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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The cross appeals filed by assessee and Revenue are against order of CIT(A)-IT/TP, Pune, dated 20.05.2014 relating to assessment year 2009-10 against order passed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).
The cross appeals filed by assessee and Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.
The assessee in ITA No.1539/PUN/2014 has raised the following grounds of appeal:- Grounds of appeal pertaining to transfer pricing adjustment: 1. Inappropriate transfer pricing adjustment even though the pricing of all international transactions of the Appellant was at arm's length Erred in making/ confirming transfer pricing adjustment by rejecting the analysis undertaken by the Appellant to determine arm's length price for its international transactions pertaining to rendering of software development support services to the AEs. 2. Inappropriate use of single year and non-contemporaneous financial data of comparable companies for transfer pricing analysis Erred in considering the operating margins on operating cost of the comparable companies based on the financial data pertaining only to financial year ended 31 March 2009 and rejecting use of financial data of comparable companies for multiple i.e. including 31 March 2008 and 31 March 2007. Further, erred in computing the arm's length price using the financial information of comparable companies available at the time of assessment proceedings, although such information was not available at the time when the Appellant complied with the transfer pricing regulations
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Inappropriate modification of export earning filter applied by the Appellant Erred in inappropriate modification of export earnings filter applied by the Appellant by rejecting companies having export earnings less than 75% of operating revenue as against the filter of 25% applied by the Appellant. 4. Inappropriate rejection of loss making companies which are otherwise functionally comparable Erred by rejecting certain companies from the set of comparable companies which are otherwise functionally comparable merely on the ground that the companies are incurring losses during FY 2008-09. 5. Inappropriately accepting supernormal profit making companies as comparable to the Appellant Erred in selecting the companies having supernormal profits as comparable to the Appellant. 6. Inappropriate modification of the turnover filter Erred in inappropriately directing the AO to apply a turnover filter of Rs 1 crore to Rs.200 crores as against the turnover filter of Rs 1 crore to Rs 100 crores applied by the Appellant while conducting its transfer pricing study for FY 2008-09. 7. Inappropriate rejection of certain comparable companies identified in the transfer pricing study report Erred by rejecting certain comparable companies from the set of comparable companies identified by the Appellant in its transfer pricing study report for benchmarking its international transactions pertaining to rendering of software development support and consultancy services even though the companies satisfied all the comparability criteria/ filters applied while conducting the transfer pricing study. 8. Inappropriately considering functionally different companies as comparable to the Appellant Erred in adopting an incoherent approach and identifying certain inappropriate additional non-comparable companies as comparable to the Appellant on an ad-hoc basis (cherry picking). 9. Inappropriately rejecting adjustment to account for differences in functions and risk profile of the Appellant vis-a-vis the comparable companies Erred in comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies considered as comparable vis-a-vis the risk profile of the Appellant. 10. Erred by not considering the fact that Appellant is availing tax holiday under section 10A of the Act
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Erred in ignoring the fact that since Appellant is availing tax holiday under section 10A of the Act, there is no intention to shift the profits out of India, which is one of the basic intentions of Indian transfer pricing regulations. 11. Erroneously computing the transfer pricing adjustment from the arithmetic mean of arm's length price instead of lower 5% arithmetic mean Erred in computing the arms-length price, without taking into account the lower 5% variation from the mean arms-length price determined, which is permitted to and which has been opted for by the Appellant under the provisions of section 92C(2) of the Act. Other Grounds of appeal: 12. Inappropriate levy of penalty and interest Erred in initiating penalty proceeding under sections 271(1)(c) of the Act and levying interest under section 234B of the Act.
