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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ A ’
Before: SHRI SUNIL KUMAR YADAV & SHRI JASON P BOAZ
Per Shri Jason P Boaz, A.M. : This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-IV, Bangalore dt.5.8.2014 for the Assessment Year 2009-10.
Briefly stated, the facts of the case are as under :-
2.1 The assessee is a company engaged in the provision of software development services and shared services (ITES) to its Associated Enterprise
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 2 (‘AE’) i.e. ADC Telecommunications Inc., USA, which is its holding company. For Assessment Year 2009-10, the assessee filed its return of income on 30.09.2009 declaring income of Rs.1,04,430, after claiming deduction of Rs.1,44,70,511 under Section 10A of the Income Tax Act, 1961 (in short 'the Act'). The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In view of the international transactions entered into by the assessee in the year under consideration, as reported in Form 3CEB, the Assessing Officer made a reference to the Transfer Pricing Officer (‘TPO’) for determining the Arm’s Length Price (‘ALP’) of the international transactions entered into with its AEs. The TPO passed an order under Section 92CA of the Act dt.28.1.2013 proposing the following TP Adjustments :- i) SWD Segment : Rs.1,50,87,408. ii) ITES Segment : Rs.1,23,13,265. Total Transfer Pricing Adjustment u/s.92CA : Rs.2,74,00,673.
The Assessing Officer concluded the assessment under Section 143(3) r.w.s. 92CA of the Act vide order dt.2.4.2013 wherein the assessee's income was determined at Rs.2,78,40,699, which inter alia, included the aforesaid Transfer Pricing Adjustment of Rs.2,74,00,673.
2.2 Aggrieved by the order of assessment dt.2.4.2013 for Assessment Year 2009-10, the assessee filed an appeal before the CIT (Appeals). The learned CIT (Appeals) disposed off the appeal vide order dt.5.8.2014 allowing the assessee partial relief.
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 3 3. The assessee, being aggrieved by the order of the CIT (Appeals) dt.5.8.2014 for Assessment Year 2009-10, filed an appeal before the Tribunal raising certain grounds of appeal. Subsequently, the assessee filed revised grounds of appeal which are extracted hereunder and considered for adjudication :-
Revised Grounds of appeal.
1. That the order passed by the Learned Commissioner of Income Tax (Appeals) – IV, Bangalore (‘CIT (A)’), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
2. That the learned CIT (A) erred in upholding the rejection of Transfer Pricing (‘TP’) documentation by the Learned Transfer Pricing Officer (‘TPO’)/ Assessing Officer (‘AO’) and in making an adjustment to the transfer price of the Appellant in respect of its software development services and shared services.
3. That on the facts and in the circumstances of the case, the learned CIT (A) while making adjustment to the various segments of the Appellant, erred in;
a. Upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis performed by the learned TPO in the TP Order. b. Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2008- 09) data for companies should be used for comparability. c. Upholding the learned TPO’s approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm’s length price. d. Arbitrarily arriving at a set of companies as comparable to the software development and shared services of the Appellant, on rejecting companies that are otherwise functionally comparable to the Appellant and on inclusion of companies that otherwise fail the test of comparability.
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 4
Information Technology
Exclusion i. KALS Information Systems Limited ii. Bodhtree Consulting Limited iii. Tata Elxsi Limited iv. Persistent Systems Limited v. Larsen & Toubro Infotech Limited vi. Infosys Technologies Limited Inclusion i. ThinksoftGlobalServices Ltd ii. FCS Software Solutions Ltd Information Technology enabled Services
Exclusion i. Infosys BPO Limited ii. Aditya Birla Minacs Worldwide Limited iii. Accentia Technologies Limited iv. Cosmic Global Limited v. EClerxServices Limited
4. The learned CIT(A) erred in law and on facts in ignoring the limited risk profile of Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO and in not allowing appropriate adjustments under Rule 10B of the Rules to account for differences between the Appellant and comparable companies. The Appellant submits that each of the above grounds is independent and without prejudice to one another.”
