - 0 8 - 2016 ORDER , : PER AMIT SHUKLA , J M: THE AFORESAID APPEAL HA S BEEN FILED BY THE ASSESSEE AGAINST FINAL ASSESSMENT ORDER DATED 31.12.2014 , PASSED UNDER SECTION 143(3) R.W.S. 144C(13) , FOR THE ASSESSMENT YEAR 2010 - 11 IN PURSUANCE OF DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL II (DRP), MUMBAI UNDER SECTION 144C(5) VIDE ORDER DATED 12.11.2014. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS RAISED VARIOUS GROUNDS TO CHALLENGE THE TRANSFER PRICING ADJUSTMENT OF RS.95,2 5,556/ - IN RESPECT OF THE INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE 2 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 DEVELOPMENT SERVICES UNDERTAKEN BY THE ASSESSEE WITH ITS AE. THE RELEVANT GROUNDS RAISED BY THE ASSESSEE READS AS UNDER: - ~1 THE AO ERRED IN DETERMINING THE TAXABLE IN COME OF THE ASSESSEE AT INR 2,07.01,300 AS AGAINST THE TOTAL INCOME OF INR 1, 11,27,160 DECLARED IN THE RETURN OF INCOME. REFERENCE TO TRANSFER PRICING OFFICER 2. THE TRANSFER PRICING PROCEEDINGS INITIATED BY THE AO UNDER SECTION 92CA(I) OF THE ACT, ARE WITHOUT ANY JURISDICTION AND OUGHT TO BE QUASHED. ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS 3. THE AO/ DRP ERRED IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO INR 95,25,556 IN RESPECT OF THE INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE ('AE') VIZ. V2 SOLUTIONS INC. ('V2 SOLUTIONS'). 4. THE AO/ DRP/ TPO ERRED IN REJECTING THE EXTERNAL CPM ANALYSIS CONDUCTED BY THE ASSESSEE FOR BENCHMARKING THE IN TERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO AE ON AN ARBITRARY BASIS, WITHOUT GIVING COGENT REASONS, AS REQUIRED BY THE PROVISIONS OF SECTION 92C(3) OF THE ACT. 5. THE AO/ DRP/ TPO ERRED IN ARBITRARILY REJECTING THE EXTERNAL TNMM ANALYSIS CONDUCTED BY THE ASSESSEE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO AE. 6. THE AO/ DRP / T PO ERRED IN CONDUCTING AN ARBITRARY SEARCH FOR COMPARABLE COMPANIES UNDER THE TNMM WITH OUT HAVING REGARD TO FACTORS SUCH AS ASSESSEE'S TURNOVER, EMPLOYEE COST, ETC. 7. THE AO/ DRP/ TPO ERRED IN SELECTING THE COMPANIES WHICH ARE NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE. FURTHER, THE AO/ TPO ERRED IN SELECTING COMPANIES WHICH WERE NOT COM PARABLE TO THE ASSESSEE ON ACCOUNT OF THE FOLLOWING: A. DISPROPORTIONATE TURNOVER AS COMPARED TO THAT OF THE ASSESSEE; B. HIGH RELATED PARTY TRANSACTIONS I.E. OVER 15 PER CENT OF TURNOVER; 3 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 C. EMPLOYEE COST TO TOTAL COST RATIO BELOW 50 PER CENT AND ABOVE 8 5 PER CENT; D. SEGMENTAL RESULTS WHICH SUFFER FROM CERTAIN DEFICIENCIES. 8. THE AO/ TPO ERRED IN INCLUDING INFOSYS TECHNOLOGIES LTD. AS A COMPARABLE COMPANY EVEN THOUGH THE DRP VIDE ITS DIRECTIONS DATED NOVEMBER 11, 2014 HAS DIRECTED FOR THE REJECTION OF THE SAME CONSIDERING THAT IT IS HAVING VERY HIGH TURNOVER. 9. THE AO/ DRP/ TPO ERRED IN TAKING WRONG MARGIN IN THE FOLLOWING COMPANIES SELECTED BY HIM: A. CONSIDERING THE OPERATING MARGIN OF KALS INFORMATION LTD. AT 34.41 PER CENT AS AGAINST THE CORRECT OPERATING MARGIN OF 20.43 PER CENT AS PER THE ANNUAL REPORT OF THE COMPANY; B. CONSIDERING THE OPERATING MARGIN OF KERALA AYURVEDA LTD. AT 13.77 PER CENT AS AGAINST THE CORRECT OPERATING MARGIN OF 2.04 PER CENT AS PER THE ANNUAL REPORT OF THE COMPANY. 