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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. B. R. BASKARAN & SMT. BEENA PILLAI
Date of Hearing : 20-10-2020 Date of Pronouncement : 06-11-2020 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against final assessment order dated 10/10/2017 passed under section 143(3) read with section 144C(13) of the Act, by Ld.DCIT Circle 1(1)(2) for assessment year 2013-14, on following grounds of appeal:
1. That the order of the learned of Deputy Commissioner of Income-tax, Circle - 1(1)(2), Bangalore ("learned Assessing Officer" or "learned AO") pursuant to the directions of the Hon'ble Dispute Resolution Panel
Page 2 of 25 IT(TP)A No.2679/Bang/2017 ("Hon'ble DRP") to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
That on the facts and circumstances of the case, the Hon'ble DRP erred in upholding the approach of the Deputy Commissioner of Income- tax, Transfer Pricing -i(i)(i) ("learned TPO") in not accepting the Transfer Pricing ("TP") Study/economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rule, 1962 ("the Rules"), conducting a fresh economic analysis for the determination of the Arm's Length Price ("ALP") in connection with the impugned international transactions, and holding that the Appellant's international transactions are not at arm's length.
That the Hon'ble DRP has erred in upholding the learned TPO's approach using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining ALP, ignoring the fact that this data was not available to the Appellant at the time of complying with the TP documentation requirements.
That the Hon'ble DRP erred in upholding the approach of the learned TPO, in rejecting the Appellant's contentions against the use of information under section 133(6) of the Act, as that tantamounts to choosing secret comparable companies whose information were not available in public domain while undertaking the TP study for the respective financial year.
That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables.
That the Hon'ble DRP erred in upholding the rejection of comparability analysis in the Transfer Pricing documentation undertaken by the Appellant in accordance with the provisions of the Act read with the Rules and in conducting a fresh comparability analysis and application of certain arbitrary filters. Software Development Services 7. The Hon'ble DRP erred in upholding the appr*oach of the learned TPO , in law and on facts by excluding Akshay Software Technologies Limited, as a comparable on the ground that segmental information was not available hence considered it to be functional dissimilar, whereas this comparable company should have been included on ground of functional similarity.
The Hon'ble DRP erred in upholding the approach of the learned TPO, in law and on facts by excluding Evoke Technologies Private Limited, as a comparable on the ground that the financial statements were unreliable, whereas this comparable company should have been included on ground of functional similarity.
The Hon'ble DRP erred in upholding the approach of the learned TPO, in law and on facts by excluding Sasken Communication Technologies Limited, as a comparable on the groufe of functional dissimilarity,
Page 3 of 25 IT(TP)A No.2679/Bang/2017 whereas this comparable company is functionally similar her should have been included.
That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including CG - VAK Software and Exports Limited, as a comparable whereas this company should have been excluded on ground of functional dissimilarity. Additionally, without prejudice to the above contention, the learned TPO has earned in margin computation of the comparable, hence the correct operating margin is to be considered. ii. That the l-lon'ble DRP erred in upholding the approach of the learned TPO, in law and in fact by including ICRA Techno Analytics Limited, as a comparable whereas this company should have been excluded on ground of functional dissimilarity and it fails related party transactio] filter of 25% applied by the learned TPO. Additionally, without prejudice to the above contention, the learned TPO has earned in margin computation of the comparable, hence the crfr operating margin is to be considered.
12. That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including Larsen & Toubro Infotech Private Limited, as a comparable whereas this company should have been excluded on grounds of functional dissimilarity. Additionally, without prejudice to the above contention, the learned TPO has earned in margin computation of the comparable, hence the correct operating margin is to be considered.
That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including Persistent Systems Limited, as a comparable whereas this company should have been excluded on ground of functional dissimilarity. Additionally, without prejudice to the above contention, the learned TPO has earned in margin computation of the comparable, hence the correct operating margin is to be considered. Information Technology Enabled Services 14. The Hon'ble DRP erred in upholding the approach of the learned TPO, in law and on facts by excluding Tech process Solutions Limited, as a comparable by applying export income to sales filter greater than 75% whereas this comparable company should have been included on ground of functionally similarity.
That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including Capgemini Business Services (India) Limited, as a comparable whereas this company should have been excluded on ground that it fails related party transaction filter of 25% applied by the learned TPO.
16. That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including Infosys BPO Limited, as a comparable whereas this company should have been excluded on ground of functional dissimilarity.
