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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI INTURI RAMA RAO
Per N.V. Vasudevan, Vice President IT(TP)A No.1086/Bang/2013 is an appeal by the revenue, while CO No.159/Bang/2015 is a Cross Objection filed by the assessee. The appeal by the revenue and the CO by the assessee are directed against the order of the CIT(Appeals)-IV, Bengaluru dated 22.04.2013 relating to assessment year 2008-09.
Grounds No.1 to 8 raised by the revenue in its appeal and grounds No.1 to 13 raised by the assessee in its CO are with regard to determination of arm’s length price (ALP) in respect of an international transaction of rendering software development services by the assessee to its AE. The consideration received by the assessee for rendering software development services to its AE was a sum of Rs.47,91,29,509. Since the transaction between the assessee and its AE was an international transaction within the meaning of section 92 of the Income-Tax Act, 1961 [“the Act”], the consideration received by the assessee in the said international transaction has to pass the arm’s length test. To justify the price received in the international transaction as at arm’s length, the assessee filed a transfer pricing study in which it adopted TNMM as the most appropriate method for determination of ALP. The Profit Level Indicator (PLI) chosen for the purpose of comparison was OP to OC. The OP to OC in the software development segment was as follows:-
Description Software Development (Rs.) Operating Revenue (OR) 479579514 Operating Cost (OC)_ 456566084 Operating Profit (OP) 23013430 OP / OC 5%
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 3 of 40
The assessee chose 16 comparable companies whose arithmetic mean of profit margin was 12%. The AO made a reference to the Transfer Pricing Officer (TPO) for determination of ALP in accordance with the provisions of section 92CA of the Act. The TPO rejected the TP study filed by the assessee. The TPO accepted 3 of the comparable companies chosen by the assessee in its TP study and on his own made a search of the database and identified 17 more companies resulting in a set of 20 comparable companies. The average arithmetic mean of the 20 comparable companies chosen by the TPO was as follows:-
Sl. Name of the company OP/TC % No. 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd. 18.72 3 Celestial Biolabs 87.94 4 e-Zest Solutions Ltd. 29.81 5 Flextronics (Aricent) 7.86 6 iGate Global Solution Ltd. 13.99 7 Infosys 40.37 8 KALS Information Systems Ltd. (Seg) 41.94 9 LGS Global Ltd. 27.52 10 Mindtree Ltd. (seg) 16.41 11 Persistent Systems Ltd. 20.31 12 Quintegra Solutions Ltd. 21.74 13 R Systems International (seg.) 15.30 14 R S Software (India) Ltd. 7.41 15 Sasken Communication Technologies Ltd. (seg.) 7.58 16 Tata Elxsi (seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd. 16.50 AVERAGE 23.65
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 4 of 40
After providing for working capital adjustment, the TPO computed the shortfall in the price charged on the basis of arm’s length price and suggested an addition of Rs.5,42,83,208 to the total income of the assessee on account of adjustment u/s. 92CA of the Act. The following was the manner of computation of the addition by the TPO:-
'4.4. Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under:
Arm's Length Mean Margin on cost 23.65% Less: Working Capital Adjustment (as per Annexure-C) 6.72% Adjusted mean margin of the comparables 16.93% Operating Cost 45,65,66,084 Arms Length Price(ALP) 116.93% of Operating Cost 53,38,62,722 Price Received 47,95,79,515 Short fall being adjustment u/s.92CA 5,42,83,208 The above shortfall of Rs.5,42,83,208/- is treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions.”
Aggrieved by the aforesaid addition made consequent to the determination of ALP, the assessee filed appeal before the CIT(Appeals). The CIT(Appeals) excluded 9 out of 20 comparable companies, chosen by the TPO, the details of which are as follows:-
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 5 of 40
Sl. Name of the company Turnover OP/TC No. (Rs.Crore) (%) 1 Celestial Biolabs Ltd. 20.21 87.94 2 Flextronics Ltd. 954.42 7.86 3 iGate Global Solutions Ltd. 781.56 13.99 4 Infosys Technologies Ltd. 15,672.00 40.37 5 Mindtree Consulting Ltd. (segment) 572.97 16.41 6 Persistent Systems Ltd. 383.41 20.31 7 Tata Elxsi Ltd. 342.86 18.97 8 Wipro Limited (segment) 1,955.56 28.45 9 Sasken Communication Tech. Ltd. 335.80 7.58 (segment)
6. Out of the aforesaid 9 companies, Celestial Biolabs Ltd. was excluded for the reason that it had abnormal profits. The remaining 8 companies were excluded for the reason that they had turnover of about 200 crores and in view of their size, they were not comparable with the assessee. The CIT(Appeals) in coming to the aforesaid conclusion on the application of high turnover of comparable company being a reason for excluding companies with high turnover of over Rs.200 crores compared to turnover of the Assessee which was only Rs.48 Crores, the CIT(A) observed that the TPO has on his own applied a filter of excluding companies whose turnover was less than Rs.1 Crores on the ground that these companies did not represent the industry trend as their low cost to sales ratios made their results unreliable. Contrary to this stand the TPO has selected certain companies for comparison, holding that higher turnover does not have a bearing on profitability. The CIT(A) was of the view that contradictory position taken by the TPO was unacceptable. He held that a transaction entered into by a Rs 1,000 crore company cannot be compared with that entered into by a Rs. 10 crore company, as the size of the two companies and the relative economies of scale under which - they operate make a significant difference to their businesses. The CIT(A)
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 6 of 40 placed reliance on the decision of the jurisdictional Bench of the ITAT in the case of Genisys Integrating Systems (India) (P.) Ltd. v. DCIT [20121 53 SOT 159 (Bang) where it has been held that when there is a limit for the lower end for identifying the comparables, there is no reason why there should not be an upper limit also, as size matters in business. He also relied on the ITAT's observation in the above case wherein it was held that while a big company would be in a position to bargain the price, attract more customers and have a broad base of skilled employees who are able to give better output, a small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. He also relied on the decision of Delhi Bench of ITAT in the case of Sony India (P.) Ltd. v. DCIT 120081 114 ITD 448 (Del) wherein it was held that the objection of assessee on inclusion of a comparable when the distinctive differences like size and turnover materially affect performance or prices of products, should be accepted. Reliance was also placed on the decision in the case of Deloitte Consulting India Pvt. Ltd. v. DCIT (ITA No 1082/Hyd/2010) wherein it was held that in the event of use of the TPO's filter of a turnover of less than Rs. 1 crore, it would be appropriate to reject companies having higher sales turnover as well to neutralise the impact of both low and high turnover companies and to provide a more reliable result.
