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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’
Before: SHRI N.V VASUDEVAN, VICE- & SHRI B.R.BASKARAN
PER SHRI N.V VASUDEVAN, VICE-PRESIDENT:
This is an appeal by the Revenue against the order dated 30/01/2017 of Commissioner of Income-tax, (Appeals)- 5, Bengaluru, relating to assessment year 2011-12 arising out of an order passed u/s 143(3) of the Income Tax Act, 1961 (Act).
The Assessee is engaged in the business of providing contract software development services(SWD Services). In this appeal by the Assessee the disputes relate to determination of Arm’s Length Price (ALP) in respect of provision of SWD services by the Assessee to its Associated Enterprise (AE).
The Assessee is a captive service provider and provided SWD services to its AE for which the AE paid the Assessee a sum of Rs.19,38,02,988/-. Since the IT(TP) A 875/Bang/2017 Netscout Systems Software India Pvt.Ltd. transaction of provision of Software service by the Assessee to its AE was an international transaction, income from such international transaction has to be determined having regard to Arm’s Length Price (ALP) as laid down in the provisions of Sec.92 of the Act.
The TPO to whom the question of determination of ALP of the international transaction of providing software development services by the Assessee to its AE suggested an addition to the total income of the Assessee consequent to determination of Transfer Price of a sum of Rs.1,64,31,124/-.
The Assessee in support of its stand that the price paid to the AE for rendering software development services was at Arm’s Length filed a Transfer Pricing Analysis containing the following details:
Operating Income Rs.19,38,02,988/- Operating Cost Rs.16,85,24,338/- Operating Pr Operating Profit (Op. Income – Op. Rs.2,52,78,650/- Cost) Operating/Net margin (OP/OC) 15% The Assessee as well as the TPO adopted Transaction Net Margin Method as the Most appropriate Method for determination of ALP and the Profit Level Indicator for comparison was Operating Profit to Total Cost (OP/TC)
The Assessee selected 22 companies as comparable companies and computed the arithmetic mean of the profit margins of those companies at 13.60% which was much lower than the profit margin of the Assessee which was 15%. The Assessee therefore claimed that the price received in the international transaction was higher than the arithmetic mean of profit margin of comparable companies and therefore the price received is at Arm’s Length.
The TPO to whom the determination of ALP in question was referred to by the Assessing Officer (AO) u/s.92CA of the Act, rejected the Transfer Pricing Study of the Assessee and chose only six out of the 22 companies selected as comparable IT(TP) A 875/Bang/2017 Netscout Systems Software India Pvt.Ltd. companies by the Assessee viz., Evoke Technologies Private Limited, Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., R.S.Software (India) Ltd., and Sasken Communication Technologies Ltd. The TPO identified 7 other companies as comparable companies and arrived at a set of 13 comparable companies with that of the Assessee and arrived at arithmetic mean of the profit margin of those 13 companies at 24.82%. The chart given in the succeeding paragraph will show the list of 13 comparable companies ultimately chose by the TPO and the arithmetic mean of the profit margin of those companies.
The TPO Computed ALP and consequent addition to be made to the total income e as follows:
Sl. No. Name of the Company 1 Acropetal Technologies Ltd. (seg) 31.98 2 eZest Solutions Ltd. 21.03 3 E-Infochips Ltd. 56.44 4 Evoke Technologies Pvt. Ltd. 8.11 5 ICRA Techno Analytics Ltd. 24.83 6 Infosys Ltd. 43.39 7 Larsen & Toubro Infotech Ltd. 19.83 8 Mindtree Ltd.(seg) 10.66 9 Persistent Systems & Solutions Ltd. 22.12 10 Persistent Systems Ltd. 22.84 11 R S Software R.S.Software (India) Ltd. 16.37 12 Sasken Communication Technologies Ltd., 24.13 13 Tata Elxsi Ltd.(seg) 20.91 AVERAGE MARK-UP 24.82 IT(TP) A 875/Bang/2017 Netscout Systems Software India Pvt.Ltd.
Arm’s Length Mean Margin on cost 24.82% Less: working capital Adjustment 0.07%
Adjusted mean margin of comparables 24.75% Operating cost Rs. 16,85,24,338/- Arms Length Price (ALP) Rs.21,02,34,112/- 124.75% of Operating cost) Price Receive Price Received Rs.19,38,02,988/- Shortfall being Shortfall being adjustment u/s. Rs.1,64,31,124 92CA
The addition suggested by the TPO was incorporated by the AO in the draft order of assessment. The Assessee did not prefer any objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act and hence a final order of assessment was passed by the AO. The Assessee preferred appeal against the final order of assessment before the CIT(A). The CIT(A) confirmed the order of the AO and hence this appeal by the Assessee before the Tribunal.