That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including Harton Communication
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Limited, as a comparable whereas this company should have been excluded on ground of functional dissimilarity. The above grounds are independent of, and without prejudice to, each other and that the appellant craves leave to add, alter, amend, modify or withdraw the grounds of appeal or produce further documents before or at the time of hearing of this Appeal.”
2. Assessee has also raised two additional grounds, vide applications dated 09/06/2020 and 13/10/2020 which are as under: Ground raised vide application dated 9/06/2020: “The grounds mentioned herein are without prejudice to the grounds mentioned in Appeal No.: 2979/Bang/2017 dated December 12, 2017. Transfer Pricing Related
1. On the facts and in the circumstances of the case and in law the learned Transfer Pricing Officer ('TPO') / the learned Deputy Commissioner of Income Tax, Circle 1(1)(2), Bangalore ('Assessing Officer' or 'AO') / the Dispute Resolution Panel, erred in not applying the turnover filter for selection of comparable companies for benchmarking the international transaction of Software Development Services and Information Technology Enabled Services rendered by the Appellant to its Associated Enterprises. The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”
3. Ld.AR submitted that failure to raise this ground at an earlier stage was not willful and that no new facts needs to be investigated upon in order to adjudicate these grounds. It has been submitted that by way of abundant caution assessee raises exclusion of certain comparables on turnover filter. He also submitted that in the event these comparables are excluded based on turnover filter other grounds relating to exclusion of the same comparables on other dissimilarities need not be adjudicated.
4. On the contrary Ld.DR submitted that turnover filter is not a relevant criteria based on which comparables could be Page 5 of 25 IT(TP)A No.2679/Bang/2017 considered for exclusion. He thus objected for admission of additional ground. 5. We have perused the submissions advanced by both sides and records placed before us. 6. The additional ground raised vide application dated 09/06/2020 is fundamental to the appeal and the non- admission of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that failure to raise this ground at an earlier stage either neither wilful or wanton. We therefore admit the additional ground raised vide application dated 09/06/2020 by assessee.
7. Ground raised by application dated 13/10/2020 Ground relating to other than transfer pricing matters “1. That on the facts and in the circumstances of the case and in law, the Learned Assessing Of ('AO) and Learned Commissioner of Income- tax Appeals ['CIT(A']) ought to grant deduction under section 37(1) of the Income Tax Act, 1961 for Education Cess and Secondary and Higher Education Cess (collectively referred to as 'Cess) paid by the Appellant on the assessed income along with income-tax and surcharge for the year under appeal. It is prayed that the deduction of Education Cess and Secondary and Higher Education Cess should be allowed to the Appellant as business expenditure under the provisions of the Act. The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”
8. Ld.AR submitted that this issue was inadvertently missed out while filing original ground of appeal before this Tribunal. He submitted that, this issue is covered by decision of Hon’ble Rajasthan High Court, placed cash law in paper book filed by assessee. It is also submitted that no new facts needs to be investigated on to adjudicate this ground.
Page 6 of 25 IT(TP)A No.2679/Bang/2017 9. Ld.Sr.DR opposed admission of this ground. 10. We have perused submissions advanced by both sides and records placed before us. 11. The additional ground raised vide application dated 13/010/2020 is fundamental to the appeal and the non- admission of the same would result in an incomplete appreciation and adjudication of the matter. Accordingly, the additional ground raised vide application dated 13/10/2020 stands admitted.
12. Ld.AR at the outset submitted that in the even certain comparables are considered for exclusion/inclusion under both the segments the other grounds becomes academic.
13. He submitted that, Ground Nos. 1-6, 9, 11 and 14 are not pressed by assessee. Accordingly, these Ground Nos. 1-6, 9, 11 and 14 are dismissed as not pressed.
14. Ld.AR submitted that, under SWD segment, assessee wish to argue upon following comparables for inclusion raised in Ground 7, 8 being; • Akshay software technologies Ltd. • Evoke Technologies Pvt. Ltd.
15. In Ground 10, 12, 13 assessee alleges following comparables for exclusion being: • CG-VAK Software and Exports Ltd. • Larsen and Toubro Infotech Pvt Ltd. • Persistent Systems Ltd.
