QLogic (India) Private Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 215/PUN/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9337 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 03-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: DANESH BAFNA
• Keywords: Transfer pricing; International transaction; Question of law; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUNE , , , BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO . 215 /PUN/201 5 / ASSESSMENT YEAR : 20 10 - 11 QLOGIC (INDIA) PRIVATE LIMITED, B - 301 TO B - 306, MCCIA TRADE TOWERS, SENAPATI BAPAT ROAD, PUNE 411016 PAN : AAACQ1664K ....... / APPELLANT / V S. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5, PUNE / RESPONDENT ASSESSEE BY : SHRI DANESH BAFNA REVENUE BY : S HRI AVADHESH KUMAR / DATE OF HEARING : 2 2 - 0 5 - 2017 / DATE OF PRONOUNCEMENT : 21 - 0 6 - 2017 / ORDER PER VIKAS AWASTHY, JM : TH IS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 30 - 01 - 2015 PASSED U/S. 143(3) R.W.S. 144C(13) O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ). 2 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORDS ARE: THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF QLOGIC CORP., USA. THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING SOFTWARE DESIGN, DEVELOPMENT, ENGINEERING AND TESTING SERVICES TO QLOGIC CORP. FROM ITS DEVELOPMENT CENTRE LOCATED AT PUNE. THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER WITH AN ASSURED RETURN ON ITS COSTS. DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL THE ASSESSEE ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS. T HE TRANSACTIONS WHICH ARE SUBJECT MATTER OF APPEAL IS P ROVI SION OF SOFTWARE SE RVICES . T HE TOTAL VALUE OF SUCH TRANSACTION S IS RS.29,77,67,730/ - . TO BENCHMARK THE TRANSACTION S THE ASSESSEE APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. THE ASSESSEE SELECTED 16 COMPANIES AS COMPAR ABLES. THE ASSESSEE PURPORTEDLY PROVIDED SOFTWARE SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) WITH MARKUP OF 12.44% ON COST I.E. (OP / TC). THE ASSESSEE ADOPTED MULTIPLE YEAR DATA FOR COMPUTING OP / TC OF COMPARABLES AT 13.18%. A REFERENCE WAS MADE TO TPO U/S. 92CA(1) OF THE ACT TO DETERMINE ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY ASSESSEE WITH ITS AES. THE TRANSFER PRICING OFFICER (TPO) APPLIED SINGLE YEAR MARGINS AND INTRODUCED SOME ADDITIONAL FILTERS. THE TPO R EJECTED 11 COMPARABLES OUT OF 16 SELECTED BY THE ASSESSEE AND INTRODUCED 6 NEW COMPARABLE COMPANIES TO ARRIVE AT THE FINAL SET OF 11 COMPARABLES HAVING AN ARITHMETIC MEAN MARGIN OF 23.86%. THE TPO MADE ADJUSTMENT OF RS.3,13,41,197/ - . AGGRIEVED BY THE O RDER DATED 20 - 01 - 2014 PASSED BY TPO, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP INTER ALIA CHALLENGING THE EXCLUSION/INCLUSION OF CERTAIN COMPANIES IN THE FINAL SET OF COMPARABLES, SEEKING DIRECTION TO CONSIDER WORKING CAPITAL ADJUSTMENT 3 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 AS COMPUTED BY T HE ASSESSEE AND TO ADOPT CORRECT MARGIN OF COMPARABLE COMPANIES AFTER PROVIDING WORKING CAPITAL ADJUSTMENT. THE DRP VIDE DIRECTION DATED 28 - 11 - 2014 PARTLY ALLOWED THE OBJECTIONS RAISED BY THE ASSESSEE. CONSEQUENT TO THE DIRECTION S OF DRP, THE TP ADJUSTME NT WAS REDUCED TO RS.2,08,09,302/ - . STILL AGGRIEVED , THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3. THE ASSESSEE HAS RAISED 5 GROUNDS IN THE