Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SMT. BEENA PILLAI & SHRI. O.P. MEENA
ORDER PER BEENA PILLAI, JUDICIAL MEMBER : Present cross appeals have been filed by assessee as well as revenue against order dated 13/01/16 passed by Ld. ITO Ward – 2(1)(4), Bangalore, under section 144C(13) of the Act, for assessment year 2011–12 on following grounds of appeal: IT(TP) A No. 461/B/2016 (A’s Appeal)
Page 3 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12
Page 4 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 IT(TP) A No. 419/B/2016 (Revenue Appeal)
Page 5 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Page 6 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Page 7 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Page 8 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12
Page 9 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Brief facts of the case are as under:
Assessee is a private limited company and filed its return of income on 30/11/11 declaring total income at “nil” after claiming deduction under section 10A of the Act, amounting to Rs.2,92,53,281/-. Return was processed under section 143 (1) of the Act and notices under section 143 (2) and 142 (1) was issued to assessee. Assessee was called upon to file books of accounts and other details. In response to statutory notices representative of assessee appeared before Ld. AO and filed requisite details as called for.
Ld. AO observed that assessee had international transaction with its associated enterprises exceeding Rs.15 crores, and accordingly case was referred to Transfer Pricing officer for determining arm’s length price of the transaction. Upon receipt of reference, Ld. TPO issued notice to assessee, calling upon to file economic details of international transaction in Form 3 CEB. Ld.
Page 10 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 TPO observed that assessee had following international transaction with its associated enterprise:
International transactions Amount (in rupees) Software development services 19,12,66,671/- Recovery of travel expenses 61,68,117/- Cross charges of expenses 77,19,182/- Total 20,51,53,970/-
Ld.TPO observed that, assessee used TNMM as most appropriate method with PLI as OP/OC to determined its margin at 16.01% for software development services. It was noted that in TP documentation analysis was carried out by using following 12 comparables with average margin of 14.43%.
Sl. Comparables Margin No.
Acropetal Technologies Ltd., 24.74% 2. All India Technologies Ltd., 27.91% 3. MYM Technologies Ltd., 5.21% 4. CG-VAK Software & Exports Ltd., 3.94% 5. Persistent Systems & Solutions Ltd., 17.88% 6. R S Software (India) Ltd., 12.51% 7. Spry Resources India Pvt. Ltd., 22.71% 8. Synetairos Technologies Ltd., 24.88% 9. Synfosys Business Solutions Ltd., 14.91% 10. Sofscript Systems & Services Ltd., 9.35% 11. Vama Industries Ltd., 9.87% 12. Ontrac Systems Ltd., 0.06% Average Margin 14.34% Assessee, thus held transaction with AE under this segment to be at arm’s length price.
Page 11 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12
Ld.TPO rejected economic analysis undertaken by assessee and conducted fresh economic search by applying various filters and selected following 13 fresh comparables with operating margin of 23.19%.
Sl. Comparables Margins No. 1 Acropetal Technologies Ltd., 35.78% 2 E Zest Solutions 25.99% 3 E-Infochips Ltd., 63.35% 4 Evoke Technologies Pvt. Ltd., 15.00% 5 ICRA Techno Analytics Ltd., 29.92% 6 Infosys Ltd., 50.62% 7 Larsen & Toubro Infotech Ltd., 27.02% 8 Mindtree Ltd., (Seg.) 16.24% 9 Persistent Systems & Solutions Ltd., 28.27% 10 Persistent Systems Ltd., 28.69% 11 R S Software (India) Ltd., 23.26% 12 Sasken Communication Technologies 31.67% Ltd., 13 Tata Elxsi Ltd., (Seg.) 26.04% Average Margin 30.91%
Ld.TPO thus proposed adjustment of Rs.2,48,70,043/- in respect of software service segment. It is submitted that Ld.TPO provided adjustment of (-)6.28% towards working capital. Ld.TPO rejected submission of assessee to consider adjustment of ALP if any, to be limited to lower end of 5% range as per proviso to section 92C (2) of the Act. Ld.AO subsequently granted
Page 12 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 working capital adjustment, post DRP directions and hence not alleged before this Tribunal.
