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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI S.K.YADAV & SHRI A. K. GARODIA
O R D E R PER SHRI A.K.GARODIA, AM This appeal is filed by the revenue and the C. O. is filed by the assessee and these are directed against the order of learned CIT (A) IV, Bengaluru dated 08.04.2013 for A. Y. 2005 – 06.
IT(TP)A No.1044(B)2013 & 2 CO No. 6/Bang/2016
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.
2. The learned CIT (A) erred in excluding M/s. FIextronics Ltd, M/s. iGate Global Solutions Ltd , M/s. Infosys Technology Ltd, M/s L&T Infotech Ltd ., Satyam Computers Ltd. as comparables in the case of the taxpayer holding that the size and turnover of the company are deciding factors for treating a company as a comparable.
3. The Ld. CIT (A) erred in excluding the comparable companies M/s. Exensys Software Solutions Ltd and Thirdware Solutions Ltd. as comparables in the case of the taxpayer on the basis of Abnormal Profit without defining what constitutes abnormal profit filter and how the same is determined and.
4. The learned CIT (A), on the facts and circumstances of the case. erred in holding that M/s. Bodhtree Consulting Ltd and Tata Elxsi Ltd cannot be taken as a comparables in the case of the taxpayer.
5. 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.
7. 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 or the appeal.
IT(TP)A No.1044(B)2013 & 3 CO No. 6/Bang/2016
The grounds raised by the assessee in C. O. are as under;
The Order of the learned Commissioner of Income Tax (Appeals) - IV, Bangalore [CIT
(Appeals)], to the extent prejudicial to the Respondent is bad in law.
2. The learned CIT (Appeals) has erred in confirming the action of the Assessing Officer
(“AO”) in making a reference to Transfer Pricing Officer (“TPO”) for determining the arm’s length price without demonstrating as to how or why it was necessary and expedient to do so.
3. The learned CIT (Appeals), has erred in confirming the action of the AO and TPO in:
a. Passing the order without demonstrating that the Respondent had a motive of tax evasion; b. Relying upon replies received under section 133(6) without giving an opportunity to the Respondent to cross examine the parties involved, despite a specific request so made; and c. Not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore the addition made under Chapter X is bad in law.
4. The learned CIT (Appeals) has erred in confirming the action of the TPO in:
a. Rejecting the transfer pricing analysis undertaken by the Respondent on unjustifiable grounds and conducting a fresh transfer pricing analysis; b. Adopting unjustifiable and inappropriate filters like 75% onsite revenue filter for selecting comparables and thereby rejecting MI.s Orient Information Technology Ltd. and M/s. TVS Infotech Ltd. as comparables that were selected by the Respondent; c. Rejecting M/s. Melstar Information Technologies Ltd. as a comparable on the ground IT(TP)A No.1044(B)2013 & 4 CO No. 6/Bang/2016 that it had negative operating margin without appreciating that the company is functionally similar to the Respondent; and d. Rejecting M/s. VJIL Consulting Ltd. as a comparable on the ground of having peculiar economic circumstances; 5. The learned CIT (Appeals) has erred in confirming the action of the TPO in: a. Adopting companies as comparables even though they are not comparable in respect of functions performed, risks assumed, asset utilised, size, turnover etc; b. Adopting companies like Sankhya Infotech Ltd, Geometric Software Solutions
Company Ltd and Foursoft Ltd. as comparables even though they are not comparable in terms of functions performed, risks assumed, assets utilized, size, etc; c. Not appreciating that, apart from failing upper turnover filter, Flextronics Software is functionally different from the Respondent, Satyam Computers has unreliable financial statements and Infosys is a large software company having brand value and software products and therefore these companies ought to be rejected as comparables; d. Not appreciating that Exensys Software and Thirdware Solutions are even otherwise functionally different from the Respondent and have peculiar economic circumstances and therefore liable to be rejected as comparables; e. Adopting Foursoft Ltd and Geometric Software Solutions Company Ltd as comparables even though they are not comparables as their related party transactions are more than 15% of operating revenue; and f. Including reimbursement of expenses received from AE as part of operating cost and operating revenue while computing arm's length price without appreciating that reimbursement was of expenses incurred on behalf of AE and reimbursements at cost should be considered as at arm's length.
