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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI A. K. GARODIA & SHRI VIJAY PAL RAO
This is assessee’s appeal directed against the order of the AO/TPO as
per the directions of Dispute Resolution Panel, Bangalore for the assessment year 2006-07.
The assessee has raised the following grounds;
“The grounds mentioned herein are without prejudice to one another.
Transfer Pricing Related
1. That the order of the learned Income Tax Officer, Ward 11(2), Bangalore ('Assessing Officer or 'AO') to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
2. That the learned AO and the learned Dispute Resolution Panel ('Panel') erred in upholding the rejection of Transfer Pricing (TP) documentation by the learned Asst Director of Income - tax (Transfer Pricing) - IV ('Transfer Pricing Officer' or 'TPO') and thereby erred in not appreciating that the Appellant had prepared the TP documentation bona fide and in good faith and conducted the comparable analysis based on the detailed Functional Asset and Risk analysis performed with due diligence and the data available at the time of conducting the comparability analysis.
That the learned AO and the learned Panel erred in ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm's Length Price of the international transactions of the Appellant.
4. That the learned AO and the learned Panel erred both in facts and law in confirming the action of the learned TPO of making an adjustment to the transfer price of the Appellant by Rs. 1,03,97,210 holding that the international transactions do not satisfy the arm's length principle envisaged under the Act and in doing so grossly erred in: 4.1. Upholding the act of the learned TPO of collecting selective information of the companies by exercising power granted to him under section 133(6) of the Act, that was not available to the Appellant in the public domain and relying on the same for comparability purposes in denial of natural justice to be observed in the assessment proceedings. 4.2. Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2005-06) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing the TP documentation, and in doing so have grossly erred in: 4.2.1. interpreting the requirement of 'contemporaneous data in the Rules to necessarily imply current year/ single year (i.e. FY 2005-06) data: and 4.2.2. expecting the Appellant to perform act of impossibility in terms of being able to use data subsequently available (i.e. during audit proceedings). 4.3. Upholding the rejection of comparability analysis of the Appellant in the TP documentation and confirming the comparability analysis as adopted by the learned TPO in the TP Order by applying additional filters and introduction of companies as comparables that are either functionally dissimilar or have differing asset base and risk profile, and also rejection of other potentially comparable companies. 4,4. Concluding that the amended proviso to section 92C(2) of the Act under Finance (No 2) Act. 2009, would be applicable for Assessment Year 2006-07 and in not appreciating that even if the arms' length price falls outside the 5% tolerance band the and statement would have to be reckoned after allowing the benefit of +/- 5% variation as provided in proviso to Section 920(2) of the Act. while determining the arms' length price. Other than Transfer Pricing Related 5. That the order of the learned Assessing Officer (AO') is contrary to the provisions of law and liable to be quashed.
6. That the learned AO erred in not allowing deduction under section 10A of the Income tax Act, 1961 ('the Act') in respect of the entire profit of the undertaking registered with the Software Technology Parks of India.
7. That the learned AO erred while computing deduction under section 10A of the Act in treating internet access charges as 'expenditure attributable to the delivery of software outside India. under Explanation 2(iv) to section 10A of the Act.
8. That the learned AO erred while computing deduction under section 10A of the Act in treating expenditure in foreign currency as 'expenses incurred in foreign exchange in providing technical services outside India' under Explanation 2(iv) to section 10A of the Act.
9. That the learned AO erred while computing deduction under section 10A of the Act in reducing the internet access charges of Rs. 25,47,030/- and expenditure in foreign currency of Rs 4,14,863/- from the export turnover.
10. That the learned AO erred in not applying the principles of section 80HHE to section 10A. Consequently, the learned AO erred in not relying on the various judicial decisions on the said matter.
11. Without prejudice to the above, that the learned AO erred in not allowing the reduction of internet access charges of Rs. 25,47,030/- and expenditure in foreign currency of Rs 4,14,863/- from the total turnover in computing deduction under section 10A of the Act.
