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Income Tax Appellate Tribunal, “K” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM)
This appeal by the assessee is directed against the order of Assessing Officer passed pursuant to direction of learned Dispute Resolution Panel (DRP) dated 4.9.2018 and pertains to A.Y. 2014-15.
Grounds of appeal
read as under :-
1. On the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel-1, Mumbai ('Ld. DRP') erred in confirming the action of the Asst. Commissioner of Income-tax 15(2X1), Mumbai ('Ld. AO')/Dy. Commissioner of Income-tax, Transfer Pricing - 3(i)(i), Mumbai ('Ld. TPO') in making an adjustment of Rs. 11,59,94,404/- to the provision of routine, low-end software development and localization services provided by the Appellant to its Associated Enterprises ('AEs').
2. On the facts and in the circumstances of the case and in law, the Ld. DRP/Ld. AO/Ld. TPO erred in:
2.1. Disregarding the transfer pricing documentation maintained by the Appellant as per Section 92D of the Act and the benchmarking analysis undertaken by the Appellant;
2.2. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation;
2.3. Disregarding application of multiple year/prior year data as used by the Appellant in the TP documentation;
2.4. Disregarding certain filters as applied by the Appellant in selection of the comparable companies at the time of TP documentation.
2.5. Introducing/modifying certain filters while undertaking comparability analysis;
2.6. Including companies in the comparability analysis which are different from the Appellant in functions, asset base and risk profile;
2.7. Excluding companies taken by the Appellant in its TP Study which were similar to Appellant in functions, asset base and risk profile; and 2.8. Not making suitable adjustment to account for differences in the risk profile of the Appellant vis-a-vis the comparables;
On the facts and in the circumstances of the case and in law, the Ld. DRP/Ld. AO/Ld. TPO erred in including pass-through costs, being in the nature of reimbursement of outsourced costs incurred by the Appellant, while computing the margin earned by the Appellant from the international transactions entered by it.
4. On the facts and in the circumstances of the case and in law, the learned AO has erred in levying interest under Section 234A and Section 2346 of the Act.
5. On the facts and in the circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under Section 271(i)(c) of the Act.
3. Assessee has filed additional ground which reads as under :- “On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer ('Ld. TPO') erred in retaining 'Aspire Systems India Pvt. Ltd. ('Aspire Systems')' in its comparability analysis even though it does not fulfill the quantitative filter applied by Ld. TPO himself with respect to related party transaction. Further, on the facts and circumstances of the case and in law, the Ld. TPO erred in retaining Aspire Systems in its comparability analysis even though it does not fulfill the filter applied by Ld. TPO himself in rejecting companies having extra-ordinary events during the year. It is prayed that Aspire Systems be excluded from the set of comparables considered by the Ld. TPO for comparability analysis.”
Though the assessee has raised various grounds, learned Counsel of the assessee has confined his arguments for inclusion of three comparables which have been rejected.
Brief facts of the case are as under :- Lionbridge Technologies Private Limited ('LB India' or 'the Assessee' or 'the Company') is a wholly owned subsidiary of LB Mauritius Limited ('LB Mauritius'), which holds 99.96 per cent of the shares. The company is engaged in the business of providing routine, low-end software development and related services [i.e. IT and ITES] and export thereof. The Company has filed its return of income for assessment year ('AY') 2014-15 on 27 November 2014, declaring a total income of INR 12,42,99,440 /-.
For the year under consideration, the Assessee had benchmarked the IT and ITES services rendered by it to its AEs on an aggregated basis. As per the TP study maintained by the Assessee, the key conclusions were as under:
• The Assessee inter alia depicted a detailed FAR analysis and methodical economic analysis for benchmarking its international transactions with its AE.
• Considering the FAR analysis and looking at the available comparable data in the public domain, the Assessee after a careful and judicious application of Section 92C of the Act read with Rule 10C and Rule 10B, selected Transactional Net Margin Method ('TNMM') as the Most Appropriate Method for determining ALP in respect of its international transaction with its AE.
• The profit level indicator ('PLI') used to test the Assessee's result is Operating profit / Total cost ('OP/TC).
