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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI N.V.VASUDEAVAN & SHRI A.K.GAODIA
O R D E R PER SHRI A.K.GARODIA, AM
These are cross appeals filed by the assessee and the revenue and the cross objection has been filed by the assessee which are directed against the order of the ld. CIT(A)-IV, Bangalore dated 31-01-2011 & 477-12 & CO No.1(B)/15162/Bang/2012 Page 2 of 14 2. In IT(TP)A No.404(B)/2012, the assessee has raised the following grounds:
“1.That the order of the Commissioner of Income Tax (Appeals) - IV, Bangalore ['CIT (Appeals)'] is bad in law and liable to be quashed. 2 That the CIT (Appeals) erred in ignoring the functional profile of the Appellant and established comparability with entrepreneurial software development service providers.
3. That the CIT (Appeals) erred in ignoring the limited risk nature of the engineering design services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential.
4. That the CIT (Appeals) erred in not considering the revised set of comparables submitted by the Appellant which are more closely comparable to the functional profile of the Appellant. 5.That the CIT (Appeals) erred in not providing an opportunity of being heard before arriving at a conclusion on the functional profile of the Appellant and consequently while determining the transfer pricing adjustment. 6.That the CIT (Appeals) erred in not applying multiple year/ prior year data for comparable companies while determining arm's length price.
7. That the CIT (Appeals) erred in upholding the approach adopted by the Transfer Pricing Officer of collecting selective information of the companies by exercising power granted to him under section 133(6) of the Income Tax Act, 1961 ('Act') that was not available to the Appellant in the public domain.
8. That the CIT (Appeals) erred in upholding the Transfer Pricing Officer'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 arm's length price.
9. That the CIT (Appeals) erred in performing his own & 477-12 & CO No.1(B)/15162/Bang/2012 Page 3 of 14 economic analysis during the appeal proceedings by modifying the filters applied by the Transfer Pricing Officer without providing any opportunity of being heard to the Appellant.
10. That the CI'T(Appeals) erred in upholding the order of the Deputy Commissioner of Income Tax, Circle 12(4), Bangalore (hereinafter referred to as the 'learned Assessing Officer') in consequently levying interest under section 234B of the Act.
That the CIT(Appeals) erred in upholding the order of the learned Assessing Officer in consequently levying interest under section 234D of the Act. 12.That the learned Assessing Officer erred in initiating penalty proceedings under section 271(1)(C) of the Act. The appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this appeal.
Similarly, the grounds raised by the revenue in its appeal No.
IT(TP)A No.477(B)/2012 are as under;
The order of the Ld. CIT (A) is opposed to law and facts of the case.
2. The CIT(A) erred in directing the Assessing Officer to exclude expenses incurred in foreign currency towards travel of Rs.1 ,51 ,82,578/-, freight, telecommunication and insurance charges amounting to Rs.2,26,78,338/-, from total turnover as well whereas such exclusion is permitted to arrive at the export turnover only as per the definitions given in Sec.1-DA of the Act and total turnover has not been defined in the section. -
3. The CIT(A) ought to have considered that the order of the jurisdictional High Court on the above issue has not been accepted by the Department and SLP has been filed.
& 477-12 & CO No.1(B)/15162/Bang/2012 Page 4 of 14 4. On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the TPO ought to have excluded com parables having any related party transactions, not only those with more than 25% related party transactions on sales.
5. On the facts and in the circumstances of the case, the Id. CIT(A) erred in holding that M/s Flextronics Software Systems Ltd., and M/s Celestial Labs cannot be taken as com parables being functionally different.
6. The learned CIT(A) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length Price(ALP) under the proviso to section 92C(2) of the Income Tax Act.
For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing officer may be restored.
The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above.
The grounds raised in the cross objection of the assessee are as under; “1. That the contention in the appeal filed by the revenue is bad in law while stating that the case laws relied upon by the ld. CIT(A) while deciding the issue of re- computation u/s 10A are not applicable on the grounds that the revenue has not accepted those orders and has filed appeals before the Hon’ble Supreme Court as following the decision of the jurisdictional High Court is mandatory.
That the contention of the revenue is bad in law and adjustments in arm’s length price of the international & 477-12 & CO No.1(B)/15162/Bang/2012 Page 5 of 14 transactions are not based on correct facts and established principles of law and procedures in this regard. 3. That the respondent craves leave to add to and/or to alter, amend, rescrind modify the grounds herein above or produce further documents before or at the time of hearing of this appeal”. 5. It was submitted by the ld. AR of the assessee that out of 26 comparables selected by the TPO for making TP adjustment in the present case, the assessee has requested for exclusion of following comparables.