4. Revised Ground Nos. 1 to 3(a) to 3(c) and 4.
4.1 At the outset, the learned Authorised Representative for the assessee submitted that the assessee is not pressing the revised grounds raised at S.Nos.1 to 3(a) to 3(c) and 4 in this appeal, but will be only urging revised Ground 3(d) for exclusion / inclusion of comparables in the software development /information technology services segment and exclusion of comparables in the ITES Segment. In view of this the revised grounds raised
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 5 by the assessee at S.Nos.1, 3(a) to 3(c) and 4 are rendered infructuous and are accordingly dismissed as not pressed.
Ground No. 3(d) : Transfer Pricing Issues. 5.1 The assessee is a subsidiary of ADC Telecommunications Inc., USA and is engaged in the provision of software development services and IT Enabled Services to its AEs. As per the 92CE Report, the assessee entered into the following international transactions in the year under consideration :-
5.2 For the software development services segment, the assessee selected 13 companies as comparable to the assessee, listed at pages 15 & 16 of TPO’s order, with an average mean margin of 7.31 %. Since the assessee's profit margin of Operating Profit / Operating Cost was higher at 10.12%, the assessee presumed its international transactions in this segment to be at arm’s length.
5.3 For the ITES Segment, the assessee selected 5 companies listed at page 6 of the TPO’s order under Section 92CA of the Act, with average mean margin of 13.01% to be comparable to the assessee. Since the assessee's
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 6 profit at operating profit / operating cost was 13.02%, the assessee assumed that its international transactions in the ITES segment to be at arm’s length. 5.4 The TPO rejected the assessee's TP Study for both software development services and ITES segments for the reasons enumerated in his order under Section 92CA of the Act. After carrying out a fresh comparability analysis, applying certain filters and considering the assessee's objections, the TPO selected his own final set of comparables for both segments as under :- 5.4.1 Final set of 11 comparables for Software Devt.Services Segment.
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 7 5.4.2 After allowing working capital adjustment of 0.14%, the TPO worked out the proposed Transfer Pricing Adjustment of Rs.1,50,87,408 for the software development services as under :
5.5.1 Final set of 8 comparables for ITES Segment.
5.5.2 After allowing working capital adjustment of 0.09%, the TPO worked out the proposed TP Adjustment of Rs.1,23,13,265 for the ITES Segment as under :-
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 8
Assessee's Plea for Exclusion of 6 companies from list of comparables.
6.1 The assessee has prayed for exclusion of the following 6 companies from the final set of comparables selected by the TPO :- i) KALS Information Systems Ltd. ii) Bodhtree Consulting Ltd. iii) Tata Elxsi Limited iv) Persistent Systems Ltd. v) Larsen & Toubro Infotech Ltd. vi) Infosys Technologies Ltd. 6.2 In support of the assessee's plea for exclusion of the aforesaid 6 companies form the TPO’s final set of comparables, the learned Authorised Representative placed reliance , inter alia, on the following judicial pronouncements of the co-ordinate bench of this Tribunal for the same assessment year 2009-10, and the facts of which; it is submitted would go to show are engaged in similar activities as the assessee in the case on hand :-
(i) Cisco Systems India Pvt. Ltd. in IT(TP)A No.271/Bang/2014 for A.Y. 2009-10, and IT(TP)A No.1280/B/2014 No.1280/Bang/2014 9 (ii) VMware Software India Pvt. Ltd. in IT(TP)A No.1311/Bang/2014 dt.6.1.2017. 7. KALS Information Systems Ltd. (KALS)
7.1 This company ‘KALS’ was selected as a comparable by the TPO in spite of the objections of the assessee to its inclusion on grounds of being functionally dissimilar to the assessee as it was engaged in development and sale of software products and has substantial inventory in this regard; whereas the assessee in the case on hand is merely providing software development services to its AEs. The TPO’s action was upheld by the learned CIT (Appeals). Before us, it is submitted that for the very same Assessment Year 2009-10, the co-ordinate bench of this Tribunal in its order in the case of Cisco Systems (India) P. Ltd. (supra) has held that this company, ‘KALS’ to be not comparable to an assessee providing software development services and the learned Authorised Representative prayed that therefore this company ‘KALS’ be excluded from the list of comparables.
