QAD INDIA P.LTD, MUMBAI V. DCIT CIR 9(3), MUMBAI

ITA 4098/MUM/2015

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113540 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: J
• Next Hearing Date: 22-06-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 30-06-2015
• Other Referred Cases: CIT Vs. Pentair Wat India (Pvt.) Ltd.: 381 ITR 216, Commissioner of Income Tax, Chennai Vs. Same Deutz-Fahr India (Pvt.) Ltd.: [2018] 89 taxmann.com 47 (Madras), Sybase Software (India) Private Limited Vs. DCIT \\u2013 Range 14(3)(1) [ ITA No. 2658/Mum/2015, Assessment Year 2010-11], CIT V/s Cashedge India P. Ltd. (Hon'"]}]},
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: .. PERSISTENT SYSTEMS LTD. SIMILAR ARGUMENT OF FUNCTIONAL NON
• Keywords: Transfer pricing; International transaction
• Section: 271(1)(c); 143(3); 234B; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL "J" BENCH, MUMBAI SHRI B.R. BASKARAN, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 4098/MUM/2015 (Assessment Year: 2010-11) QAD India Private Limited, 301, 3 rd Floor, Techniplex-I, Techniplex Complex, Off. Veer Savarkar Flyover, Goregaon (West), Mumbai - 400062 [PAN:AAACQ1307K] The Deputy Commissioner of Income Tax, Circle 9(3), Mumbai ............... Vs ................ Appellant Respondent Appearance For the Appellant/Assessee For the Respondent/Department : : Ms. Chandni Shah, Ms. Riddhi Maru, Ms. Tejal Saraf Dr. Samuel Pitta Ms. Mahita Nair Date Conclusion of hearing Pronouncement of order : : 23.06.2023 20.09.2023 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Appellant has challenged the order, dated 05/03/2015, passed by the Ld. Commissioner of Income Tax (Appeals)-21, Mumbai [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2010-11, whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Assessment Order, dated 26/03/2013, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 2. The Appellant has raised following grounds of appeal: ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 2 1. On the facts and circumstances of the case and in law, the Deputy Commissioner of Income Tax -9(3) (the Learned AO) and the Commissioner of Income Tax (Appeals)-21 (the Learned CIT (A)) have erred in determining the arm's length mark-up for provision of software support, development and related services at 26.21% and consequently making an addition of Rs. 2,21,07.342/- to the total income of the Appellant as an adjustment to the arm's length price under Section 92CA of the Act. The Appellant prays that the aforesaid adjustment be deleted. 2. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in: 2.1 rejecting the Transfer Pricing (TP) documentation prepared by the Appellant as required under the provisions of the Act and the Income-tax Rules, 1962 (the Rules): 2.2 rejecting the methodical search process and comparability analysis carried out by the Appellant in the TP documentation without providing any cogent reasons, 2.3 arbitrarily including companies in the comparability analysis which are functionally different from the Appellant. Further the Learned ACY's approach is erred on account of following grounds: 2.3.1 adhoc selection/rejection of comparables based on incorrect interpretation of functions, asset base risk profile 2.3.2 not sharing the methodology used for arriving at the new set of comparables, 2.3.3 not sharing data used for arriving at the set of new comparables during the course of audit: 2.3.4 selecting companies which are larger in size as compared to the Appellant and companies that are earning super normal profits; 2.3.5 in not appreciating the fact that the profit margins of large Indian Software companies would be largely influenced by its goodwill/brand name and other intellectual property and such companies ought to be rejected, and 2.3.6 rejecting comparable companies selected in the TP documentation on arbitrary reasons. ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 3 3. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in considering financial data of only the current year (FY 2009-10) of the comparable companies instead of multiple year data to be used for benchmarking the Appellant's international transaction. 4. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in not granting working capital and risk adjustment. 5. On the facts and circumstances of the case and in law, the Hon'ble CTT(A) erred in upholding the decision of the Learned AO in not allowing the Appellant the benefit of 5 percent range as provided by the proviso to section 92C(2) of the Act. 6. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in interest under section 234A and 234B of the Act. 7. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the AO in initiating penalty proceedings under section 271(1)(c) of the Act” 3. The relevant facts in brief are that Appellant is a company primarily engaged in provision of software development, support and related services. The Appellant filed return of income on 17/03/2011 for the Assessment Year 2010-11. The case of the Appellant was selected for regular scrutiny. During the relevant previous year, the Appellant was engaged in the following international transactions – (a) provision of software support, development and related services; (b) receipt of software and related services; and (c) reimbursement of expenses; and (d) recovery of expenses. The grounds raised in the present appeal pertain to the transfer pricing adjustment made in relation to the provision of software support, development and related services by the Appellant to its Associated Enterprises (AEs). ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 4 3.1. During the assessment proceedings, the Assessing Officer noted that in the transfer pricing documentation as maintained by the Appellant, for the international transaction pertaining to provision of software support, development and related services were aggregated together and benchmarked using the Transactional Net Margin Method (TNMM) as the most appropriate method with Net Operating Profit on Cost (for short ‘NCP’) as the Profit Level Indicator (PLI). As per the search carried out by the Appellant for comparable companies that perform a similar function and carried a risk profile similar to that of the Appellant, arm's length NCP was 6.65%, as against Appellant's NCP of 9.99 percent. Thus, before the Assessing Officer it was contended by the Appellant the international transaction pertaining to provision of software support, development and related services were at arm's length. 3.2. However, the Assessing Officer was of the view that the NCP of the comparables was on a lowers side. The Assessing Officer disregarded the transfer pricing documentation and conducted a fresh search to arrive at a set of 21 comparables. The Assessing Officer computed NCP of the 21 comparables at 26.21 percent and proposed upward transfer pricing adjustment of INR 2,21,07,342/- vide order dated 26/03/2013. Thus, the Assessing Officer assessed total income of the Appellant as under: Particulars Amount (INR) Total Income before as per computation filed 1,96,83,199 Add: Transfer Pricing Adjustment 2,21,07,342 Assessed Income 4,17,90,540 3.3. Being aggrieved, the Appellant preferred appeal before the CIT(A) challenging the rejection of the comparables selected by the Appellant and selection of new set of 21 comparables. It was ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 5 contended on behalf of the Appellant that the nature of software developed by the Appellant was related to ERP Software. Appellant was a low risk captive software service provider providing services to its affiliates around the globe as per the terms of Inter-Company Agreements between Appellants and its Associates, and that the Appellant was remunerated on a cost plus 10% mark up for provisions of services. On the basis of the aforesaid the Appellant sought rejection of the most of the comparables selected by the Assessing Officer, inter alia, on the ground that the same were not functionally comparable. The CIT(A) rejected the contentions raised by the Appellant and dismissed the Appeal vide order dated 05/03/2015. 3.4. The Appellant is now in appeal before us on the grounds reproduced in paragraph 2 above. 4. We have heard the rival submission and perused the material on record. The Learned Authorised Representative for the Appellant has, in effect, sought exclusion of 15 out of the total 21 comparables. She submitted that in case the aforesaid comparables were excluded then the inclusion of the balance 6 comparables selected by the Assessing Officer would not lead to any transfer pricing adjustment as the NCP of the comparables would lie with the range of +/- 5% and therefore, no transfer pricing adjustment would be warranted. In this regard, the Learned Authorised Representative for Appellant relied upon the Chart containing summary of submission filed during the course of the hearing and the submission filed before CIT(A) forming part of the paper-book. Per Contra, Learned Departmental Representative relied upon supported the Transfer Pricing Adjustment and relied upon the order passed by the Assessing Officer and the CIT(A). ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 6 4.1. We note that in paragraph 5.1 of the Assessment Order, the Assessing Officer has tabulated the objections/submissions of the Appellant submitted vide letter dated 20/03/2013. Similarly, in perusal of the order passed by the CIT(A) we note that in paragraph 4.4 of the order impugned, the CIT(A) has recorded the summary of submission made by the Appellant on selection of comparables, the comments received from the Assessing Officer and the conclusion drawn by the CIT(A). We have also taken the same into consideration along with the Appellant’s contentions as summarized in the chart submitted and the arguments advanced by both the sides. 5. The Appellant has sought exclusion of 11 comparables on the ground that the same are large turnover companies having turnover much higher in comparison to that of the Appellant which stood at INR 14.98 Crores during the relevant previous year. In support, the Learned Authorised Representative for Appellant relied upon the judgment of the Hon’ble Bombay High Court in the case of CIT Vs. Pentair Wat India (Pvt.) Ltd.: 381 ITR 216 while in response, the Learned Departmental Representative placed reliance on the judgment of the Hon’ble Madras High Court in the case of Commissioner of Income Tax, Chennai Vs. Same Deutz-Fahr India (Pvt.) Ltd. : [2018] 89 taxmann.com 47 (Madras). 