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Ld.AR submitted that, in respect of ITeS services, assessee wishes to allege following comparables for exclusion raised in Ground 15-17. He submitted that these comparables are to be excluded on turnover filter which has been raised by way of additional ground • Capgemini Business Services(India) Ltd., • Infosys BPO Ltd., • Harton Communications Ltd., Brief facts of the case are as under: 17. Assessee filed its return of income for year under consideration on 30/11/2013 declaring total income of Rs.5,34,58,390/-. It has been submitted that assessee is engaged in the business of development and technical maintenance work in certain intellectual property and know- how related to certain products and systems. Ld.AO noted that during the year assessee had international transaction more than Rs.15 Crores, and therefore, the case was referred to Ld.TPO to determined arm’s length price of the international transaction. 18. Upon receipt of reference, Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB. From the details filed by assessee Ld.TPO noted that assessee provided following international transaction to its AE: Particulars Amount Provision of software development
Page 8 of 25 IT(TP)A No.2679/Bang/2017 services 33,31,78,116 Provision of BPO services 17,59,381 Employee Secondmeant charges 19,88,588
Ld.TPO considered the software development service segment and ITeS segment for the purpose of determining in ALP. Ld.TPO noted that, assessee in the TP study computed margin of assessee by using TNMM as most appropriate method and OP/TC as PLI. Ld.TPO noted that assessee computed 14.18% and 16.88% as is margin under SWD segment and ITeS segment respectively. Assessee used following 9 comparables for software development service segment and 7 comparables for ITES segment with an average margin of 13.48% and 12.01% respectively. Assessee thus held its transaction with associated enterprise to be at arms length, as it had high margins as compared to the comparables selected under both segments. SWD Segment S.No. Comparables Margin 1. Akshay Software 6.75 Technologies Ltd. 2. Evoke Technologies Pvt. Ltd. 7.79 3. E-Zest Solutions Ltd. 19.56 4. Goldstone Technologies Ltd. 10.96 5. Helios & Matheson 18.87
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Information technology Ltd. 6. Mindtree Ltd. 15.02 7. R S Software (India) Ltd. 16.40 8. R Systems International 7.62 Limited (segmental) 9. Sasken Communication 18.39 Technologies Ltd. Average Margin 13.48% ITeS Segment S.No. Comparables Margin 1. Caliber Point Business 9.82 Solutions Ltd., 2. Cosmic Global Ltd. 25.41 3. e4e Healthcare Business 13.46 Services Pvt. Ltd., 4. ICRA Techno Analytics Ltd., 19.59 5. Informed Technologies India 10.87 Ltd., 6. Jindal Intellicom Ltd., 5.17 7. Techprocess Solutions Ltd., -0.24 Average Margin 12.01% 20. Ld.TPO rejected the TP study carried out by assessee and the filters applied by assessee to shortlist the comparables. Ld.TPO instead carried out fresh search and finalised following set of comparables under both segments: SWD Segment S.No. Comparables Margin
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CG-VAK Software Exports Ltd. 20.54% 2. ICRA Techno Analytics Ltd. 17.10% 3. Larsen & Toubro Infotech Ltd. 26.06% 4. Mindtree Ltd. (Seg) 18.19% 5. Persistent Systems Ltd. 28.27% 6. RS Software (India) Ltd. 17.41% 7. Tech Mahindra Ltd (Seg) 18.72% Average Margin 20.90% ITES Segment S.No. Comparables Margin 1. Acropetal Technologies Ltd. 24.16 2. Microgenetic Systems Ltd. 16.34 3. Jindal Intellicom Ltd. -3.00 4. Hartron Communications Ltd 44.07 (Seg) 5. Microland Ltd. 8.62 6. Capgemini Business Services 26.78 (India) Pvt. Ltd. 7. Tech Mahindra Ltd (Seg) 22.27 8. e4e Healthcare Business Pvt. 17.26 Ltd. 9. Infosys BPO Ltd. 29.28 Average Margin 20.64
Ld.TPO thus computed shortfall being the proposed adjustment under both segments as under:
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SOFTWARE DEVELOPMENT SERVICES 20.90% Arm's Length Mean Margin on cost Less: Working Capital Adjustment -1,38% (As per Annex. C) Adjusted margin 22.28% Operating Cost 2943,85,019 Arm's Length Price(ALP) 3599,74,001 122.28% of Operating Cost) Price Received 3361,42,260 Variation in Price 238,31,741 3% of price received 100,84,268 Shortfall being adjustment 238,31,741
ITES SEGMENT
20.64% Arm's Length Mean Margin on cost -0.99% Less: Working Capital Adjustment (As per Annex. D) Adjusted margin 21.63% Operating Cost 169,77,390 Arm's Length Price(ALP) 206,49,966 121.46% of Operating Cost Price Received 198,43,778 Variation in Price 805,821 3% of price received 595,313 Shortfall being adjustment 805,821 22. Ld.AO while passing the draft assessment order did not grant deduction of the educational cess and secondary higher education cess paid by assessee under section 37 (1). Aggrieved by proposed adjustment, assessee raised objection before DRP. DRP excluded 1 comparable from SWD segment being, Tech Mahindra Ltd., and 2 comparables from ITES segment being Acropetal Technologies Ltd and Tech Mahindra Ltd.
