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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI S JAYARAMAN
Per Sunil Kumar Yadav, Judicial Member
This appeal and C.O. were heard together. They are being disposed off through this consolidated order. We, however, preferred to adjudicate them one after the other.
IT(TP)A No. 1298/Bang/2013 This appeal is preferred by the revenue against the order of the CIT(A), on the following grounds:
1. The order of the learned CIT (Appeals) is opposed to law and the facts and circumstances of the case.
2. The CIT (Appeals) erred in directing the AO to recompute the deduction under section 10A by excluding communication expenses and travel expenses incurred in foreign currency form the total turnover also without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover.
3. The CIT (Appeals) erred in not appreciating the fact that the decision of the jurisdictional High Court in the case of' Tata Elxsi Limited in of 2009 has not reached its finality as the department’s appeal before the Supreme Court is pending.
4. The CIT (Appeals) erred in holding that the AO had not brought anything on record to repudiate the assessee's contention that the expenses of Rs. 68,875 incurred on Club Membership Fee was wholly or exclusively for its own business without appreciating the fact that the Membership Fee is a onetime payment whose benefit
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 3 of 27 endures for a period of years and therefore the expenditure is capital in nature.
5. The CIT(A) erred in rejecting the diminishing revenue or persistent losses filter as an inappropriate filer for the selection of' comparables without appreciating that the TPO was justified in excluding some cases as not comparable, as persistent loss cases / diminishing revenue cases are exceptional and not comparables.
6. The CIT (Appeals) erred in holding the different accounting year filter for the purposes of comparability analysis without appreciating the fact that the use of this filter ensures that the transactions which are compared took place during the same period / financial year as held by the decision of the Pune bench in the case of' Honeywell Automation India Ltd. V. DCIT in dated 10.02.09 and reported in 09-TIOL- 104.
7. The CIT (Appeals) erred in directing the AO to exclude Geometric Software Solutions Ltd., Tata Elxsi Ltd., and Bodhtree Consulting Ltd., from the list of comparables as being functionally different without appreciating the fact that the companies qualify all the qualitative and quantitative filters applied by the TPO.
8. The CIT (Appeals) erred in holding that Vishal Information Technology Ltd. cannot be taken as a comparable relying on the decision of the ITAT in the assessees own case for the A.Y 2006-07 without appreciating the fact that the company qualifies all the qualitative and quantitative filters applied and that the decision of the ITAT has not reached a finality as an appeal under Section 260A is pending on the said issue.
The CIT (Appeals) erred in directing the AO to exclude Nucleus Net Soft and GIS_Ltd. from the final set of comparables without appreciating the fact that the assesee had not objected to the adoption of Nucleus Net Soft and GIS Ltd., as a comparable before the TPO.
10. The CIT (Appeals) erred in directing the AO to compute the margin of both the assessee as well as the comparable companies by including the foreign exchange gains or loss without appreciating the fact that the foreign exchange loss or gain is not derived from operating activity.
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 4 of 27 11. The CIT (Appeals) erred in not appreciating the fact that any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee nor by the TPO and do not find a place in the order under section 92CA.
12. For these and such other grounds that may be urged at the time of hearing. it is humbly prayed that the order of the CIT (A) be reversed and that of the Assessing Officer be restored.
13. The appellant craves leave to add, alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal.
Ground No. 1 is general in nature, hence needs no independent adjudication. Ground Nos. 2 and 3 relate to the computation of deduction under section 10A of the Income Tax Act (hereinafter called the ‘Act’). During the course of hearing, the learned counsel for the assessee invited our attention that this issue is squarely covered by the judgment of the Jurisdictional High Court in the case of Tata Elxsi 349 ITR 98 in which it has been held that once item is included in the export turnover, it should also be included in the total turnover. Following the judgment of the Jurisdictional High Court, we restore the issue to the file of the AO with the direction to readjudicate the deduction under section 10A of the Act in the light of judgment in the case of Tata Elxsi.
With regard to ground No. 4, our attention was invited that the assessee has made the payment for club membership fee of Rs.68,875/- and claimed to be the revenue expenditure but the AO treated it to capital expenditure and disallowed the claim. When the appeal was IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 5 of 27 preferred to the CIT(A), he treated it to be the revenue expenditure and deleted the addition. The learned counsel for the assessee has contended that by making the payment towards club membership fees, the assessee did not acquire any enduring benefit as it was obtained on account of commercial expediency. Reliance was placed upon the judgment of the Mumbai High Court in the case of Otis Elevators Vs. CIT 195 ITR 682 (Bom) and other judgments of different High Courts.