IT(TP)A No.1044(B)2013 & 5 CO No. 6/Bang/2016
6. The lower authorities have erred in:
a. Not making proper adjustment for enterprise level and transactional level differences between the Respondent and the comparable companies; and b. Not considering that the Respondent is insulated from certain risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account;
Learned DR of the revenue supported the order of AO/TPO.
Learned AR of the assessee supported the order of CIT (A) in respect of the grounds raised by the revenue. He also submitted that the revenue is objecting to the exclusion of following comparables as directed by CIT (A):- a) M/s Flextronics Ltd., b) M/s iGate Global Solutions Ltd., c) M/s Infosys Technology Ltd., d) M/s L & T Infotech Ltd., e) M/s Satyam Computers Ltd., f) M/s Exensys Software Solutions Ltd, g) M/s Thirdware Solutions Ltd., h) M/s Bodhtree Consulting Ltd. and i) M/s Tata Elxsi Ltd.
He placed reliance on the tribunal order rendered in the case of ACIT vs. M/s McAfee Software (India) Pvt. Ltd. in IT (TP)A No.1388/Bang/2011 & 04/Bang/2012 dated 18.03.2016 copy available on pages 696 to 716 of the Compilation of Case Laws. In particular, our attention was drawn to pages 702 to 712 and it was submitted that all these comparables are to be excluded as per this tribunal order.
Regarding the C.O. of the assessee, he submitted that the Ground No. 5
IT(TP)A No.1044(B)2013 & 6 CO No. 6/Bang/2016 (c) to (f) are for exclusion of a) M/s Flextronics Ltd., b) M/s Infosys Technology Ltd., c) M/s Exensys Software Solutions Ltd, d) M/s Geomatric Software Solutions Ltd. and e) M/s Thirdware Solutions Ltd. and this issue is also covered in favour of the assessee by the same tribunal order and page 711 of Compilation of Case Laws is relevant for (d) and the remaining companies i.e. a) to c) and e) are already excluded by CIT (A) and revenue is in appeal against their exclusion and it is already pointed out that these are covered by this tribunal order. He also submitted that the remaining grounds of the C. O. are not pressed.
We have considered the rival submissions. We find that the revenue is disputing the decision of CIT (A) for exclusion of 9 comparables as noted above and in addition to that, the assessee is requesting for exclusion of one more company i.e. M/s Geomatric Software Solutions Ltd. Hence, we have to decide the issue regarding exclusion of 10 comparables. The learned AR of the assessee has placed reliance on the tribunal order rendered in the case of ACIT vs. M/s McAfee Software (India) Pvt. Ltd. (Supra). First we compare the functional profile of this company and that of the assessee. The assessee is rendering Software Development services as noted by the TPO on page 2 of his order and as per Para 3 of that tribunal order, that company is also rendering Software Development services. Hence, in our considered opinion, if a company is not functionally comparable in that case, then it is not functionally comparable in the present case also. Now, we
IT(TP)A No.1044(B)2013 & 7 CO No. 6/Bang/2016 reproduce Para 10 and 11 of this tribunal order from pages 701 to 715 of the paper book. These are as under:-
“10. The final list of 17 companies selected by TPO are as under:
Sl No. Comparables selected by TPO NCP Margins as NCP Margins as per TPO Order per TPO Order (%) (WC-Unadj) (%) (WC – Adj) 1. Bodhtree Consulting Ltd., 24.85 22.35 2. Lanco Global Systems Ltd., 13.65 9.51 3. Exensys Software Solutions Ltd., 70.68 62.85 4. Sankhya Infotech Ltd., 27.39 21.14 5. Sasken Network Systems Ltd., 16.64 14.02 6. Four Soft Ltd., 22.98 21.35 7. Thirdware Solution Ltd., 66.09 63.97 8. R S Software (India) Ltd., 8.07 6.79 9. 20.34 17.75 Geometric Software Solutions Company Ltd., 10. Tata Elxsi Ltd., 24.35 22.77 11. Visualsoft Technologies Ltd., 23.52 20.10 12. 14.42 13.24 Sasken Communication Technologies Ltd., 13. Igate Global Solutions Ltd., 4.32 2.43 14. Flextronics Software Systems Ltd 32.19 29.42 15. L&T Infotech Ltd., 10.33 8.56 16. Satyam Computer Services Ltd 29.44 26.94 17. Infosys Technologies Ltd., 42.83 4.96 Arithmetical Mean 26.59 23.74 The analysis of each of the comparable company is as under.
