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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).
In view of the aforesaid decision, we hold that companies listed in paragraph 8 of this order, whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.”
The next ground to be adjudicated is ground No.6. This ground relates to exclusion of Akshay Software Technologies Ltd. The assessee brought to our notice decision of the Tribunal rendered in the case of Aptean India Pvt. Ltd., Vs. DCIT ITA 2679/Bang/2017 order dated 06.11.2020. In the aforesaid decision which relates to Assessment Year 2013-14 in the case of a software development service provider such as the assessee this Tribunal considered the comparability of Akshay Software Technologies
IT(TP)A No.2638/Bang/2017 Page 14 of 24 Ltd. This company was excluded from the list of comparable companies by the DRP. The assessee sought its inclusion before the Tribunal. On the plea for inclusion of this company, the Tribunal remanded the issue to the TPO for fresh consideration with the following observations:
“35. It has been submitted that Ld.TPO rejected this comparable on the ground it is functionally different from the activities of the assessee. Ld.TPO from response octane and on issuance of notice under section 133(6) of observed that this company is engaged in providing professional services, procurement, installation, implementation and support & maintenance of ERP products and services. Ld.TPO thus was of the opinion that this comparable is functionally not similar with assessee. Ld.AR submitted that coordinate bench of this Tribunal in case of Autodesk India Pvt. Ltd. vs DCIT reported in (2020) 119 taxmann.com 265 has considered a similar objection by Ld.TPO for assessment year 2013-14. It is also submitted that the functions performed by present assessee and Autodesk India Pvt.Ltd.,(supra) are that of captive software development service provider.
On the contrary, Ld.CIT.DR placed reliance on observations of Ld.TPO/DRP. He submitted that DRP has observed that this company is into product development though the entire revenue of Rs. 19.94 crores has been disclosed under the heading income from software services. It has been submitted that there is no segmental information available in respect of revenue earned from services and product and it is not possible to functionally compare this company under such circumstances.
We have perused submissions advanced by both sides in light of records placed before us.
We note that in case of Autodesk India private limited (supra) this tribunal has remanded the comparable back to learnt TPO/AO by observing as under: "17. We heard the parties on this issue and perused the record. We notice that the TPO has obtained information u/s 133(6) of the Act from M/s Akshay Software Technologies Ltd, as per which IT(TP)A No.2638/Bang/2017 Page 15 of 24 it is engaged in providing professional services, procurement, installation, implementation and support & maintenance of ERP products and services. In the case of Mercedes-Benz Research & Development India (P.) Ltd. (supra), we notice that the co- ordinate bench has considered the nomenclature of "income from software services" given under the head "Revenue from Operations" , which mentioned that the Income from software services was Rs. 19.83 crores. Now the dispute boils down to the nature of functions performed by this company. It is the responsibility of the assessee to show that both the assessee and the comparable company perform similar functions. Before us, the Ld A.R placed her reliance on the decision rendered by co- ordinate bench in order to contend that this company is comparable. However, TPO has issued notice u/s 133(6) of the Act to the above said company and collected the details of functions performed by it, wherein the nature of activities performed by this company is stated as "providing professional services, procurement, installation, implementation and support & maintenance of ERP products and services". It is pertinent to note that the above said information was given by M/s Akshay Software Technologies Ltd. However, we find that they are general description of the functions performed. Specific functional details have not been furnished. What is required to be found out is whether functions fall under the category of "Software development services", as in the case of the assessee company. Accordingly, we are of the view that this company may also be restored to the file of AO/TPO, so that the assessee would get an opportunity to show that the functions performed by this company and the assessee are similar. Accordingly, we restore this company also to the file of the AO/TPO."
As there are no functional differences brought out by revenue between assessee and Autodesk India Pvt Ltd., and that, both these companies have been categorised to be a captive service provider to its respective AEs, we do not find any reason to deviate from the above mentioned view taken by coordinate bench of this Tribunal.
Accordingly, respectfully following the same, we remand this comparable to Ld.AO/TPO to analyse the functions performed by this company with that of assessee. In the event it is found to be carrying
IT(TP)A No.2638/Bang/2017 Page 16 of 24 out SWD services as that of assessee and segmental details may be considered for computing margin of the international transaction.”
Respectfully following the aforesaid decision rendered on identical facts and circumstances, we remand the question of determination of comparability of this company to the TPO / AO for fresh consideration after affording opportunity of being heard to the assessee.
