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Income Tax Appellate Tribunal, BANGALORE BENCH “ B ”
Before: SHRI VIJAYPAL RAO & SHRI JASON P. BOAZ
Appellant By : Shri Ajith Kumar Jain, C.A. Respondent By : Shri Farhat Hussain Qureshi, CIT (D.R) Date of Hearing : 7.7.2015. Date of Pronouncement : 7.9.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the assessment for Assessment Year 2006-07 passed under Section 143(3) rws 144C of the Act vide order dt.11.10.2010 pursuant to the directions of the Dispute Resolution Panel (‘DRP’) dt.27.9.2010.
The facts of the case, briefly, are as under :- 2.1 The assessee company is engaged in the provision of software development services and ITES to its group companies such as :-
2 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd (i) Back-end Services to support business process in the areas of operations, technology support, finance and banking; and (ii) Software development services. 2.2 For Assessment Year 2006-07, the assessee filed its return of income on 22.11.2006 declaring income of Rs.1,59,98,791. The return of income was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. A reference under Section 92CA of the Act was made by the Assessing Officer to the Transfer Pricing Officer (‘TPO’) in respect of the following international transactions entered into by the assessee with its Associated Enterprises (‘AEs’) in the year under consideration :- Back-end Services (ITES) Rs.1,24,40,30,865 Software Development Services Rs.45,11,75,241 Reimbursement of expenses paid Rs.29,09,92,785 Reimbursement of expenses received. Rs.1,43,58,174 2.3 The TPO passed an order under Section 92CA of the Act dt.28.10.2009 wherein an aggregate T.P. Adjustment of Rs.19,52,63,407 was proposed to arrive at the Arm’s Length Price (‘ALP’) of the international transactions which included an adjustment of Rs.4,16,14,767 to the software development services segment and an adjustment of Rs.15,36,48,640 to the ITES segment. After receipt of the TPO’s order under Section 92CA of the Act, the Assessing Officer passed the draft assessment order incorporating, inter alia, the T.P. Adjustments proposed by the TPO.
3 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 2.4 Aggrieved by the draft order of assessment for Assessment Year 2006-07, the assessee filed its objections thereto before the DRP. The DRP disposed off the assessee's objections vide order dt.27.9.2010. The Assessing Officer in pursuance thereof, passed the final order of assessment under Section 143(3) rws 144C of the Act vide order dt.11.10.2010 wherein the income of the assessee was determined at Rs.21,48,14,798 in view of the following additions / disallowances :- (i) Excess claim of deduction u/s. 10A : Rs.38,00,990. (ii) T.P. Adjustment : Rs.19,50,15,017. 3.1 Aggrieved by the final order of assessment for Assessment Year 2006-07 passed u/s.143(3) rws 144C of the Act vide order dt.11.10.2010; the assessee is in appeal before the Tribunal. The assessee had initially raised detailed grounds running into 43 grounds of appeal at the time of filing of the appeal. Subsequently, the assessee filed concise grounds of appeal consisting of 17 grounds and also raised two additional grounds related to T.P. issues. 3.2 The concise grounds of appeal are as under :-
“ 1. The order passed by the Honourable Dispute Resolution Panel (“DRP”) and the learned Assessing Officer (“AO”) / Transfer Pricing Officer is not in accordance with the law and is contrary to the facts and circumstances of the present case and in any case in violation of the principle of equity and natural justice.
2. The order under section 92CA of the Income tax Act, 1961 (“the Act”) has been passed by the Joint Director of Income Tax (Transfer Pricing – I) (“TPO”) which is without valid jurisdiction and bad in law and therefore liable to be quashed. The Honourable DRP and the learned AO have erred in law and on facts by relying on the said order.
4 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 3. The Honourable DRP and the learned AO/TPO have erred in law and on facts in rejecting, without appropriate reasons, the detailed benchmarking analysis conducted by the Appellant and embarking on a fresh search for comparables.
