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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI A. K. GARODIA & SHRI VIJAY PAL RAO
This appeal is filed by the revenue and the C.O. is filed by the assessee and these are directed against the order of the ld.CIT(A)-IV, Bangalore dated 31-01-2013 for assessment year : 2008-09.
2 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015
The grounds raised by the revenue are as under;
“1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
1.The learned CIT(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding M/s. Flextronics Ltd, iGate. Global Solutions Ltd., Infosys Technologies Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd. and Wipro Ltd. as com parables.
2.The learned CIT(A), in the facts and circumstances of the case, erred in excluding the comparable company M/s. Celestial Biolabs Ltd. on the basis of high profit margin.
3.The Ld. CIT (A) erred in rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend. ! - 4. The Ld. CIT(A) erre1 in not appreciating that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party.
5. The Ld. CIT(A) erred ,in rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services and thereby including !MIs Indus Networks ltd as a comparable. I 6. The learned CIT(A), i~ the facts and circumstances of the case, erred in holding that M/s. Avani Cincom Technologies, cannot be taken as a comparable.
7.The learned CIT(A), in the facts and circumstances of the case, erred in holding that M/s. Bodhtree Consulting Ltd. being functionally different, cannot be taken as a comparable.
3 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015
8.The learned CIT(A), in the facts and circumstances of the case, erred in holding that M/s. KALS Informations Systems Ltd. being functionally different, cannot be taken as a comparable ignoring the fact that it qualifies all the quantitative and qualitative filters applied by the TPO.
9.The learned CIT(A) erred in not appreciating the fact that if any filter or criteria applied by the taxpayer for search of com parables is accepted or any filter or criteria applied by the TPO is relaxed, the entire accept/reject matrix changes resulting in a new comparable set including those companies which are not taken either by the taxpayer or by the TPO in its final comparable set and which may not be finding a place in the TP order u/s 92CA.
11.The learned CIT(A) erred in not considering the entire set of TPOs com parables in toto
12.The learned CIT(A) erred in not appreciating that a piecemeal approach negates the, hole concept of comparability anal sis
13.The learned CIT(A)erred in no appreiating that an disturbance in anyone of the criteria of the tax payer or the TPO results in fresh comparability analysis
14.The CIT(A) erred in allowing the assessee's claim of deduction u/s 10A in respect of unit-II without appreciating that the custom bonding licenses were obtained only on 29.1.2002 by the assessee but the business activity commenced even before obtaining approval from the STPI authorities.
15.The CIT(A) erred in not appreciating the facts and circumstances brought out by the AO as to whether the unit was a new undertaking or had formed by taking over an existing concern which had already a source of income.
16.The CIT(A) erred in not appreciating that the decision of the Hon'ble ITAT for the A.Y s 2002-03 , 2003-04 & 2004-05 on 4 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015 which the CIT(A) has relied upon has not been accepted by the Department and further appeal u/s 260A has been filed before the Hon'ble High Court which is pending.
17.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.
18. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. .
Similarly, the grounds raised by the assessee in its C.O.
are as under; “1. That the learned CIT(A) erred in upholding the rejection of the Respondent's TP documentation on the basis that the data used in the computation of the arm's length price was not reliable.
2. That the learned CIT(A) erred in upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm's length price, ignoring the fact that this data was not available to the Respondent at the time of complying with the TP documentation requirements.
3. That the learned CIT(A) erred in upholding the learned TPO's approach of disregarding application of multiple year/ prior year data as used by the Respondent in the TP documentation and holding that current year (i.e. Financial Year 2007-08) data for companies should be used for comparability. 4.That the learned CIT(A) erred in upholding the learned TPO's approach of collecting selective information of the 5 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015 companies by exercising powers granted to him under section 133(6) of the Act that was not available to the Respondent in the public domain and relying on the same for comparability purposes.
5. That the learned CIT(A) erred in upholding the TPO's approach of ignoring the limited risk nature of the services provided by the Respondent and in not providing an appropriate adjustment towards the risk differential, even when the full- fledged entrepreneurial companies are selected as comparables.
