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Income Tax Appellate Tribunal, BENGALURU BENCH B, BENGALURU
Before: SHRI. JASON P. BOAZ
PER LALIET KUMAR, JUDICIAL MEMBER :
The present appeal is filed by the assessee against the final assessment order u/s.143(3) r.w.s. 144C(13) of the Act, passed by the ITO, Ward -2(1)(1), Bangalore, dt.29.08.2017, in pursuance to the directions of the DRP, for the assessment year 2013-14, on various grounds mentioned in the grounds of appeal and additional grounds of appeal.
IT(TP)A.1981/Bang/2017 Page - 2
The Ld. AR for the assessee during the course of argument has submitted that the assessee is not pressing ground nos.1, 2, 5, 7, 9, 10 of the grounds of appeal and grounds 5.1 and 5.1.2 of the additional grounds. Therefore after excluding these grounds, the effective grounds Ground no.3, 4, 6, 8, Additional ground no.3.1, 4.1 (a), (c), (g), (j) and ground no.6.1 raised by the assessee are reproduced hereunder :
Additional grounds :
IT(TP)A.1981/Bang/2017 Page - 3 a) Akshay Software Technologies Ltd, c) Evoke Technologies Ltd, g) Sankhya Infotech Ltd, j) R System International Ltd
Assessee is engaged in the provision of software development services to its associated enterprises. It is the case of the assessee that it acts as a captive service provider and is remunerated by its AEs on a cost plus basis.
As per TP order during the Financial Year (‘FY’) 2012-13, Assessee has entered into the following international transactions with its Associated Enterprises (‘AEs’):
IT(TP)A.1981/Bang/2017 Page - 4
International Transactions Value (INR) Purchase of Software Development services 527,130,186 Reimbursement of expenses paid 21,974,895
The assessee has selected the following comparables in its TP study and has worked out the OP/OC margins of Assesseestood at 12.09% (considering foreign exchange as non operating item) as against 7.03% of comparable companies. SI. Company Name No. Helios & Matheson Information 1 Technology Ltd. 2 Mindtree Ltd. 3 Evoke Technologies Ltd. 4 R S Software (India) Limited 5 Cat Technologies Ltd. 6 Akshay Software Technologies Ltd. 7 Maveric Systems Ltd. 8 Silverline Technologies Ltd. 9 Acropetal Technologies Ltd. 10 Cigniti Technologies
The TPO was not satisfied with the TP study of the assessee and has therefore applied the following filter for the purpose of examining the TP study and for the purpose of ringing suitable comparable SI. Filters Applied by the TPO No. 1 Use of current year data 2 Companies having different financial year ending (i.e. not March 31, 2013) or data of the company which does not fall within 12 month period i.e. 01-04-2012 to 31-03-2013, were rejected 3 Companies whose service income < Rs. 1 crore were excluded IT(TP)A.1981/Bang/2017 Page - 5 SI. Filters Applied by the TPO No. 4 Companies whose software development service is less than 75% of the total operating revenues were excluded 5 Companies who have more than 25% Related Party Transactions of the sales were excluded 6 Companies who have export service income less than 75% of the sales were excluded 7 Companies with employee cost less than 25% of turnover were excluded
After applying the aove said filter and examining the TP study, the TPO has suggested the selection of the following comparable companies which are comparable with the profile of the assessee. Sl. Company Name Unadjusted No. OP/OC 1 CG-VAK Software & Exports Ltd. 20.54% 2 ICRA Techno Analytics Ltd. 17.10% 3 Larsen & Toubro Infotech Ltd. 26.06% 4 Mindtree Ltd. (Seg.) 18.19% 5 Persistent Systems Ltd. 28.27% 6 R S Software (India) Ltd. 17.41% 7 Tech Mahindra Ltd. (Seg.) 18.72% AVERAGE 20.90% The TPO further allowed working capital adjustment and accordingly computed arm’s length OP/OC at 18.15%.
Finally the TPO has computed the ALP of the assessee and has suggested the following adjustment u/s.92C of the Act :
IT(TP)A.1981/Bang/2017 Page - 6
Description Amount (INR) Arm’s Length Mean Margin on 20.90% cost Less. Working Capital -2.75% Adjustment Adjusted Margin 18.15% Operating Cost 473,315,113 Arm’s Length Price (ALP) 559,200,483 Price Received 527,130,186 Variation in Price 32,070,297 3% of Price received 15,813,906 Shortfall being adjustment u/s 32,070,297 92CA Proceedings before the Dispute Resolution Panel (‘DRP’) :
Feeling aggrieved by the TP order, the Assessee filed an appeal before the DRP raising objections regarding the adjustments proposed in the TP Order.