The next issue raised in ground No.5 is with regard to exclusion of company CG Vak Software Exports Ltd. As far as exclusion of this company is concerned, assessee seeks exclusion of this company for being functionally not similar with that of assessee.
Ld.AR submits that assessee seeks exclusion of this comparable for being functionally different with that of assessee. Ld.AR submitted that there are no segmental information available in respect of this company. In support of his argument he placed reliance upon decision of coordinate bench of this tribunal in case of Tavant Technologies India Pvt.Ltd vs DCIT reported in (2020) 120 taxmann.com 122.
On the contrary Ld.Sr.DR placed reliance on orders passed by authorities below.
We have perused submissions advanced by both sides in light of records placed before us.
We note that there is nothing on record placed by revenue to show that Tavent technologies India Pvt Ltd (supra) is not a captive service
IT(TP)A No.2638/Bang/2017 Page 17 of 24 provider. Assessee before us is also a captive service provider providing services only to its associated enterprise. We note that under similar circumstances Tribunal in case of Tavent technologies India Pvt Ltd (supra) observed as under: 9. Ground No. 5.3 relates to the assessee's plea for exclusion of CG Vak Software Exports Ltd. as a comparable by the TPO which action was confirmed by the DRP. The grounds on which the assessee sought exclusion of this company as a comparable by the TPO was that it was functionally different in the sense that it was engaged in software product development and absence of segmental data. The TPO & DRP took the view that product development was part of software development services.
The ld. counsel for the assessee brought to our notice a decision of ITAT Bangalore in the case of NXP India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 421 (Bang - Trib.) wherein in the case of an assessee for AY 2013-14 engaged in Software development services such as the assessee it was held that CG Vak Software Exports Ltd. was not a good comparable. The following were the relevant observations of the Tribunal:- 'III. C G Vax Software & Exports Limited 24. The learned AR submitted that this company should be excluded for the reason that C G VAX Software & Exports Limited is engaged in software development and sale of products which involves high degree of R & D expenditure and to demonstrate the same, he drew our attention to the paper book page Nos.1018 and 1034 and submitted that the nature of the business of software development involves inbuilt, constant Research and Development as a part of its process of manufacturing (development). The company is developing applications engines, re-usable codes and libraries as a part of its R & D activities. Further, it has intangible assets as shown in the financial statement as on 31-3-2013 at Rs. 3,03,83,536 and it is also engaged in outsource product development, as is evident from the attached notes forming part of the accounts. The learned AR also submitted that C G VAK Software & Exports Limited was not considered as a comparable in the case of M/s.
IT(TP)A No.2638/Bang/2017 Page 18 of 24
EPAM Systems India Private Limited (ITA No. 2122/Hyd/2017 for assessment year 20132014). Vide order dated 20-11-2018, the Tribunal held as under:-- "16. Having regard to the rival contentions and the material on record, we find that the assessee has raised its objections before the TPO but he held that it is functionally similar. We have gone through the annual reports of CGVAK Software & Exports Ltd and find that the said company is having revenue from both software services and BPO services but there is no segmental data with regard to each of these transactions. Therefore, as held by the Coordinate Bench of the Tribunal in a number of cases (cited supra), we hold that this company cannot be taken as a comparable to the assessee-company. Accordingly, we direct the TPO to exclude this company from the final list of comparables. " 24.1 Similarly, in the case of M/s. ION Trading India Private Limited v. ITO (ITA No. 1035/Del/2015 for the assessment year 2010-2011). The Tribunal vide its order dated 7-12-2015, held as under:-- "21. We have considered the submission of the Id. counsel for the assessee and have considered the argument of the ld. DR that the assessee is not producing any product, however, we find that CG-Vak Software and Exports Limited is not only into computer software but it is a product manufacturer too. Since assessee is not into product manufacturing and the segmental details cannot be bifurcated from the financial details, we find that the assessee and the CG-Vak Software and Exports Limited are not comparables. Therefore, we are inclined to uphold the orders of the authorities below in rejecting this company as a comparable. We direct accordingly. " 24.2 In our opinion, there is force in the argument of the learned AR. M/s. CG VAK Software & Exports Limited is not only engaged in the business of computer software development, but also engaged in product manufacturing process, whereas the present assessee is not in product manufacture activity. M/s. CG VAK Software & Exports Ltd. owns huge intangible assets and also engaged in outsourced product development. In view of the foregoing reasons, we hold that the said company cannot be considered
IT(TP)A No.2638/Bang/2017 Page 19 of 24 for inclusion in the list of comparables. We, therefore, direct the TPO to exclude the said company from the list of comparables.' 11. Following the aforesaid decision, we direct the exclusion of CG Vak Software Exports Ltd. from the list of comparable companies.” 23. Respectfully following the same, we direct exclusion of CG Vak software exports Ltd from the final list of comparable companies.
