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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. B. R. BASKARAN & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against final assessment order dated 25/09/2017 passed under section 143 (3) read with section 144C (13) of the Act by Ld.DCIT Circle-2 (1)
Page 2 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 (1), Bangalore for assessment year 2013-14 on following grounds of appeal: “Based on the facts and circumstances of the case and in law, Synamedia India Private Limited (hereinafter referred to as the 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax - Circle 2(1)(1) ('Assessing Officer' or 'AO') dated September 25, 2017 in pursuance of the directions issued by the Dispute Resolution Panel ('DRP'), Bengaluru dated August 23, 2017, under section 253 of the Income- tax Act, 1961 ('Act') on the following grounds: That on the facts and in the circumstances of the case and in law and based on the directions of the DRP: A. Grounds of appeal relating to transfer pricing matters specific to software development services segment The learned TPO/ learned AO have erred, in law and in facts, by not appreciating the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length.
2. The learned TPO/ learned AO have erred, in law and in facts, by determining the arm's length margin/price using only FY 2012- 13 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.
3. The learned TPO/ learned AO have erred, in law and in facts, by accepting/rejecting certain companies based on unreasonable comparability criteria.
4. The learned TPO/ AO have erred, in law and in facts, by erroneously computing the operating margins of certain comparable companies identified in the transfer pricing order.
5. The learned TPO/ learned AO have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using export sales less than 75% of the sales as a comparability criterion.
6. The learned TPO/ learned AO have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using the employee cost less than 25% of the total revenues as a comparability criterion.
7. The learned TPO/ learned AO have erred, in law and in facts, by rejecting the filter of ratio of research and development expenses to sales less than 3% considered by the Appellant for the purpose of selecting the companies which do not own intangibles and are pure service providers.
Page 3 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 8. The learned TPO/ learned AO have erred, in law and in facts, by rejecting the filter of ratio of fixed to sales greater than 200% considered by the Appellant.
The learned TPO/ learned AO have erred, in law and in facts, by rejecting the filter adopted by the Appellant for selecting companies having a ratio of sum of advertising, marketing and distribution expenses to sales less than 3%.
The learned TPO/ learned AO have erred, in law and in facts, by applying the filter of companies having different accounting year for rejecting the comparable companies (i.e., companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months).
The learned TPO/ learned AO have erred, in law and in facts, in computing the arm's length price without giving the benefit of 3 percent under the proviso to section 92C of the Act.
The learned TPO/ learned AO have erred, in law and in facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables.
The learned TPO/ AO have erred, in law and in facts, by using the information by exercising powers under section 133(6) of the Act. B. Grounds of appeal
relating to other matters
14. The learned AO has erred in law and in facts by restricting the credit for Minimum Alternate Tax while computing the total tax payable by the Appellant.
15. The learned AO has erred in law by levying interest of INR 7,78,07,682 under section 234B of the Act and INR 25,38,505 under section 234C of the Act, which is on account of the adjustments proposed to the returned income MODIFIED GROUNDS OF APPEAL
3. The learned TPO/ learned AO have erred, in law and in facts, by accepting/rejecting certain companies based on unreasonable comparability criteria: 3.1 following companies should not be treated as comparable companies: a) Larsen & Toubro Infotech Limited b) Persistent Systems Limited c) CG - Vak Software & Exports Limited 3.2 following companies should be treated as comparable companies: a) Akshay Software Technologies Limited b) IDBI Intech Limited C) Spry Resources India Private Limited
The Appellant submits that each of the above grounds is independent and without prejudice to one another.
Page 4 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Honble Tribunal to decide on the appeal in accordance with the law.
Brief facts of the case are as under: 2. Assessee filed its return of income for year under consideration on 29/11/2013 declaring total income of Rs.78,67,19,960/-. The case was selected for scrutiny and statutory notice under section 143 (2) along with 142 (1) and questionnaire was issued to assessee. 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 exceeding Rs.15 crores and therefore case was referred to transfer pricing officer for determining arms length price of international transaction as per section 92CA of the Act. Upon receipt of reference, Ld.TPO called upon assessee to file economic details of transaction in Form 3 CEB. Representative of assessee appeared before Ld.TPO and filed requisite details as called for. Ld.TPO observed that assessee was a company formerly known as Cisco Video Technologies India Ltd., incorporated under provisions of companies act. It was observed that assessee had its operations as software research and development facility. Ld.TPO observed in TP documentation that, assessee is primarily engaged in developing interactive TV applications and broadband technologies that support communications solutions of parent Page 5 of 17 IT(TP)A No.2503/Bang/20 /Bang/2017 A. Y : 201 : 2013 – 14 company in UK. It also provides pre K. It also provides pre-sales and marketing support sales and marketing support services to its associated enterprise in UK. services to its associated enterprise in UK.
