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Income Tax Appellate Tribunal, HYDERABAD BENCH “B”, HYDERABAD
Before: SHRI P. MADHAVI DEVI & D.S. SUNDER SINGH
ORDER PER P. MADHAVI DEVI, J.M.: This appeal of the assessee is directed against the assessment order passed u/s 143(3) rws 92CA(3) & 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’) dated 29/02/2016 for the AY 2011-12.
Brief facts of the case are that the assessee company engaged in the business of providing data clearing, financial settlement and backend support services to mobile operations, filed its return of income for the AY 2011-12 declaring total income of Rs. 25,04,36,050/-. During the assessment proceedings u/s 143(3) of the Act, the AO noticed that during the previous year relevant to AY 2011- 12, the assessee company entered into certain international
2 ITA.No. 475/Hyd/2016 Syniverse Technologies Services (India) Pvt. Ltd. transactions pertaining to backend and support services to mobile operations. Therefore, a reference was made to TPO for determination of Arm’s Length Price (ALP) of the said international transactions. The TPO vide his order dated 29/01/2015, determined the adjustment in ALP of the international transactions at Rs. 76,09,281/-, i.e. in respect of provision of software development services at Rs. 43,28,861/- and provision for IT enabled back office services segment at Rs. 32,80,420/-. In accordance therewith, draft assessment order was proposed bringing the adjustment in respect of international transactions to tax. Against the draft assessment order, the assessee raised its objections before the DRP.
The DRP vide its order dated 29/12/2015 passed u/s 144C(13) of the Act granted partial relief to the assessee and in accordance with the order of DRP, the final assessment order dated 29/02/2016 was passed, against which the assessee is in appeal before by us raising the following grounds of appeal: “1. On the facts and circumstances of me case and in law, me learned Dispute Resolution Panel ('DRP') erred in confirming the action of the Ld. Assessing Officer ('AO')/ Transfer Pricing Officer ('TPO') in making an adjustment of Rs· 43,28,861 to me provision of software development services by me Appellant to its associated enterprise.
2. On the fact and circumstances of the case and in law, the ld. DRP/AO/TPO erred in: 2.1. Rejecting me Transfer Pricing ("IP') documentation maintained by the Appellant under Section 92D of the Act in good faith and with due diligence; 2.2. Using data, which was not contemporaneous and which was not available in the public domain at me time of preparing the TP documentation; 2.3. Disregarding application of multiple year/prior year data as used by the Appellant in the TP documentation; 2.4. Disregarding certain filters as applied by the Appellant in selection of the comparable companies at the time of TP documentation.
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2.5 Applying/modifying certain filters while undertaking comparability analysis; 2.6. Including companies in the comparability analysis which are different from the Appellant in functions, asset base and risk profile such as; (i) Persistent Systems Limited (ii) Sasken communications Limited 2.7. Not considering comparables similar to the Appellant in functions, asset base and risk profile while performing comparability analysis such as: (i) Evoke Technologies private Limited (ii) Sankhya Infotech Ltd. 2.8 Not granting risk adjustment; 3. On the facts and circumstances of the case and in law, the Ld· DRP/ AO/TPO erred in: a. not treating provision for doubtful debts as part of operating cost while computing the operating mark-up on total cost of the comparable companies; and b. not treating provision no longer required written back as part of operating income while computing the operating mark-up on total cost of the comparable companies. ; 4. On the facts and circumstances of the case and in law, the Ld. DRP/AO/ TPO erred in: a. not treating bank charges as part of the operating cost while computing the operating mark-up on total cost of the comparable companies; and b. including miscellaneous income and other income as part of the operating income while computing the operating mark- up on total cost of the comparable companies. Other than Transfer pricing Related 5. That the Ld. DRP/AO erred in disallowing 'provision for customer claims amounting to Rs. 43,04,342 considering it to be provisional in nature and an unascertained liability.
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6. That the Ld. DRP/AO erred in adding back 'provision for customer claim5 to book profit calculated u/s 115JB of the Act, considering them to be contingent liability.
7. On the facts and in circumstances of the case and in law, the Ld. AO erred in levying interest under section 234B and 234C of the Act That the Appellant craves leave to add to and 1 or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal.” 4. At the time of hearing, the ld. Counsel for the assessee submitted that ground No. 1 is general in nature and needs no adjudication. He further submitted that the assessee does not wish to press any other ground, except, ground No. 2. Therefore, all other grounds are dismissed as not pressed.