With regard to companies which were loss making or making super profits, he held that such companies should also be excluded, as these losses or profits could be due to other factors.
8. The CIT(Appeals) also excluded M/s. Indus Networks Ltd. as a comparable company. This company was chosen as comparable company by the assessee in its TP study, but was rejected by the TPO as a comparable company for the reason that it fails the filter of employee cost
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 7 of 40 being greater than 25% of the revenue of the assessee. The CIT(Appeals) held that when the ALP is determined using TNMM, cost is not a relevant factor and only the net margin of the tested party has to be considered without looking to the new element of cost. The CIT(A) gave the following reasons for not accepting the aforesaid filter, (i) Employee cost may vary from year to year depending on a variety of factors like competition in the labour and services markets, supply of skilled manpower in the industry as a whole and to the appellant's company in particular, demand for the company's services, the geographic location of the company's clients, the nature of projects undertaken, etc. Thus no particular level of employee cost can be held as a standard or a normal level and companies which are functionally similar may have differing levels of employee costs. (ii) Secondly, in the absence of any general accounting norms governing the disclosure of employee costs in the profit and loss account, some companies may show employee costs as a separate item in their financial statements, while some others may aggregate it under other heads such as administrative expenses, sales and marketing expenses, etc., and yet other companies may classify employee-related expenses like staff welfare, etc., under various operating, administrative, or software development expenses, and not necessarily as personnel expenses. As companies follow different operating models to carry on business, many of them may choose to outsource their services rather than employ their own personnel and the outsourcing costs may be reflected in financial statements as like legal and professional services costs, contract charges, etc. There is no comprehensive and exhaustive way of ensuring that all employee costs are tracked and identified as such. (iii) The ratio of wages to total cost may vary for various reasons like industry or company policy, phase in which a company is currently operating, its business strategy, etc. The ratio may
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 8 of 40 not always have a direct correlation with the nature of business activities or profitability of companies. He also relied on the decision of ITAT Delhi in the case of Mentor Graphics (Noida) Pvt. Ltd's case (2007-TIOL-382-ITAT- DEL), wherein it was held that insisting on low employee cost is not a very credible or rational selection criterion and. as employee cost is low or similar throughout India, this is not a factor which would make a material difference. He was of the view that when TNMM is adopted as the most appropriate method for determination of ALP, only the net margin of the tested party has to be considered relative to an appropriate base (total cost in this case), without looking into individual elements of cost, as all direct and indirect costs of operation are aggregated, irrespective of their classification and composition.
The CIT(Appeals) also held that Avani Cincom Technologies Ltd. and KALS Information Systems Ltd. cannot be taken as a comparable company by following the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software (I) P. Ltd. v. DCIT in and the reason given in the said order of the Tribunal is that both the aforesaid companies were software services company as well as software products company and the segmental details of software services and software products was not available.
The CIT(Appeals) also excluded Bodhtree Consulting Ltd. as a comparable company for the reason that this company was functionally different and was in Information Technology Enable Services (ITeS). He held that this company was engaged in product development, as evidenced by the disclosures available on its website www.bodbtree.com and that the website mentions that the company offers product solutions in the areas of Data Quality, Business Intelligence, and Life sciences to a reputed
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 9 of 40 customer base worldwide and its products include Spend Data Management Solution (SDMS), Multi Industry Data Anomaly Solution (MIDAS), data cleansing and integration software, Patent Asset Management (PAM), and Patent Search and Patent Analysis Tool (PSPAT). He also relied on the reply of this company in response to the notice under section 133(6) issued by the TPO that its services can be categorized as software development and information technology enabled services (ITES), as it provides data cleansing services to its clients. The CIT(A) relied on the CBDT Notification No: SO 890(E), dated 26.09.2000, which specifies as ITES services such as back-office operations, call centres, content development, animation, data processing, engineering and design, geographic information system, human resource, insurance claims processing, legal databases, medical transcription, payroll, remote maintenance, revenue accounting, support centres, and web-site services. Given these facts and in the light of the fact that no break up of segmental revenue was available, the CIT(A) held that this company is functionally different from the Assessee appellant and fails the functionality filter set by the TPO.
Against exclusion of the aforesaid companies and inclusion of Indus Networks Ltd., the revenue has raised ground Nos. 1 to 8 before the Tribunal which reads as follows:-
“1. The order of the Learned CIT (Appeals) in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT(A) erred in erred in excluding M/s. Celestial Biolabs Ltd., M/s. Flextronics Ltd., iGate Global Solutions Ltd., M/s. Infosys Technology Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 10 of 40 Ltd., Tata Elxsi Ltd and Wipro Ltd as comparables holding that the size and turnover of the company are deciding factors for treating a company as a comparable 3. The Ld.CIT(A) erred in rejecting the diminishing revenue filter used 1w the I-130 to exclude companies that do not reflect the normal industry trend.