The DRP in its final direction had excluded Persistent Systems Ltd. on account of Significant R & D expenses and strong IP portfolio. Further the DRP has excluded ICRA Techno Analytics Ltd. - Absence of segmental information. The TP adjustment post the DRP Directions was re-worked and a Final Assessment Order was passed wherein the total adjustment stood at Rs.34,096,113/-. After the DRP direction the final set of comparables remained were as under :
Sl. Company Name OP/OC No. 1 CG-VAK Software & Exports Ltd. 20.54% 2 Larsen & Toubro Infotech Ltd. 26.06% IT(TP)A.1981/Bang/2017 Page - 7
Sl. Company Name OP/OC No. 3 Mindtree Ltd. (Seg.) 18.19% 4 R S Software (India) Ltd. 17.41% Average 20.55% Less: Working Capital Adjustment -1.98% Working Capital adjusted Margin 18.57%
Aggrieved by the order of the DRP the Assessee filed the present appeal before us on various grounds. However during the course of argument the assessee has restricted to the grounds of appeal reproduced above. We may mention here that the assessee had filed an application for additional Rule 11 of the ITAT Rules and sought admission of the additional grounds. In this regard, we observe that the additional grounds raised before us are having the factual basis and foundation before the lower authorities and no additional document is required to be considered. The order passed by the DRP / TPO had considered the inclusion / exclusion of various comparables sought in the additional ground and further the other grounds were also considered by the lower authorities at the time of passing of the orders. In view of the above and also in view of the decision in the matter of DCIT v. Quark Systems of the Hon’ble Punjab and Haryana High Court, we allow the additional grounds raised before us. Further at the outset, the Ld. AR has restricted his argument in respect of the additional ground no.3.1, 4.1 (4 comparables only) and 6.1
12. The assessee has sought exclusion of Larsen & Toubro Infotech Limited (L & T Infotech) on the ground that this company IT(TP)A.1981/Bang/2017 Page - 8 is functionally dissimilar to the assessee and is having presence of intangible. Further it has its own brand value and the segmental information is not available. In Notes to argument, the Ld. AR for the assessee has submitted as under : a) Functionally dissimilar
- L&T Infotech is engaged in diversified business. reorganised its business into three clusters namely Service cluster (comprising banking, financial services and insurance, media & entertainment and travel & logistics), Industrial Cluster comprising all manufacturing sectors and Telecom which related to product engineering services. - It is engaged in the the development of software product like “Unitrax” and “Accurusi”.
Reliance is placed on the ruling of Hon’ble High Court (Andhra Pradesh) Intoto Software India Pvt. Limited [TS-337-HC-2014(AP)-TP] (Supra) wherein it has been held that a software product company cannot be compared with a software development company.
Particulars L & T Infotech Ltd. Capco India Operate as full-fledged risk taking entrepreneur having subsidiaries, Operate at limited Risk Profile Joint ventures and Investments in risk other financial instruments. Operates in very diversified operations and service segments like Analytics & Information Management, Applications Management, Assurance Services, Captive services Cloud Apps, Cloud, Security & Nature of provider of software Infrastructure Services, Consulting, services development Enterprise Integration, services Geographical Information System (GIS), Internet of Things, Manufacturing Execution Systems, Maximo, Microsoft Dynamics, Open Source Technologies, Oracle, IT(TP)A.1981/Bang/2017 Page - 9 Particulars L & T Infotech Ltd. Capco India Operate as full-fledged risk taking entrepreneur having subsidiaries, Operate at limited Risk Profile Joint ventures and Investments in risk other financial instruments. Organizational Change Management, SAP, Smart Devices & Channels, System Integration etc. Revenue INR 3,613 crores INR 52.71 crores The Assessee is a captive service Ownership provider and does of branded / Develops/owns proprietary products not have any brand proprietary and services. name, Intellectual products Property (IP) or intangibles. Other Economies of scale NA Investments (including INR 401.92 Cr. INR 0.00Cr 100% subsidiaries) Intangibles INR 63.72 Cr INR 0.00 Cr. No resale of L & T also involved in resale of products, only software products and during FY Other operates as a 2012-13 cost of bought out goods captive service were INR 27.10 Cr provider. b) Scale of operations - The total operating income of L&T Infotech is 3613.42 crores. It is 68 times more than the turnover of the Assessee which clearly indicates that L&T Infotech has larger scale of operations. c) Presence of intangibles - L&T Infotech has intangibles worth INR 637,290,322 during FY 2012-13.
