M/s.Zafin Software Centre of Excellence P. Ltd, Trivandrum V. The ACIT, Circle-1(1), Trivandrum, Trivandrum

ITA 331/COCH/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5469 (ITAT-COCHIN)
• Duration Of Justice: 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-05-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2013-2014
• Appeal Filed On: 30-06-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHANTHAM BOSE
• Assessee Lawyers: RAGHUNATHAN S
• Keywords: Transfer pricing; International transaction; Initiation of penalty proceedings; Bad and doubtful debts
• Section: 143(3); 234B; 133(6); 10B

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., JM IT(TP)A NO. 331/COCH/2017 ASSESSMENT YEAR : 2013 - 14 M/S. ZAFIN SOFTWARE CENTRE OF EXCELLENCE PVT. LTD., G4, THEJASWINI BUILDING, TECHNOPARK CAMPUS, KARYAVATTOM PO, TRIVANDRUM-695 581. [PAN:AAACZ 2840G] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), TRIVANDRUM (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) A SSESSEE BY SHRI RAGHUNATHAN S., ADV. REVENUE BY SHRI SHANTHAM BOSE CIT( DR ) D ATE OF HEARING 18/04/2018 DATE OF PRONOUNCEMENT 16 /05/2018 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE ASSESSING OFFICER PASSED U/S. 143(3) R.W.S. 92CA R. W.S. 144C OF THE I.T. ACT DATED 08/05/2017 WHICH WAS PASSED IN CONSEQUENCE TO THE DIRECTIONS OF THE DRP DATED 03/04/2017. IT(TP).A. NO.331/C/2017 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS O F APPEAL: 1 ASSESSMENT AND REFERENCE TO TRANSFER PRICING O FFICER ARE BAD IN LAW 1.1 THE ASSISTANT COMMISSIONER OF INCOME TAX - CI RCLE- 1(1) ('AO') ERRED IN MAKING A REFERENCE TO THE DEPUTY COMMISSIONER OF IN COME TAX, (TRANSFER PRICING) ('TPO'), WITHOUT RECORDING AN OPINION THAT ANY OF THE CONDITIONS IN SECTION 92C(3) OF THE INCOME TAX ACT, 1961('THE ACT ') WERE SATISFIED IN THE INSTANT CASE. 1.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE TPO ERRED IN NOT DEMONSTRATING THAT THE MOTIVE OF THE A PPELLANT WAS TO SHIFT PROFITS OUTSIDE OF INDIA BY MANIPULATING THE PRICES CHARGED IN ITS INTERNATIONAL TRANSACTIONS, WHICH IS A PRE-REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UNDER THE PROVISION OF CHAPTER X OF THE ACT. 1.3 THE ORDER PASSED BY THE AO IS WITHOUT JURISDICT ION, INTER ALIA, INSOFAR AS IT PURPORTS TO GIVE EFFECT TO AN INVALID ORDER OF THE TPO. 2 DETERMINATION OF ARM'S LENGTH BY THE TPO/AO IN RELATION TO THE 'SOFTWARE DEVELOPMENT SERVICES' SEGMENT 2.1 THE TPO/AO ERRED ON FACTS AND IN LAW IN CONDUC TING A FRESH BENCHMARKING ANALYSIS USING NON CONTEMPORANEOUS DAT A AND SUBSTITUTING THE APPELLANT'S ANALYSIS WITH FRESH BENCHMARKING ANALYS IS ON HIS OWN CONJECTURES AND SURMISES. THUS THE APPELLANT PRAYS THAT THE