The next ground to be adjudicated is ground No.4(a) and this ground is with regard to inclusion of ICRA Techno Analytics Ltd., as a comparable company. As far as comparability of this company is concerned, this Tribunal in assessee’s own case in Assessment Year 2010-11 in the decision reported in (2016) 72 taxmann.com 187 (Bang.-Trib.) remanded the question of comparability of this company to the TPO for fresh consideration with the following observations:
“5. Before us, the learned Authorised Representative of the assessee has submitted that out of these 2 companies retained by the DRP, the assessee is seeking exclusion of ICRA Techno Analytics Limited. The learned Authorised Representative has submitted that the comparability of this company with that of software development services provider has been examined by this Tribunal in the case of Dy. CIT v Ikanos Communication India (P.) Ltd. [2015] 64 taxmann.com 436 (Bang. - Trib.). The learned Authorised Representative has submitted that the Tribunal after considering the Annual Report, accounting policy and notes from accounts reported in the Annual Report of this company has held that this company is dealing with in the software development, consultancy, engineering services, web development & hoisting and subsequently diversified itself into the domain of business analytics and business process outsourcing. Thus this company had more than one segment and there is no segmental result separately available in the public domain and also not obtained by the TPO. Therefore this company was directed to be excluded from list of comparables. The learned Authorised
IT(TP)A No.2638/Bang/2017 Page 20 of 24 Representative has pleaded that this company may be excluded from the list of comparables.
6. On the other hand; the learned Departmental Representative has submitted that ICRA Techno Analytics Ltd. is assessee's own comparable and part of T.P. Study. The assessee did not raise any objections either before the TPO or before the DRP. Thus the assessee cannot be allowed to raise objection against this company which was selected by the assessee itself without filing the additional ground. The learned Departmental Representative has vehemently objected to the exclusion of this company when this company was common to the list of assessee as well as TPO.
We have heard the rival submissions as well as considered the relevant material on record. There is no dispute that ICRA Techno Analytics Ltd. is common as selected by the assessee as well as by the TPO. It is also not disputed that the assessee did not raise any objection against this company either before the TPO or before the DRP. The assessee has raised this plea before us, on the basis of the finding of this Tribunal in the case of Ikanos Communication India (P.) Ltd. (supra) wherein the Tribunal has considered the functional comparability of this company with that of software development services provider in para 10 as under:— "10. We have perused the orders and heard the rival contentions. Notes to accounts of ICRA Techno Analytics Ltd forming a part of its audited financial statement of accounts and annual report for year ended 31.03.2010 mentions as under: Significant accounting policies and Notes to Accounts (Page 169 of the Annual Report) Background: The company was incorporated on July 27, 1992 as Computer Exchange Private Limited and subsequently become wholly subsidiary of ICRA limited on August 25, 2005 and was renamed as ICRA Techno Analytics Ltd. The company is engaged in the software development & consultancy, engineering services, web development & hoisting and subsequently diversified itself into the domain of business analytics and business process outsourcing. In the note detailing of the revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web development and hosting. Thus ICRA Techno Analytics had more than one segment. There is no case for the Revenue that the segmental results were separately available in IT(TP)A No.2638/Bang/2017 Page 21 of 24
public domain or was not obtained by the TPO from the said company, invoking the powers vested on him. In such a situation the DRP, in our opinion, was justified in directing exclusion of ICRA Techno Analytics Ltd from the list of comparables." Thus it is clear that the co-ordinate bench of this Tribunal vide order dt. 10.11.2015 (supra), one of us Judicial Member is party has held that this company is earning its revenue from diversified activities of software development consultancy, engineering services, development and housing and in the absence of segmental results of software development services activity, it cannot be considered as a good comparable. Though the assessee has not raised the objection against this company before the authorities below however, we are of the view that merely because the assessee has wrongly added in the list of comparables will not bar the assessee to take objection against the functional dis-similarity of a company as held by the Special Bench of this Tribunal in the case of Dy. CIT v. Quark System (P.) Ltd. [2010] 38 SOT 207 (Chd.). Accordingly, we are of the view that the functional comparability of this company is required to be examined. The assessee did not file additional ground to raise this objection therefore in the facts and circumstances of the case and in the interest of justice, we remit this issue of comparability of ICRA Techno Analytics limited to the record pf the A.O/TPO for adjudicating the same after giving an opportunity of hearing to the assessee.”
