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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI C.N. PRASAD
आदेश / O R D E R PER C.N. PRASAD, JM:
This appeal is filed by the assessee challenging the order of the DRP-II, Mumbai dated 25.11.2013 in sustaining the adjustment of Rs. 1,84,22,714/- made in respect of International transactions of the assessee with its AE in providing fees for software development and related services.
Brief facts are that assessee is engaged in providing software development services and related services to its AE. The assessee used TNMM to Bench mark the international transactions and arrived at margin of 14.5%. The TPO rejected the search methodology adopted by the assessee and proceeded with fresh study on comparables and selected final set of 23 comparables and arrived at arithmetic mean of 29.77% of these comparables and it resulted in TP adjustment of Rs. 2,93,92,757/-. The DRP directed the TPO to exclude 15 comparables and include one comparable i.e. Synetarios Technologies Ltd. based on functionality. The DRP further directed to adopt margin of Acropetal Technologies Ltd at 21.30% as against 39.06%. The average margin of comparables after DRP’s direction stood at 24.09% and the Transfer pricing adjustment came down to Rs. 1,84,22,714/- and the final set of DRP comparables are as under:
S. No. Name of the company OP/TC 1. Accel Transmatic Ltd (Segment) 18.33% 2. LGS Global Ltd. 18.05% 3. Mindtree Ltd (Seg) 5.52% 4. Persistent Systems Ltd. 38.12% 5. R.S. Software (India) Ltd. 10.09% 6. Thirdware Solutions Ltd 37.32% 7. KALS Information Systems Ltd 41.91% 8. Acropetal Technologies Ltd(Seg) 21.30% 9. Synetarios Technologies Ltd 26.17% Arithmetic Mean 24.09%
The Ld. Counsel for the assessee submits before us that the comparables listed at 4, 6 & 7 viz., Persistent Systems Ltd., Thirdware Solutions Ltd and KALS Information Systems Ltd should be excluded the same said companies were excluded and have not considered them as comparables in many decisions. The Ld. Counsel for the assessee submitted the following as to why the comparables in Sl. Nos. 4, 6 & 7 of the final set of comparables should be excluded from comparables.
1. Persistent Systems Ltd The company has derived revenues from provision of software services as well as products. However, no segmental details are available in the financials.
Nature of operation: The company is engaged in providing ‘Outsourced product Development Services’ to independent software vendors and enterprises and offers complete product life cycle services from end to end The company also derives revenues from royalty and licensing of products which is categorized under software development services.
The company developed many products for various industries like tyre manufacturers, pharmaceuticals, telecom etc. For tyre manufacturers – a product which help them in taking measurement readings, etc. For drug manufacturers – a product for tracking chemical samples. For telecom sector – product like BOSS, NOSS and OA.
The DRP Panel has excluded two comparables namely – Celestial Labs Ltd and Zenith Infotech Ltd as these were engaged in development of products. Further, the Revenue is not into appeal. Therefore, on the same lines, ‘Persistent’ which is also a Software Product company cannot be accepted as a comparable.
The Ld. Counsel for the assessee submits that in the case of CIT Vs Intoto Software India Pvt. Ltd. – (AP HC), Persistent Systems Ltd., was rejected as comparable on account of the fact that no segmental information is available. The Ld. Counsel for the assessee further submits that Persistent Systems Ltd., has been rejected on the reason that this company has revenues from software services as well as products and no segmental details are available and therefore was not considered as comparables in the following decisions:
1. Lionbridge Technologies Pvt. Ltd Vs ITO – – A.Y. 2010-11 dt. 18.11.2015
2. NXP Semi Conductors India Pvt. Ltd. Vs DCIT – A.Y. 2009-10 dt. 22.7.2015
3. Planet Online Pvt. Ltd. Vs ACIT – – A.Y. 2009-10 dt. 13.1.2015
Revenue from operations includes income from software services, sale of licenses, subscription fees and exports from tax holiday units.
Though segmental details of revenues from software development services are available, no bifurcation of expenditure is available in the financial statements. Further, no bifurcation is available as to whether the revenue from exports pertains to software services, products or licenses.
The operations of the company comprise of software development, implementation and support services. The DRP Panel has excluded one comparables namely –Aditya Birla Minaces IT Services Labs Ltd, as it was not only engaged in development of products but also earn license fees on sale of products. Further, the Revenue is not into appeal. Therefore, on the same lines, Thirdware which is also into development of products and sale of licenses, cannot be accepted as a comparable.
The Ld. Counsel for the assessee submits that for very same Assessment Year in the following decisions Thirdware Solutions Ltd has been rejected on the reason that this company has revenues from software services, sale of licences and is also into product development and has inadequate segmental details.
1. Planet Online Pvt. Ltd. Vs ACIT – – A.Y. 2009-10 dt. 13.1.2015
2. Approva Systems Pvt. Ltd Vs CIT – & 1803/PN/2013 – Assessment Year 2009-10 dated 13.1.2015 The company primarily derives its revenues from software services and software products. The company is engaged in development of software and software products since its inception.