12. That the learned AO erred in consequently levying interest under section 234B of the Act.
13. That 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.
3. The assessee has also raised the following additional grounds which are as under; The grounds mentioned herein are without prejudice to one another. Transfer Pricing Related 1. That the order of the learned Income Tax Officer, Ward 11 (2), Bangalore ('Assessing Officer' or 'AO') to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2.That the learned AO and the learned Dispute Resolution Panel ('Panel') erred in upholding the rejection of Transfer Pricing (TP) documentation by the learned Asst Director of Income - tax (Transfer Pricing) - IV (Transfer Pricing Officer' or TPO') and thereby erred in not appreciating that the Appellant had prepared the TP documentation bona fide and in good faith and conducted the comparable analysis based on the detailed Functional Asset and Risk analysis performed with due diligence and the data available at the time of conducting the comparability analysis. 3.That the learned AO and the learned Panel erred in ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm's Length Price of the international transactions of the Appellant. 4.That the learned AO and the learned Panel erred both in facts and law in confirming the action of the learned TPO of making an adjustment to the transfer price of the Appellant by Rs.1, 03, 97 ,210 holding that the international transactions do not satisfy the arm's length principle envisaged under the Act and in doing so grossly erred in: 4.1. Upholding the act of the learned TPO of collecting selective information of the companies by exercising power granted to him under section 133(6) of the Act, that was not available to the Appellant in the public domain and relying on the same for comparability purposes in denial of natural justice to be observed in the assessment proceedings. It was submitted by the ld. AR of the assessee that ground no.1,2,3,4.1,4.2 & 4.4 are general. Regarding ground no.4.3 and the additional grounds, it was submitted by the ld. AR of the assessee that the assessee had considered 36 comparables in the transfer pricing study, whereas the TPO has decided the issue on the basis of 20 comparables out of which seven comparables are common. He submitted a chart of all the 20 comparables selected by the TPO regarding the assessee’s objection in respect of some comparables.
Now, we discuss and decide each and every comparables on the basis of chart as under;
For M/s Aztec Software & Technology Services Ltd., it was submitted by the ld. AR of the assessee that this comparable should be rejected since RPT is in excess of 15% and it is in fact 17.78% in the present case. In this regard, our attention as drawn to page no.188 of the TPO’s order where the TPO has noted down percentage of RPT over sales in respect of all the 20 comparables selected by him.
The ld. DR of the revenue had nothing to say on this aspect. It is by now a settled position of law that if the RPT is in excess of 15% then such company cannot be considered as comparable and since RPT of this company is 17.78%, this cannot be considered as comparable in the present case. Hence the AO/TPO is directed to exclude this company from the list of final comparables.
For the second comparable M/s Geometric Software Ltd (Seg.) also, our attention was drawn to the TPO’s order and it was pointed out that RPT percentage of this company is 19.34% and therefore, this company should also be excluded from the list of comparables for the same reason. Hence the AO/TPO is directed to exclude this company from the list of final comparables.
For the third comparable M/s iGate Global Solutions Ltd., (Seg.), it was submitted by the ld AR of the assessee that the assessee has not objected to the inclusion of this comparable.
For the fourth comparable M/s Infosys Limited., it was submitted by the ld. AR of the assessee that his company is functionally dissimilar and it is a giant in the area of software development and it holds intangibles and has brand value and assumes all risks, leading to higher profit and therefore, the same cannot be considered as comparable. In support of his contention, reliance was placed on the Tribunal’s order rendered in the case of M/s Agnity India Technologies Pvt. Ltd., in ITA No.3856(Del.)/2010 (AY:
2006-07) (copy available on pages 868-874 of the case laws compendium.
Respectfully following this Tribunal order, we hold that this company also cannot be considered as comparable because of its functional dissimilarity.
