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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI S. JAYARAMAN
Per Sunil Kumar Yadav, Judicial Member
1. This appeal is preferred by the Revenue against the order of CIT(Appeals) inter alia on the following grounds:-
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 2 of 19
“1. The order of the Learned CIT(A) in so far as it relates to the following grounds is opposed to law and facts of the case.
2. The Id. CIT(A) erred in holding that all companies having related party transactions ought to be excluded as comparables irrespective of the percentage of related party transactions.
3. The Id. CIT(A) erred in directing the TPO/AO to exclude the companies having profits more than 50% on the cost from the list of comparables.
4. The learned CIT(A) erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys Technologies Ltd. as a comparable.
5. In the facts and circumstances of the case the learned CIT(A) erred in holding that foreign exchange loss or gain is a part of operating cost or operating income, as the case may be, when the TPO has excluded this data from that of the comparables.
6. The learned CIT(A) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length Price (ALP) determined by the TPO/AO.
7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
8. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above.”
2. The assessee has also filed Cross Objection assailing the order of CIT(Appeals) on certain grounds which are as under:-
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 3 of 19 “On the facts and circumstances of the case and in law:
1.
1. The learned CIT(A) has erred, in law and in facts, by not accepting the Respondent's plea in entirety and confirming with the Learned Assessing Officer ("AO)/ Transfer Pricing Officer ("TPO") on not accepting the economic analysis undertaken by the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962 and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Respondent's international transaction is not at arm's length.
2. The learned CIT(A) has erred, in law and in facts, by ignoring the fact that since the Respondent is availing tax holiday u/s 10A of the Act, there is no motive or reason to shift profits out of India, curbing which is the basic intention of introducing the transfer pricing provisions.
3. The learned ClT(A) has erred, in law and in facts in not accepting the Respondent's plea and confirming with the Learned AO/TPO by determining the arm's length margin/price using financial year 2004-2005 data which was not available to the Respondent at the time of complying with the transfer pricing documentation requirements.
4. The learned ClT(A) has erred, in law and in facts, by rejecting companies by applying different quantitative and qualitative filters: a. The learned CIT(A) has erred in law and facts by not accepting the Respondent's plea that 'onsite revenues greater than 75% of the revenues' should not be used as a comparability criterion. b. The learned CIT(A) has erred in law and facts, by not accepting Respondent's plea that companies having economic performance contrary to the industry behaviour (e.g. companies which showed a diminishing revenue trend and/or under-utilisation of assets, etc) should not be rejected. c. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that certain comparable companies identified in the transfer pricing documentation, IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 4 of 19 where consolidated results had been used for analysis should not be rejected. The Respondent had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide/ segmental revenues. d. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) should not be rejected.
5. The learned CIT(A) has erred in law by upholding the TPO's approach of exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes.
The learned CIT(A) has erred, in law and in facts, by accepting/rejecting certain comparable companies using unreasonable comparability criteria.
7. The learned CIT(A) has erred, in law and in facts, by rejecting a company having margin less than the margin of the Respondent company.
8. The learned CIT(A) has erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Respondent vis-a-vis the comparables. The Respondent submits that each of the above grounds is independent and without prejudice to one another. The Respondent craves leave to add, alter, vary, omit, amend or delete one or more of the above grounds of Cross-objections at any time before, or at the time of, hearing of the appeal, so as to enable the Appellate Tribunal to decide this response according to law.”
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 5 of 19
Through the appeal and the CO, the parties to the appeal have contested certain inclusion and exclusion of the comparables considered by the TPO. In order to demonstrate the need of inclusion/exclusion of the comparables, the ld. counsel for the assessee has filed a chart detailing the turnover, net margin, related party transactions and the reasons for the exclusion/inclusion of the comparables and accordingly arguments were heard in the light of the chart and brief synopsis filed by the assessee during the course of hearing.
