ComputerLand UK Limited, Pune V. Assistant Commissioner of Income-tax, (IT)-1, Pune

ITA 2505/PUN/2017

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6941 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 26-10-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Question of law; Initiation of penalty proceedings
• Section: 271(1)(c); 143(3); 234B

Judgement Text

आयकर अपीलीय अधधकरण “सी” न्यायपीठ पुणे में । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI R.S.SYAL, VP AND SHRI PARTHA SARATHI CHAUDHURY, JM आयकर अपील सं. / ITA No. 2505/PUN/2017 धनधाारण वषा / Assessment Year : 2013-14 ComputerLand UK Limited C/o. Ventura India Private Limited CommerZone, Building No. 2 & 7, 1 st Floor, Survey No.144 & 145, Samrat Ashoka Path, Off. Airport Road, Yerwada, Pune-411 014. PAN : AAECC4565H .......अपीलाथी / Appellant बनाम / V/s. The Assistant Commissioner of Income Tax (IT)-1, Pune. ......प्रत्यथी / Respondent Assessee by : Shri Rajendra Agiwal Revenue by : Shri Rajiv Kumar सुनवाई की तारीख / Date of Hearing : 01.12.2021 घोषणा की तारीख / Date of Pronouncement : 06.12.2021 आदेश / ORDER PER PARTHA SARATHI CHAUDHURY, JM: This appeal preferred by the assessee emanates from the directions of the Ld. Dispute Resolution Panel-3 (WZ), Mumbai dated 03.07.2017 for the assessment year 2013-14 passed u/s.144C(5) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) as per the following modified grounds of appeal as well as additional ground : 2 ITA No. 2505/PUN/2017 A.Y.2013-14 “1. Inappropriate confirmation/ enhancement of transfer pricing adjustment to INR 4,88,88,532 (from INR 2,79,42,152) in relation to the international transaction pertaining to provision of Information Technology ('IT') services to Associated Enterprises (AEs) Erred on the facts and in circumstances of the case and in law by confirming/enhancing transfer pricing adjustment from INR 2,79,42,152 to INR 4,88,88,532 by rejecting the analysis undertaken by the Appellant to determine arm's length price for its international transaction pertaining to provision of IT services for A Y 2013-14. 2. Non-consideration of comparability analysis as documented in the transfer pricing study report Erred in law on facts and in circumstances of the case by not considering the data provided in the transfer pricing study report for benchmarking analysis. 3. Non consideration of contemporaneous data Erred on facts and in circumstances of the case and in law in conducting an analysis based on information currently available for determining arm's length price but not available at the time of complying with the transfer pricing regulations. 4. Use of single year data Erred on the facts and in circumstances of the case and in law by not considering the multiple year data for determining the arm's length price. 5. Application of certain inappropriate qualitative filters Erred in adopting filter with 75% earnings from exports (instead of 25% percent as adopted by the Appellant) for rejection of comparable companies. 6. Rejection of companies having different financial year ending Erred on facts and circumstances of case and in law by rejecting following comparable companies having different financial year ending  Caliber Point Business Solutions Limited;  Helios & Matheson Information Technology Limited ; and  R Systems International Limited. Further, the Hon'ble DRP has erred in stating that companies having different financial year ending can be considered only when audited quarterly data/results for such companies are available to derive the audited data for the accounting period followed by the Appellant. 7. Rejection of loss making companies Erred on facts and in circumstances of the case and in law by rejecting following functionally comparable companies solely on the basis that they are loss making entities  Cat Technologies Limited;  Lucid Software Ltd; and  Silverline Technologies Limited. 3 ITA No. 2505/PUN/2017 A.Y.2013-14 8. Inappropriate rejection of certain comparable companies identified by the Appellant in the transfer pricing study report Erred on facts and in circumstances of the case and in law by rejecting following comparable companies from the set of comparable companies identified by the Appellant in respect of international transactions pertaining to provision of IT service to AEs.  Akshay Software Technologies Limited  Caliber Point Business Solutions Limited  Helios & Matheson Information Technology Limited  R Systems International Limited  Cat Technologies Limited  Lucid Software Ltd. and  Silverline Technologies Limited 9. Inclusion of certain additional companies as comparable to the Appellant in relation to provision of IT services  Harbinger Software Private Ltd.  Infobeans System India Private Limited. 10. Erred in accepting Cybermate Infotek Ltd. ( ‘Cybermate’) in the final set of comparable companies Erred on facts and in circumstances of the case and in law in accepting Cybermate in final set of comparable companies although the said company is functionally different to the Appellant and is having supernormal profit for A Y 2013-14. 11. Erred in accepting Megri Soft Ltd. ( ‘Megri’) in the final set of comparable companies Erred on facts and in circumstances of the case and in law in accepting Megri in final set of comparable companies although the said company is functionally different to the Appellant and is having supernormal profit for AY 2013-14. 12. Erred in excluding Evoke Technologies Private Limited (‘Evoke’) from the final set of comparable companies while computing the arm’s length margin Erred on facts and in circumstances of the case by erroneously not including Evoke in the final set of comparable companies while computing the arm’s length price in spite of the fact that the Hon’ble DRP has directed to include the aforesaid company in the comparable set as well as the learned TPO in his internal note has concluded as comparable. 13. Erred in not considering inventory of Cybermate while computing the working capital adjustment Erred in not considering the directions of the Hon’ble DRP to include inventory (which represents unbilled Revenue) for the purpose of computing working capital adjustment for Cybermate. 4 ITA No. 2505/PUN/2017 A.Y.2013-14 14. Erred in treating foreign exchange fluctuations, provisions for expenses, write back of excess provisions as non operating in nature Erred in treating foreign exchange fluctuations, provision for expenses, write back of excess provisions as non-operating in nature while computing the operating margins of the Appellant. 