At the time of hearing the learned counsel for the Assessee pressed for adjudication of exclusion of 7 out of the 13 comparable companies chosen by the TPO. No other grounds were pressed for adjudication. The seven companies of which the Assessee seeks exclusion are as follows: i) E-Infochips Limited ii) ICRA Techno Analytics Ltd. iii) Infosys Ltd. iv) Larsen & Toubro Infotech Ltd. v) Infosys Ltd. vi) Sasken Communication technologies Ltd. vii) Tata Elxsi Ltd.
We have heard the rival submissions. It is not in dispute before us that the following three companies viz., ICRA Techno Analytics Ltd., M/s Infosys Ltd., and M/sTata Elxsi Ltd., were excluded from the list of comparable companies in the case 4 IT(TP) A 875/Bang/2017 Netscout Systems Software India Pvt.Ltd. of Assessee such as the Assessee in the present appeal engaged in rendering SWD services in the case of M/s Applied Materials India Pvt.Ltd. Vs. ACIT IT(TP)A.No.17 & 39/Bang/2016 order dated 21.9.2016 by the ITAT Bangalore Bench. In Paragraph 17.2 of the aforesaid order the Tribunal held that the services and sales of this company comprises of sales of SWD services, software consultancy, engineering services, Web development etc., and no segmentation information is available and hence cannot be regarded as comparable to a SWD service provider such as the Assessee. In paragraph 18 of the said order Infosys Ltd., was excluded as comparable for the reason that the company has huge brand value and turnover. Similarly Tata Elxsi Ltd., was excluded vide paragraph 20 of the aforesaid order for the reason that it was a software products and software development company and no segmental details are available. The functional profile of the Assessee and the case decided by the Tribunal are identical and the comparable companies chosen in the case of the Assessee and the aforesaid company are also same. Respectfully following the aforesaid decision we direct exclusion of the aforesaid companies from the list of comparable companies.
As far as exclusion of two of the comparable companies retained by the CIT(A) viz., Persistent Systems Ltd., and Sasken Communication Technologies Ltd., is concerned, the learned counsel for the Assessee brought to our notice a decision of the ITAT Bangalore Bench in the case of Electronics for Imaging India (P) Ltd. Vs. DCIT (2017) 85 taxmann.com 124 (Bangalore-Tribunal) rendered in the case of an Assessee rendering SWD services such as the Assessee, wherein comparability of this company with a SWD service provider was considered and this tribunal held paragraph 9.2.4 of its order held that this company is a SWD service as well as Software Product company and the segmental details of the various segments are not available. As far as exclusion of Sasken Communication Technologies Ltd., is concerned, in the very same decision in the case of Electronics for Imaging India (P) Ltd., (supra), this company was held to be not comparable as it had revenues both from software products and SWD services and segmental details were not available. In view of the aforesaid decisions, we direct that the aforesaid two companies be excluded from the list of comparable companies. The functional profile of the Assessee and the case decided by the Tribunal are identical and the comparable IT(TP) A 875/Bang/2017 Netscout Systems Software India Pvt.Ltd. companies chosen in the case of the Assessee and the aforesaid company are also same.
As far as Larsen & Toubro Infotech Ltd., and E-Inforchips Ltd., are concerned, the company Larsen & Toubro Infotech Ltd., was excluded by the Tribunal ITAT Bangalore in the case of Applied Materials Pvt.Ltd., a company which is also engaged in providing software development services in IT (TP) A.No.17 & 39/Bang/2016 for AY 2011-12 order dated 21.9.2016 and decision the ITAT Bangalore in the case of Commonscope Networks (India) Pvt.Ltd. IT (TP) A.No.166 and 181/Bang/2016 for AY 2011-12 order dated 22.02.2017 (vide Paragraph-9 of the said order). As far as exclusion of E.Infochips Ltd., is concerned, this Tribunal in the case of Saxo India Pvt. Ltd., (Supra) had excluded the aforesaid company in the case of software development service provider such as the assesseeby following the decision of the Hon’ble Delhi Bench of the Tribunal in the case of Saxo India Pvt. Ltd., Vs. ACIT inITA No.6148/Bang/2015 dated 5/2/2016 and that order of the Tribunal has been upheld by the Hon’ble Delhi High Court in CIT Vs. Saxo India Pvt. Ltd., in order dated 28/9/2016. The functional profile of the Assessee and the case decided by the Tribunal are identical and the comparable companies chosen in the case of the Assessee and the aforesaid company are also same.
The TPO is directed to compute the ALP in the light of the directions given in this order after affording opportunity of being heard to the Assessee.
In the result, appeal of the Assessee is partly allowed.
Order pronounced in the open court on 11th March, 2020.