AUTODESK INDIA PRIVATE LIMITED,BANGALORE vs. ASST.C.I.T., BANGALORE

The brief facts relating to these appeals are that the Assessee was set up as a subsidiary of Autodesk Inc., USA ('Autodesk US' for short), in October 1998 and is engaged in the business of providing software development (technical support) services and marketing support services to its overseas Associated Enterprises ('AE' for short). It is not in dispute that the transaction of rendering of software development services and providing Marketing support services by the Assessee to its AE were international transactions and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transactions has to be determined having regard to Arm’s Length Price (ALP). The issues to be decided in the cross appeals are determination of ALP of the international transaction of providing software development services and Marketing Support Services by the Assessee to its AE.

We will first deal with dispute with regard to determination of ALP in Software Development Service Segment. During the previous year 2010- 11 relevant to the AY 2011-12, the Assessee rendered software development (technical support) to its AEs. As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of Rs.9,01,16,965/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction the Assessee filed a Transfer Pricing study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The profit level indicator (PLI) chosen for the purpose of comparison of profit margin of comparable companies was IT(TP)A.No.156 & 220/Bang/2016 Page 3 of 18 operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was Rs.9,01,16,965. The Operating cost of the Assessee was Rs.8,21,16,771/-. The operating profit was thus Rs.80,00,194 (Rs.9,01,16,965 – Rs.8,21,16,771). OP/OC was 9.74%. The Assessee in its TP Study had chosen 14 companies as comparable companies.

The arithmetic mean of the profit margin of the 14 companies so selected by the Assessee compared to the profit margin of the Assessee was at Arm’s Length. Since the Assessee’s profit margin was within the range of profit margin of the comparable companies, the Assessee claimed that the price charged in the international transaction was at Arm’s Length and therefore no addition by way of adjustment to ALP should be made.

The Assessing Officer (AO) referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is required by the provisions of Sec.92CA of the Act. The TPO after accepting some of the comparable companies chosen by the Assessee, selected 13 comparable companies. The following table will show the final list of comparable companies and their profit margin and computation of arithmetic mean of profit margin of these 13 comparable companies:-

The TPO computed the addition to be made to the total income on account of determination of ALP at Rs. 1,10,42,685/- as follows:-

The addition suggested by the TPO was added to the total income of the Assessee by the AO in the draft order of assessment. Aggrieved by the order of the AO making the aforesaid addition, the Assessee preferred objections before Disputes Resolution Panel (DRP). The DRP vide its directions dated 19.11.2015 excluded 10 comparable companies finally chosen by the TPO and retained only 3 comparable companies.

The Assessee is aggrieved by not including two comparable companies which it had chosen in its Transfer Pricing Analysis (TP Analysis) viz., C.G.Vak Software & Exports Ltd., and LGS Global Ltd., and has raised Gr.No. 3(j) in its grounds of appeal before the Tribunal. The Assessee is also aggrieved by the inclusion/retention of 3 companies by IT(TP)A.No.156 & 220/Bang/2016 Page 5 of 18 the DRP viz., Persistent Systems & Solutions Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd. The relevant Ground of appeal in Assessee’s grounds of appeal is Ground No.3(k). The Assessee is also aggrieved by the action of the DRP in excluding Evoke Technologies India Pvt. Ltd. and R.S. Systems India Pvt. Ltd. from the list of comparable companies chosen by the TPO. The relevant ground of appeal raised by the Assessee in this regard is Gr.No.3(l). At the time of hearing, the learned counsel submitted that the Assessee’s grievance would be addressed if the aforesaid three grounds are adjudicated and therefore the other grounds of appeal raised by the Assessee need not be adjudicated.

As far as the Revenue is concerned, it is aggrieved by exclusion of some of the companies chosen by the TPO and has raised the following grounds of appeal in this regard:-

The DRP erred in directing the AO to exclude M/s. Tata Elxsi Ltd., from the list of comparables, holding it to be functionally uncomparable, without appreciating the fact that the comparable qualified all the qualitative and quantitative filters applied by the TPO and it is a similar comparable company and moreover, the requirement of law and international jurisprudence require seeking similar comparable companies while searching for comparable companies under TNMM. The DRP has also not appreciated that there have been no projects in visual computing labs during the relevant previous year.

The DRP erred in directing the AO/TPO to exclude M/s. R.S. Software (India) Ltd., from the list of comparables merely to maintain consistency, even in the absence of objection with respect to inclusion of the said comparables in the list.”

We have heard the rival submissions. We shall first take up grounds of appeal of revenue for consideration. Ground Nos.3 & 4 raised by the revenue are with regard to exclusion by the DRP of M/s. Acropetal Technologies Ltd., M/s. Larsen & Toubro Infotech Ltd. and M/s. R.S. Software (India) Ltd. from the list of comparable companies that were chosen by the TPO.