IT(TP)A.1981/Bang/2017 IT(TP)A.1981/Bang/2017 Page - 10 d) L&T Infotech is conscious about brand building T Infotech is conscious about brand building e) Segmental information not available Segmental information not available The segmental breakup of revenue attributable to software product The segmental breakup of revenue attributable to software product The segmental breakup of revenue attributable to software product segment and software services segment is not available. The Company segment and software services segment is not available. The Company segment and software services segment is not available. The Company has reorganised its business into 3 has reorganised its business into 3 segments. Services Cluster includes segments. Services Cluster includes Banking, Financial services, Insurance, Media & Entertainment, Travel Banking, Financial services, Insurance, Media & Entertainment, Travel Banking, Financial services, Insurance, Media & Entertainment, Travel & Logistics and Healthcare. Industrials Cluster includes Hi Tech and & Logistics and Healthcare. Industrials Cluster includes Hi Tech and & Logistics and Healthcare. Industrials Cluster includes Hi Tech and Consumer Electronics, Consumer, Retail & Pharma, Energy & Process, Consumer Electronics, Consumer, Retail & Pharma, Energy & Process, Consumer Electronics, Consumer, Retail & Pharma, Energy & Process, Automobile & Aerospace, Plant Equipment & Industrial Machinery, Aerospace, Plant Equipment & Industrial Machinery, Aerospace, Plant Equipment & Industrial Machinery, Utilities and E&C. Telecom segment refers to Product Engineering Utilities and E&C. Telecom segment refers to Product Engineering Utilities and E&C. Telecom segment refers to Product Engineering Services. f) Extraordinary event Extraordinary event
- During FY 2012-13 L&T Infotech has written 13 L&T Infotech has written- off 100% of the business off 100% of the business right owned. - L&T Infotech has as part L&T Infotech has as part of its expansion partnered with a local South of its expansion partnered with a local South African entity to form a Joint Venture (“JV”) in the name of Larsen & African entity to form a Joint Venture (“JV”) in the name of Larsen & African entity to form a Joint Venture (“JV”) in the name of Larsen & Toubro Infotech South Africa Proprietary Limited with a shareholding Toubro Infotech South Africa Proprietary Limited with a shareholding Toubro Infotech South Africa Proprietary Limited with a shareholding ratio of 74.9% : 25.10% held by the Company and local JV. ratio of 74.9% : 25.10% held by the Company and local JV. ratio of 74.9% : 25.10% held by the Company and local JV.
IT(TP)A.1981/Bang/2017 Page - 11
On the other hand the Ld. DR has drawn our attention to the order of the TPO at page 17 and 18 where the TPO has elaborately dealt with the argument of the assessee and thereafter has decided to include in the list of comparable. The reasoning given by the TPO is as under :
IT(TP)A.1981/Bang/2017 Page - 12
We have heard the rival contention of the parties and perused the record. The Tribunal in the matter of Microsoft Research Lab India P. Ltd [TS-994-ITAT-2017(Bang)], had held as under :
IT(TP)A.1981/Bang/2017 Page - 13
6.1 Larsen & Toubro lnfotech Ltd.(' L & T' ):
6.1 This company was selected by the assessee in its TP Study. The TPO accepted this company as being comparable to the assessee in the case on hand. However, later, the assessee objected to the inclusion of this company in the list of comparables before both the TPO and the DRP; which contention of the assessee was rejected by both these authorities.
6.2 Before us, the learned Authorised Representative of the assessee has objected to the inclusion of this company in the list of comparables on the following grounds : (i) Different revenue recognition model - Fixed Price basis Vs. Monthly Billing; (ii) Functionally different as ' L & T ' is engaged in product engineering services. (iii.) 'L & T' deals in products and does reselling of bought out items; (iv) Insufficient segmental information; (v) 'L & T' owns and develops significant intangibles; (vi) ' L & T' sub-contracts services to third parties; (vii) 'L & T' has significantly large scale operations. In support of its contentions, the assessee has submitted copy of the Annual Report of' L & T' (at pages 766 to 799 of the paper book filed) and took us through various pages therein, as mentioned in the chart (viz. pages 766 - 768, 776, 779, 785, 78-8, 793, 796 to 798 etc.). It was prayed that this company ' L & T ' be excluded from the list of com parables.
6.3 Per contra, the learned Departmental Representative for Revenue supported the orders of the authorities below in retaining this company L& T in the final list of comparables; which was in fact the original choice of the assessee itself in its TP Study.
6.4.1 We have heard the rival contentions and perused and carefuUy considered the material on record. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on the following grounds, as mentioned in page 17 of the TPO's order under Section 92CA of the Act :- (i) 'L & T' functionally different; IT(TP)A.1981/Bang/2017 Page - 14
(ii) insufficient segmental information (iii) it owns significant intangibles; (iv) it has large scale of operations. 6.4.2 From a perusal of the TPO's order under Section 92CA has countered the arguments of the assessee in respect of some of the above contentions; like functional dissimilarity, intangibles, brand, on-site operations, RPT and scale of operations. However, we find that the TPO has not rebutted the assessee's objections on other grounds like insufficient segmental information.