FRE SH BENCHMARK ANALYSIS CONDUCTED BY THE LEARNED TPO IS LIABLE TO BE QUASHE D. THE LD. DRP ERRED IN UPHOLDING THE ACTIONS OF TPO/AO. 2.2 THE TPO/AO ERRED ON FACTS IN REJECTING THE COM PARABLE COMPANIES ARRIVED AT IN THE TRANSFER PRICING STUDY WITHOUT CONSIDERIN G THE FUNCTIONAL AND RISK ANALYSIS OF THE APPELLANT. THE LD. DRP ERRED IN UPH OLDING THE ACTIONS OF THE TPO/AO. 2.3 THE TPO/AO ALSO ERRED ON FACTS AND IN LAW IN A RBITRARILY REJECTING COMPANIES WITH DIFFERENT YEAR ENDING (I.E. OTHER TH AN 31 MARCH 2013). THE LD. DRP ERRED IN UPHOLDING THE ACTIONS OF THE/ TPO/AO. 2.4 THE TPO/ AO GROSSLY ERRED ON FACTS IN BENCHMAR KING THE TRANSACTIONS OF THE CAPTIVE SOFTWARE DEVELOPMENT SERVICES OF THE AP PELLANT WITH COMPANIES OPERATING AS FULL-FLEDGED ENTREPRENEURS WITHOUT CON SIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK U NDERTAKEN BY THE APPELLANT VIS-A-VIS COMPARABLE COMPANIES. THE LD. D RP ERRED IN UPHOLDING THE ACTIONS OF THE TPO/AO. IT(TP).A. NO.331/C/2017 3 2.5 THE TPO/AO ERRED IN LAW IN APPLYING ARBITRARY FILTERS TO ARRIVE AT A FRESH SET OF COMPANIES AS COMPARABLE TO THE APPELLANT, WI THOUT ESTABLISHING FUNCTIONAL COMPARABILITY. THE LD. DRP ERRED IN UPHO LDING THE ACTIONS OF THE TPO/AO. 2.6 THE TPO/AO ERRED IN RETAINING THE COMPARABLE C OMPANIES WITHOUT PROVIDING A COGENT REASON ANY RELIABLE INFORMATION TO JUSTIFICATION IN CONNECTION WITH THE REBUTTALS SUBMITTED BY THE APPE LLANT IN THE RESPONSE TO SHOW CAUSE NOTICE. THE LD. DRP ERRED IN UPHOLDING T HE ACTIONS OF THE TPO/AO AND FAILED TO CONSIDER IN COMPLETENESS, THE GROUNDS OF OBJECTIONS FILED BY THE APPELLANT REGARDING THE FUNCTIONAL COMPARABILITY OF COMPANIES SELECTED BY THE TPO. 2.7 THE TPO/AO ERRED ON FACTS IN ARBITRARILY ACCEP TING COMPANIES WITHOUT CONSIDERING THE TURNOVER AND SIZE OF THE APPELLANT AND COMPARABLES. THE LD. DRP ERRED IN UPHOLDING THE ACTIONS OF THE TPO/AO. 2.8 THE LD. TPO/AO ERRED USING INFORMATION OBTAINE D BY EXERCISING POWERS UNDER SECTION 133(6). THE LD. DRP ERRED IN UPHOLDIN G THE ACTIONS OF THE TPO/AO. 2.9 THE LD. TPO/AO ERRED ON FACTS IN WRONGLY COMPU TING THE OPERATING MARGIN OF CERTAIN COMPANIES IDENTIFIED AS COMPARABL E BY THE TPO. THE LD. DRP ERRED IN UPHOLDING THE ACTIONS OF THE TPO/AO. 2.10 THE LD. TPO/ AO ERRED ON FACTS IN WRONGLY CONS IDERING PROVISION FOR BAD AND DOUBTFUL DEBTS AS NON-OPERATING WHILE COMPUTING THE MARGIN OF CERTAIN COMPARABLE COMPANIES. THE LD. DRP ERRED IN UPHOLDIN G THE ACTIONS OF THE TPO/AO. 3 ERRONEOUS DATA USED BY THE TPO/AO 3.1 THE TPO/AO HAS ERRED IN LAW IN USING DATA, WHIC H WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF CONDUCTING THE TRANSFER PRICING STUDY BY TH E APPELLANT. THE LD. DRP ERRED IN UPHOLDING THE ACTIONS