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Income Tax Appellate Tribunal, ‘A’ BENCH, BENGALURU
Before: SHRI INTURI RAMA RAO & SHRI LALIET KUMAR
Date of hearing : 02/08/2017 Date of pronouncement : 13/10/2017 O R D E R
Per INTURI RAMA RAO, AM :
1. This is an appeal filed by the revenue directed against the order of the CIT(A)-IV, Bengaluru, dated 25/02/2013 for the assessment year 2005-06. The assessee come up in cross objections.
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 2 of 16 2. The revenue raised the following grounds of appeal:
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 3 of 16
Briefly facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is wholly owned subsidiary of Infinera Corporation, USA. It is engaged in the business of rendering software development services to its Associated Enterprises (AE). Return of income for the assessment year 2005-06 was filed on 16/09/2005 disclosing loss of Rs.61,433/-. After processing the said return of income u/s 143(1) of the Income- tax Act, 1961 [hereinafter referred to as 'the Act' for short], the case was selected for scrutiny assessment. The Assessing Officer (AO) noticed that the assessee-company also reported the following international transactions:
Rendering of Software Development Services Rs.10,30,45,238/- 2. Import of assets Rs.2,82,360 3. Reimbursement of expenses Rs.26,02,050/- The assessee-company sought to justify consideration received for the above international transaction with its AE to be at arm’s length. The assessee-company also submitted transfer pricing (TP) study report adopting ‘operating profit to operation cost’ as the profit level indicator (PLI) for TP study. The assessee-company applied TNMM as the Most Appropriate Method (MAM) which was considered be most appropriate for purposes of bench marking of international transaction. The assessee’s profit was computed at 10% and the assessee-company claimed that the same was comparable with other companies rendering software development services. The assessee-company had chosen 43 comparables and the arithmetical average of operative profit margin of the said companies was computed at 8.11%.
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 4 of 16 According to the assessee-company, its PLI was much higher than the arithmetical mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm’s length.
The AO referred the matter to the Transfer Pricing Officer (TPO). The TPO, by order dated 22.02/2008 passed u/s 92CA(3) of the Act
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 5 of 16 computed TP adjustment at Rs.1,28,24,446/-. The TPO accepted net margin and rejected TP study report. However, the TPO held that the transaction of reimbursement of expenses was at arm’s length. The TPO proceeded to identify different set of comparable entities for purposes of bench marking the transaction of rendering of Software Development Services (SDS) to its AE. While doing so, the TPO applied the following filters: � Companies whose Software Development Service revenue is less than 75% of the total operating revenues were excluded. � Companies whose Software Development Service revenue < Rs. 1 Crore were excluded. � Companies who have less than 25% of the Operating Revenues from Software Development Services as export sales were excluded. � Companies who have more than 25% related party transactions (income as well as expenditure combined) of the operating revenues were excluded. � Companies whose employee cost to Operating Revenues from Software Development Services is less than 25% were excluded. � Companies who have less than 75% onsite revenue of export revenue were excluded.
