LOGICA P LTD,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

directed against the order of the ld. CIT(A)-IV, Bangalore dated 17-10-2014 for the assessment year 2006-07.

“Transfer Pricing Related 1.That the order passed by the Learned Commissioner of Income Tax (Appeals) - IV, Bangalore (CIT (A), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2.That the learned CIT (A) erred in upholding the rejection of Transfer Pricing (TP) documentation by the 2 IT(TP)A Nos.1620(B)2014, & 1663(B)/2014 Learned Transfer Pricing Officer (,TPO')/ Assessing Officer ('AO') and in making an adjustment to the transfer price of the Appellant in respect of its software development services. 3.That on the facts and in the circumstances of the case, the learned CIT (A) while making adjustment to the various segments of the Appellant, erred in; a)Upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis performed by the learned TPO in the TP Order. b)Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2008- 09) data for companies should be used for comparability. c)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. d)Arbitrarily arriving at a set of companies as comparable to the software development services business of the Appellant, on rejecting companies that are otherwise functionally comparable to the Appellant and on inclusion of companies that otherwise fail the test of comparability. 4.That the learned CIT(A) erred in law and on facts in ignoring the low risk profile of Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO and in not allowing appropriate adjustments under Rule 1OB of the Rules to account for differences between the Appellant and comparable companies. Other than Transfer Pricing Related 5.The Learned AO / Learned CIT(A) erred in treating the expenses towards purchase of application and project based software expenses amounting to Rs 35,871,548 as capital in nature.

alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.

3. The revenue has raised the following grounds; “1. The order of the ld.CIT(A) is clearly opposed to law as fare as the findings are perverse, contrary to the facts and circumstances of the case and hence not sustainable.

2. The ld. 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 Infosys Ltd. Flextronics Software Systems Ltd. & i-Gate Global Solutions Ltd.(Seg.) companies as comparables.

The ld. AR of the assessee submitted a chart in respect of TP issues in revenue’s appeal and in assessee’s appeal as per ground no.1 to 4. It was submitted by the ld. AR of the assessee that the following companies are to be excluded by applying the RPT filer of 15%. a) Aztec Software Ltd. b) Geometric Software Ltd. c) Accel Transmatics Ltd.

4 IT(TP)A Nos.1620(B)2014, & 1663(B)/2014

He also submitted that one company should be excluded by applying turnover filter of 10 times of assessee company’s turnover and this company is M/s Infosys Ltd., having turnover of Rs.9028 Crores as against the turnover of Rs.195 Crores of the assessee company. Thereafter, she submitted that the following companies should be excluded on account of functional dissimilarity and in support of this contention, reliance was placed on the Tribunal’s order rendered in the case of M/s Infinera India Pvt. Ltd., in IT(TP)A No.1290(B)/2010 dated 24-06-2016:- a) M/s Kals Info Systems Ltd. b) M/s Persistent Systems Ltd. c) M/s Tata Elxsi Ltd.(Seg.) d) M/s Flextronics Software Systems Ltd.

He submitted a copy of the Tribunal order and our attention was drawn to para-9,11,13,15 & 19 of this Tribunal order. He also submitted that one co. i.e. M/s iGate Global Solutions Ltd.(Seg.) which was excluded by the ld. CIT(A) by applying turnover filter of 500 Crores may come back as a good comparable, because the turnover of the company is only Rs.527.91 Crores which is within the range of 10 times of the turnover of the assessee company and accordingly, ground no.2 of the appeal of the revenue may be partly allowed. But two more companies being disputed by the revenue as

per ground no2 of its appeal being M/s Infosys Ltd should be excluded by applying turnover filter of 10 times and M/s Flextronics Software Systems should be excluded on account of functional dissimilarity as per para-19 of the Tribunal order rendered in the case of M/s Infinera India Pvt. Ltd.(Supra).

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Learned DR of the revenue supported the order of the TPO.

