Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, BANGALORE BENCH ‘ B ’
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed against the assessment order dt.21.01.2015 passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute
2 IT(T.P)A Nos.491 & 174/Bang/2015 Resolution Panel (in short ‘DRP’) dt.8.12.2014 for the Assessment Year 2010-11.
The assessee has reported its segmental, functional and international transactions as reported by the Transfer Pricing Officer (‘TPO’) as under :
Sl.No. Type of Transaction Amount Amount Paid Received (Rs.) (Rs.) 1 Reimbursement of expenses 2.21,02,512 2,65,38,426 2 Receipt for Software 153,23,67,367 development services. 3 Receipt for IT enabled 9,07,95,446 services 4 Marketing Support Services 2,01,02,698 Thus it is clear that the assessee is working in three segments namely software development services, Information Technology Enables Services (ITES) and marketing support services. The dispute in these appeals is regarding two segments i.e. software development and ITES. The TPO/A.O. made adjustment in respect of software development services and ITES which was challenged by the assessee before the DRP. The DRP applied the turnover filter of Rs.200 Crores as well as Related Party Transaction (RPT) filter at 0% as against the filter applied by the TPO at 25%. Thus both the assessee as well as the revenue have challenged the 3 IT(T.P)A Nos.491 & 174/Bang/2015 final order passed in pursuant to the directions of the Dispute Resolution Panel (DRP). The grounds raised by the assessee as well as revenue are reproduced below :
Assessee's Grounds of Appeal 4 IT(T.P)A Nos.491 & 174/Bang/2015 5 IT(T.P)A Nos.491 & 174/Bang/2015 6 IT(T.P)A Nos.491 & 174/Bang/2015 Revenue’s Grounds of Appeal 7 IT(T.P)A Nos.491 & 174/Bang/2015
3. At the time of hearing the learned Authorised Representative stated at Bar that the assessee does not press Ground Nos.1 to 4, 5.6, 6, 8 & 9 and the same may be dismissed. Accordingly Ground Nos.1 to 4, 5.6, 6, 8 & 9 are dismissed being not pressed.
Software Development Services Segment
The TPO selected 10 comparable companies as under :
After allowing the working capital adjustment of 1.56%, the TPO has computed the adjusted mean margin at 21.43%. Accordingly, the TPO
8 IT(T.P)A Nos.491 & 174/Bang/2015 proposed an adjustment under Section 92CA of Rs.12,32,19,187. The assessee challenged the action of the TPO before the DRP. The DRP applied turnover filter of Rs.200 Crores as well as related party filter at 0% and consequently excluded 8 companies out of the set of 10 comparable companies selected by the TPO. The revenue has challenged the order of the DRP regarding the application of the turnover as well as RPT filter.
On the other hand, the assessee has challenged the functional comparability of 4 companies which are as under :
(i) Infosys Limited (ii) KALS Information Systems Ltd. (iii) Persistent Systems Limited. (iv) Tata Elxsi Limited (Seg.)
The learned Authorised Representative of the assessee has submitted that though the DRP has applied turnover filter of Rs.200 Crores however even if a filter of 10 times of the assessee's turnover is applied on both sides 2 companies namely Infosys Ltd. and KALS Information System Ltd. are required to be excluded as breaching the turnover filter of 10 times of the assessee's turnover on the higher side
9 IT(T.P)A Nos.491 & 174/Bang/2015 as well as lower side. He has pointed that the assessee's turnover in software development segment is Rs.151.08 Crores whereas the turnover of Infosys Ltd is Rs.21,140 Crores and turnover of KALS Information System Ltd. (Seg.) is only Rs.2.16 Crores. Thus the learned Authorised Representative has submitted that these two companies are required to be excluded on this ground.
On the other hand, the learned Authorised Representative has not disputed the fact of the turnover of these two companies however she has contended that the turnover is not a relevant factor for deciding the comparability of the companies in the software development services activity. She has relied upon the order of the TPO/A.O.
We have considered the rival submissions as well as the relevant material on record. The turnover of the assessee is in the software development services segment is Rs.151.08 Crores therefore considering the tolerance range of the turnover to the extent of 10 times of the assessee's turnover on both sides, the companies which are having the turnover of less than Rs.15.1 Crores and more than Rs.1,510 Crores would be excluded from the set of comparables. Applying this criteria of 10 IT(T.P)A Nos.491 & 174/Bang/2015 10 times tolerance range of assessee's turnover, we find that the following companies are breaching this tolerance range of filter :
i) Infosys Limited : Rs.21,140 Crores. ii) KALS Information Systems Ltd. : Rs.2.16 Crores. iii) L & T Infotech Limtied : Rs.1,776.76 Crores.
