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Income Tax Appellate Tribunal, “C’’ BENCH : BANGALORE
Before: SHRI B.R BASKARAN & SHRI PAVAN KUMAR GADALE
Per B.R Baskaran, Accountant Member :
The appeal of the assessee is directed against the assessment order dated 26-09-2017 passed by the assessing officer for assessment year 2013-14 u/s 143(3) r.w.s. 144C(13) of the Act in pursuance of directions issued by Ld Dispute Resolution Panel (DRP).
IT(TP)A No.2497 /Bang/2017
All the grounds urged by the assessee relate to Transfer pricing adjustment made in respect of Software development services. Though the assessee has raised many grounds, yet the Ld A.R restricted her arguments at the time of hearing with regard to exclusion of two comparable companies, viz., Larsen & Toubro Infotech Limited and Persistent Systems Ltd. Accordingly remaining grounds are dismissed as Not Pressed.
The assessee is engaged in the business of providing Software development services to its overseas affiliates. The turnover of the assessee company for the year under consideration was Rs.13.46 crores. The assessee adopted Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The PLI declared by the assessee was 12.33%.
Amongst the comparables selected by TPO and confirmed by Ld DRP, the assessee seeks exclusion of two companies, viz., Larsen & Toubro Infotech Limited and Persistent Systems Ltd.
The Ld A.R placed her reliance on the decision rendered by co- ordinate bench in the case of M/s Metric Stream Infotech (India) Pvt Ltd (IT(TP)A No.1418 & 2735/Bang./2017 dated 27.02.2019 relating to AY 2013-14) and submitted the co-ordinate bench, on identical set of facts, has held that both the above said companies are not good comparable companies to a company engaged in providing captive software development services to its Associated enterprises.
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On the contrary, the Ld D.R submitted that another co- ordinate bench of Tribunal has held in the case of M/s Advice America Software Development Centre P Ltd (IT(TP)A No.2531/Bang/2017 dated 23.05.2018 relating to AY 2013-14) that both M/s Larsen & Toubro Infotech Limited and M/s Persistent Systems Ltd are good comparable companies.
In the rejoinder, the Ld A.R submitted that the turnover of the assessee company was only Rs.13.46 crores, where as the turnover of M/s Larsen & Toubro Infotech Ltd and Persistent Systems Ltd was Rs. 3609.32 crores and Rs.996.75 crores respectively. Accordingly she submitted that, on applying turnover filter, the above said companies are required to be excluded. In support of this proposition, she placed her reliance on the decision rendered by the co-ordinate bench in the case of M/s Nielson Sports India P Ltd (IT(TP)A No.196/Bang/2017 dated 28-06-2019 relating to AY 2012-13). The Ld D.R, however, countered the said contention by submitting that Turnover filter cannot be the criteria for excluding a company, which is otherwise comparable. The Ld A.R further submitted that the High Courts have not rendered any decision so far on application of turnover filter. Further Rule 10B(3) does not prescribe the turnover filter as a criteria.
8. We heard rival contentions and perused the record. We notice that the co-ordinate bench has excluded both the companies viz., Larsen & Toubro Infotech Limited and Persistent Systems Ltd in its order passed in the case of M/s Metric Stream Infotech (India) Pvt Ltd (supra) with the following observations:-
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“11. As far as L&T Infotech Ltd. and Persistent Systems Ltd. are concerned, our attention was drawn to the decision of ITAT Hyderabad Bench in the case of M/s. EPAM Systems (I) P. Ltd. v. ACIT, for AY 2013-14, order dated 20.11.2017. Vide para 12 of the decision, the Tribunal took the view that Persistent Systems Ltd. was into software products and software solutions and no segmental details were available and therefore the profit margin in the software development services segment could not be compared with the assessee’s profit margin. As far as L&T Infotech Ltd. is concerned, the Tribunal vide para 17 of the aforesaid order came to a similar conclusion to hold that L&T Infotech should not be regarded as a comparable company. In the light of judicial precedents which remain uncontroverted, we are of the view that the aforesaid two comparable companies should be excluded from the list of comparable companies.”