5.1. On perusal of the judgment of the Hon’ble Bombay High Court in the case of Pentair Wat India (Pvt.) Ltd. (supra), we find that the Hon’ble High Court had confirmed the order passed by the Tribunal whereby the Tribunal had concluded that three companies were not comparable to the Appellant in the that case as the said companies failed to pass the turnover the filter. In view of concurrent finding of ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 7 CIT(A) and the Tribunal the High Court declined to frame substantial question of law and rejected the appeal preferred by the Revenue. On the other hand, in the case of Same Deutz-Fahr India (Pvt.) Ltd. (supra), the Hon’ble Madras High Court has, while declining to frame substantial question of law in the appeal of the Revenue, had confirmed the order passed by the Tribunal wherein it was held that functionally similar company cannot be excluded as a comparable only on the ground that the company has high turnover. A company with high turnover can be excluded from the list of comparables in case such turnover results in differences which cannot be eliminated [Chryscapital Investment Advisors (India) (Pvt.) Ltd. Vs Deputy Commissioner of Income-tax: [2015] 376 ITR 183 (Delhi)]. However, we note that the Appellant had also sought exclusion of the following 6 comparables on the ground of functional dissimilarity. The relevant extract of paragraph 4.4 of the CIT(A) order reads as under: “4.4 In appeal, on other hand, it is submitted that QAD was established in 2005 as a Global Resources Centers however, QAD India is engaged in provisions of Software supports, developments and related services comprising of application support and software development activities for supporting software applications and products. The nature of software developed by the appellant is claimed to be related to ERP Software. Appellant is a low risk captive software service providers to it affiliates around the globe and provision of such services is governed by Inter-Company Agreements between Appellants and its Associates. It is further submitted that assessee is remunerated on a cost+ 10% mark up. According to the A.R., Ld. Assessing Officer has not properly appreciated the fact of comparable cases relied upon the appellant where profit margin is only of 6.65% whereas appellant has shown OP @ 9.9% on TNMM method. Assessing Officer had not refer the case to the TPO and has made adjustment on the basis of 21 comparable cases. The written submission of the appellant against the additional comparable selected by the Assessing Officer is as under:- ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 8 SNo. Name of the Company Reasons given by the AO Summary of Appellant’s Arguments 1 - 5 xx xx Xx 6 I-Gate Solutions Limited The company has only one segment namely software development Engaged in a single segment of information technology and IT enabled operations offshore outsourcing solutions and services to large and medium-sized organizations using an offshore/onsite model. Segmental information not available, Page 48 of the Annual Report for the FY 2009- 10 states that the company is engaged in three distinct activities, but for the purpose of reporting the financials, the company does not disclose the segmental account for IT Services. Different scale of operation the company is a giant in software industry with a turnover of INR 932 crores pertaining to the relevant year. 7 Infosys Technologies Limited The company has major income from software services and products Abnormally high margin Different scale of operation, the turnover of the company is more than 1400 times of the appellant. Reliance can be place on the following case laws: Mercedes Benz Research and Development India Private Limited (2012 TII 69) We would also like to highlight that the company has also developed proprietary products Further, It may be pertinent to note that Infosys has been rejected by the Ld Commissioner of Income Tax (Appeals)- 15 on the same issue for the last assessment year. 8 xx xx Xx 9 LGS Global Limited The primary source of income is from software Page 14 and 15 of the annual report mentions the range of activities the company is engaged in services which constitute as information technology ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 9 development enabled services The company is engaged in provision of high end IT related services which are functionally dissimilar from those of the Appellant 10 Persistent Systems Limited The primary source of income is from sale of software services and products Engaged in providing outsourced software product development activities for different industries and in addition to software development, the company also offers services such as prototyping, porting, SaaS-enablement, usability engineering enterprise mobility competency centers in telecom and wireless, life sciences (data integration, warehousing), analytics and data infrastructure, embedded systems domains. Company also owns proprietary products namely caBIG and caTISSUE Segmental results not available, page 16 and 17 of the Annual Report for the year 2009-10 states that Persistent Systems is engaged in providing outsourced software product development activities and software development services. The turnover of the company is as high as INR 5,044 million. 