Respectfully following the aforesaid decision, we remand the issue to the TPO / AO for consideration afresh as directed by the Tribunal in the aforesaid decision, after affording the assessee opportunity of being heard.
The next ground that needs to be adjudicated in ground No.8 in which the Assessee has projected its grievance against the action of the TPO in making negative working capital adjustment. As far as the aforesaid issue is concerned, the TPO in his order in paragraph 12.1 has observed that working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009, adopting Average Prime Lending Rate (PLR) of State Bank of India (SBI) and the detailed working is given in Annexure B to the order. No reasons have been given by the TPO as to why he is IT(TP)A No.2638/Bang/2017 Page 22 of 24 adopting negative working capital adjustment. The Assessee did not raise any grounds regarding making negative working capital adjustment before the DRP. We are therefore of the view that issue requires re examination by the TPO/AO. Working capital adjustment is made for the time value of money lost when credit time is given to the customers. It is the plea of the Assessee that it does not bear any risk and has no working capital contingencies and that it has not incurred any expenses for meeting the working capital requirement. It is claimed that the Assessee is running the business without any working capital risk as compared to the comparables. The Assessee does not bear any market risk as the services are provided only to the AE. Therefore, requirement for adjustment of negative working capital does not arise. The Ld.AR placed reliance on decision of coordinate bench of this Tribunal reported in (2020) 120 com 122 and Lam Research India (P.) Ltd. v. Dy. CIT in [IT Appeal Nos. 1473 & 1385 (Beng.) of 2014, dated 30-4-2015], Tivo Tech (P.) Ltd. v. Dy. CIT [2020] 117 taxmann.com 259, and Dy. CIT v. Software AG Bangalore Technologies (P.) Ltd. [IT Appeal No. 1628 of 2014, dated 31-3-2016], where it has been held that negative working capital adjustment shall not be made.
We have considered the rival submissions. We find that in the case of Lam Research India (P.) Ltd. (supra) and Software AG Bangalore Technologies (P.) Ltd. (supra) passed by this Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. Since the issue has not been dealt with by the TPO in proper perspective and since the issue has not been raised before the DRP, we deem
IT(TP)A No.2638/Bang/2017 Page 23 of 24 it fit and proper to remand this issue to the TPO/AO for fresh consideration in the light of the law on the issue as laid down in judicial decision.
We direct Ld.TPO/AO to compute the ALP in accordance with the directions contained in this order after affording assessee opportunity of being heard.
The next ground that requires adjudication is the additional ground of appeal
with regard to levy of education cess. The additional ground of appeal being a legal ground which can be adjudicated on the basis of facts already available on record and which has a bearing on the tax liability of the Assessee is admitted for adjudication keeping in mind the ration of Hon’ble Supreme Court in the case of NTPC Ltd. 229 ITR 383 (SC). As far as this issue is concerned, this is again settled by the ITAT, Bengaluru Bench, in the case of Apten India Pvt. Ltd., ITA 2679/Bang/2017 dated 06.11.2020 wherein it was held that education cess and secondary and higher education cess is deductible as business expenditure under section 37. (1) of the Act for determining the assessed income. The view so taken was on the basis of the decisions in the case of Sesa Goa Ltd. vs. Joint Commissioner of Income-tax. 1(2020) 117 taxmann.com
96. (Bombay High Court)] • Reckitt Benckiser (I) Pvt. Ltd. vs. Deputy Commissioner of Income-tax [(2020) 117 taxmann.com 519 (Kolkata Tribunal)] • ITC Limited vs. Assistant Commissioner of Income-tax [I.T.A No. 1267 /Kol/2014(Kolkata Tirbunal)] • The Peerless General Finance & Investment Co. Ltd. vs. Deputy Commissioner of Income-tax [ITA No. 1439/Kol/2018 (Kolkata Tribunal)] • Tata Steel Limited vs. Assistant Commissioner of IT(TP)A No.2638/Bang/2017 Page 24 of 24 Income-tax [ITA No. 5573/Mum/2012 (Mumbai Tribunal) wherein it was held that education cess and secondary and higher education cess is not in the nature of tax which is not deductible expenditure. Following the decisions referred to above, we allow the additional ground of appeal.
In the result, appeal by the assessee is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.