9. However in the case of M/s Advice America Software Development Centre P Ltd (supra), another co-ordinate bench has held that both M/s Larsen & Toubro Infotech Ltd and M/s Persistent Systems Ltd are good comparable companies and the relevant observations made by the ITAT are extracted below:-
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“14. Larsen & Toubro Infotech Ltd. As far as this company is concerned, this company also renders SWD services. In page-15 of the TPO’s order, the functional similarity of this company with that of the Assessee has been tabulated by the TPO. The objections of the Assessee for rejecting such objections has been set out at page-21 to 23 of the TPO’s order. The DRP upheld the order of the TPO including this company as a comparable company.
The grounds on which the Assessee seeks exclusion of this company from the list of comparable companies is on the ground that (i) this company is functionally dissimilar to that of SWD service provider and that it develops Software products ; (ii) Segmental Information of various segments are not available; (iii) Scale of operation and presence of intangibles, brand etc.
As far as functional dissimilarity of this company is concerned, this company also renders SWD services in three clusters, in the form of Service Cluster for banking, financial services, insurance, Media & entertainment and Travel & Logistics), Industrial Cluster comprising of all manufacturing sectors, telecom cluster relating to product engineering services. As rightly held by the DRP all the above activities are SWD services. The fact that the Assessee mainly caters to SWD services in banking industry cannot be the basis to hold
IT(TP)A No.2497 /Bang/2017 that this company and the Assessee are not functionally comparable. The difference pointed out by the Assessee are not material differences in terms of Rule 10B(2) of the Rules.
As far as the objection that this company apart from rendering SWD services is also engaged in developing its own Software Products, the TPO has brought out in his order that the products developed by the Assessee are platforms used by this company to enable design and developing software for use by a customer in particular industry. For e.g., the product UNITRAX is a Software that enables recording keeping enabling fund and insurance companies to manage the administration of their wealth management. Based on this software the Assessee designs Software for specific needs of a customer. No product is sold off the shelf by the company. Hence the objection of the Assessee that this company is a Software Product company was rightly held by the TPO/DRP to be not valid.
The objection with regard to absence of segmental information has been met by the TPO by pointing out that the whole segment of SWD services was considered for comparability. The objection of the Assessee in this regard is not specific and is vague and is on an assumption that this company operates in three segments. The TPO has pointed out that there is IT(TP)A No.2497 /Bang/2017
only one segment and hence this objection in our view was rightly disregarded by the revenue authorities.
As far as the objections regarding presence of intangibles, it is seen from the order of the TPO that the intangibles are nothing but Operating systems, office tools, development tools, testing tools etc., that are used in the process of rendering SWD services by the Assessee and therefore cannot be the basis to hold that this company is functionally not comparable with the Assessee. As far as the objection regarding presence of brand value is concerned, it has been held by the TPO that there is no intangible in the form of brand owned by this company. The scale of operations of this company cannot be the basis to hold that this company is not comparable when functionally it is found to be comparable.
None of the objections raised by the Assessee meet the criteria for excluding this company in terms of comparability criteria laid down in Rule 10B(2) of the Rules. We therefore uphold the inclusion of this company in the list of comparable companies.
21.Persistent Systems Ltd.: 21. 21. Persistent Systems Ltd.: Persistent Systems Ltd.: The objection of Persistent Systems Ltd.: the Assessee for excluding this company from the list of comparable companies is on the ground that this company is also engaged in making software products and is not only in providing SWD services and that the IT(TP)A No.2497 /Bang/2017
segmental details of revenue from sale of Software Products and revenue from rendering SWD services are not available. This objection is examined in the light of the Annual Report of this company for 2013 which is at pages 648 to 841 of Volume-III Paper Book filed by the Assessee. The learned AR pointed out that even in the annual report this company is stated to be in the business of developing software products. The reference by the learned AR is to the consolidated Accounts, i.e., inclusive of the activities of the group (AE companies). The unconsolidated accounts of this company is at page 787 of Volume-III paper book filed by the Assessee. The profit & Loss account is at page- 793 of Volume-III paper book filed by the Assessee. Income from operation is Rs.9967.53 million. Note 21 to the note on accounts gives the break of this revenue which is at page- 814 and it is fully from providing software development services. This revenue has been compared with costs and the OP/TC of this company arrived at by the TPO. Note 26 to the notes on accounts gives the segmental break-up and the segments are all software services segment and there is no product segment at all. The learned AR placed reliance on decisions where this company was excluded from the list of comparable companies. These decisions do not relate to AY 13-14. We can therefore safely proceed on the basis that those decisions are rendered on their facts prevailing in the relevant AY. As IT(TP)A No.2497 /Bang/2017 far as the present AY 13-14 is concerned, the plea of the Assessee for exclusion of this company on the ground that it is a software product company is held to be without any basis and is rejected. No other arguments were advanced for exclusion of this company. Hence, we uphold the orders of the revenue authorities including this company in the list of comparable companies.”