APPEAL. THE LD. AR OF THE ASSESSEE STATED AT THE BAR THAT HE IS NOT PRESSING GROUND NOS. 1, 2(I), 2(II), 2( IV), 3 AND 4. THUS, THE GROUNDS LEFT FOR ADJUDICATION BEFORE THE TRIBUNAL ARE 2(III) AND 5. THE SAME READ AS UNDER : 2 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO/DRP ERRED IN MODIFYING THE BENCHMARKING ANALYSIS, AS CONDUCTED BY THE APPELLANT USING TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS PERTAINING TO PROVI SION OF SOFTWARE SERVICES TO THE AE, AND THEREBY MODIFYING THE SET OF COMPARABLES. IN DOING SO, THE LD. AO/DRP SPECIFICALLY ERRED IN: (III). INCLUDING COMPANIES WHICH ARE NOT FUNCTIONALLY COMPARABLE TO THE SOFTWARE SERVICES RENDERED BY THE ASSESSEE IN FI NAL SET OF COMPARABLES (IDENTIFIED BASED ON THE FRESH SEARCH/ANALYSIS CONDUCTED BY THE LD. TPO). 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN ERRONEOUSLY COMPUTING THE OPERATING MARGINS OF THE COMPARABLES AND WORKING CAPIT AL ADJUSTMENT, RESULTING IN ERROR IN COMPUTING THE TP ADJUSTMENT OF THE ASSESSEE. 4. SHRI DANESH BAFNA APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT IN GROUND NO. 2(III) THE ASSESSEE IS SEEKING EXCLUSION OF KALS INFORMATION SYSTEMS LTD. (HEREINAFTER REFERRED TO AS KALS) AND THIRDWARE SOLUTIONS LTD. (HEREINAFTER REFERRED TO AS THIRDWARE) FROM THE LIST OF COMPARABLES. THE ASSESSEE IS A SOFTWARE SERVICE COMPANY WHEREAS KALS IS SOFTWARE PRODUCT COMPANY. THE SAID COMPANY IS 4 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 FUNCTIONALLY DIFFERENT FROM THE ASSESSEE , THEREFORE, CANNOT BE CONSIDERED AS COMPARABLE. THE LD. AR SUBMITTED THAT THE TPO HAS ERRONEOUSLY INCLUDED KALS IN THE SET OF COMPARABLE BY OBSERVING THAT THE TPO IN ASSESSEES CASE F OR ASSESSMENT YEARS 2008 - 09, 2009 - 10 AND 2010 - 11 HAS INCLUDED KALS. THE OBSERVATIONS OF THE TPO ARE AGAINST THE FACTS . THE FIRST YEAR OF OPERATION OF THE ASSESSEE WAS 2009 - 10 AND KALS WAS NOT INCLUDED IN THE FINAL SET OF COMPARABLES IN THE SAID ASSESSMEN T YEAR. THE LD. AR SUBMITTED THAT AS PER INFORMATION AVAILABLE IN PUBLIC DOMAIN , KALS IS DEVELOPING SOFTWARE PRODUCTS SUCH AS SHINE ERP APPLICATION, VIRTUAL INSURANCE, DOCUFLO DMS AND L A - VISION. TO SUPPORT HIS SUBMISSIONS THAT KALS IS ENGAGED IN DEVE LOPING AND SELLING OF SOFTWARE PRODUCTS , T HE LD. AR REFERRED TO THE BALANCE SHEET OF THE COMPANY AS ON 31 - 03 - 2010 AT PAGE 517 OF THE PAPER BOOK TO SHOW THAT C URRENT A SSETS OF THE COMPANY INCLUDE I NVENTORY TO THE TUNE OF RS.60,47,977/ - . THE LD. AR CONTENDE D THAT ALTHOUGH THE TPO HAD INCLUDED KALS ON THE BASIS OF APPLICATION SOFTWARE SEGMENT , H OWEVER, A PERUSAL OF FINANCIAL RESULTS END ING ON 31 - 03 - 2010 AT PAGE 5 2 3 OF THE PAPER BOOK REVEAL THAT NO SEGMENTAL INFORMATION IS AVAILABLE BETWEEN SOFTWARE DEVELOPMEN T SERVICES AND SOFTWARE PRODUCT D EVELOPMENT ACTIVITIES OF THE SAID COMPANY. TO FURTHER STRENGTHEN HIS ARGUMENT S THAT KALS BEING A PRODUCT COMPANY IS NOT A GOOD COMPARABLE WITH A COMPANY ENGAGED IN PURE SOFTWARE DEVELOPMENT , T HE LD. AR PLACED RELIANCE ON T HE FOLLOWING DECISIONS : I . COMMISSIONER OF INCOME TAX VS. PTC SOFTWARE (I) PVT. LTD. IN INCOME TAX APPEAL NO. 732 OF 2014 DECIDED ON 26 TH SEPTEMBER, 2016 ( HONBLE BOMBAY HIGH COURT ); II . APPROVA SYSTEMS PVT. LTD. IN ITA NO. 1921/PUN/2014 FOR THE ASSESSMENT YEAR 2010 - 11 DECIDED ON 25 - 01 - 2017 (PUNE - TRIB.). 