The Honourable DRP and the learned AO/TPO erred in fact and in law in upholding the arm’s length margin determined by the TPO using data and information obtained at the time of the assessment proceedings, including information obtained under section 133(6) of the Act, which is also not as per the provisions of the Act and was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.
The Honourable DRP and the learned AO/TPO erred in fact and in law in determining the Arm’s Length Price (“ALP”) by adopting the financial data for a single year (i.e. the financial year 2005-06) of the comparables as against multiple year data considered by the Appellant.
The learned TPO and the Honourable DRP have erred in determining the arm’s length margin at 19.96 percent for the software segment and 23.19 percent for the ITES segment based on companies which are not comparable to the Appellant due to various factors such as functional comparability, product led revenues, inadequate financial information, use of unreliable segment financials, extra ordinary events, low employee cost levels, failing of TPO’s own filters, inconsistent approach of the TPO for different comparables etc. and rejecting certain companies comparable to the Appellant based on incorrect reasons.
The learned TPO erred in computing the operating margins of the comparable companies at higher levels and determining the operating margin of the Appellant to be lower than the margin of 10.72 percent actually earned by the Appellant, and the Honourable DRP and the learned AO have erred in upholding the same.
The learned AO/ Honourable DRP have erred in law and in facts in upholding he TPO’s actions of adding recovery of expenditure received by the Appellant from its Associated Enterprises of Rs.1,43,58,174 to the operating revenue and operating expenses of the Appellant for the purpose of determining the arm’s length price of the international transactions of the Appellant.
9. The learned TPO, AO and the Honourable DRP have erred in excluding the foreign exchange fluctuation gain or loss in computing the operating margin of the Appellant and the comparable companies.
5 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 10. The Honourable DRP and the learned AO/TPO erred in law and on facts in upholding the arm’s length margin arrived at by the learned TPO by not considering the lower range of 5 percent from the mean margin as allowed under section 92B(2) of the Act .
11. The Learned AO/ Honourable DRP have erred in upholding the learned TPO’s action of not making a further downward margin adjustment to consider the working capital differences between the Appellant and the comparables companies, based on the working capital adjustment workings which were provided by the Appellant.
12. The Learned AO/ Honourable DRP have erred in upholding the learned TPO’s action of not making a further downward margin adjustment to consider the risk differentials between the Appellant and the comparables companies, thereby rejecting the risk adjustment workings provided by the Appellant.
13. The Honourable DRP and the learned AO/TPO have erred in fact and in law in applying the provisions of transfer pricing to the Appellant without appreciating the fact that the Appellant was entitled to 100 percent deduction of profits under section 10A during the relevant year and therefore there would be not be any motive to shift profits to the other country.
14. The Honourable DRP and the learned AO has erred in law and on facts in concluding that the data communication expenses (being data communication expense and lease line charges of Rs 2,42,07,786) are to be excluded from the export turnover for the purpose of computation of relief under the section 10A of the Act.
15. The Honourable DRP and the learned AO have erred in law and on facts in upholding that the said communication expenses should not be reduced from the total turnover for the purpose of computation of relief under section 10A of the Act even if these are reduced from the export turnover.
The learned AO has erred in facts and on law in computing the interest under section 234C of the Act at a higher amount without appreciating that the said interest is to be computed on the basis of the income returned by the appellant.
17. The Honourable DRP and the learned AO/TPO has erred in law and on facts in levying and wrongly computing interest under section 234B, 234C and 234D of the Act.”
6 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 3.3 The Additional Grounds of appeal raised are as under :- “1. The learned DRP/A.O./TPO have erred in selecting companies (including Spanco Limited (formerly known as Spanco Telesystems & Solutions Ltd.) Allsec Technologies Ltd. (ITES), which are not comparable to the appellant. These companies cannot be retained as comparable, merely because these were initially selected by the appellant in its transfer pricing documentation.