There are only two segmental namely (1) Application Software (2) Training. The TPO has chosen application software segment as comparable to the appellant. There is no further break of revenue from software products and services in application software segment.
The company develops variety of software products like shine ERP, Docuflo, La Vision, etc. and is an established Software Developer.
The DRP Panel has excluded two comparables namely – Celestial Labs Ltd and Zenith Infotech Ltd as these were engaged in development of products. Further, the Revenue is not into appeal. Therefore, on the sake lines, Kals which is also a Software Product company cannot be accepted as a comparable.
6. The Ld. Counsel for the assessee submits that M/s. KALS Information System Ltd has been rejected in the following case for the reason that no segmental information is available, therefore should not be considered as comparable.
CIT Vs Intoto Software India Pvt. Ltd. – (AP HC)
2. ITO Vs Prana Studios Pvt. Ltd – A.Y. 2009-10
3. Lionbridge Technologies Pvt. Ltd Vs ITO–ITA No. 668/M/2014 – A.Y. 2010-11 dt. 18.11.2015
4. NXP Semi Conductors India Pvt. Ltd. Vs DCIT – A.Y. 2009-10 dt. 22.7.2015
5. Planet Online Pvt. Ltd. Vs ACIT – – A.Y. 2009-10 dt. 13.1.2015
Approva Systems Pvt. Ltd Vs CIT – & 1803/PN/2013 – Assessment Year 2009-10 dated 13.1.2015 Therefore the Ld. Counsel for the assessee strongly submits that these comparables in Sl. Nos. 4, 6 & 7 should be excluded.
The Ld. Departmental Representative submits that in so far as Persistent Systems Ltd., and Thirdware Solutions Ltd., are concerned, the assessee has not raised any objection before the lower authorities and these companies were accepted as comparables by the assessee. The Ld. Departmental Representative submitted that assessee has not even raised an additional ground before the Tribunal contending that these comparables should be excluded. In so far as KALS Information Systems Ltd is concerned, the Ld. Departmental Representative submits that the DRP has considered the objections of the assessee in para 9.5 of its order and has rightly rejected the objections of the assessee and the assessee has not uprooted/dislodged the findings of the DRP in respect of this comparable. In reply, the Ld. Counsel for the assessee submits that additional ground has been filed in so far as Item No. 4 & 6 are concerned and in respect of KALS Information Systems, he submits that this company is a product company therefore should be excluded.
We have heard the rival contentions, perused the orders of the authorities below and the decisions relied on. The only dispute before us is the exclusion of comparables in Sl. Nos. 4, 6 & 7. The assessee submits that the comparables referred to in Sl. No. 4,6 & 7 have to be excluded for the reason that either there are no segmental information available or there are revenues from software products, software services and also running training centers of professionals etc. Therefore, it was the contention that these companies are functionally dissimilar as that of the assessee company, therefore they should be rejected as comparables.
In the case of CIT Vs Intoto Software India Pvt. Ltd. in it was held as under:
“Having heard both the parties and having gone through the material on record, we find that the TPO at page-37 of his order has brought out the differences between the product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available”.
In view of the aforesaid fact finding of the learned Tribunal, this Court cannot re-appreciate the same.
Accordingly, the appeal is dismissed. Miscellaneous petitions pending, if any, shall stand closed. No order as to costs”.
In the case of ITO Vs Prana Studios Pvt. Ltd. – – A.Y. 209-10 it was held as under:
“We have heard the rival submissions and also perused the relevant finding of the TPO as well as the order of the DRP on this score. The assessee is a captive service provider, providing purely software services in the context of 3D animation to it’s AE. The sole dispute before us is, whether Kals Information System Ltd. should be taken as a comparable or not for the purpose of comparability analysis and bench making of the margin. From the perusal of the objections filed by the assessee before the DRP, as well as annual report of Kals, it is seen that the said company is engaged into development of software and software products and also running a training centre for training of software professionals. The said company offers variety of software products in the area of web solutions, e- commerce, software consultants, content management ERP applications etc. It's functional profile is quite different from the assessee company, which is purely providing software services in the field of 3D animation. Thus, it cannot be held to be a comparable company for the purpose of bench marking the assessee's margin or caring out any comparability analysis. The ITAT Pune Bench in the case of PTC Software (India) (P.) Ltd. (supra), has held that the Kals, which is engaged in the sale of software products cannot be held to be a comparable case with the companies providing software services. Similarly, in view of series of other decisions of the Tribunal as noted by the DRP, Kals cannot be held to be comparable company for bench marking with the companies providing software services. Thus, the order of the DRP as noted above is upheld. Accordingly, the ground raised by the Revenue is dismissed.”
11. In the case of Lionbridge Technologies Pvt. Ltd. vs. ITO - - AY 2010-11, it was held as under:
“79. In this regard, it is seen that the audited financials of KALS for AY 2010-11 are at APB 271 - 298. At APB 291, is Schedule no. 14, i.e., "Notes to the Financial Statements". In para-1 thereof it is stated as follows: ---------------------------- 80. This clearly shows that KALS is into development of software and software products.
