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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI A. K. GARODIA & SMT ASHA VIJAYARAGHAVAN
Per Asha Vijayaraghavan, Judicial Member
These are cross appeals filed by the appellant.
Briefly, the facts of the case are as follows: The assessee is a 100% export oriented unit established under the software technology park scheme. The appellant is primarily engaged in the business of software development services of electronic integrated circuits and firmware development of integrated circuits. The appellant also provides marketing support services to its parent company.
3. The grounds of appeal by the assessee are:
4. The appellant had filed the Return of Income for the Assessment Year 2005-06 on 31st October, 2005, declaring taxable income as NIL under the regular provisions of the Income Tax Act, 1961 (“the Act”) and paid taxes on book profits under section 115JB of the Act.
5. The return was assessed by the Assistant Commissioner of Income- Tax, Circle-11(4), Bangalore (hereinafter referred to as the Assessing Officer) under section 143(3) vide order dated 31st December, 2008 and received by the appellant on 1st January, 2008.
6. In the assessment order, the Assessing Officer has made the following adjustments/additions in the said Order:
Adjustment under Transfer Pricing under section 92CA of the Act The learned assessing officer made a reference to the Additional Director of Income Tax (Transfer Pricing) (hereinafter referred to as “TPO”) to examine the international transactions between the appellant and its Associated Enterprises(AEs).
The appellant had entered into an arrangement with its AE for provision of software development services and marketing support services.
7. The appellant has given their written submissions wherein they have quoted extensively from various tribunal judgments which are actually case specific. Also the appellant has quoted from the OECD guidelines. After examining the appellant’s written submission and having gone through the TPO’s order it is held that the TPO after doing extensive analysis has computed the ALP based on the TNMM. Even the appellant had selected TNMM as most appropriate method for determining of ALP in earlier years as mentioned by the TPO in para 7.1 in page 32 of his order. The TPO has discussed at length the reasons for rejection of cost plus method and the CUP method in his detailed discussion in para 7 page 25 to 32 and has categorically concluded the TNMM as the most appropriate method and it is held that TPO’s finding in respect of selection of the most appropriate method as TNMM is in order. As can be seen from the detailed analysis of the TPO, it is seen that the filters adopted by the TPO are in order as most similar cases as that of the appellant are chosen by applying filters like companies whose software income is less than one crore, whose related party transactions are more than 25% of the sales, whose export sales are less than 25% of the total sales, companies incurring losses year after year companies having different financial years other than YE 31.03.2005. Even the TPO has considered 02 comparables as given by the appellant. Finally, the TPO zeroed in on 594 comparables, rejected 577 out of them by applying filters and accepted 17 as comparable cases. Subsequently, after accepting 02 comparables, total comparables were determined at 17. The TPO finally arrived at 17 comparables and determined the average OP to total cost at 26.59%. From the TPO’s order it is very clear that the TPO has used contemporaneous data as against appellant’s adoption of earlier year’s data. The TPO has extensively searched “prowess”, “capital line” and NASSCOM website while zeroing on the comparables. Accordingly, it is held that the TPO had done exceptional work and only after giving opportunities to the appellant has worked out the PLI and accordingly the appellant’s arguments on all these grounds cannot be accepted except in respect of the following: • Allowance of 5% standard deduction • Exclusion of super profit/wide variation OP to cost companies.
Aggrieved with the order of the CIT (A), Bangalore dated 02/03/2011 the assessee preferred an appeal before Hon’ble ITAT. The learned counsel for the assessee pointed out that at page 20, para 4.5 of the order of the CIT(A) wherein he had discussed about the comparables selected by the TPO. The CIT (A) had held as follows: “Accordingly, it is held that the TPO had done exceptional work and only after giving opportunities to the appellant has worked out the PLI and accordingly the appellant’s arguments on all these grounds cannot be accepted except in respect of the following: • Allowance of 5% standard deduction • Exclusion of super profit/wide variation OP to cost companies.
