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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: HON’BLE SHRI SAKTIJIT DEY, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member):-
Aforesaid cross appeals for Assessment Year [AY] 2007-08 contest the order of Ld. Commissioner of Income-Tax (Appeals)-15, Mumbai [CIT(A)], Appeal No. CIT(A)-15/Arr.205/11-12 dated 09/03/2012. The Grounds raised
by the assessee read as under: - On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) ['CIT(A)']) erred in confirming the addition of Rs.66,96,877 out of the total addition of Rs.1,43,30,864 made by the learned Assessing Officer ('AO') in relation to the arms length price of the Appellant's international transactions as follows: 1. determining the arm's-length price of the Appellant's international transactions of provision of software development services at Rs.14,80,55,741 instead of Rs.14,13,58,864 as determined by the Appellant; 2. disregarding the appellant's Transfer Pricing documentation and conducting his own comparability analysis (and in this regard, obtaining the financial data of certain potential comparables using his powers under Section 133(6) of the Act) which is not in accordance with the contemporaneous documentation requirement of the Indian TP regulations; 3. requiring financial data of only the current year (FY 2006-07) of the comparable companies to be used for benchmarking the Appellant's international transactions; 4. not granting risk adjustment to the Appellant to account for the differences in the risk profile of the comparables vis-a vis the Appellant; It is prayed that the learned AO be directed to consider the international transactions of the Appellant as arm's length and accordingly the transfer pricing adjustment of Rs.66,96,877 should be deleted. The Grounds raised by the revenue read as under: -
1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in rejecting M/s. Infosys Ltd. and M/s. Wipro Ltd. as comparables without appreciating the fact that in any service industry like software sector, the price for services is decided by the market rather than the brand value.
2. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the benefit of 5% relief to the assessee, without appreciating the fact that no standard deduction of 5% to the assessee is envisaged under section 92C(2) of the Act.
M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the A.O. be restored.
2.1 The Ld. Sr. Counsel representing assessee [AR], at the outset, placed on record a chart to submit that the assessee is contesting the inclusion / exclusion of certain comparable only which are covered by the various order of these Tribunals in case of assessee having similar functional profile. The issue of few comparable is stated to have been covered by the view taken by this very bench for same AY for assessee having similar functional profile in the case of Infor Global Solutions India (P.) Ltd. Vs. DCIT [102 Taxmann.com 58]. A copy of the same has been placed on record. The Ld. DR controverted the same and advanced arguments in favor of revenue. 2.2 Brief facts are that the assessee being resident corporate assessee was stated to be engaged in providing international and domestic business and financial information services, releasing publications, software development, support services and financial educational services. 2.3 The International Transactions carried out by the assessee with its Associated Enterprises [AE] as reported in Form 3CEB for impugned AY were referred to Ld. Transfer Pricing Officer-1(6), Mumbai [TPO] u/s 92CA (1) for determination of their Arm’s Length Price [ALP]. The Ld. TPO, vide order dated 28/10/2010 proposed Transfer Pricing [TP] Adjustment of Rs.143.30 Lacs which was incorporated in the draft assessment order dated 16/12/2010. Since the assessee exercised option not to contest the M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 same before Ld. Dispute Resolution Panel, quantum assessment order was passed u/s 143(3) r.w.s. 144C(3) on 25/01/2011 wherein the income of the assessee was determined at Rs.1555.83 Lacs after aforesaid adjustment of Rs.143.30 Lacs as against returned income of Rs.1409.29 Lacs filed by the assessee on 30/10/2007. The TP adjustment of Rs.143.30 Lacs is the sole subject matter of cross-appeals before us. 2.4 Before Ld. TPO, it transpired that the assessee provided software development services to its AE for aggregate sum of Rs.1413.58 Lacs. The transactions were benchmarked using Transactional Net Margin Method [TNMM] with operating profit to total cost [OP/TC] as the appropriate Profit Level Indicator [PLI]. The assessee had earned cost-plus mark-up of 16% on all costs against these services. Using Prowess and Capitaline databases, the assessee identified 18 comparable with mean margin of 10.67% based on current year data and therefore, claimed that no TP adjustment would be required. Certain filters were also applied and the entities having turnover greater than zero and engaged in providing software development services were accepted, while searching comparable from the databases. The Ld. TPO while rejecting some of the filters, applied new filters so as to ensure selection of proper comparable. The same resulted into rejection of 15 comparable out of 18 comparable as selected by the assessee. Out of 3 comparable as accepted by Ld. TPO, the assessee is contesting for exclusion of an entity namely M/s Bodhtree Consulting Limited.