7.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company, ‘KALS’ in the final set of comparables.
7.3 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) P. Ltd. (supra) for Assessment Year 2009-10 has excluded this company, ‘KALS’ from the final set of comparables, holding as under at para 26.3 thereof :-
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 10 “ 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- “(d) KALS Information Systems Ltd.
As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: “16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.” Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 11 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.” Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable.” 7.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that ‘KALS’ which is into developing of software products, should not be considered as comparable to the assessee in the case on hand, who is merely providing software development services to its AEs and accordingly direct the TPO to exclude it from the final set of comparables.
Bodhtree Consulting Ltd. (‘Bodhtree’)
8.1 This company, ‘Bodhtree’ was included in the final set of comparables by the TPO despite the objections of the assessee that it has fluctuating profit margins and this was a year in which it earned super normal profits. The TPO’s action was upheld by the learned CIT (Appeals). Before us, apart from the aforesaid objections, it was also contended that ‘Bodhtree’ is functionally dissimilar to the assessee, as apart from software development it also provides end-to-end web solutions,is engaged in IT(TP)A No.1280/B/2014 No.1280/Bang/2014 12 software products, off-shoring data management and data warehousing. In support of the assessee's plea for exclusion of this company ‘Bodhtree’ from the TPO’s final set of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. for Assessment Year 2009-10 (supra), wherein it was excluded as it was not considered a good comparable to companies engaged in rendering software development services, like the assessee in the case on hand. 8.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company as a comparable.
8.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. for Assessment Year 2009-10 (supra) has excluded this company ‘Bodhtree’ from the final set of comparables, holding as under at para 26.1 thereof :-
“ 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee’s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 13 & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company.” 8.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that ‘Bodhtree’ which is a software product company, should not be considered as comparable to the assessee in the case on hand; who is merely providing software development services to its AEs and accordingly direct the TPO to exclude it from the final set of comparables.
Tata Elxsi Limited (‘Tata’)
9.1 This company, ‘Tata’ was included by the TPO in the final set of comparables despite the assessee's objections to its inclusion on grounds of being functionally different as it is a software product company. The learned CIT (Appeals) upheld the action of the TPO in including this company in the list of comparables. Before us, the learned Authorised Representative contended that ‘Tata’ ought to be excluded from the final set of comparables for the reasons that apart from software development services, it was also engaged in product and design services, innovation design and engineering services, visual computing labs and diverse services, which render it not comparable to the assessee in the case on hand who is merely providing software development services to its AEs. In support of the IT(TP)A No.1280/B/2014 No.1280/Bang/2014 14 assessee's contention, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. also for Assessment Year 2009-10 (supra).
9.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company, ‘Tata’ in the final set of comparables.
9.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. for Assessment Year 2009-10 (supra) has excluded this company ‘Tata’ from the final set of comparables, holding as under at para 26.4 and 26.5 thereof :-
“ 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee’s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in order dated 29.3.2013. Following were the relevant observations of the Tribunal:-
II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company
IT(TP)A No.1280/B/2014 No.1280/Bang/2014 15 has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables.
(ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables.
On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge :
1. 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs.
2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services.
3. The contribution of the embedded services segment is to the tune of Rs.230 crores in the total segment revenue of Rs.263 crores. Even if we consider the 16 IT(TP)A No.1280/Bang/2017 other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services.
This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07."
We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:” 26.5. Following the aforesaid decision of the Tribunal, we hold that M/s.Tata Elxsi Ltd. should not be regarded as a comparable.”
17 IT(TP)A No.1280/Bang/2014 9.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that ‘Tata Elxsi Ltd.’ is to be excluded from the list of comparables, it being functionally different from the assessee in the case on hand, who is merely providing software development services to its AEs.