As far as R S Software (I) P. Ltd. is concerned, the revenue has sought its inclusion in ground No.12 also. The assessee has also sought inclusion of this company in ground No.3 (l) of its grounds. This company was not sought to be excluded by the assessee in its appeal before the DRP and accepted the action of the TPO in accepting this company as comparable company. The DRP suo motu applied onsite revenue filter to exclude this company from the list of comparable companies. We are therefore of the view that R S Software (I) P. Ltd should be included in the list of comparable companies. We hold and direct accordingly. Thus, ground Nos.3 to 5 & 12 raised by the revenue stands decided accordingly.

In ground No.6, the revenue has challenged the action of the DRP in excluding E-Infochip Ltd. from the list of comparable companies. This company was excluded for the reason that no segmental information regarding its diverse functions was available and it fails the software services income filter. Besides the above, there were major fluctuation in its profit which were influenced by extraordinary and peculiar circumstances and therefore this company was regarded as not comparable. In the case of Commscope Networks (I) P. Ltd. v. ITO, IT(TP)A No.166 & 181/Bang/2016, order dated 22.02.2017, the Tribunal excluded this company from the list of comparable companies for the identical reasons as are given by the DRP in the present case. We therefore do not find any merit in ground No.6 raised by the revenue.

As far as ground No.7 raised by the revenue is concerned, the same relates to exclusion of ICRA Techno Analytics Ltd. from the list of comparable companies. It is not in dispute before us that in the case of Applied Materials (I) P. Ltd. (supra), this company was regarded as not comparable functionally vide para 17.1 to 17.2 of the said order. In short, it was held by the Tribunal that this company was engaged in diversified activities of software development and consultancy, engineering services, web development and hosting and therefore cannot be regarded as functionally comparable with assessee rendering software development services. It is also not disputed that no segmental information regarding various lines of business is available in the public domain. In view of the above, we find no merit in ground No.7 raised by the revenue.

As far as ground No.8 is concerned, it is with reference to exclusion of E-Zest Solutions Ltd. from the list of comparable companies. As far as this company is concerned, the DRP excluded this company from the list of comparable companies for the reason that it is functionally not comparable with a pure software development services provider such as the assessee as it was engaged in diverse activities. In the case of Commscope Networks (I) P. Ltd. (supra), this Tribunal considered the comparability of this company and vide para 9 of its order, upheld the exclusion of this company, for identical reasons as is given by the DRP as in the present case. We therefore find no merit in ground No.8 raised by the revenue and the same is dismissed.

Ground No.9 by the revenue is challenging exclusion of Infosys Technologies Ltd. from the list of comparable companies. The DRP excluded this company from the list of comparable companies on the IT(TP)A.No.156 & 220/Bang/2016 Page 12 of 18 ground that it is functionally not comparable due to several reasons. In the case of Applied Materials (I) P. Ltd. (supra), this Tribunal considered the comparability of this company with software development service provider such as the assessee. In para 18 of its order, the Tribunal observed that Infosys Technologies Ltd. was a giant in the filed of Information Technology and had a brand value and huge turnover and therefore cannot be compared with the company such as the assessee, who has a turnover of just Rs.9.01 crores. In view of the aforesaid decision of the Tribunal, we find no merit in ground No.9 of the revenue.

As far as ground No.10 is concerned, no specific instance of material differences in the companies excluded by the DRP from that chosen by the TPO has been pointed out and therefore ground No.10 of the revenue has to be regarded as general in nature calling for no adjudication.

As far as ground No.11 is concerned, the revenue is aggrieved by the exclusion of Tata Elxsi Ltd. from the list of comparable companies by the DRP. The DRP excluded tis company from the list of comparables for the reason that it is not functionally comparable. In the case of Applied Materials (I) P. Ltd. (supra), comparability of this company was considered by this Tribunal and vide para 20 of its order, the Tribunal came to the conclusion that this company was engaged in diversified activities of product design services, innovation design, engineering services, virtual computing labs, etc. In view of the aforesaid decision of the Tribunal excluding this company from the list of comparable companies, we find no merit in ground No.11 raised by the revenue.

The grounds that are left for consideration in the assessee’s appeal in the software development services segment is ground No.3(j) in which IT(TP)A.No.156 & 220/Bang/2016 Page 13 of 18 the assessee has aggrieved by non-inclusion of some companies in the list of comparable companies.