The facts in brief relating to the TP issue culled out from the orders of lower authorities are that the assessee, Nividia Graphics Pvt. Ltd., is a subsidiary of Nividia International Inc., US. Nividia India, the assessee, provides research & development services to Nividia International from its Bangalore, Pune and Hyderabad facilities. Nividia India is compensated on a cost plus mark-up basis for the provision of R&D services to Nividia International.
The assessee filed a return of income declaring loss of Rs.71,21,810. The return of income was processed and has been selected for scrutiny on account of international transactions entered by the assessee with its AE. A reference was made to TPO for determination of arm’s length price (ALP) and the ld. TPO passed an order making an adjustment of INR 5,11,58,733 for the research & development services transactions.
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 6 of 19 6. In the TP study, the assessee has selected 45 comparables and the TPO has rejected 35 comparables out of them and included 7 new comparables. Accordingly 17 comparables were taken by the TPO for determination of ALP. Accordingly, assessment order was passed against which an appeal was filed before the CIT(Appeals) and the CIT(Appeals) having examined the claim of assessee has directed the AO to exclude certain comparables from the set of final comparables selected by the TPO.
Aggrieved with the order of CIT(Appeals), the revenue is in appeal before the Tribunal and the assessee has filed CO with the request for the exclusion of some more comparables and inclusion of certain comparables.
The total 17 comparables taken by the TPO are as under:-
Bodhtree Consulting Ltd.
Sankhya Infotech Ltd. 3. Visual Soft Technologies Ltd. (Seg.) 4. Infosys Technologies Ltd. 5. Satyam Computer Services 6. Geometric Software Solutions Co. Ltd. 7. Tata Elxsi Ltd. (Seg.) 8. R S Software (India) Ltd. 9. Sasken communication Technologies Ltd. (Seg.) 10. Flextronics Software Systems Ltd. (Seg.)
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 7 of 19 11. iGate Global Solutions Ltd. 12. L & T Infotech Ltd. 13. Thirdware Solutions Ltd. 14. Exensys Software Solutions Ltd. 15. Four Soft Ltd. 16. Sasken Network Systems Ltd. 17. LGS Global Ltd. (Lanco Global Solutions Ltd.)
Out of the 17 comparables, the CIT(Appeals) has directed the AO to exclude the following comparables, to which assessee has no objection:-
(1) Sasken Network Systems Ltd. (2) Four Soft Ltd. (3) Thirdware Solutions Ltd. (4) R S Software (India) Ltd. (5) Geometric Software Solutions Co. Ltd. (6) Tata Elxsi Ltd. (Seg.) (7) Sasken Communications Technologies Ltd. (Seg.) (8) iGate Global Solutions Ltd. (9) Flextronics Software Systems Ltd. (10) L&T Infotech Ltd. (11) Satyam Computer Services (12) Infosys Technologies Ltd.
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 8 of 19 The CIT(Appeals) also excluded LGS Global Ltd. on the basis of margin lesser than the tested party’s margin and the ld. counsel for the assessee has requested for the inclusion of this comparable with the submission that on the basis of lesser margin than the tested party’s margin, comparable cannot be excluded.
The revenue has challenged the exclusion of these comparables in its appeal, whereas the assessee further wants the exclusion of Sankhya
We have heard the argument of the rival parties on the point of exclusion/inclusion of the comparables. We therefore prefer to deal with these comparables one by one.