6.4.3 The DRP has also rendered detailed reasoning on the objections raised by the assessee against inclusion of this company, ' L & T' in the list of comparables. The sum and substance of the DRP's reasoning is briefly as under : (i) that this company ' L & T ' was originally selected by the assessee itself in its TP Study and the assessee has not brought on record anything to prove and establish the reasons for change in its operations. (ii) The basic work of ' L & T ' is provision of software development services to its clients operating in different business segments and its functional profile is similar to the assessee in the case on hand. (iii) On the issue of intangibles and brand, the profits of' L & T ' and the assessee are similar as both are part of a large group of companies. (iv) The arguments put forth on R & D expenses and development of products were not substantiated. In the light of the aforesaid observations and findings of the authorities below, we proceed to examine the details highlighted by the learned Authorised Representative about this company. 6.4.4 Different Segments. In the Annual Report of 'L & T' under the head 'Performance of the company' {at page 766 of paper book), it is mentioned that this company has re- organised its business into three clusters, namely Services cluster, Industrial cluster and Telecom, relating to product engineering services. Whether all these 3 clusters would constitute 'software development services' is not clear from the statement referred to. At page 798 of the Annual Report, the segmental details of all three of the aforesaid clusters are given. It may be mentioned here that the assessee had IT(TP)A.1981/Bang/2017 Page - 15 raised the issue of insufficient segmental details before the TPO, which we find that has not been examined by the TPO.
6.4.5 Cost of bought-out items for sale. We also find at page 788 of the Annual Report of' L & T' that under the head "Operating Expenses", the company has shown 'cost of bought-out items of sale'. It is not clear whether this item of expense is related to the earning of income from services or these are related to any buying and selling of products. This issue was raised by the assessee for the first time before us and does not appear to have been raised before the authorities below. Therefore, this issue has neither been examined by the TPO nor the DRP.
6.4.6 Sub-contracting Expenses. At page 793 of the Annual Report of' L & T' under the head "Income / Expenditure in foreign currency", we find that this company has shown substantial "sub-contracting expenses". It is not clear whether these expenses are related to the services rendered by the company, indicating a different business model to that of the assessee in the case on hand. This issue also appears to have been raised for the first time before us and has not been raised before the authorities below. Therefore, it is evident this issue has neither been examined by either the TPO or the DRP.
6.4.7 The above three highlighted issues of; 'different segments'. 'cost of bought-out items for sale' and 'sub- contracting expenses' ; are critical issues that would have a bearing on the determination of comparability of this company, ' L & T' , with that of the assessee in the case on hand. It is an accepted principle that if there are different segments operating in different areas, then details related to the segment which is comparable to the assessee only should be considered. It is also settled principle that if any ground / objection is raised before the appellate authorities for the first time, then the concerned authorities below should be given opportunity to examine the issue. In this view of the matter, as discussed above, we deem it IT(TP)A.1981/Bang/2017 Page - 16 appropriate to remand the issue of comparability of this company i.e. ' L & T' to the file of the TPO for fresh consideration in the light of our observations above. Needless to add, the assessee shall be afforded adequate opportunity of being heard and to file details/ submissions on the above highlighted issues (supra), which shall be duly considered, before rendering of findings on these Issues by the TPO/A.O. We hold and direct accordingly.
Following the decision of the coordinate bench (supra), we would like to remand the matter to the file of TPO to the similar effect as done in the matter of Microsoft (supra).Following the above order of the coordinate bench, these two comparables namely Larsen & Toubro Infotech Ltd is restored back to the file of the TPO to decide afresh in terms of the observations made hereinabove.
The assessee, has sought the inclusion of the following companies in the list of comparables and the reasons are also given :
Sl. no Company Name Reason • Functionally comparable Akshay Software • The company clears all the filters 1 Technologies Ltd. (“Akshay”) acceptable to the Ld. TPO. • Functionally comparable • Company’s data is available in Capitaline Evoke Technologies database 2 • Accepted by Ld. TPO in Assessee’s own Ltd. (“Evoke”) case for AY 2011-12 • Functionally comparable Sankhya Infotech • The company clears all the filters 3 Ltd. (“Sankhya”) acceptable to the Ld. TPO. • Functionally comparable R Systems 4 • Audited 12 months march ending data is International Limited IT(TP)A.1981/Bang/2017 Page - 17
Sl. no Company Name Reason (Segmental) available in public domain • The company clears all the filters (“R Systems”) acceptable to the Ld. TPO Akshay Software Technologies Ltd. (“Akshay”) 17. The assessee has submitted that Akshay Software is one of the comparable companies selected by the Assessee in the TP documentation. It was further submitted that The Ld. TPO rejected Akshay as a comparable on the ground of functional dissimilarity saying that the company is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas on the basis of reply to notice u/s 133(6) received by Ld. TPO from Akshay Software. The submitted that the services rendered by Akshay were forming part of the subset of software development services and all the functions mentioned in Annual Report such as installation, support and maintenance of ERP products and services are with regard to software services. Similarly it was submitted Enterprise resource planning or ERP systems are software systems that are used for operations planning, administration and for optimizing internal business processes. A typical ERP software helps in integrating all data and processes of an organization into a single unified system. ERP is a category of business-management software and the installation/maintenance/support would come under the purview of software development activities. The assessee, relied upon the report submitted by Rangachary IT(TP)A.1981/Bang/2017 Page - 18 Committee (“Rangachary Report”), “Support for existing (software) systems”, “Adaptation of existing software” falls under the purview of “software-related activities of a routine nature”.