5 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 4.1 IN RESPECT OF THIRDWARE , THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE SAID COMPANY IS HAVING DIVERSIFIED SOURCE OF INCOME. THE COMPANY IS ENGAGED IN DEVELOPING SOFTWARE PRODUCTS WHICH ARE LICENSED TO THE C USTOMERS. IT IS ALSO ENGAGED IN TRADING OF SOFTWARE LICENSES AND CONSULTANCY SERVICES. IN ADDITION TO SOFTWARE DEVELOPMENT SERVICES THIRDWARE IS HAVING INCOME FROM SUBSCRIPTION. THE LD. AR REFERRED TO THE ANNUAL R EPORT OF THIRDWARE FOR THE F INANCIAL Y EAR 2009 - 10 AT PAGE 529 OF THE PAPER BOOK. THE LD. AR POINTED THAT A PERUSAL OF FINANCIAL RESULTS WOULD CLEARLY INDICATE THAT THE SAID COMPANY IS HAVING INCOME FROM VARIOUS SOURCES VIZ. EXPORT FROM SEZ UNITS, EXPORT FROM STPI UNIT, REVENUE FROM SUBSCRIPTI ON, SALE OF LICENCE AND SOFTWARE SERVICES. THE LD. AR FURTHER POINTED THAT THIRDWARE IS ALSO OUTSOURCING SUBSTANTIAL PART OF ITS WORK TO THIRD PARTIES. THEREFORE, THE BUSINESS MODEL OF THIRDWARE AND THE ASSESSEE IS ENTIRELY DIFFERENT. REFERRING TO THE F INANCIAL RESULTS OF THIRDWARE , THE LD. AR FURTHER SUBMITTED THAT NO SEGMENTAL INFORMATION IS AVAILABLE WITH RESPECT TO SOFTWARE SERVICES AND SOFTWARE PRODUCT SERVICES OF THE SAID COMPANY. THE LD. AR CONTENDED THAT IN THE ABSENCE OF SEGMENTAL FINANCIAL RES ULTS AND DIFFERENT BUSINESS MODEL , THIRDWARE SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. TO SUPPORT OF HIS CONTENTIONS , THE LD. AR PLACED RELIANCE ON THE FOLLOWING DECISIONS : I . APPROVA SYSTEMS PVT. LTD. IN ITA NO. 1921/PUN/2014 FOR THE ASSESSMEN T YEAR 2010 - 11 DECIDED ON 25 - 01 - 2017 (PUNE - TRIB.); II . ION TRADING INDIA (P.) LTD. VS. INCOME TAX OFFICER, 70 TAXMANN.COM 349 (DELHI - TRIB.); III . I - MANY SOFTWARE PVT. LTD. VS. ACIT, IN ITA(TP) NO. 222/AHD/2015 FOR ASSESSMENT YEAR 2010 - 11 DECIDED ON 27 - 10 - 2016. 6 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 4.2 IN RESPECT OF GROUND NO. 5 RAISED IN THE APPEAL , THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER HAS ERRED IN NOT COMPUTING OPERATING MARGINS AND PROVIDING WORKING CAPITAL ADJUSTMENT IN ACCORDANCE WITH THE DIRECTIONS OF DRP. THE LD. AR SUBMITTED THAT THE DRP IN PARA 2.6.3 HAD DIRECTED THE ASSESSING OFFICER TO COMPUTE OPERATING MARGIN OF COMPARABLE COMPANIES AS PER SAFE HARBOUR RULES. THE ASSESSING OFFICER WHILE COMPUTING OPERATING MARGIN OF CERTAIN COMPARABLE COMPANIES HAS NOT APPLIED SAFE HARBOUR RULES. THE DRP IN PARA 2.5.3 HAD DIRECTED THE ASSESSING OFFICER TO COMPUTE OPERATING MARGIN OF COMPARABLE COMPANIES AFTER CONSIDERING CORRECT WORKING CAPITAL ADJUSTMENT AS PER OECD TRANSFER PRICING GUIDELINES. THE ASSESSING OFFICER HAS COMMITTED MISTAKES WHILE COMPUTING WORKING CAPITAL/COST RATIO OF THE ASSESSEE. THE ASSESSING OFFICER HAS FAILED TO CONSIDER THE AMOUNTS UNDER INTER COMPANY PAYABLES AND OTHER LIABILITIES AS SHOWN IN SCHEDULE 9 CURRENT LIABILITIES IN THE FINANCIAL ACCOUNTS OF THE ASSESSEE . THE ASSESSING OFFICER HAS FURTHER ERRED IN NOT CONSIDERING THE CORRECT OPERATING MARGIN OF THE ASSESSEE COMPANY. THE ASSESSING OFFICER HAS COMPUTED OPERATING MARGIN AT 12.08% AS AGAINST 12.13% COMPUTED BY THE ASSESSEE. THE LD. AR SUBMITTED THAT THE AS SESSING OFFICER MAY BE DIRECTED TO FOLLOW THE DIRECTIONS OF DRP WHILE MAKING AFORESAID COMPUTATIONS . THE LD. AR WHILE CONCLUDING HIS SUBMISSIONS CONTENDED THAT IF KALS AND THIRDWARE ARE EXCLUDED FROM THE FINAL LIST OF COMPARABLE , THE ARITHMETIC MEAN OF THE COMPARABLES WOULD BE 14.51% . A FTER APPLYING THE SAID MEAN , T HE ASSESSEE S TRANSFER PRICE WOULD F IT WITHIN 5% RANGE AS PROVIDED UNDER THE PROVISIONS OF SECTION 92C(2) OF THE ACT. 7 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 5. ON THE OTHER HAND SHRI AVADHESH KUMAR RE PRESENTING THE DEPARTMENT VEHEMENTLY SUPPORTED THE FINDINGS OF DRP . THE LD. DR PRAYED FOR REJECTING THE SUBMISSIONS OF THE ASSESSEE AND UPHOLDING THE ASSESSMENT ORDER WITHOUT ANY MODIFICATION. 