Having carefully examined the orders of the lower authorities, we find force in the contention of the assessee that since the assessee has obtained the club membership for commercial expediency; the same is to be allowed as business expenditure. We therefore find no infirmity in the order of the CIT(A). Accordingly, we confirm the same.
6. Ground No. 10 relate to the inclusion of foreign exchange fluctuation in operating margin. In this regard, our attention was invited that it is not clear whether the foreign exchange fluctuation was included as operating margin in the case of comparables. Under these circumstances, we are of the view that similar treatment should be given in the case of tested parties and the comparables. If the foreign exchange fluctuation is included in the case of comparables, it should also be included in the case of tested parties. Therefore, we are of the view that these facts should be verified by the AO. Accordingly, we set aside the order of the CIT(A) and restore the matter to the file of the AO to verify whether foreign exchange fluctuation was included in the operating margin of the comparables. If the assessee succeeds in IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 6 of 27 establishing that foreign exchange fluctuation was included in the operating margin of the comparables, the same may be included in the case of tested parties also.
The remaining grounds in this appeal relate to Transfer Pricing issue for which the assessee has filed the chart detailing the profile of the comparables taken by the TPO and the ground for their inclusion/exclusion and also the judgment/orders whereby the exclusion of particular comparables are covered.
The brief facts borne out with regard to the Transfer Pricing issue are that during the course of assessment proceedings, it was observed by the AO that the assessee has international transactions as per section 92B of IT Act. Accordingly, the case was referred to the TPO in order to determine the Arm’s Length Price (ALP). The order under section 92CA was passed by the TPO which was received by the AO on 03.11.2008 and consequently, the adjustment at ALP to the extent of Rs.3,48,72,821/- was made under section 92CA of the Act of which breakup is hereunder: Description Software ITES Services Total Development services Arms Length Rs.14,46,29,504 Rs.16,22,61,474 Rs.30,68,90,978 Price of operating cost Price Received Rs.12,88,92,858 Rs.14,31,25,117 Rs.27,20,17,975 Adjustment u/s Rs.1,57,36,464 Rs.1,91,36,357 Rs.3,48,72,821 92CA
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 7 of 27 9. Against this adjustment to ALP, the assessee preferred an appeal before the CIT(A) and the CIT(A) partly accepted the contentions of the assessee and directed the AO/TPO to recompute the ALP in terms indicated in his order.
The assessee as well as the revenue are in appeal before the Tribunal. During the course of hearing, the learned counsel for the assessee invited our attention to the fact that the assessee Google India Pvt. Ltd., provides information technology services and IT enabled services to its Associated Enterprises (‘AEs’). During the impugned assessment year, international transactions with its AEs undertaken by the assessee are as under: International Transactions Value (INR) Software development service 12,88,92,858 IT Enabled service income 14,31,25,166 Purchase of capital assets 5,29,01,598 Advance received interest free 1,22,11,929 Reimbursement of expenses 7,10,35,365
The learned counsel for the assessee further contended that ALP adjustment was made in both the segments i.e., Software Development Services and IT enabled services.
We therefore are of the view that the issue of ALP adjustment in both the segments be examined independently. We therefore first of all take up the segment of Software Development Services in which the TPO has taken following 17 comparables:
1. Bodhtree Consulting Limited
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 8 of 27 2. Lanco Global Systems Ltd., 3. Exensys Software Solutions Limited 4. Sankhya Infotech Limited 5. Sasken Networks Systems Limited 6. Four Soft Limited 7. Thirdware Solutions Limited 8. R. S. Software (India) Limited 9. Geometric Software Solutions Limited 10. Tata Elxsi Limited (Seg.) 11.Visualsoft Technologies Limited (Seg.) 12. Sasken Communications Limited (Seg.) 13. Flextronics Software Systems Limited (Seg.) 14. Larsen & Toubro Infotech Limited 15. Satyam Computer Services Limited 16. Infosys Technologies Limited 17. Igate Global Solutions Limited (Seg.)
Out of these 17 comparables, the CIT(A) has rejected 10 comparables and directed the TPO to take only following 7 comparables to recompute the ALP in Software Development Services:
1. Lanco Global Systems Ltd., 2. Sankhya Infotech Limited 3. Sasken Networks Systems Limited 4. Four Soft Limited 5. R. S. Software (India) Limited 6. Visualsoft Technologies Limited (Seg.) 7. Sasken Communications Limited (Seg.)