Aggrieved by adjustment proposed by Ld.TPO, assessee raised objections before DRP. DRP rejected 9 comparables selected by Ld. TPO and restricted to 4 comparables with average margin of 19.94% as under: Sl. Margin No. Comparables adopted 1 Persistent Systems & Solutions Ltd., 28.27% 2 E Zhest Solutions 25.99% 3 Sasken Communication Technologies Ltd., 31.67% 4 Persistant Systems Ltd., 28.69% Based upon DRP directions, Ld.AO passed final assessment order making addition. Aggrieved by order of Ld.AO, revenue is in appeal and assessee filed cross objection before us.
In revenue’s appeal, grounds raised pertains to application of “on-site revenue filter” selectively to reject few comparables and excluding E-Infochips Ltd., on the ground of having service income less than 75% of sales, which is alleged to be contrary to observations of Ld.TPO.
In cross objection filed by assessee it is observed that assessee seeks exclusion/inclusion of following comparables on the basis of functional dissimilarities/similarities, being:
Page 13 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 • Persistent Systems and Solutions Ltd; • Persistent Systems Ltd; • Sasken Communication Technologies Ltd; • E Zhest Solutions And seeks inclusion of: • R.S.Software Systems Ltd., • Evoke Technologies Ltd., • Mindtree Ltd., Additional grounds raised by assessee as well as revenue: Following are the additional ground raised by assessee, vide application dated 14/02/17 and 16/11/17 and revenue.
Additional ground raised by revenue:
Page 14 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Additional ground raised by assessee: Application dated 14/02/17: 1 The lower authorities have erred in adopting Persistent Systems & Solutions Limited and Persistent Systems Limited as comparable even though they are functionally different. 2 The lower authorities have erred in adopting Persistent Systems Limited and Sasken Communication Technologies Limited as comparable even though they have turnover ten times higher than the turnover of the Appellant. Application dated 16/11/17
1. The Honorable Dispute Resolution Panel has erred in rejecting Evoke Technologies Private Limited as comparable even though it is functionally similar.
2. On facts and circumstances of the case and law applicable, Evoke Technologies Private Limited should be considered and included in the list of comparables.
Assessee vide application dated 14/02/17 and 16/11/17 and revenue raised Additional Grounds, by submitting that inadvertently these comparables were not raised at the time of filing of original appeal. Placing reliance upon decision of Hon’ble Supreme Court in case of NTPC Ltd., vs CIT reported in 229 ITR 383 and Jute Corporation of India vs CIT reported in 53 taxman 85, submitted that comparables specified in additional grounds may be admitted. We have perused details relied upon by both sides 10.1. In our considered opinion comparables alleged in additional grounds raised by both sides arises out of the records and was subject matter of consideration before DRP. Considering
Page 15 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 inadvertent omission on behalf of assessee and revenue in raising these grounds before this Tribunal, we allow admit additional grounds raised before us.
Accordingly, additional grounds raised by assessee vide application dated 14/02/17 and 16/11/17 and additional ground raised by revenue reproduced hereinabove stands allowed.