2. The learned DRP/A.O./TPO have erred in not selecting companies (including Genesys International Corp. Ltd.) even though the aid companies qualified as a comparable to the appellant.” Transfer Pricing Issues. 4.0 Before dealing with the grounds of appeal raised, the facts related to the T.P. issues are, briefly, summarized as under :- 4.1 The assessee company is engaged in the provision of services in two segments, namely Information Technology Enabled Services (ITES) and Software Development Services. For the year under consideration, the assessee reported the following international transactions :- Back-end Services (ITES) Rs.1,24,40,30,865 Software Development Services Rs.45,11,75,241 Reimbursement of expenses paid Rs.29,09,92,785 Reimbursement of expenses received. Rs.1,43,58,174 4.2 The segmental results reported by the assessee during the year under consideration are as under :- Description Software development Back end services to services support business processes Operating Revenue Rs.45,11,75,241. Rs.124,58,47,731. Operating Cost Rs.41,01,59,310. Rs.113,25,88,847. Operating Profit (PBIT) Rs.4,10,15,931. Rs.11,32,58,884. Operating Profit to Cost 10.00% 10.00% Ratio
7 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 5. Before proceeding to adjudicate on the concise grounds of appeal raised in respect of T.P. issues at S.Nos.1 to 13. (supra), the learned Authorised Representative in the course of hearings before us submitted that he would only be pressing the ground at S.No.6 which is with regard to the claim for the exclusion of certain comparables from the TPO’s list and inclusion of certain companies in the list of comparables as sought for by the assessee. In this context, the learned Authorised Representative submitted that the concise grounds rasied at S.Nos.1 to 5 and 7 to 13 are not being pressed in this appeal. These grounds are therefore rendered infructuous and are accordingly dismissed. Software Development Service Segment. 6.1 The assessee conducted a T.P. Study for the reported international transactions by separately bench marking the transactions related to the ITES Segment and software development services segment. The assessee adopted Transactional Net Margin Method (‘TNMM’) as the Most Appropriate Method (‘MAM’). The profit level indicator taken was operating profit to operating cost. Based on the study conducted and comparability analysis, the assessee selected a set of 49 companies as comparable to the assessee. The average operating profit margin of these 49 comparables was computed at 12.80%. As the average mean of the comparables was within the 5% range, as compared to the assessee's margin at 10%, the assessee conducted that its international transactions of the software development service segment were at arm’s length. 6.2 The TPO examined the assessee's T.P. Report and rejected the same for the various reasons enumerated in the T.P. order. The TPO then conducted his own search process 8 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd adopting various criteria/filters and finally selected the following 20 companies as the final set of comparables. Sl. Company Name Sales (Rs. OP to Total Cost % No. Crores) 1. Aztec Software Ltd. 128.61 18.09 2. Geometric Software Ltd. (Seg.) 98.59 6.70 3. iGAte Global Solutions Ltd. 527.91 15.61 (Seg) 4. Infosys Ltd. 9028.00 40.38 5. KALS Info Systems Ltd. 1.97 39.75 6. Mindtree Consulting Ltd. 448.79 14.67 7. Persistent Systems Ltd. 209.18 24.67 8. R Systems International Ltd. 79.42 22.20 9. Sasken Communication Ltd. 240.03 13.90 (Seg) 10. Tata Elxsi Ltd. (Seg.) 188.81 27.65 11. Lucid Software Ltd. 1.02 8.92 12. Mediasoft Solutions P Ltd. 1.76 6.29 13. R S Software(India) Ltd. 91.57 15.69 14. SIP Technologies Ltd. (Seg) 6.53 3.06 15. Bodhtree Consulting Ltd. 5.32 15.99 16. Accel Transmatics Ltd. (Seg) 8.02 44.07 17. Synfosys Business Solutions 4.49 10.61 Ltd.