During the course of hearing, the ld. counsel for the assessee has invited our attention that Visual Soft Technologies Ltd., Infosys Technologies Ltd., Satyam Computer Services, Geometric Software Solutions Co. Ltd., Tata Elxsi Ltd. (Seg.), R S Software (India) Ltd., Sasken Communication Technologies Ltd. (Seg.), Flextronics Software Systems Ltd. (Seg.), iGate Global Solutions Ltd. and L&T Infotech Ltd. cannot be called to be good comparables as their turnover is more than 10 times of the turnover of the assessee. The assessee’s turnover is Rs.4.95 crores, whereas turnover of these companies ranges from Rs.81.69 crores to Rs.6859.66 crores. Therefore, on the basis of turnover filter, these comparables are required to be excluded from the list of comparables. In IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 9 of 19 support of this contention, the ld. counsel for the assessee has placed reliance upon the orders of the Tribunal in the case of ITO v. Maxim India Integrated Circuit Designs Pvt. Ltd. in IT(TP)A No.28/Bang/2012 in which it has been held that if the turnover of the comparables is more than 10 times of the turnover of the tested party, the same has to be excluded from the list of comparables. Since we have taken a consistent view in this regard, we find no infirmity in exclusion of these comparables.
With regard to Sankhya Infotech Ltd., the ld. counsel for the assessee has contended that this company is functionally different from the assessee company. It was engaged in software products – Silicon LMS/QT and Silicon Athena and the revenue recognition talks of only software development, but there is no mention of the products. It was further contended that segmental information was also not available. The justification of its exclusion was examined by the Tribunal in the case of ITO v. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1032/Bang/2011, copy of which is placed on record. The relevant observations of the Tribunal is extracted hereunder for the sake of reference:-
“19. 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
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 10 of 19 cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below:
SILICONTM Training Suite of Products: The products (1) 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.1211/Bang/2011 & CO No.48/Bang/2012 Page 11 of 19 20. 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.”
Similarly, this company was also examined by the Tribunal in the case of DCIT v. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012, of which copy is placed at pages 935 to 955 of the assessee’s compilation and the Tribunal while adjudicating the issue of exclusion of this comparable, has examined the profile of this comparable and has directed the TPO/AO for its exclusion.
Since the profile of this company was examined by the Tribunal in the aforesaid orders and the assessment year involved is also the same, we find no justification to readjudicate the justifiability of its exclusion from the list of comparables. We accordingly following the aforesaid orders of the Tribunal, hold that this company is not a good comparable and we accordingly direct the AO for its exclusion from the list of comparables.
With regard to Thirdware Solutions Ltd., the ld. counsel for the assessee has contended that this company is also functionally different than the assessee company as this company was involved in trading of software and revenue was from sale of license and subscription. It was further contended that its exclusion was examined by the Tribunal in the IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 12 of 19 case of Sunquest Information Systems (India) Pvt. Ltd. (supra) and Textron Global Technology Centre Pvt. Ltd. (supra) [copies of the orders are placed on record] and we find that this company was examined by the Tribunal and following the order of the Hyderabad Bench of the Tribunal in the case of CNO IT Services (India) Pvt. Ltd. [formerly Conseco Data Services (I) Pvt. Ltd.] v. DCIT, Cir. 1(2), in IT(TP)A No.1280/Hyd/2010 for the AY 2005- 06, the Tribunal directed the TPO for its exclusion from the list of comparables. The relevant observations of the Tribunal are extracted as under:-
“21. The learned counsel for the Assessee submitted before us that two of the comparable companies 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 , viz., Four Soft Ltd., and Thirdware Solutions Ltd., will have to be excluded as these companies were considered as not comparable. These companies according to him, will however, have to be excluded as these two companies were 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.
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 : ………………….. ……………………………
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 13 of 19 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 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 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 IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 14 of 19 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 ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables.
23. 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 said company has derived income from software licence also and AMCs.
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.
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 15 of 19 26. 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.”
Similarly, its exclusion was also examined in the case of Textron Global Technology Centre Pvt. Ltd. (supra). Since the Tribunal has taken consistent view with respect to this comparable by holding that it is functionally different, we find no justification to readjudicate it again. We accordingly following the aforesaid orders of the Tribunal, hold that this company cannot be called to be a good comparable and we accordingly direct the TPO/AO to exclude this company viz., Thirdware Solutions Ltd., from the list of comparables.