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On receipt of DRP directions, Ld. AO passed the final assessment order by making transfer pricing addition addition computed by Ld.TPO, after giving effect to the DRP directions enhanced to Rs.2,51,81,533/-. Ld. AO also made addition of education cess and secondary and higher education cess on the assessed income along with income tax and surcharge for year under consideration.
Aggrieved by the addition made by Ld.AO, assessee is in appeal before us now. 25. Before dealing with comparability analysis, it is sine qua non to understand functions performed, assets owned and risk assumed by assessee under both segments. 26. We note that in paper book at page 404 assessee has placed the transfer pricing study in respect of international transaction undertaken by assessee with its associated enterprise. Provision of software development services: 27. Assessee is engaged in rendering software development service to its AE in respect of formulation of software courts, low-level designing and related documentation. It has been submitted that on finalisation of courts, it also undertakes systems testing which includes unit level testing and integration testing. For rendering such services, assessee has entered into an agreement with Cimnet Inc on 01/07/2003 and with Consona Corporation on 01/01/2011. Functions: 28. Functions performed by assessee under this segment includes unit level testing and integration testing on specified
Page 13 of 25 IT(TP)A No.2679/Bang/2017 parameters. Once the software is developed and tested, it is given to AE which then undertake the integration of the software into the system. The software thus integrated and bundled with the products are sold in the market. It has been submitted in the TP analysis that assessee undertakes Ltd functions under this segment and is compensated on a cost plus basis. Business process outsourcing services: 29. Assessee provides BPO service to its AE, Cimnet LLC pursuant to agreement dated 01/11/2004. Under this segment services include back-office support and designing of printed circuit boards.
Functions: 30. Functions performed by assessee under this segment include Quote Data Processing, front-and engineering , Pre- CAM and post-CAM services. It has been recorded in the trans-apprising study at page 420-421 that assessee is compensated at cost plus basis. Assets owned: 31. It has been submitted that assessee does not own any non-routine valuable intangibles. Risks assumed: 32. It has been submitted that assessee owns Ltd contract risk and foreign exchange risk as the invoices raised by assessee are on its AE and is remunerated in foreign currency. Categorisation:
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Assessee has thus been concluded as less than ordinary risks in the course of providing services to its AE based upon the above analysis, we shall consider the comparability of assessee with alleged comparables for exclusion/inclusion.
Ground 7- 8 has been raised for inclusion of following comparables. Akshay software technologies Ltd. 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. 36. 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
Page 15 of 25 IT(TP)A No.2679/Bang/2017 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 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 these
Page 16 of 25 IT(TP)A No.2679/Bang/2017 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 out SWD services as that of assessee and segmental details may be considered for computing margin of the international transaction. Evoke Technologies Pvt. Ltd.
Ld.AR submitted that assessee seeks inclusions of this comparable as it is engaged in SWD services. It has been submitted that the comparable was rejected by Ld.TPO as the company reported loss from discontinued business during relevant financial year and no further details was available in this respect. Ld.AR submitted that DRP rejected the comparable as the financials of the company are unreliable and that it offers a end-to-end IT business solutions to enable clients to enhance business performance.
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Ld.AR submitted that this company has only one segment i.e, SWD. He thus requested that the comparable may be remanded for verification.