Ld.TPO observed that, assessee had following international Ld.TPO observed that, assessee had following international Ld.TPO observed that, assessee had following international transaction during the year: transaction during the year:
Ld.TPO observed that assessee used OP/TC as PLI for Ld.TPO observed that assessee used OP/TC as PLI for Ld.TPO observed that assessee used OP/TC as PLI for determining margin at 12.69% for software development service margin at 12.69% for software development service margin at 12.69% for software development service segment and 13.51% for pre segment and 13.51% for pre-sales and marketing support service sales and marketing support service segment. TNMM was used as most appropriate method. Assessee segment. TNMM was used as most appropriate method. Assessee segment. TNMM was used as most appropriate method. Assessee used following set of 6 comparables with average margin of used following set of 6 comparables with average margin of used following set of 6 comparables with average margin of 13.17% for software dev 13.17% for software development services. S.No Comparables Comparables Margin 1. Akshay Software Technologies Ltd. Akshay Software Technologies Ltd. 4.45% 2. Helio and Matheson Information Technology Ltd. Helio and Matheson Information Technology Ltd. 15.78% 3. R S Software (India) Ltd. R S Software (India) Ltd. 15.67% 4. Spry Resources India Pvt.Ltd. Spry Resources India Pvt.Ltd. 21.01% 5. Think software global services Ltd software global services Ltd 6.34% 6. IDBI Intech Ltd 15.78% Average margin Average margin 13.17%
Page 6 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 5. Ld.TPO applied various search filters and rejected the comparables selected by assessee in its TP study. The final comparables selected by Ld.TPO was as under: S.No Comparables Margin 1. CG-V a case software exports Ltd 20.54% 2. ICRA techno analytics Ltd 17.10% 3. Larsen and Toubro Infotech Ltd 26.06% 4. Mind tree Ltd (SEG) 18.19% 5. Persistent systems Ltd 28.27% 6. RS software (India) private limited 17.41% 7. Tech Mahindra Ltd (SEG) 18.72% Average margin 20.90%
Ld.TPO thus proposed adjustment being shortfall at Rs.25,04,82,139/-.
On the basis of draft assessment order, assessee raised objection before DRP, wherein comparables selected by Ld.TPO was challenged for various functional dissimilarities. DRP on considering assessee’s submission, accepted rejection of Tech Mahindra Ltd., since this company had expanded its business through various acquisitions which, materially affected on its profitability. In respect of other comparables, objections raised by assessee were dismissed. 8. Upon receipt of DRP directions, Ld.AO passed final assessment order computing income in the hands of assessee at Rs.105,99,28,701/-.
Page 7 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 9. Aggrieved by order of Ld.AO, assessee is in appeal before us now. 10. Ld.AR at the outset, submitted that, assessee has filed revised ground of appeal wherein, in Modified Ground of Appeal No.3, assessee seeks exclusion/inclusion of following comparables: Seeking Exclusion of: • Larsen and Toubro Infotech Ltd • Persistent Systems Ltd • CG-VAK Software and Exports Ltd Seeking Inclusion of: • Akshay Software Technologies Ltd • IDBI Intech Ltd • Spry Resources India Pvt.Ltd.,
11. Ld.CIT DR at this juncture, submitted that CG-VAK Software and Exports Ltd., was not raised by assessee before DRP. She submitted that assessee has not filed application for raising additional before this Tribunal under Rule 11 and therefore this comparable cannot be considered at this juncture.
12. Ld.AR at the outset filed application under Rule 11 seeking indulgence to consider comparable CG-VAK Software and Exports Pvt. Ltd., for exclusion from final list of comparables. We have perused submissions advanced both sides in light of records placed before us.
13. As rightly submitted, this comparable was not been raised for exclusion before DRP by assessee. However, this does not estop assessee from raising this plea before this Tribunal. We
Page 8 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 refer to decision of special bench of Chandigarh Tribunal in case of Quark systems reported in (2010)132 TTJ 1 (Chandigarh) (SB). 14. Accordingly we are inclined to admit this ground raised by assessee.
15. Ld.AR submitted that Grounds 1-13 are intermingled with comparables sought for inclusion/exclusion by assessee and therefore need not be considered separately.
16. On the basis of above submissions, we adjudicate only Ground 3 under Modified Grounds of Appeal raised by assessee. Before we undertake the comparability analysis, it is sine qua non to understand the functions performed by assessee, assets owned and risks assumed under this segment. Functions:
17. In TP study, it has been submitted that, there is a service agreement for provision of software research and development services entered into by assessee, with its associated enterprise in UK from 01/04/2006. As per the agreement, remuneration received by assessee on is cost +15% mark up.