Sl. No. Name of the Co. PLI %age Basis for seeking exclusion. 1M/s Avani Cimcon Tech. Ltd., 52.59 Functional Dissimilarity 2.M/s Celestial Labs Ltd., 58.35 Functional Dissimilarity 3.M/s Flextronics Software Sys.Ltd (Seg.) 25.31 Diversified Segment an no segment disclosure 10.71 Higher RPT percentage 4.M/ Geometric Ltd.(Seg.)
M/s Infosys Ltd. 40.30 Branding, ownership of Intangibles & R&D Higher RPT percentage 6. M/s Ishir Infotech Ltd., 30.12 7. M/s Kals Information Systems Ltd., 30.55 Significant rev. from product and no segmental details available 8. M/s Lucid Software Ltd., 19.37 Functional Dissimilarity 9. M/s Megasoft Ltd., 60.23 Functional Dissimilarity 10.M/s Tata Elxsi Ltd., 26.51 Functional Dissimilarity 11.M/s Wipro Ltd (Seg.) 33.65 Branding, ownership of Intangibles & R&D
He submitted a chart and pointed out that the issue regarding exclusion of these comparables is covered in favour of the assessee by various judgments as indicated in the chart submitted by him before us. He also submitted that if these comparable are excluded then, the average PLI of remaining comparables will be 17.72% before working capital adjustment and 16.68% after working capital adjustment as against profit percentage of & 477-12 & CO No.1(B)/15162/Bang/2012 Page 6 of 14 the assessee company, being tested party at 13.16% and since the difference is within the range of +- 5% no TP adjustment is called for.
The ld. DR of the revenue supported the orders of the authorities below.
Both sides agreed that if the assessee succeeds on the issue regarding exclusion of various comparables as per chart submitted by the ld. AR of the assessee then no other issue remain to be decided except the issue regarding computation of deduction allowable u/s 10A of the IT Act, 1961.
On this issue, it was submitted by the ld. AR of the assessee that this issue is covered in favour of the assessee by the judgment of the Hon’ble Karnataka High Court in the case of M/s Tata Elxsi Ltd., as reported in 349 ITR 98.
We have considered the rival submissions. First we take up Corporate Tax issue i.e. the issue regarding allowability of deduction u/s 10A of the IT Act. The AO has excluded expenses incurred in foreign currency towards travel, freight, telecommunication and insurance charges from the export turnover but not from the total turnover. As per the judgment of the Hon’ble Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd. (Supra), it was held that total turnover is sum total of export turnover and domestic turnover. Therefore, if an amount is excluded from export turnover then the total turnover goes down by the same amount, as a consequence. Respectfully following this judgment of the Hon’ble Karnataka High Court, we decline to interfere with the order of the ld. CIT(A) on this issue and ground no.2 & 3 of the revenue’s appeal are rejected and the & 477-12 & CO No.1(B)/15162/Bang/2012 Page 7 of 14 grounds raised in the C.O. by the assessee are allowed.
Now we decide the TP issue i.e. regarding the exclusion of various comparables as per the chart submitted by the learned AR of the assessee.
First company for which exclusion has been requested is M/s Avani Cimcon Tech. Ltd. Apart from other Tribunal orders, reliance has been placed on the Tribunal order rendered in the case of M/s Trilogy E-Business Software Ind.
