Loading judgment…
No AI summary yet for this case.
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, “C’’BENCH: BANGALORE
Before: SHRI B. R. BASKARAN & SMT. BEENA PILLAI
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the assessment order dated 26.12.2018 passed by the A.O. for assessment year 2009-10 u/s 143(3) r.w.s. 254 r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short], in pursuance of directions given by Ld. Dispute Resolution Panel (DRP).
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore
Page 2 of 11 2. This is second round of proceedings. In the earlier round, the Tribunal restored all the issues to the file of Ld. DRP for taking a fresh decision by way of speaking and reasoned order.
The assessee is engaged in the business of software development and support services to its parent company M/s. Sonus, USA. The assessee is a wholly owned subsidiary of Sonus Network Inc., USA.
The issue under consideration relates to transfer pricing addition made by the TPO in respect of provision of software services and confirmed by Ld. DRP.
The international transactions entered by the assessee with its associated enterprises, inter-alia, included provision of software development services to its AE. The total receipts of the assessee declared by it for the year under consideration was Rs.31.59 crores. The assessee adopted transactional net marginal method (TNMM) as most appropriate method and Operating revenue by Operating cost as Profit Level Indicator. The assessee declared net margin of 11.81%. The assessee selected 13 companies as comparables and contended that the provision of software development services was at arm’s length.
The TPO rejected the transfer pricing study conducted by the assessee and finally selected following companies as comparable companies: Sl. Company Name Unadjusted No. Margins FY 2008-09 1. Kals Information Systems Ltd. 13.89% 2. Akshay Software Technologies Ltd. 8.11% 3. Bodhtree Consulting Ltd. 62.27%
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore
Page 3 of 11 4. R.S. Software (India) Ltd. 9.97% 5. Tata Elxsi Ltd. 20.28% 6. Sasken Communication Technologies Ltd. 27.91% 7. Persistent Systems Ltd. 41.40% 8 Zylog Systems Ltd. 7.81% 9. Mindtree Ltd. 5.52% 10. Larsen & Toubro Infotech 24.72% 11. Infosys Ltd. 45.61% The arithmetic mean of the above said companies was 24.32%. After allowing working capital adjustment deduction of 1.71%, the TPO arrived at adjusted margin at 22.61%. Accordingly, he made transfer pricing adjustment of Rs.3,24,80,968/-. The Ld. DRP confirmed all the comparables selected by TPO and hence the assessee has filed this appeal.
The Ld. A.R. submitted that the assessee is pressing only part of ground No.9 and he does not press all other remaining grounds also. The assessee has sent a e-mail confirming the above said position. In ground No.9, the assessee has sought exclusion of 8 comparable companies. The Ld. A.R. submitted that the assessee is accepting the comparable companies named M/s Mindtree Ltd. & M/s. Zylog Systems Ltd. Accordingly, he is pressing for exclusion of only 6 companies mentioned below: a. Bodhtree Ltd. b. Infosys Ltd. c. Larsen & Toubro Infotech Ltd. d. Persistent Systems Ltd. e. Sasken Communication Technologies Ltd. f. Tata Elxsi Ltd. The Ld. A.R. submitted that all these companies have been examined by the coordinate benches in the cases of M/s. Schneider Electric IT Business India Pvt. Ltd. Vs. JCIT (2019) 106 taxmann.com 70 (Bangalore) and they have been held to be not a IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore
Page 4 of 11 good comparable for captive software development service provider. Accordingly, he prayed for exclusion of the above said 6 companies. He submitted that the Tribunal, in the above said case has followed the decision rendered by another co-ordinate bench in the case of M/s. Infinera India Pvt. Ltd. Vs. ITO in IT(TP)A No.977 & 1008/Bang/2014 (Bangalore) (2016) 72 taxmann.com 68 (Bangalore) and M/s VMware Software India (P) Ltd (IT(TP)A No.1311 (Bang) 2014 dated 06-01-2017.
The Ld. D.R. on the contrary supported the order passed by Ld. DRP.