The TPO rejected 35 comparables selected by the assessee-company in its TP study and accepted 8 comparables selected by the assessee- company, introduced 2 comparables i.e. R S Software and Sasken Network Systems which were not objected by the assessee-company. The comparables selected by the TPO are as under:
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 6 of 16 Balance 35 comparables have been excluded by the TPO for which the assessee-company had not objected. Another 7 companies are introduced by the TPO after giving due opportunity to the assessee- company during the course of proceedings before the TPO. Finally, TPO selected the following comparables: Sl. Name of the comparable company No. 1 Bodhtree Consulting Ltd. 2 Lanco Global Systems Ltd. 3 Exensys Sosftware Solutions Ltd. 4 Sankhya Infotech Ltd. 5 Sasken Network Systems Ltd. 6 Foursoft Ltd. 7 Thirdware Solution Ltd. 8 R S Software (India) Ltd. 9 Geometric Software Solutions co. Ltd. 10 Tata Elxsi Ltd. (seg) 11 Visual Soft Technologies Ltd.(seg) 12 Sasken Communication Technologies Ltd.(seg) 13 Igate (seg.) 14 Flextronics (seg) 15 L&T Infotech 16 Satyam 17 Infosys After giving working capital adjustment at 26.59%, the adjusted arithmetic mean PLI was determined at 23.69%. The TPO completed the assessment as follows: Arithmetic Mean PLI : 26.59% Add: Working capital adjustment : 2.91% Adjusted Arithmetic Mean PLI : Rs.93,677,487 Arm’s length Margin : 23.69% of the operating cost Arm’s Length price @ 123.69% of Operating cost: Rs.115,868,684/-. The price charged by the taxpayer to its Associated Enterprises is compared to the Arm’s length price as under: Arm’s length price @ 123.69% of operating cost: Rs.115,868,684/- Price shown in the International Transactions : Rs.103,045,238/- Shortfall being adjustment u/s 92CA : Rs.12,824,446/-.
AO passed assessment order u/s 143(3) incorporating above TP adjustment and restricting deduction u/s 10A by reducing expenditure incurred in foreign currency on travel, insurance, telecommunication from export turnover.
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 7 of 16 6. Being aggrieved, an appeal was preferred before the CIT(A)-IV, Bengaluru inter alia contending that the very reference made to TPO was bad in law, contesting rejection of certain comparables considered by the assessee-company in the TP study and inclusion of certain comparables by the TPO.
The CIT(A) after upholding the validity of reference to TPO held that Exencys Software Solutions, M/s.Flextronics Software Systems Ltd., iGate Global Solutions LTd., Infosys Technolgoeis Ltd., M/s.L&T Infotech Ltd., Satyam Computers Ltd., and M/s.Thirdware Solutions Ltd. are held to be incomparable applying turnover of Rs.1 to Rs.200 crores. The CIT(A) also held that companies M/s.Bodhtree Consulting Ltd., Tata Elxsi Ltd., VJIL and Geometric Software Solutions Ltd., are functionally different and therefore, held to be not comparable with that of the assessee-company. The CIT(A) also held that as regards expenditure incurred in foreign currency on travel, insurance, telecommunication from export turnover, the same should be reduced from total turnover as well as export turnover for the purpose of calculating benefit u/s 10A of the Act. Being aggrieved, the revenue is in appeal before us.
The learned Departmental Representative contended that the CIT(A) was not justified in adopting turnover of a company as a criteria to decide the comparibility with the assessee company. Therefore, CIT(A) was not justified in excluding the companies viz., Exencys Software Solutions, M/s.Flextronics Software Systems Ltd., iGate Global Solutions LTd., Infosys Technolgoeis Ltd., M/s.L&T Infotech Ltd., Satyam Computers Ltd., and M/s.Thirdware Solutions Ltd. It was further submitted that the CIT(A) ought not to have excluded the comparables viz., M/s.Bodhtree, Tata Elxsi Ltd., VJIL and Geometric Software Solutions Ltd., holding to be functional dissimilar with that of the assessee-company as these companies were included by the assessee-company in the TP study.
On the other hand, learned AR of the assessee had argued that the comparables viz., Exencys Software Solutions, M/s.Flextronics
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 8 of 16 Software Systems Ltd., iGate Global Solutions LTd., Infosys Technolgoeis Ltd., M/s.L&T Infotech Ltd., Satyam Computers Ltd., and M/s.Thirdware Solutions Ltd. require to be deleted from the list of comparables on account of functional difference. In support of this contention, he relied on several decisions of co-ordinate benches which we shall refer to at a later stage. He drawn our attention to the chart filed before us showing functional difference, with that of the assessee- company. He also supported the order of the CIT(A) in excluding M/s.Bodhtree, Tata Elxsi Ltd., VJIL and Geometric Software Solutions Ltd. on account of functional differences.