10. THE DRP ERRED IN REJECTING A COMPARABLE COMPANY SELECTED BY THE TPO I.E. AJEL INFOTECH LIMITED BY ERRONEOUSLY STATING THAT THE COMPANY HAS INCURRED CONSISTENT LOSSES IN THREE PREVIOUS YEARS, WHICH IS WITHOUT ANY BASIS. 11. THE DRP ERRED IN REJECTING A CO MPARABLE COMPANY SELECTED BY THE TPO I.E. MUKTA ARTS, WITHOUT APPROPRIATE REASONING. 12. THE AO/ DRP/ TPO ERRED IN NOT MAKING ANY ADJUSTMENT FOR RISK CONSIDERING THE FACT THAT RISK PROFILE OF THE COMPARABLE COMPANIES SELECTED BY HIM CANNOT BE COMPARED WIT H THE RISK PROFILE OF THE ASSESSEE, SINCE THE ASSESSEE BORE MINIMUM RISK IN RESPECT OF ITS INTERNATIONAL TRANSACTION. 13. THE AO/ DRP/ TPO ERRED IN NOT ALLOWING THE BENEFIT OF +/ - S % TO THE ASSESSEE AS PER THE SECOND PROVISO TO SECTION 92C(2) OF THE ACT. ADDITION ON ACCOUNT OF OTHER TAX ISSUES 14 THE AO/ DRP ERRED IN DISALLOWING A PART OF DEPRECIATION AMOUNTING TO INR 48,584 BY RECLASSIFYING THE ASSETS (UPS / BATTERIES) AS PLANT & MACHINERY ELIGIBLE FOR 15% RATE OF DEPRECIATION, AS AGAINST COMPUTER ELIGI BLE FOR 60% RATE OF 4 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 DEPRECIATION 15 THE LEARNED AO ERRED IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT. 16 THE AO ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT . 2 . THE FUNCTIONAL PROFILE OF M/S V 2 TECH VENTURES PVT . LTD. AS STA TED IN RECORDS BEFORE US ARE THAT, IT OPERATES IN CUSTOMIZED SOFTWARE DEVELOPMENT INDUSTRY AND PROVIDES OFFSHORE SOFTWARE DEVELOPMENT SERVICES IN VARIOUS AREAS AS PER THE NEEDS OF V2 SOLUTIONS, WHICH IN TURN DEPENDS ON THE END USERS NEEDS. THE END USERS AR E THOSE ENTITIES WHO ARE INVOLVED IN PROVIDING APPLICATION SUPPORT AND TECHNICAL CONSULTING SERVICES AS WELL AS OFF - THE SHELF SOFTWARE PRODUCTS AND PRODUCTS USING SOFTWARE AS A SERVICE MODEL. V2 TECH SPECIALIZES IN PROVIDING NET, J2EE SOFTWARE SOLUTIONS AN D OFFSHORE SOFTWARE DEVELOPMENT SERVICES IN VARIOUS AREAS, VIZ., CUSTOM APPLICATION, TOOL DEVELOPMENT SERVICES IN VARIOUS AREAS, VIZ., CUSTOM APPLICATION, TOOL DEVELOPMENT, APPLICATION INTEGRATION, ETC. V2 TECH OFFERS ITS AE THE SKILLS TO USE WEB DEVELOPME NT TOOLS TO DEVELOP INTERNET DEPENDENT COST EFFECTIVE SOLUTIONS UNIQUE TO THEIR BUSINESSES, BRINGING THEM IMPROVED TECHNICAL EFFICIENCY CUSTOMIZED TO THEIR VARIED REQUIREMENTS. IT ALSO PROVIDES QUALITY ASSURANCE SERVICES IN THE AREAS OF MOBILE SERVICES AND P ROVIDES SUPPORT IN BUSINESS PURCHASES RELATED TO DIGITAL CONTENT MANAGEMEN T AND TECHNICAL SUPPORT. THERE IS A STRONG FOCUS ON STANDARDIZATION OF SECURITY FEATURES, SUCH AS DATA AND IP SECURITY. 