Before we undertake comparability analysis, it is sine qua non to understand functions performed by assessee, risk assumed and assets owned in provision of software development services. Functions performed: a. Software Engineering Function Software Engineering function includes development of the product and quality assurance. These functions are performed collaboratively by variety of people (program managers, developers, testers, designers & programmers) with varied skill sets. b. Software Engineering Function The development team at Evolving Systems India as per the instructions, guidance and specifications provided by the AEs for the product, initiates the development process. c. Quality Assurance (Testing) Evolving Systems India is responsible for ensuring that all the software developed is free of error and conforms to Page 16 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 design specifications. If any errors are found, then they have to be reported to the development team for corrective action. Subsequently the software is ready for export to the AEs. The services are reviewed by the AEs and in case of errors, it is sent back to Evolving Systems India for rectification. d. Software Maintenance and Support Function In order to focus on providing customer satisfaction, the enterprise must engage resources to provide the end-user with support in using the product effectively. The support function includes Technical Support, Documentation, IT Integration/Configuration management. e. Technical Support All customer needs and queries are managed by the AEs Evolving Systems India assists the AEs in resolving bug fixes, which includes service packs (i.e generic packs for all releases) or hot fixes (customer specific). f. Documentation All software products require comprehensive documentation in order for them to be used effectively. This involves creating the user tools such as the User manual and the on- line Help for products. Evolving Systems India provides write-up for the services performed to the Documentation team in USA. It provides “Knowledge Transfer Slides” to Evolving Systems UK for the services rendered.
Page 17 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Assets employed Assessee poses the necessary assets and infrastructure as its offshore software development facilities for performing its function it does not own any intangibles in respect of any software development activities carried on by it. Risks assumed It has been submitted that assessee does not bear any market risks since it renders services exclusively to its associated enterprises it does not carry out any R&D activities and therefore does not assume any such risk, it does not undertake any credit risk as it renders services only to AE. All what assessee assumes is product risk which is directly to the associated enterprises and foreign exchange risk, as remuneration received by assessee is in foreign exchange. In TP study assessee has been categorized to perform routine and normal functions undertaking limited/bear minimal risk as a software service provider in India. It also understates minimum risk with respect to transaction with associated enterprises, which is an admitted position. With aforestated FAR analysis, comparables sought by revenue as well as assessee for inclusion/exclusion shall be analysed as under.
We first take up appeal filed by revenue in .
Page 18 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 12 Ld.CIT DR submitted that Ground No.1 (i)-(iv) is in respect of applying “on-site revenue filter” selectively on following comparables by DRP: • RS software Pvt. Ltd., • Acropetal Technologies Ltd., • L&T Infotech Ltd., 12.1 Ld.CIT DR submitted that, DRP applied on-site revenue filter selectively instead of applying on all comparables. It has been argued that application of a filter determines what set of comparables would be displayed on the database, where search is carried. Application of filter to shortlist companies under a particular segment is the second step in transfer pricing analysis. She payment clay argued that, once comparables are shortlisted by TPO, DRP suo moto applied “on-site revenue filter” and excluded 3 comparables, which is not as per procedures laid down under law. She submitted that “on-site revenue filter” applied by DRP, neither applied by assessee in transfer pricing study nor considered by Ld.TPO, while conducting analysis under section 92CA of the Act.
12.2 Placing reliance upon decision of this Tribunal in case of ACIT vs Broadcom Communication Technologies Pvt. Ltd., reported in (2017) 88 Taxmann.com 309, she submitted that new filter suo moto cannot be applied by DRP selectively, but should be applied to all comparables.
Page 19 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 In support, reliance is placed on decisions of Delhi Tribunal in case of DCIT vs Vertex customer services in vide order dated 06/11/17 and Aircom International India Pvt. Ltd., in ITA No. 04/04/03/del/2012 wide order dated 19/05/17. It is also submitted that RS Software India Ltd rejected by DRP was acceptable to assessee as well as Ld.TPO. Ld.CIT DR submitted that, entire analysis needs to be revisited based upon new filter that has been applied by DRP and therefore needs to be set aside to Ld.TPO. 13 On the contrary, Ld.AR submitted that issue of suo moto application of “on-site revenue” filter by DRP has been addressed by coordinate bench of this Tribunal in case of Autodesk India private limited vs ACIT in ITA(TP)A No.156/Bang/2016 for assessment year 2011-12 vide order dated 21/12/18. She further submitted that assessee do not have any objection of RS software India Pvt. Ltd., to be included as they are functionally similar. 14 We have perused submissions advanced by both sides in the light of records placed before us.
