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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI B. R. BASKARAN
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A No.537/Bang/2021 Assessment Year : 2009-10 M/s. IDS Software Solutions Pvt. Ltd., DCIT, Vs. Shabari Complex, Ground Floor, FO Cabin, No.8, Circle – 3(1)(1), Field Marshal Cariappa Road, Ashok Nagar, Bengaluru. Bengaluru-560 025. PAN : AABCI 243O G ASSESSEE RESPONDENT Assessee by : Shri. K. R. Vasudevan, Advocate Revenue by : Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru Date of hearing : 09.03.2022 Date of Pronouncement : 11.03.2022 O R D E R Per N V Vasudevan, Vice President
This is an appeal by the assessee against the final Order of Assessment dated 29.09.2021 passed by the DCIT, Circle – 3(1)(1), Bengaluru, under section 143(3) r.w.s. 144C(13) and r.w.s.254 of the Income Tax Act, 1961 (hereinafter called ‘the Act’), in relation to Assessment Year 2008-09.
Though the assessee has raised several grounds of appeal, at the time of hearing, learned Counsel for the assessee pressed for adjudication of ground No.3 in the grounds of appeal in which the assessee has sought exclusion of certain comparable companies.
IT(TP)A No.537/Bang/2021 Page 2 of 11 3. Ground No.3 reads as follows: “3. The learned AO / learned TPO / Honorable DRP erred in concluding that the following comparable companies are comparable to the appellant, whereas the said comparable companies do not satisfy the test of comparability and ought to be rejected: Bodhtree Limited Infosys Technologies Limited Persistent Systems Limited Tata Elxsi Limited KALS Information Systems Limited 4. The assessee is an Indian company and is a 100% owned subsidiary of IDS Inc. US and is engaged in providing software development services to its Associated Enterprises (AEs), in the domain of leasing and loan accounting and portfolio management solutions. 5. The assessee entered into the following international transactions with its AEs: International transaction Methodology Value(INR) adopted Software development services TNMM 20,15,45,579
Margins earned by IDS India for Financial Year (‘FY’) 2008 – 09 Particulars Total Income from Software development services 201,545,579 Exchange Fluctuation Gain 2,778,717 Total Operating Revenue (D) 204,324,296
Less: Operating Costs Employee Costs 122,276,023 General & Administrative Expenses 49,635,098 Depreciation & Amortization 14,833,644 Less: Exchange Loss -
IT(TP)A No.537/Bang/2021 Page 3 of 11 Total Operating Costs (E) 186,744,765 Operating profit F = (D – E) 17,579,531 Net Operating Margin on cost (F/E) 9.41%
In view of he provisions of section 92 of the Act, the income arising from the international transaction had to be determined having regard to Arm’s Length Price. To justify the price received from the AE for providing SWD services as at Amr’s Length, the assessee filed a Transfer Pricing study adopting Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining ALP. The assessee had chosen the following set of comparable companies to justify arm’s length nature of its international transactions with its AEs in its TP Report:
3-year Weighted Sl. No. Company Name Average Margin on Cost 1 Akshay Software Technologies Ltd. 6.88% 2 Helios & Matheson Information Technology 25.12% Ltd 3 Igate Global Solutions Ltd. 10.30% 4 Mindtree Ltd 23.72% 5 Netripples Software Ltd. -19.50% 6 Prithvi Information Solution Ltd. 11.08% 7 R S Software India Ltd. 9.56% 8 Sagarsoft (India) Ltd. 14.66% 9 Serveall Enterprise Solutions Ltd. 16.08% 10 S I P Technologies & Exports Ltd. -9.78% 11 Thirdware Solutions Ltd. 21.43% 12 VMF Soft Tech Ltd. 0.20%
IT(TP)A No.537/Bang/2021 Page 4 of 11 13 Zylog Systems Ltd. 17.64% Arithmetic Mean 9.80%
As the margin earned by the assessee was within +/-5% range with the average net margin on cost of comparable companies which is at 9.80%, it was claimed by the assessee that the international transaction of IDS India with its AEs was at arm’s length.