For the fifth comparable M/s Kals Info Systems Ltd., the argument of the ld. AR of the assessee is that this company is also functionally dissimilar because it derives its revenue primarily from software services and software products and segmental information was not available. In support of his contention, reliance was placed on Tribunal’s order rendered in the case of M/s Onward Technologies Ltd., 26 ITR (Trib.) 734(ITAT (Mum) for AY: 2006-07. Respectfully following this Tribunal’s order, we hold that this company cannot be considered as comparable in the present case, because of functional dissimilarity.
For the sixth comparable M/s Mindtree Consulting Limited., it was submitted by the ld. AR of the assessee that the assessee is not objecting to inclusion of this company as comparable. We hold accordingly.
For the seventh comparable M/s Persistent Systems Ltd., ld. AR’s argument was the same that this company is dissimilar because it derives revenue from its software products and segmental information was not available. In support of his contention, reliance was placed on Tribunal’s order rendered in the case of 3DPLM Software Solutions Ltd. in IT(TP)A No.1303(Bang)/2012 (AY: 2008-09) (copy available on pages 151-153) of the case laws compendium. As per the annual report of this company available on record it is seen is that this company is 100% export oriented unit (EOU) and it derived its income predominantly from export of software services and its products. It is also seen that the turnover is reported in a combined manner as sale of software services and products (export) of Rs.209.17 Crores in the present year and segmental information is not available in the annual report. Under these facts, we find force in the submissions of the ld. AR of the assessee that this company cannot be considered as comparable for the reasons stated in the chart submitted by the ld. AR of the assessee that it derives its revenue from its software production and segmental information is not available. We hold that this company cannot be considered as comparable in the present case.
For eighth and ninth comparables M/s R Systems International Ltd.,(Seg.) and M/s Sasken Communications Ltd (Seg.), it was submitted by the ld. AR of the assessee that the assessee is not objecting to inclusion of these companies as comparable. We hold accordingly.
For tenth comparable company i.e. M/s Tata Elxsi Ltd.,(Seg.), it was submitted by the ld. AR of the assessee that this company cannot be considered as comparable because, this company is functionally dissimilar.
Reliance was placed on Tribunal’s order rendered in the case of M/s Telcordia Technologies India Pvt.Ltd., Vs DCIT in (AY: 2007-08) (copy available on 741 of the case laws compendium.
Reliance was also placed on another Tribunal’s order rendered in the case of EMC Data Storage Systems (Ind.)Pvt. Ltd., Vs DCIT (IT(TP)A No.1274/Bang/2010 (AY: 2006-07) (copy available on pages 38-40 of the case laws compendium. Respectfully following these Tribunal orders, we hold that this company cannot be considered as comparable in the present case.
Regarding 11th to 15th comparables as per the chart, i.e. M/s Lucid software Ltd., M/s Mediasoft Solutions Pvt. Ltd., M/s SIP Technologies & Exports Ltd, M/s Bodhtree Consulting Ltd., the ld. AR of the assessee has no objection regarding the inclusion of these companies as comparable in the present case. We hold accordingly.
For comparable no.16 i.e. M/s Accel Transmatics Ltd., (Seg.), it was submitted by the ld. AR that this company had to be excluded for the reason that the RPT percentage is in excess of 15% and the same is in fact 31%. The second argument is that this company should be excluded for this reason also that it is functionally dissimilar. In this regard, when we examine page 389 of the paper book containing page no.188of the TPO’s order, we find that percentage of RPT to sales of this company is noted by the TPO at only14.46% which less than 15% as against the claim of the assessee that the RPT percentage of this company is 31%. Hence, on this account, we find no merit in the argument of the ld. AR of the assessee.
Regarding his second contention that this company is dissimilar, reliance had been placed on a Tribunal order rendered in the case of M/s Ariba Technologies India Pvt.Ltd. Vs IT(TP)A No.1179(Bang)/2010 (AY: 2006-07)
( copy available at page 191 to 193 of case laws compendium). In this case, the Tribunal considered the comparability of this company i.e. M/s Accel Transmatics Ltd(Seg.) and it was held that respectfully following another Tribunal order rendered in the case of M/s Triology E-Business Software India Pvt. Ltd. V DCIT or AY: 2007-08, this company cannot be considered as comparable. Respectfully following these two Tribunal orders, we hold that in the present case also, this company cannot be considered as comparable because of functional dissimilarity.