We heard the rival contentions and perused the record. In the case of M/s. Schneider Electric IT Business India Pvt. Ltd. (supra), the above said 6 companies have been discussed by the Tribunal in paragraph 10 to 12 of its orders and has held that these are not good comparables. For the sake of convenience, we extract below the said paragraphs: “10. As far as the appeal of the Assessee is concerned, the first aspect is with regard to exclusion of some of the comparable companies chosen by the TPO and retained by the DRP as comparable companies. The learned counsel for the Assessee submitted before us that the comparability of the following 5 comparable companies out of the 13 companies that remain after the order of the DRP viz., (i) Kals Information Systems Ltd., (ii) Bodhtree Consulting Ltd., (iii) Tata Elxsi Ltd., (iv) Persistent Systems Ltd. and (v) Infosys Ltd. was considered by the Tribunal in the case of Infinera India (P.) Ltd. v. ITO [2016] 72 taxmann.com 68 (Bang-Tribunal). The said decision was also in relation to AY 2009-10. In the aforesaid decision the issue raised was against including the aforesaid five companies as comparable companies. The plea of the Assessee was that the aforesaid five companies are not functionally comparable with the Assessee who was engaged in the business of providing SWD services to AE. It is also not in dispute before us that the functional profile of the Assessee in this appeal and the Assessee in the decision rendered in the case of Infinera India (P.) Ltd. (supra) are identical. In the case of Infinera India (P.) Ltd. (supra) this Tribunal held that the aforesaid 5 companies are not functionally comparable with a company rendering SWD services. The learned DR could not point out any difference in facts. Hence, we hold these 5
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore Page 5 of 11 companies be excluded from the list of comparable companies as functionally not comparable with the Assessee company.
11. Similarly one of the comparable company chosen by the TPO and retained by the DRP viz., Sasken Communication Technologies Ltd. was held to be functionally dismissilar with an Assessee who was engaged in the business of providing SWD services to AE such as the Assessee, in the case of VM Ware Software India (P.) Ltd. (supra). The learned DR could not point out any difference in facts. Hence, we hold this company be excluded from the list of comparable companies as functionally not comparable with the Assessee company.
12. Similarly one of the comparable company chosen by the TPO and retained by the DRP viz., Larsen & Toubro Infotech Ltd., was held to be not comparable company for the reason that the related party transaction to sales of this company was more than 15 per cent by this Tribunal in the case of VM Ware Software India (P.) Ltd. (supra). The learned DR could not point out any difference in facts. Hence, we hold this company be excluded from the list of comparable companies as the related party transactions to sales was more than 15 per cent.”
We notice that the coordinate bench has followed the decision rendered by another coordinate bench in the case of M/s. Infinera India Pvt. Ltd. (supra), wherein following discussions have been made in respect of four of the above said comparable companies, viz., (i) M/s Bodhtree Consulting Ltd, (ii) Tata Elxsi Ltd., (iii) Persistent Systems Ltd. and (iv) Infosys Ltd. “(2) M/s Bodhtree Consulting Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of Cisco Systems (Ind.)(P.) Ltd. (supra) and in particular, our attention was drawn to para-26.1 available on page no.98 to 99 of Case Law Compendium. In this case, it is noted by the Tribunal that this company is in the business of software product and was engaged in providing open and end to end web solutions software consultancy and design and development of software using latest technology and therefore, the same cannot be considered as a comparable in the case of companies rendering software development services, as in the present case. Therefore, by respectfully following this Tribunal order, we hold that this company is also excluded from the list of final comparables. (3) M/s Tata Elxsi Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of Cisco Systems (India)(P.) Ltd. (supra) and our attention was drawn to para 26.4
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore
Page 6 of 11 to 26.5 of the order available on pages 103 to 105 of the case law compendium. For the sake of ready reference these paras are reproduced hereunder; '26.4 Tata ElxsiLtd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables.
………………………………………………………………………………………………… …………………………………………………………………………… 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S. Tata Elxsi Ltd. should not be regarded as a comparable'.