The assessee’s case was referred by the AO to the Transfer Pricing Officer (TPO) under section 92CA of the Act, to determine the arm’s length price of the international transactions. The TPO rejected the contentions of the assessee relating to net operating margins and selection of comparable companies. The TPO passed the transfer pricing order dated 8th January 2013 and determined the arms’ length price as follows: a. The TPO rejected segmental analysis provided by the assessee for AE and Non-AEs segments and computed the net operating margins of the assessee at 5.59%. b. The TPO proposed a fresh set of comparable companies and determined the arm’s length price at 22.61% after providing working adjustments with upper limit. c. Transfer Pricing adjustments were determined at INR 3,34,44,013/-
The assessee filed objections to the proposal of the TPO which was incorporated in the draft Assessment Order by the AO before the Dispute Resolution Panel (DRP). The DRP in its order dated 29 November 2013 rejected all the contentions of the assessee except to include two comparable companies rejected by the TPO viz., FCS Software Solutions Ltd and Think soft Global Services Ltd. Further, the DRP has also held that there should not be any upper cap on the working capital adjustments. The
IT(TP)A No.537/Bang/2021 Page 5 of 11 AO passed the final assessment order in accordance with the DRP directions and concluded adjustments at INR 3,01,81,677/-
Aggrieved by the order passed by the AO, both the assessee and Revenue filed appeals before the Honourable ITAT, which was disposed of, vide order dated 20.12.2017 as under :
Adjudication on Revenue Appeal a. Working capital should be granted on actuals and should not have any upper cap limit; b. Not to exclude two comparable companies FCS Software Solutions Ltd and Thinksoft Global Services Ltd contended by the assessee for inclusion
Adjudication on Assessee’s Appeal a. The Honourable ITAT remanded the issue of comparability of the following 5 comparable companies to the file of the TPO for fresh examination. a. Bodhtree Consulting Limited; b. Tata Elxsi Ltd; c. Persistent Systems Ltd d. Infosys Ltd e. Kals Information Systems Ltd b. To verify the actual segmental cost base and compute the margins of the assessee accordingly.
Post remanding of the case by the Honourable ITAT, the assessee made representation before the Transfer Pricing Officer and the details of the same is as follows:
IT(TP)A No.537/Bang/2021 Page 6 of 11 The Transfer Pricing Officer (“TPO”) rejected the contention for exclusion of 5 comparable companies and also rejected the segmental margins between AE and Non-AE and retained the same set of comparable companies, as under :
Sl. Margin Adjusted Company Name No. on Cost Margin 1 Akshay Software Technologies Ltd 8.11% 7.56% 2 Bodhtree Consulting Ltd 62.27% 60.80% 3 FCS Software India Ltd 15.82% 11.42% 4 Infosys Technologies Ltd 45.61% 42.43% 5 Kals information System Ltd. 13.89% 11.47% 6 Larsen & Toubro Infotech Ltd 24.72% 24.04% 7 Mindtree Ltd (Segment) 5.52% 2.71% 8 Persistent Systems Ltd 41.40% 39.66% 9 R S Software (India) Ltd 9.97% 9.98% 10 Sasken Communication Technologies Ltd 27.91% 26.89% 11 Tata Elxsi Ltd (Segment) 20.28% 18.46% 12 Thinksoft Global Services Ltd. 16.27% 12.80% 13 Zylog Systems Ltd 7.81% 3.74% Arithmetic Mean 23.04% 20.95% Less: Working Capital Adjustment -2.09% Adjusted Arithmetic Mean 20.95%
Computation of Arm’s Length Price Particulars Amount (in INR) Arm’s length margin 23.04% Less: Working capital adjustment -2.09% Adjusted arithmetic mean PLI (A) 20.95%
IT(TP)A No.537/Bang/2021 Page 7 of 11 Particulars Amount (in INR) Operating cost (B) 19,65,26,248 ALP [ 120.95% of B] 23,76,98,497 Price received 21,02,95,537 Shortfall being adjustment u/s 92CA 2,74,02,960 5% of price received (shortfall exceeding 5%) 1,05,14,777
The AO passed the draft assessment order dated 27th December 2019 considering the TP adjustments made by the TPO, against which the assessee preferred objections before the DRP. The directions provided by the DRP, in the order dated 9thFebruary 2021 were as follows: S.No Directions of DRP 1. The DRP accepted the segmental margin analysis of the appellant and directed to exclude the costs and revenue from Non-AEs in computing the profit level indicator of the appellant. 2. The DRP rejected the submissions regarding the exclusion of the five comparable companies, as mentioned above and retained the same set of comparables, as proposed by the TPO.