Ld.CIT.DR did not object for the comparable to be remanded. We have perused submissions advanced by both sides in light of records placed before us. 44. We note that both Ld.AO/TPO did not dispute that this comparable is providing SWD services. This is contrary to what is observed by DRP. 45. Under such circumstances, we deem it necessary to remand this comparable to Ld.AO/TPO. It is also directed that necessary details may be called for to verify the FAR with assessee. In the event it is found to be carrying SWD services during relevant period, and segmental details are available, the same may be considered for purpose of computing margin ALP. 46. In Ground 10 assessee alleges exclusion of CG-VAK Software and Exports Ltd. for being functionally not similar with that of assessee. CG-VAK Software and Exports Ltd. 47. 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 is 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.
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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. 50. 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 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. 10. 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 Page 19 of 25 IT(TP)A No.2679/Bang/2017
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. 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 10 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 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.
Page 20 of 25 IT(TP)A No.2679/Bang/2017 Respectfully following the same, we direct exclusion of CG Vak software exports Ltd from the final list of company.
Following two comparables alleged in Ground 12-13 are sought to be excluded on turnover filter under software development service segment: • Larsen and Toubro Infotech Pvt Ltd. • Persistent Systems Ltd.
In Ground 15-17, assessee seeks to excluded following comparables under ITeS turnover filter: • Capgemini Business Services(India) Ltd., • Infosys BPO Ltd., • Harton Communications Ltd., Assessee seeks exclusion of aforesaid comparables by applying on turnover filter which has been raised by way of additional ground.
We have already admitted additional ground raised by assessee vide application dated 09/06/2020. The Ld.AR submitted that exclusion of companies based on turnover has been discussed by this Tribunal in case of Autodesk India (P.) Ltd. vs DCIT (2018) 96 taxmann.com 263. Tribunal in this decision after considering various decisions by coordinate bench, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal observed and held as follows:
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"17.7 We have considered the rival submissions. The substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non- jurisdiction High Court, even though the said decision is of a non- jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT v. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16-9-2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5- 8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to Page 22 of 25 IT(TP)A No.2679/Bang/2017 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)."
Respectfully following the same, we also hold that turnover is a relevant criteria for considering comparables. Accordingly additional ground raised by assessee stands allowed. Assessee has alleged comparables for exclusion in Grounds 12-13 and 15-17 by applying turnover filter. We have upheld the turnover filter in that aforestated paragraphs, and that these comparables are admittedly more than 200 crores, we are of the opinion that they cannot be included in the final list for computing the arm’s length margin. Accordingly grounds 12-13 and 15-17 stands allowed. Additional ground raised by assessee wide letter dated 13/10/2020
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In respect of additional ground raised
by assessee vide letter dated 13/10/2020, Ld.AR submitted that this issue stands squarely covered in favour of assessee by decision of orderable Rajasthan High Court in case of Chambal Fertilizers & Chemicals Ltd. Vs. JCT in by order dated 31/07/2018. He submitted that’s education says and secondary and higher education cess has been duly discharged by assessee while computing tax liability under normal provisions of income tax act. Placing reliance on following decisions Ld.AR submitted that ‘cess’ is deductible as business expenditure under section 37 (1) of the Act for determining the assessed income for year under consideration and that this view is upheld in following decisions: • 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 Income-tax [ITA No. 5573/Mum/2012 (Mumbai Tribunal)]
56. We have perused submissions advanced by both sides in light of records placed before us.
57. Nothing is discernible from the record to establish that assessee has raised the claim by way of revised return before Ld.AO. However we are of considered opinion that this is an allowable expenditure and has of assessee’s. Accordingly we
Page 24 of 25 IT(TP)A No.2679/Bang/2017 remand this issue back to Ld.AO to consider the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands partly allowed as indicated hereinabove. Order pronounced in the open court on 6th Nov, 2020. Sd/- Sd/- (B. R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 6th Nov, 2020. /Vms/ Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order Assistant Registrar, ITAT, Bangalore.
Page 25 of 25 IT(TP)A No.2679/Bang/2017 Date Initial On Dragon 1. Draft dictated on Sr.PS -11-2020 2. Draft placed before Sr.PS author -11-2020 3. Draft proposed & placed JM/AM before the second member -11-2020 4. Draft JM/AM discussed/approved by Second Member. 5. -11-2020 Sr.PS/PS Approved Draft comes to the Sr.PS/PS 6. Kept for pronouncement -11-2020 Sr.PS on 7. Date of uploading the -11-2020 Sr.PS order on Website 8. If not uploaded, furnish -- Sr.PS the reason 9. File sent to the Bench -11-2020 Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk.
Date of dispatch of Order. No 1*3. Draft dictation sheets are Sr.PS attached