The segmental information of KALS is available at APB- 293, as follows: --------------------------------- ------------------------------------ 82. From the above, it is evident that segmental information of KALS regarding its software development segment is not available. Therefore, comparison of the assessee, who is into software development only, with the software development segment of KALS is not possible. Therefore, finding the functionality of KALS incomparable with the assessee, we reject this company as a comparable. We hold that the DRP has erred in confirming the TPO’s action including KALS as a comparable”
In the case of NXP Semi-Conductors India Private Ltd vs. DCIT - - AY 2009-10, it was held as under:
9. KALS Information Systems Ltd. 9·1 . …………………….. 9.2 . …………………………… 9·3······················ 9.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co- ordinate bench of the Tribunal in the case of M/s. Cisco Systems Services BE., India Branch (supra), for Assessment Year 2009-10 has excluded this company as a comparable, observing that it was developing software products and was not comparable to a purely software service provider and at para 20 thereof it was held as under :-
20 . ……………………………. 26.1 .......................................... 26.2 ..... ……………………………… 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal: "(d) KALS Information Systems Ltd.
46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs. 45,93,351/-. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. ………………………..
47. We have given a careful consideration to the submission made on behalf of Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable." 9.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra) for Assessment Year 2009-10, we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider.
In the case of Planet Online Pvt. Ltd. vs. ACIT - - AY 2009-10.
10. We have considered . ………………………….. 10.1 As far as comparables at SI. Nos. 1 to 5 are concerned, the issues are more or less covered by decisions of the coordinate benches for the self-same AY i.e. 2009-10. In of M/s CISCO systems (India) Pvt. Ltd. Vs. DClT, IT(TP) No. 130/Bang/14 dated 14/08/14, the coordinate bench after examining in detail, excluded Bodhtree consulting Ltd., Infosys Ltd., Kals Information Systems and Tata Elxsi Ltd. (Seg.) The relevant observations of the ITAT, Bangalore Bench in respect to each of the aforesaid companies are reproduced hereunder for the sake of clarity: …………………… ………………….. 26·3············· (d) KALS Information Systems Ltd.
As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs. 45,93,351/-. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITATin the case of Bindview India Private Limited Vs. DCI, No 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: ………………………… …………………………..
We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice U/S.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable. …………………………. ……………………………. 10.2 ITAT, Hyderabad Bench following the aforesaid decision of the ITAT, Bangalore Bench also excluded these four companies in case of M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT in ITA No. 243/Hyd/2014 dt. 14/11/2014. Respectfully following the decisions of the ITAT, we direct AO/TPO to exclude these four companies.”
In the case of Approva Systems Private Ltd vs. CIT - ITA No. 1788 & 1803/PN/2013 -AY 2009-10, it was held as under:
“18. So far as the grounds raised by the revenue are concerned, we find the same relates to exclusion of Kals Information System Ltd. from the list of comparable companies by the Ld.CIT(A).
19. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. We find the Pune Bench of the Tribunal in the case of Bindview India (P) Ltd. (supra) for A.Y. 2006-07 has held that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. Similarly, the Pune Bench of the tribunal in the case of Bitwise Solutions (P.) Ltd. v. Asstt. CIT [2014J 66 SOT 22/49 taxmann.com 532 has also held that Information System Ltd., cannot be considered as comparable. Similar view has been taken by the various other Benches of the Tribunal, the details of which are given above below: ………………………… ……………………… 19.1 Since the Ld.CIT(A) following the decision of the Pune Bench of the Tribunal has rejected Kals information System Ltd. holding the same to be functionally different, therefore, in absence of any contrary material brought to our notice, we find no infirmity in the order of the CIT(A). Accordingly, the same is upheld and the grounds raised by the Revenue are accordingly dismissed”.
15. Therefore, as it could be seen from the decisions referred above, KALS Information Systems Ltd. has not been considered as comparable for the reason that there are no segmental results and also this company should be excluded as comparable, since it was developing software products and was not comparable to be a purely software services provided like assessee. It was also one of the reason for not considering KALS Information Systems Ltd., as comparables is that this company is engaged in providing training therefore this company is functionally different from the assessee. Therefore, in view of various judicial pronouncement referred to above, we direct the TPO to exclude KALS Information System Ltd., and not to consider as a comparable company. In respect of the companies mentioned in S. Nos. 4 & 6 i.e. Persistent Systems Ltd., and Thirdware Systems Ltd., we find it appropriate to restore the issue to the file of the TPO who shall consider the contentions of the assessee and pass necessary order since the assessee has not contended before the lower authorities that these two companies are functionally different and should be excluded from comparables. Thus, we restore the issue of considering as to whether these two comparables should be excluded or not for the purpose of arriving at the adjustment, to the file of the TPO who shall decide in accordance with law after considering the submissions and various decisions relied on by the assessee and after providing adequate opportunity of being heard.
In the result, the appeal filed by the assessee is partly allowed for statistical purpose.