The learned Authorized Representative for the assessee at the outset pointed out that ground of appeal No.1 is general and grounds of appeal No.2, 3, 5, 6, 7 and 10 are not pressed, hence the same are dismissed. He further pointed out that ground of appeal No.12 is premature and also dismissed. The learned Authorized Representative for the assessee also pointed out that issue in ground of appeal No.9 is against allowability of risk adjustment and ground of appeal No.11 is +/-5% range to be adopted. He further submitted that the issues which need to be decided are as per modified grounds of appeal No.4 and 8, which read as under:- 4. Inappropriate rejection of loss making companies which are otherwise functionally comparable Erred by rejecting following company from the set of comparable companies which are otherwise functionally comparable merely on the ground that the companies are incurring losses during FY 2008-09. SIP Technologies and Exports Limited 8. Inappropriately considering functionally different companies as comparable to the Appellant Erred in adopting an incoherent approach and identifying following inappropriate additional non-comparable companies as comparable to the Appellant on an ad-hoc basis (cherry picking).
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Bodhtree Consulting Limited; and KALS Information Systems Limited. Thinksoft Global Services Limited Comp-u-learn India Limited
The Revenue in ITA No.1578/PUN/2014 has raised the following grounds of appeal:- 1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case. 2. The Learned Commissioner of Income-tax (Appeals)- IT/TP has erred on facts and in law in directing the A.O. to apply the Turnover filter of Rs. 1 crore to 200 crore in view of the UN and OECD guidelines. 3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in directing the A.O. to adopt the comparables (companies) other than the AO/TPO has adopted. 4. For this and such other reasons as may be urged at the time of hearing, the order of the Id. CIT(A) may be vacated and that of the Assessing Officer be restored.
Briefly, in the facts of the case, the assessee was engaged in provision of software development services to its associated enterprises. The assessee had furnished return of income declaring total income of ₹ 55,37,245/-. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determining the arm's length price of international transactions undertaken by the assessee. The value of international transactions of provision of software development services to associated enterprises was ₹ 48,29,13,194/-. The assessee had applied TNNM method and the assessee was being remunerated at cost plus markup of 7.5% on such cost incurred for rendering of offshore software development services, whereas charges for onsite consultancy services was decided on case to case basis. The assessee arrived at PLI of net profit to total cost ratio of 7.16%. The assessee had adopted weighted average margin after adjustment of working capital for two years and selected certain concerns as
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comparable. During TP proceedings, the assessee was asked to consider data for the contemporaneous period i.e. year ending 31.03.2009. The updated margins of nine concerns was worked out and arithmetic mean of margins was at (-) 6.96%. The TPO however, did not accept the approach adopted by assessee vis-à-vis accept/reject matrix of comparables and finally selected five concerns as comparables. The TPO did not allow risk adjustment to the assessee and consequently, arm's length price of software development services rendered by assessee was worked out at ₹ 8,84,21,599/-. The said adjustment was proposed by the TPO, which was then adopted by Assessing Officer in the draft assessment order and the assessee was show caused. The Assessing Officer thereafter, passed final assessment order under section 143(3) r.w.s. 144C(13) of the Act.
Before the CIT(A), the assessee requested exclusion of super normal profit earning companies and the CIT(A) did not accept the plea of assessee. Further in respect of exclusion of loss making comparable companies also, the CIT(A) held that the same are to be excluded from final set of comparables. Another aspect was the application of turnover filter of ₹ 25 crores to 100 crores as against assessee applying turnover of ₹ 1 crore to 200 crores, where the turnover of assessee was ₹ 48.36 crores. The CIT(A) directed the Assessing Officer to apply turnover filter of ₹ 1 crore to 100 crores. Thus, the CIT(A) also dealt with concerns which were excluded by TPO, which the assessee wanted it to be included. The CIT(A) directed the Assessing Officer to accept Akshay Software Technologies Ltd., CG-VAK Software & Exports Ltd., and Indium Software (India) Ltd. Further directions were given to include Maars Software International Ltd. and Quintegra Solutions Ltd. in the final list of comparables. However, the plea of assessee of including SIP Technologies and Exports Ltd.
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was not accepted. Similarly, Bodhtree Consulting Ltd. was also included in final set of comparables. The assessee further wanted Comp-u-learn India to be included but the same was not accepted by CIT(A). Further, exclusion of KALS Information Systems Ltd., as pleaded by assessee was not accepted and the said concern was held to be comparable. Another concern Thinksoft Global Service Ltd. was held to be not comparable and the same was excluded, then there is finding in respect of other companies. The CIT(A) also did not allow the benefit of risk adjustment to the assessee.
