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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI R.S. SYAL & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
(formerly Siemens Public Communication Networks Pvt. Ltd.), (hereinafter referred to as ‘the assessee’), by filing the present appeal sought to set aside the impugned order dated 31.10.2011 passed by the AO/DRP/TPO qua the assessment year 2007-08 on the grounds inter alia that :-
“1. That on the facts and circumstances of the case and in law, the impugned order of assessment framed by the learned Assistant
Commissioner of Income-tax, Circle 13(1), New Delhi (hereinafter referred to as 'the learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 (,Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio.
2. That on the facts and circumstances of the case and in law, the learned AO / DRP has erred in making an addition of Rs. 171,224,237 to the total income of the appellant on account of adjustment in the arm's length price of the international transaction entered by the Appellant with its associated enterprises.
3. That on the facts and the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO') / AO ignored the fact that the appellant is entitled to a tax holiday under section 10A of the Act on its profits earned from the provision of software Services to associated enterprises and therefore does not have an ulterior motive of shifting profits outside India.
4. That on the facts and circumstances of the case and in law, the learned TPO / AO has erred in rejecting the com parables selected by the appellant and in conducting a fresh search and selecting a new set of com parables for the determination of the ALP of the software services transaction.
5. That on the facts and circumstances of the case and in law, the learned TPO / AO has erred in (a)
(a) rejecting the data used by the appellant which was available to it at the relevant time and proceeding to use the data which was available only at the time of TP audit and (b) using data for a single year instead of multiple year data.
6. That on the facts and circumstances of the case and in law, the learned TPO / AO has erred by rejecting certain comparable companies identified by the Appellant on untenable grounds such as:
a. turnover < Rs. 1 Crore as a comparability criterion and rejected the turnover filter of Rs. 50 Crore to Rs. 250 Crore applied by the appellant; b. difference in accounting year; c. employee cost less than 25 percent of the total revenues; d. Onsite revenues more than 75 percent of the export revenues; e. misconceived difference in economic performance.
7. That on the facts and circumstances of the case and in law, the learned TPO / AO has erred in exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes.
8. That on the facts and circumstances of the case and in law, the learned TPO / AO has erred by selecting certain companies which are earning super normal profits as comparable to the Appellant and adding certain companies in the final set of comparables on an adhoc basis.
9. That on the facts and circumstances of the case and in law, the learned TPO/ AO has erred by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a- vis the comparables.
10. That on the facts and circumstances of the case and in law, the learned TPO/ AO has erred in not providing the benefit of the arm's length range as provided under proviso to Section 92C of Act for purposes of computing the arm's length price under Section 92F of the Act.
11. Based on the facts and circumstances of the case and in law, the learned AO has erred in holding that waiver of deferred sales tax loan amounting to Rs.2,48,88,643 represents remission of trading liability, liable to taxation under the provisions of section 41 (1)(a) of the Act.
11.1 Without prejudice, based on the facts and circumstances of the case and in law, the Hon'ble DRP / learned AO has erred in not following the ratio of Special Bench decision in the case of Sulzer India Limited (133 TTJ 385).
11.2 Without prejudice, based on the facts and circumstances of the case and in law, the learned AO has erred in not appreciating that waiver of deferred sales tax loan was in fact settled as per the provisions of Rule 127 A of the West Bengal Sales Tax Rules, 1995 which provides for settlement of such loan at equivalent to Net Present Value and accordingly no benefit arises to the appellant upon waiver of such loan.
11.3 Without prejudice, based on the facts and circumstances of the case and in law, the learned AO has erred in not appreciating that the provisions of Bombay Sales Tax Act are similar to the provisions of West Bengal Sales Tax Act, in as much as both the legislations provides for the settlement of deferred sales tax loan at or equivalent to Net Present Value.
12. Based on the facts and circumstances of the case and in law, the Hon'ble DRP/ learned AO has erred, in apportioning certain expenses that are specifically incurred in respect of non- STP unit to the STP unit of the appellant, thereby reducing the deduction available to the said STP unit by an amount of Rs.65,03,158.
13. Based on the facts and circumstances of the case and in law, the learned AO has erred in not allowing deduction for provisions utilized / released back during Assessment Year 2007- 08, despite of a specific direction by the Hon'ble ORP in this regard.
14. That on the facts and circumstances of the case arid in law, the learned AO has erred in levying consequential interest under section 234D of the Act.
15. That on the facts and circumstances of the case and in law, the learned AO has erred in withdrawing the interest under section 244A of the Act.
16. That on the facts and circumstances of the case arid in law, the learned AO has erred in initiating penalty proceedings under section 271 (1)(c) of the Act.”
Assessing Officer in consonance with the order passed BY TPO/DRP made adjustment on Arm’s Length Price (ALP) to the tune of Rs.17,12,24,237/- and assessed the total income at Rs.70,79,59,500/-.
Briefly stated the facts of this case are : the assessee company is a 99.9% subsidiary of M/s. Siemens India Limited which is a subsidiary of Siemens AG, Germany, which is into the business of manufacturing and trading of telecommunication network equipments and network design. It is also providing support services to major Telecom and IT service providers and telecom related software. During the year under assessment, the assessee company entered into international transactions in the nature of provision of software services, purchase of raw materials, export of finished goods, commission income, etc. During the year under assessment, only software segment of the assessee company is in dispute whereas there is no dispute qua the telecom segment.
Assessee company as a tested party has been characterized as provider of software and development services to its AEs which has used Transactional Net Margin Method (TNMM) as most appropriate method for its benchmarking of international transaction. Search for uncontrolled comparables was made using Prowess and Capitaling Database by the assessee in its Transfer Pricing Study. Assessee company taken 11 comparables for its TP study. TPO by applying the filters rejected all the comparable companies chosen by the assessee except Persistent Systems Ltd. TPO has selected 26 companies as comparables duly detailed at para 15.2.1 of his order. The assessee company computed its Profit Level Indicator (PLI) at 16.71% on cost whereas TPO computed the same at 21.11% on cost on the basis of reply filed by the assessee company.
Assessee company is primarily engaged in manufacturing of telecommunication equipment and software development services.
TPO concluded that average export revenue of 26 selected comparables is at 93.55% of their total revenue and the 26 selected comparables have average related party transactions at 4.87% of their total revenue. TPO also observed on the basis of FAR analysis of the taxpayer vis-à-vis the comparables that the taxpayer incurs 61% of its revenue on employee costs whereas 26 selected comparables have average employee cost at 51.46% of their total revenue. TPO, on the basis of TP analysis, initially determined the ALP of the international transactions for providing research and development services at Rs.1,59,95,73,695/- instead of Rs.1,38,90,75,786/- charged by the assessee in its international transaction resulted into adjustment to the extent of Rs.20,14,97,909/-. However, subsequently TPO in compliance to the directions issued by the DRP passed supplementary order and made final TP adjustment at Rs.17,12,24,237/-.
6. Assessee carried the matter before the DRP on the basis of which assessment order has been passed. Feeling aggrieved, the assessee has come up in appeal before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
As per profile of the assessee company narrated by the TPO in para 2.2 of the TPO order, assessee company is into the business of manufacturing and trading of telecommunication network equipments and network designs, installation and it also provides support services to major telecom and IP Sectors providers.
Assessee company also develops telecom related software.
Assessee company filed the TP study of selecting itself as a tested party. Assessee company characterized itself as a provider of software and development services to its Associated Enterprises (AEs) and selected TNMM as the most appropriate method and the search for the uncontrolled comparables was made using prowess and capitaling database. Assessee company applied eight filters in the search of nine comparables duly detailed in para 10 of the TP report, out of which three comparables have been rejected by the TPO. TPO, after thoroughly examining 82 companies, proposed to choose 26 companies in the final set of comparables having Operating Profit / Total Cost (OP/TC) at 25.14% as under :-
Sl. Company Name Sales OP to Product RPT % of Export % of Onsite R & D % of r Mktg. % of % of Data No. (Rs. cr.) Total sales (Rs. RPT (Rs.Cr.) exports Reven- (Rs. &d (Rs. mktg. salary/ base cost % (Rs. / cr.) over over ues Cr.) over Cr.) over sales % of Sales Sales sales sales sales) 1. Accel 9.68 21.11% 0 0.6 6.20% 9.43 97.42% 3.28% 0 0.00% 0.04 0.41% 37.90% P (Seg Transmatic Ltd. ,) (Seg.) 2. Avani Cimcon 3.55 52.59% 0 0.07 1.97% 100 100% 0 0 0.00% 0.05 1.41% 41.78% P Technologies Ltd.
3. Celestial Labs 14.13 58.35% 0.51/ 0 0.00% 13.23 93.63% 0 2.52 17.83% 0.94 6.65% 25.69% P 3.61% Ltd.
4. Datamatics Ltd. 54.51 1.38% 0 7.16 13.14% 53.53 98.20% 23.00% 0 0.00% 0.14 0.26% 61.59% P 5. E-Zest Solutions 6.26 36.12% 0 0 0.00% 6.14 98.08% 0 0 0.00% 0.07 1.12% 61.50% P Ltd.
Flextronics 848.66 25.31% 9.21/ 44.21 5.21% 807.75 95.18% 22.00% 3.88 0.46% 7.02 0.83% 46.31% P 1.08% (Seg Software .) Systems Ltd. (Seg.) 7. Geometric Ltd. 158.38 10.71% 0 31.64 19.98% 134.71 85.05% 21.66% 0 %0.00 3.18 2.01% 60.86% (Seg.) 8. Helios & 178.63 36.63% 0 5.24 2.93% 101.86 57.02% 73.00% 0 0.00% 6.28 3.52% 35.67% P Matheson Information Technology Ltd.
9. IGate Global 747.27 7.49% 0 39.64 5.30% 747.27 100% 54.00% 0 0.00% 4.51 0.60% 69.74% P (EF) Solution Ltd.
10. Infosys 13149 40.30% 538/ 664 5.05% 12939 98.40% 51.70% 167 1.27% 719 5.47% 45.84% P 4.1% Technologies Ltd.
11. Ishir Infotech 7.42 30.12% 0 1.63 21.97% 7.08 95.42% 0 0 0.00% 0.57 7.68% 48.25% P Ltd.
KALS 2.00 30.55% 106/ 0 0.00% 2 100% 0 0 0.00% 0.08 4.00% 36.62% C 3% (EF) Information Systems Ltd. (Seg.) 13. LGS Global Ltd. 45.39 15.75% 0 1.22 2.69% 43.75 96.39% 56.14% 0 0.00% 0.83 1.83% 64.00% P (Lanco Global Solutions Ltd.) 14. Lucid Software 1.70 19.37% 0 0 0.00% 1.69 99.41% 0 0 0.00% 0.3 17.65% 41.17% P (EE) Ltd.
15. Mediasoft 1.85 3.66% 0 0 0.00% 1.84 99.46% 0 0 0.00% 0.03 1.62% 69.19% P Solutions Ltd.
16. Megasoft Ltd. 139.33 60.23% 26.47/ 10.21 7.33% 134.36 96.43% 56.00% 0 0.00% 2.2 1.58% 37.87% P 19% 17. Mindtree Ltd. 590.35 16.90% 0 0 0.00% 553.44 93.75% 36.18% 0 0.00% 2.75 0.47% 55.27% P 18. Persistent 293.75 24.52% 2.16/ 28.55 9.72% 282.06 96.02% 4.83% 2.71 0.92% 2.35 0.80% 54.95% P 0.73% Systems Ltd. 19. Quintegra 62.72 12.56% 0 0 0.00% 59.91 95.52% 48.52% 0.39 0.62% 2.02 3.22% 66.68% P Solutions Ltd. 20. R S Software 101.04 13.47% 0 0.85 0.84% 97.17 96.17% 68.77% 0 %0.00 1.83 1.81% 64.62% P Ltd. 21. R Systems 112.01 15.07% 2.68/ 12.77 11.40% 105.36 94.06% 8.55% 0.63 0.56% 0.93 0.83% 56.32% P 2.39% International Ltd. (Seg.) 22. Sasken 343.57 22.16% 0 3.94 1.15% 262.66 76.45% 21.43% 0 0.00% 32.26 6.48% 57.03% P Communication Technologies Ltd. (Seg.) 23. SIP 3.80 13.90% 0 0 0.00% 3.8 100% 30.96% 0 0.00% 0.04 1.05% 39.92% P Technologies & Exports Ltd. 24. Tata Elxsi Ltd. 262.58 26.51% 0 3.34 1.27% 252.57 96.19% 22.90% 10.91 4.15% 2.63 1.00% 54.35% P (Seg.) 25. Thirdware 36.08 25.12% 0 3.60 9.90% 27.44 76.05% 7.98% 0 0.00% 0.07 0.19% 62.64% P Solutions Ltd. 26. Wipro Ltd. 9616.09 33.65% 0 58.26 0.61% 98% 54.70% 817.36 8.50% 427.4 4.44% 42.13% C (Seg.) 25.14%
The segmental detail pertaining to the software development services, which are in question, is detailed by the TPO as under :-
Description Software Telecom Development Net Sales 1398075786 6245232150 Operating Expenses 1292375935 5769787646 Operating Profit 105699851 475444504 OP on Cost 8.17% OP on Sales 7.61%
Undisputedly, assessee company entered into international transactions as per report under section 92CE as under :-
• Provision of software services Rs.138,40,62,575/- • Purchase of raw materials, components etc. Rs.147,52,30,169/-
• Export of finished goods Rs.8,97,30,310/- • Import of fixed assets Rs.2,34,86,131/- • Royalty Rs.3,82,68,828/- • Purchase of software Rs.42,93,294/- • Commission income Rs.16,93,62,494/- • Commission charges Rs.1,59,65,014/- • Training charges Rs.41,90,100/- • Reimbursement of expenses paid Rs.7,41,61,364/-
12. The ALP of aforesaid international transactions is to be determined. Assessee company has earned an operating profit margin of 8.24% on sales of telecom equipment manufacturing segment and 8.7% operating profit margin to cost ratio on software development segment.
Following comparables companies selected by the TPO in his transfer pricing study, though initially disputed by the ld. AR for the assessee for inclusion in the final list of comparables, but, during the course of argument, the ld. AR for the assessee has fairly conceded that all these companies are valid comparables for benchmarking of international transactions :-
(i) GEOMETRIC LIMITED (SEGMENTAL) (ii) HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED (iii) I GATE GLOBAL SOLUTIONS LIMITED (iv) MEDIASOFT SOLUTIONS LIMITED (v) MINDTREE LIMITED (vi) QUINTEGRA SOLUTIONS LIMITED (vii) R S SOFTWARE (INDIA) LTD. (viii) SASKEN COMMUNICATION TECHNOLOGIES LTD. (ix) SIP TECHNOLOGIES & EXPORTS LTD.
(x) DATAMATICS LIMITED COMPARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE ASSESSEE COMPANY FOR BENCHMARKING OF ITS INTERNATIONAL TRANSACTION :
Ld. AR for the assessee contended that in order to make correct TP adjustment, he is pressing for the exclusion of ONLY nine comparables, viz., (i) Celestial Labs Ltd., (ii) Flextronics Software Systems Ltd. (Seg.), (iii) Infosys Technologies Ltd., (iv)
KALS Information Systems Ltd. (Seg.), (v) Lucid Software Ltd., (vi) Megasoft Ltd., (vii) Persistent Systems Ltd., (viii) Tata Elxsi Ltd. (Seg.) & (ix) Wipro Ltd. (Seg.). So, to arrive at the logical conclusion, we would like to examine aforesaid comparables chosen by the TPO and disputed by the assessee company for benchmarking of international transaction in the light of the functional profile and annual reports.
(i) CELESTIAL LABS LIMITED :
This comparable has been selected by the TPO and opposed to be included in the set of comparables by the assessee company on the grounds inter alia that it does not qualify the employees cost filter as its employees cost is less than 25% of the total cost i.e. 23.73% and this company is providing clinical research software products/services as well as bio-informatics services and as such, engaged in product development and sales of developed product; that this company has earned super-normal profit at 54.55%.
Ld. AR for the assessee by relying on the order passed by the Income Tax Appellate Tribunal, Delhi Bench ‘I’, New Delhi in AY 2007-08 in case entitled Toluna India Pvt. Ltd. vs. ACIT, Circle 12 (1), New Delhi (hereinafter “TOLUNA”) contended to exclude this comparable from the final set of comparables. Undisputedly, TOLUNA is also into the business of software development and providing related services to the Greeenfield Group, its AE. The coordinate Bench in the judgment TOLUNA (supra), ordered to exclude this comparable company by making following observations :-
“18.2. After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of this company, a copy of which is available on page 41 of the paper book, that it is engaged mainly in the developing the software products in the shape of tools etc., which are protected using the patent. This company developed a tool, “CELSUITE” to drug discovery in finding the lead molecules for drug discovery. As this company is engaged in developing software tools after enough research and development activity and the tools so produced by it are its intellectual property, it cannot be considered as comparable to the assessee which is, also albeit in software development, but is doing it on contract basis without having any I.P. rights in the software developed by it. It is further relevant to note that this company has been held to be not comparable by the Dispute Resolution Panel (DRP) in its Directions for a subsequent year, a copy of which is available on record. Thus this company can’t be considered as functionally similar to that of the assessee. We, therefore, direct to exclude this company from the list of comparables. The assessee succeeds.”
Keeping in view the facts that this comparable company does not qualify the employee cost filter, adopted by the TPO; it is functionally dis-similar, which is though in software development, but is doing the same on contract basis and it is earning super- normal profit; that this company has been held to be incomparable for subsequent year by the DRP and by following the order passed by the coordinate Bench, we hereby order to exclude this company from the final list of comparables.
(ii) FLEXTRONICS SOFTWARE SYSTEMS LTD. :
Assessee, during the TP proceedings, opposed the inclusion of this comparable on ground of functional dis-similarity but the TPO by recording his finding at pages 80 to 82 of the TP order selected it as a final comparable on the ground that it passes all the necessary filters. TPO rejected the argument addressed by the assessee that this company is driving revenue from both product and software services on the ground that as per detail of product revenue, the product revenue was of Rs.92.1 crores out of the product and services segment revenue of Rs.847.2 crores i.e 10.87% of the segmental revenue and that the sub-segmental result have not been filed by the assessee company. TPO also recorded that the software development segment revenue in that segment is more than 75% i.e. 89.13% and as such, qualifies for 75% revenue from the service segment.
Ld. AR for the assessee to support his argument for exclusion of this company relied upon TOLUNA (supra) and Avaya India Private Limited vs. ACIT in ITA No.5528/Del/2011. Functional profile of the assessee company is undisputedly similar to TOLUNA (supra) and Avaya India Private Limited (supra) rather TOLUNA (supra) has been followed by the coordinate Bench in Avaya India Private Limited (supra). Coordinate Bench in TOLUNA (supra) ordered to exclude this company from the list of comparables by making following observations :-
“21.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be not comparable to that of the assessee. The reason for our this decision is that the TPO has taken segmental data of `Product and service segment’ of this company which has Product revenue of Rs.92.1 crore. In contrast to it, the instant assessee is not selling any software products, but, is doing the job assigned to it on cost plus basis. The contention of the ld. DR that since the majority of the revenue from `Product and services segment’ was from the services segment and, hence, this company should be considered as comparable, is bereft of any force. When figures of Products and services are combined, it cannot be ascertained as to how much contribution was made by the product division or the service division to the overall revenue of the Product and services segment. As the assessee is admittedly not engaged in selling its software products, such a company cannot be considered as comparable. It can be seen from the annual report of this company, a copy of which is available on page 88 of the paper book, that it consolidated its existing product portfolio and took steps to expand into further technologies by increasing the momentum in key initiatives in WIMAX, IMS, SIP & ISS/ESS domains. This company has its own products such as ASN, WIMAX, Gateway Product with ASN Light. It is further relevant to note that the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO has adopted the relevant figures for comparison. In view of the foregoing discussion, we hold this company to be not comparable and direct its exclusion from the list of comparables. The assessee succeeds.”
Keeping in view the fact that the assessee company is not selling any software product and when figure of product and services are examined into totality, it is difficult to ascertain as to how much contribution has been made by the product division or the service division to the overall revenue of the product and service segment. So, when the assessee company is undisputedly not into selling software product such company cannot be considered as a comparable. So, we are of the considered view that this company cannot find place in the final list of comparables for transfer pricing.
(iii) ACCEL TRANSMATIC LIMITED (SEGMENTAL) 21. During TP study, assessee opposed inclusion of this comparable on the ground of having turnover of less than Rs.50 crores and Rs.250 crores. Assessee also opposed the inclusion of this comparable company being functionally dis-similar. However, TPO included the same on the ground that no reason has been given by the assessee for functional dis-similarity and its data being available in prowess database along with the annual report for the year 2006-07, it qualifies all the filters and kept the same in the final list of comparables.
However, the ld. AR for the assessee by relying upon the decisions of – (i) AOL Online India Pvt. Ltd. – (ii) NMS Communications Pvt. Ltd. – ITA No.1541/Bang/2012; (iii) M/s. NTT Data India Enterprises Application Services Pvt. Ltd. – ITA No.2190/Hyd/2011; (iv)
Hewlett Packard (India) Globalsoft P. Ltd. – IT(TP)
A.No.1031/Bang/2011; (v) Trilogy E-business Software India P.
Ltd. – (vi) Capgemini India (P) Ltd. vs. Ad.CIT – ITA No.7729/Mum/2010; (vii) M/s. Cypress Semiconductor Technology India Pvt. Ltd. vs. DCIT – ITA No.1167/Bang/2010; (viii) M/s. Cypress Semiconductor Technology India Pvt. Ltd. vs. DCIT – ITA No.1002/Bang/2011; (ix) Intoto Software India Pvt. Ltd. – ITA No.1196/Del/2010; (x)
HCL EAI Services Ltd. – sought the exclusion of this company on the same ground as set out before the TPO.
However, on the other hand, the ld. DR protected this company as comparable by relying upon TOLUNA (supra).
Perusal of the annual report at page 283 apparently goes to prove that this comparable company has four divisions, namely, Transmatic Systems, Ushus Technologies, Accel Animations Studios and Accel IT Academy. Ld. DRP rejected the argument addressed by the assessee company by making the following observations :-
“48. Accel Transmatic Limited: It is argued that the information of this company is unreliable and it also fails employee cost filter as per the information available in public domain. We find no force in this argument of the taxpayer. It seems that before the TPO no objection was raised by the taxpayer against its selection. The taxpayer in its reply dated 08.07.2010 did not offer any comments against this comparable (page 53 of the TPO's order). As regards the onsite filter, on the basis of information received u/s 133(6) this company passes this filter. Similarly, there is no force in the argument of the taxpayer that the employee cost is less than 25% of the sales. On page 55 the TPO has given the segmental details of this company where from it can be seen that the employee cost is more than 25% of the sales. In any case, as discussed above employee cost filter is only a trigger and not a conclusive filter. The selection of this comparable by the TPO is therefore upheld.”
When the issue of functional dis-similarity and different model of revenue recognition is examined keeping in view the functional and business profile of assessee company vis-à-vis Accel Transmatic Limited (supra), both are in the business of manufacturing and trading of telecommunication network and network design and the assessee company during the year under assessment has also undertaken international transactions which were in the nature of profession of software services, purchases of raw material, export of finished goods, commission income, etc.
During the course of argument, the ld. AR for the assessee fairly conceded that when examined in totality this company is a valid comparable. So in view of the matter, we are of the considered view that this company has been rightly included in the final list of comparable by the ld. TPO/DRP.
(iv) AVANI CIMCON TECHNOLOGIES LIMITED
This comparable company is opposed to be included in the list of final comparables by the assessee on the ground that this is earning super-profit and during the financial year 2006-07, the turnover of the company was less than Rs.50 crores and does not qualify specific turnover filter applied by the assessee. However, TPO retained this company in the final list of comparables by making following observations :-
“14.4.2 Avani Cimcon Technologies Ltd (OP/TC for the FY 2006-07 - 52.59%,) This company was nor finding place in the accept / reject matrix of the taxpayer. However, the data of the company is available in Prowess database. As per the information available in the public domain, it is a software development and consulting company. Based in India with offices in U.S, ACTL has a varied client base in Australia, U.S, UK, Africa and the European Union. 'with major focus on the Travel and Insurance industry. The Annual Report of the company was not available. RPT information was also not available. Thus 133(6) notice was issued to the company to get complete information. As per the reply received from the company, it qualifies all the filters applied by the TPO, As it qualifies all the fillers applied by the TPO, the same was proposed as a comparable vides this office letter dated 31-05-2010. The taxpayer in its reply dated 08-07-2010 objected to it as under : "8.1 Avani Cimcon Technologies Ltd. (“Avani”)
The assessee submits that Avani is earning super profits and such companies should be rejected while arriving at arm’s length price. The assessee wishes to bring to your office's notice the following judicial decisions:
• E-Gain Communication Pvt. Ltd. (ITA No.1885/PN/ 2007) Ruling of the Hon‘ble Pune ITAT in the case of E-Gain Communication Pvt. Ltd. (supra) while reviewing the comparability analysis of some companies:
"A cursory look at the chart ill the assessment order of 20 compatibles would reveal that the margin of profit shown by Thirdware Solutions Ltd. and WTI Advanced Technology is extraordinary at 67.65 per cent and 54.72 per cent respectively. Therefore, it was necessary for the tax authorities to examine whether these entities have rightly been taken as comparables for application of Most Appropriate Method ….". • Quark Systems Private Limited (supra)
Ruling of the Hon’ble Chandigarh ITAT, Special Bench in the case of Quark Systems Private Limited (supra) while reviewing the comparability analysis or super profit companies:
“…Even if the tax payer or its counsel had taken Datamatics as comparable in its IP audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercious technologies has suffered heavy losses and, therefore it is not treated as comparable by the tax authorities, they also have to consider that Datamatics has earned extraordinary profit and has a huge turnover."
(emphasis supplied) Without prejudice to the above, we also wish to submit that at during FY 2006-07, the turnover of the company was less than Rs.50 crore. Accordingly, the company does not satisfy the turnover filter applied by the Assessee (as mentioned ill section 6.3 above) and is hence rejected.” The taxpayer did not give the basis on which it came to the conclusion that 52.59% on cost is extra ordinary. The higher profit of the company is mainly attributable to higher component of offshore work. In fact, the company generates 100% of its revenues from offshore operations similar to the taxpayer. The margins of the other companies are lower, apart from other reasons, the onsite revenues dragged down their margins. So, the argument of the taxpayer that the company earned super profits is without any basis and also the taxpayer did not bring out any special or peculiar economic circumstances under which the company generated these profits. The company's' higher margins are due to the fact that offshore - margins are higher than the onsite margins, Regarding the turnover range filter applied by the taxpayer, as per the discussions held as above the TPO rejected this filter. Thus the company is considered as a comparable.”
The issue of functional dis-similarity has been dealt with by the coordinate Bench in case of TOLUNA (supra) while making following observations :-
“17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to get complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such contention by relying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software development company engaged in providing software development and consulting IT services to its clients. This company was concentrating on internet enabled business information systems in a wide range of industries. Resultantly, this company was included in the list of comparables. 17.2. After considering the rival submissions and perusing the relevant material on record, we find from the description of business activity of this company as reproduced on internal page 90 of the TPO’s order, that it is a pure software development service provider. In the absence of any other specific objection against this company, we are of the considered opinion that this company has been rightly included by the TPO in the list of comparables. The assessee fails.”
During the course of argument, the ld. AR for the assessee has failed to stick to the argument earlier addressed before ld. TPO/DRP that this company has insufficient segmental information. So, in view of the segmental information available in the annual report as well as finding returned by the coordinate Bench in TOLUNA (supra), we are of the considered view that this company qualifies to be retained as a valid comparable for transfer pricing adjustment.
(v) E-ZEST SOLUTIONS LIMITED :
Assessee sought to exclude this company from the list of comparables on the grounds inter alia that it is functionally dis- similar; that it has different revenue model recognition and this company has been rejected by Ld. DRP in assessee’s own case in AY 2011-12. However, coordinate Bench in TOLUNA (supra) examined this company as a comparable for TP adjustment with a company which is engaged in rendering software development services and came to the conclusion that the TPO has rightly included this company as comparable and operating part of the findings returned by the coordinate Bench are as under :-
“20.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be comparable to that of the assessee company, because it is also engaged in rendering software development services to outsiders. The ld. AR needlessly tried to distinguish this company by contending that the services rendered by it were different from that of the assessee. We do not find any force in this submission. The comparability of a company is tested on various parameters and a view is taken as to its comparability or otherwise by considering the entirety of the facts and circumstances. Simply because the nature of software development services provided by a company is different from those provided by the assessee, the same does not become incomparable. Here is a case in which this company is also providing software development services as is done by the assessee on contract basis for others without having any intellectual property rights in them. A small variation in the nature of services does not make a company incomparable. It is not a case that the TPO has considered a company rendering managerial or engineering services and treated it as comparable to the assessee rendering software development services. Merely because the nature of service rendered by this company within the overall software development services, is not identical, will not make it incomparable, when it is otherwise similar to that of the assessee on all other scores. As such, we hold that this company was rightly included by the TPO in the list of comparables. The assessee fails.”
So, in view of the findings returned by the coordinate Bench, comprehensive order passed by the ld. TPO showing segmental detail and the fact that this company is functionally similar vis-à- vis assessee company, we are of the considered view that this company is a valid comparable for transfer pricing adjustment in this case.
(vi) INFOSYS TECHNOLOGIES LIMITED :
Assessee opposed the inclusion of this company in the final list of comparable on the grounds inter alia that this is functionally dis-similar; that it has large scale of operation vis-à-vis assessee company; that it has a brand impact to determine the premium pricing; that it has a different model of revenue recognition and this comparable company has been rejected in assessee’s own case in AY 2011-12 in case of TOLUNA (supra). Moreover, this comparable company has been rejected by the TPO in assessee’s own case in AY 2011-12.
Coordinate Bench in the case cited as TOLUNA (supra) examined comparability of the assessee company vis-à-vis TOLUNA (supra) which is undisputedly dis-similar to assessee company and found the same to be not a valid comparable by returning following findings :-
“25. From the nature of services rendered by the assessee to its AE on a cost plus basis without having any intangible assets or retaining any intellectual property in the work done by it, we find that Infosys Technologies Ltd., which is a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, onsite and offshore services, etc., cannot be compared with the assessee. Our view is fortified by the judgment of the Hon’ble jurisdictional High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. [(2013) 219 Taxman 26 (Del)] in which Infosys Ltd. has been held to be not comparable to a company that was engaged in the business of development of software for parent company. We, therefore, direct the exclusion of this case from the list of comparables. The assessee succeeds.”
Keeping in view the findings returned by the coordinate Bench that a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, onsite and offshore services, etc. make it incomparable with the assessee company for benchmarking, we are also of the considered view that this company cannot be a valid comparable to the assessee company, hence, hereby directed to be excluded.
(vii) ISHIR INFOTECH LIMITED :
This company was not in the accept / reject matrix of taxpayer but the same has been retained by the TPO in the final list of comparable despite raising objections by the assessee that assessee failed to comply with 25% employee cost filter.
Ld. DRP also retained this company as a comparable by rejecting the objections raised by the assessee by returning following findings :-
“65. Ishir Infotech Limited: The taxpayer has objected on the ground of unreliable information and employee cost filter. We find no merit in both the objections. Its objection against 133(6) information has been rejected. As regards employee cost filter the TPQ has discussed this issue on page 86 of the order which clearly shows that the employee cost is 48.32%. The objection regarding inclusion of professional fees as part of employee cost has also been discussed by the TPQ on page 86/87 of the order. In view of the reasons given by the TPa we find no force in the taxpayer's objections.”
Coordinate Bench in the case cited as TOLUNA (supra) 35. examined this company to be taken as a valid comparable vis-à-vis assessee company, which is undisputedly similarly situated as assessee company and directed to retain this company as a valid comparable by returning following findings :-
“26.2. Having heard both the sides and perused the relevant material on record, we find this company to be comparable to that of the assessee. The assessee’s objection that employee cost of this company was 4% only, is not correct because of the exercise carried out by the TPO indicating that the employees cost was more than 25%. The ld. DR has taken us through the Annual accounts of this company which show that some part of the employees cost was also included in ‘Administrative expenses’ apart from direct Establishment expenses. It can be seen that the company has included Professional fees of Rs.3.41 crore along with Director’s salary, etc., under the head ‘Administrative expenses’. When this objection was taken by the assessee before the TPO that the employee cost was only 4% viewing only the ‘Establishment expenses’ in isolation without considering the employee cost included under the head ‘Administrative expenses’, the TPO corrected the position by observing that the employee cost was more than 25% by impliedly including the personnel cost included under the head ‘Administrative expenses’. The assessee did not challenge the TPO’s calculation before the DRP on this issue. As such, it becomes apparent that there is no merit in this objection again taken up before us which has already been successfully dealt with by the TPO. Insofar as the assessee’s objection about the related party transactions is concerned, we have discussed this issue thoroughly while dealing with the comparable case of Accel Transmatics Ltd. (supra) in which it has been held that filter of 25% of RPT is good enough to make a controlled transaction and thus expunging it from the list of comparables, which can only be uncontrolled transactions. The ld. AR failed to point out any functional difference of this company vis-a-vis the assessee. As such, we approve the view taken by the TPO in including this case in the list of comparables. The assessee fails.”
So, keeping in view the findings returned by the coordinate Bench and the annual report available on the file, the sole objection raised by the assessee company that in this company, employees cost is less than 25% of the revenue is apparently not sustainable as the same was more than 25% and functional dissimilarities vis-à- vis assessee company have also not been brought on record. So, we hereby direct to retain this comparable company as a valid comparable.
(viii) KALS INFORMATION SYSTEMS LIMITED (SEGMENTAL)
Assessee opposed the inclusion of this company in the final set of comparables for transfer pricing adjustment on the ground that this company is driving revenue from both product and software services and such is functionally dis-similar and relied upon the case of TOLUNA (supra).
The coordinate Bench in the judgment (supra) directed to exclude this company as comparable by returning following grounds :-
“27.2. After considering the rival submissions and perusing the relevant material on record, it is an admitted position that the TPO adopted Software development segment of this company by noticing that this segment also included revenues from software products and training. In view of the fact that the assessee is not engaged in imparting any training on commercial basis or selling its software products, we hold that the financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability. As such, this case is directed to be excluded. The assessee succeeds.”
Perusal of the annual report of this company available on file goes to prove that software development segment of this company also includes revenues from software and training whereas assessee company is not engaged in imparting any training or selling its software product to attract revenue. So, the finances of this company are not comparable with the assessee company. In view of the matter, we hereby direct that this company is not a valid comparable.
(ix) LGS GLOBAL LIMITED (LANCO GLOBAL SOLUTION LIMITED) 40. This company having 15.75% OP/TC has been selected by the TPO as a comparable company as it qualifies all the filters applied by the TPO. During the TP proceedings, the assessee has not raised any objection for inclusion of this company vide its letter dated 08.07.2010. However, before ld. DRP, assessee raised the sole objection that this company was cherry picked which was not part of the search list. However, this is a vague and ambiguous objection and is not sustainable in the light of the fact that the functional comparability is not in dispute and its financial data is available in the public domain and has been considered as a valid comparable by the TPO in his TP study. So, we find no ground to interfere into the findings returned by the ld. TPO/DRP to retain this company as a valid comparable for TP adjustment.
(x) LUCID SOFTWARE LIMITED :
This company is not in the accept/reject matrix of search process conducted by the assessee. Assessee opposed inclusion of this company on two grounds – one : that it is functionally dis- similar as it is deriving revenue both from product development as well as software services; two : that it has insufficient segmental information and relied upon the case of TOLUNA (supra).
Coordinate Bench in the judgment of TOLUNA (supra) directed the inclusion of this company in the list of comparables by returning the following findings :-
“29.2. After considering the rival submissions and perusing the relevant material on record, it can be seen that the assessee categorically objected before the TPO to the effect that this company was mainly into software product business having license of such products. The TPO ignored the assessee’s submissions despite the fact that sufficient material taken from the website of this company was placed before him in support of the contention. It can be seen from page 192 of the paper book, being Notes to the balance sheet of Lucid Software Ltd., that this company developed software products in-house. The expenditure so incurred on product development has been duly capitalized by Lucid Software Ltd. These facts amply bring out that Lucid Software Ltd. cannot be considered as comparable. We, therefore, direct the exclusion of this case from the list of comparables. The assessee succeeds.”
Perusal of the findings returned by the TPO/DRP apparently goes to prove that the same are factually incorrect because from the balance sheet of this company available on the file, it is proved that this company is developing software product in-house and the expenditure incurred on product development has been duly capitalized by this company. Whereas TPO has stated that this company does not have any revenue by way of sale of product/licence. So, by respectfully following the findings returned by the coordinate Bench, we hereby direct to exclude this company from the list of comparables for TP adjustment.
(xi) MEGASOFT LIMITED :
This company was not in the accept/reject matrix of search process in the TP study. It has OP/TC for the financial year 2006- 07 at 60.23%. TPO retained this company as a comparable despite objections raised by the assessee on the grounds inter alia that this company is functionally dis-similar being into the sale of software product along with provision of software development services; that the information provided by the company u/s 133(6) of the Act is not reliable nor it is available in the public domain and again relied upon the case of TOLUNA (supra). The coordinate Bench to exclude this company from the list of comparable for comparability with TOLUNA (supra), a similarly situated company as that of the assessee, returned the following findings :-
“31.2. Having heard the rival submissions and perused the relevant material on record, we find from the Director’s report of this company, a copy of which is available on page 193 of the paper book, that the financial results for the year include the business performance of Visual Soft Technologies Ltd. w.e.f. 1st October, 2006 consequent to the amalgamation. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. vs. DCIT [(2013) 154 TTJ (Mum) 176] has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. Since the financial results of Megasoft Ltd. have the impact of the merger of Visual Software Technologies Ltd., w.e.f. 1st October, 2006, obviously, this company cannot be considered as comparable. Accordingly, this company is directed to be excluded. The assessee succeeds.”
This company is apparently not qualified to be kept in the list of comparables on the ground that due to amalgamation, financial results of this company include business performance of Visual Technology Limited amalgamated w.e.f. 01.10.2006 for the detailed reasons recorded by the coordinate Bench, so, by following the aforesaid decision, we hereby direct to exclude this company from the list of comparables.
(xii) PERSISTENT SYSTEM LIMITED :
This company is not in the select list of the assessee in TP study. However, TPO kept this company in the final list of comparable by stating that the taxpayer has not raised any objection for inclusion of this company as comparable. Assessee opposed this company as comparable on the grounds inter alia that this company is into the software product development as well as software services provider and as such, is functionally dis-similar and its data / information is not available in the public domain and relied upon the case of TOLUNA (supra). However, this company has been excluded as comparable by the coordinate Bench in TOLUNA (supra) on ground of merger of the subsidiary company into this company by returning the following findings :-
“33. After considering the rival submissions and perusing the relevant material on record, we hold that this company also cannot be considered as comparable because of merger of another company into it, which fact is evident from page 196 of the paper book. It can be seen that a subsidiary company was merged into this company pursuant to judgment of Hon’ble Bombay High Court w.e.f. 1.4.06. Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds.”
Following the decision rendered by the coordinate Bench in the case of TOLUNA (supra), we hereby direct to exclude this company form the final list of comparable on ground of merger which has impacted the financial result of this company necessary for comparison for transfer pricing adjustment.
(xiii) R SYSTEMS INTERNATIONAL LIMITED (SEGMENTAL)
This company has been selected as a comparable by the TPO having OP/TC for the financial year 2006-07 at 15.07% despite objections raised by the assessee that this company is deriving revenue from both product and software services and as such is functionally dis-similar. However, on the other hand, ld. DR contended that this company is a valid comparable with correct percentage of OP/OC at 15.07% and relied upon the case of TOLUNA (supra).
Coordinate Bench examined the comparability of this company with TOLUNA (supra), a similar situated company as assessee in this case, and retained the same as valid comparable by returning following findings :-
“36.2. We are not agreeable with the contention advanced on behalf of the assessee for the reasons set out by the TPO on this issue at page 126 of his order. It has been mentioned that the provision for doubtful debts/advances was excluded because these were not recurring for the last three years and were also not at consistent level. We fail to appreciate as to how a `Provision for doubtful debts’ can be considered as a part of operating cost unless it is shown that the actual expenditure on account of bad debts was equal to such amount of provision. Nothing of this sort has been proved on behalf of the assessee. As such, we hold that the TPO was justified in excluding the `Provision for doubtful debts/advances’ from total operating cost. This contention raised on behalf of the assessee is repelled. Resultantly, this company is held to be rightly included in the list of comparables with the correct percentage of OP/OC at 15.07%. The assessee fails.”