4. The Ld.CIT(A) erred in not appreciating the fact that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party .
5. The Ld. CIT(A) erred in including M/s. Indus Networks Ltd as a comparable rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services.
The Ld. CIT(A) erred in rejecting the employee cost filter applied by the TPO) to select companies which are predominantly into software development services .
7. The learned CIT (A), on the facts and in the circumstances of the case. erred in holding that M/s. Avani Cimcon Technologies and KA LS Information Systems cannot be taken as comparables.
8. The learned CIT (A). on the facts and in the circumstances of the case. erred in holding that M/s. Bodhtree Consulting Ltd being functionally different. cannot be taken as comparables.”
As far as the assessee’s CO is concerned, grounds No. 1 to 8 raised in the CO are general and no arguments were raised by the ld. counsel for the assessee at the time of hearing and therefore these grounds do not require any adjudication.
In ground Nos. 9 to 13, the assessee has challenged the action of the CIT(Appeals) in accepting the following companies as comparable
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 11 of 40 companies by the CIT(Appeals). Viz., Lucid Software Ltd., Quintegra Solutions Ltd., Thirdware Solutions Ltd. and e-Zest Solutions Ltd. The assessee has also challenged the non-inclusion of Computech International Ltd. as a comparable company. Ground Nos. 9 to 13 raised by the assessee in its CO reads as follows:-
“9. That the decision of the learned CIT(A) is bad in law and on facts while upholding the action of the learned TPO of accepting certain companies (Lucid Software Limited, Quintegra Solution Limited and Thirdware Solutions Limited) that fail the test of comparability, as comparable to the Respondent in respect of its software development services.
10. That the learned TPO erred in accepting e-zest Solutions Limited, which fails the test of comparability, as comparable to the Respondent in respect of its software development services.
11. That the learned CIT(A) ought to have held that certain companies (Flextronics Ltd, Infosys Technologies Ltd, Persistent Systems Ltd, Sasken Communication Tech Ltd, Wipro Limited (Seg) and Tata Elxi Limited) fail the test of comparability, even apart from having a turnover > Rs. 200 crores and thus not comparable to the Respondent in respect of its software development service segment.
12. That the learned CIT(A) ought to have held that Celestial Biolabs Ltd fails the test of comparability, even apart from having abnormally high margin and thus not comparable to the Respondent in respect of its software development service segment.
13. That the learned CIT(A) ought to have held Computech International Limited as a comparable on the rejection of the employee cost filter as applied by the learned TPO.”
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 12 of 40
We have heard the submissions of the ld. counsel for the assessee and the ld. DR on the grounds of appeal in the revenue’s appeal and grounds raised by the assessee in its CO.
15. As far as grounds by the revenue are concerned, the first objection of the ld. DR was that turnover cannot be a relevant criterion in choosing comparable companies and in this regard placed reliance on the decision of the Hon’ble High Court in the case of Chrys Capital Ltd.,82 Taxmann.com 167(Del). Similar objection was raised by the Revenue in one of the case decided by this Tribunal in Autodesk India Pvt.Ltd. Vs. DCIT in IT IT(TP)A Nos. 540 & 541/Bang/2013 order dated …06.2018. The following discussion on the issue of application of turnover filter, would be some relevance. On the various aspects of application of turnover filter, this Tribunal has already pronounced a decision which is as follows:-
“17. The first issue to be decided in Revenue’s appeal is the application of turnover filter for exclusion of companies that are otherwise found to be functionally comparable. The Grievance of the revenue in this regard is projected in Gr.No.2 of the Grounds of appeal raised by the revenue in its appeal. The basic facts to be noticed with regard application of turnover filter are that the Assessee’s turnover for the relevant previous year was Rs.10.65 crores. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the CIT(A) was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 13 of 40 companies. The CIT(A) agreed with the submission of the Assessee and he excluded the following 5 companies whose turnover was above Rs.200 Crores from the list of comparable companies, viz., (i) Flextronics Ltd., (ii) L & T Infotech Ltd., (iii) M/s. Infosys Technologies Ltd., (iv) Satyam Computer Services Ltd., (v) iGate Global Solutions Ltd. The CIT(A) in coming to the above conclusion placed reliance on the decision of the ITAT Bangalore in the case of Genisys Integrating Systems (India) (P) Ltd. Vs. DCIT (2012) 53 SOT 159 (Bang.) wherein it was held when there is a limit for the lower end for identifying the comparable companies, there is no reason why there should not be an upper limit also, as size matters in business. 17.1. The learned DR submitted that high turnover is not a relevant criterion to regard a company as not comparable, so long as the two companies are functionally comparable. If functions by two companies are identical then they have to be regarded as comparable. According to him therefore the CIT(A) was not justified in excluding 5 companies on the ground that their turnover was above Rs.200 Crores and cannot be compared with the Assessee whose turnover was around Rs.10.65 Crores. In support of his contention the learned DR placed reliance on the following decisions: Sl. Name of the case Citation Relevant No. paragraph 1. M/S.NTT DATA IT(TP)A No. 23 & Global Delivery 1487/Bang/2013 AY 2005-06 24 Services Ltd. Vs. order dated 6.4.2016 ACIT 2. LSI Technologies IT(TP)A.Nos. 1380 & 14.3 India Pvt. Ltd. Vs. 1381/Bang/2010, AY 2006-07 The ITO order dated 13.5.2016 2. M/S. Societe IT(TP) A.No.1188/Bang/2011 10 Generale Global for AY 2007-08 order dated Solution Centre 22.4.2016 Pvt.Ltd. Vs. DCIT 5. Willis Processing (2013)30 Tamann.com 350 47 Services (Mumbai-Tribunal) for AY (I) (P)Ltd. Vs. DCIT 2007-08 order dated 1.3.2013 6. Capgemini India for 4.3
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 14 of 40
Pvt. Ltd. Vs. ACIT AY 2007-08 order dated 28.2.2013