3. IN FORM 3CEB, THE ASSESSEE HAS REPORTED THE FOLLOWI NG INTERNATIONAL TRANSACTION: 5 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 TRANSACTION ASSOCIATED ENTERPRISE AMOUNT OF TRANSACTION IN RS. METHOD USED PROVISION OF OFFSHORE SOFTWARE DEVELOPMENT SERVICES TO THE AE V2 SOLUTIONS INC. 223, ESPERANCA AVE, SANTA CLA, CALLIFOR NIA - 95054 RS.15,32,21,000 CPM IN THE TRANSFER PRICING REPORT, THE ASSESSEE HAS BENCHMARKED TH E TRANSACTION BY ADOPTING COST PLUS M ETHOD (CPM) AS THE MOST APPROPRIATE METHOD (MAM). THE GROSS MARGIN WORKED OUT ON THE BASIS OF GROSS PROFIT/ DIRECT EX PENSES AS THE PLI. THE OPERATING GROSS MARGIN ON THE GROSS OPERATING COST WAS SHOWN AT 58.77%. IN THE TP STUDY REPORT, ASSESSEE HAS SHORT - LISTED SOME 14 COMPARABLES, WH OSE ARITHMETIC MEAN OF GROSS MARGIN OF COST WAS ARRIVED AT 31.64%. AC CORDINGLY, IT WAS R EPORTED THAT ASSESSEES TRANSACTION ARE AT ARMS LENGT H PRICE. HOWEVER, THE LD. TPO AFTER DETAILED DISCUSSION AND ANALYSIS FOUND THAT CPM METHOD AS ADOPTED BY THE ASSESSEE CANNOT BE TAKEN AS MAM FOR THE PURPOSE OF BENCHMARKING THE ASSESSEES TRANSACTION AN D SHOW CAUSED THE ASSESSEE AS TO WHY TNMM SHOULD NOT BE TAKEN AS MAM INSTEAD OF CPM. IN RESPONSE, THE ASSESSEE TRIED TO JUSTIFY ITS CPM METHOD, HOWEVER, THE TPO HAS REJECTED THE SAME AFTER DETAILED DISCUSSION AND RE AS ONING CONTAINED IN PAGES 6 TO 8 OF THE ORDER. THEREAFTER, HE PROCEEDED TO ANALYZE THE 14 COMPARABLES IDENTIFIED BY THE ASSESSEE WH ICH WERE BASED ON THE FOLLOWING FILTERS: - ( I ) COMPANIES WITH DATA AVAILABLE FOR YEAR ENDED MARCH 2010; 6 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 ( II ) COMPANIES WITH TURNOVER OF SALES BETWEEN 1 CRORES AND 50 CRORE; ( III ) CO MPANIES HAVING PERCENTAGE OF EMPLOYEE COSTS TO TOTAL COSTS BETWEEN 50 PERCENT AND 85 PERCENT; AND ( IV ) COMPANIES ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND PROVIDING RELATED SERVICES. THE LISTS OF 14 COMPARABLES AS IDENTIFIED BY THE ASSESSEE WERE AS UNDER : - 1 ACCEL TRANSMATIC LTD 2 AVANI CIMCON TECHNOLOGIES LTD 3 BODHTREE CONSULTING LTD 4 CARAVE INFO SYSTEMS PVT LTD 5 CHERRYTEC INTELISOLVE LTD 6 LASER SOFT INFOSYSTEMS TD. 7 NEXTBRICK SOLUTIONS LTD 8 POLARIS ENTERPRISE SOLUTIONS LTD 9 SAGARSOFT (IN DIA) LTD 10 SPRY RESOURCES INDIA PVT LTD 11 TRIDENT INFOTECH LTD 12 ACE SOFTWARE EXPORTS LTD 13 AJEL LTD 14 IGATE INFRASTRUCTURE MANAGEMENT SERVICES LTD 4. THE TPO, FIRST OF ALL ANALYSED THE FILTERS APPLIED BY THE ASSESSEE FOR IDENTIFYING THE COMP ARABLES IN ITS SEARCH PROCESS AND AFTER DETAILED DISCUSSION, HE ACCEPTED 5 COMPARABLES CHOSEN BY THE ASSESSEE OUT OF 14 COMPARABLES, WHICH WERE : - AVANI CIMCON TECHNOLOGIES LTD BODHTREE CONSULTING LTD NEXTBRICK SOLUTIONS LTD SPRY RESOURCES INDIA PVT LT D AJEL LTD (FORMERLY CHOKSH INFOTECH LTD) THEREAFTER, TPO INITIATED HIS OWN INDEPENDENT SEARCH PROCESS FOR THE COMPARABLES IN THE SOFTWARE INDUSTRY AFTER APPLYING FOLLOWING FILTERS: 7 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 ( I ) FUNCTIONAL SIMILARITY FILTER; ( II ) AVAILABILITY OF AUDITED ANNUAL REPORTS FOR THE RELEVANT YEAR, I.E. FY 2009 - 10; ( III ) THE REJECTION OF COMPARABLES HAVING RPT MORE THAN 25% OF TOTAL REVENUE; ( IV ) THE REJECTION OF COMPANIES HAVING SALES TURNOVER LESS THAN 1 CRORE; ( V ) REJECTION OF COMPANIES HAVING CONSISTENT LOSSES. FROM HIS OWN SEARCH PROC ESS AND ANALYSIS , THE TPO IDENTIFIED 