17.1 Further our attention was drawn to Note 20 of Annual Report 2013, where it is clearly mentions that it derives about 99% of its total income is from software development services.
17.2 Our attention was drawn to the Annual Report of Akshay Software where it is mentioned that it is predominantly engaged in providing IT related services to the following effect :
On the basis of the above, it was submitted that Akshay Software is functionally comparable to the assessee and it further fulfilled all the quantitative filters applied by the TPO. Hence, the company is functionally comparable to the Assessee. The Ld. AR relies upon the decision rendered by the Tribunal in the assessee’s own case for the asst.year 2007-08 bearingITA.1340/Bang/2011 and Arowana Consulting P. Ltd in IT(TP)A.157/Bang/2016, for AY 2011-12.
Per contra, the Ld. DR, relies upon the order of the DRP at page 24-25 and has submitted that the company is functionally not IT(TP)A.1981/Bang/2017 Page - 19 comparable with the assessee and the decision relied upon are distinguishable on facts.
We have heard the rival contentions and perused the record. As per the TP study of the assessee the software development services rendered by the assessee to its AE involved various steps including banking, capital markets, finance, risk and compliances, package integration, technology, wealth and investment management. Whereas the comparable Akshay Software Technologies Ltd, is into different category of software development and further Akshay Software Technologies Ltd, is into providing professional services, procurement and installation, implementation, support and maintenance, ERP products and services in India and overseas. On account of that, the comparable is attending the business operation of AE by rendering the above said services to the clients of AE both in India and outside India. Thus the revenue of the comparable had been consolidated and disclosed under the income under the head ‘income from software services’. In fact, when the comparable rendering services outside India, then it is rendering services onsite and therefore the segregation of financials is required for making it comparable with the assessee company. Further the assessee was shared with the response received by the TPO from the comparable u/s.133(6) of the Act and the assessee was given the opportunity. Further in our considered opinion, the financial of the comparable clearly shows that Akshay Software Technologies Ltd is primarily earning its revenue from onsite services as mentioned at page 86 of the DRP order and Note 28 of the P & L account. Thus in the IT(TP)A.1981/Bang/2017 Page - 20 considered opinion of the Bench, Akshay Software Technologies Ltd is not comparable with the assessee. The reliance on the decision of the Tribunal in the matter of the assessee for AY 2007- 08 is unfounded as the decision was for the earlier year and no reasoning was given by the Tribunal while directing the TPO to include Akshay Software Technologies as comparable. Further in the matter of Arowana Consulting P. Ltd (supra), the Tribunal in para 9 has mentioned that the DRP has not given any independent finding for arriving at the conclusion that this company is not comparable with the assessee. In the light of the above, we restore the matter back to the file of TPO for examining afresh.
EVOKE TECHNOLOGIES LTD ( EVOKE ) 20. Evoke is one of the comparable companies selected by the Assessee in the TP documentation.
Evoke is engaged in software development services. The Ld. TPO has rejected Evoke on the following grounds:
• No Data in prowess database The relevant extract of the TP order is as below:
Assessee’s contentions: 20.1. Company selected from Capitaline Database :
IT(TP)A.1981/Bang/2017 IT(TP)A.1981/Bang/2017 Page - 21 The Assessee herein submits that the said comparable company is The Assessee herein submits that the said comparable company is The Assessee herein submits that the said comparable company is selected from Capitaline selected from Capitaline Database. The complete qualitative and Database. The complete qualitative and quantitative information of Evoke Technologies is available for FY quantitative information of Evoke Technologies is available for FY quantitative information of Evoke Technologies is available for FY 2012-13. Also, the annual report of the company is available in public Also, the annual report of the company is available in public Also, the annual report of the company is available in public domain i.e. Ministry of Corporate Affairs, wherein it has been domain i.e. Ministry of Corporate Affairs, wherein it has been domain i.e. Ministry of Corporate Affairs, wherein it has been clearly mentioned that the company is engaged in provision of ned that the company is engaged in provision of ned that the company is engaged in provision of software development services. The software development services. The assessee has furnished the assessee has furnished the relevant screenshot in this regard relevant screenshot in this regard, as under:
20.2 Functionally Functionally Comparable Comparable – Engaged Engaged in in software software development services development services The Company is engaged The Company is engaged in software development services. Refer in software development services. Refer below the screenshot from annual report: below the screenshot from annual report:
Even the Ld. TPO has not objected on the functional comparability Even the Ld. TPO has not objected on the functional comparability Even the Ld. TPO has not objected on the functional comparability of Evoke Technologies. of Evoke Technologies. 20.3 Accepted by Ld. TPO in Assessee’s own case for AY 2011 Accepted by Ld. TPO in Assessee’s own case for AY 2011 Accepted by Ld. TPO in Assessee’s own case for AY 2011-12 : The Assessee would like to bring to the notice of Ld. TPO that would like to bring to the notice of Ld. TPO that would like to bring to the notice of Ld. TPO that Evoke Technologies Ltd. was selected as a comparable to the Evoke Technologies Ltd. was selected as a comparable to the Evoke Technologies Ltd. was selected as a comparable to the Assessee by TPO in its final set of comparables of TP order for AY Assessee by TPO in its final set of comparables of TP order for AY Assessee by TPO in its final set of comparables of TP order for AY 2011-12. There is no change in functional profile of the company 12. There is no change in functional profile of the company 12. There is no change in functional profile of the company IT(TP)A.1981/Bang/2017 Page - 22 from AY 2011-12. Hence, the Assessee humbly submits that Evoke technologies should be accepted as a comparable.