4.1 In addition to the above grounds, the assessee had also raised additional grounds of appeal. However, at the time of hearing, ld. Counsel for the assessee submitted that the assessee does not wish to press additional grounds of appeal as well. Therefore, they are not admitted for hearing and adjudication.
4.2 Thus, only ground No. 2.6 is to be adjudicated, wherein the assessee is seeking exclusion of only two companies from the final list of comparables i.e. (1) Persistent Systems Ltd. and (2) Sasken Communication Ltd. in respect of software development service transactions.
The ld. Counsel for the assessee submitted that the TPO has categorized the assessee as a contract software development provider. He submitted that the margin of the assessee was 15.15% as against margin of the comparables arrived at by the assessee at 12.78% in its TP study and since assessee’s margin
5 ITA.No. 475/Hyd/2016 Syniverse Technologies Services (India) Pvt. Ltd. was within the arithmetic mean PLI of 12 companies, it was held that the transactions were within the arm’s length. He submitted that the TPO, however, rejected the TP study of the assessee and arrived at 17 companies as final comparables to the assessee and arrived at the adjustment and arithmetic mean PLI of the comparables at 19.46% after allowing the working capital adjustment of 1.73%.Thus, the TPO proposed an adjustment of Rs. 43,28,861/- u/s 92CA in respect of provision of software development services.
5.1 The ld. counsel for the assessee submitted that before the TPO also the assessee had challenged the comparability of Persistent Systems Ltd. by contending that this company is functionally different as it is engaged in rendering outsourced product development services as against software development services rendered by the assessee company. It was also pointed out that the said company is having income from ‘sales of software services and products’ and during the year, the said company had also acquired the business of Agilent, which owns intangibles and has high turnover as compared to the assessee. He submitted that the TPO did not accept assessee’s contentions and has taken it as a comparable and even the DRP has not appreciated the contention of the assessee properly and has retained the said company as comparable. He has drawn our attention to the P&L Account of the Persistent Systems Ltd. for year ended 31 st March, 2011 to demonstrate that the income from the sale of software services and products has been offered at Rs. 6,101.27 Million and he has also demonstrated from the Schedule – 11 of the P&L Account of the said company wherein the income from sale of software services and products has been shown at Rs. 6101.27 Million and there is no bifurcation of the income between the services and products. The ld. Counsel for the assessee submitted that since no segmental data is available in the public domain, the 6 ITA.No. 475/Hyd/2016 Syniverse Technologies Services (India) Pvt. Ltd. said company cannot be taken as comparable to the assessee company. Further, he has also submitted that as per Notes of Account of Persistent Systems Ltd., it is predominantly engaged in the outsourced product development services and the company offered complete produce lifecycle services, unlike the assessee, who is offering only software development services. He has drawn our attention to page No. 99 of the paper book wherein the company described itself as a company engaged in providing outsourced product development services to independent software vendors and enterprises and that the company derives significant portion of its revenue from export software services and products. He has also submitted that Persistent Systems Ltd. has been recognized and awarded as a leading global outsourced product development vendor in terms financial statement of FY 2009-10 and the relevant portion is reproduced hereunder: “OPD and outsourced IT services: the difference How is OPD different from outsourced IT Services is an oft asked question. In IT services, projects start with well- defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined. Instead, most product developers are given ship- dates for the product that are typically determined by external factors. Once the ship-dates are identified, the budgets for the products are frozen. In product development projects, all requirements can never be completely fulfilled in a particular version. As a result, most product companies plan multiple product versions for their product. Every team member must contribute not only to building features for the current release but must also contribute enhancements and provide feed back for future releases of the product.”