Since ld. DR of the revenue could not point out any difference in facts, respectfully following these Tribunal orders, we direct the AO/TPO to exclude this company also from the list of final comparables. (4) Persistent Systems Ltd., For exclusion of this company, reliance has been placed on the Tribunal order rendered in the case of Unisys India (P.) Ltd. IT(TP) Appeal No.67(Bang) of 2015, copy available on pages 210 to 246 of case law compendium and in particular, our attention
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore Page 7 of 11 was drawn to para 36 to 37 of the Tribunal order. These paras are reproduced as under:— '36. As far as Persistent Systems Ltd. a comparable by the assessee in his TP study but was objected by the assessee before the TPO as not comparable, this Tribunal in the case of IT(TP)A No.108(Bang)/21014 order dated 12-12-2014 in the case of Yodlee Infotech Pvt. Ltd. v. ITO held as follows: "5.12…………… This Tribunal in the case of 3DPLM Software Solutions Ltd. v. Dy. CIT (IT(TP) A No. 1303(Bang)/2012 dated 28-11-2013) has also held that Persistent Systems Pvt. Ltd., was in product designing services and into software product development. In the same decision it was also held that M/s Infosys Technologies Ltd., had considerable intangibles like IPR, and was also into software product development. It was also held that M/s Tata Elxsi Ltd., was developing niche products and into product designing services. Hence, these companies would in any case have to be excluded from the comparables being functionally different".
Following the said decision, we direct that Persistent Systems Ltd., be excluded from the final list of comparable companies chosen by the TPO'. The ld. DR of the revenue supported the orders of the authorities below; 16. We have considered the rival submissions. We find that in this case, the Tribunal has followed another Tribunal order rendered in the case of Yodlee Infotech Ltd. v. ITO [IT(TP) Appeal No. 108 (Bang) of 2014]. The relevant portion of that Tribunal order is re- produced above and as per the same, this company i.e. M/s Persistent Systems Ltd., was in product designing services and into software product development. Since the present assessee company is only providing software development services to the AE, this company cannot be considered as a comparable in the present case. Since the ld. DR of the revenue could not point out any difference in facts, by respectfully following this Tribunal order, we direct the AO/TPO for exclusion of this company from the final list of comparable. 16.1 M/s Infosys Technologies Ltd., For exclusion of this company, reliance has been placed on the judgment of the Hon'ble Delhi High Court rendered in the case of CIT v. Aginity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi) and in particular, our attention was drawn to para-6 of the judgment as available inpage-386 of the case law compendium and the same is reproduced hereunder:— "6. Learned counsel for the revenue has submitted that the Tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the Tribunal has stated hat Infosys Technologies Ltd., should be exclude from the list of comparables for the reason latter was giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent assessee was a captive unit of the parent company and assumed only a limited risk. It
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore
Page 8 of 11 has also stated that Infosys Technologies Ltd. cannot be compared with the respondent-assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted".
17. From the above para of the judgment of the Hon'ble Delhi High Court, it is seen that this company is a giant company in the area of software and it assumed all risks leading to higher profits, whereas the assessee company was a captive unit of the parent company and assumed only a limited risk. In the present case also, the assessee company is providing services to the parent company and therefore, assuming only limited risk and hence, respectfully following this judgment of the Hon'ble Delhi High Court, we direct the AO/TPO to exclude this company also from the list of final comparables.”
Following above said the decision rendered by the Tribunal in the case of M/s. Schneider Electric IT Business India Pvt. Ltd (supra) and M/s. Infinera India Pvt. Ltd. (supra), we direct exclusion of (i) M/s Bodhtree Consulting Ltd, (ii) Tata Elxsi Ltd., (iii) Persistent Systems Ltd. and (iv) Infosys Ltd.