The learned counsel for the assessee also submitted that the CIT(A) had not applied his mind and had given a general statement that the TPO had done exceptional work. We have perused the order of the CIT(A). We find that the CIT(A) has not given any reasons for the comparables to have been rejected by the TPO or elaborately dealt with the issue. The absence of reasoned order by the CIT(A) has prevailed on us to send back the issue to the file of the TPO to pass a denova order to determine the PLI after giving reasonable opportunity to the assessee to present its case.
The learned counsel for the assessee stated that grounds 1 to 1.10 is not pressed. The learned counsel also stated that he was pressing ground No. 1.11 and ground Nos. 1.12, 1.13, 1.14, 1.15 and 1.16 are not pressed. The learned counsel by way of additional grounds raised ground No. 1.17 which is as follows:
The depreciation cost as a percentage of the cost of the appellant during the financial year 2004-05 is significantly different from that of the comparable companies.
The difference in the depreciation cost arises due to differences in the accounting treatment across the comparable companies and the appellant.
Considering the above fact, to achieve reliable comparability, the margins of the comparable companies should be adjusted for differences in depreciation cost of comparable companies and tested party.
We heard both the parties. We are of the opinion that when applying the arm’s length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are compared t the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin). In case, there are any such differences, reasonably accurate adjustments need to be made to eliminate the effect of any such differences. There are differences in the treatment across enterprises of operating expenses and non-operating expenses particularly of depreciation affecting the net profits. Such differences should be reckoned in order to achieve reliable comparability between the taxpayer and the third party comparable companies. Hence, it is essential to perform a depreciation adjustment to bridge the disparities between appellant and the comparable companies selected by the TPO.
Therefore, it is necessary to make appropriate adjustments for depreciation while benchmarking the Appellant with comparable companies. Hence we send back this issue to the file of TPO who shall follow our directions.
The learned counsel also raised additional grounds 1.18 to 1.21 which are as follows:
Ground No.1.18: Exensys Software Solutions Limited should be rejected as comparable companies. The Appellant submits that the Ld. CIT(A) has erred in not adjudicating Exensys Software Solutions Limited on the basis of functional comparability and rejecting the comparable company only on the basis of super profits.
Ground No. 1.19: Thirdware Solutions Limited should be rejected as comparable companies. The appellant submits that the Ld. CIT(A) has erred in not adjudicating Thirdware Solutions Limited on the basis of functional comparability and rejecting the comparable company only on the basis of super profits.
Ground No. 1.20: Infosys Limited should be rejected as comparable companies. The Appellant submits that the Ld. CIT(A) has erred in not adjudicating Infosys Limited on the basis of functional comparability and rejecting the comparable company only on the basis of super profits.
Ground No. 1.21: Bodhtree Consulting Limited should be rejected as a comparable company The Appellant submits that the Ld. CIT (A) has erred in including Bodhtree as a comparable company to the Appellant, while doing the comparability analysis.
With respect to the additional grounds, following the decisions in the case of M/s. Quark Systems we adjudicate as follows:
“Per contra, learned DR strongly objecting admission of above additional grounds submitted that in case these were admitted, the comparability of the concerned companies had to be referred back to the AO/TPO for verification fresh.
After considering the averments of the counsels with regard to admission of additional grounds, we find force in contension of the learned AR that by virtue of Special Bench decision in the case of M/s. Quark Systems Pvt. Ltd., (Supra), assessee can raise additional grounds seeking exclusion of comparables selected by it or not objected by it before the lower authorities. However, the Hon’ble Punjab & Haryana High Court in (2011) 62 DTR 0182 had upheld the Special Bench decision in the case of M/s Quark Systems Pvt. Ltd., (Supra) specifically noting that the Special Bench had remitted the issue of comparability of such companies to the AO/TPO for verification afresh. Hence, we are admitting the additional grounds and we set aside the issues to the file of AO/TPO to adjudicate on the same.