Pvt. Ltd., in copy available on page 926 of the case law compendium. As per the profile of this company, i.e. M/s Trilogy E- Business Software Ind. Pvt. Ltd.,(Supra) noted in para-3 of this Tribunal order, this company is providing software research and development services to the AE on a contract basis and in the present case also, the assessee is providing software services to the AE and therefore, both these companies profile are similar. In the case of that assessee i.e. M/s Trilogy E-Business Software Ind. Pvt. Ltd.,(Supra), it was held by the Tribunal that M/s Avani Cimcon Tech. Ltd., (supra) is functionally different and therefore, this company has to be excluded from the list of comparables and while holding so, the Tribunal followed another Tribunal order of the Mumbai Bench of the Tribunal rendered in the case of M/s Telecordia Tech. Pvt. Ltd., Vs ACIT in ITA No781(Mum)/2011. The ld. DR of the revenue could not point out any difference in facts in the present case and in these two cases where the Tribunal held that this company i.e. M/s Avani Cimon Tech. Ltd. cannot be considered as a comparable. Hence, respectfully following these Tribunal orders, we direct the AO/TPO in the present case also to exclude this company from the list of final comparables. & 477-12 & CO No.1(B)/15162/Bang/2012 Page 8 of 14 11. The next company for which exclusion is being requested by the assessee is M/s Celestial Labs Ltd. For this company also, reliance has been placed on the same Tribunal order rendered in the case of M/s Trilogy E- Business Software Ind. Pvt. Ltd.,(Supra) and our attention was drawn to page no.927 to 931 of the case law compendium. In that case, the Tribunal held that this company was basically in clinical research and manufacture of bio-products and other products and there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software services and on this basis, it was held by the Tribunal that this company should not be considered as a comparable and no difference in facts could be pointed out by the ld. Dr of the revenue. Therefore, respectfully following this Tribunal’s order, we direct the AO/TPO in the present case also that this company M/s Celestial Labs Ltd., (Supra) should not be considered in the final list of comparables.
The next company for which exclusion is being requested by the assessee is M/s Flextronics Software Systems Ltd.,(Seg.). For exclusion of this company, reliance has been placed on the judgment of the Hon’ble Telangana & Andhra Pradesh High Court rendered in the case of DE Shaw India Software Pvt. Ltd., in ITTA No.433 of 2014, copy of which is available on pages 212 & 213 of Case law compendium. He also submitted that the Tribunal order in that case is in and copy of the same is available on pages 226 of case law compendium and since this Tribunal order in that case has been approved by the Hon’ble Telangana & Andhra Pradesh High Court, in the present case also, this company should & 477-12 & CO No.1(B)/15162/Bang/2012 Page 9 of 14 be excluded from the list of final comparables.
We have considered the rival submissions. We find that in the case of DE Shaw India Pvt. Ltd.,(Supra), it was held by the Tribunal that M/s Flextronics Software Systems Ltd.,(Seg.) cannot be considered as a comparable because this company is into product development. The Tribunal in that case has followed another Tribunal order rendered in the case of M/s Intoto Software India Pvt. Ltd., and the ld. DR of the revenue could not pint out any difference in facts in the present case and in the case of M/s DE Shaw India Pvt. Ltd.(Supra). Hence, respectfully following these Tribunal orders as well as the judgment of the Hon’ble Telangana & Andhra Pradesh High Court rendered in the case of DE Shaw India Pvt. Ltd.,(Supra), we direct the AO/TPO that in the present case also, this company i.e. M/s Flextronics Software Systems Ltd., (Seg.) (Supra) should be excluded from the list of final comparables.
The next company for which exclusion is sought for is M/s Geometric Ltd.,(Seg.)(Supra). Exclusion of this company is requested on this basis that RPT percentage in this case is 17% and as per various Tribunal orders, any company having RPT percentage of more than 15% is to be excluded and therefore, we direct the AO/TPO to exclude this company i.e. M/s Geometric Ltd.,(Seg.)(Supra) from the list of final comparables because of higher RPT percentage at 17%.
The next company for which exclusion is being requested is M/s Infosys Ltd., In support of his claim for exclusion of this company, it was submitted that in assessee’s own case, in IT(TP)A No.49(Bang)/2012 for AY: & 477-12 & CO No.1(B)/15162/Bang/2012 Page 10 of 14 2006-07 available on page 882 of case law compendium, it was held by the tribunal in para-16 of this Tribunal order that this company should be excluded from the list of final comparables and apart from this, in so many cases, the Tribunal has taken consistent view because of various factors such as branding, ownership of intangibles and R&D and software products, this company cannot be considered as a comparable. We therefore, direct the AO/TPO in the present case also to exclude this company from the list of final comparables.
The next company for which exclusion is being requested is M/s Ishir Infotech Ltd., The RPT percentage of this company is at 22%.
Considering this fact, we direct the AO/TPO to exclude this company from the list of final comparable.