18. Main function performed by assessee, is in respect of R&D functions, wherein assessee focuses on developing existing technologies for direct customer application. It has been submitted in TP study that assessee has a small team which works on new initiative projects, wherein assessee primarily carries out limited documentation of designs and limited integration. In TP study, entire project is conceptualised, designed and codified by UK associated enterprise. Assets owned Page 9 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 19. Assessee owns routine assets like furniture fixtures, office space etc. Any intangible developed during the process of research carried out by assessee exclusively belongs to the associated enterprise. Risks assumed.
As per TP study, assessee has been held to be bearing limited risk of market and foreign exchange risks to the extent that, remuneration received by assessee is in foreign exchange. Characterisation: 21. Based on the above discussions, assessee has been characterised to be working on a risk mitigated environment on a contract basis strictly providing services, as per needs/requirements of associated enterprise. Based on the above FAR analysis of assessee, we shall undertake the comparability of assessee with alleged comparables for inclusion/exclusion. A. Comparables sought for exclusion: a) Larsen and Toubro Infotech Ltd: 22. Ld.AR submitted that this comparable was included by Ld.TPO in finalist, and objected by assessee for various reasons. Ld.AR submitted that this company earns revenue from software solutions and products without there being segmental details available. It has been submitted that Ld.TPO accepted that this company deals and products, but still included in the list of comparables to be compared with a contract software service provider like assessee. This comparable also owns huge intangibles and incurs expenditure to maintain the brand name which has earned 8 supernormal profits during the year.
Page 10 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 23. On the contrary Ld.CIT.DR submitted that in case of CGI Information Systems and Management Consultants Pvt.Ltd vs DCIT reported in (2019) 101 taxman.com 294, this Tribunal has set aside this comparable to the file of Ld.TPO for fresh decision. She submitted that in case of CGI Information Systems and Management Consultants Pvt Ltd (supra) this Tribunal relying upon the case of Advice America Software Development Centre (P) Ltd reported in (2018) 94 Taxmann.com 179 and observations made therein. She thus submitted that this comparable should be sent back to Ld.TPO for verification.
We have perused submissions advanced by both sides in light of records placed before us. We have also perused decisions relied upon by Ld. CIT DR in order to understand the reasoning been this Tribunal for setting aside this comparable to Ld.TPO. There is no doubt that this comparable is a software development service provider. However, this comparable owns intangibles, unlike assessee who is a contract service provider that functions in accordance with and guidelines given by its associated enterprises. Even though assessee is also involved in software development life cycle, contribution that it makes in the development is very limited to the extent of certain research activities and support services that it does at the behest of its associated enterprises. In our view this comparable undertakes complete responsibility of the entire life-cycle involved in a software development whereas assessee participates only to a limited extent on behalf of its associated enterprises at their behest. Whatever functions performed by assessee in providing it Page 11 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 services under this segment are very limited as compared to this comparable.
In our considered opinion the Ltd functions performed by assessee cannot be compared to a full-fledged software development service provider like this company.
On the basis of above, we direct the Ld.AO/TPO to exclude this company from final list. b) Persistent Systems Ltd 27. It has been submitted that this comparable has been included by Ld.TPO even though it was objected by assessee for functional dissimilarities. Ld.AR submitted that this company is engaged in both product and development of software development services and therefore cannot be compared to a contract software development service provider like assessee. It is also been submitted that there are significant research and development expenditure that resulted in global patents and company owns significant intangibles which has either been developed or have been acquired from 3rd parties as a part of growth strategy. Ld.AR submitted that on these para meters this comparable cannot be compared to a limited service provider like that of assessee. On the contrary, Ld.CIT.DR submitted that, in case of CGI Information Systems and management Consultants Pvt.Ltd vs DCIT reported in (2019) 101 taxman.com 294, this Tribunal set aside this comparable to the file of Ld.TPO for fresh decision. She submitted that in case of CGI Information Systems and management consultants Pvt.Ltd.,(supra) this Tribunal relying upon the case of Advice America software development Centre (P)
Page 12 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 Ltd reported in (2018) 94 Taxmann.com 179 and observations made therein. She thus submitted that this comparable should be sent back to Ld.TPO for verification.
We have perused submissions advanced by both sides in light of records placed before us. We have also perused decisions relied upon by Ld. CIT.DR in order to understand the reasoning been this Tribunal for setting aside this comparable to Ld.TPO. Admittedly this comparable provides services across the entire life-cycle of software development which enables them to work for a wide range of customers. From the annual report of this company is also observed that this company earns income from royalty fee and is engaged in development of products which is not at all comparable with the services provided by assessee to its associated enterprise.