6. W E HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF RIVAL SIDES AND HAVE EXAMINED THE DOCUMENTS REFERRED TO BY THE LD. AR AND HAVE ALSO CONSIDERED VARIOUS DECISIONS RELIED UPON BY THE LD. AR OF THE ASSESSEE. THE ASSESSEE IS IN APPEAL PRIMARILY SEE KING EXCLUSION OF TWO COMPANIES I.E. KALS AND THIRDWARE FROM THE FINAL LIST OF COMPARABLES. THE FINAL SET OF COMPARABLE COMPANIES AND ADJUSTED OPERATING MARGIN ADOPTED BY THE DRP ARE AS UNDER : SR. NO. NAME OF THE COMPARABLE COMPANY ADJUSTED OPERATING MA RGIN AS PER FINAL ASSESSMENT ORDER 1 GOLDSTONE TECHNOLOGIES LTD. 12.32% 2 LGS GLOBAL LTD. 6.05% 3 LARSEN & TOUBRO INFOTECH LTD. 27.50% 4 MINDTREE LTD. 13.88% 5 PERSISTENT SYSTEMS LTD. 26.36% 6 AKSHAY SOFTWARE LTD. ( - )2.43% 7 THINKSOFT GLOBAL SERVICES LTD. 17.67% 8 ACROPETAL TECHNOLOGIES LTD. (IT SERVICES SEGMENT) 33.92% 9 KALS INFORMATION SYSTEMS LTD. (APPLICATION SOFTWARE SEGMENT) 34.41% 10 THIRDWARE SOLUTIONS LTD. 30.04% ARITHMETIC MEAN 19.9% 6. THE ASSESSEE COMPANY IS PROVIDING CAPTIVE IT DEVELOPMENT AND ENGINEERING SERVICES, QUALITY ASSURANCE SERVICES AND IT SUPPORT TO ITS HOLDING COMPANY QLOGIC CORP. THE CONTENTION OF THE ASSESSEE IS THAT 8 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 KALS IS ENGAGED IN PRODUCT DEVELOPMENT , T HEREFORE, IT IS FUNCTIONALLY DIFFERENT . A PERUSAL OF FINANCIAL RESULTS OF THE KALS SHOW THAT SEGMENTAL INFORMATION IS NOT AVAILABLE VIS - - VIS SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT ACTIVITY . THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF PTC SOFTWARE (INDIA) PVT. LTD. VS . ACIT IN ITA NO. 1605/PN/2011 FOR ASSESSMENT YEAR 2007 - 08 DECIDED ON 30 - 04 - 2013 HAD EXCLUDED KALS FROM THE LIST OF COMPARABLES ON THE GROUND THAT THE SAID COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THE COMPANY ENGAGED IN PROVIDING IT SERVICES AND ITES . THE FINDINGS OF THE TRIBUNAL ON THIS ISSUE WERE UPHELD BY THE HONBLE BOMBAY HIGH COURT IN AP PEAL FILED BY THE REVENUE TITLED COMMISSIONER OF INCOME TAX VS. PTC SOFTWARE (I) PVT. LTD. (SUPRA). THE RELEVANT EXTRACT OF THE FINDINGS OF HONBLE HIGH COURT ARE AS UNDER : 10. RE. QUESTION (II) : - (A) KALS INFORMATION SOLUTIONS LTD. (KALS LTD.) AND HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. (HELIOS & MATHESON LTD.) WERE INCLUDED BY THE TPO IN HIS COMPARABILITY ANALYSIS. THE GRIEVANCE OF THE RESPONDENT ASSESSEE BEFORE THE TRIBUNAL WAS THAT BOTH THE FUNCTIONALLY DIFFERENT FROM THE RESPONDENT ASSESSEE AND, THEREFORE, COULD NOT BE USED AS COMPARABLES. THE RESPONDENT ASSESSEE POINTED OUT THAT KALS LTD. AND HELIOS & MATHESON LTD. ARE ENGAGED IN THE BUSINESS OF SELLING OF SOFTWARE PRODUCTS WHILE THE RESPONDENT ASSESSEE RENDERS SOFTWARE SERVICES TO ITS HOLDING COMPANY. (B) THE TRIBUNAL IN THE IMPUGNED ORDER RECORDS THAT FOR THE PRECEDING ASSESSMENT YEAR I.E. A.Y. 2006 - 07, THE TPO HAD FOUND THAT KALS LTD. AND H ELIOS & MATHESON LTD. WERE FUNCTIONALLY NOT COMPARABLE WITH THE RESPONDENT ASSESSEE. IN THE SUBJECT ASSESSMENT YEAR ALSO, ON THE BASIS