Infosys Technologies Limited (‘Infosys’)
10.1 This company, ‘Infosys’ was included in the final set of comparables by the TPO rejecting the assessee's objections to its inclusion on grounds of its scale of operations, owning of significant intangibles, brand value, significant R & D activities and being functionally different. The learned CIT (Appeals) upheld the action of the TPO. Before us, the learned Authorised Representative reiterated its objections put forth before the authorities below for exclusion of this company ‘Infosys’ as it was functionally dissimilar to the assessee in the case on hand on account of its owning significant intangibles, its brand value, R & D activities and scale of operations. In support of the assessee's plea for exclusion of this company, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. also for Assessment Year 2009-10 (supra).
18 IT(TP)A No.1280/Bang/2014 10.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including ‘Infosys’ as a comparable to the assessee.
10.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra) has directed exclusion of this company ‘Infosys’ from the final list of comparables to a mere provider of software development services, for reasons that it owns significant intangibles and is functionally different as it generates huge revenues from software products. In this regard, at para 26.2 of its order, the co-ordinate bench of this Tribunal has held as under :-
“ 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, by order dated 28.11.2013 with regard to this comparable has held as follows:- “11.0 Infosys Technologies L t d . 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to 19 IT(TP)A No.1280/Bang/2014 the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY’, a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the 20 IT(TP)A No.1280/Bang/2014 learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.”
The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies.” 10.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that Infosys Technologies Limited, is to be excluded from the list of comparables, it being functionally different from the assessee in the case on hand, who is merely providing software development services to its AEs.
Persistent Systems Limited (‘Persistent’)
11.1 This company, ‘Persistent’ was included by the TPO in the final list of comparables, rejecting the assessee's objections to its inclusion on grounds of being functionally different and for owning significant
21 IT(TP)A No.1280/Bang/2014 intangibles. The learned CIT (Appeals) upheld the action of the TPO in including this company in the list of comparables. Before us, the learned Authorised Representative reiterated the arguments put forth before the authorities below for exclusion of this company from the list of comparables on grounds of being functionally dissimilar to the assessee in the case on hand, as ‘Persistent’ was also engaged in development and sale of software products, change in business activities – partnered with customers leading to ownership of applications, attending to outsourced business needs, etc. In support of the assessee's plea for exclusion of this company ‘Persistent’ from the list of comparables, reliance was placed on the decision of the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd. for Assessment Year 2009-10 (supra).
11.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including ‘Persistent’ in the final set of comparables.
11.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd., also for Assessment Year 2009-10 (supra) at paras 15 and 16 thereof, observing that ‘Persistent’ is engaged in software product development and product design services, has excluded this company as one cannot be considered as comparable to a 22 IT(TP)A No.1280/Bang/2014 company which is merely providing software development services to its AE’s ; as is the assessee in the case on hand. At paras 15 & 16 of its order (supra) the co-ordinate bench of this Tribunal has held as under :-
15. Since ld. DR of the revenue could not point out any difference in facts, respectfully following these Tribunal orders, we direct the AO/TPO to exclude this company also from the list of final comparables. (4) Persistent Systems Ltd., For exclusion of this company, reliance has been placed on the Tribunal order rendered in the case of Unisys India (P.) Ltd. IT(TP) Appeal No.67(Bang) of 2015, copy available on pages 210 to 246 of case law compendium and in particular, our attention was drawn to para 36 to 37 of the Tribunal order. These paras are reproduced as under:— '36. As far as Persistent Systems Ltd. a comparable by the assessee in his TP study but was objected by the assessee before the TPO as not comparable, this Tribunal in the case of IT(TP)A No.108(Bang)/21014 order dated 12-12-2014 in the case of Yodlee Infotech Pvt. Ltd. v. ITO held as follows:
5.12…………… This Tribunal in the case of 3DPLM Software Solutions Ltd. v. Dy. CIT (IT(TP) A No. 1303(Bang)/2012 dated 28-11-2013) has also held that Persistent Systems Pvt. Ltd., was in product designing services and into software product development. In the same decision it was also held that M/s Infosys Technologies Ltd., had considerable intangibles like IPR, and was also into software product development. It was also held that M/s Tata Elxsi Ltd., was developing niche products and into product designing services. Hence, these companies would in any case have to be excluded from the comparables being functionally different".