6. That the learned CIT(A) erred in upholding the learned TPO's approach of considering the reimbursement of expenses received as part of the cost and added back to the costs for the purpose of applying mark up for the software development services in spite of the fact that these costs are in the nature of reimbursements and do not constitute any service element and thus were recovered from AEs without any mark - up. 7.That the learned CIT(A) erred in upholding the learned TPO's approach of disregarding the Research and development expenses filter as applied by the Respondent in selection of the comparable at the time of TP documentation.
8. That the learned CIT(A) erred in upholding the learned TPO's approach of using the related party filter greater than 25% for exclusion of comparable instead of related party filter> 10% filter as applied by the Respondent.
9. That the learned CIT(A) erred in upholding the learned TPO's approach of using the export sales < 25% of revenues filter and the onsite revenue> 75% filter for the exclusion of comparables.
10. That the learned CIT(A) ought to have held Globsyn Technologies Limited as a comparable on the rejection of the diminishing margin filter as applied by the learned TPO.
11. That the learned CIT(A) erred in confirming the action of the learned TPO of accepting certain companies (Lucid Software
6 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015
Limited, Quintegra Solution Limited, Thirdware Solutions Limited and Softsol India Ltd) that fail the test of comparability, as comparable to the Respondent in respect of its software development services.
12. That the learned CIT(A) ought to have held that the following companies (Celestial Biolabs Ltd, Flextronics Ltd, Infosys Technologies ltd, Persistent Systems Ltd, Sasken Communication Tech Ltd, Wipro Limited (Seg) and Tata Elxi Limited) fail the test of comparability, even apart from having a turnover> Rs. 200 crores and thus not comparable to the Respondent in respect of its software development service services.
13. That the learned CITCA) erred in rejecting M/s Computech International Limited on the ground that it had a negative operating margin.
14. That the learned CIT(A) has erred in upholding the learned TPO's approach of not considering the one- time adjustment made under AS-IS with respect to valuation of leave encashment and long term service benefit in arriving at the operating profit margin of the Respondent.
15. That the learned CIT(A) erred in upholding the learned TPO's approach of not considering the recovery of payment of FBT made on behalf of the AEs in arriving at the operating margin of the Respondent.
16. That the contention of the learned AO is bad in law and on facts while stating that the deletion of the addition on account of adjustments in arm’s length price of the international transactions are not base on correct facts and circumstances and established principals of law and procedures in this regard.
That the Respondent craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this appeal”.
7 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015
The ld. DR of the revenue supported the assessment order whereas the ld. AR of the assessee supported the order of the ld. CIT(A) in connection with the appeal of the revenue. He also submitted that the issue regarding Corporate Tax as per ground no.14 to 16 of the revenue’s appeal is squarely covered in favour of the assessee by the Tribunal decision in assessee’s own case for the assessment years 2002-03, 2003-04 & 2004-05 as has been stated by revenue itself in ground no.16 and these grounds had been raised only for this reason that the department has filed further appeal u/s 260A of the IT Act, 1961 before the Hon’ble Karnataka High Court.
Regarding the TP issue involved as per the remaining grounds of the revenue’s appeal and the Cross Objection of the assessee, he submitted a chart. He pointed out that out of 20 comparables selected by the TPO, the ld. CIT (A) has directed for exclusion of 12 comparables and he further directed for inclusion of one comparable i.e. M/s Indus Network Ltd. He fairly conceded that this ground of the revenue should be allowed because as per the Tribunal order, it was held that this comparable has to be excluded. In respect of twelve comparables directed to be excluded by the ld. CIT(A), it was submitted that three comparables i.e. 1) M/s iGate Global Solution Ltd. 2) Mindtree Ltd.(Seg.) and 3) M/s Sasken Communication Technologies Ltd (Seg.) had to come back because these comparables were excluded by the ld. CIT(A) by applying turnover filter of Rs.1.00 Crores to Rs.200 Crores but now the Tribunal is taking a consistent view that the turnover filter
8 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015 of 1/10th and 10 times of the turnover should be adopted and since, the turnover of these three companies is within this range of 1/10th to 10 times of assessee’s turnover, these three comparables should be included in the list of final comparables.
Regarding one more comparable i.e. M/s e-Zest Solutions Ltd, he submitted that this comparable was retained because the turnover of this company is Rs.7.66 Crores but now if we apply the turnover filter of 1/10th of the turnover of assessee company then this comparable has to be excluded because it does not satisfy the turnover filter of 1/10th of turnover of the assessee company.