18 COMPARABLES AND INVITED ASSESSEES OBJECTIONS ON SUCH COMPARABLES. AFTER CONSIDERING THE ASSESSEES OBJECTIONS/ SUBMISSIONS, THE TPO FINALLY MADE A COMPARABLE LIST OF 22 COMPARABLES AND BENCHMARKED THE SAME UNDER TNM M METHOD. THE DETAIL DISCUSSIONS FOR EACH AND EVERY COMPARABLES HAVE BEEN DISCUSSED BY THE TPO FROM PAGES 13 TO 18 OF HIS ORDER. THEREAFTER, THE TPO WORKED OUT THE PLI AT 16.64% OF THE ASSESSEE WHICH WAS WORKED OUT ON THE BASIS OF OPERATING COST. THE WORKI NG OF THE PLI BY THE TPO AFTER MAKING VARIOUS ADJUSTMENTS IS AS UNDER: RS. RS. THE AE SALES 15,32,21,348 ADD: THE OTHER OPERATING INCOME ALLOCATED TO THE AE SEGMENT 90,807 TOTAL OPERATING INCOME OF THE AE S EGMENT 15,33,12,155 TOTAL DIRECT EXPENDITURE ALLOCATED TO THE AE SEGMENT 9,65,03,193 TOTAL INDIRECT EXPENDITURE ALLOCATED TO THE AE SEGMENT 2,48,25,925 TOTAL EXPENDITURE ALLOCATED TO THE AE SEGMENT 12,13,29,118 LESS: DONATION EXPENSES ALLOCATED TO THE AE SEGMENT 70,401 ADD: ( A ) 91% OF THE TOTAL DEPRECIATION ON OFFICE PREMISES 31,02,675 ( B ) 91% OF THE CARVED OUT INSURANCE C HARGES 3,96,040 ( C ) 91% OF THE CARVED OUT LEGAL AND LICENSE CHARGES 9,26,259 8 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 ( D ) 91% OF THE CARVED OUT OFFICE EXP. 6,63,709 ( E ) 91% OF THE CARVED OUT OFFICE MAINTENANCE EXPENSES 4,98,779 ( F ) 91% OF THE CARVED OUT OFFICE RENT 23,74,757 ( G ) 91% OF THE CARVED OUT SECURITY CHARGES 1,01,715 ( H ) 91% OF THE CARVED OUT DEPRECIATION ON ASSETS OTHER THAN OFFICE PRE MISES AND FURNITURE AND FIXTURES 10,99,821 ( I ) 91% OF THE CARVED OUT DEPRECIATION ON FURNITURE AND FIXTURES 10,15,550 TOTAL OPERATING EXPENSES ALLOCABLE TO THE AE BUSINESS SEGMENT 13,14,38,020 OPERATING PROFIT OF AE BUSINESS SEGMENT 2, 18,74,135 PLI (OP/ OC) OF THE AE BUSINESS SEGMENT 16.64% 5. THE LIST OF 22 COMPARABLES ALONG WITH ARITHMETIC MEAN OF PLI WAS WORKED AT 27.98% AND ACCORDINGLY, AN ADJUSTMENT OF RS.1,49,93,378/ - WAS MADE. THE LIST OF COMPARABLES ALONG WITH THE I R PLI AND ALP A DJUSTMENT MADE BY THE TPO IS REPRODUCED HEREUNDER: S.NO. NAME OF THE COMPANY PLI(OP/OC)% 1 M/S ELNET TECHNOLOGIES LTD 138.70 2 M/S INFOSYS TECHNOLOGIES LTD. 45.01 3 M/S NUCLEUS SOFTWARE EXPORTS LTD. 17.01 4 M/S PERSISTENT SYSTEMS LTD 40.5 4 5 M/S SONATA SOFTWARE LTD 35.20 6 M/S TATA CONSULTANCY LTD 36.52 7 M/S DIGICOMP COMPLETE SOLUTIONS LTD. 12.22 8 M/S INDUS NETWORKS LTD. 2.44 9 M/S POWERSOFT GLOBAL SOLUTIONS LTD 11.86 10 M/S TELEDATA MARINE SOLUTIONS LTD. (2.72) 11 M/ S VISHWA VIKAS SERVICES LTD. 65.87 12 M/S WINFOWARE TECHNOLOGIES LTD 17.06 13 M/S COMPUCOM SOFTWARE LTD. (SEGMENTAL) 94.21 14 M/S KALS INFORMATION SYSTEMS LTD 34.41 15 KERALA AYUVERDA LTD. (SEGMENTAL) 13.77 16 SQL STAR INTERNATIONAL LTD (SEGM ENTAL) 0.84 17 MUKTA ARTS LTD. (SEGMENTAL) (13.15) 18 AVANI CLMCON TECHNOLOGIES LTD. 4.09 19 BODH TREE CONSULTING LTD. 34.27 20 NEXTBRICK SOLUTIONS LTD. 19.01 21 SPRY RESOURCES LTD. 33.25 22 AJET INFOTECH LTD. (25.60) ARITHMETIC MEAN 27.98 TESTED PARTY 16.64% 9 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 FROM THE STAGE OF THE DRP, 5 COMPARABLES AS INCLUDED BY THE TPO WERE REJECTED BY THE DRP WHICH INCLUDED , I NVESTOR T ECHNOLOGIES LTD. ; TATA CONSULTANCY SERVICES LTD; COMPUCOM SOFTWARE LTD (SEGMENTAL); MUKTA ARTS LTD (SEGMENTAL); AJEL LTD (FORMERLY CHOKSH INFOTECH LTD) . THE ARITHMETIC MEAN OF THE BALANCE COMPARABLES WAS NOW 23.82% AS AGAINST 27.98% WORKED OUT BY THE TPO AND THE TP ADJUSTMENT WAS REVISED TO RS.95,25,556/ - . 