Accordingly we direct this comparable to be excluded from finalist. B. Comparables sought for inclusion a) Akshaya Software Technologies Pvt.Ltd
It has been submitted by Ld.AR that this company is functionally similar with that of assessee. Referring to the reply filed by this comparable under section 133(6) forming part of assessment proceedings before Ld.TPO, Ld.AR submitted that this comparable should be considered in finalist. Ld.AR submitted that observations of DRP that this comparable is engaged in providing professional services, procurement, installation, implementation, support and maintenance, ERP products and services in India and overseas. The Ld.AR
Page 13 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 submitted that, as these were not in the nature of software development, the DRP directed its exclusion. He submitted that revenue earned by this comparable is software services for which segmental information is are available. Note 29 at page 1 to 10 reveals that this company earns foreign currency from export of software services.
On the contrary Ld. CIT DR submitted that submitted that it is an accepted position that this company is providing ERP products and services. Further it is also an admitted position that this company is operating in variance segments including software product however the segmental information available is only as income from software services. Ld.CIT DR submitted that going by the para meters applied by assessee to exclude Persistent Systems Infotech Ltd., this comparable also deserves to be included as there is sale of products for which segmental information is are not available. He also refer to the decision of this Tribunal in case of M/s Metricstream Infotech (India) private limited vs. DCIT in ITA (TP) A No. 1418 and 273518/2017 for assessment year 2013-14 wherein this comparable has been upheld for exclusion.
We have perused submissions advanced by both sides in light of records placed before us. We also perused decision relied upon by Ld.CIT DR in case of M/s Metricstream Infotech (India) Put. Ltd (supra),.
It is noted that this tribunal excluded this comparable for the reason that the nature of services are doubtful. Before us Ld. A.R. has not been able to establish the correct nature of business
Page 14 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 carried out by this company or provide with segmental information is in respect of various services provided by this company to its clientele. Under such circumstances we are unable to appreciate the argument advanced by Ld. ar for inclusion of this comparable.
Respectfully following the view taken by this tribunal in case of M/s Metricstream Infotech (India) Pvt.Ltd (supra), we uphold exclusion of this comparable.
Accordingly this comparable deserves to be excluded from finalist.
This comparable has been excluded by Ld.TPO as it fails forex filter of 75% of sales. Ld. AR submitted that this company earns revenue only from export of services and therefore the observation of Ld.TPO is erroneous to the facts. He vehemently submitted that this comparable satisfies all relevant filters adopted by Ld.TPO and therefore deserves to be included.
Ld. CIT DR placed reliance on orders passed by authorities below. 36. We have perused submissions advanced by both sides in light of records placed before us. 37. It is observed that there is no other reason except for failing forex filter of 75% of sales for rejecting this company by Ld.TPO. From annual report of this company placed at page 1095. It is observed that this comparable earns revenue, only from export of services amounting to Rs.181,82,05,708/- out of total revenue
Page 15 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 earned amounting to Rs.184,35,26,541/- and that the revenue earned from export of services amounts to more than 75% of total revenue. Under such circumstances we do not find any reason to exclude this comparable as neither Ld.TPO nor has raised any objection regarding its functional similarity. 38. We therefore direct Ld. AO/TPO to be included this comparable in final list. c) Spry Resources India Pvt.Ltd.,
This comparable was excluded by Ld.TPO by observing that this company has reported trade receivables at Rs.7.49 crores for year under consideration whereas, in immediately preceding year, total turnover was Rs.3.45 crores only. Ld.AR submitted that, there is no objection raised by Ld.TPO regarding its functional similarities. He further submitted that merely because trade receivables for year under consideration are more than what was in the preceding year, exclusion of this comparable is not appropriate.
Ld.CIT DR placed reliance upon orders passed by authorities below. 41. We have perused submissions advanced by both sides in light of records placed before us. 42. We are of opinion that this comparable needs to be re- looked into by Ld.AO/TPO, as this has not been raised before DRP and nothing has been filed before DRP in respect of this comparable. Ld.CIT DR did not object for considering this comparable and therefore in the interest of Justice, we direct Page 16 of 17 IT(TP)A No.2503/Bang/2017 A. Y : 2013 – 14 Ld.AO/TPO to look into export income earned by this comparable.
Accordingly this comparable is set aside to Ld.AO/TPO for due verification.
We observe that, on exclusion of comparables alleged by Ld.AR, the margin of comparables is within +5% range. We therefore do not find it necessary to adjudicate upon comparability of CG-VAK Software & Exports Ltd., raised in Additional grounds.
Accordingly, modified Ground No.3 raised by assessee stands partly allowed as indicated hereinabove and additional grounds stands dismissed as it is academic in nature.
In the result appeal filed by assessee stands partly allowed. Order pronounced in the open court on 19th March, 2020.