17.2. The learned DR also filed before us a note contending that in software industry, size has no influence on the margins earned by an entity. According to him economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. According to him, in software industry, size does not matter, what matters is the human capital. According to him application of the filter of turnover might be justified for excluding companies with low turnover of say Rs.1 crore or less because the margin earned by these companies might widely fluctuate due to narrow capital base and lack of competitive strength, lack of operational efficiencies and also lack of human resources. They also escape the eyes of regulators. He drew our attention to the turnover and profit margins of company Infosys Technologies Ltd. For FY 1997 to 2010 and submitted that in FY 1997 the company had turnover of Rs.139 Crores and its profit margin was 34.95% whereas in FY 2010 its turnover was Rs.21140 crores but its profit margin was only 44.91%. According to him therefore the profit margins hover between 35% and 40% over the period of 15 years and therefore high turnover does not necessarily mean high profit margins. He also gave a chart showing turnover and margin of 20 companies in the IT-BPO industry for three years. According to him the chart would show that for the same range of turnover companies earned different profit margins. Therefore according to him there is no relation between the margins earned and the turnover of a company. According to him software industries operate on the basis of cost plus margin of profits and therefore turnover would be irrelevant and have no impact of the profit margins. His further submission was that under Rule 10B(3) of the Income Tax Rules, 1962 (Rules) it is only functions performed, assets employed and the risks assumed that are relevant criteria for comparison and turnover is not a prescribed criterion for the purpose or comparison. He fairly admitted that there are differences of opinion amongst various benches of the Tribunal on the application of turnover filter and that some Benches have held that IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 15 of 40 high turnover was relevant criteria for excluding comparable companies. His prayer in the alternative was for constitution of a special bench to resolve the conflict. 17.3. Per Contra the learned counsel for the Assessee submitted that ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, considered the various aspects of application of turnover filter for excluding companies and has noted that the first decision rendered on application of this filter was in the case of Genisys Integrating Systems (I)(P) Ltd. Vs. DCIT (2010) 20 taxmann.com 715 rendered on 5.8.2011. In the case of Dell International (supra), the tribunal took note of a divergent view expressed by ITAT Bangalore Bench in the case of Robert Bosch Engineering and Business Solutions Ltd. Vs. DCIT order dated 13.9.2017 after considering the decision rendered by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The Tribunal in the case of Dell International (supra) also took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon’ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): “41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet’s
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 16 of 40 analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- “9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 17 of 40 should be taken into consideration for the purpose of making TP study.”
The Assessee’s turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon’ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference.” 17.4. His submission was that the decision rendered by the Hon’ble Delhi High Court in the case of Chryscapital (supra) was not on the application of turnover filter. He brought to our notice that the relevant substantial question of law in the case of Chryscapital decided by the Hon’ble Delhi High Court was (i) whether comparables can be rejected on the ground that they have exceptionally high profit margins as compared to the Assessee in Transfer Pricing Analysis.(ii) Whether factors like differential functional and risk profile coupled with high degree of volatility in operating profit margins is sufficient ground to reject comparables for transfer pricing analysis. In answering the above question, the Hon’ble Court however at page 218 of the report (the said decision is reported as 376 ITR 183 (del)) observed that the mere circumstance that a company-otherwise confirming to the stipulations in rule 10B(2) of the Rules in all details, presenting a peculiar feature- such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The Court further observed that the Transfer Pricing officer, first, has to be satisfied that such differences do not “materially affect the price …….……… or cost”. Secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. According to him therefore the observations of the Hon’ble Delhi High Court in so far as it relates to application of turnover filter are IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 18 of 40
obiter dictum. Obiter dictum though is entitled to a weight cannot be equated with ratio decidendi of a case. In support of his contention as above, he relied on the decision of the Hon’ble Supreme Court in the case of Director of Settlements A.P. and others Vs. M.R. Apparao and another (2002) 4 SCC 638. Countering the submission of the learned DR that the decision of the Hon’ble Bombay High Court rendered in the case of Pentair (supra) is not ratio decidendi as it was merely dismissal of appeal u/s.260A of the Act on the ground that no substantial question of law arose for consideration, learned counsel drew our attention to the decision of the Bombay High Court in the case of Pentair (supra) paragraph 9, wherein the Hon’ble Bombay High Court after referring to a decision of the Hon’ble Delhi High Court rendered in the case of CIT Vs. Agnity India Technologies (P) Ltd. (2013) 36 taxmann.com 289 (Delhi), clearly observed that turnover is obviously a relevant fact to consider the comparability. Our attention was also drawn to paragraph-3 of the decision rendered in the case of Pentair (supra) wherein the department specifically contended that the Tribunal erred in holding that size and turnover of a company are deciding factors for treating a company as comparable. According to him therefore it was not a case of merely dismissal of appeal u/s.260A of the Act as unadmitted on the ground that no substantial question of law arose for consideration but was precedent in so far as the Hon’ble Court has expressed a clear opinion on the issue. 17.5. The learned counsel for the Assessee also drew our attention to a decision of the Hon’ble Delhi High Court rendered in the case of PCIT Vs. New River Software Services (P) Ltd. In order dated 22.8.2017 wherein the Hon’ble Delhi High Court followed the decision of the Hon’ble Bombay High Court rendered in the case of Pentair (supra) and held that Infosys BPO was rightly excluded as not being a comparable company. Our attention was also drawn by him to a decision of the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Mercer Consulting (I) (P) Ltd. (2016) 76 Taxmann.com 153 (Punjab & Haryana) wherein the Hon’ble Court held that a giant company cannot be compared with a company which was a captive service provided assuming limited risks.