OF THE TPO/AO. 4 TO PROVIDE APPROPRIATE ADJUSTMENTS TO THE COMP ARABLE COMPANIES 4.1 THE LD. DRP ERRED IN DISALLOWING THE WORKING CA PITAL ADJUSTMENTS UNDER RULE 10B OF THE INCOME TAX RULES, 1962 PROVIDED BY THE LD. TPO WHICH IS IN LINE WITH THE OECD GUIDELINES. ADDITIONALLY, THE LD. DRP ERRED IN NOT CONSIDERING VARIOUS TRIBUNAL JUDGMENTS WHICH PROVID E GUIDANCE ON (A) THE REQUIREMENT TO GRANT THE BENEFIT OF WORKING CAPITAL ADJUSTMENT AND (B) THE IT(TP).A. NO.331/C/2017 4 NEED FOR ADOPTING CERTAIN ASSUMPTIONS WHILE COMPUTI NG THE SAID ADJUSTMENT FOR THE PURPOSE OF TRANSFER PRICING. 4.2 THE LD. DRP, BY DENYING ON FLIMSY GROUNDS THE BENEFIT OF WORKING CAPITAL ADJUSTMENT TO THE APPELLANT GRANTED BY THE TPO, HAS IGNORED THE PRINCIPLES OF COMPUTATION OF THE WORKING CAPITAL ADJUSTMENT THAT HAS BEEN ACCEPTED BY VARIOUS TRIBUNALS TILL DATE. 4.3 THE LD. DRP ERRED IN RELYING ON M/S MOBIS INDIA LIMITED IN ITA NO. 2112/MDS/2011 (A Y: 2007-08) [2013] 38 TAXMANN.COM 231 TO REJECT THE BENEFIT WORKING CAPITAL ADJUSTMENT TO THE APPELLANT WHICH WAS GRANTED BY THE TPO. THE LD. DRP CONVENIENTLY IGNORED THE ARGUMENTS PLACED BY THE APPELLANT DURING THE DRP PROCEEDINGS TO DIFFERENTIATE ITS OWN CASE (A SERVICES COMPANY) FROM THAT OF MOBIS INDIA LIMITED WHICH IS A MANUFAC TURING ENTITY IN THE INITIAL YEAR OF OPERATIONS. 5 VARIATION OF 3% FROM THE ARITHMETIC MEAN 5.1 THE LD. AO/ LD. TPO ERRED IN LAW IN NOT GRANT ING THE BENEFITS OF PROVISO TO SECTION 92C(2) OF THE ACT AVAILABLE TO THE APPEL LANT. THE LD. DRP HAS UPHELD THE ACTION OF THE TPO. 6 INITIATION OF PENALTY PROCEEDINGS 6.1 THE APPELLANT SUBMITS THAT, BASED ON THE FACT S AND CIRCUMSTANCES OF THE CASE, THERE WAS NO BASIS FOR THE LD. AO TO INITIATE PROCEEDINGS UNDER SECTION 274 READ WITH SECTION 271 OF THE ACT. 7 THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDE R SECTION 234B OF THE ACT 7.1 THE LEARNED AO HAS ERRED IN LEVYING INTEREST UN DER SECTION 234B OF THE ACT OF INR. 23,73,650. 8 THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDE R SECTION 234C OF THE ACT 8.1 THE LEARNED AO HAS ERRED IN LEVYING INTEREST UN DER SECTION 234C OF THE ACT OF INR. 61,428. IT(TP).A. NO.331/C/2017 5 9 RELIEF 9.1 THE APPELLANT PRAYS THAT DIRECTIONS BE GIVEN TO GRANT ALL SUCH RELIEF ARISING FROM THE ABOVE GROUNDS AND ALSO ALL RELIEF CONSEQUENTIAL THERETO. 9.2 THE APPELLANT DESIRES LEAVE TO ADD TO OR ALTER , BY DELETION, SUBSTITUTION OR OTHERWISE, ANY OR ALL OF THE ABOVE GROUNDS OF OBJEC TIONS, AT ANY TIME BEFORE OR DURING THE HEARING OF THE APPEAL. 9.3 FURTHER, THE APPELLANT PRAYS THAT THE ADJUSTME NT IN RELATION TO TRANSFER PRICING MATTERS MADE BY THE LEARNED AO/ TPO AND UPH ELD BY THE LD. PANEL IS BAD IN LAW AND LIABLE TO BE DELETED. THE APPELLANT SUBMITS THAT THE ABOVE GROUNDS ARE IN DEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. 