The next company for which exclusion is being requested is M/s Kals Information Systems Ltd., For this purpose, reliance has been placed on the Tribunal order rendered in the case of M/s DE Shaw India Pvt. Ltd., (Supra) in copy available on page no.227 to 230 of case law compendium. In that case, the Tribunal had followed various other Tribunal orders such as rendered in the case of M/s Trilogy E-business Software India Pvt. and M/s HCL EAI Services Ltd., and it was held that this company should be excluded from the list of final comparables. Since ld. DR of the revenue could not point out any difference in facts in both these cases, we direct the AO/TPO to exclude this company i.e. M/s Kals Information Systems Ltd(Supra) from the list of final comparables. & 477-12 & CO No.1(B)/15162/Bang/2012 Page 11 of 14 18. The next company for which exclusion is being requested is M/s Lucid Software Ltd. and for this purpose, reliance has been placed on the same Tribunal order rendered in the case of DE Shaw India Pvt. Ltd., (Supra). The relevant portion is available on page no.230 of case law compendium. Since in that case, the Tribunal held that this company i.e. M/s Lucid Software Ltd., (Supra) should be excluded from the list of comparable and the ld. DR of the revenue could not point out any difference in facts, we direct the AO/TPO in the present case also to exclude this company i.e. M/s Lucid Software Ltd., from the list of comparables.
The next company for which the exclusion is requested is M/s Megasoft Ltd., and in this regard, reliance has been placed on the Tribunal order rendered in the case of M/s Trilogy E-Business Software India Pvt. Ltd.,(Supra) and it was pointed out that the relevant discussion is on page no.916 to924 of case law compendium. We find that in this case, as per para-38 of the Tribunal order, it was held by the Tribunal that profit margin of 23.11% which is the margin of software services segment be taken for comparability. Hence, it is seen that regarding this company i.e. M/s Megasoft Ltd.,(Supra), this is not the decision of the Tribunal that this company should be excluded and in fact, the Tribunal decision is this that this company should not be excluded but the profit margin in this company should be considered in respect of software services segment only and the profit margin of that segment has been noted as 23.11%. Accordingly, in the present case also, we direct the AO/TPO to consider the profit margin of software services segment only of this company i.e. M/s Megasoft Ltd., & 477-12 & CO No.1(B)/15162/Bang/2012 Page 12 of 14 (Supra) which has been noted at 23.11%.
The next company for which exclusion is being requested is M/s Tata Elxsi Ltd.,(Seg.). For this company, reliance has been placed on two Tribunal orders in assessee’s own case for AY: 2005-06 & 2006-07, copy available on pages 854 – 873 of the case law compendium. In addition to this, reliance is also placed on the Tribunal order rendered in the case of M/s Telecordia Tech. India Pvt. Ltd., in copy available on page 830 of case law compendium and this Tribunal order is for the same assessment year i.e. AY: 2007-08. As per this Tribunal order rendered in the case of M/s Telecordia Tech. India Pvt. Ltd., it is noted by the Tribunal that this company is engaged in the development of niche product development and related services, as in the present case. Therefore, by respectfully following this Tribunal order, we direct the AO/TPO in the present case also to exclude this company i.e. M/s Tata Elxsi Ltd., also from the list of final comparables.
The next company for which exclusion is being requested is M/s Wipro Ltd., (Seg.) and for this, reliance has been placed on the tribunal order rendered in the case of M/s Telecordia Tech. India Pvt. Ltd. (Supra) and it was pointed out that it is noted by the Tribunal in this order that this company i.e. M/s Wipro Ltd., is a Global IT company having varieties of services and products and looking into magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis.
The ld. DR of the revenue could not pointing out any difference in & 477-12 & CO No.1(B)/15162/Bang/2012 Page 13 of 14 facts and therefore, respectfully following this Tribunal order, we direct the AO/TPO that in the present case also, this company i.e. M/s Wipro Ltd., should not be considered as a comparable.
As per above discussion, we find that as against the request of the assessee for exclusion of 11 companies out of total 26 companies considered by the TPO as comparable, we have held that all but one company should be excluded and in respect of one company i.e. M/s Megasoft Ltd., we have directed the AO/TPO to consider the profit margin of computer services segment only of that company which has been noted as 23.11% by the Tribunal.
We therefore direct the AO/TPO to re-compute the average PLI of comparable companies as per above directions and if the same is within +/- 5% of the profit of the assessee company i.e. tested party then, no TP adjustment is to be made.
In the result, the appeal of the assessee and the revenue are partly allowed for statistical purposes whereas the cross objection of the assessee is allowed.
Order pronounced in the open court on the date mentioned on the caption page.