6. BEFORE US, THE LD. COUNSEL MR . VISP I PATEL, AFTER EXPLA INING THE BACKGROUND AND THE FACTS OF THE CASE, SUBMITTED THAT, POST DRP ORDER CERTAIN MISTAKES HAVE BEEN CREPT IN THE WORKING OF THE MARGIN OF CERTAIN COMPARABLES FOR WHICH THE ASSESSEE HAD FILED SEPARATE PETITION FOR RECTIFICATION UNDER SECTION 154 BEFOR E THE AO VIDE PETITION DATED 9 TH JANUARY, 2015 (FILED ON 12 TH JANUARY, 2015). HE SUBMITTED THAT IN THE SAID APPLICATION ASSESSEE HAS SPECIFICALLY POINTED OUT THAT, IN CASE OF TWO COMPARABLES NAMELY ; KALS INFORMATION SYSTEMS LTD . (SEGMENTAL RESULTS) THE ACT UAL PROFIT MARGIN WILL COME DOWN TO 24.43% IN STEAD OF 34.41% ; AND IN CASE KERALA AYURVEDA LIMITED (SEGMENTAL) ACTUAL OPERATING PROFIT WILL COME DOWN TO 2.04% INSTEAD OF 13.77%. IN SUPPORT, HE HAS SHOWN US THE WORKING GIVEN AT PAGE 86 AND 87 OF THE PAPER - BO OK FILED BEFORE US . HE SUBMITTED THAT, IF THE MARGINS OF THESE TWO COMPARABLES ARE RECTIFIED, THEN AGGREGATE ARITHMETIC MARGIN/ MEAN WILL COME DOWN TO 21.06%. HE, THUS, SUBMITTED THAT A DIRECTION SHOULD BE GIVEN TO THE TPO THAT ASSESSEES APPLICATION SHOUL D BE DECIDED EX PEDITIOUSLY OR THIS TRIBUNAL CAN DIRECT THE AO TO EXAMINE THESE FACTS AND GRANT SUITABLE RELIEF. 10 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 7. LD DR AGREED THAT A SUITABLE DIRECTION CAN BE GIVEN, HOWEVER, SUBJECT TO PROPER VERIFICATION OF THE WORKING OF ACCOUNTS OF THESE TWO COMPARA BLES. 8. AFTER CONSIDERING THE AFORESAID SUBMISSION OF THE LD. COUNSEL AND ON PERUSAL OF THE RELEVANT DOCUMENTS HAS POINTED OUT BEFORE US FROM PAGES 81 TO 88, WE FIND THAT IN CASE OF I NV ESTOR TECHNOLOGIES LTD, THE DRP HAS DIRECTED FOR EXCLUSION OF SUCH A COMPARABLE. HOWEVER, THE AO WHILE GIV ING EFFECT TO THE DRPS ORDER HAS NOT TAKEN INTO ACCOUNT THIS ASPECT FOR WHICH THE ASSESSEE HAS MOVED AN APPLICATION UNDER SECTION 154 BEFORE THE AO. ACCORDINGLY, WE DIRECT THE AO TO FOLLOW THE DIRECTIONS OF DRP AND EXC LUDE THE SAID COMPARABLE FROM THE COMPARABILITY LIST . FURTHER, BEFORE US LD. COUNSEL HAS ALSO POINTED OUT TO THE APPROPRIATE WORKING OF THE OPERATING PROFIT MARGIN O F KALS INFORMATION SYSTEMS (SEGMENTAL) AND KERALA AYURVEDA LIMITED, THE REVISED OPERATING P ROFIT OF WHOM HAS BEEN ARRIVED AT 20.43% AND 2.04% RESPECTIVELY, WHICH ARE EVIDENT FROM AT PAGES 86 AND 87 OF THE PAPER - BOOK. THE WORKINGS OF THE CORRECT MARGIN AS GIVEN BY ASSESSEE ARE AS UNDER: - PARTICULARS MARGIN AS PER TPOS ORDER MARGIN AS PER AOS OR DER U/S 143(3) R.W.S. 144C(13) CURRENT MARGIN AS PER ASSESSEES APPLICATION U/S 154 ELNET TECHNOLOGIES LTD 138.70 67.42 67.42 INFOSYS TECHNOLOGIES LTD. 45.01 45.01 REJECTED AS PER DRP NUCLEUS SOFTWARE EXPORTS LTD. 17.01 17.82 17.82 