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 19 of 40
17.6. As far as the decisions of the Tribunal rendered on the application of turnover filter that are contrary to the decision rendered in the case of M/s. Genisys Integrating Systems (supra), the first submission of the learned counsel for the Assessee was that those decisions were rendered at a later point of time and were to be regarded as per incurium since these decisions were also rendered by a bench of equal strength and either the subsequent decisions refused to follow or were rendered in ignorance of an earlier binding precedent. He submitted that if a bench of equal strength differs with a view taken earlier, the proper course for them is to make a reference to larger bench. They cannot refuse to follow a binding decision. If they do so, the decisions so rendered have to be regarded as per incurium. Even if they are rendered in ignorance of the earlier binding precedent, they have to be regarded as per incurium. In this regard the learned counsel for the Assessee placed reliance on the decisions of Hon’ble Supreme Court in the case of Union of India Vs. Raghubir Singh AIR 1989 SC 1933, Union of India Vs. S.K. Kapoor (2011) 4 SCC 589 and Sundeep Kumar Bafna Vs. State of Maharashtra and another (2014) 16 SCC 623. In the aforesaid decisions the Hon’ble Supreme Court held that in a situation where there are conflicting decisions of High Court on an issue which are irreconcileable and pronounced by judges of co-equal strength, then the earlier view has to be followed as the later decision has to be regarded as per incuriam. The Hon’ble Supreme Court in the case of Sundeep Kumar Bafna Vs. State of Maharashtra & another (2014) 16 SCC 623 (at page-642 (Para-19) held that a decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench and when High Courts encounter two or more mutually irreconcilable decisions of the Supreme Court cited at the Bar, the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam. The following were the relevant observations of the Hon’ble Supreme Court: “19. It cannot be over-emphasised that the discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule is of great importance, since without it,
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 20 of 40 certainty of law, consistency of rulings and comity of Courts would become a costly casualty. A decision or judgment can be per incuriam any provision in a statute, rule or regulation, which was not brought to the notice of the Court. A decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench; or if the decision of a High Court is not in consonance with the views of this Court. It must immediately be clarified that the per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam.” It was therefore submitted by him that the earliest view rendered by the ITAT Bangalore Bench in the case of Genisys Integrating (supra) should be followed. 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 21 of 40 available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 22 of 40 relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).”
16. Following the aforesaid decision of the Tribunal, we uphold the order of the CIT(A) excluding companies by application of turnover filter. We also observe that the TPO has himself applied lower turnover filter of excluding companies with turnover of less than Rs.1 Crore and in such circumstances, there is no reason as to why he should not apply the higher turnover limit. For the reasons given above, we uphold the order of the CIT(A).
The next issue to be considered is exclusion of Celestial Biolabs Ltd. The only reason given by the CIT(Appeals) for excluding this company is that the profit margins are very abnormal. This by itself cannot be a ground to exclude a company which is otherwise functionally comparable, unless there are extra-ordinary events that has taken place during the relevant accounting period which has resulted in the abnormal profits. On exclusion of this company, in the CO the assessee has in ground No.12 submitted that comparability of this company fails on other parameters also. Since this aspect has not been considered by the CIT(Appeals) though submissions were made by the assessee in this regard before CIT(A), we deem it fit and appropriate to remand the issue to the CIT(Appeals) to consider the comparability of this company on other parameters.
As far as inclusion of Indus Networks Ltd. is concerned, the ld. DR has filed before us a decision of ITAT Bangalore Bench in the case of DCIT v. Misys Software Solutions (I) P. Ltd. (2017) 87 taxmann.com 170 (Bang.
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 23 of 40 Trib.) wherein the Tribunal took the view that companies having less than 25% employee cost cannot be considered as a good comparable to software development service provider. In view of the aforesaid decision, we are of the view that Indus Networks Ltd. cannot be regarded as a comparable as it fails the employee cost filter. The reasons given by the CIT(A) for not applying this filter are general and no instances of specific distortion of real employee cost in the comparable companies have been brought out. Ground Nos. 5 & 6 raised by the revenue are accordingly allowed, while ground No.2 raised by the revenue is partly allowed.
Ground Nos.3 & 4 raised by the revenue do not require any adjudication as by application of the filters referred to in those grounds, none of the companies were excluded or included by the CIT(Appeals).
Ground No.7 raised by the is with regard to exclusion of comparable M/s. Avani Cincom Technologies and KALS Information Systems Ltd. These companies have been excluded by the CIT(Appeals) by following the decision of Tribunal in the case of Trilogy e-business Software (I) P. Ltd. (supra). These companies were found to be engaged in both the software development and software products and segmental details of these companies were not available. We therefore uphold the order of CIT(Appeals) in this regard.
In ground No.8 raised by the revenue, the challenge is to the exclusion of Bodhtree Consulting Ltd. from the list of comparable companies. It is clear from a reading of para 128 of the CIT(Appeals) order that this company in its reply to the TPO u/s. 133(6) of the Act has accepted that it is in ITeS and software development. In view of the above,
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 24 of 40 we find no infirmity in the conclusions of CIT(Appeals) and ground No.8 raised by the revenue is dismissed.
Ground Nos.9 to 12 raised by the revenue reads as follows:-
“9. The CIT (A) erred in directing the AO to recompute the deduction allowable u/s 10A of the 1. T. Act after reducing the telecommunication expenses of Rs. 67,67,964/- and foreign currency expenses amounting to Rs. 2.38.00.502- from the total turnover also.
10. The learned CIT(A) erred in not appreciating the fact that there is no pros Hon in section 10A which requires the concerned expenses: which are required to be reduced from the export turnover as per clause (iv) of the Explanation to section 10A, to be reduced from the total turnover also.
