M/S. VERISIGN SERVICES INDIA PVT. LTD.,BANGALORE vs. DCIT, BANGALORE

The learned counsel for the assessee at the outset submitted that he was pressing only ground nos.4.4, 4.5 and 4.6 out of the grounds raised on the Transfer Pricing issues accordingly, we dismiss ground nos.4.1,4.2,4.3 & 4.7 as not pressed. Ground nos.4.4 & 4.5 are concerned with selection of comparables taken by the lower authorities for bench marking the pricing of the international transactions undertaken by the assessee with its Associated Enterprises (AE) during the relevant previous year. Ground no.4.6 is on the benefit of +/-5% as stipulated u/s 92C(2) of the IT Act. These grounds 4.4 to 4.6 are taken up together for disposal.

Facts apropos are that the assessee a wholly owned subsidiary of M/s LightSurf Technologies India Pvt.Ltd., USA had filed its return for the impugned assessment year on 29-11-2006 declaring an income of Rs.11,61,159/-. Since assessee had international transactions with its Associated Enterprises (AE) the issue of evaluating the pricing of such international transactions was referred to the TPO. The TPO has summarized the business profile of the assessee as under;

Financial results of the assessee for the relevant FY: 2005-06 read as under; Description Amount Operating Revenue Rs.31,19,31,742/- Operating Cost Rs.28,19,42,969/- Operating Profit(PBIT) Rs.2,99,88,773/- Operating Profit to Cost Ratio 10.64%

Its segmental results and operating profit to cost ratio, reported by the learned TPO read as under; Description Software development Marketing support services services Operating Revenue Rs.30,34,90,270/- Rs.84,41,472/- Operating Cost Rs.27,41,62,659/- Rs.76,48,101/- Operating Profit (PBIT) Rs.2,93,27,611/- Rs.7,93,371/- Operating Profit to Cost 10.70% 10.37% Ratio

International transactions with AE reported by the assessee in its audit report were as under; Contract software design & development services Rs.30,34,90,270/- Provision of marketing support services Rs. 84,41,472/- Purchase of fixed assets Rs. 18,05,200/- Recharge of expenses Rs. 2,32,879/- Interest paid/payable on loan from AE Rs. 82,230/-

The TPO found adjustment necessary only with regard to the contract software design and development services segment. Therefore, the issues in this appeal are also confined to this particular segment.

Assessee had selected TNM method in its TP study to justify its profit level and had used prowess and capital data base for selecting 44 comparables. It worked out a mean operating margin of 11% for such comparables without making any adjustment for working capital and 7% after such adjustment. As per the assessee since the average PLI and of the comparables selected by it fell within +/- 5% of its own PLI, there was no necessity for any adjustment towards ALP.

When a proposal on the above lines was made to the assessee, assessee chose to move an application before the DRP. The DRP did not accept any of the contention raised by the assessee before it except for computation of operating margin of Ms/s Megasoft Ltd., On account of this the final addition made by the AO in the assessment came to Rs.2,12,19,994/-.

Now before us learned AR submitted that the additional grounds numbering five have been filed by the assessee. As per the learned AR such additional grounds were for exclusion of M/s Aztec Software Ltd. M/s Geometric Software Ltd (Seg.) Infosys Ltd, M/s Mindtree Consulting Ltd., M/s Persistent System Ltd., M/s Sasken Communication (Seg.) M/s Megasoft Ltd and iGate Global Solutions (Seg.). As per the learned AR out of these M/s Aztec Software Ltd., M/s Accel TRansmatics Ltd (Seg.) and M/s Megasoft Ltd. were a part of assessee’s study, whereas others though were TPO selection, were assailed before lower authorities for exclusion on different criteria on filters. Learned AR also submitted that turnover of the following comparables exceeded Rs.200 Crores, but application of turnover filter was not put before the lower authorities. a. iGate Global Solutions Limited b. Infosys Limited c. Mindtree Limited d. Persistent Systems Limited e. Sasken Communication Limited f. Flextronics Softtware Systems Limited For admitting the additional grounds learned AR placed reliance on the Special Bench decision in the case of DCIT Vs M/s Quark Systems Pvt. Ltd (2010) 42 DTR 0414.

Per contra, learned DR strongly objecting admission of above additional grounds submitted that in case these were admitted, the comparability of the concerned companies had to be referred back to the AO/TPO for verification fresh.