15. Non consideration of adjustment to factor the differences on account of risk undertaken by comparable companies and the Appellant Erred on the facts and circumstances of the case and in law by comparing the full-fledged risk bearing entities with the Appellant's low risk operations without making any risk adjustment on account of differences between the functional and risk profile of comparable companies vis-a-vis the risk profile of the Appellant. 16. Inappropriate levy of interest u/s.234B of the Act Erred on the facts and in circumstances of the case and in law by levying interest under section 234B of the Act, without considering the fact that the addition on account of transfer pricing is due to the difference of opinion and as at the due date of payment of advance tax by no means the Appellant could have estimated such adjustments and consequential tax on such adjustment. 17. Erred in initiating penalty proceedings under sec. 271(1)(c) of the Act in the final order Erred on the facts and in circumstances of the case and in law by initiating penalty proceedings in the final order without giving any reference of the same in the draft order issued under section 143(3) read with section 144C( 1) of the Act. 18. Initiation of penalty proceedings under sec.271(1)(c) of the Act Erred in initiating penalty proceedings under section 271 (1)(c) of the Act without appreciating the fact that transfer pricing adjustment to the international transactions of the Appellant is on account of difference of opinion as to application of selection criterion for selection of comparable companies, incoherent approach, interpretation of the provisions, interpretation of case laws etc.” Additional Ground 19 Modification of turnover filter of 10 times downward and 10 times upward of the Appellants turnover On the facts and in the circumstances of the case and in law, the turnover filter should be modified to 10 times downward and 10 times upward of the Appellant’s turnover as against the turnover filter of INR 1 Crore to INR 500 Crore applied by the Appellant and upheld by the learned TPO and consequently by the Hon’ble DRP.” 5 ITA No. 2505/PUN/2017 A.Y.2013-14 2. The brief facts in this case are that the Capita Group is one of the leading business process outsourcing (BPO) and professional services company in United Kingdom (UK). Capita delivers back office administration and front office customer contact services to private and public sector organizations across the UK and Ireland. Computerland UK focuses on providing organizations with essential Information Technology (IT) services that improve business productivity, increase quality of IT service and reduce IT costs. CL UK‟s products and services enable its customers to improve acquisition, implementation, management and support of their customer‟s essential IT infrastructure. CL India is a branch of CL UK in India engaged in providing IT services including application management and development, infrastructure management, software testing and data migration services and products to its AE‟s. CL India is the branch office of CL UK whose ultimate holding company is Capita Plc. During the year under consideration, the assessee has entered into following transactions with AE: 2.1 The assessee had selected 21 companies as comparables as per its Transfer Pricing (TP) study report and the assessee has taken data for FY 2010-11, 2011-12 & 2012-13 which reads as follows: Name of the Company Description Amount Method Capita IT Services Ltd. UK Provision of software services 53,57,21,202 TNMM Capita Business Services Ltd. UK 20,14,57,700 TNMM Capita IT and Consulting India Pvt. Ltd. Procured Software Testing Services 15,71,924 CUP Computerland UK Ltd. Reimbursement of Actual Exp 1,99,87,004 Other Total 75,87,37,830 6 ITA No. 2505/PUN/2017 A.Y.2013-14 Sl. No. Name of the Company Year wise operating profits/operating cost(%) Weighted average of operating profits/operating cost (%) FY 2010-11 FY 2011-12 FY 2012-13 1 Akshay Software Technologies Limited 0.69% 9.87% 8.15% 6.74% 2 Blue Star Infotech Limited (Consolidated) 10.20% 4.43% NC 7.18% 3 Caliber Point Business Solutions Limited (Segmental) 2.16% 7.10% 3.26% 3.19% 4 Cat Technologies Limited 4.71% 5.11% -13.00% -1.75% 5 CG-VAK & Exports Limited ( Segmental) for FY 2010-11 and FY 2011-12 5.20% -14.96% 14.58% 1.44% 6 Cigniti Technologies Private Limited 7.66% 9.22% 8.70% 8.63% 7 Evoke Technologies Private Limited 8.11% 11.60% NA 10.44% 8 Goldstone Technologies Limited 6.01% 11.01% NC 8.52% 9 Helios & Matheson Information Technology Limited 16.12% 15.16% 16.96% 16.13% 10 Lucid Software Limited 46.32% 15.58% NA 27.68% 11 Maveric Systems Limited -9.68% NA NA -9.68% 12 Persistent Systems and Solutions Limited 16.00% NA NA 16.00% 13 Priya Softweb Solutions Private Limited 14.03% NA NA 14.03% 14 R.S. Software (India) Limited 16.35% 15.21% 17.89% 16.58% 15 R Systems International Limited (Segmental) 6.85% 2.86% 13.69% 7.95% 16 Sasken Communication Technologies Limited 28.04% 10.63% 4.94% 14.14% 17 Saven Technologies Limited (Consolidated) 17.30% NC NC 17.30% 18 Silverline Technologies Ltd. 14.25% NA NA 14.25% 19 Thinksoft Global Services Limited 2.47% 12.98% 19.39% 13.73% 20 Thirdware Solutions Limited 18.12% NA NA 18.12% 21 Ybrant Digital Limited ( formerly known as LGS 13.60% NC NC 13.60% 7 ITA No. 2505/PUN/2017 A.Y.2013-14 Global Limited) Arithmetic mean 10.68% Note 1 : Weighted average of the margin for FY 2012-13, FY 2011-12 and FY 2010-11 has been computed using The operating cost of the respective years being used as weights NA denotes Not available NC denotes not Comparable The assessee has also submitted that the operating margin of the comparables using single year data of FY 2012-13 and arrived at the Arithmetic Mean of 5.13%. 3. Ground No.1 raised in appeal by the assessee is general in nature and hence, no adjudication is required. 4. The Ld. Counsel for the assessee submitted that he is not pressing Ground Nos. 2 to 6, Ground Nos.9, 14 and 15. In view of the submissions made by the Ld. Counsel for the assessee, Ground Nos. 2 to 6, Ground Nos.9, 14 and 15 are dismissed as not pressed. 5. Ground Nos.16, 17 & 18 are consequential, hence, Ground Nos. 16, 17 & 18 raised in appeal by assessee are dismissed being devoid of any merit. 