OF ANNUAL REPORT, IT WAS NOTED THAT THE KALS WAS ENGAGED IN SELLING OF SOFTWARE PRODUCTS WHICH IS DIFFERENT FROM THE ACT IVITY UNDERTAKEN BY THE RESPONDENT ASSESSEE, NAMELY, RENDERING OF SOFTWARE SERVICE TO ITS HOLDING COMPANY. FURTHER, THE IMPUGNED ORDER ALSO RECORDS THAT NO ATTEMPT WAS EVEN MADE BY THE REVENUE BEFORE IT TO BRING ON RECORD ANY CHANGE IN THE NATURE OF ACTIV ITIES CARRIED OUT BY KALS LTD. AND HELIOS & MATHESON LTD. IN THE SUBJECT ASSESSMENT YEAR, MAKING THEM FUNCTIONALLY 9 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 COMPARABLE TO THE RESPONDENT ASSESSEE. IN THE AFORESAID FACTS, THE TRIBUNAL RENDERED A FINDING OF FACT THAT KALS LTD. AND HELIOS & MATHESON LTD. ARE NOT COMPARABLE WITH THE RESPONDENT ASSESSEE. (C) EVEN BEFORE US, NO SUBMISSIONS WERE ADVANCED JUSTIFYING THE ORDER OF THE ASSESSING OFFICER THAT THE SERVICE RENDERED BY KALS LTD. AND HELIOS & MATHESON LTD. ARE COMPARABLE FOR THE SUBJECT ASSESSMEN T YEAR WITH THAT OF THE RESPONDENT ASSESSEE. (D) IN THE ABOVE VIEW, AS THE FINDINGS OF THE TRIBUNAL BEING ONE OF THE FACT WHICH HAS NOT BEEN SHOWN TO BE PERVERSE, THE QUESTION AS PROPOSED DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THUS, NOT E NTERTAINED. 7. THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF APPROVA SYSTEMS PVT. LTD. VS. DCIT (SUPRA) BY FOLLOWING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. PTC SOFTWARE (I) PVT. LTD. (SUPRA) EXCLUDED KALS FROM THE LIST OF COMPARABLES BEING FUNCTIONALLY INCOMPARABLE WITH A COMPANY ENGAGED IN SOFTWARE SERVICES. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL IN THE CASE OF APPROVA SYSTEMS PVT. LTD. VS. DCIT (SUPRA) ARE AS UNDER : 13. NOW, COM ING TO THE SECOND CONCERN I.E. KALS INFORMATION SYSTEM LTD. VIS - - VIS OTHER CONCERN, THE CIT(A) IN ASSESSMENT YEAR 2009 - 10 HAD EXCLUDED THE SAID CONCERN AND THE TRIBUNAL FOLLOWING SERIES OF DECISIONS INCLUDING BINDVIEW INDIA PVT. LTD. VS. DCIT (2013) 34 TA XMANN.COM 164 HELD THAT THE SAID CONCERN WAS FUNCTIONALLY DIFFERENT AS IT WAS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS AND ITS SALE AND WAS NOT COMPARABLE TO THE SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. THE HONBLE BOMBAY HIGH COURT IN CIT VS. PTC SOFTWARE (I) PVT. LTD. IN INCOME TAX APPEAL NO.732 OF 2014, VIDE JUDGMENT DATED 26.09.2016 HAVE ALSO OBSERVED THAT KALS INFORMATION SYSTEM LTD. IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE WHICH IS RENDERING SOFTWARE SERVICES TO ITS HOLDIN G COMPANY SINCE KALS INFORMATION SYSTEM LTD. WAS ENGAGED IN SELLING OF SOFTWARE PRODUCTS. FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT KALS INFORMATION SYSTEM LTD. IS NOT TO BE INCLUDED IN THE FINAL SET OF COMPARABLES IN ORDER TO BENCHMARK THE INT ERNATIONAL TRANSACTIONS. THE ASSESSING OFFICER IS ACCORDINGLY, DIRECTED TO RE - COMPUTE THE MARGINS OF FINAL SET OF COMPARABLES. THE GROUNDS OF 10 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 APPEAL NO.7 AND 9 ARE THUS, ALLOWED. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, PARTLY ALLOWED. T HUS, IN VIEW OF THE FACTS OF THE CASE AND THE DECISIONS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED OPINION THAT KALS BEING FUNCTIONALLY DIFFERENT FROM THE ASSESSEE SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. 