Both the assessee and Revenue are in appeal against the order of CIT(A).
The first issue raised by assessee against order of CIT(A) vide modified ground of appeal No.4 is against exclusion of SIP Technologies and Exports Ltd. from final set of comparables being functionally not comparable. The assessee by way of modified ground of appeal No.8 has sought exclusion of two concerns i.e. Bodhtree Consulting Ltd. and KALS Information Systems Ltd.
The Revenue by way of ground of appeal No.2 is aggrieved by the order of CIT(A) in directing Assessing Officer to apply turnover filter of ₹ 1 crore to 200 crores. The ground of appeal No.3 raised by Revenue is against directions of CIT(A) to Assessing Officer to adopt comparable companies / other than the ones Assessing Officer / TPO had adopted. The grounds of appeal No.1, 4 and 5 raised by Revenue are general in nature, hence dismissed.
The learned Authorized Representative for the assessee at the outset pointed out that there was no dispute on the method to be employed to
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benchmark provision of software development services by assessee to its associated enterprises. It was further pointed out that margins shown by assessee were 7.16% and weighted average margins were 9%. He further pointed out that TPO had accepted one comparable finally selected by assessee and rejected six comparables. He further added four new concerns as functionally comparable. The CIT(A) included five out of six which were rejected by TPO and upheld inclusion of four new ones, against which the Revenue is in appeal. The final list of comparables picked up by TPO comprised of five concerns, whose mean margins worked out to 26.39%, resulting in an upward adjustment of ₹ 8.84 crores in the hands of assessee. He further pointed out that the value of international transactions was ₹ 48.29 crores. The learned Authorized Representative for the assessee pointed out that vide modified ground of appeal No.4, it has raised the issue of inclusion of SIP Technologies and Exports Ltd., which was not persistent loss making concern. Our attention was drawn to the details of said concern placed at page 573 of Paper Book. He further pointed out that the said concern was included as functionally comparable in assessee’s own case for assessment year 2008- 09 by the Tribunal in ITA No.254/PUN/2013, order dated 13.04.2018. He also placed reliance on the decision of Tribunal in the case of John Deere India Pvt. Ltd. Vs. ACIT in ITA No.2236/PN/2012, relating to assessment year 2008-09, dated 18.11.2015. He further pointed out that vide modified ground of appeal No.8 though it has raised the issue about several concerns but in case Bodhtree Consulting Ltd. is excluded and even KALS Information Systems Ltd., product company is excluded, then arm's length price of international transactions shown by assessee would be within +/-5% range margin. He further pointed out in case this is allowed, then the issues raised by Revenue
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would become academic and similarly, the issue of risk adjustment would become academic.
The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of Assessing Officer / CIT(A).
We have heard the rival contentions and perused the record. The assessee was engaged in providing software development services to its associated enterprises. The total international transactions undertaken by assessee were ₹ 48.29 crores. The assessee had applied TNNM method and there is no dispute about application of said method. The TPO however had applied revised filters; as against the concerns selected by assessee in its TP study report, another set of comparables were finally selected by TPO and the same were confronted to the assessee. The assessee is aggrieved by exclusion of one concern SIP Technologies and Exports Ltd., against which it has filed modified ground of appeal No.4. The said concern was excluded by TPO/Assessing Officer on the ground that it was persistent loss making concern. However, if we look at the details filed by assessee i.e. summary of operating profit margins for three years of SIP Technologies and Exports Ltd., then in assessment year 2007-08, unadjusted operating margins were to the tune of 10.19%; in assessment year 2008-09, it was (-)33.20% and in the year under appeal, it was (-) 19.33%, The assessee in support has furnished the audit report along with attachments to establish its case that the said concern SIP Technologies and Exports Ltd. was not persistent loss making.
