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Income Tax Appellate Tribunal, BANGALORE BENCH ‘A’, BANGALORE
Before: SHRI A. K. GARODIA & SMT. ASHA VIJAYARAGHAVAN
per the direction of DRP.
2 IT(TP)A No.180(B)2015 & CO 108/B/2015
The grounds raised by the revenue in this appeal are as under;
l.The order of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case.
2.The DRP erred in directing the AO to exclude M/s. ICRA Techno Analytics Ltd., M/s. KALS Information Systems Ltd., M/s. Persistent Systems Ltd., M/s, Tata Elxsi Ltd., from the list of comparables in Software development segment as being functionally different without appreciating the fact that these companies qualify all the qualitative and quantitative filters applied by the TPO.
3.The DRP erred in holding that M/s. Infosys Ltd cannot be taken as comparable, being functionally different, big brand by relying on various decisions of the 'TAT without appreciating the fact that the company qualify all the qualitative and quantitative filters applied by the TPO.
4. The DRP erred in holding that M/s Persistent Systems & Solutions Ltd cannot be taken as comparable for the reason that it does not have segmental results pertaining to Software Development Service without appreciating the fact that the taxpayer was not raised any objection during TP proceeding and the company qualify all the qualitative and quantitative filters applied by the TPO.
5. The DRP erred in directing the TPO to apply Onsite filter on Software development segment and to exclude M/s. R. S. Software (India) Ltd as comparables without appreciating that the directions to the AO amounts to setting aside the issue which is outside the purview of the DRP under the provision of Section 144C as the DRP is not empowered to set aside the issue in terms of Section 144C(8) of the Act.
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6. The DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude telecommunication expenses and foreign currency expenses from the export turnover also while computing the deduction u/s 1OA of the I.T. Act, without appreciating the fact that there is no provision in section 1OA that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 1OA provides that such expenses are to be reduced only from the export turnover.
7.The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court.
8. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the AO be restored.
9. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.
The grounds raised by the assessee in its cross objection are as under;
“The grounds stated here under are independent of, and without prejudice to one another; 1 Comparability Analysis adopted by the TPO for determination of arm's length price. a)The Ld. AO / Ld. Transfer Pricing Officer ('Ld. TPO') had grossly erred on facts and in law in benchmarking the transactions of the Respondent without considering the differences in the functions performed, assets employed and risk undertaken by the Respondent vis-a-vis
4 IT(TP)A No.180(B)2015 & CO 108/B/2015 comparable companies. The Ld. Dispute Resolutions Panel ('Ld. Panel') erred in confirming the same. b)The Ld. AO / Ld. TPO had erred on facts and in law in not acknowledging that the sub-contracting charges, incurred by the Respondent, represents arm's length consideration, and thereby was required to be considered as pass-through cost. The Ld. Panel erred in confirming the same. c)The Ld. Panel erred in law in arbitrarily applying the onsite revenue filter without providing the respondent an opportunity of being heard. Accordingly, the Ld. Panel erred in rejecting Akshay Software Technologies Limited and R S Software (India) Limited, as comparable upon application of the onsite revenue filter. d) The Ld. AO I Ld. TPO had erred on facts and in law in rejecting Powersoft Global Solutions Limited ('Powersoft') as a comparable on the application of the employee cost filter. The Ld. Panel erred in confirming the same without considering the submissions of the Respondent. e) The Ld. Panel erred on facts in rejecting LGS Global Limited ('LGS') upon application of the export earnings filter. 2 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The Ld. Panel erred in upholding the action of the Ld. AO/the Ld. TPO in not allowing appropriate adjustments under Rule 1OB to account for, inter alia, differences in differences in (a) Marketing expenditure adjustment, (b) Research and development expenditure adjustment; and (c) risk profile between Respondent and the comparable companies. 3 Reduction of expenses from export and total turnover for computation of deduction under section 1OA of the Act a)The Ld. Panel erred in upholding the action of the Ld. AO in reducing communication expenses of Rs. 14,863,917, without considering the fact that these expenses were not attributable to delivery of computer software outside India: b)The Ld. Panel erred in upholding the action of the Ld. AO in reducing travel expenses incurred in foreign currency amounting to Rs. 563,348,461 from the export turnover, without considering the fact that the said travel expenses
5 IT(TP)A No.180(B)2015 & CO 108/B/2015 were not incurred for the purpose of rendering any technical services outside India. c) 4 Relief a)Respondent prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b)Respondent craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal.