We have considered the rival submissions. Regarding TP issues as per ground no.1 to 4 of the assessee’s appeal and as per appeal of the revenue, we hold that by applying RPT filter of 15%, following four companies are to be excluded i.e.. a) Aztec Software Ltd. b) Geometric Software Ltd. c) Accel Transmatics Ltd. d) Megasoft Ltd. Similarly, on the basis of turnover filter of 10 times of the turnover of the assessee company, we uphold the order of the ld. CIT(A) regarding exclusion of M/s Infosys Ltd. (Supra) because, this company is having a turnover of Rs.9028 Crores as against the assessee’s turnover of Rs.195 Crores.

Now, we examine the claim of the assessee regarding exclusion of various comparables on the basis of functional dissimilarity and in this regard, reliance has been placed by the ld. AR of the assessee on the Tribunal order rendered in the case of M/s Infinera India Pvt. Ltd. (Supra).

As per the functional profile of the assessee company noted by the TPO on page-2 & 3 of his order, the assessee company is rendering software services and the ld. DR of the revenue could not point out any difference in facts in 6 IT(TP)A Nos.1620(B)2014, & 1663(B)/2014 the present case and in the case of M/s Infinera India Pvt. Ltd. (Supra) and therefore, we hold that this Tribunal order is applicable in the present case.

As per para-9 of this Tribunal order, it was held by the Tribunal that M/s Kals Info Systems Ltd. is functionally dissimilar because, it derives its revenue primarily from software services and software products and segmental information was not available. Similarly, as per Para -11 of the Tribunal order, it was held by the Tribunal that M/s Persistent Systems Ltd. is not a good comparable because the turnover of this company is reported in a combined manner as a sale of software services and products (export) of Rs.209.17 Crores in the present year and segmental information is not available in the annual report. Thereafter, in para-13 of this Tribunal order, the Tribunal held that M/s Tata Elxsi Ltd.(Seg.) cannot be considered as good comparable because, this company is functionally dissimilar and for holding so, the Tribunal considered and followed two Tribunal order rendered in the case of M/s Telecordia Technologies India Pvt. Ltd. Vs DCIT in and in the case of EMC Data Storage Systems (Ind.) Pvt. Ltd. Vs DCIT (IT(TP)A No.1274(Bang)/2010. Thereafter, in para-19 The Tribunal held that M/s Flextronics Software Systems Ltd. is also not a good comparable because, this company incurred large amount of R&D expenditure of Rs.40.23 Crores and it is functionally dissimilar as was held by the Tribunal in the case of M/s Intoto Software India Pvt. Ltd. Vs ACIT in ITA No.1196/Hyd)/2010.

Respectfully following this Tribunal order, we hold that these companies i.e.… a) M/s Kals Information Systems Ltd.

7 IT(TP)A Nos.1620(B)2014, & 1663(B)/2014 b) M/s Persistent Systems Ltd. c) M/s Tata Elxsi Ltd. (Seg.) d) Ms/s Flextronics Software Systems Ltd. should be excluded from the list of final comparables on the basis of functional dissimilarity.

Regarding iGate Global Solutions Ltd., which was excluded by the ld.

CIT(A) by applying turnover filter of Rs. 500 Crores, we hold that this company is a good comparable in the facts of the present case and therefore, this company should be included in the list of final comparables.

The ld.AO/TPO should work out the ALP and TP adjustment, if any, to be made after considering the exclusion/inclusion of various company as

per the above paras.

Now we decide ground no.5 of the assessee’s appeal i.e. regarding allowability of software expenses of Rs.3,58,71,548/- as revenue expenditure. This Tribunal for the assessment year 2008-09 decided the issue in favour of assessee by respectfully following the decision of the Special Bench of the Tribunal rendered in the case of Amway India Enterprises Vs DCIT reported in 301 ITR(AT)1 (Del.) It was the claim of the ld. AR of the assessee that the nature of software expenditure is the same in the present year also and the same could not be controverted by the ld. DR of the revenue and therefore, we find no reason to take a contrary view in the present year. Accordingly, ground no.5 of the assessee is allowed.

Both sides agreed that other grounds raised in the appeal of the assessee are not required to be decided separately.

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In the result, the appeal of the assessee and revenue are partly allowed for statistical purposes.

Order pronounced in the open court on the date mentioned on the caption page.

(ASHA VIJAYARAGHAVAN) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER Bangalore: D a t e d : 10.2016 am*