The AO passed the final assessment order, vide order dated 29th September 2021, based on the DRP directions, making an adjustment of INR 2,33,57,747/-, as under :
Particulars Amount (in INR) Arm’s length margin 23.04% Less: Working capital adjustment -2.09% Adjusted arithmetic mean PLI (A) 20.95% Operating cost (B) 18,82,44,765 ALP [120.95% of B] 22,76,82,043
IT(TP)A No.537/Bang/2021 Page 8 of 11 Particulars Amount (in INR) Price received 20,43,24,296 Shortfall being adjustment u/s 92CA 2,33,57,747 5% of price received (shortfall exceeding 5%) 1,02,16,215
Aggrieved by the Final Order of Assessment passed by the AO incorporating the directions of the DRP, the assessee has preferred the present appeal before the Tribunal. The only effective ground in the present appeal is Ground No. 3 for the exclusion of the following five companies, for the following reasons: Accept/ Reason for exclusion Margin SL. Company Reject by on cost No. Name Appellan (2009) t Reject Functionally different Bodhtree 60.80% Develops own Software Consulting Ltd; Products, offshoring data 1 management and data warehousing. Software Application Development – MIDAS Reject Functionally different Infosys 42.43% R & D Activities& software Technologies Ltd products Assumes significant risks as 2 compared to captive service providers Owns brand Intangibles Generated several inventions and acquired IPR Reject Functionally different Persistent 39.66% Engaged in development of Systems Ltd 3 Software Products and software products designing Reject Functionally different Tata Elxsi Ltd; 18.46% 4 Hardware Design Services,
IT(TP)A No.537/Bang/2021 Page 9 of 11 Accept/ Reason for exclusion Margin SL. Company Reject by on cost No. Name Appellan (2009) t product design services, engineering design services and visual computing labs Reject Functionally different Kals Information 11.47% Engaged in Software Product 5 Systems Ltd Development
Reliance was placed on the following decisions of this Hon’ble Tribunal in support of the assessee’s claim: i) Infinera India Private Limited v. ITO - IT(TP)A Nos 977 and 1008/Bang/2014 ii) Toshiba Software India Pvt Ltd v. DCIT I.T(T.P).A Nos 268 & 198/Bang/2014 iii) TE Connectivity Global Shared Services India (P.) Ltd. v. ITO I.T(T.P)A No 1280/Bang/2014
The learned Counsel for the assessee reiterated submissions as made above. Learned DR relied on the order of the DRP. 16. We have considered the rival submissions. As far as exclusion of Bodhtree Consulting Ltd., is concerned, we find that this Tribunal in the case of Toshiba Software India Pvt. Ltd., Vs. DCIT (2020) 116 taxmann.com 616 (Bangalore Tribunal), vide paragraphs 13.1 to 13.3.2 held that Bodhtree Consulting Ltd., is a software product company and should not be compared to a company providing software development services. Following the aforesaid decision, we direct exclusion of Bodhtree Consulting Ltd., from the list of comparable companies. As far as Infosys Technologies Ltd., is concerned, this Tribunal in the case of Infinera India Pvt. Ltd., Vs. ITO in IT(TP)A Nos.977 and 1008/Bang/2014 for
IT(TP)A No.537/Bang/2021 Page 10 of 11 Assessment Year 2009-10, vide order dated 30.06.2016 in paragraph 17 held, following the decision of Hon’ble Delhi High Court in the case ITA No.1204/Bang/2011 dated 10.07.2013 that Infosys should not be compared as it is a market leader and giant company in the software development services sector and cannot be compared with a captive SWD service provider to the parent company. Following the same, we direct exclusion of Infosys Technologies Ltd. 17. As far as Persistent Systems India Ltd., is concerned, in the decision rendered by this Tribunal in the case of Infinera India Pvt. Ltd., (supra) in para 15, this company was excluded from the list of comparable companies in a case which related to assessee rendering SWD services such as the assessee in this appeal, for the reason that it was not a pure software development service providing company and was in product designing service and software product development. Following the said decision, we direct exclusion of Persistent Systems Ltd. As far as Tata Elxsi Ltd., is concerned, this Tribunal in the case of Infinera India Pvt. Ltd., (supra) excluded Tata Elxsi Ltd., from the list of comparable companies on the ground that this company is both SWD services company as well as a product company and there were no segmental details available from which the profits of the SWD services segment can be compared with the margin of software development service segment. Following the aforesaid decision, we direct exclusion of Tata Elxsi Ltd., from the list of comparable companies. 18. As far Kals Information Systems Ltd., is concerned, this Tribunal in the case of Infinera India Pvt. Ltd., (supra) excluded Kals Information Systems Ltd., from the list of comparable companies on the ground that this company was engaged in software products as well as optical networking equipment to telecommunication provider and therefore cannot be regarded
IT(TP)A No.537/Bang/2021 Page 11 of 11 as functional comparable. Following the aforesaid decision, we direct exclusion of Kals Information Systems Ltd., also from the list of comparable companies. 19. The TPO is directed to compute the ALP of the international transaction, after affording the assessee opportunity of being heard in accordance with the directions contained in this order.
In the result, appeal by the assessee is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (B. R. BASKARAN) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 11.03.2022. /NS/*
Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.