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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI N.V.VASUDEVAN & SHRI A. K. GARODIA
Regarding ground no.4, ld. DR of the revenue supported the order of the AO/TPO whereas the ld. AR of the assessee submitted that he has no objection even if this company is included as a comparable. Accordingly, this issue is decided in favour of the revenue and against the assessee and ground no.4 of the revenue is allowed.
Regarding ground no.5, ld. DR of the revenue supported the order of the ld. AO/TPO whereas the ld. AR of the assessee supported the order of the ld.CIT(A). & C.O No.156/Bang/2013 Page 9 of 16 14. We have considered the rival submissions. We find that this issue has been decided by the ld. CIT(A) as per para-89 & 90 of his order which are re-produced below for the sake of ready reference;
“89. I have considered the appellant’s submissions on this aspect. The reason given by the TPO for applying the diminishing revenue and persistent losses filters is that the filters are designed to eliminate companies which are not in line with the trend of growth witnessed in the software industry. However, use of these filters depends on “trends over a period of time” and is contrary to the TPO’s own stand that only current year’s data are required to be used.
Growth of the Indian software industry cannot be attributed solely to existing companies, but also to new companies being set up, which in turn depends upon the entry and exit barriers that characterise an industry. Moreover, revenue may not always be a true indicator of a company’s performance, which may also depend on its own business cycle. A company with increasing revenues over a period of time does not necessarily reflect better performance, as increase in expenses in the corresponding period can be higher than that in revenues and consequently, the company may still incur losses. Conversely, a company with diminishing revenues over a period of time may not necessarily be performing badly, if it still has a good profit margin achieved through cost efficiently”.
From the above paras reproduced from the order of the ld.CIT(A), we find that he has given cogent reasoning for rejecting the diminishing revenue filter used by the TPO and therefore, on this issue, we find no & C.O No.156/Bang/2013 Page 10 of 16 reason to interfere with the order of the ld. CIT(A). Accordingly, ground no.5 of the revenue is rejected.
Regarding ground no.6, ld. DR of the revenue supported the order of the ld. AO/TPO whereas the ld. AR of the assessee supported the order of the ld.CIT(A).
We have considered the rival submissions. We find that this issue was decided by the ld. CIT(A) as per para no.96 to 99 of his order which are reproduced below;
“96.On consideration of the appellant’s contentions, I am unable to agree with the TPO that in a short time horizon of current year’s business, a mere change in financial year ending would make significant difference to companies that are functionally similar, operate in a similar business environment, and face the same business cycle. If the TPO had evidence that such a thing had happened in the case of a particular company, it was for him to point out what exact difference had the change of accounting year made to the financial results of that company and whether it would not be possible to restate or reconcile those financial results for a different accounting period without significant change in the net profit margin or any other parameters he considered relevant.
Since multinational companies operate in different geographical regions and different countries follow different accounting or financial years, functionally similar or even identical companies cannot be held to be incomparable only owing to differences in the date of ending of the financial & C.O No.156/Bang/2013 Page 11 of 16 year. Most business enterprises operate on the going concern concept which is fundamental to present day accounting, but the period concept used in accounting is just an artificial means to reckon the operating results of business operations at a given point in time. Nothing would turn upon changing the end of accounting period from31st March to another date within a short span of time (say, six months). This view finds support from paragraph 32 of the OCED Draft Comparability Issues which states that while it is practical to make year by year comparisons, economic circumstances cannot be assumed to change overnight at the end of a tax year.
AS-21 issued by the ICAI on consolidation of accounts as well as section 212 of the Companies Act permit differences in the dates of financial year closure of companies within six-month time frame. Considering this, I am inclined to hold that where he accounting period of a comparable exceeds the financial year by not more than six months relative to the accounting year of the appellant, it should be considered as a comparable, so long as these companies, despite having a different financial year ending, are operating during the same period of time and are also facing the same business cycles and market and economic conditions as the appellant does.
In the absence of evidence that there has been a significant impact on margins due to different reporting or accounting periods, it would be incorrect to disregard companies by using this filter. Considering these aspects, I uphold the appellant’s arguments on this issue and disapprove of this filter”.
& C.O No.156/Bang/2013 Page 12 of 16 18. From the above paras from the order of the ld.CIT(A), we find that as
per the ld. CIT(A), even if the accounting year of the comparable is not financial year, but the accounting year of the comparable company is closing within six months time frame then such company can be considered as comparable. On this aspect, we are of the considered opinion that if the assessee or TPO wants that such company should be considered as a comparable then the assessee/TPO should be able to provide the data of the same company for the same financial year by adding the data of two years and then making exclusion of preceding period data and subsequent period data and hence, we feel it proper to set aside this matter back to the file of ld. CIT(A) for a fresh decision and if the assessee can furnish data of such comparable for the relevant financial year then such company may be considered as a comparable and not without that. Ld. CIT(A) should pass necessary order as per law after providing reasonable opportunity of being heard to both sides. Ground no.6 is allowed for statistical purposes.