The revenue is aggrieved with the rejection of Bodhtree Consulting Limited, Geometric Software Solutions Limited and Tata Elxsi Limited, whereas the assessee is aggrieved for the inclusion of Sankhya Infotech Ltd., and Four Soft Ltd. During the course of hearing, the assessee has filed a chart with the submissions that rejection of Bodhtree Consulting Ltd, Sankhya Infotech Ltd., Four Soft
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 9 of 27 Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd., was covered by the judgment of the Tribunal in the case of ACIT Vs. McAfree Software (India) Pvt. Ltd., in IT(TP)A No. 04/Bang/2012 and DCIT Vs. Kodiak Networks India Ltd., in IT(TP)A No. 532/Bang/2013 in which the Tribunal has held that these comparables are functionally different with the profile of the assessee company. The learned counsel for the assessee further contended that the profile of the assessee is almost similar to the McAfree Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., where the assessee is also engaged in providing software development services to its AE.
With regard to Bodhtree Consulting Limited, the learned counsel for the assessee has contended that besides functional dissimilarity, this comparable fails on RPT filter as related party transaction in this case is 35%.
The learned DR however contended that the rejection of this comparable is not proper and therefore can be included in the list of comparables.
Having carefully examined the functional profile of Bodhtree Consulting Limited and its related party transactions, in the light of judgment of ACIT Vs. McAfree Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., we find that the Tribunal has categorically held in the case of McAfree Software (India) Pvt. Ltd., whose profile is similar to the assessee’s profile, that Bodhtree Consulting Limited is functionally different and also fails on RPT filter as it is more than
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 10 of 27 25%. The relevant observation of the Tribunal in this regard is extracted hereunder:
“Bodhtree Consulting Ltd.,:
10.3. This company was retained by Ld.CIT(A) but Assessee objects on the basis of functionality. However, as seen from the orders of Co-ordinate Benches in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as well as DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013, Bodhtree Consulting Ltd., was accepted as a comparable. However, in the case of Cordys Software India P. Ltd., in dt. 13-06-2014 (Where one of us, AM is the author) has considered in detail and excluded the same for the following reasons:
"1. Bodhtree Consulting Ltd.
The learned counsel submitted that this company should be rejected under the following TPO's filters:
• Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover. • Functionally different filter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services".
Considering the above, we direct that the above company has to be excluded on the reason of RPT of more than 25% and functionality.”
Since the profile of the Bodhtree Consulting Ltd., was examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd., in AY 2005-06, we find no justification to take a contrary view in the IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 11 of 27 instant case. Accordingly following the same, we hold that Bodhtree Consulting Ltd., is not a good comparable. Therefore, we uphold the order of the CIT(A) who has rightly excluded this comparable from the list of comparables.
With regard to Sankhya Infotech Ltd., it was contended that this comparable is functionally dissimilar from the profile of the assessee and more so the segmental data are not available and these aspects were examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd. Similarly, the profile of Four Soft Ltd., Geometric Software Solutions Limited and Tata Elxsi Ltd., was also examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd. and Kodiak Networks India Ltd., in which the Tribunal has held that Four Soft Ltd., is functionally dissimilar and RPT is at 19%. With regard to Geometric Software Solutions Limited, it was also held that this comparable is functionally dissimilar. Similar is the position with regard to Tata Elxsi. The relevant observations of the Tribunal in the case of McAfee Software (India) Pvt. Ltd. are extracted hereunder:
“Sankhya Infotech Ltd., Thirdware Solution Ltd., & Tata Elxsi Ltd., : 10.5. These three companies are rejected as comparables on functionality in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (paras 19- 20, 22-26, 27-30 restively) and in the case of Cordys Software India P. Ltd., in dt. 13-06-2014 (supra) at Para No. 13. The analysis by the Co-ordinate Benches is as under: "Sankhya Infotech Limited ('Sankhya')
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 12 of 27
It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below:
(1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:-
- SILICONTM LMS (Training Management Information - SILICONTM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System)
- IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations.
- Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below:
"2. Activities
The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956."
The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in for the assessment year 2005-06) has held that the said company is not a comparable to the Assessee therein which was also in the business of software development.
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 13 of 27
The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies.
We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:-
"15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product developments. Since Assessee is in the product development, having I.P. rights, the same is not comparable.