18. Megasoft Ltd. 56.15 52.74 19. Lanco Global Solutions Ltd. 35.63 5.27 20. Flextronics Software Systems 595.12 27.24 Ltd. Average 20.68 6.3 The TPO thereafter proceeded to determine the ALP of the international transactions by applying the arithmetic mean of the final list of comparable companies chosen by him. After allowing working capital adjustment of 0.72% of the TPO computed the ALP of the assessee's international transactions and the proposed T.P. Adjustment thereto as under :-
9 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd Particulars Amount (Rs.) Arm’s Length Mean Margin on cost 20.68% Less : Working Capital Adjustment 0.72% Adjusted Margin 19.96% Operating Cost 41,39,81,454. ALP @ 119.96% of operating cost 49,66,12,153 Price received 45,49,97,386 Shortfall being adjustment u/s.92CA 4,16,14767.
6.4 Based on the above computation, the TPO proposed an adjustment of Rs.4,16,14,767 for the international transactions in the software development services which was incorporated in the assessment order by the Assessing Officer. The assessee filed its objections before the DRP. The DRP rejected the adjustments put forth by the assessee on the issues regarding comparability of the companies selected by the TPO. Aggrieved by the order of the authorities below, the assessee is in appeal before the Tribunal. 6.5 We have heard both parties and perused and carefully considered the orders of the authorities below, the submissions of both the learned Authorised Representative for the assessee and the learned Departmental Representative for revenue, including the judicial decisions cited and placed reliance upon. We now proceed to consider the comparability of the individual companies objected to by the assessee. COMPANIES IN THE TPO’s LIST OF COMPARABLES WHICH ASSESSEE SEEKS EXCLUSION. 7.0 The assessee has put forth submissions for exclusion of the following companies from the TPO’s list of comparables :-
10 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd i) Accel Transmatics Ltd. (Seg.) ii) Infosys Technologies Ltd. iii) KALS Info Systems Ltd. iv) Megasoft Ltd. v) Tata Elxsi Ltd. In support of the assessee's contentions for exclusion of the above comparables, the learned Authorised Representative for the assessee placed reliance on the following decisions :- (i) Ariba Technologies India (P) Ltd – IT(TP)A No.1179/Bang/2010. (ii) CES Pvt. Ltd. – ITA No.1445/Hyd/2010. (iii) NTT Data FA Insurance Systems – IT(TP)A No.1311/Bang/2010. (iv) Yahoo Software Development India Pvt. Ltd. – ITA1129/Bang/2010. (v) Agnity India Technologies Ltd. – (Delhi) 8.1 Accel Transmatics Ltd. The assessee contends that this company is not a pure software development service company but rather it is a product development company and has a different functional profile from the assessee who is providing only software development to its AEs. It is submitted that this company is engaged in business application products in the healthcare and education segments which operate the products ‘Healthspace’ and ‘Prodigy’ respectively for which it received and would continue to receive royalty. It is also submitted that in the period under consideration, this company has ventured into the area of developing animation and gaming software and offers 2D, 3D animation, visual effects and gaming solutions.
11 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 8.2 KALS Infosystems Ltd. The assessee contends that this company is into product development and is a product oriented company. It was submitted that this company deals with a variety of products such as Insure, La Vision and eDMS. Further, the application software segment would include both software development and software product sales for which appropriate segmental information is not available. 8.3 In support of its contention for exclusion of these two companies from the list of comparables, on the grounds that they are functionally different from the assessee in the case on hand who is a provider of software development services to its AEs, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) for Assessment Year 2006-07 dt.19.12.2014. 8.4 Per contra, the learned Departmental Representative supported the orders of the authorities below in including these two companies in the list of comparables to the assessee. 8.5.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited and placed reliance upon. We find that a co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) for Assessment Year 2006-07 has excluded both these companies from the list of comparables from companies in the business of software development services 12 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd since both these companies are functionally different and at paras 11 to 13 of its order, the co-ordinate Bench has held as under :-
“ 11. Improper selection of comparables: It was submitted by the learned counsel for the Assessee that the following 2 companies are not functionally comparable with that of the Assessee. a) KALS Information Systems Limited b) Accel Transmission Limited. In this regard our attention was drawn to the decision of the Hon’ble ITAT Bangalore Bench in the case of Triology E-Business Software India Pvt.Ltd. (supra) wherein these companies were held to be not functionally comparable with that of a pure software developer like the Assessee.