8. THE ASSESSEE IS SEEKING EXCLUSION OF THIRDWARE FROM THE LIST OF COMPARABLES ON ACCOUNT OF FUNCTIONAL DIFFERENCE. THE LD. AR OF THE ASSESSEE HAS CONTENDED THAT THE SAID COMPANY IS ENGAGED IN DEVELOPING SOFTWARE PRODUCTS, TRADING OF SOFTWARE LICENSES AND CONSULTANCY SERVICES, HAS INCOME FR OM SUBSCRIPTION AND IS ALSO ENGAGED IN SOFTWARE DEVELOPMENT SERVICES. A PERUSAL OF THE ANNUAL REPORT OF THE SAID COMPANY FOR FINANCIAL YEAR 2009 - 10 PLACED ON RECORD IN THE PAPER BOOK SHOW THAT THE SAID COMPANY HAS DEVELOPED SOFTWARE PAPA. THE FINANCIAL RESULTS OF THE SAID COMPANY FURTHER SHOW THAT THE COMPANY IS HAVING INCOME FROM SALE OF LICENSES, REVENUE FROM SUBSCRIPTION , ETC. IT HAS ALSO BEEN POINTED THAT THE THIRDWARE HAS OUTSOURCED SUBSTANTIAL PORTION OF WORK TO THIRD PARTIES AND HAS PAID RS. 11.4 2 CRORES TOWARDS OUTSOURCING CHARGES DURING THE FINANCIAL YEAR 2009 - 10. THE OUTSOURCING CHARGES PAID BY THE SAID COMPANY AMOUNTS TO 27% OF THE TOTAL DIRECT COST. THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF APPROVA SYSTEMS PVT. LTD. VS. DCIT (SUP RA) EXCLUDED THIRDWARE FROM THE FINAL LIST OF COMPARABLES IN ASSESSMENT YEAR 2010 - 11 ON THE GROUND THAT THE SAID COMPANY IS SUPER PROFIT EARNING COMPANY AND IS ENGAGED IN THE BUSINESS OF SOFTWARE LICENSES AND TRADING OF IMPLEMENTATION ACTIVITIES. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL ON THIS ISSUE ARE AS UNDER : 11 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 11. WE FIND THAT THE TRIBUNAL NOTED THAT THE TPO HAD SELECTED KALS INFORMATION SYSTEM LTD. AND THIRDWARE SOLUTION LTD. AS BEING COMPARABLE, WHEREAS THE CASE OF ASSESSEE WAS THAT BOT H THE SAID CONCERNS WERE FUNCTIONALLY DIFFERENT. WITH REGARD TO KALS INFORMATION SYSTEM LTD., IT WAS POINTED OUT THAT THE SAID COMPANY WAS EARNING INCOME FROM SALE OF APPLICATION SOFTWARE AND SEGMENTAL INFORMATION WITH RESPECT TO SOFTWARE SERVICES WERE AV AILABLE. IN RESPECT OF THIRDWARE SOLUTION LTD., IT WAS POINTED OUT THAT THE SAID CONCERN WAS ENGAGED IN SOFTWARE DEVELOPMENT, TRADING OF SOFTWARE LICENCES AND TRAINING IMPLEMENTATION ACTIVITIES APART FROM SOFTWARE DEVELOPMENT. ANOTHER CONTENTION WAS RAIS ED THAT THIRDWARE SOLUTION LTD. WAS SUPER PROFIT EARNING COMPANY AND WAS ALSO ENGAGED IN THE BUSINESS OF SOFTWARE LICENCES AND TRADING OF IMPLEMENTATION ACTIVITIES. THE TRIBUNAL TAKING NOTE OF THE SPECIAL BENCH DECISION IN THE CASE OF MAERSK GLOBAL CENTRE S (INDIA) PVT. LTD. VS. ACIT VIDE ITA NO.7466/M/2012 IN RESPECT OF SUPER PROFITS AND INCLUSION OF CONCERN THIRDWARE SOLUTION LTD., HELD THAT THE SAID CONCERN WAS NOT COMPARABLE AND OBSERVED AS UNDER: - 29. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES. WE FIND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) PVT. LTD. VS. ACIT VIDE ITA NO.7466/MUM/2012 HAS OBSERVED AS UNDER : 99. THE QUESTION NO. 2 REFERRED TO THIS SPECIAL BENCH IS AS TO WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, COMPANIES EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD BE INCLUDED IN THE LIST OF COMPARABLE CASES FOR THE PURPOSE OF DETERMINING ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. AS ALREADY OBSERVED, THE ISSUE INVOLVED IN THIS QUESTION HAS BECOME INFRUCTUOUS IN SO FAR AS THE CASE OF THE ASSESSEE BEFORE THE SPECIAL BENCH IS CONCERNED AND THE SAME THEREFORE NO MORE SURVIVES FOR CONSIDERATION IN THE PRESENT CASE. IN GENERALITY, WE ARE OF THE VIEW THAT THE ANSWER TO THIS QUESTI ON WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE INASMUCH AS POTENTIAL COMPARABLE EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD TRIGGER