14.1. Main grievance of revenue is in respect of on-site revenue filter applied by DRP suo moto selectively, on certain comparables, and excluding them. On this, we agree with contention raised by Ld. CIT DR that a filter cannot be applied once TP analysis has been concluded by Ld.TPO However on perusal of observations recorded by DRP, Acropetal Technologies Ltd., L &T Infotech Ltd., has been excluded for functional
Page 20 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 dissimilarities and that segmental information not being available. DRP also observed that, these comparables cannot be considered comparable with contract service provider like assessee. Therefore, in our considered opinion, these grounds raised by revenue becomes academic. 14.2. Decisions relied upon by Ld.CIT DR of Delhi Tribunal in case of DCIT vs Vertex customer services in (supra) and Aircom International India Pvt. Ltd., (supra) does not deal with on-site revenue filter as has been admitted by Ld. CIT DR.
15. On merits, Ld.CIT DR regarding functional similarities/ dissimilarities of these companies with assessee, relied upon decision of coordinate bench of this Tribunal in case of Mercedes- Benz Research and Development India Private Limited vs ACIT reported in (2018) 90 Taxmann.com 300, and submitted that, these comparables were sent back to Ld.TPO for re-examination. She thus submitted that, view taken by coordinate bench of this Tribunal in Mercedes-Benz Research and Development India Pvt Ltd. vs ACIT (supra) may be followed. 16 We have perused view of coordinate bench of this tribunal in case of Mercedes-Benz Research and Development India Pvt. Ltd (supra) in respect of M/s. Accropatel Technologies Ltd., and M/s L&T Infotech Ltd.,. It is observed that these comparables were sent back to Ld.TPO by observing as under:
Page 21 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12
Acropetal Technologies Ltd. ('Acropetal') …….. 13.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the DRP has observed that this company, 'Acropetal', operates in three segments and the segmental results are available; while on the contrary the assessee contends that 'Acropetal' operates in four segments. Further, it is seen that even though the assessee has raised the other issues before the DRP, as laid out in para 13.1 of this order, the DRP has not rendered any finding thereon. We find that the co-ordinate bench of this Tribunal in the case of AMD India (P.) Ltd. (supra) relied on by the assessee has excluded 'Acropetal' on the ground that it fails the service income filter of 75%; a ground apparently not put forth by the assessee before the authorities below. 13.3.2 Considering the facts and circumstances of the case, as discussed above; that the DRP has not rendered findings on some of the issues raised by the assessee before it and there is a contradiction in the number of segments that this company 'Acropetal' operates in, we are of the opinion that it is necessary to remand the issue of comparability of this company back to the file of the DRP for examining and adjudication of the issues raised by the assessee, after affording the assessee adequate opportunity of being heard in the matter and to file details /submissions in this regard, which shall be duly considered. We hold and direct accordingly. ……………………. 16.2 During proceedings before us, the learned Authorised Representative for the assessee stated that the assessee does not wish to press the ground related to exclusion of Sasken Communication Technologies Limited, therefore, this ground is dismissed as not pressed and consequently Sasken Communication Technologies Ltd. is retained in the final list of comparables. 16.3 According to the learned Authorised Representative, the other two companies were chosen as comparables by the assessee in its TP Study itself. The learned Authorised Representative however submits that the assessee seeks exclusion of L & T Infotech Limited and Persistent Systems Limited, due to more details being now available in the public domain which render these two companies as not comparable to the assessee and therefore prays that they be excluded from the list of comparable companies. 16.4 Per contra, the learned Departmental Representative for revenue objected to the admission of this additional ground stating that when the assessee itself has selected these two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal. 16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two
Page 22 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 companies i.e. (i) L & T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of these companies on the issue of functional dissimilarity and other grounds. In our considered view, the assessee cannot be precluded from raising an objection against inclusion of a company even if the said company was selected by the assessee in its TP Study. This view was taken by the Special Bench of ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems (P.) Ltd.[2010] 38 SOT 307. As per the principles laid down in the aforesaid decision of the Special Bench (supra), we admit this additional ground raised by the assessee seeking exclusion of these two companies (i) L & T Infotech Limited (ii) Sasken Communication Technologies Limited without commenting on the merits of the case and remit the matter of their comparability analysis to the file of the TPO/A.O. for examination of the assessee's claim and to adjudicate thereon after providing the assessee adequate opportunity of being heard, which shall be duly considered. We hold and direct accordingly.”