Satyam Computers Ltd:
10.1. Out of the above comparables, Satyam Computer Services Ltd., was excluded by CIT (A) on the basis of non-reliability of financial data. Revenue has accepted the same and has not contested. So, the said company has been rightly excluded. Infosys Technologies Ltd., Exensys Software Solutions Ltd 10.2. Ld.CIT(A) has excluded Infosys and Exensys, on the basis of functional dissimilarity and having extraordinary event during the year. Exensys was having extraordinary profits by way of amalgamation of companies during the IT(TP)A No.1044(B)2013 & 8 CO No. 6/Bang/2016 year. Infosys was excluded having different functionality of products, having high turnover and brand name. Following the decision of Agnity Technologies Vs. ITO of ITAT as approved by the Hon'ble Delhi High Court, Infosys cannot be considered as comparable. The same view was held by Co-ordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra). Since the order of Ld.CIT(A) is in agreement with the decision on these two comparables by various Co-ordinate Benches, we uphold the same. Bodhtree Consulting Ltd.,:
10.3. This company was retained by Ld.CIT(A) but Assessee objects on the basis of functionality. However, as seen from the orders of Co-ordinate Benches in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as well as DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10- 05-2013, Bodhtree Consulting Ltd., was accepted as a comparable. However, in the case of Cordys Software India P. Ltd., in dt. 13-06- 2014 (Where one of us, AM is the author) has considered in detail and excluded the same for the following reasons: “1. Bodhtree Consulting Ltd. The learned counsel submitted that this company should be rejected under the following TPO’s filters:
• Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover.
• Functionally different filter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services”. Considering the above, we direct that the above company has to be excluded on the reason of RPT of more than 25% and functionality. Lanco Global Systems Ltd., :
10.4. This company even though included by TPO and has not been objected to by Assessee, was rejected by the CIT(A) on the reason of low profit margin. This is not a valid ground. Only continuous loss making companies are being
IT(TP)A No.1044(B)2013 & 9 CO No. 6/Bang/2016 excluded from the comparability. If this argument was accepted, the high profit making companies are also to be excluded. This is not the purpose for which TP analysis is being undertaken. Therefore, keeping the principles laid down by the Special Bench of ITAT in the case of Maersk Global Centers (India) P.Ltd 43 Taxmann.com 100 Mumbai(SB), we, consider the same as comparable and retain it in the list. Sankhya Infotech Ltd., Thirdware Solution Ltd., & Tata Elxsi Ltd., : 10.5. These three companies are rejected as comparables on functionality in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (paras 19-20, 22-26, 27- 30 restively) and in the case of Cordys Software India P. Ltd., in dt. 13-06-2014 (supra) at Para No.
The analysis by the Co- ordinate Benches is as under: “Sankhya Infotech Limited (‘Sankhya’)
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 cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below:
(1) SILICONTM Training Suite of Products: The products 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:
IT(TP)A No.1044(B)2013 & 10 CO No. 6/Bang/2016 “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.
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.
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 : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product developments. Since Assessee is in the product development, having I.P. rights, the same is not comparable.
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
IT(TP)A No.1044(B)2013 & 11 CO No. 6/Bang/2016 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 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.
The learned D.R. however, supported the Orders of the authorities below.
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(TP)A No.1044(B)2013 & 12 CO No. 6/Bang/2016 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.
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.