• The weighted average and single year margins of the Assessee's comparable companies are given in table below :-
Nature of Operating Operating Profit / Total Cost of No. of Transactions Profit / Total comparable companies as per TP Comparables Cost of the Study report selected as per the Assessee TP Study report Weighted Updated Average Margins Margins Low end Software 16.87% 9.57% 12.39% 8 development and localisation service
During the course of the TP assessment proceedings, in response to the notice issued by the learned TPO under section 92CA of the Act, the Assessee submitted, inter-alia, the details /information as under:
• Audited Financial Statements for FY 2013-14. • TP Study for FY 2013-14, • Rebuttals against the comparables proposed by the learned TPO as per the show cause notice issued by TPO vide submission dated 25 October 2017.
The Id.TPO recomputed the margins of the Assessee by rejecting the approach of the Assessee to not charge mark-up on the outsourcing costs which is a "pass-through costs" and it is expressly agreed between the AE and the Assessee that such costs shall not be subject to mark-up. The recomputed PLI as per department is 14.45 percent and the same is tabulated as under:
Particular Amount in INR Operating Revenue 98,50,80,576 Add: Foreign Exchange Gain 4,91,89,455 Total Operating Revenue (A) 1,03,42,70,031 Cost of Sales 77,44,02,501 Add : Outsourcing Cost to third party's and AE's 12,92,54,059 Total Operating Expenditure (B) 90,36,56,560 Operating margin (A-B) = (C) 13,06,13,471 Margin 14.45%
Further the Id. TPO introduced additional comparables and rejected some of the assessees. The summary of the final set of comparables as per the Id, TPO's order is as below:-
Sr.No. Comparables Operating margin OP/TC (%) 1. Accentia Technologies Limited ('Accentia') -17.11 2. Cigniti Technologies Limited ('Cigniti') 27.62 3. Aspire Systems India Private Limited (Seg) ('Aspire') 36.13 4. Infobeans Technologies Private Limited ('Infobeans') 41.85 5. R. S. Software (India) Limited (RS Software) 24.33 6 Thirdware Solutions Lmited (Thirdware) 50.93 Arithmetic Mean 27.29%
Against the above, the assessee filed objection before DRP.
On the issue of selection/rejection of comparables, DRP rejected all the contentions raised by the assessee. DRP’s direction read as under :- Vrinchi Technologies Ltd The TPO had rejected the comparables as the company's Annual report is not available in public domain, however the assessee claims that the report is available.
We find from the submission of the assessee that though the annual report of the company is available the company was rejected as comparable in A.Yr. 2013-14 by the DRP on the ground that the company has employee cost less than 20%. Since the facts in the current year are the same it is seen that the company was rightly rejected by the TPO.
R Systems International limited The TPO rejected the comparable as the company follows different accounting year. Since the company does not follow the same accounting year as the assessee does and as there are other similar comparables available, the said comparable was rightly rejected by the TPO.
Allsec Technologies limited The TPO rejected the comparable as the company Fails export turnover filter. Since the company fails export filter it is noted that the said comparable was rightly rejected by the TPO.
Lycos Internet ltd. (Formerly Ybrant Digital The TPO rejected the comparable as the company Fails export turnover filter. Since the company fails export filter it is noted that the said comparable was rightly rejected by the TPO.
The TPO had rejected the comparables as the company fails turnover filter. Since the fails turnover filter it is noted that the said comparable was rightly rejected by the TPO. The TPO rejected the comparable as the company is having unallocated foreign exchange gain which requires allocation. Since the allocation of foreign exchange income of the company is not available it is seen that the TPO had rightly rejected the comparable.
5.2.2 We have also gone through the further submission made by the assessee and it is observed that the TPO has selected the below given companies as comparables:
(a) Aspire Systems India Private Limited Assessee has rejected the said comparable as it is not functionally comparable. However, we have gone through the TP Order and also the submission of the assessee and it is noted that the assessee has accepted that Aspire systems is into software development as compared to low end development of the assessee hence, from the same it is evident that Aspire systems is also into software development services. Further there is no merit in the claim of the assessee that there was extraordinary event as this is not borne from record. Since the company is functionally comparable, the objection of the assessee is rejected.