In view of all the above features, ld. Counsel for the assessee submitted that Persistent Systems Ltd. is to be excluded from the list of final comparables. Further, he also placed reliance on the following decisions, in which, Persistent Systems has been held to 7 ITA.No. 475/Hyd/2016 Syniverse Technologies Services (India) Pvt. Ltd. be not comparable to a software development company like the assessee: • Conexant Systems Pvt. Ltd. vs. DCIT (AY 2011-12) - - Para 9 Page 8 (Page 23 of the compilation) • CIT vs. Intoto Software India Private Limited - ITA No. 233/2014 (AP HC) - Page 2 (Page 27 of the compilation) • Intoto Software India Private Limited vs. ACIT (2014) 146 lTD 360 (Hyd ITAT) - Para 25 Page 10 (Page 37 of the compilation) • PCIT vs. Saxo India (P) Ltd. - ITA 682/2016 (Del HC) - Para 4,5,10 (Page 47,48 & 51 of the compilation) • Saxo India (P) Ltd. vs. ACIT (AY 2011-12) - (2016) 176 TTJ 540 (Del ITAT)- Para 14 Page 15-16 (Page 67-68 of the compilation) • Medpluxes India Pvt. Ltd. vs. ACIT (AY 2011-12) - ITA No. 411/Hyd/2016 - Para 6.1-6.2 & 8 Page 10-11 & 14 (Page 80- 81,84 of the compilation) • Symantec Software & Services India (P.) Ltd. vs. DCIT (AY 2011-12) - ITA No. 614/Mds/2016 - Para 9-10 Page 6-7 (Page 101-102 of the compilation)”
The ld. DR, on other hand, supported the orders of the authorities below and submitted that the assessee as well as Persistent Systems Ltd. are offering software development services only and further that Persistent Systems is not into software product development as is evident from the financial statement of the company. He submitted that TPO perused the financials of the company and observed that the company has significant portion of its revenue from software development services and products and that the DRP also noted that the company has 297 customers with whom the company has long term contract for ‘software development’. With regard to assessee’s contention that Persistent Systems Ltd is into rendering of product development services, the DR submitted that 8 ITA.No. 475/Hyd/2016 Syniverse Technologies Services (India) Pvt. Ltd. it is not into product development but it is into software development services like the assessee. Regarding owning of intangibles and high turnover of Persistent Systems Ltd. as compared to other companies, the DR submitted that the onus is on the assessee to show the quantitative linkages with the said parameters and their margin. He, therefore, prayed that the said company be retained as comparable to the assessee.
Having regard to the rival contentions and material on record, we find that the assessee is engaged in the software development services, whereas, Persistent Systems Ld. is engaged in the product development services. The company Persistent Systems Ltd has income from outsourced product development and outsourced enabled services. No adjustment has been made by the TPO on account of these two distinguishing features. The Persistent Systems Ltd., in its P&L Account has declared its income from software development services and products. The TPO ought to have enquired from Persistent Systems Ltd. as to the income from the products that is included in the income from software development services. Therefore, we are satisfied that the said company is functionally different from the assessee company and, therefore, has to be excluded from the list of final comparables as comparable. It is also further noticed that the said company has intangibles and the turnover is also high i.e. it has a turnover of Rs. 6,101.27 Millions as compared to assessee’s turnover of 955.68 Millions. For these reasons also, the said company is distinguishable to the assessee company. Further, in the decisions relied upon by the ld. counsel for the assessee, Persistent Systems was excluded by ITAT. For the sake of ready reference, the relevant paras of ITAT order in the case of Conexant Systems for the AY 2011-12 are reproduced hereunder:-
9 ITA.No. 475/Hyd/2016 Syniverse Technologies Services (India) Pvt. Ltd. “i. Persistent Systems Ltd: 6.1. The above company is engaged in product development which is different from software development services. The company is engaged in development of products. It earns revenue from licensing of products, royalty on sale of products as well as income from maintenance contracts. However, no segmental details are available. Ld. Counsel placed reliance on the following decisions where in this company was excluded as functionally not similar: i. Saxo India (P) Ltd. Vs. ACIT - (Pg. 16; para 15.1 - 15.2) affirmed by Hon'ble Delhi High Court in ITA No. 682/2016 (pg.4; para 10); ii. PCIT Vs. Cashedge India P. Ltd., - ITA No. 279/2016 (Hon'ble Delhi High Court); iii. Assessee's own case for AY. 2010-11 in ITA No. 264/Hyd/2015 - (Pg. Nos. 6-10); iv. Electronic Imaging India (P) Ltd., Vs. DCIT - AY. 2011-12 - ITA No. 1506/Bang/2015 (Pg. 9-10; para 8); v. Symantec Software & Services India (P) Ltd., Vs. DCIT - AY. 2011-12 - ITA No. 614/Mds/2016 (Pg. 6-7; para 9-10); vi. ACIT Vs. Broadcom India Research (P) Ltd., - AY. 2010-11 – ITA No. 348/Bang/2015 (pag. 10; para 13.4).”
We have considered the rival contentions. As seen from the orders placed on record and also consistent stand taken by the Tribunal in various such cases, we have no hesitation in excluding two companies, Persistent Systems Ltd., and Sasken Communication Technologies Ltd on functionality basis. As far as Evoke Technologies Pvt. Ltd., is concerned, this company was also argued to be included in the case of Electronic Arts Games (India) Private Ltd., Vs. Dy.CIT (supra). But the Bench did not accept on the reason that assessee has accepted the exclusion in a later year. However, as pointed out by the Ld. Counsel, this company is functionally similar to assessee-company and the annual report does not disclose any peculiar economic circumstances as stated by the DRP. Moreover, the said consultancy charges were shown under the head administrative expenditure and the increase in administrative expenditure is proportionate to increase in turnover. Therefore, we are of the opinion that Evoke Technologies Pvt. Ltd., can be included as a comparable company.”