PERSISTENT SYSTEMS LTD 40.54 28.87 28.87 SONATA SOFTWARE LTD 35.20 35.20 35.20 TATA CONSULTANCY LTD 36.52 REJECTED AS PER DRP REJECTED AS PER DRP DIGICOMP COMPLETE SOLUTIONS LTD. 12.22 12.22 12.22 INDUS NETWORKS LTD. 2.44 2.44 2.44 POWERSOFT GL OBAL SOLUTIONS 11 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 LTD 11.86 11.86 11.86 TELEDATA MARINE SOLUTIONS LTD. (2.72) (2.72) (2.72) VISHWA VIKAS SERVICES LTD. 65.87 65.87 65.87 WINFOWARE TECHNOLOGIES LTD 17.06 5.12 5.12 COMPUCOM SOFTWARE LTD. (SEGMENTAL) 94.21 REJECTED AS PER DR P REJECTED AS PER DRP KALS INFORMATION SYSTEMS LTD 34.41 34.41 34.41 KERALA AYUVERDA LTD. (SEGMENTAL) 13.77 13.77 2.04 SQL STAR INTERNATIONAL LTD (SEGMENTAL) 0.84 0.84 0.84 MUKTA ARTS LTD. (SEGMENTAL) (13.15) REJECTED AS PER DRP REJECT ED AS PER DRP AVANI CLMCON TECHNOLOGIES LTD. 4.09 4.09 4.09 BODHTREE CONSULTING LTD. 34.27 34.27 34.27 NEXTBRICK SOLUTIONS LTD. 19.01 19.01 19.01 SPRY RESOURCES LTD. 33.25 33.25 33.25 AJET INFOTECH LTD. (25.60) REJECTED AS PER DRP REJECTED AS PER DRP ARITHMETIC MEAN 27.98 23.82 21.06 ACCORDINGLY, WE DIRECT THE AO TO EXAMINE THE WORKING GIVEN BY THE ASSESSEE AND IF SUCH A WORK IS FOUND TO BE CORRECT, THEN HE SHALL ADOPT THE CORRECT OPERATING PROFITS FOR BOTH THE COMPARABLES AND THEN INCLUDE THE SAME IN THE LIST O F COMPARABLES WITH THE CORRECTED MARGIN TO WORK OUT THE AV ERAGE PROFIT MARGIN TO BENCHMARK THE ALP. 9. AS REGARDS THE INCLUSION AND EXCLUSION OF VARIOUS COMPARABLES AND WHAT SHOULD BE THE MOST APPROPRIATE METHOD (MAM) FOR BEN CHMARKING THE INTERNATIONAL TRANSACTION IN THE PRESENT CASE, THE LD. COUNSEL VISPI PATEL SUBMITTED THAT, SO FAR AS THE OBJECTIONS WITH REGARD TO THE ADOPTING OF MAM, HE HAS NO SERIOUS OBJECTION IF TNMM IS CONSIDERED AS APPROPRIATE METHOD FOR BENCHMARKING T HE TRANSACTION. THUS, SO FAR AS THE APPLICATION OF TNMM AS MAM , THERE IS NO DISPUTE BETWEEN PARTIES AND ACCORDINGLY WE HOLD THAT THE TNMM SHOULD BE ADOPTED AS THE APPROPRIATE METHOD 12 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 FOR BENCHMARKING THE TRANSACTIONS. AS REGARDS COMPARABLES, THE LD. COUNSEL SUBMITTED THAT, THE ASSESSEE IS ONLY CHALLENGING FOUR COMPARABLES NAMELY: - I) M/S PERSISTENT SYSTEMS LTD; II) M/S SONATA SOFTWARE LTD; III) M/S VISHWA VIKAS SERVICES LTD; AND IV) M/S ELNET TECHNOLOGIES LTD REGARDING THESE FOUR COMPARABLES AS SELECTED BY THE TPO , HE SUBMITTED THAT, SAME ARE LIABLE TO BE REJECTED ON VARIOUS COUNTS WHICH ARE MAINLY AS UNDER: I ) PERSISTENT SYSTEMS LIMITED : THE COMPANY IS IN DIFFERENT LINE OF BUSINESS, LIKE OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT, ETC. AND ALSO IT HAS DIFFEREN T SCALE OF EMPLOYEES, LARGE NUMBER ETC. THE COMPANY HAS VERY HIGH TURNOVER I.E. MORE THAN INR 500 CRORES AND HENCE DIFFERENT SCALE OF OPERATION. THE COMPANY CHANGE IN FINANCIAL POSITION DUE TO ITP, THAT IS, EXCEPTIONAL FINANCIAL CIRCUMSTANCES. PERSISTENT S YSTEMS LIMITED RELATED HAVING PARTY TRANSACTION OF 15.23% . II ) SONATA SOFTWARE LIMITED : THIS COMPANY IS IN DIFFERENT LINE OF BUSINESS, LIKE SOFTWARE PRODUCT, IT SPENDS ON R&D, IN TRAVEL