We have considered the rival submissions and we examine various comparables one by one in the light of the chart submitted by ld. AR of the assessee.
The first comparable as per this chart is M/s Avani Cimcon Technologies. The turnover of this company is Rs.2.93 Crores and the turnover of the assessee company is Rs.90.00 Crores approximately and therefore, the turnover of this company is less than 1/10th of the turnover of the assessee company. Hence, by applying this turnover filter of 1/10th or 10 times of the turnover of the assessee company, this company is to be excluded from the list of final comparables. We uphold the order of the ld. CIT(A) regarding this comparable.
The second comparable is M/s Bodhtree Consulting Ltd.
This company was excluded by the ld. CIT(A) on this basis that services provided are in the nature of ITES and no break-up of segmental data
9 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015 is available and also for this reason that this is functionally different and we find that exclusion of this company is squarely covered in favour of the assessee by the Tribunal order rendered in the case of GXS India Technology Centre Pvt.Ltd. Vs ITO in IT(TP)A No.1444/Bang/2012 dated 31-07-2015 for the same assessment year 2008-09, copy of which is available on pages 38 to 86 of the case laws paper book. Respectfully following this Tribunal order, we decline to interfere in the order of the ld. CIT(A) about exclusion of this comparable. .
The third comparable as per the chart is M/s Celestial Biolabs. Exclusion of this company is also squarely covered in favour of the assessee by the same Tribunal order rendered in the case of M/x GXS India Technology Centre Pvt. Ltd (Supra) and therefore, regarding this comparable also, we decline to interfere in the order of the ld. CIT(A).
The fourth comparable as per chart is M/s e-zest Solutions Ltd. This comparable was retained by the ld. CIT(A) but since this company is having turnover of only Rs.7.66 Crores which is less than 1/10 of the turnover of the assessee company, we hold that this company does not satisfy the turnover filter of 1/10th of turnover of assessee company and therefore, we exclude this company from the list of final comparables.
The fifth comparable as per the chart is M/s Flextronics (Arient). Regarding this comparable, it is submitted by the assessee in 10 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015 the chart that this company is having a turnover of Rs.954.42 Crores and therefore, this company’s turnover is in excess of 10 tines of assessee’s turnover and therefore, we find no reason to interfere with the order of the ld. CIT(A) regarding this comparable also.
The sixth comparable as per chart is iGate Global Solution Ltd. It has been fairly conceded by the ld. AR of the assessee that this company may be retained in the list of final comparables because this company satisfies the turnover filter of 1/10th or 10 times of turnover and the ld. CIT(A) excluded this company by applying the turnover filter of Rs. one Crore to Rs. 200 Crores filter. Hence, we reverse the order of the ld. CIT(A) regarding exclusion of this comparable and direct the TPO to include this company in the final list of comparables.
The next company as per the chart is M/s Infosys Ltd. and this company is having turnover of Rs.15672 Crores and this company has to be excluded by applying the turnover filter of 10 times of turnover filter. Accordingly, we decline to interfere with the order of the ld. CIT(A) regarding exclusion of M/s Infosys Ltd.
The next comparable as per the chart is M/s Kals Information Systems Ltd.(Seg.). The turnover of this company is Rs.2.05 Crores and therefore, this company has to be excluded because the turnover of this company is less than 1/10th of the assessee’s turnover. Therefore, we decline to interfere with the order of the ld. CIT(A) regarding exclusion of this comparable.
11 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015
The Ninth comparable as the chart is M/s LGS Global Ltd.
this comparable was retained by the ld.CIT(A) and we find no reason to interfere with the order of the ld. CIT(A) regarding this comparable.
The tenth comparable as per the chart is M/s Mindtree Ltd.(Seg.). The ld. AR of the assessee fairly conceded that this company has to be included in the final list of comparable because this company was excluded by the ld.CIT(A) by applying turnover filter of Rs.200 Crores. But if we apply the turnover filter of 10 times of the turnover of the assessee company, this company is a good comparable.