After considering the averments of the counsels with regard to admission of additional grounds, we find force in the contention of the learned AR that by virtue of Special Bench decision in the case of M/s Quark Systems Pvt. Ltd (Supra), assessee can raise additional grounds seeking exclusion of comparables selected by it or not objected by it before the lower authorities. However, the Hon’ble Pubjab & Haryana High Court in (2011) 62 DTR 0182 had upheld the Special Bench decision in the case of M/s Quark Systems Pvt.Ltd., ( Supra) specifically noting that the Special Bench had remitted the issue of comparability of such companies to the AO/TPO for verification afresh. Hence, we are admitting the additional grounds. However, the comparability of the companies assailed in such additional grounds will be dealt by us, considering the judgment of the Hon’ble Punjab & Haryana High Court judgment in the case of CIT Vs M/s Quark Systems India (P) Ltd., (2011) 62 DTR 0182.

Learned counsel for the assessee submitted before us a chart which according to him, summarize the exclusions which were sought by the assessee from the list of comparables selected by the TPO and the decisions of the Co-ordinate Bench wherein similar companies were considered for exclusion, on which he was placing reliance.

Per contra, learned DR after going through the chart filed by the assessee, reiterated his contentions with regard to comparability of companies freshly sought for exclusion by the assessee. As per the learned DR, these had to be remitted back to the AO/TPO.

We have perused the orders and heard the rival contentions and also carefully gone through the chart submitted by the assessee and the decisions relied upon by the assessee. The decision mainly relied on by the assessee for exclusion of various companies listed by it in its chart is that of Co-ordinate Bench in the case of M/s ThoughtWorks Tech.(Ind.) Pvt. Ltd., Vs DCIT in IT(TP)A No.1326(Bang)/2010 dated 30-07-2015. On the strength of this order assessee is seeking exclusion M/s Aztec Software Ltd., M/s Geometric Software Ltd (Seg.) M/s Infosys Ltd., and M/s Kals Info Systems Ltd., M/s Mindtree Consulting Ltd., M/s Persistent Systems Ltd., M/s Saskaen Communications (Seg.) M/s Tata Elxsi Ltd.,(Seg.) M/s Accel Transmatics Ltd (Seg.), M/s Flextronics Software Systems Ltd. (Seg.)

However, out of the very many companies which prima facie have to be excluded on account of the decision of the Co-ordinate Benches in the case of M/s ThoughtWorks Tech.(Ind.) Pvt. Ltd (Supra), 24x7 Customer.com. Pvt. Ltd.,(Supra) and M/s Genesys Integrating System India Pvt.Ltd.,(Supra), we find that M/s Aztec Software Ltd., M/s Accel Tansmatics Ltd.(Seg.) M/s Megasoft Ltd were part of assessee’s own transfer pricing study. Further, vis-à-vis M/s Geometric Software Ltd.(Segment) M/s Mindtree Consulting Ltd., M/s Persistent Systems Ltd., assesee had not raise any objections before either the TPO or DRP against their exclusion. At the same time, we note that vis-à-vis M/s Aztec Software Ltd., and M/s Accel TransmaticsLtd., and M/s Megasoft Ltd., though it formed a part of assessee’s own transfer pricing study, assessee had exclusion either before the TPO and/or the DRP seeking their exclusion citing the application of RPT filter and functional disparity. The DRP had rejected this. Considering all these, and the Co-ordinate Bench decision cited above, we direct exclusion of the following companies. a) M/s Aztec Software Ltd., b) M/s Infosys Ltd., c) Kals Info SystemLtd., d) M/s Sasken Communications(Sg.) e) M/s Tata Elxsi Ltd., f) Accel Transmatics Ltd (Segmental) g)Flextronics Software Systems Ltd.,(Segmental) h) Megasoft Ltd., and i) iGate Global Solutions Ltd.,(Seg.)

Comparability of M/s Geometric Software Ltd. (Segmental) M/s Mindtree Consulting Ltd. and M/s Persistent Systems Ltd., are remitted back to the file of the AO/TPO for consideration afresh in accordance with the judgment of Punjab & Haryana High Court in the case of M/s Quark Systems Ltd., (Supra) since their exclusion was not sought by the assessee before the lower authorities. Ordered accordingly.

Vide its ground no.5 to 8 assessee aggrieved on data link charges of Rs.16,55,375/- being excluded from the export turnover while calculating its deduction u/s 10A of the IT Act, 1961.

We find that by virtue of definition of export turnover given Explanation-2(iv) to Sec.10A of the IT Act, 1961, interpretation sought by the assessee cannot be accepted. However, its alternative contention for exclusion of such amount from the total turnover also, while calculating deduction u/s 10A of the IT Act, 1961 is reasonable in view of the Hon’ble jurisdictional High Court in the case of CIT Vs M/s Tata Elxsi Ltd., (2012)

In the result, the appeal of the assessee is partly allowed for statistical purposes.