Following the said decision, we direct that Persistent Systems Ltd., be excluded from the final list of comparable companies chosen by the TPO'. The ld. DR of the revenue supported the orders of the authorities below; 16. We have considered the rival submissions. We find that in this case, the Tribunal has followed another Tribunal order rendered in the case of Yodlee Infotech Ltd. v. ITO [IT(TP) Appeal No. 108 (Bang) of 2014]. The relevant portion of that Tribunal order is re- produced above and as per the same, this company i.e. M/s. Persistent Systems Ltd., was in product designing services and into software product development. Since the present assessee company is only providing software development services to the AE, this company cannot be considered as a comparable in the present case. Since the ld. DR of the revenue could not point out any difference in facts, by respectfully following this Tribunal order, we direct the AO/TPO for exclusion of this company from the final list of comparable.”
23 IT(TP)A No.1280/Bang/2014 11.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that this company, Persistent Systems Ltd., is to be excluded from the list of comparables, it being functionally dissimilar to the assessee in the case on hand, who is merely providing software development services to its AEs.
Larsen & Toubro Infotech Ltd. (‘L & T’)
12.1 This company, ‘L & T’ was included by the TPO in the final list of comparables, rejecting the assessee's objections to its inclusion on grounds of scale of operations, etc. The TPO held that this company ‘L & T’ was functionally comparable to the assessee as it was engaged in providing software development services. The learned CIT (Appeals) upheld the action of the TPO. Before us, the learned Authorised Representative reiterated the arguments put forth before the authorities below and further submitted that this company is to be excluded as it has RPT in excess of 15%. In support of the assessee's contention on RPT, reliance was, inter alia, placed on the decision of the co-ordinate bench of this Tribunal in the case of Novell Software Development (India) Pvt. Ltd. in IT(TP)A No.1287/Bang/2011 for Assessment Year 2007- 08.
12.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company, ‘L & T’ in the list of comparables. The learned Departmental
24 IT(TP)A No.1280/Bang/2014 Representative submitted that in a number of decisions the co-ordinate benches of this Tribunal had consistently taken the view that application of RPT filter at 25% of turnover is reasonable. It was also pointed out that in the case of Novell Software Development (India) P. Ltd. (supra) relied upon by the assessee, the co-ordinate bench of this Tribunal noted that the RPT was generally applied by the Tribunal between 15% and 25%, but the RPT filter at 15% was applied in that case only because there was a large number of comparables, i.e. 26 comparables; unlike in the case on hand where there are only 11 comparables selected by the TPO out of which the inclusion of 6 comparables is being challenged by the assessee.
12.3 We have heard the rival contentions, perused and carefully considered the material on record. Before us, the learned Authorised Representative for the assessee could not controvert the submissions of the learned Departmental Representative for Revenue that various co- ordinate benches of this Tribunal have been consistently following application of RPT filter at 25% of turnover. Respectfully following the decision of the co-ordinate benches of this Tribunal in the case of ITO Vs. CAE Simulation Technologies Pvt. Ltd. in IT(TP)A Nos.100 & 141/Bang/2014 dt.1.9.2017 also for Assessment Year 2009-10, we reject the assessee's claim for exclusion of L & T Infotech Ltd., from the list of comparables and consequently uphold inclusion of this company ‘L & T’ by the authorities below in the final set of comparables.