11 xx xx Xx 12 Tata Elxsi Limited The primary source of income is from software development and related services Company has two segment viz. software development and services and system integration and support. Segment relating to software development and services includes embedded product design services, industrial design and engineering (IDE) as well as animation and visual effects. Company has also invested in in-house R&D to enable creation of Intellectual Property and technology expertise in areas such as multimedia, networking, WIMAX, Mobile TV, semiconductors and storage. The ratio of intangibles to total gross fixed ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 10 assets is 16 percent. The ratio of intangibles to total gross fixed assets is 16 percent. High margin 13 xx xx Xx 14 Wipro Limited The primary source of income is from IT services The Company is operating under three segments during the year, namely, Global IT services and products, (comprising of IT services and products and BPO services segment). However, the IT services segment selected by the Ld AO also includes BPO services, research services for hardware design. The company owns significant brand intangible that has contributed to the immense growth of the company. Further, it may be pertinent to note that Wipro has been rejected by the Ld Commissioner of Income Tax (Appeals)- 15 on the ground that the company has a different functional profile and enjoys far greater market leadership with huge marketing spends. ................” (Emphasis Supplied) 5.2. We note that the CIT(A) has dealt with the objections of the Appellant in paragraph 4.15 of the order impugned which reads as under: “4.15 The contention of the appellant that Acropetal Technologies Ltd. having OP/TC @58.14% is not comparable because that company engaged in Engineering Designing Services and Information. That company engaged in exporting software, hence there high margin. This argument cannot help to the appellant because this comparable reveals that company has also involved in information Services related to software, its development and support services. The higher margin profit of this company reveals the fact that in line up such business, barring exceptional cases of loss due to some peculiar reason, there is substantial profit, therefore, the profit margin shown by the appellant @9.99 cannot be presumed to be in commensurate with profit margin earned by such companies. As regards, counter arguments against the comparable of ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 11 Aricent Technology, counter arguments of the appellant has also not convincing one because that company is also engaged in giving support services. Of course profit margin is on higher side that 32.58% which also suggest that profit margin in such business cannot be low shown by the appellant @9.99 %. This company is engaged software development providing services and also performing consultancy which similar to the activities of the appellant, hence cannot be argued that this case is not at all comparable. Similarly, the case Bodhtree Consulting Ltd., arguments of appellant is not convincing one as that company also engaged in giving support services, specialized services, cloud services and product Engineering. It means this comparison not strange one. Similar is the fact in the case of Celestial Labs Ltd. This company also engaged in development of software and providing related services, hence, to some extent this company is also comparable. Ltd. much suitable comparable because that company engaged in software development and also providing I.T. enabled services. Thus, the profit of this company indicates that profit margin business like one appellant cannot be as low IGate Solutions Ltd. also to some extent, in the similar business, hence profit this company, irrespective being company be considered for reviewing as to whether profit shown prefixed is genuine one or not. Of course profit margin of Infosys technology cannot be compare with because that company has also developed proprietary products which is given license basis. However, KALS Information similar business activities like development of software support services, data management and services. Similarly, LGS also engaged in technology enabled services which dependent upon product Systems be compared extent as this company is also engaged in support services software products. Of course Softsol India Ltd. is having business of sale of software, hence to some extent, the case not comparable, but the fact that this company has also earned income for providing related services, hence same cannot be ignored