VERTICAL ETC. THE COMPANY HAS A VERY HIGH TURNOVER, THAT IS, MORE THAN INR 240 CRORES AND HENCE IT HAS TO ADOPT DIFFERENT SCALE OF OPERATION; III ) VISHWA VIKAS SERVICES LIMITED : THIS COMPANY IS IN A DIFFERENT LINE OF BUSINESS, E.G., IT IS ENGAGED IN ITES AND BPO, IT SPENT ON R&D ETC. IT IS SIGNIFICANTLY HIGH RELATED PARTY TRANSACTIO N I.E. 20.22%; AND IV ) ELNET TECHNOLOGIES LIMITED : THIS COMPANY HAS SUBSTANTIAL INVESTMENT IN LAND AND BUILDING AND 13 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 MARGINAL INVESTMENT IN COMPUTERS, ITS REPAIRS AND MAINTENANCE EXPENSES CONSTITUTE MORE THAN 50% OF TOTAL COST. ITS EMPLOYEE COST TO SALES RATI O IS ONLY 9.63%. THUS IT IS ESTABLISHED THAT THE COMPANIES IS INTO DIFFERENT ACTIVITIES OTHER THAN SOFTWARE DEVELOPMENT. 10. AFTER MAKING HIS BRIEF SUBMISSION FOR THE EXCLUSION OF THE AFORESAID COMPARABLES, MR. PATEL, ALTERNATIVELY CONTENDED THAT, EV EN IF M/S ELNET TECHNOLOGIES LTD. IS REMOVED FROM THE COMPARABILITY LIST, THEN ALSO THE ASSESSEES MARGIN WILL FALL WITH 5% RANGE AND THEN ADJUDICATION OF THE OTHER COMPARABLES WILL NOT BE NECESSARY AND WILL BECOME PURELY ACADEMIC. 1 1 . REGARDING ELNET TECHNOLOGIES LTD., HE SUBMITTED THAT, THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE, WHICH IS EVIDENT FROM THE FACT THAT IT IS IN A DIFFERENT LINE OF BUSINESS ALTOGETHER , THAT IS, PROVIDING INFRASTRUCTURE TO SOFTWARE AND BPO INDUSTRIES . I N SUPPO RT , HE DREW OUR ATTENTION TO THE ANNUAL REPORT OF THE COMPANY PLACED IN THE PAPER BOOK FROM PAGES 283 TO 339. THAT APART, HE POINTED OUT THAT THIS COMPANY HAS MADE SUBSTANTIAL INVESTMENTS IN LAND AND BUILDING WHICH IS EVIDENT FROM THE SCHEDUL E OF FIXED ASS ETS AND THERE IS VERY MARGINAL INVESTMENT IN COMPUTERS. FURTHER, THE EMPLOYEE COST TO SALE S RATIO IS ONLY 9.63% AS CONTRAST TO LINE OF ASSESSEES BUSINESS WHERE THE EMPLOYEE COSTS ARE FAR HIGHER , BECAUSE FOR ITS OPERATIONS IT REQUIRES HIGHLY QUALIFIED AND SKILLED HUMAN RESOURCES FOR SOFTWARE DEVELOPMENT SERVICES AND SUPPORT SERVICES. THUS, ON FAR 14 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 ANALYSIS, THIS COMPARABLE CANNOT BE BROUGHT INTO THE BASKET OF COMPARABILITY LIST. 1 2 . ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER OF THE TPO AND THE DRP. 1 3 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER AS WELL AS MATERIAL ON RECORD, WE FIND THAT BEFORE THE TPO, THE ASSESSEE HAD OBJECTED FOR THIS COMPARABLE ON THE GROUND THAT IT HAS A HIGH VALUE RELATED PARTY TRANSACTIONS AND HAS ABNORMAL HIGH MARGINS WHICH HAS BEEN REJECTED BY THE TPO. HOWEVER, AS POINTED OUT BY THE LD. COUNSEL BEFORE US AND ALSO ON PERUSAL OF THE ANNUAL REPORT OF E L NET TECHNOLOGIES LTD, WE FIND THAT THIS COMPANY IS INTO PROVIDIN G INFRASTRUCTURE TO SOFTWARE COMPANIES AND BUSINESS PROCESS OUTSOURCING INDUSTRIES [BPOS]. THIS COMPANY IS NOT INTO SOFTWARE DEVELOPMENT SERVICES OR SOFTWARE SUPPORT SERVICES, UNLIKE ASSESSEE, WHICH IS A CAPTIVE SERVICE PROVIDER OPERATING AS CUSTOMIZED SOF TWARE DEVELOPMENT INDUSTRY PROVIDING SUPPORT SERVICES IN VARIOUS AREAS INCLUDING SUPPORT