25 IT(TP)A No.1280/Bang/2014 Assessee's Plea for Inclusion of 2 companies in the list of comparables – Software Development Services Segment. 13.1 In the revised grounds raised (supra), the assessee has sought inclusion of the following two companies in the final set of comparables :- (i) Thinksoft Global Services Ltd. and (ii) FCS Software Solutions Ltd. 13.2 On a perusal of the TPO’s order under Section 92CA of the Act at para 13.1 (b), we find that the TPO himself in the show cause notices has proposed the aforesaid two companies for inclusion in the final set of comparables, but had thereafter came to the view that the working capital adjustment for both these companies exceeded 4% of profits and therefore these two companies could not be taken as proper comparables. At para 13.1 (b), the TPO has rendered the following reasoning for excluding these two companies as under :-
“13.1 (b) Two companies proposed in the show cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin get distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly form operating business and not from financial activities. This pre- requisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded.
26 IT(TP)A No.1280/Bang/2014 1. Thinksoft Global Services Limited. 2. FCS Software Solutions Limited.”
13.3 Before us, the learned Authorised Representative submitted that in similar factual circumstances, as those prevailing in the case on hand with respect to the aforesaid companies, for the same assessment year 2009-10, a co-ordinate bench of this Tribunal in its order in the case of ARM Embedded Technologies P. Ltd. in IT(TP)A No.1659/Bang/2014 dt.31.8.2015; where the assessee was engaged in, inter alia, provisions of software development and maintenance services to its AEs; just as in the case on hand, the Tribunal directed inclusion of the aforesaid two companies in the final set of comparables and set aside to the file of the TPO the computation of working capital adjustment on actual basis for working out the correct PLI of the final comparables.
13.4 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in excluding the above two companies from the list of comparables.
13.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find the very same issue, in similar circumstances of inclusion of the aforesaid two companies i.e. (i) Thinksoft Global Services Ltd. and (ii) FCS Software Solutions Ltd. in the final list as comparables to an assessee providing software development services to its AEs; just as in the case on hand, was considered by a co-ordinate bench of this Tribunal
27 IT(TP)A No.1280/Bang/2014 in the case of ARM Embedded Technology P. Ltd. for Assessment Year 2009-10 (supra). In its order, at paras 20 to 25 thereof, the co-ordinate bench (i) directed inclusion of the aforesaid two companies in the final set of comparables and (ii) set aside to the file of the TPO/A.O., the issue of working out the correct PLI of the final set of comparables by computing and allowing working capital adjustment on actual basis; holding as under :
“ 20. Coming to the ground for inclusion of M/s. Thinksoft Global Solutions Ltd and FCS Software Solutions Ltd, we find that TPO herself had suggested these in the show cause notice, but had thereafter come to a conclusion that working capital adjustment required for these two companies exceeded 4% of profits and could not be therefore taken as proper comparables. Reasons given by the TPO for excluding these two companies, appear at paras 3.6.5.1, of her order which reads as under : b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded.
21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and Loss account of M/s. Thinksoft Global Solutions for the relevant previous year is placed at paper book page.247. Software service revenues of the said company came to Rs.920921452/-. Other income of the said company came to Rs.35,738,801/-. Break-up of the other income as given at schedule 10 placed at paper book page.256 show that out of such amount Rs.26,536,978/- was exchange gain. Interest received from deposits with banks and others came to Rs.29,15,080/- only. For better clarity this break-up is given hereunder :
28 IT(TP)A No.1280/Bang/2014 Other income Interest received on deposits with banks .. 2,371,740 Interest received from others .. 543,310 Profit on sale of fixed assets .. 6,276,773 Exchange gain (Net) .. 26,536,978 Miscellaneous income .. 10,000 35,738,801 We cannot say that the ‘other income’ arose out of any financial services done by the assessee and would take away the sheen of its software services income. The amount, in our opinion, was insignificantly small and not enough to warrant a conclusion that its operating margins had come not from its core operational activities.