The ld. DR of the revenue supported the order of (DRP) and the Draft Assessment Order passed by the AO and he also submitted that various relief allowed by the DRP is not justified. As against this, it is submitted by the ld. AR of the assessee that the revenue is disputing
about the direction of the DRP for exclusion of the following comparables. a) ICRA Techno Analytics Ltd., b)M/s Kals Information Systems Ltd., (Seg.) c) M/s Persistent Systems Ltd., d)M/s Tata Elxsi Ltd., e)M/s Infosys Ltd., f) M/s Persistent Systems & Solutions Ltd., g)M/s R.S Software (India.) Ltd., In this regard, he submitted that so far ground no.5 of the revenue’s appeal is concerned in respect of direction of DRP to exclude R. S. Software Ltd., he has no objection if this ground of the revenue is allowed and it is held that M/s R. S. Software Ltd., is a good comparable. Regarding the remaining comparables for which the exclusion is being objected by the 6 IT(TP)A No.180(B)2015 & CO 108/B/2015 revenue, it was submitted that all these comparables are to be excluded as
per the Tribunal’s order rendered in the case of DCIT Vs M/s Electronics for Imaging India (P) Ltd., as reported in 70 Taxmann.com 299(Bangalore)(Trib.), copy available on pages 1615 to 1636 to the case laws paper book and in particular, our attention was drawn to para-nos.13 to 33 of this order,
We have considered the rival submissions and have gone through the material available on record and the Tribunal order on which reliance has been placed by the ld. AR of the assessee. For the sake of ready reference, we reproduce para-13 to 33 of this Tribunal order:-
“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,
7 IT(TP)A No.180(B)2015 & CO 108/B/2015 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.
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
8 IT(TP)A No.180(B)2015 & CO 108/B/2015 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.
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.
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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. 25. 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. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including
10 IT(TP)A No.180(B)2015 & CO 108/B/2015 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.
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 ______________________________________________________
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
11 IT(TP)A No.180(B)2015 & CO 108/B/2015 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).
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 12 IT(TP)A No.180(B)2015 & CO 108/B/2015
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”.
From the above paras of the Tribunal order, it is seen is that it was held by the Tribunal in that case that the following companies i.e. a)
M/s ICRA Techno Analytics Ltd (Seg.) b)Infosys Ltd., c) M/s Kals Information Systems Ltd., (Seg.), d) M/s Persistent Systems & Solutions Ltd., e) M/s Persistent Systems Ltd., and f) M/s Tata Elxsi Ltd., (Seg.) should be excluded from the list of final comparables. As per para-8 of the 13 IT(TP)A No.180(B)2015 & CO 108/B/2015 Tribunal order, the assessee company was engaged in the business of development of software services Ltd., as well as rendering sales and supports services. In the present case, it is noted by the TPO in para-2 of his order that the assessee is rendering engineering services in the nature of software development services. Hence, it is seen that the business profile of the present assessee and the assessee in the case of DCIT Vs M/s Electronics Imaging India (P) Ltd., is similar and the ld. DR of the revenue also could not point out that any difference in facts in the present case and in that case. In view of this, by respectfully following this Tribunal order cited by the ld,. AR of the assessee we hold that the following comparables i.e. a) M/s ICRA Techno Analytics Ltd (Seg.) b)Infosys Ltd., c) M/s Kals Information Systems Ltd., (Seg.), d) M/s Persistent Systems & Solutions Ltd., e) M/s Persistent Systems Ltd., and f) M/s Tata Elxsi Ltd., (Seg.) should be excluded from the list of final comparables. Accordingly, ground no.2 to 4 of the revenue’s appeal are rejected and ground no.1 of the revenue’s appeal is general in nature which requires no separate adjudication. Ground no.5 of the revenue’s appeal is allowed in view of the contention of ld. AR of the assessee that the assessee has no objection if this comparable company i.e. M/s R. S. Software Ltd., is held to be a good comparable.
Regarding ground no.6 & 7 of the revenue’s appeal, we find that this issue is covered in favour of the assessee by the judgment of Hon’ble Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd., as reported in 349 ITR 98 wherein it was held that the total turnover is sum
14 IT(TP)A No.180(B)2015 & CO 108/B/2015 total of export turnover and domestic turnover and therefore, if some amount is reduced from the export turnover then the total turnover also goes down automatically by the same amount. Respectfully following this judgment of the Hon’ble Karnataka High Court, we decline to interfere with the order of the DRP on this issue. Accordingly, round no.6 & 7 are rejected.
Ground no.8 & 9 are general in nature and the same do not require any specific adjudication.
In the result, the revenue’s appeal is partly allowed.
Regarding cross objection of the assessee, it was submitted by the ld. AR of the assessee that if the issues raised by the revenue in its appeal are decided in favour of the assessee except ground no.5 of the revenue’s appeal, the issue raised by the assessee in its cross objection will be of academic interest except the issue regarding the allowability of deduction u/s 10A which is covered in favour of the assessee by the judgment of the Hon’ble Karnataka High Court rendered n the case of M/s Tata Elxsi Ltd., (Supra). While deciding the revenue’s appeal as per above para, we have decided all the TP issues and the issue regarding deduction u/s 10A in favour of assessee except allowing ground no.5 of the revenue’s appeal. Therefore, as per the contention of the ld. AR of the assessee, the issues raised by the assessee in its cross objection are held to be of academic interest only and we make no adjudication on the same.
In the result, the cross objection of the assessee is dismissed.
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In the combined result, the appeal of the revenue is partly allowed whereas the cross objection of the assessee is dismissed.
Order pronounced in the open court on the date mentioned on the caption page.