M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 2.5 At the same time, finding information and data used in assessee’s study unreliable and incorrect, the assessee’s TP documentation were rejected in terms of Section 92C(3)(c) and Ld. TPO proceeded to carry out fresh search by applying the new filters using the same databases. The selection /rejection matrix & result of the search etc. has been discussed on para 5.8 to para 5.11 of Ld. TPO’s order. After considering assessee’s submissions, Ld. TPO, in the final analysis, accepted 28 comparable with mean margin of 27.96%. Applying the same to total cost, operating margins were worked out at Rs.338.28 Lacs as against Rs.194.97 Lacs reflected by the assessee. Accordingly, the differential of the two i.e. Rs.143.30 Lacs was proposed as TP adjustment against these services. 2.6 Aggrieved, the assessee contested the same with partial success before Ld. CIT(A) vide impugned order dated 09/03/2012 wherein the assessee contested the methodology adopted by Ld. TPO to arrive at proposed adjustment. The Ld. CIT(A) while rejecting the assessee’s multiple contentions, directed for exclusion of two entities namely M/s Infosys Technologies Ltd. & M/s Wipro Limited on the premise that these companies had brand value and incurred heavy marketing and selling expenses and cost of software package for own use and therefore, not comparable. Another relief provided was benefit of +5% range as standard deduction applying the provisions of Section 92C(2). The stand of Ld.CIT(A) reduced the proposed adjustment to Rs.66.96 Lacs. The same has given rise to cross appeals before us. The revenue is agitating the relief provided M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 by Ld. first appellate authority whereas the assessee seek exclusion of certain comparable. 3.1 Upon perusal, we find that the assessee is contesting exclusion of following comparable: - No. Name of Entity 1. Bodhtree Consulting Limited 2. Lucid Software Limited 3. KALS information system Limited 4. Avani Cimcon Technologies Limited 5. Tata Elxi Limited 6. Flextronics Software Systems Limited 7. Celestial Labs Limited The main arguments of Ld. Sr. Counsel are two folds i.e. these entities are not functionally comparable due to various factors and secondly, these have been directed to be excluded in various orders of the Tribunal for same AY in case of assessees having similar functional profile. The aforesaid decisions have been tabulated in the chart and the copy of the same has been placed on record. The Ld. DR supported the TP adjustment worked out by Ld. TPO. 3.2 We have carefully perused the same. We find that the entities listed at serial numbers 1 to 5 have been directed to be excluded by this very bench in the case of Infor Global Solutions India (P.) Ltd. Vs. DCIT [102 Taxmann.com 58] for same AY 2007-08. The assessee, in that case, was having same functional profile i.e. in the business of software development and distribution of software licenses. The methodology used was also the same. The relevant findings of the bench, for ease of reference, could be extracted in the following manner: - M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 (i) AVANI CIMCON TECHNOLOGIES LTD.
The aforesaid company was selected by the Assessing Officer and retained by the DRP.
The learned Authorised Representative objecting to the selection of the aforesaid comparable submitted that the company is functionally different from the assessee since as per the information available in the website of the company, it is into software solution, software development and consulting and information technology services. He submitted that the company owns products like D- Xchange, Bizrule Exchange, CARMA, etc. In this context, he drew our attention to the relevant extract of the website as submitted in the paper book. The learned Authorised Representative submitted, no segmental break-up of software product and software development is available in the annual report of the assessee. He submitted, considering the aforesaid factual aspect, the Tribunal in a number of decisions pertaining to the very same assessment year has held this company not to be a comparable to a software development service provider. In this context, he relied upon the following decisions:— (i) Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 22 taxmann.com 96/137 ITD 1 (Mum.) (ii) Sumtotal Systems India (P.) Ltd. v. Asstt. CIT [2014] 46 taxmann.com 231/65 SOT 48 (URO) (Hyd. - Trib.) (iii) LSI Technologies India (P.) Ltd. v. ITO [2015] 60 taxmann. com 405 (Bang. - Trib.) (iv) CAPCO IT Services India (P.) Ltd. v. ITO [2017] 79 taxmann.com 214 (Bang. - Trib.) (v) Global Logic India (P.) Ltd. v. Asstt. CIT [2015] 56 taxmann. com 159/69 SOT 57 (URO) (Delhi - Trib.); and (vi) Dialogic Networks (India) (P.) Ltd. v. Asstt. CIT [2018] 97 taxmann.com 57 (Mum. - Trib.) 7. The learned Departmental Representative relying upon the observations of the DRP and the Transfer Pricing Officer submitted that the assessee has never brought to the notice of the Departmental Authorities that the company is also developing product.