We heard the rival submissions and considered material on record. The ground of appeal relates to issue of selection of comparables to determine ALP of the transactions of Software Development Services to its AE. The revenue is challenging exclusion of the following comparables: i. Exencys Software Solutions, ii. M/s.Flextronics Software Systems Ltd., iii. iGate Global Solutions Ltd., iv. Infosys Technolgoies Ltd., v. M/s.L&T Infotech Ltd., vi. Satyam Computers Ltd., vii. M/s.Thirdware Solutions Ltd viii. M/s.Bodhtree, Tata Elxsi Ltd., ix. VJIL and x. Geometric Software Solutions Ltd.
11. Ground No.2 challenges the direction of the CIT(A) in directing deletion of the following comparables applying turnover filter of 1 to 200 crores: i. Exencys Software Solutions, ii. M/s.Flextronics Software Systems Ltd., iii. iGate Global Solutions Ltd., iv. Infosys Technolgoies Ltd., v. M/s.L&T Infotech Ltd., vi. Satyam Computers Ltd., vii. M/s.Thirdware Solutions Ltd Learned AR of the assessee not argued on the applicability or otherwise of turnover filter. But we find from record that iGate Global
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 9 of 16 Solutions Ltd., Infosys Technolgoies Ltd., M/s.L&T Infotech Ltd., Satyam Computers Ltd., were the comparables introduced by the assessee-company in its TP study and accepted by the TPO. It is only during the course of proceedings before the CIT(A), assessee-company had chosen to contest the inclusion on the ground that turnover filter is between Rs.1 & Rs.200 crores. The CIT(A), after noticing that the TPO had applied turnover below crore and directed for deletion of these companies. However during the course of hearing of the present appeal, the learned AR of the assessee had given up turnover as relevant criteria for deciding the comparability. However, the assessee- company had argued that these companies were functionally different and therefore pleaded for exclusion of these companies from the list of comparables. Since these companies was selected by the assessee- company itself as the comparables and the TPO had accepted them as comparables there was no occasion for the TPO to rebut the submission made by the assessee-company on these comparables. The CIT(A) had also not dealt with the functional aspect of these comparables, but deleted these companies by applying new filter without giving an opportunity to the TPO thereby violating the provisions of rule 46A of the Income-Tax rules 1962. Thus, CIT(A) has granted relief in violation of rule 46A as well as principles of natural justice.
As regards the contentions urged by learned AR of the assessee on functional difference, as mentioned by us supra, the TPO had no occasion to examine the aspect of these companies as the assessee- company itself has selected the comparables and TPO also accepted the same. The assessee-company has not filed any cross appeal seeking exclusion of these companies on the functional difference. Therefore, in our considered opinion the CIT(A) had grossly erred in excluding these companies without giving an opportunity to the TPO. Hence, we uphold inclusion of the above companies in the list of comparables.
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 10 of 16 13. As regards M/s.Thirdware Solutions Ltd., this company was selected by the TPO and contested by the assessee-company before lower authorities on the ground that this company is functionally different as it is engaged in the diversified activities, income from licensing implying that the company is engaged in software products though it was further contended that the above company was making abnormal profits and therefore this company is required to be excluded. However, the CIT(A) deleted this company applying turnover filter of Rs.1 to Rs.200 crores.