Though the assessee is not seeking exclusion of L&T Infotech Ltd. however once a filter is applied it has to be applied uniformly and therefore the companies having turnover of more than 10 times of the assessee's turnover and less than 1/10 th of the assessee's turnover are required to be excluded. We direct the TPO/A.O. to exclude these three companies from the set of comparables.
Persistent Systems Limited
The learned Authorised Representative of the assessee has submitted that though the DRP excluded this company by applying the turnover filter however this company is otherwise functionally dissimilar to that of the assessee. This company is engaged in outsource software product development which is different from assessee's software development services provided to Associated Enterprise (AE). He has referred to the Annual Report of this company to show the income
11 IT(T.P)A Nos.491 & 174/Bang/2015 earned from the sale of both software services and products. He has further pointed out that this company also receives income from licensing, royalty of products and no segmental results are given. This company has also incurred R&D expenditure. The learned Authorised Representative has further submitted that there was an extraordinary event during the year as this company has issued IPO during the year under consideration. In support of his contention, he has relied upon the decision of this Tribunal in the case of DCIT Vs. Electronics for Imaging (India) Pvt. Ltd. 70 taxman.com 299 and submitted that for the same assessment year the Tribunal has held that this company is not functionally comparable to the software development captive service provider.
On the other hand, the learned Departmental Representative has submitted that when the nature of activity is identical and similar to the assessee in providing software development services then the minor variation in the nature is not relevant. She has relied upon the order of the TPO/A.O.
13. Having considered the rival submissions as well as the relevant material on record, we note that the functions as pointed out from the 12 IT(T.P)A Nos.491 & 174/Bang/2015 Annual Report of this company has been considered by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging (India) Pvt. Ltd. (supra) in paras 24 to 26 as under :
“ 24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration.
The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us.
26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables.”
Following the earlier order of this Tribunal, we direct the TPO/A.O. to exclude this company from the set of comparables.
Tata Elxsi Limited (Seg.)
This company was excluded by the DRP by applying the turnover filter of Rs.200 Crores.
The learned Authorised Representative of the assessee has submitted that this company is functionally dissimilar as indulged in the 13 IT(T.P)A Nos.491 & 174/Bang/2015 product design service, innovation design, engineering services and visual computing lab, special effects and animation. He has referred to the Annual Report of this company and submitted that the software development services segment of this company includes these functional activity which are entirely different from the functions of the assessee.
He has further submitted that this company is also engaged in R&D activity as clear from the financials of this company. The learned Authorised Representative has submitted that this Tribunal in assessee's own case for the Assessment Year 2006-07 has excluded this company from the set of comparables by holding that this company is functionally not comparable with the assessee. He has also relied upon the decision of the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging (India) Pvt. Ltd. (supra).
On the other hand, the learned Departmental Representative has relied upon the order of the TPO/A.O. and submitted that the TPO found this company as functionally comparable and also satisfied all the filters then there cannot be a vertical bifurcation in the segment of software development services.
14 IT(T.P)A Nos.491 & 174/Bang/2015 17. We have considered the rival submissions as well as the relevant material on record. We find that for the Assessment Year 2006-07, the Tribunal in assessee's own case vide order dt.23.9.2015 in IT(TP)A No.1425/Bang/2010 has held that this company is not a good comparable and directed to be excluded from the list of comparables.
Further the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging (India) Pvt. Ltd. (supra) has held in paras 30 to 33 as under :
“ Tata Elxsi Ltd.
30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1/22 taxmann.com 96.
The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra).
We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies India (P.) Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:— "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We 15 IT(T.P)A Nos.491 & 174/Bang/2015 agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties."
No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra), we do not find any reason to interfere with the finding of the DRP.”
In view of the earlier order of this Tribunal in assessee's own case as well as the decision in the case of DCIT Vs. Electronics for Imaging (India)
Pvt. Ltd. (supra), we hold that this company is functionally not comparable with the assessee and accordingly we direct the TPO/A.O. to exclude this company from the set of comparables.
As regards revenue’s grievance against the DRP the remaining companies which were excluded by the DRP by applying the turnover filter and RPT filter stand restored to the set of comparables. Needless to say the benefit under Section 92CA be given to the assessee.
Since we have directed the TPO/A.O. for exclusion of certain companies from the set of comparables, accordingly, the TPO/A.O. is directed to recompute the ALP on the basis of remaining comparables.