6. The Ld. Counsel for the assessee submitted that he would like to take Ground No.13 first in the grounds of appeal memo filed before us. That as regards the ground No.13, the assessee has contended that the TPO had erred in not considering the directions of the Hon‟ble DRP to include 8 ITA No. 2505/PUN/2017 A.Y.2013-14 inventory (which represents unbilled Revenue) for the purpose of computing working capital adjustment for Cybermate. The TPO in its order on this issue has held as follows: “2. During the course of the TP proceedings, after considering the reply of the assessee to the show cause notice, the following set of comparables was finalized. Sr. No. Name of the Company FY 2012-13 OP/OC % After working capital Adjt. 1 CG-VAK Software & Export Limited (Segmental) 18.40 17.13 2 Cigniti Technologies Ltd. 8.59 6.42 3 Priya Softweb Solutions Pvt. Ltd. 21.02 22.78 4 R.S Software (India) Ltd. 17.35 17.78 5 Thirdware Solutions Ltd. 36.98 36.16 6 Exilant Technologies Pvt. Ltd. 10.48 9.90 7 Ezest Solutions Ltd. 9.30 8.18 8 Harbinger Software Pvt. Ltd. 21.98 19.59 9. Infobeans System India Ltd./Infobeans Technologies 33.73 33.83 Arithmetic Mean 19.76 19.08 The average margin of comparable company 21.21% was applied and upward adjustment of Rs.2,79,42,152/- was made. 3. Being aggrieved, the assessee referred the matter to the Hon’ble DRP vide above mentioned order, the Hon’ble DRP-3, Mumbai issued the following directions; i) The TPO’s filter of single year data, use of same financial year data, use of contemporaneous data, Minimum Export of 75%, Removing Loss making companies have been upheld by the DRP ii) Companies having diversified activities and where no segmental financial results are available, the minimum turnover of the same activity is enhanced to 75%, instead of 50% selected by the TPO. iii) The TPO not to apply exceptionally low and high PLI ( i.e. 5% and 70%, respectively), iv) Foreign exchange fluctuation gain/loss to be treated as non- operational, v) Assessee’s objection regarding not granting Risk adjustment is rejected. 9 ITA No. 2505/PUN/2017 A.Y.2013-14 4. The decision regarding the comparable selected by the assessee and by the TPO is as follows: Sr. No. Name of the Company Selected by Remarks DRP‟s Directions 1 Akshay Software Technologies Limited Assessee Rejected. TPO’s Action Upheld 2 Blue Star Infotech Limited (Consolidated) Assessee Rejected. Considered as not comparable by assessee TPO’s Action Upheld 3 Caliber Point Busines Solutions Limited (Segmental) Assessee Rejected. Year ending Dec. 2021 TPO’s Action Upheld 4 Cat Technologies Limited Assessee Rejected book loss TPO’s Action Upheld 5 CG-VAK Software & Export Limited (Segmental) Assessee Accepted TPO’s Action Upheld 6 Cigniti Technologies Ltd. Assessee Selected by this office as comparable TPO’s Action Upheld 7 Evoke Technologies Private Limited Assessee Not Comparable as per assessee also Held as functionally comparable 8 Goldstone Technologies Limited Assessee Rejected. Diversified nature of business. TPO’s Action Upheld 9 Helios & Matheson Information Technology Limited Assessee Rejected. September ending TPO’s Action Upheld 10 Lucid Software Limited Assessee Rejected. Loss making TPO’s Action Upheld 11 Maveric Systems Limited Assessee Not comparable as per assessee also TPO’s Action Upheld 12 Persistent Systems and Solutions Limited Assessee Not considered by assessee also TPO’s Action Upheld 13 Priya Softweb Solutions Private Limited Assessee Selected as comparable TPO’s Action Upheld 14 R.S. Software (India) Limited Assessee Accepted TPO’s Action Upheld 15 R Systems International Limited (Segmental) Assessee Rejected. Year ending Dec.2012 TPO’s Action Upheld 10 ITA No. 2505/PUN/2017 A.Y.2013-14 16 Sasken Communication Technologies Limited Assessee Accepted TPO’s Action Upheld 17 Saven Technologies Limited (Consolidated) Assessee Considered as comparable by this office Was not considered in the final set as fails RPT 18 Silverline Technologies Ltd. Assessee Rejected as loss making. Rejected by assessee also TPO’s Action Upheld 19 Thinksoft Global Services Limited Assessee Rejected this year as RPT expenses are more than 25% TPO’s Action Upheld 20 Thirdware Solutions Limited Assessee Accepted TPO’s Action Upheld 21 Ybrant Digital Limited ( formerly known as LGS Global Limited) Assessee Rejected as financials not available. Not considered by assessee also TPO’s Action upheld 22 Cybermate Infotek Ltd. TPO 74.73 Held as comparable 23 Exilant Technologies Pvt. Ltd. TPO 10.48 TPO’s Action upheld 24 Ezest Solutions Ltd. TPO 9.30 TPO’s Action upheld 25 Harbinger Software Pvt. Ltd. TPO 21.98 TPO’s Action upheld 26 Infobeans System India Ltd./Infobeans Technologies TPO 33.73 TPO’s Action upheld 27 Megri Soft Ltd. TPO 77.77 Held as comparable 28 Panoramic Universal Ltd. TPO 500.20 Held as not comparable 29 Sankhya Infotech Ltd. TPO 4.45 Held as comparable 30 Tecnotree Convergence Ltd. TPO 2.54 Held as not comparable due to RPT 5. In view of the above, the final set and PLI after granting Working Capital Adjustment is as under: Sr. No. Name of the Company PLI PLI after WCA 1 CG-VAK Software & Export Limited (Segmental) 18.40 17.10 11 ITA No. 2505/PUN/2017 A.Y.2013-14 2 Cigniti Technologies Ltd. 8.59 6.41 3 Priya Softweb Solutions Pvt. Ltd. 21.02 22.78 4 R.S Software (India) Ltd. 17.35 17.78 5 Sasken Communication Technologies Ltd. 3.18 4.74 6 Thirdware Solution Ltd. 36.98 36.16 7 Cybermate Infotek Ltd. 74.71 36.84 8 Exilant Technologies Pvt. Ltd. 10.48 9.90 9 Ezest Solutions Ltd. 9.30 8.18 10 Harbinger Software Pvt. Ltd. 21.98 19.58 11 Infobeans System India Ltd./Infobeans Technologies 33.73 33.83 12 Megri Soft Ltd. 77.77 75.80 13 Sankhya Infotech Ltd. 4.45 1.36 Average 26.00 22.34 6. The DRP, in the case of BNY Mellon Ltd. for the AY 2013-14 has held that the Inventories relating to the relevant services provided only can be considered for granting of Working Capital Adjustment. Accordingly, on the perusal of the inventory of Cybermate Intotek Ltd., it is seen that it is nothing but the work in progress, the opening and closing figures of which are the same. Hence, these figures cannot be considered as Inventory. In its financial these items are appearing as below: Note No.15 : INVENTORIES Sr.. No. Particulars 31.03.2013 Rs. 31.03.2012 Rs. 1. a) Work in Progress Total Inventories 267,886,500 267,886,500 267,886,500 267,886,500 Hence, this Work in progress, (although appearing as inventory), is not considered while granting WCA, as these are not relating to the software services provided. It may be relating to development of product, the activities of which cannot be held functionally comparable with the assessee. 