(b) Cignity Technologies ltd. Assessee has rejected the said comparable as it is not functionally comparable. Further it is stated that there is an extraordinary event during the year. However, we have gone through the TP Order and also the submission of the assessee and it is noted that the that Cignity is into software development and is comparable to assessee. Further there is only share acquisition activity by the company and no merger has taken place which could qualify as extraordinary event. Since the company is functionally comparable, the objection of the assessee is rejected.
(c) Infobeans Technologies Limited The assessee objects to the selection of the company as comparable because it is not functionally similar to the business of the assessee which has IP's in the name of the company and in house R & D centre. It is also claimed that inadequate information is available in the annual report.
From the submission of the assessee it is seen that the company Infobeans is into development of software hence, the claim of the assessee that company is not functionally similar to the business of the assessee is rejected. Merely because the company has IP's, one cannot reject the comparable. Hence, the claim of the assessee is rejected.
(d) Thirdware Solutions Ltd. The assessee claims that the company is into high end software development and functionally not similar. Further the company has its product sales reported and IPs in the accounts, hence the said comparable need to be rejected. It is noted that merely because the company has some product sales and IP's, one cannot reject the comparable. Hence, the claim of the assessee is rejected.”
Now in appeal before us, learned Counsel of the assessee has confined his argument towards following comparables :- i) Thirdware Soloutions Ltd. :- Learned Counsel of the assessee contended that exclusion of Thirdware Solutions as a comparable has been accepted by the ITAT in its order for A.Y. 2013-14. For the same reasoning learned counsel contended that this comparable should not be considered as a valid comparable. ii) Aspire Systems India Pvt. Ltd.:- In this regard learned Counsel of the assessee submitted that this company has related party transaction (RPT) of more than 25%. This comes out of financials of the company. Learned counsel submitted that the TPO himself has applied this filter. Hence, learned counsel submitted that this company should be excluded as a valid comparable. Learned counsel made further written submission. iii) Cignity Technologies Ltd. :- Learned Counsel of the assessee submitted that this company is not functionally comparable. The said company is engaged into software technology and the assessee engaged in software development. In this connection, learned counsel referred to the ITAT Bangalore Bench decision in the case of Advice America Software Development Center (P) Ltd. Vs. ITO (94 taxamnn.com 179). Learned counsel made further written submission. Learned Counsel submitted following conclusion :-
“5.2 If the above arguments of the Appellant are accepted, then the arithmetic mean of the remaining comparables would be as follows:-
Sr.No. Name of Company OP/TC (post WCA) 1 R S Software (India) Ltd. 24.33% 2. Accentia Technologies Ltd. -17.11% 3- Infobeans Technologies Pvt. Ltd. 41.85% ARITHMETIC MEAN 16.36% C. +/- 3% of the Net Margin of the Appellant:
Particulars Margin Net Margin of the Assessee 14.45% +3% of the Assessee's Margin 17.89% D. The arithmetic mean of the remaining comparables as shown in Table B above would fit within +/-3% Range provided u/s 92C(2) of the Act (as shown in Table C) and thus, the TP adjustment made by the TPO would be reduced to NIL.”
Per contra, learned Departmental Representative relied upon the direction of learned DRP.
We have carefully considered the submission and perused the records. As regards exclusion of Thirdware Solution Ltd., we note that this ITAT in assessee’s own case in dated 21.5.2018 as held as under :- “25. In this regard, the Id. Counsel of the assessee submitted that this comparable is into acquisition/purchase of hardware and software including software as a service. She further submitted that it is into software development, implementation and support services. It has been claimed that it earned income from products and services. While the assessee on the other hand is not into product activity and is solely into software services. It has been further submitted that in several case laws, Thirdware Solutions Ltd., has been held to be a company not engaged in software development services. In the ITAT Delhi Bench decision in the case of St-Ericsson India (P.) Ltd. vs. Asst. CIT[2017] 79 taxmann.com 207 (Delhi - Trib.) it was held that the substantial revenue of this company is from sales and operating sales of licence, software services, export from SEZ unit, export from STPI unit and revenue from subscription. So, when this company's substantial revenue is from other various business segments like sale of licence, software services and segmental results are not available, this company cannot be a valid comparable for benchmarking the international transaction. This decision of the ITAT had been upheld by the Hon'ble Delhi High Court in ITA No. 821 0/2017 vide order dated 31.01.2018. For similar proposition, the Id. Counsel of the assessee cited CIT vs. IVY Computech Ltd. (in ITA No. 707 of 2014 (AP PIC) and CIT vs. Intoto Software India Pvt. Ltd. (ITTA No. 233 of 2014 (AP HC). Following the above precedent, we hold that this is not a valid comparable in the present case."