13.1 Before us learned AR of the assessee reiterated the same submissions made before the lower authorities and also placed reliance on the following decisions: i. M/s.McAfee Software (India) Pvt. Ltd. [IT(TP)A No.4/Bang/2012 & 1388/Bang/2011 dated 18/03/2016] ii. M/s.Symbol Technologies India Pvt.Ltd. vs. ACIT [IT(TP)A No.391/Bang/2012] iii. M/s.Sunquest Information Systems (India) Pvt.Ltd. [IT(TP)A No.1302/Bang/2011 & CO 92/Bang/2012 dated 11/06/2015] iv. Textron Global Technology Centre Pvt. Ltd [IT(TP)A No.29/Bang/2012 & CO. No.49/Bang/2012 dated 20/03/2015] v. United Online Software Development (India) Pvt. Ltd. [ITA No.1480/Hyd/2010 dated vi. Colt Technology Services India Pvt. Ltd. [ITA No.609/del/2011 dated l. vii. Intoto Software India Pvt. Ltd. [ITA No.1196/Hyd/2010 dated 24/05/2013] viii. Intoto Software India Pvt. Ltd. [ITTA No.233 of 2014] The assessee-company contests inclusion of this company on three grounds viz. (i) functional difference (ii) non-availability of segmented details between software development services and (iii) abnormal profits. The Special bench of Tribunal in the case of DCIT v. Quark Systems P. Ltd held that abnormal profit or loss cannot be a ground for exclusion or inclusion of a comparable. Therefore, the submission of the assessee that this company requires exclusion from the list of comparables on the ground of making abnormal profits cannot be accepted. As regards the functional difference, TPO has categorically
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 11 of 16 held that revenue from software development services is more than 75% that is 78.31 of the total revenue. Therefore this company is considered to be functionally similar as it qualifies all the filters.
13.2 As regards the contention that segmental details were not available, learned DR has drawn our attention to the order of the TPO where segmental details were available between software development services and sale of products. Therefore the contentions raised by the assessee company cannot be accepted. Therefore we direct the AO/TPO to include in the list of comparables. The grounds of appeal Nos.2, 3 and 4 filed by the revenue are allowed.
14. Ground number 5 challenges the direction of the CIT(A) to exclude M/s.Bodhtree Consulting Ltd., Tata Elxsi Ltd., VJIL and Geometric Software Solutions Ltd., M/s.Bodhtre Consulting Ltd.,: 14.1 This company was selected by the assessee-company and accepted by the TPO. It was only during the course of hearing before the CIT(A) , the assessee-company sought exclusion of this company on the ground of functional difference which was accepted by CIT(A). While doing so, CIT(A) had not given opportunity to the TPO as this company was not contested before the TPO. Thus, CIT(A) violated the provisions of rule 46A of the IT Rules and also infringed principle of natural justice. Therefore, we hold that the CIT(A) was not justified in excluding this company from the list of comparables. As regards Tata Elxsi Ltd.,, VJIL and Geometric Software Solutions Ltd., these companies were introduced by the TPO and after giving opportunity, had included in the list of comparables. These companies were contested on the ground that they are functionally dissimilar as they are engaged in design, ITES and GPO services and also no segmental details were available. This contention was rebutted by the TPO by drawing attention of the assessee-company to the segmental information contained in the annual report of the company. It was further held that the assessee-company was also engaged in design services as per agreement with the AEs which are functionally similar
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 12 of 16 to Software Development Services. The assessee-company had not brought anything on record controverting this finding of the TPO. The CIT(A) excluded this company accepting the contention fo the assessee-company and placing reliance on the decision of the co- ordinate bench in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011). The decision of the CIT(A) is premised on the ground that this company is in ITeS company and no segmental details are available. This finding of the CIT(A) is contrary to evidence on record and therefore, the CIT(A) was not justified in deleting this company from the list of comparables on this ground. Further the CIT(A) had not referred to TPO’s order wherein factual information on functional profile is discussed and also segmental details are very much available.
VJIL: 14.2 This Company was introduced by the TPO and subsequently dropped. The Assessee-company contests that this company should be included in the list of comparables as it qualifies all the filters applied by the TPO. TPO rejected it by holding that it is into product development and after drawing attention to the annual report describing business of the company and also the balance sheet wherein inventories were shown. The assessee-company had not filed any evidence on record controverting the finding of the TPO. Therefore, we uphold exclusion of this company from the list of comparables.