7. The working of adjustment is as under: Col. Description Amount (Rs.) A Price charged (operating revenue of the assessee) 739179000 B Operating cost (OC) 642527000 12 ITA No. 2505/PUN/2017 A.Y.2013-14 C Arms Length Mean Margin (OP/OC) 22.34 D Arms Length Price (ALP) of the international transaction (B) +(B)*(C)/100} 786067532 E 103% of international transaction 761354370 F Adjustment over operating income (D-A) (Shortfall being adjustment u/s.92CA) 46888532 7. The Ld. Counsel for the assessee also submitted that they have not taken this issue before the Ld. DRP. 8. Having gone through the submissions of the assessee and the order of the TPO, we find, this Work in progress, (although appearing as inventory), is not considered while granting WCA, as these are not relating to the software services provided. It may be relating to development of product, the activities of which cannot be held functionally comparable with the assessee. We do not find any discrepancies in the findings of the TPO. This part of the ground raised by the assessee is rejected. Thus, Ground No.13 raised by the assessee is dismissed. 9. The assessee vide Ground No.7 wants inclusion of two companies namely (i) Cat Technologies Limited and (ii) Lucid Software Ltd. The assessee had also taken one comparable company i.e. Silverline Technologies Limited which was at the time of hearing, this comparable has been not pressed by the Ld. Counsel for the assessee. Thus, this part of the ground is dismissed as not pressed. 10. The TPO with regard to these two companies i.e. (i) Cat Technologies Limited and (ii) Lucid Software Ltd. has held and observed as follows: “ 9.4. Cat Technoloiges Limited 13 ITA No. 2505/PUN/2017 A.Y.2013-14 This comparable is rejected as it is loss making. For the same reason this company was rejected during last year also. The objection of the assessee in this regard is disposed above, in the disposal of common grounds of appeal. This objection of the assessee is therefore not accepted.” “9.10 Lucid Software Ltd. This comparable is rejected as it is loss making. For the same reason this company was rejected during last year also. The objection of the assessee in this regard is disposed above, in the disposal of common grounds of appeal. This objection of the assessee is therefore not accepted.” 11. The Ld. DRP has dealt with these comparables at Page 28, Para 6.10 onwards of their and has given findings at Para 6.10.4. The relevant paras are extracted as follows: “6.10 We have considered the order of the TPO and the contentions of the assessee. The TPO rejected this company from the set of comparables on the ground that it has made an Operating loss during the year under consideration and that a loss making company cannot be considered as a comparable in the case of the assessee who is remunerated by the AE for its services on a cost plus basis. On the other hand, the assessee contended that a company which is otherwise functionally comparable and satisfies other quantitative filters cannot be rejected merely on the ground that it has made an operating loss' for the year under consideration. 6.10.1 In this regard, we find that the hon'ble ITAT in many cases has held that the Indian Transfer Pricing Regulations have consciously not adopted the basis of inter-quartile range of the comparable companies for determining the transfer price, which would eliminate the outliers which are either super-normal profit making or very low profit or loss making companies. The Indian Transfer Pricing Regulations provide for arriving at the arithmetic mean of the profit margin of the comparable companies to determine the arm’s length transfer price. Therefore, the India law does not permit exclusion of either super normal profit making companies or loss making companies from the list of comparable companies. This has been held in the decisions in the cases of : a) Diagio India Private Limited Vs. ACIT (2011) 47 SOT 252 (Mum) b) 24/7 Customer.com (p) Ltd. Vs. DCIT 144 ITD 344 (Bang) c) Exonn Mobil Company India (P) Ltd. Vs. DCIT (2021) 46 SOT 294 (Mum) d) Wills Processing Services (I) (P) Ltd. Vs. DCIT (2013) 57 SOT 339 (Mum) 6.10.2 These decisions hold that as long as a company is functionally comparable, it should be included in the set of the comparable companies, whether it has incurred losses or has earned super-normal profits. Further, the hon'ble special Bench of Mumbai ITAT held in the case of Maersk Global Centres (India) Private Limited vs ACIT that the 14 ITA No. 2505/PUN/2017 A.Y.2013-14 Indian TP regulations deviate from the DECO guidelines by way of adopting the arithmetic mean instead of quartile range suggested by the DECO which excludes outliers such as companies making abnormally high profits or losses. Further, the Hon'ble Delhi HC held in the case of Chryscapital Investment Advisors (India) (P.) Ltd [2015] 56 taxmann.com 417 that mere fact that an entity makes extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of com parables for the purpose of determination of ALP, as in such circumstances an enquiry under rule 10B(3) ought to be carried out to determine as to whether material differences between the assessee and the said entity can be eliminated and unless such differences cannot be eliminated, entity has to be included as a comparable. 6.10.3 As the Indian TP regulations contained in the first proviso to section 92C(2} of the Act, which govern the computation of the Arm's Length Price in cases where more than one price is determined by the most appropriate method, provide for adopting the arithmetical mean of such prices, the impact of presence of outliers such as super-normal profit making companies and loss making companies in the set of comparables is evened out and properly factored into the arithmetical mean that is computed by considering them along with other com parables in the set. Exclusion of such outliers from the set of com parables on the ground of being an outlier militates against the principle of arriving at the arm's length price by determining the arithmetic mean of the profit margin of various comparables in the set. Potential comparable companies therefore cannot be excluded merely on the ground of abnormally high profits or incidence of losses during the year. However, if further investigation and analysis points to existence of some abnormal business conditions during the year in such cases which affects the comparability, there can be a case for exclusion of the loss making companies in such cases. In the present case, no such abnormal conditions resulting in operating loss during the year for this company have been brought out by the TPO. 6.10.4 In view of the above, we hold that there is no legal basis for excluding companies which made operating loss during the year under consideration from the set of comparable companies, if they are otherwise functionally comparable and satisfy other quantitative filters. Having regard to the same, the action of the TPO in rejecting loss making companies from the set of com parables is held to be in order.” 