2.1 HOWEVER, AT THE TIME OF HEARING, THE LD. AR H AS PRESSED ONLY GROUND NOS. 2.2, 2.7 AND 4 OF THE APPEAL. THE LD. AR HAS MADE AN ENDORSEMENT TO THE EFFECT THAT THE ASSESSEE IS NOT INTERESTED TO PURSUE THE O THER GROUNDS OF APPEAL RAISED BY IT. ACCORDINGLY, WE PROCEED TO ADJUDICATE ONLY GROUND NOS. 2.2, 2.7 AND 4 AND OTHER GROUNDS OF APPEAL ARE DISMISSED AS NOT PR ESSED. 3. THE FIRST GROUND, GROUND NO. 2.2 IS WITH REGAR D TO DETERMINATION OF ARMS LENGTH PRICE BY THE TPO/AO IN RELATION TO THE SOFT WARE DEVELOPMENT SERVICES SEGMENT. 3.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE WA S INCORPORATED AS A PRIVATE LIMITED COMPANY UNDER THE PROVISIONS OF COMPANIES A CT, 1956 ON 26 SEPTEMBER 2006. IT IS A FULLY OWNED SUBSIDIARY OF ZAFIN BVI. THE COMPANY PROVIDES BANKING IT(TP).A. NO.331/C/2017 6 SOFTWARE SOLUTIONS TO FINANCIAL SERVICE PROVIDERS, GLOBALLY. AS PER THE ASSESSEE IT HAD ENTERED INTO AGREEMENTS WITH ZAFIN BVI FOR THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND HAS RENDERED SOFTWARE DEVE LOPMENT SERVICES TO ITS AE AND IT IS REMUNERATED FOR THE SERVICES PROVIDED BY IT ON THE COST-PLUS BASIS. IN THIS CASE, TRANSFER PRICING ADJUSTMENT OF RS.90,40, 492/- WAS MADE IN RESPECT OF INTERNATIONAL TRANSACTIONS WITH ITS AES. 3.2. THE DRP CONSIDERED THE SUBMISSIONS OF THE ASS ESSEE AGAINST THE EXCLUSION OF AKSHAY SOFTWARE TECHNOLOGIES LIMITED FROM THE FI NAL LIST OF COMPARABLES. THE TPO REJECTED THIS COMPANY AS A COMPARABLE BY STATIN G THAT THE COMPANY WAS ENGAGED IN PROVIDING PROFESSIONAL SERVICES, PROCURE MENT, INSTALLATION, IMPLEMENTATION, SUPPORT AND MAINTENANCE OF ERP PRODU CTS AND SERVICES. THE ASSESSEE ARGUED THAT THE COMPANY IS FUNCTIONALLY SI MILAR TO IT. THE DRP FOUND THAT THE FUNCTIONS OF THIS COMPANY IS A MIX OF DIFF ERENT TYPES OF SERVICES WHICH MAY OR MAY NOT INCLUDE SOFTWARE DEVELOPMENT. ACCOR DING TO THE DRP, IN ITS REPLY TO 133(6) NOTICE ISSUED BY TPO, IT WAS STATED THAT IT IS IN PROVISION OF SUPPORT SERVICES, WHICH CANNOT BE INTERPRETED AS S OFTWARE DEVELOPMENT ACTIVITIES OF THIS COMPANY ANYWHERE IN THE ANNUAL REPORT ALTHO UGH THE PROFIT AND LOSS ACCOUNT REFERS TO INCOME FROM SOFTWARE SERVICES, WI THOUT INDICATING THE NATURE OF SUCH SOFTWARE SERVICES. THE DRP FOUND THAT THERE I S NO REFERENCE TO SOFTWARE DEVELOPMENT ACTIVITIES OF THIS COMPANY ANYWHERE IN THE ANNUAL REPORT ALTHOUGH THE PROFIT AND LOSS ACCOUNT REFERS TO INCOME FROM S OFTWARE SERVICES, WITHOUT IT(TP).A. NO.331/C/2017 7 INDICATING THE NATURE OF SUCH SOFTWARE SERVICES. T HUS, ACCORDING TO THE DRP, NO DATA WAS AVAILABLE TO SUPPORT THE CLAIM OF THE ASSE