We have considered rival submissions and perused materials on record. As could be seen, the main contention of the assessee against selection of the aforesaid comparable is, it is engaged in both software development services as well as product development and segmental details are not available. As could be seen from the materials placed on record, comparability of this company with software development service providers has come up for consideration before different benches of the Tribunal for the very same assessment year. In case of Telcordia Technologies India (P.) Ltd. (supra), the Co-ordinate Bench after taking note of the fact that segmental details of operating income of information technology services and sale of software products have not been provided in the annual report has rejected this company as a comparable. The same view has been expressed by the Tribunal in the other decisions cited by learned Authorised Representative. Since, the aforesaid decisions of the Tribunal pertain to the very same assessment year, respectfully following the consistent view expressed by the M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 Tribunal with regard to the acceptability of the aforesaid comparable, we direct the Assessing Officer to exclude this company from the list of comparables. (ii) BODHTREE CONSULTING LTD.
This company was selected by the Transfer Pricing Officer and retained by the DRP. Objecting to the selection of this company, the learned Authorised Representative submitted that it is into varied activities like software solutions, end-to-end web solution, software consultancy, design and development of solutions. He submitted, no segmental information is available in the annual report of the company. He submitted, income from e-paper activity is included in the company's Profit & Loss account, however, expenses have been debited to the joint venture created in the name and style of Learn Smart India Pvt. Ltd. He submitted, the company has recorded an abnormal growth in turnover and profit of 91.63% and 546% respectively. For aforesaid reasons, the company cannot be treated as a comparable. In support of such contentions, he relied upon the following decisions:— (i) Ness Innovative Business Services (P.) Ltd. v. Dy. CIT [2014] 47 taxmann.com 377/151 ITD 190 (Hyd. - Trib.) (ii) Pr. CIT v. Barclays Technology Centre India (P.) Ltd. [2018] 95 taxmann.com 170 (Bom.) (iii) Dialogic Networks (India) (P.) Ltd. (supra) (iv) QAD India (P.) Ltd. v. Dy. CIT [2016] 75 taxmann.com 280 (Mum. - Trib.).
The learned Departmental Representative relied upon the orders of the DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. As could be seen, in case of Ness Innovative Business Services (P.) Ltd. (supra), the Tribunal having taken note of the fact that the related party transaction of the company during the relevant previous year exceeded the threshold limit of 25% has excluded this company as a comparable. Since, the aforesaid decision of the Tribunal pertains to the very same assessment year, we are of the view that the company cannot be treated as comparable as it fails the RPT filter. Even otherwise also, in various other decisions, as cited by the learned Authorised Representative, this company has been held as not comparable. Therefore, following the consistent view of the Tribunal in the decisions cited above, we direct the Assessing Officer to exclude this company from the list of comparables. …… (v) KALS INFO SYSTEMS LTD.
This company was selected by the Transfer Pricing Officer and retained by the DRP. Objecting to the selection of this company, the learned Authorised Representative submitted that it is engaged in software development as well as products. He further submitted that segmental details relating to the aforesaid two segments are not available in the annual report. Drawing our attention to the financial statement of the company, the learned Authorised Representative submitted that 52.47% of the total current asset comprises of inventories which demonstrates that the company is into M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 development of software products. In support of this contentions, he relied upon the following decisions:— (i) PTC Software (I) (P.) Ltd. (supra)— (ii) Sumtotal Systems India (P.) Ltd. (supra); (iii) LSI Technologies India (P.) Ltd. (supra); (iv) CAPCO IT Services India (P.) Ltd. (supra); (v) Global Logic India (P.) Ltd. (supra); (vi) Barclays Technology Centre India (P.) Ltd. (supra); (vii) Dialogic Networks (India) (P.) Ltd. (supra); (viii) Accenture Services (P.) Ltd. (supra); (ix) Telelogic India (P.) Ltd. v. Dy. CIT [2015] 58 taxmann.com 364/69 SOT 135 (Mum. - Trib.); and (x) QAD India (P.) Ltd. (supra); 19. The learned Departmental Representative relied upon the order of the DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. The main plank on which the assessee has challenged selection of the aforesaid comparable is, it is engaged in development of software products. Notably, in case of PTC Software (I) (P.) Ltd. (supra), the Hon'ble Jurisdictional High Court upheld the decision of the Tribunal in rejecting this company as a comparable to a software development service provider on the ground that it is engaged in the development of product. The other decisions cited by the learned Authorised Representative also express similar view. Since, most of the decisions cited by the learned Authorised Representative including the decision of the Hon'ble Jurisdictional High Court in PTC Software (I) (P.) Ltd. (supra) pertain to the impugned assessment year, respectfully following them, we exclude this company from the list of comparables. (vi) LUCID SOFTWARE LTD.