12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): “(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 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 Q 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, No 1386/PN/1O 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. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained 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. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.”
13 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 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.” “(e) Accel Transmatic Ltd.
With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: “In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee’s claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin.” Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the 14 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO.
We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables.”
13. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Triology E- Business Software India Pvt.Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Triiology E-Business Software India Pvt. Ltd.(supra), we direct that KALS Info Systems Ltd. And Accel Transmatic Ltd. be excluded from the list of 20 comparable arrived at by the TPO.” 8.5.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. for Asst. Year 2006-07 (supra), we direct the Assessing Officer / TPO to exclude M/s. Accel Transmatics Ltd. (Seg) and M/s. KALS Infosystems Ltd. from the set of comparables from companies in the software development services segment of the assessee.
Infosys Technologies Ltd. 9.1 The learned Authorised Representative of the assessee contended that this company is a giant company, an industry leader with significant brand value, brand related profits and on site presence and therefore is not comparable to a captive software service provider like the assessee in the case on hand. In view of this, the learned Authorised Representative prayed that this company be excluded from the list of comparable companies. In support of the assessee's contentions, reliance was placed on the decision 15 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd of the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) and the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07. 9.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables to the assessee. 9.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Hyderabad Bench of the ITAT in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07 has excluded this company i.e. Infosys Technologies Ltd., from the list of comparables to companies who are merely providers of software development services and at para 16(1) & 17 thereof has held as under :-
16. W ith ref erence to sof tware se gment, Assessee objections are as under: 1 . I n f o s ys L t d . T he learned counsel f or the assessee s ubmission is to e xclude the said company f rom the list of comparables on the ground that this company is a giant company and is e ngaged in the de ve lopment of niche products. He relied on the decis ion of Hyderabad I T AT in the case of In toto Soft ware P vt. Ltd. in IT A No. 1196/Hyd/2010 (32 T axmann.com 21).
17. we have considered various objection in the light of material placed before us. Various co-ordin ate benches have already considered the above object ions on similarly pla ced sof tware development companies. Accord ingly, these objections o f Assessee are accepted and the T PO directed to exclude the above companies and re work out arith metic mean of PLI.”
16 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 9.3.2 Following the decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07, we hold and direct that this company i.e. Infosys Technologies Ltd. is to be excluded from the set of comparable companies for the software development services segment of the assessee.
Megasoft Ltd. 10.1 The learned Authorised Representative of the assessee submitted that this company is a product development company and is therefore functionally different from the assessee in the case on hand who is purely a provider of software development services to its AEs. It is submitted that this company has three divisions; one of which, is, XIUS Division is completely into product development and has various products such as XIUS WISE, XIUS Voise, XIUS Roaming, XIUS Infinet, etc. customises its own products and only passes on right in the form of licenses. The learned Authorised Representative also submitted that this company fails the Related Party Transaction (‘RPT’) filter of 15% and is a super profit company. In support of the assessee's contentions, that this company, being into products and product development should be excluded from the list of comparables, as it is functionally different from companies into provision of software development services, the learned Authorised Representative placed reliance on the decision of the Hyderabad bench of the ITAT in the case of CES Pvt. Ltd. in for Assessment Year 2006-07.
17 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 10.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparable companies to the assessee in the case on hand. 10.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the Hyderabad bench of the ITAT in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07, has held that this company is not to be considered as comparable to a company merely providing software development services as is the assessee in the case on hand. At paras 16(6) and 17 of its order, the co-ordinate bench of the ITAT, Hyderabad has held as under :- “16…… (6 ) M e g a s o f t L t d . T he learned counsel f or the assessee s ubmission is to e xclude the said company f rom the list of comparables on the ground that this company is a su per prof it making company and diff erence in f unctionality and b usiness model. Fu rther, T PO pla ced a f ilter of simila r year financial endin g i.e., March year endin g. Ho we ver, Megasof t Ltd has a diff erent f inancial year endin g compared to Assessee company i.e., December Year ending and ought n ot to have considered it as a c omparable. He relied on the follo win g c ase la w:
1. 1. Hyderabad IT AT order in the case of Capital IQ Inf ormation Systems (India) Ltd. vide para 15 - 32 T axmann.com 21.