Regarding ground no.7of the revenue’s appeal, ld. DR of the revenue placed reliance on the order of the AO/TPO whereas the ld. AR of the assessee supported the order of the ld. CIT(A). Regarding company M/s Avani Cincom Technologies Ltd., he placed reliance on the Tribunal order rendered in the case of 3DPLM Software Solutions Pvt. Ltd., in IT(TP)A No.1303/Bang/2012 (AY: 2008-09). Copy available on pages 12 to 17 of case law compendium.
Regarding M/s Celestial Biolabs Ltd., objection raised as per ground no.8, it was submitted by the ld. AR of the assessee that exclusion of this & C.O No.156/Bang/2013 Page 13 of 16 company is justified on account of functional dissimilarity and in this regard, reliance was placed on the same Tribunal order rendered in the case of 3DPLM Software Solutions Pvt. Ltd.(Supra).
In respect of M/s Kals Information Systems Ltd., exclusion of which is being disputed by the revenue as per ground no.9, Learned AR of the assessee placed reliance on the same Tribunal order rendered in the case of 3DPLM Software Solutions Pvt. Ltd.(Supra).
Regarding M/s Accentia Technologies Ltd., for which objection is raised as per ground no.10, Learned AR of the assessee placed reliance on the Tribunal order rendered in the case of IGS Imaging Service (I) Pvt. Ltd., Vs DCIT in IT(TP)A No.470/Bang/2013 (AY: 2008-09), copy available on page - 160 of the case law compendium.
We have considered rival submissions. Regarding ground no.7 to 9 in respect of M/s Avani Cincom Technologies Ltd., M/s Celestial Biolabs Ltd., and M/s Kals Information Systems Ltd., we find that in the case of 3DPLM Software Solutions Pvt. Ltd(Supra), it was held by the Tribunal that these companies are functionally dissimilar. In that case also, the assessee company i.e. 3DPLM Software Solutions Pvt. Ltd(Supra) was engaged in providing software development services and other related services to its group companies as in the present case. Therefore, respectfully following this Tribunal order, we decline to interfere with the order of the ld.CIT(A).
Accordingly, ground nos.7 to 9 raised by the revenue are rejected. & C.O No.156/Bang/2013 Page 14 of 16 24. Regarding ground no.10 we find that it was held by the Tribunal in the case of IGS Imaging Services (I) Pvt. Ltd.,(Supra) that this company cannot be considered as a comparable and it was so held by following another Tribunal order rendered in the case of M/s Symphony Marketing Solutions India Pvt. Ltd., IT(TP)A No.1316(Bang)/2012 dated 14-08-2013) The relevant portion of that Tribunal order was reproduced by the Tribunal in the order in the case of IGS Imaging Services (I) Pvt. Ltd., (Supra) and there in, it has been noted by the Tribunal that there was merger and demerger in FY: 2007-08 and on this basis, the Tribunal held that because of extraordinary events like merger and demerger, it will have an effect on the profitability of this company in the financial year in which such event takes place and therefore, in that year, this company cannot be considered as a comparable. In the present case also, assessment year involved is AY: 2008-09 for which relevant AY: is FY:
2007-08 and therefore, respectfully following this Tribunal order, we decline to interfere with the order of ld.CIT(A) on this issue. Accordingly, ground no. 10 of the revenue is rejected.
Regarding ground no.11, ld. DR of the revenue supported the order of the AO/TPO whereas the ld. AR of the assessee submitted that the assessee company held to be functionally dissimilar as per the same Tribunal order rendered in the case of IGS Imaging Services (I) Pvt. Ltd., (Supra). Copy available on pages 163 to 165 of case law compendium.
We have considered the rival submissions. We find that in the case of IGS Imaging (I) Pvt. Ltd(Supra), the Tribunal has followed another Tribunal & C.O No.156/Bang/2013 Page 15 of 16 order rendered in the case of Symphony Marketing Solutions India Pvt.
Ltd.,(Supra) and as per the relevant portion of that Tribunal order rendered in the case of Symphony Marketing Solutions India Pvt. Ltd.,(Supra) reproduced in the Tribunal order rendered in the case of IGS Imaging (I) Pvt. Ltd., (Supra), it was held by the Tribunal that this company is providing services of KPO and therefore, this cannot be considered as comparable in the case of a company engaged in providing BPO services.
The ld. DR of the revenue could not point out as to why this Tribunal order is not applicable in the present case and therefore, respectfully following this Tribunal order, we decline to interfere with the order of the ld.CIT(A) on this issue. Accordingly, ground no.11 of the revenue is also rejected.
In the result, the appeal of the revenue is partly allowed for statistical purposes.
In the combined result, the appeal of the revenue is partly allowed for statistical purposes whereas the cross objection of the assessee is dismissed.
Order pronounced in the open court on the date mentioned on the caption page.