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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ B ’
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
directed against the assessment order dt.29.1.2015 passed under Section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short 'the Act') in 2 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 pursuant to the directions of the Dispute Resolution Panel (in short ‘DRP’) dt.18.12.2014 for the Assessment Year 2010-11.
The revenue has raised the following grounds :
3 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015
Ground No.1 is general in nature and does not require any specific adjudication.
Ground Nos.2 to 7 are regarding certain comparable companies selected by the Transfer Pricing Officer (‘TPO’) were directed by the DRP to be excluded from the set of comparables. The assessee is engaged in providing software development services to its Associated Enterprise (‘AE’) at U.S. The assessee is engaged in developing and maintaining custom e-business systems, application and platforms for the enterprise wide systems developed by the Arcot Group. The TPO selected 11 comparable companies for determining the Arm’s Length Price (‘ALP’) having average margin of 22.71%, after allowing the working capital adjustment the average margin was arrived at 20.73%. Accordingly, the 4 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 TPO proposed adjustment under Section 92CA of Rs.1,56,18,629. The assessee challenged the action of the TPO/A.O before the DRP by filing objections. The DRP vide its direction dt.18.12.2014 directed the TPO/A.O to exclude certain companies being not comparable with the assessee.
Before us, the revenue has challenged the finding of DRP and consequently seeking the inclusion of the following companies in the set of comparables: i. KALS Information Systems Ltd. (Seg) ii. Tata Elxsi Ltd. (Seg.) iii. Persistent System Ltd. iv. Infosys Ltd. v. ICRA Techno Analytics Ltd.(Seg) vi. Sasken Communication Technologies Ltd. vii. Persistent Systems & Solution Ltd. 6.1 The learned Departmental Representative has submitted that as regards KALS Information Systems Ltd., the TPO has considered only segmental data. Further the TPO found from the Annual Report that the revenue reflected in the Annual Report is income from software development export. The ld. DR has further submitted that this company
5 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 is functionally comparable with the assessee as there is nothing on record to say that this company is engaged in the product and the revenue has been earned by sale of product. Further the assessee itself is engaged in the development of product. The DRP has directed the exclusion of this company by following decisions of the Tribunal without examination of the nature of the activity of the assessee as well as this company. Thus the ld. DR has submitted that this company is functionally comparable as found by the TPO and included I the list of comparable.
6.2 As regards the Tata Elxsi Ltd. (Seg.), the ld. DR has submitted that the basic function of this company is software development services.
There has been no visual computing laboratory during the year.
Therefore the decisions relied upon by the assessee are not applicable in the facts of the present case. The assessee has raised the objection before the TPO only with regard to the doubtful debts. The DRP has not given a finding of fact but directed the TPO to exclude this company by following the decision of the Tribunal.
6 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 6.3 Persistent Systems Ltd. – The ld. DR has submitted that this company is engaged in the services of product development and end-to- end solution to its clients. The basic functions are software development services therefore it is functionally comparable with the assessee. The DRP has directed to exclude this company on the gorund that this company has shown sales from the software development services and no segmental data is available. However this objection was not confronted with the TPO.
6.4 Infosys Limited - The ld. DR has submitted that the size of this company cannot be the only criteria for inclusion or exclusion of the same in the list of comparable therefore when the main functions of the company are similar to the functions of the assessee then the same cannot be excluded only because of its size.
6.5 ICRA Techno Analytics Limited (Seg) - This company is engaged in providing services in certain areas. This company is providing software solutions therefore it does not render ITES but provides software development services.
7 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 6.6 Sasken Communication Technologies Ltd. - The ld. DR has submitted that the basic functions of the company is software development services therefore this company is comparable to the assessee.
6.7 Persistent System & Solutions Ltd. - The ld. DR has submitted that this company is engaged in providing software development support services and system integration services to the group company therefore this company functions are comparable to the assessee.
7.1 On the other hand, the learned Authorised Representative has submitted that the functional comparability of these companies has been examined by this Tribunal in a series of decisions. The DRP has directed for exclusion of these 7 companies by following various decisions of this Tribunal wherein it has been held that these companies are not functionally comparable with software development service provider.