This company was selected by the Transfer Pricing Officer and retained by the DRP. Objecting to the selection of this company as comparable, the learned Authorised Representative submitted that the annual report of the company reveals that it has incurred product development expenses which demonstrate that the company is into product development activity and not software development. Thus, he submitted that the company cannot be treated as comparable. In support of this contentions, he relied upon the following decisions:— (i) Tech Mahindra Ltd. (supra); (ii) Telcordia Technologies India (P.) Ltd. (supra); (iii) Sumtotal Systems India (P.) Ltd. (supra); (iv) LSI Technologies India (P.) Ltd. (supra); (v) CAPCO IT Services India (P.) Ltd. (supra); and (vi) Global Logic India (P.) Ltd. (supra).
M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 22. The learned Departmental Representative relied upon the order of the DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. It is noted by us, in case of Tech Mahindra Ltd. (supra), the Tribunal having found that this company is into software product development has rejected this company as a comparable. The same view has been expressed by the Co-ordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra) and various other decisions as cited by the learned Authorised Representative. Since the aforesaid decisions pertain to the very same assessment year, respectfully following them, we exclude this company as a comparable. …. (x) TATA ELXSI LTD.
This company was selected by the Transfer Pricing Officer and retained by the DRP. Objecting to the selection of the aforesaid company as a comparable, the learned Authorised Representative submitted that the company is engaged in various activities such as software development and services, embedded product design services, industrial design and engineering, visual computing labs etc. Thus, he submitted, the company being functionally different cannot be treated as comparable. In support of such contention, the learned Authorised Representative relied upon the following decisions:— (i) Telcordia Technologies India (P.) Ltd. (supra); (ii) Sumtotal Systems India (P.) Ltd. (supra); (iii) Ness Innovative Business Services (P.) Ltd. (supra); (iv) LSI Technologies India (P.) Ltd. (supra); (v) CAPCO IT Services India (P.) Ltd. (supra); (vi) Global Logic India (P.) Ltd. (supra); (vii) Dialogic Networks (India) (P.) Ltd. (supra); (viii) Pr. CIT v. S.T. Ericsson India (P.) Ltd. [IT Appeal No. 821/2017, dated 31-1- 2018]; and (ix) St-Ericsson India (P.) Ltd. v. Addl. CIT [2017] 79 taxmann.com 207 (Delhi - Tib.).
The learned Departmental Representative relied upon the order of the DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. On a perusal of the documents placed in the paper book it appears that this company is engaged in various activities including development of niche product and development services. Thus, the company is functionally different from the assessee. Considering the aforesaid aspect, the Co-ordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra), which is for the very same assessment year, has excluded this company as a comparable. Similar view has also been expressed in the other decisions cited by the learned Authorised Representative. Thus, keeping in view the decisions of the M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 Tribunal referred to above, we hold that this company cannot be a comparable to the assessee.