SSEE THAT THIS COMPANY IS ONLY IN SOFTWARE DEVELOPMENT ACTIVITIES AND NO SEGMENTAL DATA RELATING TO THESE MULTIPLE SEGMENTS WAS AVAILABLE IN THE FINANCIALS O F THIS COMPANY. THEREFORE IN THE ABSENCE OF THE SAME, THE DRP HELD THAT THE COMP ANY CANNOT BE CONSIDERED AS A PROPER COMPARABLE. FURTHER, THE DRP FOUND THA T AS PER ITS WEBSITE, IT IS RESELLER OF ERP PRODUCTS AND FOR DETERMINING THE FUN CTIONALITY OF A COMPANY, IT NEEDS TO BE DETERMINED AS TO WHAT IS THE EXACT NATU RE OF FUNCTIONS. ACCORDING TO THE DRP IN CASE A COMPANY IS IN SOFTWARE DEVELOPMEN T, IT WOULD NOT MATTER AS TO WHAT KIND OF CUSTOMER IT SERVES AS THE BROAD RANGE OF SERVICES REMAIN THE SAME AND THAT IS THE DEVELOPMENT OF SOFTWARE. FURTHER I T WAS OBSERVED THAT IT WILL NOT MATTER WHETHER THE COMPANY DEVELOPS COMPLETE SOFTWA RE FOR ITS CLIENTS E.G. DEVELOPS A FINAL PRODUCT AS PER DEMAND OF THE CLIEN T OR DEVELOPS ONLY SOME SOFTWARE MODULES, AS PER THE REQUIREMENTS OF ITS CL IENT AND THE FUNCTION REMAINS THE SAME. HOWEVER, ACCORDING TO THE DRP, A COMPANY CAN BE CONSIDERED IN THE BUSINESS OF SOFTWARE PRODUCTS, IF IT IS ITSELF DEVE LOPING AND SELLING THE PRODUCTS DEVELOPED BY IT AS THEN IT OWNS THE IPR OF THE PROD UCT AND EXPLOITS IT BY SELLING THE PRODUCT/SOFTWARE LICENSE TO DIFFERENT CUSTOMERS . IT WAS FOUND THAT THIS COMPANY WAS OPERATING IN MULTIPLE SEGMENTS INCLUDIN G SOFTWARE PRODUCTS AS WELL AS RESELLING OF ERP PRODUCTS, HOWEVER SEGMENTAL DATA OF THE SAME WAS NOT AVAILABLE. IT(TP).A. NO.331/C/2017 8 3.3 THE ASSESSEE RELIED ON THE DECISION OF THE IT AT, BANGALORE BENCH IN THE CASE OF METRIC STREAM INFOTECH (2017) (78 TAXMAN.CO M 87) TO SUPPORT ITS CASE. BUT ACCORDING TO THE DRP, THE DECISION OF THE TRIBU NAL IN THE CASE OF CISCO SYSTEMS LTD. (2014) (50 TAXMAN.COM 280), IT WAS HEL D THAT THE COMPANY M/S. AKSHAY SOFTWARE TECHNOLOGIES LIMITED WAS INVOLVED I N PROCUREMENT, INSTALLATION, IMPLEMENTATION, SUPPORT AND MAINTENANCE OF ERP PRODU CTS AND SERVICES AND PROVIDING PROFESSIONAL SERVICES AND SO THE SAME IS A PROPER COMPARABLE FOR MANAGEMENT SERVICES SEGMENT. THUS IT WAS DIFFERED IN ITS DECISION IN RESPECT OF A COMPANY CONSIDERED AS A COMPARABLE FOR SAME ASSES SMENT YEAR IN TWO DIFFERENT CASES. THE DRP RELIED ON THE DECISION OF THE ITAT, DELHI BENCHES IN THE CASE OF AGNITY INDIA TECHNOLOGIES (P.) LTD. VS. DCI T (73 TAXMAN.COM 102) WHEREIN IT WAS HELD AS UNDER: WHETHER A PARTICULAR COMPANY IS A COMPARABLE OR NO T IS AN EXERCISE WHICH HAS TO BE CARRIED OUT EVERY YEAR IN CASE OF A N ASSESSEE CONSIDERING FACTS OF THAT SPECIFIC YEAR AND NOT BLINDLY FOLLOWI NG PRECEDENT WHICH HAS BEEN LAID DOWN IN EARLIER OR SUBSEQUENT YEAR. 3.4 THUS, CONSIDERING THE FACTS AS BROUGHT OUT BY THE TPO AND THOSE