FURTHER INVESTIGATION IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. SUCH INVESTIGATION SH OULD BE TO ASCERTAIN AS TO WHETHER EARNING OF HIGH PROFIT REFLECTS A NORMAL BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITIONS PREVAILING IN THE RELEVANT YEAR. THE PROFIT MARGIN EARNED BY SUCH ENTITY IN 12 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 THE IMMEDIATELY PRECEDING YEA R/S MAY ALSO BE TAKEN INTO CONSIDERATION TO FIND OUT WHETHER THE HIGH PROFIT MARGIN REPRESENTS THE NORMAL BUSINESS TREND. THE FAR ANALYSIS IN SUCH CASE MAY BE REVIEWED TO ENSURE THAT THE POTENTIAL COMPARABLE EARNING HIGH PROFIT SATISFIES THE COMPARABILITY CONDITIONS. IF IT IS FOUND ON SUCH INVESTIGATION THAT THE HIGH MARGIN PROFIT MAKING COMPANY DOES NOT SATISFY THE COMPARABILITY ANALYSIS AND OR THE HIGH PROFIT MARGIN EARNED BY IT DOES NOT REFLECT THE NORMAL BUSINESS CONDITION, WE ARE OF THE VIEW THAT THE H IGH PROFIT MARGIN MAKING ENTITY SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. OTHERWISE, THE ENTITY SATISFYING THE COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT MARGIN REFLECTING NORMAL BUSINESS CONDITION SHOULD NOT BE REJECTED SOLELY ON THE BASIS OF SUCH ABNORMAL HIGH PROFIT MARGIN. QUESTION NO. 2 REFERRED TO THIS SPECIAL BENCH IS ANSWERED ACCORDINGLY. 29.1 WE FIND FROM THE DETAILS FURNISHED BY THE ASSESSEE THAT THE A SSESSEE IS A SOFTWARE DEVELOPER WHEREAS THIRDWARE SOLUTIONS LTD. IS ENGAGED IN THE BUSINESS OF SALE - CUM - LICENCE OF SOFTWARE WHICH IS AVAILABLE FROM THE AUDITED ACCOUNTS, THE DETAILS OF WHICH ARE AS UNDER : SCHEDULE : SALES AS ON AS ON 31 - 03 - 2009 31 - 03 - 2008 SALE OF LICENCE 22,237,588 3,916,427 SOFTWARE SERVICES 89,177,023 76,724,371 EXPORT FROM SEZ UNIT 478,572,420 263,971,033 EXPORT FROM STPI UNIT 162,900,630 168,863,049 REVENUE FROM SUBSCRIPTION 16,433,714 9,293,874 770,321,376 522,768,754 APART FROM THE ABOVE THE COMPANY IS ALSO HAVING DIVIDEND INCOME, INTEREST INCOME AND PROFIT ON SALE OF INVESTMENT AS WELL AS PREMIUM OF SOFTWARE CONTRACT TOTALLING TO RS.2,30,48,603/ - WHICH 13 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 IS AS PER SCHEDULE - 13 OTHER SOURCES. FROM THE VARIOUS DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE WE FIND THIRDWARE SOLUTIONS LTD. HAS BEEN REJECTED ON THE GROUND THAT IT IS FUNCTIONALLY DISSIMILAR. THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF INTOTO SOFTWARE INDIA PVT. LTD. VS. ACIT AND VICEVERSA IN CONSOLIDATED ORDER DATED 24 - 05 - 2013 FOR A.Y. 2005 - 06 AND 2007 - 08 AT PARA 26 OF THE ORDER HAS OBSERVED AS UNDER : 26. AS FAR AS THIRDWARE SOFTWARE SOLUTION LIMITED IS CONCERNED, WE FIND FROM THE INFORMATION FURNISHED BY THE SAID COMPANY THAT THOUGH THE SAI D COMPANY IS ALSO INTO PRODUCT DEVELOPMENT, THERE ARE NO SOFTRWARE PRODUCTS THAT THE COMPANY INVOICED DURING THE RELEVANT FINANCIAL 52 YEAR AND THE FINANCIAL RESULTS ARE IN RESPECT OF SERVICES ONLY. THUS, IT IS CLEAR THAT THERE IS NO SALE OF SOFTWARE PRODU CTS DURING THE YEAR BUT THE SAID COMPANY MIGHT HAVE INCURRED EXPENDITURE TOWARDS THE DEVELOPMENT OF THE SOFTWARE PRODUCTS. 29.2 IN VARIOUS OTHER DECISIONS ALSO THIRDWARE SOLUTIONS LTD. HAS BEEN REJECTED AS A COMPARABLE ON THE GROUND THAT IT IS FUNCTIONAL LY DISSIMILAR. WE THEREFORE FIND FORCE IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THIRDWARE SOLUTIONS LTD. SHOULD NOT BE INCLUDED AS A COMPARABLE. WE ACCORDINGLY SET - ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO EXCLUDE THE SAME FROM THE LIST OF COMPARABLES. 