15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED :
This company is objected to by the Assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns.
15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under :
"23. The other companies which are objected to by the Assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the Assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 14 of 27 more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the Assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in / Bang/2010 wherein these companies were directed to be excluded from the list of comparables.
The learned D.R. however, supported the Orders of the authorities below.
24. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 15 of 27
said company has derived income from software licence also and AMCs.
25. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products.
As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the Assessee company to bring them on par with the Assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables.
The learned counsel for the Assessee submitted before us that TATA Elxsi Ltd., a comparable company out of the 10 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability. It was his submission that this company will however, have to be excluded as this company was held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005- 2006 order dated 12.2.2014.
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 16 of 27
We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows:
"15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and Assessee's objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to Assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, Assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22:
"22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the Assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another Assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the Assessee."
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 17 of 27
Keeping the Assessee's objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the Assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to Assessee services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to Assessee."
Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services Pvt.Ltd., order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee.
In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies.
"13. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 discussing above comparables in detail, but, suffice to say that Assessee's submissions are valid. The AO is directed to exclude the above comparables and re- work out the arm's length margin accordingly. The ground No.8 and additional ground raised by Assessee are considered as allowed".
In view of the above, the above three companies are to be excluded.
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 18 of 27
Sasken Network Systems Ltd., R S Software (India) Ltd., Visualsoft Technologies Ltd., and Sasken Communication Technologies Ltd.,
10.6 Since there is no objection from Assessee and was selected by TPO, the above companies are retained.
Four Soft Ltd.,
10.7. The objection by Assessee is that this company is a product company. was analysed and accepted in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) para 22. It was held that the said company ahs derived income from software license and AMCs. Since functionality was already analysed, respectfully following the Co-ordinate Benches also, the same was to be excluded. i. Intoto Software India Pvt. Ltd., ITA No. 1196/Hyd/2010; ii. Cordys Software India P. Ltd., ITA No. 1451/Hyd/2010
Geometric Software Solutions Company Ltd.,:
10.8. Even though this company was accepted as comparable in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) and Cordys Software India P. Ltd., in dt. 13-06-2014 (supra) and was not objected to, we find that the Co- ordinate Bench at Banalore in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 has considered that this is in product devolopement. We have perused the TPO's order. In page 85 and 86 of the order, this comparable was analysed. TPO records that there are product sales to the extent of 18%. Segmental profits are not available. On assumptions, this company was retained. We are of the opinion that being a product based company, the same is not strictly comparable to a service company like Assessee. In the absence of segmental profit of service income, we have to exclude the same. Following the decision in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 (supra), this company is accordingly excluded.
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 19 of 27
19. Since the Tribunal has examined the profile of these comparables in the case of McAfee Software (India) Pvt. Ltd., in the light of other orders of the Tribunal and has categorically held that these comparables are not good comparables for determining the ALP in the case of McAfee Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., whose profile is similar to assessee’s profile, we find no justification to re-examine the profile of these comparables again. We therefore hold that Sankhya Infotech Ltd., Four Soft Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd., are not good comparables. Therefore they have to be excluded from the final list of comparables. We accordingly confirm the order of the CIT(A) with respect to exclusion of Bodhtree Consulting Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd. Since the CIT(A) has taken Sankhya and Foursoft Ltd., in the list of comparables, we set aside the order of the CIT(A) and direct the AO to exclude these comparables from the final list of comparables. After the exclusion of these comparables, left out comparables, Lanco Global Systems Ltd., Sasken Networks, R. S. Software (India) Ltd., Visualsoft Technologies and Sasken Communications Ltd., be taken in the final list of comparables
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 20 of 27 for determination of the ALP for the software development services provided by the assessee to its AE.
20. IT enabled services : Under this segment, the TPO has taken following 9 comparables:
Allsec Technologies Ltd., 2. Saffron Global Ltd., 3. Vishal Information Tech Ltd., 4. Cosmic Global Ltd., 5. Transworks Information Services Ltd., 6. Wipro BPO Solutions Ltd., 7. Ace Software Exports Ltd., 8. Nucleus Netsoft & GIS Ltd., 9. Maple E Solutions Ltd.,
Out of these 9 comparables, the CIT(A) has rejected Vishal Information Tech Ltd., Wipro BPO and Nucleus Netsoft & GIS Ltd. The assessee is against the inclusion of Allsec Technologies Ltd. But during the course of hearing, he could not establish sufficient reasons for its rejections. With regard to Vishal Information and Nucleus Netsoft & GIS Ltd., of which exclusion was challenged by the revenue, it was submitted that these comparables were examined by the Tribunal in the case of Pr. CIT Vs. IHG IT Services (India) Pvt. Ltd., in ITA 264/2016 and DCIT Vs. Genesis Integrating Systems India Pvt.