to review that profit margin such business cannot be as low shown by the appellant. Similar is fact the case of Tata Elxi Ltd. and Thirdware Solutions Ltd. Both these companies are also doing software related services. The case of Wipro Ltd. may be slightly different but one cannot afford ignore that profit such line of business cannot be low shown by the appellant.” Infosys Technology & Wipro Limited 5.3. On perusal of the above, we note that the CIT(A) had concluded that that Infosys Technology could not be compared while in the case of Wipro Limited the CIT(A) had observed that it was slightly different. The Revenue has not opposed/challenged the findings given by the ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 12 CIT(A). The fact that the aforesaid two comparables were excluded by the CIT(A) in appeal for the immediately preceding assessment year has also not been controverted. Therefore, in view of the aforesaid, we direct the Assessing Officer to exclude Infosys Technologies and Wipro Limited from the final set of comparables. Persistent Systems Limited 5.4. As regards Persistent Systems Limited, we note that the Mumbai Bench of the Tribunal had, in the case of Sybase Software (India) Private Limited Vs. DCIT – Range 14(3)(1) [ ITA No. 2658/Mum/2015, Assessment Year 2010-11] relied upon by the Ld. Authorised Representative for the Appellant, held as under: “4.1.2 Persistent Systems Ltd. Similar argument of functional non- comparability has been raised for this entity and it has been submitted that this entity was providing software development services and engaged in development of software products. However, segmental results were not available to facilitate desired comparison. Further, the revenue of this entity include revenue from licensing of products & royalty which are in the nature of R & D services and therefore, this entity could not be held to be comparable entity. Reliance has been placed on following decisions in support of submissions: - (i) CIT V/s Cashedge India P. Ltd. (Hon’ble Delhi High Court ITA No. 279 of 2016, AY 2010-11) (ii) Lionbridge Technologies Pvt. Ltd. V/s ITO (Mumbai Tribunal, ITA No. 668/Mum/2014, Ay 2010-11) (iii) DCIT V/s Electronics of imaging India (Bangalore Tribunal, ITA No. 212/Bang/2015, AY 2010-11) (iv) Dialogic Networks India P. Ltd. V/s ACIT (Mumbai Tribunal, ITA No.7280/Mum/2012 AY 2008-09) Since the revenue is unable to controvert these decisions, we direct for exclusion of this entity.” Thus, it has been held by the Tribunal that for the Assessment Year 2010-11, the Persistent Systems Limited earned revenues from ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 13 licensing of the products and royalty which are in the nature of research and development services. Further, the segmental results were not available. Therefore, Persistent Systems Limited should be excluded from the list of comparables. We note that similar objections were raised by the Appellant before CIT(A). Therefore, taking a view consistent with the view taken in the above decision by the Tribunal, we conclude that the reasons stated hereinabove, Persistent Systems Limited cannot be taken as a comparable and therefore, the same is excluded from the final set of comparables. iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited 5.5. As regards, iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited we note that the CIT(A) has not dealt with the objections raised by the Appellant while the Assessing Officer had included the same given the reasoning that the primary source of income is from software development. Therefore, we deem it appropriate to remand the issue of exclusion of the aforesaid comparable back to the file of the Assessing Officer. Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited & Aricent Technology 5.6. As regards, balance 5 comparables (namely Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited & Aricent Technology Limited) we find that the Appellant had not raised objections to their inclusion in the ground of functional dissimilarity. The contention of the Appellant before the Tribunal is that the aforesaid 5 comparables be excluded on account of high turnover. We note that the CIT(A) had in paragraph 4.16 of the order impugned observed that Sonata Software Limited was a giant company having turnover of INR 1,380 Crores. Before the Tribunal, ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 14 the Appellant had contended that 11 companies having high turnover be excluded from the list of comparables. In paragraph 4.1. to 4.6. above, we have already directed exclusion of 3 companies (i.e. Infosys Technology, Wipro Limited and Persistent Systems Limited), though for different reasons. Out of the balance 8 companies, the issue related to exclusion of 3 companies (namely iGate Global Solutions Ltd., Tata Elxsi Ltd, & LGS Global Limited) has been remanded back to the file of the Assessing Officer in paragraph 4.7 above. Therefore, we permit the Appellant to also raise contention of high turnover for seeking exclusion of the aforesaid 3 comparables before the Assessing Officer. As regards the balance 5 comparables (i.e.Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited & Aricent Technology), in view of paragraph 4.3 above, we grant the Appellant an opportunity to establish before the Assessing Officer that the aforesaid 5 comparables should be excluded on account of high turnover as the high turnover would result in a material difference which cannot be eliminated and direct the Assessing Officer to decide the issue keeping in view the ratio of the said judgments of the Hon’ble High Courts. Accordingly, the issue of inclusion/exclusion of the aforesaid 5 comparables is also remanded to the file of the Assessing Officer. 6. As regards Kals Information Systems, Bodhtree Consulting Ltd., Acropetal Technologies Limited, and Softsol India Limited, we note that the Appellant had contended that the aforesaid companies were functionally different from the Appellant. In the case of the Assessee for the Assessment Year 2009-10 (ITA No. 1685/Mum/2013, dated 30/09/2016) the Tribunal had held that the aforesaid 4 companies were functionally non-comparable with the Appellant. ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 15 Kals Information Systems 6.1. As regards Kals Information Systems, the Tribunal has, vide order dated 30/09/2016 passed in ITA No. 1685/Mum/2013 pertaining to Assessment Year 2009-10, held as under: “17. We have considered the submissions of the parties and perused the material available on record. The primary and fundamental reason for which the assessee seeks exclusion of this companies it is involved in product development and segmental details are not available. In the notes to the financial statement under Schedule–18, it has been stated that the company derives its revenue from software services and software products, whereas, on a perusal of the Profit & Loss account for financial year 2008–09, we do not find any segmental details of the revenue earned from software services and software products. Thus, in absence of segmental details of the revenue earned, the company cannot be treated as comparable to the assessee. For these reasons also, the Co–ordinate Bench of the Tribunal in the decisions cited by the learned Authorised Representative have rejected this company as a comparable. As these decisions are for the very same assessment year and the learned Departmental Representative has not brought to our notice any material difference in factual position, we are inclined to follow the Co–ordinate Bench decisions referred to above and exclude this company from the list of comparables.” 6.2. On perusal of the financial statements forming part of Annual Report 2009-10 of Kals Information Systems Limited (placed at page 830 to 857 of the paper-book), we find that there is no change in the manner of disclosure of revenues by this company. We do not find any segmental details of the revenue earned from software services and software products in the relevant financial statements. We note that in the case of M/s John Deere India Pvt. Ltd. Vs. ACIT, Circle 14, Pune [ITA No. 518 & 575/PUN/2015, Assessment Year 2010-11, dated 25/04/2019] the Tribunal had concluded that during the relevant previous year Kals Information Technology Systems was not only engaged in providing software development services but was also dealing in software products under the relevant segment. Since ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 16 the company was engaged in selling software products which was different from the activity undertaken by the Appellant in that case, namely, rendering of software service to its holding company, the company was excluded from the list of comparables. 6.3. Accordingly, consistent with the view taken by the Tribunal in the above decisions, we direct the Assessing Officer to exclude Kals Information Systems Limited from the final set of comparables on account of non-availability of segmental data. Bodhtree Consulting Ltd 6.4. As regards Bodhtree Consulting Ltd, the Tribunal has, vide order dated 30/09/2016 passed in ITA No. 1685/Mum/2013, pertaining to Assessment Year 2009-10, held as under: “14. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the annual report of this company for the financial year 2008–09, we have noted that as per director’s report of the company, it is engaged in providing open and end to end web solution, off–shoring data management, data warehousing, software consultancy, design and development of solution, using the latest technologies. Thus, looking at the activities carried on by this company, it is evident, though, it has reported only one segment, namely, software development but it is involved in various activities including product development. However, it has not done segmental accounting for each of the activities. We have further noted that for the reason that the aforesaid company is involved in product development the Tribunal in the decisions relied upon by the learned Authorised Representative has excluded this company as a comparable. As these decisions of the Tribunal are for the very same assessment year, respectfully following the consistent view of the Tribunal in case of other assessees, we exclude this company as a comparable.” 