With regard to Exensys Software Solutions Ltd., the ld. counsel for the assessee has contended that this company is also functionally different as there was amalgamation of this company with Holool International Ltd. during the impugned assessment year. It was also engaged in development and consultancy in software, but the break-up of the same is IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 16 of 19 not given in the annual report. There were heavy R&D expenditure, but details of the same were not adequately provided in the annual report. Copy of the annual report is placed at pages No.744 to 766 of the compilation of the assessee.
The ld. counsel for the assessee further contended that justification of its exclusion was considered by the Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (supra) and Textron Global Technology Centre Pvt. Ltd. (supra). Copies of the orders are available on record at pages 903 to 955 of the compilation of the assessee. In the case of Sunquest Information Systems (India) Pvt. Ltd. (supra), this company was examined by the Tribunal in para 14 of its order in which the Tribunal has directed the AO/TPO for its exclusion, following another order of the Tribunal in the case of Agnity India Technologies v. ITO in IT(TP)A No.3856/Del/2010. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:-
“Ground No.3 raised by the Revenue is misconceived and the issue does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd. Infosys Technologies Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non- reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon’ble
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 17 of 19 Tribunal in Agnity India Technologies v. ITO (ITA 3856/Del/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore the grievance as projected by the Revenue in ground No.3 is misconceived. On the facts of the present case, we are of the view that the CIT(A) rightly excluded Exensys Software Solutions Ltd., Infosys Technologies Ltd., and Satyam Computers Ltd., from the list of comparable companies.”
Similarly, its exclusion was also examined by the Tribunal in the case of Textron Global Technology Centre Pvt. Ltd. (supra) in para 14 of its order.
Since the Tribunal has taken a consistent view that this company is not a good comparable, we find no justification to take a contrary view, where the profile of assessee company and Exensys Software Solutions Ltd. are almost same and we accordingly hold that Exensys Software Solutions Ltd. is not a good comparable and we direct the AO/TPO for its exclusion from the list of comparables.
22. With regard to Four Soft Ltd., the ld. counsel for the assessee has contended that this company was rejected by the CIT(Appeals) by applying RPT filter. In the case of this comparable RPT was 19.89%, whereas the Tribunal has repeatedly held that comparable which has more than 15% RPT transaction has to be excluded from the list of comparables. In this case, RPT was 19.89%, therefore the CIT(Appeals) has rightly excluded the same from the list of comparables by following the RPT filter.
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 18 of 19
The ld. counsel for the assessee has also invited our attention that this comparable was also excluded by the Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (supra) on the ground of functional difference; whereas this company can also be excluded by applying the RPT filter. This company was also examined by the Tribunal in the case of Textron Global Technology Centre Pvt. Ltd. (supra) in para 22 of its order and the Tribunal has held that this comparable be excluded from the list of comparable companies. Besides being functionally different, this company has more Related Party Transactions (RPT), therefore applying the RPT filter also, this company cannot be included in the list of comparables. We accordingly uphold the order of CIT(Appeals) who has rightly directed its exclusion.
With regard to LGS Global Ltd. (Lanco Global Solutions Ltd.), the ld. counsel for the assessee has contended that this company was excluded by the CIT(Appeals) only for the simple reason that its margin was lesser than the tested party margin. Besides, no other reasons were cited by the CIT(Appeals) for its exclusion.
25. The ld. counsel for the assessee further contended that its turnover was 6.11 crores, whereas the turnover of assessee is 4.59 crores, therefore lesser margin cannot be a ground for exclusion of the company from the list of comparables. We accordingly direct the AO/TPO to include
IT(TP)A No.1211/Bang/2011 & CO No.48/Bang/2012 Page 19 of 19 this comparable in the list of comparables. Accordingly, appeal of the revenue and CO of the assessee are disposed of.
In the result, the appeal of revenue is dismissed and CO of the assessee is allowed.
Pronounced in the open court on this 23rd day of November, 2016.