The co-ordinate bench has excluded M/s Sasken Communication Technologies Ltd and M/s Larsen & Toubro Infotech Ltd by following the decision rendered by another co- ordinate bench in the case of M/s VMware Software India (P) Ltd (supra). In the above said case, both these companies were excluded with the following discussions:-
“Sasken Communication Technology Limited. 17. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that the co-ordinate bench of this Tribunal in the case of Novell Software Development India Pvt. Ltd. Vs. DCIT vide order dt.31.8.2015 in IT(TP)A No.1287/Bang/2011 has considered the comparabilty of this company in paras 25 & 30 as under :
" 25. As for Sasken Communication Technologies Ltd (seg), findings of this Tribunal as appearing in para 13 of its order mentioned supra is given hereunder
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore Page 9 of 11 13) Sasken Communication Technologies Ltd.: "109. Ld TPO noticed that the company was rejected in the TP document on the ground that the company fails its filter of business review and R&D to sales was more than 3%. However, no reasons were given for the business review. 109.1 Ld. TPO pointed out that R&D to sales being more than 3% is not acceptable for which detailed discussion has already been made earlier. He further noticed that the company has software services segment and segmental results are available for software services. He further pointed out that on the basis of information obtained u/s 133(6), the company qualifies onsite revenue filter (onsite revenues were to the extent 27.27% of its export revenues). After considering the assessee's reply, Id. TPO included this company in the list of comparables. Ld. counsel pointed out that this company has incurred significant expenditure on research and development activity the same being 6.07% of sales. He further submitted that the company had significant intangible inasmuch as it develops siskin branded products. The company owns 1PR Further it was pointed out before TPO that during the year the company hod acquired Botnia Hightech F. and its two subsidiaries and thus, it had under gone significant restructuring. However, Id. TPO ignored these facts He relied on the following decisions: • IQ Information System (I) Pvt. Ltd., ITA No. 1961/Hyd./2012 (paw no. 11 & 23, page 25), • Amerson Process Management India Pvt. Ltd., ITA No. 8118/Mum./2010 (para 16 page 15).
Ld. DR relied on the order of TPO and submitted that TPO considered the companies software services segment details only. We have considered the rival submissions and have perused the record of the case.
Ld. TPO has completely ignored the extraordinary business circumstances pointed out by assessee for which necessary adjustment was required to be made in accordance with Rule 10E3(3) of Income Tax Rules. However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find t7iat the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the TPO to exclude this comparable from the list of comparables.If we follow the coordinate bench decision in the case of Motorola Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore
Page 10 of 11 at para 24 above, where the contested comparable formed part of assessee's own study, then the AO / TPO has to be given a chance for verification, in view of judgment of Hon'ble Pun jab & Haryana High Court in the case of Quark Systems India P. Ltd (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd back to the AO / TPO for consideration afresh as per law. Ordered accordingly."
"
Accordingly we direct the AO to exclude Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, Flextronics Software Systems Ltd (seg), Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid software Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd (seg), Tata Elxsi Ltd (seg), Third- ware Solutions Ltd (seg) and Wipro Ltd (seg) from the list of comparables considered by him."
Following the earlier order of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables.”
………………………………………………………………………………………… ………………………………………………………………………………………… L & T Infotech Limited.
The learned Authorised Representative of the assessee has submitted that the correct RPT of this company is 16.61 which is more than 15% filter. Therefore this company is required to be excluded from the set of comparables. The learned Departmental Representative has submitted that this fact is to be verified by the TPO as to whether the RPT of this company is more than 15%.
Having considered the rival submissions as well as the relevant material on record, we note that the assessee has raised objection that the RPT of this company is 16.61% and therefore it exceeds the tolerance range of 15% of the RPT. The learned Authorised Representative has pointed that the details of related party has been given by this company in the Annual Report and the correct computation comes to 16.61%. In view of the above facts and circumstances of the case, when we have considered the tolerance range of related party at 15%, this issue requires to be examined and verified by the TPO. Accordingly, this issue is set aside to the record of TPO for limited purpose of verifying the correct RPT of this company
IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore
Page 11 of 11 and in case the RPT are found to be more than 15% then this company should be excluded from the list of comparables.”
Accordingly following the decision rendered by the Tribunal in the case of M/s. Schneider Electric IT Business India Pvt. Ltd (supra) and M/s VMware Software India (P) Ltd (supra), we direct exclusion of M/s Sasken Communication Technologies Ltd and M/s Larsen & Toubro Infotech Ltd.
In the result, the appeal of the assessee is treated as allowed.