12. The Ld. Counsel for the assessee also brought to our notice at Page 159 of the Paper book wherein there is a chart regarding operating profit/ operating cost in respect of Cat Technologies Limited. The Ld. Counsel further submitted that so far as both Cat Technologies Limited and Lucid Software Ltd., they are not persistent loss making company. Since they are not persistent loss making companies, they could not be compared as functionally similar with that of the assessee company. The Ld. Counsel for 15 ITA No. 2505/PUN/2017 A.Y.2013-14 the assessee further submitted that a comparable company cannot be rejected until and unless it is a persistent loss making company. For this proposition, he has placed reliance on the following decision of the Hon‟ble Bombay High Court: i) The Pr. Commissioner of Income Tax-5 Vs. Sandvik Asia Pvt. Ltd., Income Tax Appeal No.1088 of 2015 ii) The Commissioner of Income Tax-3 Vs. Gold Sachs (India) Securities Pvt. Ltd., Income Tax Appeal No.2222 of 2013 iii) The Commissioner of Income Tax-2 Vs. Welspun Zucchi Textiles Limited, Income Tax Appeal No. 1286 of 2014 12.1 The Ld. Counsel for the assessee further submitted that in this case Cat Technologies Limited is not persistent loss making companies and this fact may be looked into in the light of the decisions of the Hon‟ble Bombay High Court by the TPO for fresh adjudication. Same prayer was made with regard to the comparable Lucid Software Ltd. 13. The Ld. DR conceded to the submissions of the assessee and did not raise any objection if the issues are restored to the file of the AO/TPO for fresh adjudication. 14. We have heard the rival contentions and considered the judicial pronouncements placed before us. We observe the Hon‟ble Bombay High Court in the case of The Pr. Commissioner of Income Tax-5 Vs. Sandvik Asia Pvt. Ltd (supra.) has held as follows: “5. Re- Question No.3:- (i) The TPO excluded M/s. Hitco Tools from the list of the comparables on the ground that it was a persistent loss making unit. The same was accepted by the Assessing Officer in his draft assessment order. 16 ITA No. 2505/PUN/2017 A.Y.2013-14 (ii) Being aggrieved, the Respondent filed an application to the DRP. By an order, the DRP upheld the view of the TPO. On further appeal, impugned order of the Tribunal has rendered finding of fact that M/s, Hitco Tools is not a persistent loss making unit. It was so only in the year 2005 but for the year 2006 and for the years subsequent to the year ending 31st March, 2010, M/s. Hitco Tools was making profit. The impugned order further records that for the earlier Assessment Years namely Assessment Years 2006 -07 and 2007-08, M/s. Hitco Tools was taken as a functionally comparable by the Revenue. Nothing was brought on record to indicate as to why for the subject Assessment Year – M/s. Hitco Tools Ltd., ceased to be comparable. Thus, directing inclusion M/s. Hitco Tools as a comparable.” (iii) We find that the aforesaid finding of fact by the Tribunal is not shown to be perverse and/or arbitrary in any manner. Accordingly, question as proposed does not give rise to any substantial question of law. Thus, not entertained.” 14.1 Further, the Hon‟ble Jurisdictional High Court in the case of The Commissioner of Income Tax-3 Vs. Gold Sachs (India) Securities Pvt. Ltd. (supra.) has held as follows : “4. Re Question (a) :- (a) The Respondent assessee urged before the Tribunal that the upward adjustment of Rs.1.60 crores by the TPO pertaining to Business support services rendered to its AE was, inter alia on the basis of having rejected one of the comparable namely Capital Trust Limited, chosen by the Respondent assessee. This was rejected on account of the fact that Capital Trust Limited is a loss making unit. Before the Tribunal, the Respondent Assessee contended that the nature of business as carried out by the Capital Trust Ltd. and that carried out by the Respondent Assessee are similar. Therefore, it ought to have been included in as comparable to arrive at ALP; (b) The Revenue on the other hand contended that Capital Trust Limited is a persistent loss making unit and thus, cannot be used as a comparable for the purposes of determining the ALP. The Tribunal by the impugned order held on a finding of fact that for the Assessment Year 2005-06,- Capital Trust Ltd. has made a profit although it made a loss for the subsequent two years namely Assessment years 2006- 07 and 2007-08. However, the impugned order of the Tribunal inter alia relies upon its order in the case of Brigade Global Vs. ITO, ITA No.1494/Hyd/2010 rendered by the coordinate Bench at Hyderabad-wherein it is held that only persistently loss making unit cannot be said as comparable. In this case, the impugned order holds on facts that Capital Trust Ltd., it is not a persistent loss making unit. Therefore, Capital Trust Ltd. is comparable.” 17 ITA No. 2505/PUN/2017 A.Y.2013-14 Similar view has been taken by the Hon‟ble Jurisdictional High Court in the case of The Commissioner of Income Tax-2 Vs. Welspun Zucchi Textiles Limited (supra.). In view of above, we restore the issue on Cat Technologies Limited and Lucid Software Ltd. to the file of AO/TPO for fresh adjudication in the light of the decisions of the Hon‟ble Jurisdictional High Court mentioned hereinabove after complying with the principles of natural justice. Thus, Ground No.7 raised in appeal by the assessee is partly allowed for statistical purposes. 15. Ground No.8 deals with erroneous exclusion of the comparable company namely Akshay Software Technologies Limited. 16. The brief facts on this ground are that the assessee included this company in the list of comparables which was excluded by the TPO as it was a reseller of ERP products. The assessee contended that Akshay Software Technologies Limited is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas and it is functionally similar and margin from sale of software license was minimal. These submissions did not find favour of the TPO. The DRP did not concur with the findings of the TPO on the exclusion of this company for the reason of low software license, commission etc. After making detailed analysis of the activities undertaken by this company, the Ld. DRP found that this company was engaged in providing on-site software support services and the nature of professional services, production services rendered by this company was examined by the Ld. DRP which found the same were entirely different in as much as. The Ld. DRP held that the professional services being rendered by the assessee are clearly in 18 ITA No. 2505/PUN/2017 A.Y.2013-14 the nature of staffing services by which the company employs IT professional and provides them to various clients in the IT industry on a contract staffing/permanent staffing basis which was quite distinct from software support services rendered by the assessee. Thus, this issue has come up before the Tribunal. 