10. We notice that in both the decisions rendered by the co- ordinate benches, the turnover filter was not applied. Admittedly the turnover of the assessee company was Rs.13.46 crores during the year under consideration, while the turnover of the above said two comparable companies was Rs. 3609.32 crores and Rs.996.75 crores respectively.
Though the Ld D.R contended that the “turnover filter” cannot be a criteria for exclusion of comparable companies, yet we notice that the co-ordinate benches of tribunal are consistently holding that “turnover filter” is a relevant criteria. In the case of Neilsen Sports India P Ltd (supra), the co-ordinate bench, by following the decisions rendered by other co-ordinate benches, has applied the turnover filter for examining the comparability of companies. The relevant observations made by the co-ordinate bench in the above said case are extracted below:-
“7. Before us, the ld AR sought exclusion of 2 companies viz., M/s Infosys BPO Ltd., and TCS-E-
IT(TP)A No.2497 /Bang/2017
Serve Ltd., on the ground that the turnover of both these companies are more than 200 cores while the turnover of the assessee company was only 20.23 crores. By placing reliance rendered in the case of Northern Operating Services IT(TP)A No.101/Bang/2016, more particularly paragraph 18 of the order thereof, the ld AR submitted that high turnover companies cannot be compared with the low turnover companies.
The ld AR further submitted that the ld DRP has confirmed inclusion of Universal Print Systems Ltd., and BNR Udyog Ltd. The coordinate bench in the case of Mobility Infotech India Pvt. Ltd., (2018) 97 taxmann.com 2 has restored both these comparable companies to the file of AO/TPO for examining the same afresh by duly considering the contentions of the company.
The ld DR on the contrary supported the order passed by the AO.
We have heard the rival contentions on this issue and perused the record. Admittedly the turnover of the assessee company is 20.43 crores for the year under consideration. The turnover of Infosys BPO Ltd., for the year under consideration was 1312.41 crores and the turnover of TCS-E- Serve Ltd., was 1578.40 crores. The co-ordinate
IT(TP)A No.2497 /Bang/2017 bench in the case of Northern Operating Services (Supra) has held that the decision rendered in the case of Genisys Integrating Systems in IT(TP)A No.1231/Bang/2010 is good law. In the case of Genisys Integrating Systems (supra) a guideline in the matter of turnover filter was suggested and the categorization of software companies in the Dun and Brad Street Study to be adopted as the method of classification by size. According to this study, 3 categories of firms are identified i.e small with turnover less than 200 cores, medium with turnover of 200 to 2000 crores and large with turnover greater than 2000 crores. Accordingly it was held that small companies cannot be compared with large companies. Accordingly, the assessee herein being a small company cannot be compared with large companies. Accordingly we find merit in the contentions of the assessee and direct the AO to exclude both the companies on the basis of turnover criteria.”
In the instant case, the assessee shall fall under the category of companies having turnover of 1 – 200 crores, while the two comparable companies referred above do not fall under the above said category. Accordingly, by following the decision rendered by the co-ordinate bench in the case of Genisys Integrating Systems (IT(TP)A No.1231/Bang/2010, we direct the AO/TPO to exclude both M/s Larsen & Toubro Infotech Ltd and M/s Persistent Systems Ltd.
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In the result, the appeal of the assessee is partly allowed.