16 IT(T.P)A Nos.491 & 174/Bang/2015 ITES Segment
The assessee is providing finance back office support service to its AE. The TPO selected 9 comparable companies to determine the ALP of international transactions in ITES segment as under :
Sl.No. Name PLI 1 Accentia Technologies Ltd. 43.06% 2 Fortune Infotech Ltd. 22.80% 3 ICRA Online Ltd. (Seg.) 43.39% 4 Informed Technologies India Ltd. 26.15% 5 Infosys BPO 31.23% 6 Cosmic Global Ltd. 14.97% 7 Jeevan Scientific Technology Ltd. (Seg.) 21.05% 8 Nittany Outsourcing Services Ltd. 30.67% 9 Microland Ltd. - 2.14% Average 25.69%
The TPO has allowed the working capital adjustment of 0.47% and calculated the adjusted mean margin at 25.22%. Accordingly, the TPO has proposed an adjustment under Section 92CA of Rs.74,69,292. The assessee challenged the action of the TPO before the DRP. The DRP applied the turnover filter of Rs.200 Crores and RPT at 0% and accordingly excluded 7 companies from the set of comparables. Thus both the assessee as well as revenue have challenged the order of the DRP. The assessee is now seeking exclusion of 5 companies from the set
17 IT(T.P)A Nos.491 & 174/Bang/2015 of comparables selected by the TPO on functional dissimilarity which are as under : ii) Icra Online Limited (Seg.)
At the time of hearing, the learned Authorised Representative has stated that the assessee does not press the exclusion of Informed Technologies India Ltd. therefore the same may be retained in the set of comparables. The learned Departmental Representative has no objection if this company is retained in the set of comparables.
Accordingly, the company Informed Technologies India Ltd. is retained in the set of comparables.
We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The assessee's turnover in the ITES segment Rs.9.06 Crores. Applying the filter of 10 times on both sides the companies which - 18 IT(T.P)A Nos.491 & 174/Bang/2015 are having more than Rs.90.6 Crores and less than Rs.0.90 Crores are to be excluded. The company Accentia Technology India Ltd. is having turnover of Rs.92.76 Crores therefore this company breach the turnover tolerance range of 10 times of the assessee's turnover. Further the learned Authorised Representative of the assessee has relied upon the decision of the co-ordinate bench of this Tribunal dt.6.1.2017 in the case of Goldman Sachs Services Pvt. Ltd. Vs. DCIT in IT(TP)A No.267/Bang/2015 and 222/Bang/2015. We find that in the said case, the Tribunal has considered the functional comparability of this company in paras 8 & 9 as under :
“ 08. With regard to Accentia Technologies Ltd, the AR submitted that it is functionally different from it as that company is also engaged in medical coding which is a niche function requiring understanding of medical terminologies. Further, it is also engaged in KPO services including legal process outsourcing, and high end software services and also operates from onsite locations in US, UK, and Middle east. No segmental information is reported by that company in its financial statement, it owns IPs and during the year it amalgamated with Asscent lnfoserve and relied on the following cases :
� ISG Novasoft Technologies Ltd (IT No.185(B)/2015) AY 2010-11) (Bangalore ITAT) � Amba Research (India) Private Limited (IT no. 286/Bang/201S) (AY 2010-11) (Bangalore ITAT) � Goldman Sachs Services P Ltd vs DCIT (IT(TP)A No. 1659/B/2012 (AY 2008-09) (Bangalore ITAT) � Rampgreen Solutions Pvt. Ltd. (ITA No. 1066/Del/2015) (AY 2008- 09) (Delhi High court) .
19 IT(T.P)A Nos.491 & 174/Bang/2015 09. The relevant portion of the order from ISG Novasoft Technologies Ltd in IT No.185(B)/2015) a y 2010-11 (Bangalore ITAT) is extracted as under: “5. We have perused the orders and hear the rival contentions. The issue of comparability of M/s Accentia Technologies Ltd., in the ITES segment had come up before this Tribunal in the case of M/s Novo Nordisk India Pvt.Ltd., Vs DCIT (Supra) This Tribunal had held as under; “ As regards the selection of Acentia Technologies Ltd., as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (Ind.) Pvt.LTd., Vs Addl/Dy CIT, Circle- 1(2), Hyderabad and vice versa (ITA No.124 and 170/Hyd/2014 dated 31.7.2014); Excellence Data Research Pvt.Ltd, Hyderabad Vs ITO Ward 2(1), Hyderabad (ITA No.159/Hyd/2014 dated 31.7.2014); and Hyndai Motors India Eng.Pvt.Ltd., Hyderabad Vs DCIT, Circle-2(2), Hyderabad (ITA No.255/Hyd/2014 dated 31.7.2014, wherein M/s Accentia Tech. Ltd., (Seg) was excluded by the Tribunal from the list of comparables on the ground that it was a case of mergers and acquisition and the company was also found to be functionally different. The relevant observations of the Tribunal as recorded in para-19.2 of the order passed in the case of Excellence Data Research Pvt.Ltd. Hyderabad(Supra) being relevant in this case, are reproduced below; “19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion, that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s Mercer Consulting (Ind.) Pvt.Ltd (Supra), which indicates that the TPO therein has excluded it at outset. In view of this, we direct the AO/TPO to exclude this comparable, from the list of comparable selected”.