We find that similar issue of concern being persistent loss making or not, arose before the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. DCIT
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in ITA No.827/PN/2014, relating to assessment year 2009-10, order dated 27.10.2016 and it was held that the said concern SIP Technologies and Exports Ltd. was not persistent loss making company, since out of three years, it had got profit in one of the years, hence the same was directed to be included in final set of comparables. Further, even in assessee’s own case for assessment year 2008-09 (supra), the said concern was held to be functionally comparable and not to be excluded on the ground of persistent loss making concern. Accordingly, we reverse the finding of CIT(A) in this regard and direct the Assessing Officer / TPO to include SIP Technologies and Exports Ltd. in final set of comparables. Hence, modified ground of appeal No.4 raised by assessee is thus, allowed.
Now, coming to modified ground of appeal No.8 raised by assessee, wherein the assessee has pleaded that Bodhtree Consulting Ltd. and KALS Information Systems Ltd. are to be excluded being product companies.
The learned Authorized Representative for the assessee pointed that similar addition was made in preceding year and the Tribunal has directed the exclusion of Bodhtree Consulting Ltd. on the basis of decision of Pune Bench of the Tribunal in the case of John Deere India (P.) Ltd. Vs. DCIT reported in 77 taxmann.com 7 (Pune). He further brought to our notice that for the instant assessment year i.e. assessment year 2009-10, in the case of John Deere India (P.) Ltd. Vs. DCIT in ITA No. 827/PN/2014, order dated 27.10.2016, Bodhtree Consulting Ltd. was directed to be excluded being not comparable to a concern providing software development services to its AEs. He also pointed that KALS Information Systems Ltd. was also directed to be excluded being functionally dissimilar. In respect of Bodhtree Consulting Ltd. the learned
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Authorized Representative for the assessee pointed that there was huge fluctuating margins of the said concern over the period of years and the Tribunal in the case of DCIT Vs. Barclays Technology Centre India (P.) Ltd. reported in 72 taxmann.com 351 (Pune-Trib.) has directed the exclusion on this account. He further referred to the decision of Hon’ble Bombay High Court in the case of CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014, judgment dated 26.09.2016, wherein the concern KALS Information Systems Ltd. have been held to be not functionally comparable to a concern providing software development services to its AEs.
Further, Pune Bench of the Tribunal in the case of John Deere India (P.) Ltd. Vs. DCIT (supra) while deciding the appeal for assessment year 2009-10 vide order dated 27.10.2016 it was held that the said concern Bodhtree Consulting Ltd. was engaged in the sale of software product apart from providing software services and no segmental data was available in the said context. Following the same parity of reasoning, we hold that the concern Bodhtree Consulting Ltd. is to be excluded from the final set of comparables.
Now, coming to the next concern i.e. KALS Information Systems Ltd., the Tribunal in Nihilent Ltd. Vs. ACIT in ITA No. 2428/PUN/2012 for the assessment year 2008-09, order dated 10.05.2018 has held that the said concern to be not functionally comparable and had excluded the same. Further, while deciding the appeal for assessment year 2009-10 in the case of John Deere India (P.) Ltd. (supra) the Tribunal observed that the said concern was also engaged in sale of software product and providing software services and no segmental details were available. Therefore, the said concern had to
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be excluded while benchmarking the arm’s length price of international transactions of a concern engaged in software development services.
The Hon’ble Bombay High Court in the case of CIT Vs. Principal Global Services (P.) Ltd. reported in 95 taxmann.com 315 (Bom) while deciding the appeal have held that KALS Information Systems Ltd. was engaged in developing software products, development of software services and was also engaged in running a training centre for software professional on online projects. It was held that the margins of KALS Information Systems Ltd. should not be compared with the concern engaged in the activity of providing software solution i.e. software services. Following the same parity of reasoning we hold that the KALS Information Systems Ltd. is to be excluded from the final list of comparable, since the said concern is functionally dissimilar.