DISCUSSED ABOVE, THE DRP HELD THAT THE COMPANY CANNOT BE CONS IDERED AS FUNCTIONALLY SIMILAR TO THE ASSESSEE AS ALTHOUGH IT IS OPERATING IN MULTIPLE SEGMENTS BUT SEGMENTAL DATA WAS NOT AVAILABLE AND HENCE, REJECTE D THE OBJECTION OF THE ASSESSEE ON THIS COUNT. IT(TP).A. NO.331/C/2017 9 3.5 AGAINST THIS THE ASSESSEE IS IN APPEAL BEFORE US. 3.6 THE LD. AR SUBMITTED THAT THE REVENUE OF AKSHA Y SOFTWARE TECHNOLOGIES LIMITED FOR THE ASSESSMENT YEAR 2013-14 IS AS FOLLO WS: NOTE 20: REVENUE FROM OPERATIONS RS. INCOME FROM SOFTWARE SERVICES (REFER NOTE 29) 1 9,83,23,358 COMMISSION RECEIVED 5,68,690 SALE OF SOFTWARE LICENCES 5,21,730 19,94,13,787 3.7. HE DREW OUR ATTENTION TO THE FINANCIALS OF T HE ASSESSEE WHICH IS AS FOLLOWS: STATEMENT OF PROFIT AND LOSS AS FOR THE YEAR ENDED 31 ST MARCH, 2013 PARTICULARS NOTE NO. AY 2012 - 13 AY 2011 - 12 INCOME: REVENUE FROM OPERATIONS OTHER INCOME TOTAL REVENUE 17 18 263,027,908 1,576,266 264,604,174 159,849,060 838,010 160,687,070 3.8 ACCORDINGLY, THE REVENUE EARNED BY AKSHAY SOF TWARE TECHNOLOGIES LIMITED FROM OTHER THAN SOFTWARE IS VERY LESS AND IT IS VER Y MARGINAL. AS SUCH, IT CANNOT BE REJECTED AS COMPARABLE TO THE ASSESSEES CASE. WE FIND FORCE IN THE ARGUMENT OF THE LD. AR. AKSHAY SOFTWARE TECHNOLOGIES LIMITE D WAS CONSIDERED AS VALID COMPARABLE BY THE ITAT, BANGALORE BENCH IN THE CASE OF METRIC STREAM INFOTECH VS. DCIT (78 TAXMAN. COM 87) WHEREIN IT WAS HELD AS UNDER: 15. WITH RESPECT TO AKSHAY SOFTWARE TECHNOLOGIES L TD. WE FIND THAT IT OFFERS SOFTWARE SERVICES AND PRODUCTS. THE SALE OF PRODUC TS IS ONLY 4% OF THE TOTAL REVENUE. VERTICAL OF THIS COMPANY IS FINANCIAL SER VICES. MAJOR ASSETS UNDERTAKEN BY THIS COMPANY ARE MANPOWER AND COMPUTE RS. THIS COMPANY IT(TP).A. NO.331/C/2017 10 ALSO PASSES ALL FILTERS APPLIED BY THE TPO. WE DIR ECT THE RETENTION OF AKSHAY SOFTWARE TECHNOLOGIES IN THE LIST OF COMPARABLES. 3.9 THE DECISION OF THE ITAT, BANGALORE BENCH IN T HE CASE OF CISCO SYSTEMS (INDIA) (P.) LTD. VS. DCIT (50 TAXMAN.COM 280) RELI ED UPON BY THE DRP WAS PASSED ON 14/08/2014. HOWEVER, IT WAS OVERLOOKED BY THE ITAT, BANGALORE BENCH WHILE PASSING THE ORDER IN THE CASE OF METRIC STREAM INFOTECH VS. DCIT (2017) (78 TAXMAN. COM 87) WHICH WAS PASSED ON 09/1 2/2016. HENCE, WE ARE OF THE OPINION THAT AKSHAY SOFTWARE TECHNOLOGIES LI MITED IS TO BE CONSIDERED AS COMPARABLE WHILE DETERMINING THE ALP OF THE INTERNA TIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 4 THE NEXT GROUND, GROUND NO. 2.7 IS WITH REGARD TO ARBITRARILY ACCEPTING THE COMPANIES WITHOUT CONSIDERING THE TURNOVER AND SIZE OF THE ASSESSEE AND COMPARABLES. 