Per contra, the Ld. DR, relies upon the order of the DRP at page 20 & 21 and has submitted that the company is functionally not comparable with the assessee and the decision relied upon are distinguishable on facts.
We have heard the rival contentions and perused the record. The primary reason for not including Evoke Technologies Ltd was that the data were not available in public domain when search was conducted by the TPO. However the assessee has submitted that data was available and the same was submitted to the authorities below. The DRP, has recorded that were various contradictions in the director’s report and P & L account and further it was mentioned that there were abnormal espenses debited under other expenses on account of consultancy charges and the comparable Evoke Technologies Ltd was into IT services and end to end IT services, which were akin to ITES and there were the same is not comparable. However in the considered view of the Tribunal all these aspects are required to be examined by the TPO at the first instance and the assessee should be given a chance to explain the same. In the light of the above, we remand the matter for a fresh examination to the file of the TPO with a direction to decide the inclusion of Evoke Technologies Ltd after giving due opportunity to the assessee.
IT(TP)A.1981/Bang/2017 Page - 23 Sankhya Infotech Ltd. (“Sankhya”) : 23. Sankhya is one of the comparable companies selected by the Assessee in the fresh search given during TP Assessment proceedings. The Ld. TPO has rejected Sankhya on “segmental not available”. The relevant extract of the TP order is as below:
Assessee’s contentions: 23.1 As per the annual report of Sankhya Infotech Ltd for FY 2012- 13, Sankhya is engaged in provision of IT services to customers globally in transportation segment.
(Page 32 of Annual report for FY 2012-13) As can be seen from above extract from annual report, the company provides software development services to its customers. As per the segment information, during FY 2012-13, the entire revenue was from software services and no revenue was earned from software products.
IT(TP)A.1981/Bang/2017 Page - 24 (Page 33 of Annual report for FY 2012-13) There is no mention of online training, e-learning anywhere in the annual report of Sankhya Infotech Ltd. Hence, the Ld. TPO has wrongly rejected Sankhya on functional grounds. Hence, Sankhya is functionally comparable to the Assessee and should be accepted as a comparable. a) Clears all the filters proposed by Ld. TPO The Assessee submitted that it clears all the quantitative filters proposed by Ld. TPO in SCN. Following table is furnished for summary of filters:
(Amt in crores) Emplo RPT Sales Service Export Expor Employe yee Year Particulars RPT < > INR Income Sales > t Sales e cost cost > End 25% 1 Cr. > 75% 75% 25% Sankhya InfotechLtd. 0.02 0.02 56.43% Mar- 105.71 100% 102.51 97.00% 59.65 % 13 IT(TP)A.1981/Bang/2017 Page - 25 Hence, the Assessee submited that the company should be accepted as a comparable.
Judicial pronouncements supporting the inclusion of Sankhya - Joint Commissioner of Income-tax(OSD) V/s M/s.Winphoria Networks India Pvt.Ltd - IT(TP)A No.25/Bang/2012 23.2 Per contra, the Ld. DR, relies upon the order of the DRP at page 17 & 18 and has submitted that the company is functionally not comparable with the assessee and the decision relied upon are distinguishable on facts.