As facts and circumstances considered by the coordinate bench (to which one of us, i.e. JM is a signatory) are similar, respectfully following the same, we direct the AO/TPO to exclude this company
10 ITA.No. 475/Hyd/2016 Syniverse Technologies Services (India) Pvt. Ltd. from the final list of comparables. The ld. DR had relied upon the decision of the coordinate bench at Bangalore in the case of Advice America Software Development Centre (P) Ltd., reported in [2018] 94 Taxmann.com 179 (Bangalore Trib.). However, we find that the AY in the said case was 2013-14 whereas the AY before us is 2011-12. Therefore, the said decision cannot be applied to the AY before us.
The next company, which is sought to be excluded as comparable from the final list of comparables is, Sasken Communication Technologies Ltd. The objection of the assessee is that the said company is into telecom software services and therefore is engaged in R&D activities. The ld. counsel for the assessee has drawn our attention to the P&L account of the said company where the income is shown from sale of software services/products and other services at page 68 of the paper book and the break up of the revenue from software is given at Rs. 35,685.92 Million and the software products is at Rs. 3721.84 Million. Therefore, according to the ld. counsel for the assessee since it is into software products as well, the said company should not be taken into consideration as comparable at all. The ld. counsel for the assessee relied upon the following cases for its exclusion:
“• Conexant Systems Pvt. Ltd. vs. DCIT (AY 2011-12) - - Para 9 Page 8 (Page 23 ofthe compilation) • CIT vs. Intoto Software India Private limited - ITA No. 233/2014 (AP HC) - Page 2 (Page 27 of the compilation) • Intoto Software India Private limited vs. ACIT (2014) 146 lTD 360 (Hyd ITAT) - Para 25 Page 10 (Page 37 of the compilation) • PClT vs. Saxo India (P) Ltd. - ITA 682/2016 (Del HC) - Para 4,5,10 (Page 47,48 & 51 of the compilation)
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• Saxo India (P) Ltd. vs. ACIT (AY 2011-12) - (2016) 176 TTJ 540 (Del ITAT)- Para 15 Page 16 (Page 68 of the compilation) • Medpluxes India Pvt. Ltd. vs. ACIT (AY 2011-12) - - Para 6·36-4 Page 11-12 & 14 (Page 81,82 & 84 of the compilation) • Symantec Software & Services India (P.) Ltd. vs. DCIT (AY 2011-12) - ITA No. 614/Mds/2016 - Para 11-12 Page 8 (Page 103 of the compilation).”
9. The ld. DR, on other hand, submitted that the TPO has taken only segmental details of this company into consideration and, therefore, it should not be excluded from the final list of comparables only on the ground that it has developed products also.
Having regard to the rival contentions and material on record, we find that in the case of Conexant Systems Pvt. Ltd. for AY 2011-12, the coordinate bench of this Tribunal has observed that though the breakup of revenue between the services and products is available, the breakup of operating costs and the net profitability between the two segments is not available. Similar view has been expressed by the coordinate bench of ITAT, Delhi in the case of Saxo India (P) Ltd. reported in (2016) 176 TTJ 540. The relevant paras are reproduced hereunder:- “(vi) Sasken Communications Technologies Ltd. 15.1 The TPO included this company in the set of comparables despite the assessee's objection that it was functionally different and also had Product portfolio. 15.2 After considering the rival submissions, we find from page 58 of the TPO's order that he has J recognized sale of software products to the tune of Rs.37 crore and odd. Though the break-up of revenue from software services and software products is available, but, the break-up of operating costs and net operating revenues from these two segments have not been given. It is further observed that 12 ITA.No. 475/Hyd/2016 Syniverse Technologies Services (India) Pvt. Ltd. the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee's contention is accepted on this issue.”
Since the facts of the case in Saxo India (P) Ltd. and the assessee’s case are for the same AYs, respectfully following said decisions of the coordinate benches, in which, one of us i.e. the JM is the signatory, we direct the AO/TPO to exclude Sasken Communication Technology Ltd. from the list of final comparables. Accordingly, assessee’s ground No. 2.6 is allowed and all other grounds are dismissed.
In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on 9th November, 2020