The learned counsel for the Assessee submitted before us that TATA Elxsi Ltd., a comparable company 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. It was his submission that this company will however, have to be excluded as this company was 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 on comparability of TATA Elxsi Ltd. as follows:
15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments –system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and Assessee’s objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to Assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company’s operations are functionally different as such, the same is not comparable. Further, Assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in Para 22:
22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the Assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed
IT(TP)A No.1044(B)2013 & 13 CO No. 6/Bang/2016 that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another Assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the Assessee.”
Keeping the Assessee’s objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the Assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to Assessee services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to Assessee.”
Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services Pvt. Ltd., order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt. Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee.
In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies.
13. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suffice to say that Assessee’s submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm’s length margin accordingly. The ground No.8 and additional ground raised by Assessee are considered as allowed . In view of the above, the above three companies are to be excluded.
IT(TP)A No.1044(B)2013 & 14 CO No. 6/Bang/2016 Sasken Network Systems Ltd., R S Software (India) Ltd., Visualsoft Technologies Ltd., and Sasken Communication Technologies Ltd., 10.6 Since there is no objection from Assessee and was selected by TPO, the above companies are retained. Four Soft Ltd., 10.7. The objection by Assessee is that this company is a product company. was analysed and accepted in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) Para 22. It was held that the said company ahs derived income from software license and AMCs. Since functionality was already analysed, respectfully following the Co-ordinate Benches also, the same was to be excluded. i. Intoto Software India Pvt. Ltd., ii. Cordys Software India P. Ltd., ITA No. 1451/Hyd/2010 Geometric Software Solutions Company Ltd.,: 10.8. Even though this company was accepted as comparable in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) and Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) and was not objected to, we find that the Co-ordinate Bench at Bangalore in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 has considered that this is in product development. We have perused the TPO’s order. In page 85 and 86 of the order, this comparable was analysed. TPO records that there are product sales to the extent of 18%. Segmental profits are not available. On assumptions, this company was retained. We are of the opinion that being a product based company, the same is not strictly comparable to a service company like Assessee. In the absence of segmental profit of service income, we have to exclude the same. Following the decision in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 (supra), this company is accordingly excluded. Igate Global Solutions Ltd., & L&T Infotech: 10.9. These two companies are found comparable in many orders of the Co- ordinate Benches, but excluded on the basis of turnover filter of Rs. 200 Crores limit in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra), we have considered the same. Assessee’s turnover is about 63 Crores. The turnover of Igate Global
IT(TP)A No.1044(B)2013 & 15 CO No. 6/Bang/2016 Solutions Ltd., (Seg) is about 405 crores and L & T Infotech Ltd is of 562 Crores. This is with the range of ten times the upper limit. Moreover, Assessee Counsel has not pressed on turnover filter of Rs. 200 Crores. Therefore, these two are retained. Flextronics Software Systems Ltd.,: 10.10. This company was objected to on functional dissimilarity. This was considered in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as under: “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”. Respectfully following, we exclude the same.
That leaves us with another ground in Revenue’s appeal about granting deduction (+) or (-) 5% as a standard deduction. Consequent to the amendment brought out to the proviso to Section 92C (2), the Revenue contends that the deduction is not permissible. It relies on Co-ordinate Bench decision in ITO vs. M/s. Sunquest Information Systems (India) Private Limited, in IT (TP) A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (at Para 16)]. Learned Counsel contends that the standard deduction was granted correctly as the amendments will apply to the cases pending as on 01-04-2009 and this order was passed by AO on 28-11-2008. Even the explanation brought in later also does not apply to the case. He relied on the principles laid down in SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] and DCIT Vs. Synopsis India P. Ltd., in IT(TP)A No. 1107 & 1093/Bang/2011 dt. 08-10-2015 in support. 11.1. We have considered the rival contentions. The order of Ld.CIT (A) is in accordance with the provisions. The issue was analysed by the Co-ordinate Bench in the case of SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] (supra) at paras 61, 62, 63 & 64 as under: “61. The Central Board of Direct Taxes in its Circular No. 5 of 2010 dated June 3, 2010 [(2010) 324 ITR (St.) 293] has clarified that these new provisos are effective from April 1, 2009 onwards. In fact these provisos have been brought into the Act by the Finance (No.2) Act, 2009. So, it will be applicable to the assessment year 2009-10 and onwards.