6.5. On perusal of the financial statements of the relevant previous year (placed at page 431 to 501 of the paper-book) we find that there is ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 17 no change in the segmental reporting made by this company for the relevant previous year the company is stated to be operational in only one segment namely software development, which involves providing open and end-to-end web solutions, Off-shore Data Management, Data Warehousing, software consultancy, design and development of solutions, using the latest technologies. Concurring with the reasoning given by the Tribunal for excluding this company as a comparable in the case of the Appellant for the Assessment Year 2009-10, we direct the Assessing Officer to exclude Bodhtree Consulting Ltd. from the list of final set of comparable. Acropetal Technologies Limited 6.6. As regards Acropetal Technologies Limited, the Tribunal has, vide order dated 30/09/2016 passed in ITA No. 1685/Mum/2013 pertaining to Assessment Year 2009-10, held as under: “11. We have considered the submissions of the parties and perused the material available on record. On a perusal of the audited Balance Sheet of this company, a copy of which is placed at Page–558 of the paper book. We have noted that under the head “Current Assets” & “Loans and Advances” assessee has shown inventories which pre–supposes that the company is into manufacturing activities. We have also noted, considering the fact that this company is a product company; the Hon'ble Andhra Pradesh High Court in Intoto Software India Pvt. Ltd. (supra) has upheld the decision of the Tribunal in rejecting this company. It is also a fact that the Tribunal, Mumbai Bench, in Ness Technologies India Pvt. Ltd. (supra) has rejected this company as a comparable as it is not functionally similar to the assessee. Therefore, on over all consideration of facts and materials on record, we are of the view that Acropetal Technologies Ltd. cannot be treated as a comparable to the assessee.” (Emphasis Supplied) 6.7. On perusal of the financial statements of this company for the relevant previous year (placed at page 320 to 367 of the paper- book), we find that there is no change in the facts circumstances as ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 18 compared to the immediately preceding year. This company continues to show ‘inventories’ under the head ‘Current Assets’ & ‘Loans and Advances’ suggesting that this company is engaged in manufacturing. Further, during the course of hearing, the Learned Authorised Representative had relied upon the decision of the Tribunal in the case of M/s John Deere India Pvt. Ltd. Vs. ACIT, Circle 14, Pune [ITA No. 518 & 575/PUN/2015, dated 25/04/2019] pertaining to the Assessment Year 2010-11 wherein it was held that even if the segmental accounts are taken into consideration this company would still not qualify as a comparable. The relevant extract of the aforesaid decision of the Tribunal reads as under: “ Acropetal Technologies Ltd. (Seg) 11. This company was also included by the TPO in the list of comparables. The assessee raised objections to its inclusion by contending that apart from others, this company was engaged in providing on-site services which made it functionally different. The TPO observed that on-site development expenses were less than 50% of total expenses and hence, it was not a significant factor. He, therefore, proceeded to include it in the list of comparables. The DRP directed the TPO to take only the IT service segment of this company as comparable. The assessee is aggrieved by this direction of the DRP incorporated in the final assessment order. 12. Having heard both the sides and gone through the relevant material on record, we find that the Annual report of this company is available at page 353 onwards of the paper book. Information regarding segmental reporting has been given at pages 376 and 377 of the paper book. There are only three segments, namely, (a) Engineering Design Services, (b) Information Technology Services and (c) Health care. Pursuant to the direction of the DRP, the TPO has included only Information Technology Services segment in the final set of comparables. Directors’ report of this company records that “the company is uniquely placed with readymade Software products to cater to the needs of Hospitals and Healthcare Centres both in India and abroad especially in the USA”. Profit and Loss account of this company appears at page 367 of the paper book, ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 19 which records `Decrease in Inventories’ by (Rs.1,50,80,060/-) under the head “Expenditure”. Balance sheet of this company also has a figure of `Inventories’. Apart from this company being engaged in Software products also, it is pertinent to note that it has rendered on-site services of a greater magnitude. It can be seen from expenses of Rs.55,85,57,169/- incurred under the head “Employee related and on-site Development Charges”, this company incurred “on-site Development Expenses” at Rs.42,32,55,491/-, which transpires that employees