Similar issue has arisen before the Pune Bench of Tribunal in the case of Nihilent Ltd. Vs. ACIT in ITA No.304/PUN/2014, relating to assessment year 2009-10, order dated 31.08.2018, which was providing software development services and the concerns Bodhtree Consulting Ltd. and KALS Information Systems Ltd. were selected as functionally comparable to the said concern. The Tribunal had directed exclusion of said two concerns observing as under:- “11. The first issue which has been raised before us is in respect of exclusion of two concerns i.e. Bodhtree Consulting Ltd. and Kals Information Systems Ltd. The ld. AR for the assessee strongly stressed that the two concerns were not functionally comparables and the same had to be excluded from the final set of comparables. In this regard the reliance was placed by the ld. AR for the assessee on the decision of Tribunal in assessee’s own case in ITA No. 2428/PUN/2012 for the assessment year 2008-09, order dated 10.05.2018 wherein relying n the decision of John Deere India Pvt. Ltd. in ITA No. 2236/PN/2012 for assessment year 2008-09 it was held that the said concern was not functionally comparable since it was engaged in the product engineering and content engineering services, which were in the nature of ITES services and was not comparable with the assessee’s activity of providing software development services. The relevant findings of the Tribunal are in para 19 at pages 25 to 28 of the order, which are being referred but not being reproduced for the sake of brevity.
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Further, Pune Bench of the Tribunal in the case of John Deere India (P.) Ltd. Vs. Deputy Commissioner of Income Tax (supra) while deciding the appeal for assessment year 2009-10 vide order dated 27.10.2016 it was again held that the said concerns Bodhtree Consulting Ltd. was engaged in the sale of software product apart from providing software services and no segmental data was available in the said context. Following the same parity of reasoning i.e. in the case of assessee and the in the case of John Deere India (P.) Ltd. (supra) we hold that the concern Bodhtree Consulting Ltd. is to be excluded from the final set of comparables. 13. Another aspect for exclusion of the said concern is the fluctuating margins shown by the company over the period of years. In the financial 2007- 08 the said concern had shown margin of 17% whereas in financial year 2008- 09 it had shown margin of 56% and in financial year 2009-10, 40%. The Tribunal in the case of Deputy Commissioner of Income Tax Vs. Barclays Technology Center India (P.) Ltd. (supra) while deciding the appeal for assessment year 2009-10 has held that the said concern needs to be excluded because of the huge fluctuating margins. Accordingly, we hold that Bodhtree Consulting Ltd. is to be excluded from the final list of comparables. 14. Now, coming to the next concern i.e. Kals Information Systems Ltd., the Tribunal in assessee’s own case for assessment year 2008-09 has held that the said concern to be not functionally comparable and had excluded the same. Further, while deciding the appeal for assessment year 2009-10 in the case of John Deere India (P.) Ltd. (supra) the Tribunal observed that the said concern was also engaged in sale of software product and providing software services and no segmental details were available. Therefore, the said concern had to be excluded while benchmarking the arm’s length price of international transactions of a concern engaged in software development services.”
We also find that the Hon’ble Bombay High Court in CIT Vs. PTC Software (I) Pvt. Ltd. (supra) has directed exclusion of KALS Information Systems Ltd. on the ground that it was a product company. In view thereof, we hold that Bodhtree Consulting Ltd. and KALS Information Systems Ltd. have to be excluded from final set of comparables. The Assessing Officer/TPO is directed, accordingly.
The learned Authorized Representative for the assessee pointed out that in case Bodhtree Consulting Ltd. and KALS Information Systems Ltd. are excluded from final set of comparables and SIP Technologies and Exports Ltd. is included in final set of comparables, then margins shown by assessee and mean margins of comparables would be within +/-5% range and even grounds
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of appeal raised by Revenue would become academic and even the issue of risk adjustment would become academic. Accordingly, we direct the Assessing Officer / TPO to re-determine the mean margins of comparables in line with our directions and delete the addition made in the hands of assessee.
In the result, appeal of assessee is partly allowed and appeal of Revenue is dismissed.
Order pronounced on this 24th day of October, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 24th October, 2018. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : 1. अऩीऱाथी / The Appellant; 2. प्रत्यथी / The Respondent; 3. आयकर आयुक्त(अऩीऱ) / The CIT(A)-IT/TP, Pune; 4. The DIT(TP/IT) / CIT-III, Pune; ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे “ए” / DR 5. ‘A’, ITAT, Pune; 6. गार्ड पाईऱ / Guard file. आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे / ITAT, Pune