2. Mumbai IT AT order in T eva India P vt. Ltd. Vs. DCIT Mum bai.
3. Dy. CIT Vs. America l E xpres s (India )(P ) Ltd. [2012] 135 IT D 211 (Delhi)(T rib)” “ 17. we have considered various objection in the light of material placed before us. Various co-ordin ate benches have already considered the above object ions on similarly pla ced sof tware development companies. Accord ingly, these objections o f Assessee are accepted and the T PO directed to exclude the above companies and re work out arithmetic mean of PLI.”
18 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 10.3.2 Following the decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that this company, namely, Megasoft Ltd. is to be excluded from the list of comparable companies for software development services segment of the assessee.
11. Tata Elxsi Ltd. 11.1 The learned Authorised Representative of the assessee submitted that this company is a product company and it has several core practices which encompass product design services, industrial design and engineering services for automotive and consumer goods; animation and visual effects including content development and system integration services. It is also submitted that appropriate segmental information is not available in respect of the software development segment which have different segments. In support of the assessee's contention that this company ought not to have been included in the set of comparable companies to the assessee who is a non-provider of software development services to its AEs, the learned Authorised Representative placed reliance on the decision of a co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. in IT(TP)A No.1179/Bang/2010 dt.19.12.2014 for Assessment Year 2006-07. 11.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparable companies to the assessee in the case on hand.
19 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 11.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement cited by the assessee. We find that a co- ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) for Assessment Year 2006-07 has excluded this company i.e. M/s. Tata Elxsi Ltd. from the set of comparable companies which are mere providers of software development services, as is the assessee in the case on hand. At paras 17 and 18 of its order, the co- ordinate bench has held as under :-
17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica Pvt.Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- “14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- “7.7.Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties.
In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd.
20 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable.”
In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO.” 11.3.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that this company, namely, Tata Elxsi Ltd. shall be excluded from the set of comparable companies for the software development segment of the assessee. I.T. Enabled Services (‘ITES’) 12.1 The assessee conducted a T.P. Study for the international transactions by separately bench marking the transactions related to the ITES segment and adopted TNMM as the MAM. Based on the study conducted and the comparability analysis conducted, the assessee selected a set of 11 companies as comparable companies to the assessee. The average of the operating profit margin of these 11 comparables was computed at 12.55%. As the average mean margin of the comparables at 12.55% was within the 5% range, as compared to the assessee's margin at 10%, it was concluded that the international transactions of the ITES segment of the assessee are at arm’s length. 12.2 The TPO examined the T.P. Report submitted by the assessee and rejected the same for various reasons enumerated in the T.P. order. The TPO then conducted his own search process adopting various criteria/filters and finally selected the following 13 companies as the final set of comparables :-