12. The Ld. CIT(A) erred in not appreciating the fact that the jurisdictional High Court decision relied upon by him has not been accepted by the department and a SLP has been filed before Hon'ble Supreme Court.”
The issue raised in the aforesaid grounds of appeal
is with regard to telecommunication expenses and foreign currency expenses reduced from the total turnover without reducing the same from the export turnover. The decision of the Hon’ble High Court of Karnataka in the case of Tata Elxsi Ltd. 249 ITR
50. (Karn.) on this issue holding that whatever is excluded from the total turnover while computing deduction u/s. 10A of the Act has since been confirmed by the Hon’ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 & Ors. dated 24.04.2018. In view of the above, there is no merit in ground Nos. 9 to 12 raised by the revenue.
Thus, the appeal by the revenue is dismissed.
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As far as CO by the assessee is concerned, we have already held that ground Nos.1 to 8 are general in nature and calls for no adjudication.
Ground No.9 raised by the assessee in its CO is with regard to exclusion of Lucid Software Ltd., Quintegra Solutions Ltd. and Thirdware Solutions Ltd. As far as these companies are concerned, the CIT(Appeals) did not agree with the plea of the assessee for exclusion of these companies for the following reasons:-
“(i) M/s. Lucid Software Ltd. The Assessee had pleaded for exclusion of this company on the ground that this company was functionally different as this company was a product company focusing on Advanced Non destructive Testing (NDT) Technologies and that it was actively involved in R&D activities with leading scientific and educational institutions and that the annual report of the company showed that it had been claiming depreciation on the software products developed by it and was amortising the expenses incurred on product development. In the search strategy adopted by the Assessee, in the TP documentation, all companies which were incurring advertising, marketing, and distribution expenses of more than 3% of their total sales had been eliminated in order to select comparables which did not hold marketing intangibles. It was the plea of the Assessee that Lucid had incurred selling, marketing, and distribution expenses to the tune of Rs. 12.11 lakh, which constituted 5.95% of its total sales, which clearly established that Lucid had invested amounts in brand building and marketing which made it incomparable to the appellant. These arguments were rejected by the CIT(A) as follows: “134. I am unable to agree with the appellant's contentions. The company's total turnover for FY 2007-08 was Rs. 2,34,71,583 and total cost was Rs. 2,01,46,551. Schedule-E to the balance sheet shows that of the total cost, the company spent Rs. 11,41,177 or 6% on product development, which is not abnormally high. It is clear
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 26 of 40 from the Schedule that the expenditure amortised at Rs. 24,47,822 was out of the cumulative expenditure of Rs. 58,55,960 not pertaining to this year alone, leaving an unamortised expenditure of Rs. 34,08,138. These figures cannot lead one to the conclusion that the company is functionally different from the appellant.
Secondly, the TPO has not accepted the selling, marketing, and distribution expenses filter adopted by the appellant and I find no explanation or rationale for either the filter or the 3% threshold the appellant has adopted. Moreover, a 5.95% expenditure on sales, marketing, and distribution, does not mean that the company is incomparable to the appellant and it is not the TPO's case that it was a captive service provider like the appellant. In these facts and circumstances, I uphold the selection of this company by the TPO as a comparable.” (ii) M/s. Quintegra Solution Ltd. The Plea of the Assessee for exclusion of this company was that this company undertook research and development activity, as reflected in its Annual Report for the year ended 31.03.2008. The annual report showed that R&D expenditure was 3.80% of sales and the company failed the R&D filter applied by the appellant. Another argument advanced was that this company was into a niche area of Information Technology as against the appellant, which provided only routine software development services involving low level coding, testing and documentation. These arguments were rebutted by the CIT(A) by holding that this company in response to the notice by the TPO under section 133(6) replied that it was into software development services. The CIT(A) also held that the 3% R&D filter sought to be used by the Assessee cannot be accepted. The CIT(A) also held that there is no scope to differentiate between high-end and low-end services within the same segment of business.
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 27 of 40 (vii) M/s Thirdware Solutions Ltd. The Assessee had objected to the selection of M/s Thirdware Solutions Ltd. on the ground that it was functionally different and the company earned revenue by rendering software development services, sale of user licences for software applications, and sale of investments. It had not provided segmental information in its annual report and therefore, considering it as a comparable would not be appropriate. This plea was rejected by the CIT(A) on the ground that revenue from sale of licences was a mere Rs. 39,16,427, which was less than 1% of the total revenue. The CIT(A) also held that there was no basis to say that sale of software licences or of investment was the primary activity of the company or that it is functionally different from the Assessee.
The ld. counsel for the assessee, brought to our notice the decision of ITAT Bangalore Bench in the case of SAP Labs (I) P. Ltd. v. ACIT for AY 2008-09 in order dated 06.04.2008, wherein these three companies viz., Lucid Software Ltd., Quintegra Solutions Ltd., and Thirdware Solutions Ltd., were excluded from the list of comparable companies in the case of a software development service provider such as the assessee. Following were the relevant observations of the Tribunal:-
“48.3 We have heard the rival submissions and perused the material on record. The comparability of Lucid Software Ltd. had come up for consideration before co-ordinate bench of this Tribunal in the case of M/s. Hewlett-Packard (India) Software Operation P. Ltd. (supra). The relevant portion is extracted hereunder: 11. Lucid Software Ltd. 11.1 This company was selected as a comparable by the TPO. Before the DRP, the assessee objected to the inclusion of this company in the list of comparables but the DRP retained this company as a comparable on the ground that it is a pure software
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 28 of 40 development services provider and does not have any revenue’s by way of sale of products/licenses. 11.2 Before us also, the assessee objected to the inclusion of this company as a comparable on the grounds that it is into software product development and is therefore functionally different from the assessee in the case on hand. In this context, the learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for assessment year 2008-0-9 has omitted this company from the list of comparables on the ground that it is into development of software products and therefore is functionally different from provider of software development services. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable. 11.4.1 We have heard the rival submissions and perused and carefully considered the material on record; including the decision relied on by the assessee. We find that the co-ordinate Bench in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for assessment year 2008-09 excluded this company from the list of comparables observing that this company, being into development of a software products, is functionally different from a provider of software development services, as is the assessee’s in the case on hand and therefore ought to be excluded from the list of comparables. At para 16.3 of this order the co-ordinate bench held as under:- “16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd.