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 21 of 27 Ltd., in IT(TP)A 869/Bang/2013. Copy of the order is placed on record. It was also contended that profile of these comparables are similar to the assessee’s profile as they are also engaged in IT enabled services. On perusal of the orders of the Tribunal, we find that Vishal Information Tech Ltd., and Nuclues Netsoft & GIS Ltd., were examined by the Hon’ble Punjab and Haryana High Courts and their exclusion was approved. The relevant decision of the Hon’ble Punjab and Haryana High Court in this regard is extracted hereunder:
“5. As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal has come to a clear finding of fact that it outsourced about 44.81% of its business. For instance, it was observed that Vishal Information Technologies Limited has a low employee cost of 1.25% of operating revenue. The Tribunal also observed that the TPO had himself referred to the NASSCOM survey that the average wages and salaries to sales ratio of IT/ITES industry in India was 46.1%. The assessee’s wages to sales is 53% which is not comparable to Vishal Information Technologies Ltd., whose wages to sales is 1.25%. This is a finding of fact and there is nothing to indicate that the same is erroneous much less perverse. The exclusion of Vishal Information Technologies Limited is, therefore, justified.
The only contention regarding the exclusion of Nucleus Netsoft and GIS (India) Limited is that there is no reasoning. This, however, is not even a ground taken in the appeal filed before us. In any event, we perused the 22nd annual Report for the year 2005-06 of Nucleus Netsoft and GIS (India) Ltd. Schedule 12 furnishes the operating & other expenses. The data processing charges are Rs.1.04 crores out of the total
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 22 of 27 operating & other expenses of about Rs.2.41 crores. Thus, an amount of over 40% is outsourced. The finding of the Tribunal, therefore, cannot be held to be perverse.”
These comparables were also examined by the Tribunal in the case of Genesis Integrating Systems India Pvt. Ltd. A copy of order is placed on record at page Nos. 65 to 79 of the compilation in which the Tribunal has examined the profile of Vishal Information Tech Ltd., and Nuclues Netsoft & GIS Ltd. The relevant observations of the Tribunal in this regard are extracted hereunder:
“20. Ground no.3 & 4 challenges the directions of the learned CIT(A) deleting the comparable of M/s Vishal Information Tech. Ltd. selected by the TPO from the list of comparables. We find merit in the submission of the learned counsel that the company is functionally different as this company is engaged in the business of providing call centre services. The Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) had distinguished the nature of business between the KPO and ITES as follows:
“34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centres (India) (P.) Ltd.(supra). As indicated above, the expression BP0 and KPO are plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge, KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression KPO in common parlance is used to indicate an ITEs provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BP0 service providers, in as much as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly 1TEs sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the IT Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 23 of 27 service product characteristics. This factor cannot be undermined by using a broad classification of ITEs which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entry rendering KPO services cannot be considered as a comparable for the purpose of Transfer Pricing analysis. This perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO service providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently.
As pointed out by the Special Bench of the Tribunal in Maersk Global Centres (Ind.) Pvt. Ltd (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases, a classification of BP0 and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower- end ITEs such as call centres etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold".
Furthermore, the company operating margin is 50.68% which is considered to be abnormal, in the line of business it is engaged. Therefore, it cannot be considered as a comparable in the light of the following decisions of the Co-ordinate Benches; 1. Genesis Integrating Systems (India) (P) Ltd., v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 2. Google India (P) Ltd., V. Dy. CIT [2013] 55 SOT 489/29 taxmann.com 412 (Bang – Trib.) 3. CRM Services India (P) Ltd. case (supra) 4. Fiat India (P) Ltd., v. ACIT 2010-TII-30-ITAT-Mum-TP
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 24 of 27 5. Global Turbine services Inc. V. DDIT (International Taxation) [2013] 38 taxmann.com 220 (Delhi – Trib.) 6. Dy. CIT V. Panasonic AVC Networks India Co. Ltd. [2014] 63 SOT 121 (URO)/42 taxmann.com 420 (Delhi – Trib.) 7. Dy. CIT V. Petro Araldite (P) Ltd., [2013] 145 ITD 182/35 taxmann.com 590 (Mum. – Trib.) 8. Ariston Thermo India Ltd., V. Dy. CIT [2014] 147 ITD 388 [2013] 36 taxmann.com 501 (Pune – Trib.) 9. Honeywell Technology Solutions Lab (P.) Ltd. v. Dy. CJT [2014] 61 SOT 61 (RO)/[2013] 35 taxmann.com 144 (Bang. – Trib.) 10.Toyota Kirloskar Motors (P.) Ltd V. Asstt. CIT [2012] 28 taxmann.com 293 (Bang.). Therefore, we do not find any reason to interfere with the reasoning of the learned CIT(A). Hence, these grounds of appeal filed by the revenue are dismissed.
