INCOME-TAX OFFICER vs. AVALARA TECHNOLOGIES PVT. LTD.,, PUNE

The brief facts of the case as emanating from records are : The assessee company is engaged in the business of providing software development and other IT Enabled Support Services (ITES) to its AE. The assessee company was incorporated in February, 2006. The assessee is a fully owned subsidiary of Avalara Inc., a US based company. The assessee company is claiming deduction u/s. 10A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) and its only customer is Avalara Inc., i.e. its parent company. The assessee company filed its return of income for the impugned assessment year on 29-09-2011 declaring total income as Nil after claiming deduction u/s. 10A of the Act. During the period relevant to assessment year under appeal, the assessee had entered into international transactions with its US based parent company to the tune of Rs.3,16,92,998/- on account of software development and other ITES Services. The assessee followed Transactional Net Margin Method (TNMM) as the most appropriate method for determining Arm’s Length Price (ALP). The assessee selected 11 companies as comparables. The Assessing Officer accepted TNMM as the most appropriate method, however, he rejected 8 out of 11 companies selected by assessee and further introduced 5 new companies as comparables. The final set of comparables selected by Assessing Officer are as under : Sr. No. Company’s Name % OP/OC 1 7Seas Entertainment Ltd. 27.90% 2 Acropetal Technologies Ltd. 23.82% 3 Compucom Software Ltd. 33.62% 4 Infosys Ltd. 43.36% 5 Persistent Systems & Solutions Ltd. (Merged) 24.54% 6 Sasken Communication Technologies Ltd. 18.83% 7 Sonata Software Ltd. 21.01% 8 Spry Resources India Pvt. Ltd. 22.18% Arithmetic Mean 26.91%

The Revenue has raised following grounds assailing the findings of Commissioner of Income Tax (Appeals). “2. The learned Commissioner of Income-tax (Appeals) erred in holding that the company such as R System should be included in the list of comparable companies even though it financial year starts from 01/01/2010 to 31/12/2010 and this is not as per as per the requirement of Rule 10B(4) of the I T Rules. As per Rule 10B(4) only those companies should be selected as comparable companies which follows financial years start from 1st April and ends on 31st March. 3. The learned Commissioner of Income-tax (Appeals) erred in holding that the company M/s Compucom Software Limited should be excluded from the list of comparable without assigning any acceptable reasons for exclusion of this company from the list of comparables. 4. The learned Commissioner of Income-tax (Appeals) erred in holding that the companies such as Infosys Limited, Sasken Communication Technologies Limited and Sonata Softwate Limited should be excluded from the list of comparable companies being giant companies as compare to assessee company relying of the decision of Hon'bl Delhi High Court in the case CIT Vs Agnitya India Technologies Ltd. 5. The learned Commissioner of Income-tax (Appeals) erred in holding that the company such as Tata Elix Ltd., and Thinksoft Global Services Limited should be included in the list of comparable companies inspite of the facts that the assessee company while preparing its Transfer Pricing Report has not itself included these companies as comparable companies.”

Shri Nikhil Pathak appearing on behalf of the assessee fairly admitted at the outset that the findings of Commissioner of Income Tax (Appeals) with respect to inclusion of R Systems International Ltd. have to be reversed and decided against the assessee in view of Tribunal’s order in assessee’s own case in ITA No. 1800/PN/2013 in immediately preceding assessment years i.e. assessment year 2010-11. The ld. AR submitted that the Tribunal following the decision in the case of Dover India (P.) Ltd. Vs.

On the other hand Dr. Vivek Agrawal representing the Department vehemently supported the findings of Assessing Officer and the list of comparable companies finalized by Assessing Officer. The ld. DR submitted that the Commissioner of Income Tax (Appeals) has erred in excluding Compucom Software Ltd., Infosys Technologies Ltd., Sasken Communication Technologies Ltd. and Sonata Software Ltd. from the list of comparables. The ld. AR submitted that the Assessing Officer has given a reasoned finding in including these companies in the list of comparables.

We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. In so far as application of TNMM is the most appropriate method for determining ALP is concerned, there is no dispute. The only dispute in the present appeal by Department is with regard to inclusion/exclusion of certain companies in the final list of comparables.

The ground Nos. 1, 6 and 7 of the appeal are general in nature, hence require no adjudication.

In ground No. 2 of appeal, the Department has assailed inclusion of R Systems International Ltd. in the list of comparables. The ld. AR has fairly admitted that R Systems International Ltd. has to be excluded as the said company has financial year different from that of assessee. The financial year of assessee company starts from 1st April and ends on 31st March. Whereas, the financial year of R Systems International Ltd. starts from 1st January and ends on 31st December. We find that Tribunal in assessee’s own case in immediately preceding assessment year excluded Silver Line Technologies for the similar reasons after placing reliance on the decision in the case of Dover India (P.) Ltd. Vs. DCIT (supra). Thus, in view of the decision of Tribunal on similar issue and fair admission by ld. AR the ground No. 2 raised in appeal by Department is allowed.

In ground No. 3 of appeal, the Revenue has assailed exclusion of M/s. Compucom Software Limited. A perusal of impugned order shows that the Commissioner of Income Tax (Appeals) has excluded the said company from final list of comparables as it fails to qualify export turnover filter of 75%. A perusal of P & L Account of the said company at page 30 of the paper book reveal that domestic turnover of said company for the financial year ended on 31st March, 2011 is Rs.5,21,90,273/- as against the overseas turnover of Rs.2,82,13,301/-. The above data clearly indicates that the domestic turnover of the company from Software and E- Governance Services is more than the export turnover. The said company was rejected as comparables for the same reason in assessment year 2010-11. Thus, we do not find any infirmity in the order of Commissioner of Income Tax (Appeals) in excluding Compucom Software Ltd. from the list of comparables. Accordingly, ground No. 3 raised in appeal by Department is dismissed.

In ground No. 4 the Revenue has assailed the order of Commissioner of Income Tax (Appeals) in excluding Infosys Technologies Limited, Sasken Communication Technologies Limited and Sonata Software Limited from the final list of comparables. The ld. AR submitted that these three companies have turnover of more than Rs.200 crores, whereas the turnover of assessee company is Rs.3.16 crores. The assessee had applied turnover filter with range of Rs.1 crore to Rs.200 cores. The Assessing Officer rejected upper range of the filter applied by assessee. If turnover filter with range of Rs.1 crore to Rs.200 crores is applied the aforesaid three companies would fall outside the range. We observe that the Co- ordinate Bench of Tribunal in assessee’s own case in assessment year 2010-11 has approved the turnover filter with the range between Rs.1

In ground No. 5 of appeal, the Revenue has assailed the directions of Commissioner of Income Tax (Appeals) to consider Tata Elaxi Ltd. and Thinksoft Global Services Ltd. for inclusion in the final list of comparables, if the said companies qualify the filters adopted at the time of passing of assessment order. The ld. AR of assessee fairly stated at the Bar that turnover of Tata Elaxi Ltd. is beyond the tolerance range of Rs.200 croers, therefore, the said company has to be rejected from the list of comparables. In so far as Thinksoft Global Services Ltd. is concerned we do not find any error in the Commissioner of Income Tax (Appeals) in directing the Assessing Officer to consider the said company and include the same in the list of comparables, if it qualifies all the filters applied in selection of other comparable companies. The ld. DR has raised objection that this company was not consider by assessee at the time of TP study by assessee

In the result, appeal of the Revenue is partly allowed in the terms aforesaid.