4.1 IN THIS GROUND, THE ASSESSEE OBJECTED TO THE SELECTION OF THE FOLLOWING COMPARABLES IN VIEW OF THE HUGE TURNOVER: A) LARSEN & TOUBRO INFOTECH RS.3613.42 CROR ES B) MINDTREE LTD. RS.2361.8 0 CRORES C) PERSISTENT SYSTEMS LTD. RS. 996.75 CR ORES IT(TP).A. NO.331/C/2017 11 4.2 THE LD. AR SUBMITTED THAT THE TURNOVER OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION WAS RS.26.46 CRORES. HE SU BMITTED THAT THE TURNOVER OF THE COMPANIES MENTIONED HEREINBELOW IS VERY HUGE AN D CANNOT BE COMPARED WITH THAT OF THE ASSESSEE. BEING SO, IT SHOULD BE EXCLUDED. 4.3 HE ALSO RELIED ON THE FOLLOWING CASE LAWS: 1) XM SOFTWARE SOLUTION (P.) LTD. VS. ACIT (2018) 9 0 TAXMAN.COM 318 (COCHIN- TRIB.) 2) CIT VS. PENTAIR WATER INDIA (P.) LTD. 69 TAXMAN. COM 180- (HC BOMBAY) 3) M/S. OBOPAY MOBILE TECHNOLOGY INDIA PRIVATE LIMI TED VS. DCIT- (IT(TP)A NO. 469/BANG/2015 4) M/S. LOGITECH ENGINEERING & DESIGN INDIA PRIVATE LTD. VS. DCIT- IT(TP)A NO.287/BANG/2015 5) DELL INTERNATIONAL SERVICES INDIA PRIVATE LTD. V S. DCIT IT(TP)A NO. 85/BANG/2014 & CO NO.21/BANG/2016 IN IT (TP)A NO. 1838/BANG/2013 6) DCIT VS. HELLOSOFT INDIA (P) LTD. - ITA NOS. 645 & 1411/HYD/2009 AND CO NO. 40/HYD/2009. 4.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL ON RECORD. IN OUR OPINION, THERE IS FORCE IN THE ARGUMENT OF THE ASSE SSEE. IN OUR OPINION THE ABOVE COMPANIES WHICH ARE HAVING HUGE TURNOVER CANNOT BE COMPARED WITH THE ASSESSEE- IT(TP).A. NO.331/C/2017 12 COMPANY WHICH IS HAVING ONLY 26.46 CRORES SO AS TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH ITS AES. HENCE, IN OUR OPINION, IT IS APPROPRIATE TO EXCLUDE THE ABOVE THREE COMPANIES AS COMPARABLES FR OM THE LIST OF COMPARABLES TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTI ONS WITH ITS AES. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 5. THE NEXT GROUND, GROUND NO. 4 IS WITH REGARD T O WORKING CAPITAL ADJUSTMENT. 5.1 THE FACTS OF THE CASE ARE THAT WHILE COMPUTING ALP OF THE INTERNATIONAL TRANSACTIONS, THE TPO REDUCED THE AVERAGE MARGIN OF THE COMPARABLES BY 2.34% BY ALLOWING WORKING CAPITAL ADJUSTMENT. 5.2 THE DRP HELD THAT THE AVERAGE WORKING CAPITAL WILL NOT SHOW THE ACTUAL WORKING CAPITAL EMPLOYED DURING THE YEAR. ACCORDING TO THE DRP THE ADJUSTMENT SOUGHT BY THE ASSESSEE IS FOR THE DIFFERENCES IN TH E WORKING CAPITAL LEVELS BETWEEN THE TESTED PARTY AND THE COMPARABLE COMPANI ES. HOWEVER, SUCH DIFFERENCE IN WORKING CAPITAL LEVELS CANNOT BE MEAS URED WITH REASONABLE ACCURACY AND WHAT IS DISCLOSED IN THE BALANCE SHEET IS ONLY THE OPENING AND CLOSING FIGURES OF DEBTORS AND CREDITORS. THE DRP OBSERVED THAT TH ESE OPENING AND CLOSING FIGURES ARE THE BALANCES AS THEY EXISTED ON THE OPE NING AND CLOSING DAY OF THE YEAR RESPECTIVELY AND THEY DO NOT SHOW THE MOVEMENT S IN THEIR ACCOUNTS DURING THE YEAR. ACCORDING