21. Ground no.5 challenges the directions of the learned CIT(A) to exclude Ms/s Nucleus & GIS Ind. Ltd from the list of comparables selected by the TPO. The CIT(A) deleted this company on the ground that the TPO had not clarified whether this company satisfies the filter of related party transactions. We find that from its annual account it had outsourced a considerable portion of its business, where as assessee company, it carried out the entire operation by itself. It cannot be considered as a comparable on the same reasoning the Co-ordinate Bench of Hyderabad in the case of IVY Coinptech (P) Ltd (supra) deleted this company from the list of comparables by holding as under:
"We have heard the parties. The sole contention of the assessee for excluding the aforesaid company is the employee cost as a percentage of the operating revenue is much lower compared to the assessee. On a perusal of the order passed by the co-ordinate bench in the case of HSBC Electronic Data Processing India Pvt. Ltd. (supra), it is to be noted that the co-ordinate bench while considering the objection of the assessee with regard to the aforesaid company in para-13 accepted assessee's contention that the company outsourced its work and has held that the company cannot be selected as a comparable on account of its low employee cost. In view of such order of the co-ordinate bench, we direct the AO/TPO to examine this aspect and if IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 25 of 27 there is substantial difference between the assessee the aforesaid company, then this company cannot be treated as a comparable".
Respectfully following the co-ordinate bench decision, we hold that the learned CIT(A) is justified in giving direction to delete M/s Nucleus Netsoft & GIS Ind. Ltd. as a comparable. Hence, this ground of appeal filed by the revenue is dismissed.”
22. Since the Tribunal has examined the profile of these comparables and is of the view that these comparables are not good comparables for computing the ALP, we find no justification to readjudicate the profile of these comparables again. We therefore confirm the order of the CIT(A) who has rightly excluded these comparables. Accordingly, the order of the CIT(A) is confirmed with respect to IT enabled services segment. Accordingly, the AO/TPO is directed to recompute the ALP under software development services segment only.
CO No. 13/Bang/2016:
23. The assessee has also filed C.O. assailing the order of the CIT(A) on the following grounds:
1. The Commissioner of Income-tax Appeals has erred in confirming the action of the Assessing Officer / the Transfer Pricing Officer of rejecting 'Quintegra Solutions Limited' as a comparable company while benchmarking the assessee's international transactions in the software services segment.
2. The Commissioner of Income-tax Appeals has erred in confirming the action of the Assessing Officer / the Transfer Pricing Officer of including the following companies while benchmarking the assesee's international transactions in the software service segment:
IT(TP)A No.1298/Bang/2013 & CO No. 13/Bang/2016 Page 26 of 27 • Sankhya Infotech Limited; and • Four Soft Limited.
3. The Commissioner of Income-tax Appeals has erred in confirming the action of the Assessing Officer / the Transfer Pricing Officer of including 'Allsec Technologies Limited' as a comparable company while benchmarking the assesee's international transactions in the Information Technology Enabled Services ("lTeS") segment.
During the course of hearing, the assessee has opted not to press ground Nos. 1 and 3. Therefore, are dismissed being not pressed. As far as ground No. 2 is concerned, we have already dealt with these 2 comparables while adjudicating the issue in the revenue’s appeal on the basis of the chart filed by the assessee and we have directed that only Sankhya Infotech and Four Soft Ltd., be excluded from the final list of comparables. Accordingly, the appeal of th e revenue and the C.O. of the assessee are partly allowed for statistical purposes.
In the result, revenue’s appeal and C.O. of the assessee are partly allowed for statistical purposes.
Pronounced in the open court on this 3rd day of March, 2017.