14.3 As regards M/s.Geometric Software Solutions Ltd., this company was selected by the TPO and the assessee-company had contested inclusion of this company by drawing attention that product sales, etc. are 25% of the total revenue of the company. Thus, assessee-company had failed to bring evidence on record controverting the above finding. However, the CIT(A) had simply accepted the contention of the assessee-company without referring to the factual information contained in the annual report. This finding of the CIT(A) is perverse and contrary to record. Therefore, we direct the TPO/AO to IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 13 of 16 include this company in the list of comparables. Grounds No.5 to 8 filed by the revenuer are allowed.
Grounds No.9 to 11 challenge the direction of the CIT(A) to allow deduction u/s 10A after reducing expenditure in foreign currency on travel, telecommunication and insurance both from export turnover as well as total turnover. This decision of the CIT(A) is consonance with the law laid down by the Hon’ble jurisdictional High Court in the case of CIT vs. Tata Elxsi (349 ITR 98). This ground of appeal filed by the revenue is dismissed.
In the result, the appeal filed by the revenue is partly allowed.
CO No.158/Bang/2015: 17. The assessee raised the following cross objections:
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 14 of 16
Cross objection Nos.1 and 14 are general in nature and do not require any adjudication.
18.1 Cross objection No.2 challenges the finding of the CIT(A) to apply only current year data. It is settled principle of law that only current year data should be used for the purpose of comparability. Thus, cross objection No.2 is dismissed.
18.2. Cross Objections No.2, 3 & 4 challenges the finding of the CIT(A) upholding action of the TPO in using information obtained u/s 133(6) of the Act. The assessee-company assails use of information obtained u/s 133(6) of the Act on the ground that this information was not put to the assessee-company. But this allegation is contrary to the fact that the TPO furnished information obtained u/s 133(6) to the assessee during the course of proceedings before the TPO, this is evident from perusal of the order of the TPO. Thus cross objections Nos.2, 3 and 4 are misconceived.
18.3 Cross Objection No.5 challenges denial of risk adjustment to the assessee-company. Neither before the lower authorities or before us, assessee-company had furnished working of risk adjustment nor
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 15 of 16 filed any evidence suggesting that this claim was made before the lower authorities. In the circumstances, we dismiss cross object No.5.
18.4 Cross objection No.6 and 7 challenge the finding of the CIT(A) upholding applying of filter of more than 75% of the total revenue. The assessee-company had not demonstrated as to how filter of more than 75% of the total revenue is not appropriate filter. Hence, we dismiss cross objection Nos.6 & 7 filed by the assessee- company.
18.5 Cross objection No.8 challenges the finding of the CIT(A) upholding application of diminishing revenue filter. The assessee- company had not demonstrated before us as to how this is not a proper filter for selection of comparables. Hence dismissed.
18.6 Cross Objection Nos.9 & 10 challenge inclusion of Flextronics Ltd, Infosys Technologies Ltd., Satyam Computer Services Ltd., Exensys Software Solutions Ltd. and Thridware Solutions on functional difference. The assessee-company is seeking exclusion of Flextronics and Infosys on functional difference. As by held by us in the revenue’s appeal in IT(TP)A No.599/Bang/2013, assessee-company never argued before the TPO on the functional difference. In fact, the assessee- company has included this company in the list of comparables and there was no discussion by the CIT(A) on functional difference of this comparable. Therefore, cross objections filed by the assessee- company are not maintainable, hence, dismissed.
18.7 Cross Objection Nos.11 & 12 challenge the comparables M/s Bodhtree Consulting Ltd., and Geometric Software Solutions Ltd., on the ground that they fail the test of RPT filter of more than 15%. It is matter of record that the assessee-company as well as the TPO applied RPT filter of more than 25% and now seeking relief by RPT filter of only 15%. The cross objections are not maintainable.
18.8 Cross objection No.14 is general in nature and does not require any adjudication and dismissed as such.
IT(TP)A No.599/Bang/2013 & CO No.158/Bang/2015 Page 16 of 16 19. In the result, the cross objection filed by the assessee is dismissed.