23.3 We have heard the rival contentions of the parties and perused the record. We are of the opinion that the authorities below have erred in arriving at the conclusion that the segmental information of the software services and software product for the assessment year 2013-14 is not available and therefore the lower authorities have not included M/s. Sankhya Infotech Ltd as comparable. The perusal of page 102 (page 134 of the annual report) clearly shows that for AY 2013-14, no revenue has been shown to have been earned by the assessee from software products and the total turnover has been shown as Rs.1057107636/- from the software services. Further M/s. Sankhya Infotech Ltd is engaged in providing IT services to customers globally in transportation segment. However, considering the reporting done by Sankhya Infotech Ltd, wholly under the software services in contradiction to the submissions given with respect to segment reporting and segment information relating to the activities of the assessee, we deem it appropriate to IT(TP)A.1981/Bang/2017 Page - 26 remand the matter to the file of the TPO to examine afresh the profile of Sankhya Infotech Ltd, on the touchstone of FAR with the assessee. Accordingly, the inclusion of Sankhya Infotech Ltd is remanded back to the file of TPO for examining afresh.
R Systems International Ltd. (“R Systems”) : 24. R Systems is one of the comparable companies selected by the Assessee in the fresh search given during TP Assessment proceedings. The Ld. TPO has rejected R Systems on the ground of “different financial year no data available”. The relevant extract of the TP order is as below:
Assessee’s contentions: 24.1 The Assessee’s contentions against the different financial year no data available filter are set out in the section 5.3 (III) above. The Assessee submits that R Systems is engaged in two segments namely software development services and business process outsourcing services (BPO). The software development services segment is functionally comparable to the Assessee. Also, the Ld. TPO has not objected to the functional comparability of R Systems. Without prejudice, audited quarterly results are available in public domain. Hence, for the purpose of comparability analysis, 12 months (March ending) results of software development segment for March 2013 year end has been considered.
IT(TP)A.1981/Bang/2017 Page - 27 Therefore, R Systems is functionally comparable to the Assessee and should be accepted as a comparable. b) Clears all the filters proposed by Ld. TPO The Assessee also wishes to submit that it clears all the quantitative filters proposed by Ld. TPO in SCN. Please refer below table for summary of filters: (Amt in crores) RP Sal Servi Expo Exp Empl R T es > ce rt Emplo Yea Particul ort oyee P < IN Inco Sales yee r ars Sale cost > T 25 R 1 me > > cost End s 25% % Cr. 75% 75% R Systems 5. 2.4 228 86.9 202. 88.6 65.35 Mar Internati 149.62 59 4% .93 5% 87 2% % -13 onal Ltd. Hence, the Assessee submits that the company should be accepted as a comparable.
24.2 Per contra, the Ld. DR, relies upon the order of the DRP at page 20 and has submitted that the company is functionally not comparable with the assessee and the decision relied upon are distinguishable on facts.
24.3 We have heard the rival contentions and perused the record. At the outset we may record that in the matter of Mercer Consulting IT(TP)A.1981/Bang/2017 Page - 28 (India) (P.) Ltd.* [2016] 76 taxmann.com 153 the Hon’ble High court of Punjab & Haryana has held as under : “27. The TPO excluded the case of R. Systems International Limited from the list of comparables. The ITAT included the same. The TPO excluded the case of R. Systems International Limited on the ground that it follows the calendar year i.e. Ist January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The TPO followed an order passed by the Mumbai Bench of the Tribunal in Asstt. CIT v. Hapag Lloyd Global Services Ltd. [2014] 62 SOT 8/[2013] 34 taxmann.com 241 in which it had been held that a company with a different financial year ending cannot be compared.
We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP.
As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009.
This view is not contrary to Rule 10(B)(4) which reads as under:— "10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall IT(TP)A.1981/Bang/2017 Page - 29 be the data relating to the financial year in which the international transaction has been entered into".
The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R. Systems International Limited is available.
We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B.” In view of the authoritative pronouncement of the Hon’ble High Court we do not find the reason for excluding R. System International Ltd, is now available with the Revenue. In the light of the above, we direct the TPO to examine the functional profile on the touchstone of FAR analysis of R System International Ltd and after giving opportunity to the assessee. In the light of the above, the comparability / inclusion of R System International Ltd is remanded back to the TPO for examining afresh without being influenced by the fact that the year ending is different for this comparable vis-a-vis, the assessee.