TO THE DRP WORKING CAPITAL ARE NOT UNIFORM DURING THE ENTIRE IT(TP).A. NO.331/C/2017 13 PERIOD OF THE YEAR AND THEY DIFFER WITH THE CHANGES IN THE WORKING CAPITAL CYCLE AND THE REGULARITY OF SALES AND PURCHASES AND THE W ORKING CAPITAL REQUIREMENTS DURING THE YEAR IS INFLUENCED BY THE NATURE OF MARK ET IN WHICH THE COMPANY IS OPERATING. CONSIDERING THE ABOVE, THE DRP DIRECTE D THE TPO TO DISALLOW WORKING CAPITAL ADJUSTMENT ALLOWED TO THE ASSESSEE AND RE-C OMPUTE THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH ITS AES. 5.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RECORD. THE LD. AR RELIED ON THE DECISION OF THE ITAT, CHENNAI BENCH I N THE CASE OF FOXTEQ SERVICES INDIA (P) LTD. VS. ACIT IN 74 TAXMAN.COM 216 WHERE IN IT WAS HELD AS UNDER: 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASS ESSEE OBJECTED TO THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER. W ITH REGARD TO WORKING CAPITAL ADJUSTMENT, THE ASSESSEE CLAIMS THAT THE DI FFERENCE IN WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPARABLE COM PANIES WOULD MATERIALLY AFFECT THE PROFIT DETERMINED. THEREFORE , CERTAIN ADJUSTMENT NEEDS TO BE MADE TO BRING THEM ON EQUAL FOOTING. T HE ASSESSEE ALSO BROUGHT TO THE NOTICE OF THE DRP THAT THE WORKIN G C APITAL ADJUSTMENT, WHICH WAS TO ENSURE THE PROFIT DERIVED BY THE COMPA RABLE COMPANIES, CAN BE COMPARED WITH THE PROFIT OF THE ASSESSEE. THIS T RIBUNAL IS OF THE CONSIDERED OPINION THAT THE CAPITAL EMPLOYED BY THE ASSESSEE, INCLUDING THE WORKING CAPITAL, AND THAT OF COMPARABLE COMPANI ES NEEDS TO BE TAKEN INTO CONSIDERATION. WITHOUT COMPARING THE WORKING CAPITAL EMPLOYED BY THE COMPARABLE COMPANIES AND THAT OF THE ASSESSEE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CANNOT BE ANY TRANSFE R PRICING ADJUSTMENT. 5.4 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DIRECT THE ASSESSING OFFICER TO CONSIDER THE WORKING CAPITAL A DJUSTMENT AS COMPUTED BY HIM IT(TP).A. NO.331/C/2017 14 WHILE DETERMINING THE ALP OF INTERNATIONAL TRANSACT IONS OF THE ASSESSEE WITH ITS AES. HENCE, THIS GROUND OF APPEAL TAKEN BY THE ASSE SSEE IS PARTLY ALLOWED. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSE SSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THI S 16 TH MAY, 2018. SD/- SD/- ( GEORGE GEORGE K.) (CHAN DRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: DATED: 16 TH SSMAY, 2018 GJ COPY TO: 1. M/S. ZAFIN SOFTWARE CENTRE OF EXCELLENCE PVT. LT D., G4, THEJASWINI BUILDING, TECHNOPARK CAMPUS, KARYAVATTOM PO, TRIVANDRUM-581. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1(1), TRIVANDRUM. 3. THE PR. COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRA R) I.T.A.T. , COCHIN IT(TP).A. NO.331/C/2017 15