TECHNOLOGY, CONSULTANCY SERVICES. THUS, AT THE THRESHOLD, BOTH THE COMPANIES DIFFER ON FUNCTIONAL ANALYSIS ITSELF. APART FROM THAT, IT IS BORNE OUT FROM THE ANNUAL REP ORT THAT THIS COMPANY HAS MADE SUBSTANTIAL INVESTMENT IN LAND AND BUILDING INSTEAD OF IN THE EQUIPMENTS FOR PROVIDING SOFTWARE DEVELOPMENT SERVICES. THE EMPLOYEE COST OF THE SALE RATIO IS ALSO QUITE MARGINAL WHICH ALSO INDICATES THE FACT THAT THE FUNCTION OF THIS COMPA NY IS ENTIRELY DIFFERENT THEN THE COMPANY PROVIDING SOFTWARE DEVELOPMENT SERVICES WHERE HIGHLY TECHNICAL HUMAN RESOURCE S ARE REQUIRED. TH U S ON FAR ANALYSIS, THIS COMPARABLE CANNOT BE 15 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 HELD TO BE A COMPARABLE COMPANY TO BENCHMARK THE ASSESSEES OPERATING PROFIT MARGIN . ACCORDINGLY, WE DIRECT THE AO/ TPO TO EXCLUDE THIS COMPARABLE FROM THE COMPARABILITY LIST . AS SUBMITTED BY THE LD. COUNSEL, IF ELNET TECHNOLOGIES LTD IS REMOVED THEN ASSESSEES PROFIT MARGIN WILL FALL WITHIN THE RANGE OF 5%, HENC E, WE ARE NOT ADJUDICATING THE OTHER COMPARABLES AND ARE BEING TREATED AS ACADEMIC AND DIRECT THE TPO/AO TO EXAMINE THE FINAL AVERAGE PROFIT MEAN AND GIVE THE BENEFIT OF 5% FROM ARMS LENGTH PRICE . 1 4 . IN GROUND NO. 14, THE ASSESSEE HAS CHALLENGED TH E DISALLOWANCE OF RS.48,584/ - ON UPS BY TREATING IT AS PLANT AND MACHINERY ELIGIBLE FOR 15% RATE OF DEPRECATION AS AGAINST THE CLAIM OF 60% MADE BY THE ASSESSEE ON THE GROUND THAT, THE SAME HAS TO BE TREATED AS PART OF THE COMPUTER. 1 5 . BEFORE THE AO, I T WAS SUBMITTED THAT AS A SOFTWARE DEVELOPMENT SERVICE PROVIDER, COMPUTER SYSTEM I S AN ESSENTIAL ASSET OF THE COMPANY AND THE UPS IS INEVITABLE PART OF THE COMPUTERS , BECAUSE THE ASSESSEES BUSINESS IS LOCATED AT VASHI WHERE THERE IS ACUTE POWER FAILURE PR OBLEM AND FUNCTIONING /OPERATION OF ASSESSEES BUSINESS GETS EFFECTED BY INTERRUPTED POWER FAILURES AND FLUCTUATIONS , THEREFORE WITHOUT THE UPS SYSTEMS , COMPUTER CANNOT OPERATE SMOOTHLY AND UNINTERRUPTEDLY. IN THIS REGARD DETAILED SUBMISSIONS WERE MADE BEFO RE THE AO VIDE LETTER DATED 17.12.2013. THE DRP FOLLOWING THE EARLIER ORDER FOR AY 2009 - 10 PASSED BY THE DRP HAS CONFIRMED THE DISALLOWANCE AND DIRECTED THE AO TO ALLOW 15% DEPRECIATION. 16 2 V2 TECH VENTURES PVT LTD. ITA 1103 /MUM/ 2015 1 6 . BEFORE US, NOTHING HAS BEEN BROUGHT ON RECORD TO THE ON THE FATE OF SUCH A FINDING GIVEN BY THE DRP IN THE AY 2009 - 10. ONCE IN THE EARLIER YEAR, DEPRECIATION HAS BEEN ALLOWED @ 15% NOT 60%, THEN NO DIFFERENT STAND CAN BE TAKEN IN THIS YEAR , BECAUSE DEPRECIATION HAS TO BE ALLOWED ON WDV . ACCORDINGLY, GROUND NO.14 AS TAK EN BY THE ASSESSEE IS TREATED AS DISMISSED. 1 7 . IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 T H AUGUST, 2016 . SD/ - SD/ - ( ) ( ) ( R C SHARMA ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DA TE: 24 TH AUGUST, 2016. / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3 ) THE DRP II /CONCERNED___ , MUMBAI. 4 ) THE CIT /DIT - CONCERNED___ , MUMBAI 5 ) , , / THE D.R. K BENCH, MUMBAI. 6 ) \ COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS