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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
Captioned appeal at the instance of the Revenue is directed against the order dated 16th March 2011, passed by the learned Commissioner (Appeals)–15, Mumbai, pertaining to assessment year 2005–06.
2. The only effective ground raised by the Revenue is reproduced as under:–
2 M/s. Keystone Solution P. Ltd.
“On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in eliminating 13 companies from the list of 19 comparable companies selected by the Transfer Pricing Officer ignoring the fact that the Transfer Pricing Officer has systematically arrived at the arm's length price after fair analysis.
As the issue in dispute relates to selection / rejection of certain comparables, we will restrict ourselves in discussing the facts to this issue only.
Brief facts are, the assessee is a wholly owned subsidiary of Systems Task Group International Ltd., U.S.A. The assessee provides software development services to its overseas A.E. only. In other words, it is a captive service provider. For the relevant previous year, the assessee entered into international transactions with its A.E. in the nature of providing software development services and earned revenue of ` 16,37,26,161. For Bench marking the arm's length price of the international transaction with its A.E., the assessee selected transactional net margin method (TNMM) as the most appropriate method with operating profit / sales as profit level indicator (PLI). The assessee selected 10 companies as comparable with an arithmetic mean of 10.33% as against assessee’s net profit margin shown of 13%. Therefore, the price charged to the A.E. was considered to be at arm’s length. The Transfer Pricing Officer after examining the transfer pricing study of the assessee and other facts and materials, though,
3 M/s. Keystone Solution P. Ltd. accepted TNMM as the most appropriate method, however, he was not convinced with the selection process adopted by the assessee for bench marking the transaction with its A.E. He was also of the view that the PLI should be operating profit / costs. The Transfer Pricing Officer observed, out of the 10 comparables selected by the assessee, seven comparables are not functionally similar, hence, he rejected them. Thereafter, the Transfer Pricing Officer proposed 16 new comparables along with three comparables selected by the assessee and accordingly, 19 companies were treated as comparables by the Transfer Pricing Officer. The arithmetic mean of 19 comparables selected by the Transfer Pricing Officer being 27.31% as against the assessee’s margin of 15.66% transfer pricing adjustment of ` 1,64,92,538, was proposed by the Transfer Pricing Officer. In terms with the order passed by the Transfer Pricing Officer under section 92CA(3) of the Act, the Assessing Officer passed the assessment order adding the transfer pricing adjustment proposed by the Transfer Pricing Officer. Being aggrieved with the assessment order so passed, the assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee was convinced that 13 out of 19 companies selected by the Transfer Pricing Officer were not comparable to the assessee for various reasons, hence, directed
4 M/s. Keystone Solution P. Ltd. excluding them for the purpose of comparability analysis. The comparables excluded by the learned Commissioner (Appeals) are as under:– i) Bodhtree Consulting Limited; ii) Compulink Systems Limited; iii) Exensys Software Solutions Limited; iv) Flextronics Software Systems Limited; v) Four Soft Limited; vi) Geometric Software Selections Company Limited; vii) Infosys Technologies Limited; viii) L&T Infotech Limited; ix) Sasken Communications Technologies Limited; x) Satyam Computer Services Limited; xi) Tata Elxsi Limited; xii) Thirdware Solution Limited; xiii) Visual Soft Technologies Limited.
Being aggrieved with the exclusion of the aforesaid comparables, the Revenue is in appeal before us. Herein after, we will deal with each of the comparable disputed before us.
i) BODHTREE CONSULTING LIMITED;
The learned Commissioner (Appeals), while excluding this company as a comparable, has observed that the company cannot be treated as comparable as the domestic sales works out to 27.61% of the total turnover of ` 3.87 crore. According to the learned
5 M/s. Keystone Solution P. Ltd. Commissioner (Appeals), as the company is having substantial operations in domestic market, it cannot be treated as a comparable to the assessee.
The learned Departmental Representative submitted before us that neither at the time of transfer pricing study the assessee had applied the domestic turnover filter nor the Transfer Pricing Officer while selecting the comparable had adopted the said filter. Therefore, at a later stage, a fresh filter cannot be applied for selecting / rejecting a comparable. He submitted, even otherwise also, the export sales turnover comes to 72.35%, therefore, difference being marginal, the company can be treated as comparable. In support of his contention, the learned Departmental Representative relied upon the decision of the Tribunal, Bangalore Bench, in Genesis Information Systems India Pvt. Ltd., ITA no.17/Bang./2014 dated 12th September 2014.
Learned Authorised Representative on the other hand strongly relying upon the observations of the learned Commissioner (Appeals) submitted, in software development service segment fee is charged on man hour basis. Therefore, functions performed, assets employed and risk undertaken (FAR) varies from domestic turnover to international turnover. Further, the learned Authorised Representative submitted, even if the assessee and the Transfer Pricing Officer have not applied a filter at the initial stage, before the appellate forum at a later stage,
6 M/s. Keystone Solution P. Ltd. the issue can be taken up. In this context, he relied upon the decision of the Tribunal, Bangalore Bench, in Yahoo Software Development India Pvt. Ltd., ITA no.1129/Bang./2010 dated 31st December 2014. He submitted, even otherwise also, the related party transaction (RPT) of the company at 34.68% is more than the threshhold limit of 25%. In this context, the learned Authorised Representative relied upon the decision of the Tribunal, Hyderabad Bench, in Cordys Software India Pvt. Ltd. v/s DCIT, [2014] 48 taxmann.com 112 (Bang.). Learned Authorised Representative also relied upon a number of other decisions of the Tribunal in which this company was rejected as comparable on RPT filter as well as various other functional dissimilarities. A list of such decisions was submitted in the compilation marked as Paper Book–3.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. As far as factual aspect of the issue is concerned, the Department has neither controverted the fact that the export sales as a percentage of total turnover is less than 75% nor also the fact that RPT as a percentage of sales is 34.68%. In a number of decisions referred to by the learned Authorised Representative as submitted in the legal paper book, it has been held by different benches of the Tribunal, many of which relate to impugned assessment year also, that 7 M/s. Keystone Solution P. Ltd. companies having substantial domestic turnover cannot be treated as comparable. In the instant case, there is no dispute that the assessee is a captive service provider and the entire sales have been made to the overseas A.E. That being the case, in our view, the learned Commissioner (Appeals) was justified in excluding companies having export sales less than the threshold limit of 75% of the total turnover. Further, the learned Authorised Representative has successfully demonstrated before us that the RPT of this company as a percentage of total sales works out to 34.68%. As per the generally accepted norm in the industry as well as by the Department also, a company having RPT in excess of 25% is not treated as comparable. Therefore, on this score also, the company cannot be treated as a comparable to the assessee. The contention of the learned Departmental Representative that domestic turnover filter was not applied neither by the assessee nor by the Transfer Pricing Officer at the initial stage, hence, it cannot be applied at the appellate stage, in our view, is an expansive argument and cannot be accepted. The entire purpose of determination of arm's length price of an international transaction between A.E. is to find out whether it is similar to transaction between two unrelated parties under similar facts and circumstances. Therefore, efforts should be made to find out comparables which are functionally similar to the assessee. If there is any factor which makes a company functionally dissimilar, or if the business model is different,
8 M/s. Keystone Solution P. Ltd. it cannot be treated as a comparable. Moreover, we have noted that this company has been rejected as a comparable by different Benches of the Tribunal, as it failed both the domestic sales filter as well as RPT filter. As many of the decisions are for the impugned assessment year, relying upon the same, we hold that this company cannot be treated as a comparable to the assessee. ii) COMPULINK SYSTEMS LIMITED
The learned Commissioner (Appeals) excluded this company as a comparable on the following reasons:–
a) Income from software development service is less than 75%; and b) The company has substantial income from domestic market as the domestic sales as a percentage of total turnover works out to 40.04%.
Learned Departmental Representative submitted, the assessee at the time of selecting comparable has not adopted domestic turnover filter. Therefore, the same cannot be applied at a later stage to exclude a comparable. Further referring to the annual report of the company, the learned Departmental Representative submitted that entire revenue is earned from software development services. He, therefore, submitted, there is no reason to exclude this company.
9 M/s. Keystone Solution P. Ltd.
The learned Authorised Representative on the other hand relying upon the observations of the learned Commissioner (Appeals) submitted the revenue earned by this company from sources other than software development is more than 25% of the total income, therefore, it is not pre–dominantly engaged in software development service like the assessee. He submitted, more over, the domestic sale of the company is more than 25% of the total sales. For that reason also, it cannot be treated as comparable. Learned Authorised Representative, drawing the attention of the Bench to the annual report of the company submitted the company has patents and cop rights which indicate that it is into product development and project management. He further submitted, the company is engaged in sale of software product / license, therefore, it cannot be treated as comparable. In support of such contention, learned Authorised Representative relied upon the decision in Intera Information Technoligies (I) Pvt. Ltd. v/s DCIT, [2012] 27 taxmann.com 001.
We have considered the submissions of the parties and perused the material available on record in the light of the decision relied upon. The fact that this company has substantial domestic sales is evident from the annual report of the company and the domestic sales as percentage of total sales works out to 40.04%. Further, it is also evident on record that the company has earned substantial income
10 M/s. Keystone Solution P. Ltd. from activities other than software development services which works out to 38% of the total revenue earned. From the annual report of the company, it also appears that it is engaged in sale of software products and owns intangible by way of patents and copy–rights. The aforesaid facts indicate that the business model of this company is different from the assessee which is fundamentally a software development service provider. In the aforesaid view of the matter, we uphold the rejection of this company. iii) Exensys Software Solutions Limited
The learned Commissioner (Appeals) rejected this company as comparable for the following reasons:–
a) During the relevant previous year, there is an amalgamation with Holool India Ltd.; b) It has reported abnormal high profit of 70.68%
Learned Departmental Representative submitted, a company cannot be rejected as comparable only because of abnormal profit. He submitted, amalgamation also should not be a reason for excluding a company unless it affects the profit of the company.
Learned Authorised Representative on the other hand submitted that the company cannot be treated as a comparable as it has shown
11 M/s. Keystone Solution P. Ltd. abnormally high profit during the relevant financial year which may be as a result of amalgamation effected during the relevant previous year. He submitted, the company owns IPR, patents and brand and also performs marketing functions. Therefore, it cannot be treated as a comparable. In this context, learned Authorised Representative drew our attention to the annual report of the company. He submitted, the company cannot be treated as a comparable. For such contention, he relied upon a number of decisions which are listed below:– i) CIT v/s IVY Computech Ltd., of 2014; ii) ACIT v/s Sonata Software Ltd. 55 SOT 533 (Mum.); iii) IVY Computech P. Ltd. v/s ACIT, 43 taxmann.com 183; iv) United Online Software Development (I) P. Ltd. v/s ITO, 44 taxmann.com 424; and v) Cordys Software India P. Ltd. v/s DCIT, 48 taxmann.com 112.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon by both the parties. On a perusal of the annual report of the company for the financial year 2004–05, we have noted that in the relevant previous year, the assessee entered into a scheme of amalgamation with Holool India Ltd. to gain business / market exposure especially in Middle East. Therefore, the abnormally high profit shown by the assessee may be as a result of such amalgamation. Further, the Profit & Loss account indicates that the 12 M/s. Keystone Solution P. Ltd. company has incurred expenditure towards marketing and advertisement which is suggestive of the fact that the company is engaged in sale of products also. We have also noted that various benches of the Tribunal for the very same assessment year has rejected this company as a comparable for the aforesaid reasons. Thus, following the consistent view expressed by various benches of the Tribunal, we uphold the rejection of the aforesaid company as a comparable.
iv) Flextronics Software Systems Limited
The learned Commissioner (Appeals) rejected this company for the following reasons:–
a) Turnover is more than ` 100 crore; and b) Engaged in sale of software products / license.
Learned Departmental Representative submitted, the turnover has no impact on profitability, therefore, only as a result of high turnover a company cannot be excluded. He further submitted, out of the total turnover of ` 476 crore, during the relevant previous year an amount of ` 405 crore was towards service and only ` 70 crore is from sale of products. Therefore, the company being a pre–dominantly software development service company is to be treated as a comparable.
13 M/s. Keystone Solution P. Ltd.
Learned Authorised Representative strongly supporting the decision of the learned Commissioner (Appeals) submitted, compared to assessee’s turnover of ` 16.37 crore, the turnover of this company is ` 476 crore. Therefore, for that reason alone, it should not be treated as comparable. He further submitted, the company has high networth and high number of employees. He submitted, the company is engaged in sale of software products / license and owns IPR / patents / brand. Therefore, the company being functionally different from the assessee, cannot be treated as comparable. In support of such contention, learned Authorised Representative relied upon the following decisions:–
i) Sunquest Information Systems (I) P. Ltd. v/s ITO, 61 taxmann.com 81; ii) CNO IT service (I) P. Ltd. v/s DCIT, 43 taxmann.com 231; iii) Intoto Software India Pvt. Ltd. v/s ACIT, 30 ITR 504; iv) NTT Data India Enterprise Application Services Pvt. Ltd. v/s ACIT, 40 taxmann.com 173; v) Conexant Systems P. Ltd v/s ITO, 65 SOT 123; vi) ITO v/s Vendio Technologies (I) P. Ltd., IT(TP)A no.1374/Bang. /2011; vii) Mindtech India Ltd. v/s ITO, IT(TP)A no.1548/Bang./2010 viii) Agile Software Enterprises Pvt. Ltd. v/s ITO, 52 taxmann.com 517; ix) Ariba Technologies India Pvt. Ltd. v/s ITO, IT(TP)A no.1179/Bang./2010;
14 M/s. Keystone Solution P. Ltd. x) Cordys Software India P. Ltd. v/s DCIT, 48 taxmann.com 112. xi) United Online Software Development (I) P. Ltd. v/s ITO, 44 taxmann.com 424; xii) Adaptec India Pvt. Ltd. v/s ITO, ITA no. 481/Hyd./2011. xiii) IVY Computech P. Ltd. v/s ACIT, 43 taxmann.com 183; xiv) Microchip Technologies India Pvt. Ltd. v/s DCIT, IT(TP)A no.1429/Bang./2010; xv) Exxon Mobil Co. (I) P. Ltd. v/s DCIT, 12 taxmann.com 84; xvi) Trigent Software Ltd. v/s ACIT, 20 taxmann.com 506; and xvii) Freescale Semiconductor India Pvt. Ltd. v/s DCIT, 52 taxmann.com 233.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon by both the parties. On a perusal of the annual report of the company and more particularly the Profit & Loss account we have noted that the company is engaged in sale of products also. However, segmental information is not available. Moreover, the company has a comparatively high turnover of ` 476 crore in comparison to turnover of ` 16.37 crore of the assessee. We have also noted that for the aforesaid reasons various Benches of the Tribunal in the decisions cited before us have rejected this company as a comparable. Consistent with the view of the Tribunal, which are for the very same assessment year, we uphold rejection of this company.
15 M/s. Keystone Solution P. Ltd. iv) Four Soft Limited
The learned Commissioner (Appeals) rejected this company as a comparable for the following reasons:–
a) It has substantial RPT; b) Engaged in sale of software products / license.
Learned Departmental Representative submitted, learned Commissioner (Appeals) has excluded the company on the reasoning that RPT exceeds 15% of the total turnover. He submitted, as per the accepted norms of RPT filter of 25%, the company cannot be rejected.
As far as the issue of sale of software product is concerned, the learned Departmental Representative submitted out of the total turnover of ` 15.94 crore, the product sale accounts for ` 2.57 crore which is very nominal, hence, should be ignored.
Learned Authorised Representative submitted, the company is not only engaged in software products / license but also performs marketing functions. In this context, learned Authorised Representative referred to the annual report of the company and the schedules attached thereto. He submitted, even the RPT works out to 29.70% of the operating expenditure. Therefore, it cannot be treated
16 M/s. Keystone Solution P. Ltd. as comparable. In support of such contention, learned Authorised Representative relied upon the following decisions:– i) Sunquest Information Systems (I) P. Ltd. v/s ITO, 61 taxmann.com 81; ii) DCIT v/s Textron Global Technology Centre (P) Ltd., 89 taxmann.com 465; iii) Cordys Software India P. Ltd. v/s DCIT, 48 taxmann.com 112. iv) United Online Software Development (I) P. Ltd. v/s ITO, 44 taxmann.com 424; v) Adaptec India Pvt. Ltd. v/s ITO, ITA no. 481/Hyd./2011. vi) Intoto Software India Pvt. Ltd. v/s ACIT, 30 ITR 504; vii) IVY Computech P. Ltd. v/s ACIT, 43 taxmann.com 183; viii) Invensys Development Centre India Pvt. Ltd. v/s ACIT, 43 taxmann.com 419; ix) Conexant Systems Pvt. Ltd. v/s ITO, 65 SOT 123; x) Sumtotal Systems India Pvt. Ltd. v/s ACIT, 65 SOT 48; xi) DE Shaw India Software Pvt. Ltd. v/s AICT, ITA no.1302/Hyd./ 2010; xii) CNO IT Services India Pvt. Ltd. v/s DCIT, 43 taxmann.com 231 xiii) Ness Innovative Business Services P. Ltd. v/s DCIT, 151 ITD 190; xiv) DCIT v/s Hellosoft India Pvt Ltd., 57 SOT 4/32 taxmann.com.
We have considered the submissions of the parties and perused the material available on record as well as the decisions relied upon by both the parties. As far as the issue of application of RPT filter is concerned, we agree with the learned Departmental Representative
17 M/s. Keystone Solution P. Ltd. that threshold limit of more than 25% is to be applied to exclude the company on account of RPT. However, it has been submitted before us by the learned Authorised Representative that the RPT of the company works out to 29.70%. We direct the Assessing Officer / Transfer Pricing Officer to examine this aspect and not to treat it as comparable if it is found to be correct. Further, on a perusal of the Schedule–XII to the Profit & Loss account of the company, we have noted that it has earned revenue from sale of license and on–site development. Schedule–XV to the Profit & Loss account also indicates that company has incurred expenditure on advertisement and business promotions and commission to selling agent. These factors indicate that the company is into sale of products. If that is the case, then this company cannot be treated as a comparable. The Assessing Officer / Transfer Pricing Officer is directed to verify this aspect and decide accordingly after providing due opportunity of being heard to the assessee. vi) Geometric Software Selections Company Limited 27. The learned Commissioner (Appeals) excluded this company only for the reason that RPT exceeds 15% of the total transaction.
Learned Departmental Representative submitted, as per accepted norms RPT filter of 25% is to be applied, hence, this company is to be treated as comparable.
18 M/s. Keystone Solution P. Ltd. 29. Learned Authorised Representative on the other hand submitted, the company has high turnover and high networth. He submitted, it is also engaged in sale of software products / license and performs marketing functions. He submitted, the related party transaction also exceeds 15% of the operating income and 10% of the operating expenses. Therefore, this company cannot be treated as comparable. For such proposition, he relied upon the following decisions:– i) SAP labs India Pvt. Ltd. v/s ACIT, 44 SOT 156; ii) CSR India pvt. Ltd. v/s ITO, 31 taxmann.com 265; iii) Agile Software Enterprise P. Ltd. v/s ITO, 52 taxmann.com 517; iv) Delmia Solution P. Ltd. v/s DCIT, 33 taxmann.com 372; v) L.G. Soft India Pvt. Ltd. v/s DCIT, 35 taxmann.com 202; vi) Huawel Technology India Pvt. Ltd. v/s ITO, IT(TP)A no.1338/ Bang./2010; vii) Tektronix Engineering Devt. India P. Ltd. v/s DCIT, IT(TP)A no.1465/Bang./2010.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon by both the parties. It is evident, the learned Commissioner (Appeals) has excluded this company only for the reason that RPT exceeds 15% of the total transaction. We have already held earlier in case of another comparable that as per the accepted principle only where RPT exceeds 25% a company cannot be treated as a 19 M/s. Keystone Solution P. Ltd. comparable. Therefore, we are unable to accept the aforesaid reasoning of the learned Commissioner (Appeals).
The learned Authorised Representative, however, has pleaded before us that the company is also engaged in sale of software products / license and has a high turnover. These aspects have not been considered by the learned Commissioner (Appeals). Moreover, the decisions relied upon by the learned Authorised Representative do not pertain to impugned assessment year. For the aforesaid reason, we consider it appropriate to restore the issue relating to the comparability of this company to the file of the Assessing Officer / Transfer Pricing Officer for fresh adjudication after due opportunity of being heard to the assessee.
vii) Infosys Technologies Limited;
The learned Commissioner (Appeals) excluded this company for the following reasons:–
a) Exceptionally high turnover; b) Engaged in sale of software products and license. 33. Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer.
Learned Authorised Representative on the other hand strongly supporting the order of the learned Commissioner (Appeals)
20 M/s. Keystone Solution P. Ltd. submitted, the company cannot be treated as comparable under any circumstances. For such proposition, he relied upon a number of decisions as submitted in paper book–3.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. In our view, there cannot be any match between the assessee and Infosys Technologies Ltd. for various reasons including turnover. As could be seen, the turnover of Infosys Technologies Ltd., during the relevant previous year is ` 6859.66 crore as against ` 16.37 crore of the assessee. For this reason alone, the company cannot be treated as comparable. Moreover, the consistent view not only of the Tribunal but also of different High Courts including Hon'ble Jurisdictional High Court, is giant companies like Infosys Technologies Ltd. cannot be compared with small company like assessee who is purely a captive service provider and the function performed, asset employed and risk employed by it as compared to companies like Infosys Technologies Ltd. are totally different. In view of the aforesaid we uphold the rejection of this company as a comparable.
viii) L&T Infotech Limited
The learned Commissioner (Appeals) rejected this company as a comparable on the ground of high turnover.
21 M/s. Keystone Solution P. Ltd.
Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer.
Learned Authorised Representative submitted, the company is not a comparable not only because of high turnover but also its high networth. He submitted, the company owns IPR / patents / brands and also performs marketing functions. In support of such contention, learned Authorised Representative relied upon the following decisions:–
i) ITO v/s Vendio Technologies (I) P. Ltd., IT(TP)A no.1374/Bang. /2011; ii) Invensys Development Centre India Pvt. Ltd. v/s ACIT, 43 taxmann.com 419; iii) Aptean Software India P. Ltd. v/s ITO, 52 taxmann.com 407; iv) Sumtotal Systems India Pvt. Ltd. v/s ACIT, 46 taxmann.com 231.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon by both the parties. Like Infosys Technologies Ltd., this company is also a big company having brand value of “L&T”. The turnover of the company for the relevant assessment year is ` 562.45 crore as against ` 16.37 crore of the assessee. We have also noted that the company has reported income under the head “software development service
22 M/s. Keystone Solution P. Ltd. and product” without providing segmental details. It is also noticed that it owns intangible assets. Therefore, in our considered opinion, this company cannot be treated as comparable to the assessee. We have also noted that the Tribunal, Bangalore Bench, in ITO v/s Vendio Technologies India Pvt. Ltd., has rejected this company as a comparable for the very same assessment year. In view of the aforesaid, we uphold the rejection of this company as a comparable. ix) Sasken Communications Technologies Limited
The learned Commissioner (Appeals) rejected this company as a comparable for the following reasons:–
a) The turnover is more than ` 100 crore; and b) Engaged in sale of software products and license.
Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer.
Learned Authorised Representative submitted, this company cannot be treated as comparable only because of its high turnover but also for the fact that it is engaged in sale of software products / license and performs marketing functions. For such proposition, he relied upon the following decisions:–
i) DCIT v/s Hellosoft India P. Ltd., 32 taxmann.com 101;
23 M/s. Keystone Solution P. Ltd. ii) Autodesk India Pvt. Ltd. v/s DCIT, ITA no.1108/Bang./2010 iii) Mindteck India Ltd v/s ITO, IT(TP)A no.1548/Bang./2010 iv) Ariba Technologies India Pvt. Ltd. v/s ITO, 52 taxmann.com 407; v) Aptean Software India P. Ltd. v/s ITO, 52 taxmann.com 407; vi) Symbol Technologies India Pvt. Ltd. v/s ITO, IT(TP)A no.1352/Bang./2011; vii) EMC Data Storage Systems India Pvt. Ltd. v/s DCIT, IT(TP)A no.973/Bang./2010; viii) Trilogy E–Business Software India Pvt. Ltd. v/s DCIT, 29 taxmann.com 310; ix) Transwitch India Pvt. Ltd v/s DCIT, 21 taxmann.com 257 x) Broadcom India Research Pvt. Ltd. v/s DCIT, IT(TP)A no. 1180/Bang./2011.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the annual report of the company, it is noticed that as per the director’s letter to shareholder, the company during the relevant previous year had earned revenue from sale of products as well as network engineering service. However, the Profit & Loss account does not provide the segmental details of services and products segment. It is also evident the company has incurred in selling and marketing expenses. Moreover, the turnover of the company at ` 222.99 crore is much above assessee’s turnover of `
24 M/s. Keystone Solution P. Ltd. 16.37 crore. For the aforesaid reasons, we uphold the order of the learned Commissioner (Appeals) in excluding this company. x) Satyam Computer Services Limited
The learned Commissioner (Appeals) excluded this company as a comparable for the following reasons:–
a) The turnover is more than ` 100 crore; and b) Financial statement does not reflect correct financial position.
Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer.
Learned Authorised Representative submitted, the company cannot be treated as a comparable as the financial results of the company are not reliable due to various mis–statements, manipulation in accounts. Even otherwise also company is functionally dissimilar to the assessee as it performs marketing functions. He submitted, company is also a very high turnover company and has a very high networth. He, therefore, submitted, this company cannot be treated as comparable to the assessee. In support of his contention, the learned Authorised Representative relied upon the following decisions:–
i) SAP labs India Pvt. Ltd. v/s ACIT, 44 SOT 156; ii) ACIT v/s Sonata Software Ltd. 55 SOT 533 (Mum.);
25 M/s. Keystone Solution P. Ltd. iii) ITO v/s Vendio Technologies (I) P. Ltd., IT(TP)A no.1374/Bang. /2011; iv) Invensys Development Centre India Pvt. Ltd. v/s ACIT, 43 taxmann.com 419; v) CIT v/s Agnity India Technologies P. Ltd., 262 CTR 291; vi) Adaptec India Pvt. Ltd. v/s ITO, ITA no. 481/Hyd./2011.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. Undisputedly, the turnover of this company during the relevant financial year amounted to ` 3464.22 crore as against the turnover of ` 16.37 crore of the assessee. Therefore, for this reason alone, it cannot be considered as a comparable. Moreover, it is now well known that the company indulged in manipulation of its account as a result of which its financial results are not reliable. For this reason also, the company has not been treated as a comparable in case of other assessee’s for the very same assessment year as is evident from the decisions relied upon by the learned Authorised Representative. We, therefore, uphold the order of the learned Commissioner (Appeals) in excluding this company.
xi) Tata Elxsi Limited
The learned Commissioner (Appeals) has removed this company from the list of comparables for the following reasons:–
26 M/s. Keystone Solution P. Ltd. a) The turnover is more than ` 100 crore; and b) Domestic turnover is more than 25% of the total turnover.
The learned Departmental Representative submitted, domestic turnover filter was not adopted by the assessee at the time of selection of comparables. Therefore, it cannot be adopted at a later stage.
Learned Authorised Representative, however, supported the view expressed by the learned Commissioner (Appeals) and relied upon the following decisions.
i) Sumtotal Systems India Pvt. Ltd. v/s ACIT, 65 SOT 48; ii) Invensys Development Centre India Pvt. Ltd. v/s ACIT, 43 taxmann.com 419; iii) Intoto Software India Pvt. Ltd. v/s ACIT, 30 ITR 504; iv) Adaptec India Pvt. Ltd. v/s ITO, ITA no. 481/Hyd./2011; v) NTT Data India Enterprise Application Services Pvt. Ltd. v/s ACIT, 40 taxmann.com 173; vi) Conexant Systems P. Ltd v/s ITO, 65 SOT 123; vii) DE Shaw India Software Pvt. Ltd. v/s ACIT, ITA no.1302/Hyd./ 2010; viii) United Online Software Development (I) P. Ltd. v/s ITO, 44 taxmann.com 424; and
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied
27 M/s. Keystone Solution P. Ltd. upon. The learned Departmental Representative has not controverted the fact that the domestic turnover of the company is more than 25% of the total turnover. It is also a fact that the turnover of the company is relatively high at ` 186.74 crore compared to assessee’s turnover of ` 16.37 crore. After carefully perusing the decisions relied upon by the learned Authorised Representative, we have noted that in a number of cases of different assessee, for the very same assessment year, the Tribunal has found this company uncomparable to a purely software development service provider for various reasons. In view of the aforesaid, we uphold the decision of the learned Commissioner (Appeals) in excluding this company. xii) Thirdware Solution Limited
The learned Commissioner (Appeals) has removed this company from the list of comparables for the following reasons:–
a) It has shown super normal profit; b) Domestic turnover is more than 25% of the total turnover; and c) Engaged in sale of software products and license.
Learned Departmental Representative submitted, out of the total turnover, service segments account for 90% and product is less than 10%. He further submitted, at the time of preparing the transfer
28 M/s. Keystone Solution P. Ltd. pricing study the assessee has not applied domestic turnover filter, hence, he cannot apply it at a later stage.
Learned Authorised Representative on the other hand strongly supporting the order of the learned Commissioner (Appeals) submitted, the company cannot be treated as a comparable not only for the reason of high domestic sales and abnormal profit but also for the fact that it is engaged in sale of software products and license and owns intangible / IPRs. In this context, the learned Authorised Representative drew attention of the bench to the financials of the company. In support of his contention, the learned Authorised Representative relied upon the following decisions:–
i) E–Gain Communication P. Ltd. v/s ITO, 23 SOT 385; ii) Invensys Development Centre India Pvt. Ltd. v/s ACIT, 43 taxmann.com 419; iii) ACIT v/s Sonata Software Ltd. 55 SOT 533 (Mum.); iv) DCIT v/s Textron Global Technology Centre (P) Ltd., 89 taxmann.com 465; v) DCIT v/s Colt Technology Services India Pvt. Ltd., 34 taxmann.com 182; vi) Adaptec India Pvt. Ltd. v/s ITO, ITA no. 481/Hyd./2011. vii) Intoto Software India Pvt. Ltd. v/s ACIT, 30 ITR 504; viii) NTT Data India Enterprise Application Services Pvt. Ltd. v/s ACIT, 40 taxmann.com 173; ix) CIT v/s IVY Computech Ltd., of 2014; x) CNO IT service (I) P. Ltd. v/s DCIT, 43 taxmann.com 231;
29 M/s. Keystone Solution P. Ltd. xi) DE Shaw India Software Pvt. Ltd. v/s AICT, ITA no.1302/Hyd./ 2010; xii) United Online Software Development (I) P. Ltd. v/s ITO, 44 taxmann.com 424; and xiii) Ness Innovative Business Services P. Ltd. v/s DCIT, 151 ITD 190; xiv) i2 Technologies India Pvt. Ltd. v/s DCIT, IT(TP)A no.1189/Bang./2011; xv) NXP Semiconductors India Pvt. Ltd. v/s ACIT, IT(TP)A no.1174/Bang./2011; xvi) Agnity India Technologies India Pvt. Ltd. v/s DCIT, 147 ITD 574; xvii) 3DPLM Software Solutions Ltd. v/s DCIT, 42 taxmann.com 333; xviii) Actiance India Pvt. Ltd. v/s ITO, 52 taxmann.com 14; xix) DCIT v/s Approva Systems Pvt. Ltd. ITA no.1788/PN./2013; xx) Planet Online Pvt. Ltd. v/s ACIT, ITA no.464/Hyd/2014.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. The Department has not disputed that domestic sales exceeds more than 25% of the total turnover. Further, it is a fact on record that assessee is engaged in sale of products / license. A perusal of the Profit & Loss account of the company for the relevant financial year it is noticed that it has earned revenue from sale of license, which indicates that it has two segments i.e., rendering of service as well as sale of products. However, segmental details are not available.
30 M/s. Keystone Solution P. Ltd. Moreover, the company has shown profit of 66.11% for the relevant financial year which is to some extent abnormal. Therefore, without analyzing the reasons which might have impacted, the earning of such high profit, it will not be safe to treat the company as a comparable. We have also noted that the company owns IPRs which also indicates that it is into product development. Considering the aforesaid factors, different benches of the Tribunal have excluded this company from the list of comparable in the case of various assessee for the very same assessment year as evident from the decision cited before us by the learned Authorised Representative. That being the case, we uphold the exclusion of this company as a comparable. xiii) Visual Soft Technologies Limited
The learned Commissioner (Appeals) excluded this company from the list of comparables for the reason that the turnover exceeds ` 100 crore.
The learned Departmental Representative reiterating the stand taken in removal of other high turnover companies submitted, the turnover is not a criterion to reject any comparable.
The learned Authorised Representative submitted, apart from the fact that the company is having high turnover high networth and high number of employees, it also performs marketing functions. He
31 M/s. Keystone Solution P. Ltd. submitted, the employee cost of the company is 12 times more than the assessee. He, therefore, submitted, the company cannot be treated as comparable. For such proposition, he relied upon the following decisions:– i) Invensys Development Centre India Pvt. Ltd. v/s ACIT, 43 taxmann.com 419; ii) SAP labs India Pvt. Ltd. v/s ACIT, 44 SOT 156;
We have considered the submissions of the parties and perused the material available on record. As could be seen from the facts on record, the turnover of the company during the relevant financial year was ` 188.18 crore as against assessee’s turnover of ` 16.37 crore, therefore, when the Transfer Pricing Officer had excluded companies having turnover of less than ` 1 crore, he should also have applied a cap on the upper limit as far as turnover is concerned. In our view, this company being a comparatively high turnover company should be excluded. Furthermore, on a perusal of the financials of the company for the relevant assessment year, we have noted that it has incurred expenditure on account of advertisement, business promotion and marketing which indicates that its functions, assets and risks are not similar to the assessee. We have also noted that the Tribunal, Hyderabad Bench, in Invensys Development Centre India Pvt. Ltd. (supra), for the very same assessment year having found that the 32 M/s. Keystone Solution P. Ltd. company is engaged in distribution of software products, implement– tation and customer service has excluded this company as a comparable. Thus, for the aforesaid reasons, we uphold the view of the company that the learned Commissioner (Appeals) cannot be treated as comparable to the assessee.
The Assessing Officer / Transfer Pricing Officer is directed to determine the arm's length price keeping in view our observations made herein above.
In the result, appeal stands partly allowed for statistical purpose. Order pronounced in the open Court on 19.10.2016