17. On perusal of aforestated observations by coordinate bench of this Tribunal, it is very clear that comparables were remanded for the reason that, in case of Acropetal, DRP rendered finding that segmental details were available, which was contrary to materials placed on record. In case of L & T, coordinate bench sent back comparable for reason that financial details which were initially not available on public domain was subsequently available for consideration. 17.1 In the facts of present case there is no such dispute between parties and observations regarding financials of these companies by DRP are concurrent with annual reports placed in paper book filed before us. Thus, in our considered opinion, these comparables cannot be held to be functionally similar with of assessee, who is a contract service provider, working on a cost- plus business model.
Page 23 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 It is observed that RS software (India) Ltd, has been excluded by DRP on application of ‘on-site revenue filter’. Both parties do not have objection for inclusion of this company. We are therefore of the view that this company should be included in the list of comparables. Accordingly, Ld. TPO is directed to consider this comparable in the list. Accordingly, Ground No. 1 raised by revenue stands partly allowed.
Ground No.2 is against excluding M/s. E-Infochips, by DRP as comparable on the ground that it fails service income filter. Ld. CIT DR submitted that Ld. TPO while analysing comparables observed that, this company has revenue from software development up to 88%, whereas DRP observes that revenue earned by this company is less than 75%, and therefore cannot be included. She submitted that basis of DRP to hold that revenue is less than 75% has not been demonstrated and therefore needs to be reconsidered. 18.1. Ld.AR placed reliance upon decision of coordinate bench of this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) wherein, M/s. E-Infochips Ltd., is excluded for failing in service income filter.
We have perused submissions advanced by both sides in light of records placed before us. 19.1. It is observed that this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) excluded E-Infochips Ltd., by following view taken by this Tribunal in case of Comscop Network (India)
Page 24 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Pvt. Ltd., vs ITO in IT (TP) A/Bang/2016 dated 22/02/17 wherein, this company was excluded for reason that, there is no segmental information regarding diverse functions performed by this company and that there was major fluctuation in its profits, which influenced turnover of this company. Further it is observed that in case of DCIT vs M/s CGI Information Systems and Management Consultations Pvt. Ltd., in for assessment year 2011-12 vide order dated 06/04/18 dealt with identical objection raised by Ld.CIT DR before as under: “24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal is weak and any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the act and rules. As far as ground No. 5 in revenue’s appeal is concerned, the revenue seeks to challenge the exclusion of AE Infotech Ltd. On the ground that it failed direct software service income filter at 75%. At the outset, the assessee submits that E Infotech Ltd was excluded by the DRP on the ground that: (i) no segmental information is regarding its diverse functions is available; (ii) it failed the software service income filter and 75%; (iii) there were major fluctuations in profit and turnover every years which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence of inventory (page 10 and 11 of the DRP’s directions). The revenue, in its appeal has challenged its exclusion only on the 2nd ground. In other words, the revenue has not challenged its exclusion on the other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and cannot be disturbed by this Hon’ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that companies’ software development service revenue for FY 2010-11 was less
Page 25 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 than 75% of its total operating revenue for the year. Thus, the above action of the DRP in rejecting the above companies correct.” 19.2. From the above, it is observed by this Tribunal consistently in various decisions for AY:2011-12 held that this company does not satisfy service income filter being 7.5%. We therefore, do not see any reason to set aside this company to Ld.TPO. 19.3. In the facts before us, revenue is challenging exclusion of this comparable as DRP recorded finding in respect of service income being less than 75%. Other factual dissimilarities considered by DRP regarding extraordinary event and no segmental information available, has not been challenged before us. 19.4. Therefore, respectfully following view taken by coordinate bench of this Tribunal in DCIT vs M/s CGI Information Systems and Management Consultations Pvt. Ltd., (supra), we direct Ld. TPO to exclude this company. Accordingly, this ground and additional ground raised by revenue stands dismissed.