12. BOTH THE LEARNED AUTHORIZED REPRESENTATIVES HAVE ADMITTED THAT THIRDWARE SOLUTIONS LTD. WAS INVOLVED IN SIMILAR FUNCTIONS AS IN EARLIER YEAR AND IN VIEW THEREOF, WE HOLD THAT THE SAID CONCERN IS FUNCTIONALLY DIFF ERENT AND IS TO BE EXCLUDED FROM FINAL LIST OF COMPARABLES. 9. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ION TRADING INDIA PVT. LTD. VS. ITO (SUPRA) HAS EXCLUDED THIRDWARE FROM THE LIST OF COMPARABLES IN ASSESSMENT YEAR 2010 - 11 ON ACCOUNT OF OUTSOURCING OF ITS WORK TO THIRD PARTIES AND INCOME FROM DIVERSIFIED ACTIVITIES. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL IN THE SAID CASE ARE AS UNDER: 14 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 56. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED TH E MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THE FUNCTIONS OF THIRDWARE ARE IN CONTRAST WITH THE ASSESSEE WHICH ONLY PROVIDES SOFTWARE DEVELOPMENT IN THE FINANCE DOMAIN AS PER THE INSTRUCTION OF ITS AE. ALSO, THIRDWARE HAS INCURRED EX PENSES TOWARDS IMPORT OF SOFTWARE SERVICES, EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THE ASSESSEE. SINCE, IT IS ALSO ENGAGED IN OUTSOURCING ITS ACTIVITIES AS IT HAS INCURRED EXPENSES TOWARDS IMPORTS OF SOFTWARE SERVICES, EVIDENCING OUTSOURCING O F SOFTWARE SERVICES UNLIKE THE APPELLANT COMPANY. HENCE, IT IS FUNCTIONALLY NOT COMPARABLE AND CANNOT BE TREATED AS A COMPARABLE TO ASSESSEE. WE ORDER ACCORDINGLY. THUS, IN VIEW OF THE AFORESAID FACTS AND THE DECISIONS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THIRDWARE IS NOT A GOOD COMPARABLE BEING FUNCTIONALLY DIFFERENT . THUS, THIRDWARE HAS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. 10. IN VIEW OF OUR ABOVE FINDINGS , GROUND NO. 2(III) RAISED BY THE ASSESSEE IN APPEAL IS ALLOWE D. 11. IN GROUND NO. 5 THE ASSESSEE HAS PRAYED FOR DIRECTIONS TO THE ASSESSING OFFICER TO COMPUTE OPERATING MARGINS OF THE COMPARABLE COMPANIES AND PROVIDE FOR WORKING CAPITAL ADJUSTMENT AS PER THE DIRECTIONS OF DRP. THE LD. AR HAS SPECIFICALLY POINTED THAT THE ASSESSING OFFICER HAS NOT CARRIED OUT COMPUTATION OF WORKING CAPITAL ADJUSTMENT AND CORRECT OPERATING MARGINS IN ACCORDANCE WITH THE DIRECTION S OF DRP IN PARA 2.5.3 AND PARA 2.6.3. THE ASSESSING OFFICER IS DIRECTED TO RECOMPUTE WORKING CAPITAL A DJUSTMENT AND OPERATING MARGIN OF THE COMPARABLES AND ASSESSEE COMPANY IN ACCORDANCE WITH THE DIRECTIONS OF DRP. ACCORDINGLY, GROUND NO. 5 RAISED IN THE APPEAL BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 15 ITA NO . 215/PUN/2015, A.Y. 2010 - 11 12. THE LD. AR OF THE ASSESSEE HAS STAT ED AT THE BAR THAT HE IS NOT PRESSING GROUND NOS. 1, 2(I), 2(II), 2(IV), 3 AND 4. IN VIEW OF THE STATEMENT MADE BY THE LD. AR OF THE ASSESSEE , THE AFORESAID GROUNDS RAISED BY THE ASSESSEE IN APPEAL ARE DISMISSED AS NOT PRESSED. 13. IN THE RESULT, THE A PPEAL OF THE ASSESSEE IS PARTLY ALLOWED IN THE AFORESAID TERMS. ORDER PRONOUNCED ON WEDNESDAY, THE 21 ST DAY OF JUNE, 201 7 . SD/ - SD/ - ( / ANIL CHATURVEDI ) ( / VIKAS AWASTHY) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; / DATED : 21 ST JUNE, 2017 RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE DISPUTE RESOLUTION PANEL, PUNE 4. THE DIT (INTL. TAXATION), PUNE 5. , , , / DR, ITAT, B BENCH, PUNE. 6. / GUARD FILE. / / // TRUE COPY// / BY ORDER, / ASSISTANT REGISTRAR , , / ITAT, PUNE