Co. engaged in sale of software products is not comparable to Co. rendering software development service unless segmental data is available: • CIT vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 176 (Bom HC) • CIT vs. Intoto Software India Private Limited-ITA No. 233/2014-(AP HC)”
Respectfully following the above we direct that Thirdware Solutions Ltd. should not be considered as comparable.
16. As regards exclusion of Aspire Systems India Pvt. Ltd., we note that it is the plea of the assessee that the TPO has himself applied quantitative filter for excluding those companies whose Relates Party Transaction (RPT) is greater than 25%. This aspect has arising out para 5 to 6 of the TPO’s order. Further learned Counsel of the assessee has given following working for the proposition that RTP is greater than 25% :-
Particulars Amount (Rs.) Rendering of services 22,34,17,070 Purchase of services 18,82,53,307 Expenses reimbursed 96,50,786 Total related party transaction 42,13,21,163 Total Sales 156,52,92,158 Related party transaction to Sales 26.91%
Hence, learned Counsel of the assessee pleaded that on the basis of non- fulfillment of RPT filter of 25% applied by TPO himself, this comparable should be excluded. In support of this proposition learned counsel placed reliance upon the decision of the ITAT in the case of Deutsche Networking Services (P) Ltd. Vs. DCIT 98 taxmnn.com 52.
Learned Counsel of the assessee has further challenged that comparability of this company on the basis of following submissions :-
“As per Note 36 to financial statements, in January 2014 Aspire entered into a commercial rights transfer agreement with SRA Systems Limited ('SRA') whereby SRA transferred its commercial rights under all its customer relationships and contracts along with its related business workforce with effect from 01 February 2014 to Aspire for a consideration of Rs. 8.41 crores. This arrangement resulted into a Goodwill of Rs. 7.84 crores. The above arrangement is an extraordinary event which directly affects the income of Aspire.
Aspire has huge amount of Intangible assets/Intellectual Property whereas Appellant is a captive service provider having no intangibles”.
Upon careful consideration, we note that this company is liable to be excluded from the list of comparable in as much as its related party transaction to sale is above 25% of filter applied by the TPO himself. Learned counsel has claimed that this aspect is arising out of financials of the company itself. On the facts and circumstances of this case, we deem it appropriate to remit this issue to the file of the TPO. The TPO shall examine the working as given by learned counsel as above. If RPT exceeds 25%, this shall cease to be a good comparable and be liable to be excluded. As regards the claim that this company has extraordinary event affecting the income, the said plea has been rejected by DRP on the ground that it is not borne out of records. Now learned counsel is referring to notes of account of the said company to canvas his proposition. We deem it appropriate to remit this aspect also to the TPO for factual verification and order accordingly.
As regards Cigniti Technologies Ltd., learned Counsel of the assessee’s contention is that this is functionally different comparable. That the company is world’s third largest independent software testing services company. In this regard, learned Counsel of the assessee has referred to following case laws where this company has not been considered a good comparable because company engaged in provision of software testing services and assessee was in software development :-
(i) Advice America Software Development Center (P) Ltd. vs. ITO (2018) 94 taxmann.com 179 (Bang) (Page 9/Para 22) (ii) Mercedes-Benz Research & Development India (P) Ltd. vs. DCIT (2018) 95 taxmann.com 134 (Bang) (Page 18 / Para 18)
Considering the above, we find that Cigniti Technologies Ltd. is engaged in software testing services and the same has been found to be functionally different from software development services in the aforesaid case law. Following the precedents as above, we direct that the above comparable should be excluded.
In accordance with the above direction the TPO shall compute the arithmetic margin afresh.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order has been pronounced in the Court on 2.8.2019.