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 29 of 40 (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 11.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment year 2008-09, we direct the Assessing Officer/TPO to exclude this company from the list of comparables in the case on hand. Respectfully following the ratio of the decision of the co-ordinate bench in the case of M/s. Hewlett-Packard (India) Software Operation P. Ltd. (supra) we direct the AO/TPO to exclude Lucid Software Ltd from the list of comparables. Quintegra Solutions Ltd.
This company was selected by the TPO, but contested by the assessee-company before the TPO on the ground that the company is having peculiar economic circumstances and as an extraordinary event of acquisition of another company. 43.1 On appeal, the ld.CIT(A) deleted this company from the list of comparables by applying turnover filter of range of Rs.200 crores to Rs.2000 crores. Being aggrieved by this revenue was in appeal before us in IT(TP)A No.1070/Bang/2013 wherein we held that turnover is not an appropriate filter.
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43.2 Hence, the assessee-company is challenging the inclusion of this company on the ground that this company on the ground that the company provides a full range of custom high end IT solutions such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies. During the year under consideration, the company has developed certain proprietary products portfolio and acquired copy rights for the same in Flexible Home Building (HBfx), Hospital Management and Information System (HMIS) in healthcare and EduCampus in Education verticals as products. During the year, the company made a key strategic acquisition of PA Corporation Inc. ('PAC'), a US-based information technology corporation providing a broad range of services. PAC has core competencies in high-end IT consulting and leadership in middle space IT services, enabling Quintegra to leverage across multiple points in the value chain. Reliance in this regard was placed on the decision of the coordinate bench of Tribunal in the case of M/s.Hewlett-Packard (India) Software Operation P.Ltd. vs. Asst.CIT in IT(TP)A No.1682/Bang/2012 dated 26/08/2015. 43.4 We heard rival submissions and perused the material on record. The comparability of Quintegra Solutions Ltd. had come up for consideration before co-ordinate bench of this Tribunal in the case of M/s.Hewlett-Packard (India) Software Operation P.Ltd (supra). The relevant portion is extracted hereunder: "26. Vis-a-vis M/s. Quintegra Solutions Ltd, findings of this coordinate bench in the case of M/s. Broadcom Communications Technologies P. Ltd (supra), appears at para 13 which is reproduced hereunder : 13. Quintegra Solutions Ltd. 13.1 This company was selected as a comparable by the TPO inspite of the objection of the assessee to its inclusion in the list of comparables on the ground that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied.
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13.2 Before us, the assessee objected to the inclusion of this company as a comparable on the ground that it is functionally different as it is engaged in product engineering services and not in software development services. It was also submitted that this company was engaged in developing proprietary software products and has IPR's and is functionally different from a provider of software development services, as is the assessee in the case on hand. In support of its contentions, the assessee relied on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 where it was held that this company was to be omitted from the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the orders of the authorities in including this company in the list of comparables. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company, being engaged in product engineering services, having substantial R&D activity resulting in the creation of proprietary software products and IPR's, is functionally different from a mere provider of software development services is to be omitted from the set of comparables; observing as under at paras 18.3.1 to 18.3.3 of the order:- ‘18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 32 of 40 trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3 .3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider.- 13.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of 3DPLIVI Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand. Respectfully following the ratio of the decision of the co-ordinate bench in the case of M/s.Hewlett-Packard (India) Software Operation P.Ltd (supra) we direct the AO/TPO to exclude Quintegra Solutions Ltd. from the list of comparables.”
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 33 of 40 “Thidware Solutions Ltd.
This company was selected by the TPO, but contested by the assessee-company before the TPO on the ground that it its turnover is more than Rs.,500 crores. 45.1 On appeal, the Id.CIT(A) deleted this company from the list of comparables by applying turnover filter of range of Rs.200 crores to Rs.2000 crores. Being aggrieved by this revenue was in appeal before us in IT(TP)A No.1070/Bang/2013 wherein we held that turnover is not an appropriate filter. 45.2 Hence, the assessee-company is challenging the inclusion of this company on the ground that this company on the ground that the company is engaged in implementation and consulting services of software based on ERP and Business Intelligence. M/s.Thirdware also earns revenues from sale of user licenses and subscription. Software development services rendered by the company comprise of implementation and consulting services of developed and traded software. There are no segmentals for software development services and product development services and the financials indicate that the production and sale of developed and traded software cannot be expressed in any generic unit and therefore, segmental data is not available. Reliance in this regard was placed on the decision of the co-ordinate bench of Tribunal in the case of M/s.Hewlett-Packard (India) Software Operation P.Ltd. vs. Asst.CIT in IT(TP)A No.1682/Bang/2012 dated 26/08/2015. 45.3 We heard rival submissions and perused the material on record. The comparability of Thirdware Solutions Ltd. had come up for consideration before co-ordinate bench of this Tribunal in the case of M/s.Hewlett-Packard (India) Software Operation P.Ltd (supra). The relevant portion is extracted hereunder: "28. Vis-a-vis M/s. Thirdware Solutions Ltd, findings of this coordinate bench in the case of M/s. Broadcom Communications Technologies P. Ltd (supra), appears at para 16 which is reproduced hereunder :
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Thirdware Solutions Ltd. 16.1 This company was included in the list of comparables despite the objections of the assessee to its inclusion in the list of comparables on the ground that its turnover was in excess of Rs.500 Crores. 16.2 Before us, the assessee objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development, trading in software, giving licenses for use of software and that segmental details are not available. It was also submitted that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) in its order for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables for providers of software development services. 16.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables. 16.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied upon. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 had held that since this company is engaged in product development and earns revenue from sale of licenses it is to be omitted from the list of comparables for software development services, holding as under at para 15.3 of the order: 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 35 of 40
pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand." 16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand." Respectfully following the ratio of the decision of the co-ordinate bench in the case of M/s.Hewlett-Packard (India) Software Operation P.Ltd (supra) we direct the AO/TPO to exclude Thirdware Solutions Ltd., from the list of comparables.”