17. Having heard the parties and perused the materials available on record, it is seen that the Ld. DRP excluded this company from the final list of comparable on the ground that firstly, it derives major chunk of revenue from professional services and secondly, it was functionally different. In contrast, the assessee is engaged only in providing services from its own premises which are in the nature of software services. That this company apart from having earned income from sale of software licenses, received income from professional services which were mainly in the nature of staffing services by which, it employs IT professionals and providing them various clients in the IT industry. In view of the fact, the nature of services rendered by this company is absolutely different from that rendered by the assessee. Therefore, we satisfy with the findings of the Ld. DRP justifying in upholding exclusion of this company from the final list of comparables. Thus, this part of Ground No.8 is not allowed. 18. With regard to Ground No.10, the Ld. Counsel for the assessee submitted on the issue of accepting Cybermate in final set of comparable companies mistaking on facts and circumstances in law by the TPO since the said company is functionally different to the assessee having supernormal profit for assessment year 2013-14. 19 ITA No. 2505/PUN/2017 A.Y.2013-14 19. The TPO vide Page 5, Para 7.3 of his order, as per filter used following companies were also found to be comparable: 20. The Ld. DRP has dealt with this issue at Page 47, at Para 7.3.8 onwards of his order which reads as follows: “Cybermateinfotek Ltd.: 7.3.8 In this case, the company has been rejected in TPSR as comparable on the ground that it is functionally different. It is explained that the company is into software products and Services whereas the assessee is into Software Development Services. We have seen the Annual Report of the company. No doubt, it is mentioned on page-6 of Annual Report that the company is into products and services. However, in continuity it is also mentioned that the company continued its efforts in products and services in Domestic and Overseas Markets. However, it we see the revenue as per Note - 19, the entire revenue during the year is from exports and there is no Domestic Sales. Therefore, the statement on page-6 of Annual Report is not determinative of the activities of the S. No. Name of company PLI % 1 Cybermate Infotek Ltd. Not considered as the PLI is exceptionally high i.e.74.43 2 Exilant Technologies Pvt. Ltd. 10.48 3 Ezest Solutions Ltd. 9.30 4 Harbinger Software Pvt. Ltd. 21.98 5 Infobeans System India Ltd./Infobeans Technologies 33.73 6 Megri Soft Ltd. Not considered as the PLI is exceptionally high i.e. 77.77 7 Panoramic Universal Ltd. Not considered as the PLI is exceptionally high i.e.500.2 8 Sankhya Infotech Ltd. Not considered as PLI is exceptionally low i.e. 4.45 9 Tecnotree Convergence Ltd. Not considered as the PLI is exceptionally i.e.2.54 10 Vama Industries Ltd. 36.27 20 ITA No. 2505/PUN/2017 A.Y.2013-14 companies though it is indicative. From the Note under the heading "Management Discussion & Analysis" on page - 7, 'Company's Focus & Strategy' on page-8, 'Opportunities', 'Our Focus' etc. in the Annual Report demonstrate that the company is providing IT Services & Software Solutions mainly to Hospitals. The various products listed on page - 10 are in fact areas of hospital management which are core areas of the company. These are the Generic Software Applications or various modules which are customised to specific needs of the customers. These are not product per se. Software Modules are the components which are combined in a specific manner as per the embedded code etc. All necessary modules when combined together and modified as per needs, make the desired software required by the customer. These are not software products as submitted. 7.3.8.1 It is also as evident from the Financials Note-15 as per which there is no change in the inventory during the year over the preceding year. If the company had been dealing into products as argued, there will be a change in the inventory. If the value of inventory in Note-15 with that in Note-21, it is evident that this is some unbilled revenue carried forward without any change. Further, reference is also made to Note - 3 on page - 29 of the Annual Report under heading 'Revenue Recognition'. A mere perusal of this process demonstrates that the assessee is providing Software Development services through contracts. It is not selling any software as standard product like a Shrink Wrapped Software. Hence, the company is into software development and services like the assessee and hence functionally comparable.” 21. The Ld. Counsel for the assessee submitted that TPO had not included this company and the Ld. DRP had recommended for inclusion of this company. The Ld. Counsel for the assessee has placed reliance on the decision of the Pune Bench of the Tribunal in the case of M/s. PubMatic India Private Limited Vs. Assistant Commissioner of Income Tax, ITA No.655/PUN/2017 for the assessment year 2012-13 and in the case of M/s. Triple Point Technology (India) Pvt. Ltd. Vs. Deputy Commissioner of Income Tax, ITA No.581/PUN/2016 & Ors. for the assessment year 2011-12 and prayed for exclusion of the Cybermate Infotek Ltd. from the final set of comparables. 22. The Ld. DR also conceded that this issue is covered by the decision of the Pune Bench of the Tribunal (supra.) in favour of the assessee. 