At the time of hearing, the ld. counsel for the assessee pressed for adjudication the inclusion of only two companies viz., CG Vak Software & Export Ltd. & LGS Global Ltd. These companies were excluded by the TPO for the reason that the details regarding expenses under the head ‘purchases & personnel cost’ was not available. In the absence of such details, the TPO as well as DRP came to the conclusion that the employee cost filter and its application cannot be decided. Besides the above, the DRP has also come to the conclusion that there are peculiar economic circumstances of foreign currency inflow being less than the export sales. It is the plea of the assessee before us that LGS Global Ltd. ought to be included in the list of comparable companies for the following reasons:-

The ld. counsel for the assessee also brought to our notice the decision of the Tribunal in the case of Applied Materials (I) P. Ltd. (supra) wherein this Tribunal under identical circumstances vide para 13.1 to 13.4 set aside the issue to the AO for fresh consideration with IT(TP)A.No.156 & 220/Bang/2016 Page 14 of 18 a direction to the TPO to seek necessary information regarding employee cost u/s. 133(6) of the Act. Following the aforesaid decision, we remand to the TPO the question of inclusion of this company as a comparable company on the same lines as directed by the Tribunal in the case of Applied Materials (I) P. Ltd. (supra).

As far as CG Vak Software & Export Ltd. is concerned, this company was excluded for the reason that details regarding employee cost was not available and therefore it was not possible to apply the employee cost filter. The contention of the assessee before us is that:-

The assessee has also placed reliance on the order dated 29.09.2016 passed by the TPO in assessee’s own case for the AY 2009- 10. In the aforesaid case for AY 2009-10, the ITAT remanded the issue to the TPO for fresh consideration regarding inclusion of this company after verification of employee cost. In the order giving effect to the order of Tribunal, the TPO has found that the employee cost was more than 25% of the revenue of this company and therefore this company was to be regarded as a comparable company. In our view, it would be just and appropriate to set aside the order of DRP and remand for consideration afresh by the TPO, the employee cost in this year and thereafter decide the comparability of this company in accordance with the law.

In ground No. 3(k), the assessee has prayed for exclusion of all 3 companies which were retained by the DRP in the impugned order. In this IT(TP)A.No.156 & 220/Bang/2016 Page 15 of 18 regard, the ld. counsel for the assessee has brought to our notice that Persistent Systems & Solutions Ltd. was regarded not comparable for the reason that it had diverse functions and segmental details were not available and that it was product company and that there was abnormal increase in turnover due to funding from holding company. These aspects were considered by the Tribunal in the case of Applied Materials (I) P. Ltd. (supra) and vide para 9.2.1 to 9.2.4, the Tribunal regarded this company as not comparable. Persistent Systems Ltd. was also considered as not comparable in the aforesaid order vide same paras referred to above for the reason that it was engaged in diverse activities and in the absence of segmental details, besides holding IPRs.

The other company is Sasken Communication Technologies Ltd. which was retained by the DRP. As far as this company is concerned, the plea of the assessee is that this company is a software product company and segmental details between the software development services and software products is not available. Our attention was drawn to the decision of the Bangalore Bench of the Tri in the case of Applied Materials (I) P. Ltd. (supra) wherein in para 9.3.1 to 9.3.3 this Tribunal came to the conclusion that comparability of this company has to be decided afresh by the TPO after considering the facts as recorded in the decisions rendered by the Tribunal in the case of Electronics for Imaging India P. Ltd. (2017) 85 taxmann.com 124 (Bang.Trib.). We are of the view that similar directions would be appropriate in the present assessment year also. Thus, ground No.3(k) is decided accordingly.

We shall now take up for consideration the dispute with regard to determination of ALP in the Marketing Support Segment. Ground No.2 raised by the revenue in its appeal is with regard to determination of ALP in the sales and marketing support segment. As far as this ground is IT(TP)A.No.156 & 220/Bang/2016 Page 16 of 18 concerned, the TPO had chosen 3 comparable companies and determined the addition to be made towards shortfall of ALP as follows:-

On appeal by the assessee, the DRP excluded ICC International Agencies Ltd. from the list of comparable companies on the ground that information regarding nature of services available in public domain was not sufficient to come to conclusion whether servicing income is also earned by the assessee from sales & marketing activity. The assessee was also earning servicing income and in the absence of that detail, it was not possible to compare this company with the assessee. The revenue is aggrieved by this direction of DRP and has raised ground No.2 before the Tribunal.

After hearing the rival submissions, we find that the said company is not comparable as it is rendering services in the nature of indenting activity (pages 675-676 and 1258-1260 of the paperbook). On a perusal of the same, it is clear that the service rendered by the company is not similar to that of marketing support services provided by the Assessee. The company is engaged in trading activity which is dissimilar to that of the functions carried out by the Assessee. Reliance was placed on the decision of Tribunal in the case of Electronics for Imaging (P.) Ltd. v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib)] at para 16 page 15, wherein in the case of a similar assessee, this company was directed to be excluded. Reliance was also placed on the decision of this Tribunal in Assessee's own case for A.Y 2007-08, wherein the said company was rejected as being functionally not comparable. Since the relevant circumstances leading to its rejection in A.Y 2007-08 continue to prevail in the assessment year under consideration, the company was rightly rejected by the DRP and thus does not require any interference. We therefore do not find any merit in ground No.2 raised by the revenue.

In the result, the appeal by the assessee and revenue are partly allowed.