The learned Authorised Representative has also referred to the respective Annual Reports of these companies and pointed out the functions of these companies are not similar to the assessee. He has relied upon the decision dt.24.2.2016 of this tribunal in the case of DCIT
8 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 Vs. Electrnic Imaging India Pvt. Ltd. in IT(TP)A No.212/Bang/2015 and submitted that except Persistent System and Solutions Ltd., the functional comparability of all other six companies have been examined by this Tribunal in the said order and it was found that these companies are not functionally comparable with software development captive service provider.
7.2 As regards the Persistent System & Solutions Ltd., the learned Authorised Representative has submitted that the co-ordinate bench of this Tribunal in the case of ACIT Vs. Broadcom India Research Pvt. Ltd. vide its order dt.13.7.2016 in IT(TP)A No.348/Bang/2015 has considered and decided the functional comparability of this company and found that this company is not comparable with the software development services provider.
Having considered the rival submissions and relevant material on record, we found that the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered the functional comparability of these companies in paras 13 to 33 as under :
9 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 “ 13. We shall deal with each comparable which has been disputed by the Revenue one by one as under:- (1) ICRA Techno Analytics Ltd. (seg)
At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:-
“Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables.”
We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE.
In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. (2) Infosys Ltd.
The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs.21,140 crores, which is 442 times higher than the assessee.
10 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 18. The DRP accepted the objections of the assessee and by following the decision of the Delhi Benches of the Tribunal in the case of Agnity India Pvt. Ltd. v. ITO [2015] 58 taxmann.com 167 (Delhi – Trib), directed the TPO to exclude this company from the list of comparables.
We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Pvt. Ltd. (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon’ble Delhi High Court. The Hon’ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry.
In view of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE. (3) KALS Information Systems Ltd.
The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists of STPI unit and also having a training centre engaged in training of software professionals on online products. Thus, when this company is having revenue from software services as well as software product, the same cannot be considered as comparable with software development service providing company. 22. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, dated 23.11.2012, this company was found to be not comparable with that of the assessee.
11 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 23. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs.60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persistent Systems Ltd.
We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration.
The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us.
Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables. (5) Sasken Communication Technologies Ltd.
The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables.
12 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 28. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. lakhs _____________________________________________________________ Year ended Year ended March 31, 2010 March 31, 2019 _____________________________________________________________ Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 _____________________________________________________________ 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. (6) Tata Elxsi Ltd.
The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum).
13 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra).
We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies Pvt. Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:- “7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable parties.”
No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP.”
As regards the Persistent System & Solutions Ltd., the co-ordinate bench of this Tribunal in the case of Broadcom India Pvt. Ltd. (supra) has considered the functional comparability in para 13.2 as under :
14 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015
15 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 Following the decisions of the co-ordinate bench, we do not find any reason to interfere with the findings of the DRP in directing the A.O/TPO to exclude the 7 companies from the set of comparables.
Ground Nos.8 & 9 are regarding exclusion of expenditure incurred in foreign currency from export turnover as well as total turnover while computing the deduction under Section 10A of the Act.
10.1 We have heard the rival submission and perused the material on record. The Hon’ble Karnataka High Court in the case of CIT
16 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 v M/s Tata Elxsi Ltd. & Others 349 ITR 98 (Kar) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon’ble jurisdictional High Court reads as follows:-
“………..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define ‘total turnover’, the word ‘total turnover’ falls for interpretation by this Court; ……..In section 10A, not only the word ‘total turnover’ is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In 17 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same”.
In the light of the above binding precedents, we do not find any error or illegality in the impugned order of DRP directing the A.O. to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s.10A of the Act.
C.O. No.148/Bang/2015 Though the assessee has raised various grounds in the C.O. however, at the time of hearing, the learned Authorised Representative of the 18 IT(T.P)A No.393/Bang/2015 & C.O. No.148/Bang/2015 assessee has submitted that if the issue of comparability of 7 companies as involved in the revenue’s appeal is decided against the revenue and in favour of the assessee then the assessee does not press the C.O. as it becomes academic. Accordingly, in view of our finding in respect of the revenue’s appeal, the C.O. filed by the assessee is dismissed as not pressed.
In the result, the revenue’s appeal as well as C.O. of the assessee are dismissed. Order pronounced in the open court on the 4th day of Nov., 2016.