IT(TP)A No.1044(B)2013 & 16 CO No. 6/Bang/2016
In the present case, the assessment year is 2003-04. Therefore, the amended proviso as explained above is not applicable to the present case in hand. The proviso applicable to the present case is the one which stood before the substitution brought in by the Finance (No.2) Act, 2009 with effect from October 1, 2009. The earlier proviso is extracted below: “Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices, or, at the option of the Assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean”.
The first limb of the old proviso and the first limb of the present proviso are regarding arriving at the arithmetical mean which is the same. There is no change with regard to that. The change is with reference to the second limb. The old proviso says that at the option of the Assessee, the Assessee may adopt a price different from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean, i.e.., the Assessee has an option to claim the tax payer’s marginal relief at 5 per cent with reference to the arithmetical mean irrespective of the range of actual deviation between the margin disclosed by the Assessee and the average mean margin. Therefore, in effect, this marginal relief takes the character of a standard deduction of 5 per cent. For e.g., in a case, average mean of the arm’s length price determined by the Transfer Pricing Officer/Assessing Officer is 20 per cent and that one disclosed by the Assessee is 10 per cent. The Assessee will get a standard deduction of 5 per cent and the Assessee’s arm’s length price will be increased to 15 per cent and thereafter the difference of 5 per cent between 20 per cent and 15 per cent alone shall be added as arm’s length price adjustment. This is the theme of the old proviso. But under the newly substituted proviso, the marginal relief of 5 per cent will not Act as standard deduction. If the price determined by the average mean price is 20 per cent and that of the Assessee is 10 per cent., then the difference of 10 per cent is more than 5 per cent and therefore, the Assessee will not get the marginal relief and the entire difference of 10 per cent will be added as the arm’s length price adjustment. If the arm’s length price determined by the Transfer Pricing Officer/Assessing Officer is 15 per cent and that of the Assessee is 11 per cent., the difference of 4 per cent is less than 5 per cent and in that case, the rate disclosed by the Assessee at 11 per cent shall be taken as the arm’s length price. This is the position after the amendment.
In view of the above discussion, we find that the second limb of the proviso to section 92C(2) given an option to the Assessee to claim a marginal variance of 5 per cent as standard deduction. This ground of the Assessee is accepted and we hold that this benefit of deduction of 5 per cent has to be given to the Assessee, if the circumstances, so warrant”.
11.2. Not only that, the explanation brought in by Finance Act, 2014 w.e.f. 01- 04-2015 also specifies that the provisions of second proviso shall also be applicable to all assessments or reassessments proceedings pending before the AO as on the first day of October, 2009. The present proceedings were concluded before that day. So, the second proviso to Section 92C (2) does not apply to the impugned order. The pre-amended proviso, as interpreted by IT(TP)A No.1044(B)2013 & 17 CO No. 6/Bang/2016 various authorities does permit standard deduction of (+) or (-) 5% to Assessee. The order of Ld.CIT (A) is confirmed. The Revenue’s ground is rejected accordingly.”
We find that out of these 10 companies i.e. 9 companies noted in Para 4 above and M/s Geomatric Software Solutions Ltd., the tribunal has excluded eight and retained two i.e. a) M/s iGate Global Solutions Ltd. and b) M/s L & T Infotech Ltd. We also hold that out of these 10 companies, eight should be excluded but these two should be retained. The AO/TPO should work out the ALP by excluding these 8 companies and retaining these two companies over and above other companies retained by CIT (A) in the list of comparables and TP adjustment, if any should be made on that basis as per law.
In the result, the appeal of the revenue and C.O. of the assessee stand partly allowed for statistical purposes in the terms indicated above.
Order pronounced in the open court on the date mentioned on the caption page.