Facts being pari-materia the same, we direct for exclusion of these 5 comparable. 3.3 Flextronics Software System Ltd. It has been submitted by Ld. Sr. Counsel that this entity is not functionally comparable as it was engaged in software product which could not be compared with assessee’s functions which were software development services. Reliance has been placed on the decision of Hyderabad Tribunal in DE-Shaw India Software Pvt. Ltd. [ITA No.2071/Hyd/2011] for the said submissions. Upon perusal of this decision, we concur with the stand of Ld. AR that the said entity has been directed to the excluded since it was found to be engaged in product development. The co-ordinate bench, in that case, has placed reliance on another decision of Tribunal rendered in Intoto Software India Pvt. Ltd. [ITA 2012/Hyd/2010]. Respectfully following the consistent view of the benches, we direct for exclusion of this comparable. 3.4 Celestial Labs Ltd. It has been submitted that this entity is not functionally comparable as it was engaged in development of drug discovery tool and was a research & development company as against the assessee’s functions i.e. software development services. Reliance has been placed on the following decisions: - i) Trilogy E-Business Software India P. Ltd. [Bangalore Tribunal [confirmed by Hon’ble Karnataka High Court vide ITA No.151/2015] M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 ii) Witness System Software India P. Ltd. [Bangalore Tribunal IT(TP)A No.1366/Bang/2011] iii) Transwitch India P. Ltd. [Bangalore Tribunal IT(TP)A No.948/Bang/2011] The decision listed at serial no.1 is for same AY and rendered in case of assessee having similar functional profile. The co-ordinate bench has held that the aforesaid entity was engaged in clinical research and manufacturing of bio products and other products and hence, not functionally comparable. The other decisions also support the case of the assessee for exclusion of this comparable. Respectfully following the consistent view, we direct for exclusion of the same. 3.5 No other arguments / grounds have been urged before us in assessee’s appeal. Therefore, the same are kept open and not dealt with. Resultantly, the appeal stands partly allowed to the extent of exclusion of above comparable. 4.1 So far as the revenue’s ground no. 2 is concerned, we are of the considered opinion that the benefit of +5% was not allowable as a standard deduction. The provisions of Section 92C(2) only envisages that no TP adjustment would be warranted in case variance was within a range of +5% and nothing more. It would be only a tolerance range and available only when the prices of international transaction are within the range of 5% of the arithmetic mean of margin of more than one comparable entity. This ground stands allowed. 4.2 In ground No. 1, the revenue is agitating exclusion of two entities i.e. M/s Infosys Technologies Ltd. & M/s Wipro Limited by Ld. CIT(A). The Ld.
M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 CIT(A) has excluded the same on the premise that these companies had brand value and incurred heavy marketing and selling expenses and cost of software package for own use and therefore, not comparable. The Ld. Sr. counsel, on the strength of judicial pronouncements justified exclusion of the same. After hearing rival contentions, our adjudication for the same is as follows. 4.3 Infosys Technologies Limited It has been submitted by Ld. Sr. Counsel that this entity is not functionally comparable due to various factors viz. its size, turnover, brand value, scale of operations, diversified activities and owning of intangibles. Reliance has been placed on the following judicial pronouncements in support of exclusion of the same: - i) Telcordia Technologies India P. Ltd. [Mumbai Tribunal AY 2007-08] ii) Sumtotal Systems India P. Ltd. [ITA No.1710/Hyd/2011 09/05/2014 AY 07-08] iii) Adaptec India Pvt. Ltd. [ITA No.1801/Hyd/2009 31/01/2013 AY 2007-08] Upon perusal, we find force in the arguments of Ld. Sr. Counsel. The co- ordinate bench of Mumbai Tribunal in the case of Telcordia Tech. India P. Ltd. [supra], relying upon, Agnity India Tech. Pvt. Ltd. [ITA 3856/Del/2010], held that the said entity was giant enterprise and in the area of development of software and it assumes all risks, leading to higher profits and cannot be compared with the company which is captive unit of its parent company assuming only limited risk. Similar views have been expressed in other decisions. Keeping in view the same, we confirm exclusion of the same.
M/s Dun & Broadstreet Info. Servives I. Pvt. Ltd. Assessment Year 2007-08 4.4 Wipro Limited It has been submitted by Ld. Sr. Counsel that this entity is not functionally comparable due to various factors viz. its size, turnover, brand value, scale of operations, diversified activities and owning of intangibles. Reliance has been placed on the following judicial pronouncements in support of exclusion of the same: - i) Telcordia Technologies India P. Ltd. [supra] ii) Sumtotal Systems India P. Ltd. [supra] iii) DE Shaw India Software Pvt. Ltd. [supra] iv) Virtusa India Pvt. Ltd. [ITA No. 1962/Hyd/2011 30/08/2013 AY 2007-08] Similar is the situation for this comparable. In decision listed at serial no.1, the co-ordinate bench has directed for exclusion of this entity on the same reasoning as given for exclusion of Infosys Tech. Ltd. The other decisions also support the submissions. Keeping in view the same, we confirm exclusion of the same. 4.5 Ground No. 1 stand dismissed. The appeal stands partly allowed.
Conclusion 5.1 The Ld.AO / TPO are directed to recompute the income of the assessee in terms of our above order. The benefit of tolerance range as provided in Section 92C(2), if found admissible as per law, shall be granted to the assessee. 5.2 Both the appeal stands partly allowed in terms of our above order.