related costs incurred by the company on on-site development is roughly at 75% of total employees related costs. As against this, the assessee is not engaged in rendering any on-site services. A company engaged in providing on-site services cannot be compared with a company providing similar services from its own premises (in-house) due to several significant differences in operating costs and also the revenues apart from vital differences in the level of assets employed and risks undertaken. In view of the foregoing, we are satisfied that this company cannot be considered as comparable as it is not only engaged in the business of Software products but is also providing on-site services, which make it distinguishable from the assessee company. We, therefore, order to exclude this company from the list of comparables.” 6.8. Accordingly, consistent with the view taken by the Tribunal in the above decisions, we direct the Assessing Officer to exclude Acropetal Technologies Limited from the final set of comparables on account of non-availability of segmental data. Softsol India Limited 6.9. As regards Softsol India Limited, we note that before the CIT(A) it was contended by the Appellant that the company was functionally different as was engaged in the various services such as enterprise modernization, test automation services, custom software development, cloud computing services, SalesForde CRM services and strategic consulting. We note that in paragraph 4.15 the CIT(A) has observed that Softsol India is having business of software and is therefore to some extent not comparable, but since the company is ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 20 also earning income from providing relating services, the same cannot be ignored. 6.10. On perusal of the 28 th Annual Report 2009-10 of Softsol India Limited (placed at page 1046 to 1116 of the paper-book), we find that in Note 1 forming part of Notes to Financial Statements the nature of business of this company is recorded as under: “Note: 1-Nature of Business SoftSol Resources, Inc. (the "Company" or "SRI") was incorporated in the state of California on January 11, 1993. It is a provider of E- commerce, network technology, internet infrastructure and other special technology areas. Its IT services include application development, system integration, IT consulting and staffing, IT project management, domestic and offshore outsourcing. SoftSol has diverse client-based ranging from large customers to small high-tech start-up companies. The Company's vision is to create a global enterprise by taking a leading role in the revolution in Information Technology to provide highly competent and innovative software solutions.” 6.11. Further, on perusal of consolidated Profit & Loss Account, we find that entire income has been recorded under the head software exports and no bifurcation or details of the same have been provided. It is stated therein that the company does not have separate reportable segments. 6.12. In view of the above, we find merit in the contention advanced on behalf of the Appellant that Softsol India Ltd. cannot be selected as a comparable on account of functional dissimilarly and lack of segmental data. Working Capital Adjustment 7. As regards contention of the Appellants for seeking working capital adjustment, we grant the Appellant an opportunity to establish ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 21 before the Assessing Officer that the Appellant is entitled to working capital adjustment in respect of the comparables finally selected. The Assessing Officer is directed to decide the claim for working capital adjustment, if any made by the Appellant before the Assessing Officer as per law. 8. Thus, in accordance with the above, the Assessing Officer is directed to determine the final set of comparables; re-compute arm’s length price; and transfer pricing adjustment, if any, after giving the Appellant a reasonable opportunity of being heard. Accordingly, Ground No. 1 raised by the Appellant is disposed off as being general in nature, Ground No. 2 relating to selection of comparables is partly allowed in terms of paragraph 5 to 6.12 above, Ground No. 4 relating to working capital adjustment is allowed for statistical purposes in terms of paragraph 7 above, Ground No. 6 relating to levy/charge of interest is disposed off as being consequential in nature and Ground No. 7 related to initiation of penalty proceedings under Section 271(1)(c) of the Act is dismissed as being premature. Balance grounds (i.e. Ground No. 3 and 5) are dismissed as not pressed as no submissions were advanced in relation to the same. 9. In result, the present appeal preferred by the Assessee is partly allowed. Order pronounced on 20.09.2023. Sd/- Sd/- (B.R. Baskaran) Accountant Member (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 20.09.2023 Alindra, PS ITA No. 4098/Mum/2015 (Assessment Year: 2010-11) 22 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त/ The CIT 4. प्रध न आयकर आय क्त / Pr.CIT 5. दिभ गीय प्रदिदनदध, आयकर अपीलीय अदधकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदधकरण, म ुंबई / ITAT, Mumbai