Now we will deal with ground 8 of the assessee’s appeal which read as under :
The Ld. AO/ Ld. TPO has erred in modifying the OP/ OC computed by the Assessee in the TP documentation by IT(TP)A.1981/Bang/2017 Page - 30 considering gain or loss arising out of fluctuation in foreign exchange as operating in nature, which are sought to be corrected 25.1 In this regard, the Assessee submitted that the foreign exchange losses/ gains should not be considered in Assessee’s case as it has nothing to do with the main operations of the Company. Further it was submitted that foreign exchange losses/ gains are a direct manifestation of the underlying risk embedded in a business arising from uncertainties in the spot market price of the nominal exchange rate. Thus in a comparable analysis wherein, a set of companies are identified as comparable, it is imperative that the comparable companies will have different level of foreign currency exposure depending upon i) extent of transactions with overseas entities, ii) Geographical location of the transacting entities (The market and price dynamics differ for same services/ same products in different economies and geographies) and iii) the respective hedging policies adopted by respective companies. Further for the purposes of provision for bad and doubtful debts the Ld. AR relied upon Outsource Partners International (P.) Ltd. [2017] 79 taxmann.com 74 (Bengaluru – Trib), wherein the coordinate bench held as under : 6. The next ground pertains to ground no 7 ie the AO/DRP not considering provision for bad and doubtful debts as non-operating in nature. In this regard, it is submitted that the provision for doubtful debts fit the description of "operating items" associated with the rendering of services and should be considered as part of the operating costs and relied in case of Techbooks International (P.) Ltd. v. Dy. CIT [2015] 63 taxmann.com 114 (Delhi - Trib.). In this regard, relevant extract of said judgment is provided below:
IT(TP)A.1981/Bang/2017 Page - 31
"Both the provision for bad debts as well as doubtful advances are in the realm of the operations of the business. It is not the case of the either side that the assessee made any excess provision. In our considered opinion, the same has been rightly taken as an item of operating expense of the assessee." We heard the rival submissions. In light of the above, provision for bad and doubtful debts should be treated as operating expenses as they are closely linked with the business operations and accordingly direct the TPO to do so.
25.2 On the other hand the Ld. DR relied upon the order of theDRP and has submitted that the forex loss is required to be considered as part of the operating profit in terms of the judgment of the Hon’ble Supreme Court in the matter of Woodward Governor India P. Ltd [179 taxmann.com 326]. Further it was submitted that the provision for doubtful debts were excluded by the lower authorities as were not operative in nature.
25.3 We have heard the rival contentions and perused the record. Whether the forex loss / gains is operating in nature or not is no longer res integra as the Hon’ble Supreme Court in the matter of Woodward Governor India P. Ltd, (supra) has held that forex loss / gain arising out of foreign exchange fluctuation are required to be treated as part of the operating cost and are therefore required to be considered as operating cost for the assessee as well as the comparable. In any case, as the forex loss / gain are required to be included for both the assessee as well as the comparable Hence it will not impact the overall determination of the ALP. Therefore the objection of treating the foreign exchange / loss as operating in nature was without any basis. Hence it is rejected.
IT(TP)A.1981/Bang/2017 Page - 32 25.4 With respect to provision for treating doubtful debts as operating or non-operating in nature, in the considered opinion of the bench the provision for doubtful debts are required to be treated as operating in nature in case the said provisions were there for the same assessment year under consideration. Further the said provision for doubtful debts should be closely linked with the business operation of the assessee. In the present case before the TPO the assessee has not furnished any documents or basis for both, i.e., whether the provision of doubtful debts are for the same year for the assessee as well as for the comparable. Moreover the assessee has not substantiated that the provision for doubtful debts are closely linked with the business operations of the assessee. In our view, the judgment relied upon by the assessee on Outsource Partners International (P.) Ltd. (supra), clearly lays down that if the provision for doubtful debts is closely linked with the business operations of the assessee then the same is required to be treated as operational in nature. As the needful has not been done therefore the bench did not agree with the contention of the assessee and accordingly the ground for treating the provision for doubtful debts as operational in nature is rejected.
Further there is one more reason for rejecting the contention of the assessee i.e., the TPO has not considered the provision for doubtful debts both for the assessee as well as for the comparable and hence they are both treated at par, therefore assessee cannot be aggrieved by the inclusion / exclusion of the comparables as both have been treated in the same yard stick.
IT(TP)A.1981/Bang/2017 Page - 33 There is no merit in the contention of the assessee and accordingly the same rejected. Hence ground 8 of the assessee’s appeal is rejected.
The last ground 6.1 relates to Market risk adjustment .The Assessee submits that it is essential to perform a risk adjustment to bridge the disparities in risk profile between a risk free entity i.e., Assessee and risk bearing entities like the comparables selected by the TPO. It was submitted that the comparable companies selected by the TPO are independent, risk-bearing entities, whereas the software segment of Assessee is a risk-free entity that is compensated on a Cost plus basis irrespective of the result of its operations. The Assessee placed reliance on the following jurisdictional ITAT’s rulings wherein adjustment for risk differential has been granted:-
• Intellinet Technologies India Private Limited (ITA No 1237/Bang/2010) • Bearingpoint Business (ITA No.1124/Bang/2011)
26.1 The Ld. DR relied upon the order of the DRP. 26.2 We have heard the rival contentions and perused the record. At page 201 of the paper book the assessee has given the details of marketing risk undertaken by the assessee as well as by the comparable. However the DRP / TPO has not considered the same. In view of the above, we direct the TPO to examine the market risks / risk adjustment of the assessee as well as the comparable in view of the details submitted by the comparable.
IT(TP)A.1981/Bang/2017 Page - 34
In the result appeal of the assessee is partly allowed. Order pronounced in the open court on 21st day of March, 2018.