20. Ground No. 3-4 raised by revenue seeks inclusion of ICRA Techno Analytics Ltd., and M/s Infosys Technologies Ltd. A. M/s. Infosys Technologies Ltd., Regarding M/s Infosys technologies Ltd, Ld.CIT DR referred to observations of authorities below. Whereas, Ld.AR placed reliance upon order of DRP. We have perused submissions advanced by both sides in light of records placed before us.
Page 26 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 This company has been included by Ld.TPO which is objected by assessee due to very high turnover, which is more than 200 crores. It has been submitted by Ld.AR that this company during year ending 31/03/10 had turnover of about Rs.21,140 crores, which is much higher than that of assessee. Further he submitted that this company is a joint and software development space while assessee is a small captive service provider, providing exclusive services only to its AE’s. It is also been submitted by Ld.AR that this company has heavy R&D expenses and thus has intangibles associated with it. It is observed that this company provides solutions that span entire software run life-cycle encompassing technical consulting, design, developed meant, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. With such diversified activities carried on by this company, it is not appropriate to compared it with a one-to-one service provider like assessee. It is observed that in case of Agnity India Technologies Pvt. Ltd., reported in (2015) 58 Taxmann.com 167 Delhi Benches of this Tribunal after analysing various aspects took a view that, this company is not a fit comparable for captive service provider. The said view has been upheld by Hon’ble Delhi High Court wherein, Hon’ble Court upholding the view taken by this Tribunal, observed that company having brand value as well as intangible assets cannot be compared with an ordinary entity who provide captive services.
Page 27 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Respectfully following the above, we direct Ld. TPO to exclude this company from the finalist. B. ICRA Techno Analytics Ltd: It has been submitted that, this comparable has been included by Ld.TPO and has been objected by assessee for the reason that it is engaged in diverse range of IT solutions services. Ld.CIT DR submitted that observations of DRP are contrary to observations of Ld.TPO. He submitted that, this company is providing technology solutions in certain particular domain which does not render the services to be different. On the contrary, Ld.AR submitted that, this company is engaged in software development and high end ITES segment, of which no details are available. Ld.AR submitted that this company provides services amongst others, wide array of IT solutions like business analytics, IT engineering and business process outsourcing etc. Ld.AR submitted that this company is functionally dissimilar with that of assessee and that the service segment considered by Ld.TPO contains revenuers from all other business activities such as engineering services, Web development and hosting, business analytics and BPO services performed by this company. We have perused submissions advanced by both sides in the light of records placed before us. From annual report placed in paper book, it is observed that this company derives its revenue from services consisting of revenues earned from software development and hosting which is recognized to the extent of service performed. In profit and loss account, it is observed that income has been received from Page 28 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 services and sales, without there being bifurcation in order to understand component of income earned by this company from software development exclusively. Thus, it is amply clear that this company is engaged in diversified activities of software development for which segmental reporting has not been provided. We draw support for exclusion of this company from the decision of coordinate bench of this Tribunal in case of DCIT vs Electronics for Imaging India Pvt. Ltd., (supra) and CIT vs Broadcom India Research (P) Ltd., (supra) for exclusion of this company. Respectfully following the above, we direct Ld.TPO to exclude this company from the finalist.