The learned counsel also pointed out that M/s. Bodhtree Consulting Ltd., is functionally not comparable to that of the assessee company and relied on the decision of the Arm Embedded Technologies Pvt. Ltd., in IT(TP)A No. 1659/Bang/2014.
Further, the appellant submitted that Bodhtree provides e-paper solutions, data cleansing software, website development and other customized software and that the e-paper solutions and data cleansing services would come under category of Information Technology enabled services making it functionally not comparable to the Appellant which is involved in the software development services. The Appellant also submitted that the Bodhtree has significant related party transaction of export sales to Perigon LIC, USA of INR 133.90 lakhs, being 34.68% of the total turnover.
Hence, admitting the additional ground we set aside this comparable to file of the AO/TPO in order to decide whether it is to be included in the set of comparables taken by TPO.
With respect to 1.11, the assessee’s contention for rejection of the comparable company is given below: Sl. Name of the Company Contentions of the appellant for No. rejecting the comparable company 1. Foursoft Ltd., Engaged in sale of products; Substantial selling and marketing expenses; and Related Party Transactions greater than 0% 2. Geometric Software Solutions Related Party Transactions Co Ltd., greater than 0%; Owns Intellectual property; and Services are in the nature of design and engineering services.
Sankhya Infotech Engaged in sale of products; Substantial selling and marketing expenses; Extreme high profit company; and Owns Intellectual property & Patent.
Sasken Network System Substantial selling and marketing expenses.
5. Sasken Communication Engaged in sale of products; Technologies Ltd., and Substantial selling and marketing expenses.
Tata Elxsi Ltd., Services are in the nature of product engineering and design services.
Flextronics Software Services Extreme high profit Private Limited (seg) company; and Related Party Transactions greater than 0%.
We find that 7 companies are to be rejected/excluded from the list of comparables for the reasons given in the chart. Hence we direct the TPO to exclude 7 companies stated in 1.11.
The TPO shall rework the PLI after following the directions given by us with respect to ground No. 1.11 and also the additional grounds which are being restored to his file.
Revenue’s Appeal (ITA No.608/Bang/2011): Grounds of appeal:
Ground No. 1 is general in nature. Ground Nos. 2 and 3 are covered in the decision of the Hon’ble High Court in the case of Tata Elxsi Ltd., in 349 ITR 98. Ground Nos. 4, 5, 6 and 7 are covered by the decision of DCIT Vs. Global Vartage Pvt. Ltd., (2010 TIOL 24 ITAT – Del) wherein it has been held as under: “Therefore, having regard to the rival contentions and material on record, we find that similar facts and circumstances existed for the AY 2006-07 in assessee’s own case and the coordinate Bench of this Tribunal vide its order dated 29.07.2011 in has discussed the issue at length and at para 10 of its order has held as under:
\ also consider the judicial precedents on the issue including the orders, of the Tribunal in assessee’s own case, while determining the ALP.”
Having gone through the record before us, as recorded above, we find that even during the relevant as se ss men t y ea r, th e a ss es se e h ad mad e el ab o rate submissions and both the TPO as well as the DRP have failed to consider the said objections objectively. In view of the same, we deem it lit and proper to remit this issue to the file of the A.O./TPO for reconsideration of the issue in accordance with law. The A.O./TPO is directed to give fair opportunity of hearing to the assessee and also consider judicial precedents on the issue including the orders of the Tribunal in assessee’s own case while determining the ALP.
Ground Nos. 8, 9 and 10 have been already decided in assessee’s appeal in ITA No. 657. Ground No. 11 is consequential and has to be worked out by the AO after adjudicating the grounds preferred in this appeal.
Ground Nos. 12 and 13 are general.
In the result, the appeals of the revenue and assessee are partly allowed for statistical purposes.
Pronounced in the open court on this 6th day of January 2017.