Following the decisions of the Tribunal referred to above, we hold that the above said 3 companies should be excluded from the list of comparable companies.
As far as ground No.10 raised by the assessee in the CO is concerned, the same relates to exclusion of e-Zest Solutions Ltd. Again in the case of SAP Labs. (I) P. Ltd. (supra), this Tribunal has held that this company has to be excluded form the list of comparable companies with the following observations:-
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“E-Zest Solutions Ltd.: 38. This company was selected by the TPO, but contested by the assessee-company before the TPO on the ground that it functionally different. 38.1 On appeal, the Id.CIT(A) deleted this company from the list of comparables by applying turnover filter of range of Rs.200 crores to Rs.2000 crores. Being aggrieved by this revenue was in appeal before us in IT(TP)A No.1070/Bang/2013 wherein we held that turnover is not an appropriate filter. 38.2 Hence, the assessee-company is challenging the inclusion of this company on the ground that this company on the ground that the company is into diversified activities such as outsourced product engineering, product development, technology consulting, business consulting which are normally regarded as high-end ITES services. The services fall under the category of KPO services. Therefore, should be excluded. Further, no segmental data is provided in the annual report of the company for the year under consideration. Reliance in this regard was placed on the decision of the co-ordinate bench of Tribunal in the case of M/s. Hewlett-Packard (India) Software Operation P. Ltd. vs. Asst.CIT in IT(TP)A No.1682/Bang/2012 dated 26/08/2015. 38.3 We heard rival submissions and perused the material on record. The comparability of M/s.E-Zest Solutions Ltd., had come up for consideration before co-ordinate bench of this Tribunal in the case of M/s. Hewlett-Packard (India) Software Operation P.Ltd (supra). The relevant portion is extracted hereunder: "22. Vis-a-vis M/s. e-Zest Solutions Ltd, findings of this coordinate bench in the case of M/s. Broadcom Communications Technologies P. Ltd (supra), appears at para 8 which is reproduced hereunder :
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e-Zest Solutions Ltd. 8.1 This company was selected by the TPO as a comparable inspite of the assessee's objections to its inclusion as a comparable on the ground that it was functionally different from the assessee. The TPO rejected the assessee's objections on the ground that as per the information received under Section 133(6) of the Act this company is engaged in software development services and qualifies all the filters applied. 8.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It was submitted that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for A.Y. 2008¬09, has held that this company is to be excluded from the list of comparables to a provider of software development services as it is rendering product development services and high and technical services which come under the category of KPO services. 8.3 Per contra, the learned Departmental Representative supported the order of the TPO including this company in the list of comparables. 8.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co¬ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables to a provider of software development services as it is into product development services and high end technical services which come under the category of KPO Services; holding as under at para 14.4 thereof:- 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to notice under section 133(6) of the Act. It appears that the TPO
IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Page 38 of 40 has not examined the services rendered by the company to give a finding whether the services performed-by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed." 8.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer / TPO to omit this company from the list of comparables in the case on hand." Respectfully following the ratio of the decision of the co-ordinate bench in the case of M/s.Hewlett-Packard (India) Software Operation P.Ltd (supra) we direct the AO/TPO to exclude E-Zest Solutions Ltd., from the list of comparables.”
Following the aforesaid decision of the Tribunal, we direct exclusion of e-Zest Solutions Ltd.
Ground No.11 becomes academic in view of the exclusion of the company stated in the said ground by application of turnover filter.
Ground No.12 in the CO has already been set aside for reconsideration by the CIT(Appeals).
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As far as ground No.13 in CO is concerned, the same relates to rejection of employee cost filter by the CIT(Appeals) and consequent exclusion of Computech International Ltd. by the CIT(Appeals) from the list of comparable companies.
We have already held that employee cost filter of more than 25% of the revenue is a valid filter. Following the aforesaid view, we are of the view that inclusion of this company should be directed to be considered afresh by the CIT(Appeals) and if the assessee satisfies this filter and otherwise found to be functionally comparable and not excludible on applying other filters, then this company be adopted as a comparable. It is directed accordingly.
Ground No.14 raised in the CO is with regard to disallowance of software expenses on the ground that while making payment for use of software, no tax was deducted at source. We find no merits in this ground raised by the assessee in view of the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Ltd. 320 ITR 209(Karn.) wherein it was held that payments made for right to use software was payment in the nature of royalty and therefore there was obligation to deduct tax at source while making payment for such use and that the disallowance u/s.40(a)(ia) of the act for non deduction of tax at source was proper. Consequently the disallowance of expenses is upheld.
Accordingly, the CO by the assessee is partly allowed.
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In the result, the appeal by the revenue is partly allowed and the CO by the assessee is also partly allowed.
Pronounced in the open court on this 16th day of November, 2018.