Ground No. 5 is raised by revenue seeking inclusion of M/s Tata Elxsi Ltd. 21.1. It has been submitted that DRP excluded this comparable as it consists of embedded product design, industrial design and visual computing labs which are not comparable to a software service provider like assessee. He submitted that merely because coordinate bench of this Tribunal in Telecordia Technologies India Pvt. Ltd., excluded this comparable, cannot lead to its exclusion in the present facts. 21.2. On the contrary Ld.AR placed reliance upon observations of DRP. 21.3. We have perused submissions advanced by both sides in light of records placed before us. Ld.CIT.DR objected for its exclusion on the ground that DRP did not verify functional similarities/dissimilarities of this Page 29 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 comparable with that of assessee. From annual report of this company placed in the paper book, we note that this company is predominantly engaged in product design services and not a pure software development service provider. The details in annual report show segment software development service-related design services only. Further it is observed that in the decision referred to by DRP Telecordia Technologies India Pvt. Ltd (supra) this comparable has been excluded by observing as under: “……. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable portion.” As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.” Respective following the same we direct Ld. AO/TPO to exclude this company from final list.
Ground no.6 This ground has been raised in respect of excluding communication travel expenditure from both export turnover and total turnover.
Page 30 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 22.1. At the outset, both parties submitted that, the issue is now squarely covered with the decision of Hon’ble Karnataka High Court in case of Tata Elxsi Ltd., vs CIT, reported in (2012) 349 ITR 98, wherein Hon’ble court held that, what is reduced from export turnover should also be reduced from the total turnover. It is observed that Ld. CIT (A) granted relief to assessee following the aforestated view expressed by Hon’ble Karnataka High Court. We do not find any infirmity in the view taken by Ld. CIT (A) and the same is upheld. Accordingly, this ground raised by revenue stands dismissed. In the result appeal filed by revenue stands partly allowed. Assessee’s Appeal:
23. Ground No. 1 raised by assessee is general in nature therefore do not require any adjudication.
24. Ground No. 2-8 is raised challenging various comparables being included/excluded by Ld.AO/TPO. Assessee has also raised additional grounds which has been admitted and reproduced herein my above. All these grounds are taken up together. 24.1. Comparables alleged for Exclusion A. Persistent Systems and Solutions Ltd., This comparable has been included by Ld.TPO, though it has been objected by assessee for functional dissimilarities. It has been submitted that segmental information in respect of this company is not available in the annual report. Ld. CIT DR placed reliance upon orders of authorities below. We have perused submissions advanced by both sides in light of the records placed before us.
Page 31 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 From annual report of this company is placed in paper book, we find that this company earned income from sale of software services and products and no segmental details are available in respect of Singh. It is also observed that income generated under both these segments cumulatively amounts to tune of 6.67 crores and in Schedule 11, entire revenue has been shown under one segment. Therefore, in our considered opinion, in absence of segmental details, we cannot appreciate the view taken by authorities below. Accordingly, we direct Ld. TPO to exclude this company from the final list. B. Persistent systems Ltd., This company has been included by Ld.TPO and assessee objects to the same as this company is engaged in rendering outsourced product development, as against software development services. It has been submitted that this is not functionally similar with that of assessee. Ld.CIT DR on the contrary supported view of authorities below and opposed exclusion. We have perused submissions advanced by both sides in light of the records placed before us. It is observed in Schedule 15 of annual report of this company placed in paper book wherein, forming part of profit and loss account that income from sale of software services and products, however there is no separate segmental information in respect of these 2 segments. Thus, it is clear that this company is earning revenue from activities which includes licensing of products,
Page 32 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 royalty on sale of products as well as income from maintenance contracts etc. which could not be considered functionally similar with that of assessee holders only carrying out software development service at the behest of its AE’s on a captive basis. Similar view has been taken by this Tribunal in case of DCIT vs Electronics for Imaging India Pvt. Ltd., (supra). Respectfully following the same we direct Ld.AO/TPO to exclude this company from the final list. C. Sasken Communications Technologies Ltd., Assessee seek exclusion of this comparable for the reason that it is engaged in development of software products and has inventory is an intangible asset. He submitted that during the year under consideration revenue from software products is more and it launched a new product called VYAPAR SEVA. Ld.AR submitted that this company has significant intangibles and inventories and therefore should be rejected to be compared with a captive service provider like assessee. In support of his contentions he placed reliance upon decision of this Tribunal in case of Comscope Networks (I) Pvt. Ltd., vs ITO in IT(TP)A No.166 & 181/B/2016, vide order dated 22/02/2017.