21 ITA No. 2505/PUN/2017 A.Y.2013-14 23. We have heard the rival contentions and perused the materials available on record. We have also considered the judicial pronouncements placed before us. We find that the Pune Bench of the Tribunal in the case of M/s. PubMatic India Private Limited Vs. Assistant Commissioner of Income Tax (supra.) on the issue has held as follows: “12. The Mumbai Bench of Tribunal in Ness Technologies (India) Pvt. Ltd. Vs. ACIT in ITA No.7016/Mum/2012, relating to assessment year 2008-09, order dated 24.09.2014 had excluded Cybermate as not comparable to the company providing software development support services to associated enterprises. The learned Authorized Representative for the assessee has pointed out that profile of concern Cybermate for assessment year 2008-09 and in the year under appeal i.e. assessment year 2012-13 is the same and hence, the said proposition is to be applied. We find merit in the plea of assessee in this regard. 13. We further find that Pune Bench of Tribunal in MSC Software Corporation India (P.) Ltd. Vs. ACIT (2017) 80 taxmann.com 55 (Pune- Trib) while deciding the case of exclusion of a product company had held as under:- “18. On perusal of record and the order of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra), we find that the concern E-zest Solutions Ltd. is a product company and is engaged in both the provision of software services and sale of software services. On the other hand assessee is engaged in Software development services where the segmental details are not available, accordingly, E-zest Solutions Ltd. is functionally not comparable. Accordingly, we hold that the said concern is to be excluded from the final set of comparables.” 14. The said proposition was applied by Pune Bench of Tribunal in DCIT Vs. Amber Point Technology India Pvt. Ltd. in ITA Nos.756 & 757/PUN/2014 and cross appeals in ITA Nos.761 & 762/PUN/2014, relating to assessment years 2008-09 and 2009-10, order dated 25.01.2018 for exclusion of concern which was engaged in providing both software services and was also selling its products. Accordingly, we hold that the concern Cybermate which is engaged in both sale of software products and providing software development services and where no segmental details are available for each of the segments, then the margins of said concern could not be applied to benchmark the arm's length price of international transactions of providing software development services to associated enterprises by the assessee. 15. Similarly, the concern Cybercom is also a product company and was providing software development to its associated enterprises and was also selling developed software products. Both the activities were clubbed under one software segment. As per the annual report of said company, it was engaged in providing consultancy and advisory services and was also carrying out the business of development, testing, marketing and manufacturing of information technology products and services. The annual report of the said concern placed at page 918 of 22 ITA No. 2505/PUN/2017 A.Y.2013-14 Paper Book declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Following our reasoning in the paras hereinabove in respect of Cybermate, we hold that Cybercome is also to be excluded from final set of comparables.” 23.1 Further, we find the Pune Bench of the Tribunal in the case of M/s. Triple Point Technology (India) Pvt. Ltd. Vs. Deputy Commissioner of Income Tax (supra.) has held and observed as follows: “28. The Pune Bench of Tribunal in PubMatic India Pvt. Ltd. Vs. ACIT (supra) had held the said company to be not comparable to a concern providing software development services. Similarly, Cybermate Infotek Ltd. has also been held to be not comparable to a concern providing software development services as it was product company, by the Pune Bench of Tribunal in PubMatic India Pvt. Ltd. Vs. ACIT (supra). Following the same parity of reasoning, we find merit in the plea of assessee and four concerns are to be excluded from final set of comparables. The Assessing Officer / TPO is directed to give consequential effect to the directions of Tribunal and delete adjustment made in respect of software development segment. The grounds of appeal raised by assessee are thus, partly allowed.” Respectfully following the same parity of reasoning as mentioned in the decisions of the Pune Bench of the Tribunal (supra.), we direct the Assessing Officer/TPO to exclude Cybermate Infotek Ltd from the final set of comparables. Thus, Ground No.10 raised in appeal by the assessee is allowed. 24. With regard to Ground No.11, the Ld. Counsel for the assesse submitted that the TPO erred in accepting Megri Soft Ltd. in the final set of comparables since this company is functionally different to the assessee having supernormal profit for AY 2013-14. 25. The TPO vide Page 5, Para 7.3 of his order, as per filter used following companies were also found to be comparable: 23 ITA No. 2505/PUN/2017 A.Y.2013-14 O 26. The Ld. DRP at Para 7.3.10 on this issue has held and observed as follows: “Megri Soft Ltd. 7.3.10 The company has been rejected in TPSR as comparable on the ground that it is functionally different. It is explained that the company is into Dotcom and Information Technology Business and during the year it has done the business of Domain Registration,' Web Hosting, Web Designing, Web Development, Web Scripting, Web Based Software Development, Web Promotion, Search Engine optimization, Link building and SEO services in addition to development of its own Indian and International Web Portals/Vortals on various subjects as well as provided software services to the clients also. The services provided by Megri are varied in nature and not purely into software development services and therefore cannot be compared with CL Inida which is engaged in pure software development. It is submitted that the company is into diversified business operations and hence, it cannot be compared with the assessee.” S. No. Name of company PLI % 1 Cybermate Infotek Ltd. Not considered as the PLI is exceptionally high i.e.74.43 2 Exilant Technologies Pvt. Ltd. 10.48 3 Ezest Solutions Ltd. 9.30 4 Harbinger Software Pvt. Ltd. 21.98 5 Infobeans System India Ltd./Infobeans Technologies 33.73 6 Megri Soft Ltd. Not considered as the PLI is exceptionally high i.e. 77.77 7 Panoramic Universal Ltd. Not considered as the PLI is exceptionally high i.e.500.2 8 Sankhya Infotech Ltd. Not considered as PLI is exceptionally low i.e. 4.45 9 Tecnotree Convergence Ltd. Not considered as the PLI is exceptionally i.e.2.54 10 Vama Industries Ltd. 36.27 24 ITA No. 2505/PUN/2017 A.Y.2013-14 27. The Ld. Counsel for the assessee emphasizing this company should be excluded from the final set of comparables brought to our notice the Management Discussion and Analysis Report annexed at Page 315 of the paper book wherein Industry overview and Development has been provided which are as follows: “Overview The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, guidelines issued by Securities and Exchange Board of India (SEBI) and Generally Accepted Accounting Principles (GAAP) in India. Our Management accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used therein. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, so that the financial statements reflect in a true and fair manner the form and substance of transactions, and reasonably present our state of affairs, profits and cash flows for the year. Industry Overview and Development The software industry in fact has spawned an emerging dotcom sector, and is responsible in large part for its current high powered growth. The strong software sector is now playing parent to the nascent dot com brigade, providing newbie with an edge over competitors. The dotcom companies have added repertoire of skills by including e-business and e- commerce solutions and expertise which is currently the hottest and most in-demand both in the overseas and in the domestic markets. The Government too is playing indulgent patron. The Government of India's decision to increase Internet bandwidth will enable Internet penetration to rise which will help in expanding the dotcom business and increase the overall efficiency of the internet export business industry.” 28. That referring notes on Annual report of this company which are annexed at Pages 332, 336, 398/399, the Ld. Counsel for the assessee demonstrates that Megri Soft Ltd. is engaged in varied function and not comparable with that of the assessee company. Operational Review and Prospects and Segment Reporting of this company have been annexed at Page 332 of the paper book which reads as follows: “Operational Review and Prospects 25 ITA No. 2505/PUN/2017 A.Y.2013-14 During the year under review, the company has been carrying on dotcom and information technology business, Domain Registration, Web Hosting, Web Designing, Web Development, Web Scripting, Web Based Software Development, Web Promotion, Search Engine optimization, Link building and SEO services in addition to development of its own Indian and International Web Portals/Vortals on various subjects as well as provided software services to the clients also. This year the company registered income from operation around Rs.688.30 Lacs as compared to last year of Rs.687.22 Lacs and also registered a net profit (after taxes) of Rs.264.37 Lacs (20.04%) which is higher than last year’s profits of Rs. 220.23 (after taxes). Segment Reporting “Your Company is organizing itself to become a leading player in the IT services and other IT related applications which will provide your Company the competitive edge over the others. The company has developed around 65 of its own web portals. Although they are still in their developing stage but they are attracting heavy traffic and have a large online presence. The web portals have attracted International traffic and successfully catered to quite a large viewer base. The planned list of the company’s web portals is very large, which have made quite a significant presence on web. Also the web portals of the company are having top ranking at premium search engines. The company is in the process of developing a large online web clientage as well as large offline customer base. Your Directors are putting in their best so as to extract the best potential of the Company and make it a leading Dotcom Company. The Directors have also planned to diversify and have already started to develop in other related fields like E- commerce, web applications and development, directory scripts, readymade website sellers, payment gateway and other internet and IT related activities which will result in increasing the present clientele of the company and thereby increasing its revenue. The Directors are hopeful of achieving better results in the next year barring unforeseen circumstances.” 29. Revenue Recognition of this company has been discussed Annual Report at page 399 of the Paper book which reads as follows: “(e) Revenue Recognition: The company’s Revenue is recognized to the extent that it is probable that the economic benefits will flow to the company and the revenue and costs, if applicable, can be measured reliably. Revenue is recognized in the Income statement as follows: (i) Revenue from services rendered is recognized as the service is performed. (ii) Revenue from the sale of software products is recognized when the sale is compared with the passing of title. (iii) Incomes from domain registration, web hosting, set up and configuration charges are recognized on activation of customer account. 26 ITA No. 2505/PUN/2017 A.Y.2013-14 (iv) Revenue from software and web development contracts are priced on the completion of development work.” 30. We have also gone through the profit and loss account of this company annexed at page 413 of the paper book. Having perused all these relevant details, we find that this company is functionally dissimilar with that of the assessee company. Therefore, we direct the Assessing Officer /TPO to exclude Megri Soft Ltd. from the final set of comparables. Thus, Ground No.11 raised in appeal by the assessee is allowed. 31. With regard to Ground No.12, the Ld. Counsel submitted that this ground becomes infructuous as per order passed u/s.154 of the Act and hence, no adjudication is required. 32. The Ld. Counsel for the assessee has also raised additional ground No.19. However, at the time of hearing, he has not pressed this ground. Hence, additional ground No.19 raised by the assessee is dismissed as not pressed. 33. In the result, appeal of the assessee is partly allowed for statistical purposes. Order Pronounced on 06 th day of December, 2021. Sd/- Sd/- R.S.SYAL PARTHA SARATHI CHAUDHURY VICE PRESIDENT JUDICIAL MEMBER पुणे / Pune; ददनांक / Dated : 06 th December, 2021. SB 27 ITA No. 2505/PUN/2017 A.Y.2013-14 आदेश की प्रधतधलधप अग्रेधषत / Copy of the Order forwarded to : 1. अपीलाथी / The Appellant. 2. प्रत्यथी / The Respondent. 3. The CIT(Appeals)-13, Pune. 4. The Pr. CIT-5, Pune. 5. धवभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, “सी” बेंच, पुणे / DR, ITAT, “C” Bench, Pune. 6. गार्ा फ़ाइल / Guard File. आदेशानुसार / BY ORDER, // True Copy // धनजी सधचव / Private Secretary आयकर अपीलीय अधधकरण, पुणे / ITAT, Pune. 28 ITA No. 2505/PUN/2017 A.Y.2013-14 Date 1 Draft dictated on 01.12.2021 Sr.PS/PS 2 Draft placed before author 06.12.2021 Sr.PS/PS 3 Draft proposed and placed before the second Member JM/AM 4 Draft discussed/approved by second Member AM/JM 5 Approved draft comes to the Sr. PS/PS Sr.PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order