Accordingly, we reverse the order of the ld. CIT(A) regarding exclusion of this company and direct the TPO/AO to include this company in the list of final comparables.
The eleventh comparable in the chart is M/s Persistent Systems Ltd. As per the chart, the ld. AR of the assessee submitted that that the ld. CIT(A) excluded this company by applying the turnover filter of Rs. 200 Crores but turnover of this company at Rs.383.41 Cores is less than 10 times of the assessee company’s turnover and therefore, by applying this turnover filter, this company cannot be excluded but this company has to be excluded for this reason that this company is not functionally comparable as has been held by the Tribunal in the case of M/s GXS (Supra). By respectfully following this Tribunal order, we decline to interfere with the order of the ld. CIT(A) regarding exclusion of this company although on a different basis i.e. on the basis of functional dissimilarity.
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The 12th comparable as per the chart is M/s Quintegra Solution Ltd. The exclusion of this company is squarely covered in favour of the assessee by the same Tribunal order rendered in the case of M/s GXS (Supra) and respectfully following the same, we decline to interfere with the order of the ld. CIT(A) on this issue.
Comparable nos.13th & 14th in the chart are M/s R Systems International Ltd. and M/s R.S.Software (Ind.) Ltd. Both these comparables were retained by the ld. CIT (A) and we find no reason to interfere with the order of the ld. CIT (A) regarding these two comparables.
Comparable no.15 as per chart is M/s Sasken Communication Technologies Ltd.(Seg.) This comparable was excluded by the ld. CIT (A) by applying the high turnover filer of Rs.200 Crores because this company was having a turnover of Rs.335.80 Crores. It was fairly conceded by the ld. AR of the assessee that since we are applying the turnover filter of 10 times of assessee company’s turnover, this comparable is a good comparable and accordingly, we reverse the order of the ld. CIT (A) on this aspect and direct the TPO/AO to include this company in the final list of comparables.
For Comparable no.16 & 17 i.e. M/s Tata Elxsi Ltd.(Seg.) and M/s Thirdware Solutions Ltd., we find that the exclusion of these two comparables is squarely covered in favour of the assessee by the same Tribunal order rendered in the case of M/s GXS (Supra). Respectfully
13 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015 following this Tribunal order, we decline to interfere with the order of the ld. CIT (A) regarding exclusion of these two comparables.
Comparable no.18 in the chart is M/s Wipro Ltd( Seg.) and this company has to be excluded as per the same Tribunal order rendered in the case of M/s GXS (Supra) and accordingly, regarding exclusion of this company also, we decline to interfere with the order of the ld,. CIT(A).
Comparable no.19 in the chart is M/s Softsol India Ltd. As
per the Tribunal order rendered in the case of M/s GXS (Supra), the issue regarding exclusion of this company was restored back to the file of AO/TPO to find out the RPT percentage of this company which is claimed to be 18.38% and if it is found that the RPT percentage is morethan15% then this comparable should be excluded by applying the RPT filter. Respectfully following this Tribunal order, in the present case also, we restore the matter back to the file of the AO/TPO to find out the RPT percentage of this company with the direction that if it is found that RPT percentage of this company is more than 15% then this company should be excluded from the list of final comparables. If the same is less than 15% then it should remain in the list of final comparables.
The comparable no.20 in the chart is M/s Lucid Software Ltd.
This company is having a turnover of Rs.2.35 Crores which is less than 1/10th of assessee’s turnover and therefore, by applying this turnover filter of 1/10th turnover, we decline to interfere with the order of the ld.
14 IT(TP)A No.463(B)/2013 & C.O.No.93(B)/2015 CIT(A) regarding exclusion of this company from the list of final comparables.
Comparable no.21 in the chart is M/s Indus Networks Ltd.
The ld.CIT (A) directed to include this company in the final list of comparable but by following the Tribunal order rendered in the case of DCIT Vs M/s PMC Sierra India Pvt. Ltd. in IT (TP) A No.882 (Bang)/2013 dated 26-08-2016, copy available on page-174 to 220 of case laws paper book, we reverse the order of the ld. CIT (A) and hold that this company should not be included in the final list of comparables.
In the result, the appeal of the revenue as well the CO of the assessee is partly allowed.
Order pronounced in the open court on the date mentioned on the caption page.