Coming to FCS Software Solutions Ltd, profit and loss account placed at paper book page 321 shows that its revenue from software development and other services was Rs.1902547907/-. As against this, miscellaneous income was only Rs.7875588/-. Break-up of such miscellaneous income as given at schedule M, placed at paper book page. 328 reads as under : Interest .. 2,875,685 Rent income .. 4,515,000 Amount W/Back .. 484,902 7,875,588 23. Compared to the software development services income, interest received by M/s. FCS Software Solutions Ltd, was in our opinion, insignificantly small. Thus the reasoning given by TPO for rejecting these two companies as proper comparables, was in our opinion, incorrect. We set aside the orders of the lower authorities in this regard and direct these two companies to be included in the list of comparables for working out the average PLI.
Now coming to the issue of working capital adjustment, findings of the TPO in this regard as it appears at para 3.7, reads as under :
29 IT(TP)A No.1280/Bang/2014 TPO had restricted the cost of capitalto 1.71%. Rationality for such an upper limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of M/s. Rambus Chip Technologies (India) P. Ltd v. DCIT [IT(TP)A.23/Ban/2015, dt.22.07.2015. Coordinate bench had held as under at para 13 and 14 of its order : 13. As regards ground No.3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled comparables selected by the TPO. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He submitted that the CIT(A) also has not applied his mind to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside.
On going through the TPO’s order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjustment to 1.71%. In all the cases relating to transfer pricing adjustment, this Tribunal has been directing to give working capital adjustment on actual basis and the TPO having arrived at 5.97% ought to have adopted the same instead of restricting it to 1.71%. In view of the same, we deem it proper to remand this issue to the file of the AO/TPO for working out the ALP after giving adjustment of working capital as per the calculation of the AO in annexure D annexed to the 30 IT(TP)A No.1280/Bang/2014 transfer pricing order. This ground of appeal
is accordingly allowed.
25. Accordingly we direct the AO / TPO to correctly work out the PLI of the final comparables after giving due adjustment for the working capital on actual basis. Related ground of the assessee is therefore allowed.” 13.5.2 Respectfully following the aforesaid decision of the co- ordinate bench of this Tribunal in the case of ARM Embedded Technologies P. Ltd. for Assessment Year 2009-10, we hold and direct the TPO that the following two companies i.e. (i) Thinksoft Global Services Ltd. and (ii) FCS Software Solutions Ltd. be included in the final set of comparables and set aside to the file of the TPO the issue of working out the correct PLI of the final set of comparables by computing and allowing working capital adjustment on actual basis.
Assessee's Plea for Exclusion of 5 comparable from final set of companies in ITES Segment. 14.1 In the revised ground raised, the assessee pleads for exclusion of the following 5 companies from the final list / set of comparables :-
(i) Infosys BPO Limited (ii) Aditya Birla Minacs Worldwide Limited (iii) Accentia Technologies Limited (iv) Cosmic Global Limited (v) Eclerx Services Limited.
14.2 In support of the assessee's contentions for exclusion of the aforesaid companies at S.Nos.(i) and (iii) to (v) (supra) from the final set
31 IT(TP)A No.1280/Bang/2014 of comparables for the assessee's ITES Segment, reliance, inter alia, ws placed on the decision of the co-ordinate bench of this Tribunal in the case of Novo Nordisk India Pvt. Ltd. in IT(TP)A No.122/Bang/2014 for Assessment Year 2009-10. In respect of the company at S.No.(ii), reliance was placed on Novell Software Development (India) P. Ltd. in IT(TP)A No.1287/Bang/2011 for Assessment Year 2007-08 (supra).
(i) Infosys BPO Limited (iii) Accentia Technologies Limited (iv) Cosmic Global Limited (v) Eclerx Services Limited. 15.1 The above 4 companies (supra) were included in the final set of comparables by the TPO, despite the objections of the assessee that, inter alia, they were functionally dissimilar to the assessee in the case on hand. The TPO’s action was upheld by the learned CIT (Appeals). Before us, the learned Authorised Representative of the assessee reiterated the objections to their inclusion as comparables raised before the authorities below that they were, inter alia, functionally dissimilar from the assessee in the case on hand. It is contended that the comparability of these companies with an ITES company was considered by a co-ordinate bench of this Tribunal in the case of Novo Nordisk India Pvt. Ltd. for Assessment Year 2009-10 (supra) after which they were directed to be excluded from the final list of comparables in the ITES Segment. It was therefore prayed that these companies be excluded from the final set of comparables.