On the contrary Ld.CIT DR placed reliance upon orders passed by authorities below. She submitted that though there is revenue from 3 separate segments, however segmental information is available. He submitted that product launched is for a future period and has not generated any revenue during the year under consideration and that here is no impact of this launch on the Page 33 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 financials of this company for the year under consideration. In all fairness it was submitted that issue may be set aside to Ld.AO/TPO for verification of the same.
We have perused submissions advanced by both sides in light of records placed before.
From annual report of this company, it is observed that segmental details have been provided, and all details relevant for computing margin of this comparable are available. We are therefore unable to appreciate arguments advanced by Ld.AR regarding segmental details not available. Further it is observed that Ld.TPO considered the consolidated figure appearing in profit and loss account, instead of considering segmental profits from software services of this company. We therefore set aside this comparable to Ld.AO/TPO to verify relevant observations recorded herein above and to recompute margins of this comparable.
Accordingly, this comparable is set aside to Ld.AO/TPO.
Comparables alleged for Inclusion a) Evoke Technologies Ltd and Mindtree Ltd., It has been submitted by Ld.AR that this comparable was suo- moto rejected by DRP even though, was selected by Ld.TPO. Assessee did not object to its inclusion either before DRP It has been submitted that DRP while passing direction, excluded this comparable on its own. It has been submitted by Ld.AR that basis for exclusion of these comparables by DRP is not correct, as Page 34 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 assessee is following Transactional Net Margin Method (TNMM) therefore, certain expenses cannot be selectively identified for exclusion. It has been submitted that overall effect needs to be considered. In support, Ld.AR placed reliance on decision of Co- ordinate Bench of Delhi Tribunal in the case of Sumi Motherson Innovative Engineering Ltd. in & 1816/Del/2011 (Para 5.4(iii)).
Ld. CIT - DR on the contrary, relied on view of authorities below. We have perused submission advanced by both sides, in light of records placed before us. It is observed that DRP excluded this comparable due to low margin during the year. On one hand, DRP notes that there has to be abnormalities or circumstances, which infused low margin for purposes of exclusion, on the other hand, DRP in case of this comparable fails to analyse abnormalities or circumstances that led to low margin at 8.11%. We therefore, do not appreciate exclusion of this comparable, as it is without any basis. We also note that assessee followed TNMM as most appropriate method that subsumes expenses. We therefore, set aside this comparable back to DRP to carry out comparability analysis with assessee a per law, keeping in mind the MAM adopted by assessee which has not been disputed by authorities below. Accordingly, this comparable is sent back to Ld. AO/TPO for proper verification.
Page 35 of 35 IT(TP)A 419/Bang/2016 & IT(TP)A 461/Bang/2016 A. Y : 2011 – 12 Accordingly, these grounds as well as additional grounds raised by assessee stands allowed as indicated below.
Ground No. 9 raised by assessee is consequential and therefore do not require adjudication.
In the result appeal filed by assessee stands allowed and revenue’s appeal stands partly allowed as indicated above.
This order is pronounced by listing the case on the Notice Board of Tribunal under proviso to Rule 34(4) of Income Tax Appellate Tribunal Rules 1963.