As pointed out by the learned counsel for the assessee, there was acquisition of a company by M/s Accentia Technologies Ltd., during the relevant year, and the said company therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter-alia in the case of Excellence Data Research Pvt. Ltd(Supra). Although, the learned DR has sought to contend that the acquisition of a company by M/s Accentia Tech.Ltd., took place at the fag end of the year under consideration, the learned counsel for the assessee has 20 IT(T.P)A Nos.491 & 174/Bang/2015 pointed out that the process of acquisition had started on 15-05-2008 itself, i.e in the earlier part of the year under consideration. We therefore, follow the decision of the co-ordinate bench of this Tribunal in the case of Excellence Data Research Services Pvt.Ltd (Supra) and direct the AO/TPO to exclude the Accentia Tech.Ltd., from the list of comparables”. Since assessment year involved is very same, we are of the opinion that the assessee has to succeed on its contention. We direct the lower authorities to exclude Ms Accentia Tech.Ltd., from the list of comparables, while analyzing the pricing of the international transaction undertaken by the assessee in the ITES segment. Ground no.8 of the assessee is allowed. ”
Following the above decision, we direct the TPO to exclude Ms Accentia Tech Ltd., from the list of comparables, while analyzing the pricing of the international transaction undertaken by the assessee in the ITES segment. Thus, appeal ground no 4.2 of the assessee’s appeal is allowed.”
In view of the above facts, this company is having turnover of more than 10 times of the assessee's turnover and also found to be not functionally comparable by the co-ordinate bench decision (supra) we direct the TPO/A.O. to exclude this company from the set of comparables.
ICRA Online Limited (Seg.)
We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The DRP excluded this company by applying the RPT filter of 0%. The TPO applied the RPT filter of 25%. Thus this issue has come up in revenue’s appeal regarding proper RPT filter for selection of comparables.
21 IT(T.P)A Nos.491 & 174/Bang/2015 25. Having considered the rival submissions as well as the relevant material on record on this issue, we find that the Tribunal has taken a consistent view that in normal circumstances 15% RPT tolerance is a proper criteria for selection of comparable companies. Accordingly, by applying the said criteria of 15% RPT as a tolerance range, this company ICRA Online Ltd. having 16% RPT is required to be excluded from the set of comparables. We further note that the Tribunal in the case of Goldman Sachs Services Pvt. Ltd. Vs. DCIT (supra) in paras 6 & 7 held that this company is not a good comparable of ITES captive service provider. In view of the above facts when this company is having RPT of more than 15% as well as by following the decision of this Tribunal, we direct the TPO/A.O. to exclude this company from the set of comparables.
Infosys BPO Limited.
This company is having turnover of Rs1,126.63 Crores in comparison to the assessee's turnover of Rs.9.06 Crores therefore the turnover of this company is many times more than the upper limit of 10 times of the assessee's turnover. Hence by applying this criteria of 10 times of the assessee's turnover this company is required to be excluded
22 IT(T.P)A Nos.491 & 174/Bang/2015 from the set of comparables. Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables.
The learned Authorised Representative of the assessee has submitted that this company is functionally not comparable with the assessee. He has submitted that the TPO has not included this company in the show cause notice proposing the set of comparables however without giving an opportunity to the assessee, the TPO has included in the final set of comparables. The DRP has not examined the functional comparability of this company and excluded the same on RPT filer.
On the other hand, the learned Departmental Representative has submitted that when the TPO has examined the functional comparability of this company then this company should be retained in the set of comparables.
We have considered the rival submissions as well as the relevant material on record. We find that this company was not part of the initial proposal of the TPO as per the show cause notice. Therefore the assessee was not given an opportunity of hearing to raise its objections against inclusion of this company in the set of comparables. The 23 IT(T.P)A Nos.491 & 174/Bang/2015 assessee raised the objection against the inclusion of this company before the DRP however the DRP has not examined the functional comparability of this company and excluded the same by applying 0% RPT filter. In view of the fact that the TPO has not given an opportunity to the assessee to point out the functional dissimilarity and raise the objection, we set aside this issue to the record of the TPO for reconsideration of the functional comparability of this company after considering the objections raised by the assessee.
The grievance of the revenue regarding exclusion of the companies by the DRP by applying turnover and RPT filters stand addressed when we have applied the turnover filter of 10 times of the assessee's turnover and RPT tolerance range of 15%. Thus the remaining companies which were excluded on turnover filter and RPT filter by the DRP will be restored to the set of comparables. Since we have directed the exclusion of certain companies form the set of comparables and reconsideration therefore the TPO/A.O. has to recompute the ALP on the basis of the remaining comparables. Needless to say the benefit of proviso to section 92C(2) be considered.
24 IT(T.P)A Nos.491 & 174/Bang/2015 31. In the result, the appeals of the assessee as well as revenue are partly allowed.
Order pronounced in the open court on the 19th day of May,2017.