32 IT(TP)A No.1280/Bang/2014 15.2 Per contra, the learned Departmental Representative for Revenue supported the orders of the authorities below in including the aforesaid 4 companies in the final set of comparables. 15.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that comparability of the above 4 companies (supra) with an ITES company was considered by a co-ordinate bench of this Tribunal in the case of Novo Nordisk India Pvt. Ltd. for the very same assessment year 2009-10 (supra) and the Bench directed that they were to be excluded from the final set of comparables by holding as under at paras 86 & 87 thereof :-
33 IT(TP)A No.1280/Bang/2014 34 IT(TP)A No.1280/Bang/2014 35 IT(TP)A No.1280/Bang/2014 36 IT(TP)A No.1280/Bang/2014 37 IT(TP)A No.1280/Bang/2014 38 IT(TP)A No.1280/Bang/2014 39 IT(TP)A No.1280/Bang/2014
15.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Novo Nordisk India Pvt. Ltd. for Assessment Year 2009-10 (supra) which are rendered on similar / identical facts and circumstances, we hold that the aforesaid 4 companies listed at para 15 (supra) are not comparable to an ITES company and consequently direct the TPO/A.O. to exclude them from the list of comparable companies.
Aditya Birla Minacs Worldwide Limited (‘Aditya Birla’)
16.1 This company, ‘Aditya Birla’ was included by the TPO in the final list of comparables, rejecting the assessee's objections to its inclusion on grounds of scale of operations, etc. The TPO held that this company ‘Aditya Birla’ was functionally comparable to the assessee as it was engaged in providing software development services. The learned CIT (Appeals) upheld the action of the TPO. Before us, the learned Authorised Representative reiterated the arguments put forth before the authorities below and further submitted that this company is to be 40 IT(TP)A No.1280/Bang/2014 excluded as it has RPT in excess of 15%. In support of the assessee's contention on RPT, reliance was, inter alia, placed on the decision of the co-ordinate bench of this Tribunal in the case of Novell Software Development (India) Pvt. Ltd. in IT(TP)A No.1287/Bang/2011 for Assessment Year 2007-08.
16.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company, ‘Aditya Birla’ in the list of comparables. The learned Departmental Representative submitted that in a number of decisions the co-ordinate benches of this Tribunal had consistently taken the view that application of RPT filter at 25% of turnover is reasonable. It was also pointed out that in the case of Novell Software Development (India) P. Ltd. (supra) relied upon by the assessee, the co-ordinate bench of this Tribunal noted that the RPT was generally applied by the Tribunal between 15% and 25%, but the RPT filter at 15% was applied in that case only because there was a large number of comparables, i.e. 26 comparables.
16.3 We have heard the rival contentions, perused and carefully considered the material on record. Before us, the learned Authorised Representative for the assessee could not controvert the submissions of the learned Departmental Representative for Revenue that various co- ordinate benches of this Tribunal have been consistently following application of RPT filter at 25% of turnover. Respectfully following the 41 IT(TP)A No.1280/Bang/2014 decision of the co-ordinate benches of this Tribunal in the case of ITO Vs. CAE Simulation Technologies Pvt. Ltd. in IT(TP)A Nos.100 & 141/Bang/2014 dt.1.9.2017 also for Assessment Year 2009-10, we reject the assessee's claim for exclusion of Aditya Birla Minacs Worldwide Limited, from the list of comparables and consequently uphold inclusion of this company ‘Aditya Birla’ by the authorities below in the final set of comparables.
In the result, the assessee's appeal for Assessment Year 2009-10 is partly allowed.
Order pronounced in the open court on the 13th day of Dec., 2017.