For seventeenth comparable M/s Synfosys Business Solutions Ltd., it was submitted by the ld. AR of the assessee that the assessee has no objection for selection of this company as a comparable. We hold accordingly.
For eighteenth comparable M/s Megasoft Ltd., it is the objection of the ld. AR of the assessee that this company should be excluded for this reason that RPT percentage is high. We find that as per the TPO’s order available on page 389 of paper book, the percentage of RPT over sales is 17.08% and since it is more than 15%, we hold that this company cannot be considered as comparable because the RPT percentage is higher than 15%.
For nineteenth comparable is M/s Lanco Global Solutions Ltd., it was submitted by the ld. AR that the assessee has no objection for considering this company as a comparable. We hold accordingly.
For twentieth and the last company considered by the TPO as comparable i.e. M/s Flextronics Software Systems Ltd., it is the contention of the learned AR of the assessee that this company is dissimilar and therefore, cannot be considered as comparable.
19.1 The specific objections are that this company is engaged in selling software products and incurring R&D expenses. It was also pointed out that the cost incurred on R&D during the FY: 2005-06 was Rs.40.23 Crores, as can be seen on page no.3 of the annual report of this company.
He also placed reliance on the Tribunal order rendered in the case of M/s Intoto Software India Pvt.Ltd Vs ACIT in for AY:
2005-06 (copy available on page 457-458 of the case laws compendium.
Considering these facts that the company is incurring large amount of R&D expenditure of Rs.40.23 Crores and is functionally dissimilar and by respectfully following the Tribunal order cited by the ld. AR of the assessee as noted above, we hold that this company cannot be considered as comparable in the present case.
As per the above discussion, we find that nine companies are to be excluded from the list of twenty comparables and these nine companies are M/s Aztec Software Ltd., 2) Geometric Software Ltd.(Seg.) 3) M/s iGate Global Solutions Ltd.,(Seg.) 4) M/s Kals Info Systems Ltd., 5) M/s Persistent Systems Ltd., 6) M/s Tata Elxsi Ltd.,(Seg.) 7) M/s Accel Transmatics Ltd (Seg.) 8) M/s Megasoft Ltd and 9) M/s Flextronics Software Systems Ltd.,
20.1 The average PLI of the remaining 11 comparables have been worked out by the ld. AR of the assessee at 12.02% before working capital adjustment and 10.40% after working out adjustment as against operating profit to cost ratio of the assessee company at 10.36%. We hold that the AO/TPO should check the working of the assessee and if the same is correct that the average PLI of remaining 11 comparables is only 12.02% then the same is within +/ - 5% range and as a consequence, no TP adjustment is called for and for the limited purpose of checking the working of average PLI of the 11 comparables, we restore the mater back to the file of AO. These grounds of assessee are allowed for statistical purposes.
Regarding the remaining grounds which are relating to Corporate Tax issue being ground no.5 to 11, it was submitted by the ld. AR of the assessee that as per the judgment of the Hon’ble Karnataka High Court rendered in the case of CIT Vs M/s Tata Elxsi Ltd., reported in 349 ITR 98, this issue is covered in favour of assesee. We find that as per the judgment of the Hon’ble High Court, the total turnover is sum total of export turnover and domestic turnover and therefore, as a consequence, if an amount is excluded from export turnover, the total turnover also goes down by the same amount. Respectfully following this judgment of the Hon’ble Karnataka High Court, we direct the AO to compute the amount of total turnover as export turnover + total turnover as per this judgment of Hon’ble Karnataka High Court. These grounds are disposed of in this manner.
Ground no.12 in consequential and ground no.13 is general.
In the result, the appeal of the assessee is partly allowed in the terms indicated above.
Order pronounced in the open court on the date mentioned on the caption page.