21 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd S.No. Company Name Sales OP to Total (Rs. Cr.) Cost % 1. Maple eSolutions Ltd. 7.43 32.66 2. Allsec Technologies Ltd. 92.25 28.51 3. Datamatics Financial Services Ltd.(Seg) 2.31 24.99 4. Transworks Information Services Ltd. 163.30 19.56 5. Cosmic Global Ltd. (Seg) 3.11 16.03 6. Vishal Information Technologies Ltd. 25.64 48.03 7. Asit C Mehta Financial Services Ltd. 5.68 34.52 (Earlier known as Goldstone Teleservices Ltd.) 8. Goldstone Infratech Ltd. (Seg) (Earlier 5.03 29.01 known as Goldstone Teleservices Ltd.) 9. Spanco Ltd. (Seg.) (Ea4.97rlier known as 82.32 20.86 Spanco Telesystems & Solutions Ltd.) 10. Ace Software Exports Ltd. 4.97 7.72 11. Apex Knowledge Solutions Pvt. Ltd. 4.92 20.48 12. R Systems International Ltd. (Seg.) 9.17 15.11 13. Flextronics Software Systems Ltd. (Seg.) 21.41 14.54 Average Mean Margin 24.00 12.3 The TPO thereafter proceeded to determine the ALP of the international transactions in the ITES segment by applying the arithmetic mean of the final list of comparable companies chosen by him. After allowing working capital adjustment of 0.81% to the assessee, the TPO computed the ALP as under :- Particulars Amount (Rs.) Arm’s Length Mean Margin on cost 24.00 % Less : Working capital adjustment 0.81% Adjusted Margin 23.19% Operating cost 114,31,24,876 ALP 123.91% of operating cost 140,82,15,534 Price received 125,45,66,894 Shortfall being the adjustment u/s.92CA 15,36,48,640 22 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd Based on the above computation, the TPO proposed an adjustment of Rs.15,36,48,640 for the international transactions in the ITES segment which was incorporated by the Assessing Officer in the order of assessment for Assessment Year 2006-07. 12.4 Aggrieved, the assessee filed its objections before the DRP. The DRP rejected the assessee's arguments regarding the comparability of the companies selected by the TPO. In consequence thereof, the Assessing Officer passed the impugned final order of assessment for Assessment Year 2006-07. Aggrieved by the impugned order of assessment, the assessee is in appeal before the Tribunal. 12.5 We have heard both parties and perused and carefully considered the material on record, i.e. the impugned order of assessment, the DRP’s directions, the TPO’s order under Section 92CA of the Act, the submissions of both the learned Departmental Representative for revenue and the learned Authorised Representative for the assessee, including the judicial pronouncements cited and placed reliance upon. We now proceed to consider the comparability of the companies whose exclusion has been objected to by the assessee. COMPANIES INCLUDED BY THE TPO IN THE LIST OF COMPARBALES WHICH THE ASSESSEE WANTS TO BE EXCLUDED. 13.1 The assessee has made submissions seeking the exclusion of the following 6 companies from the TPO’s list of comparable companies from the TPO’s list of comparables.
23 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd i) Maple eSolutions Ltd. ii) Datamatics Financial Services Ltd. iii) Vishal Information Technologies Ltd. iv) Asit C Mehta Financial Services Ltd. v) Goldstone Infratech Ltd. vi) Apex Knowledge Solutions Pvt. Ltd. In support of the assessee’s contentions for excluding the above companies from the list of comparables, the learned Authorised Representative for the assessee placed reliance on the decision of the co-ordinate bench in the case of Ariba Technologies India Pvt. Ltd. (supra) for A.Y. 2006-07. 13.2.1 In the case of Maple e Solutions Ltd., it is submitted that the financial statements of the company are unreliable for comparability purposes, as there have been allegations of financial fraud against the Directors of this company and therefore this company ought to be excluded from the list of comparables to the assessee. 13.2.2 In the case of Datamatics Financial Services Ltd. (Seg.), it was submitted that this company ought to be excluded from the list of comparables to the assessee as it fails the RPT filter as it has RPT of 49% of its income. 13.2.3 in the case of Vishal Information Technologies Ltd., it was submitted that this company is functionally different from the assessee in the case on hand, as it was engaged in e-publishing services. It was also submitted that this company has a different business model as it has outsourced its ITES and therefore cannot be comparable to the assessee.
24 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 13.2.4 In the case of Asit C Mehta Financial Services Ltd., it was submitted that this company has a different business model from the assessee in the case on hand, as it has a very low employee cost of 23.4% as against 46.95% of the assessee. It was also submitted that there were extra-ordinary events in the form of merger of Nucleus Netsoft and GIS with the assessee company in the year under consideration and therefore its margin of 90%, which have significantly diminished in subsequent years, would render it not comparable to the assessee. It was submitted that in view of the above, this company cannot be treated as comparable to the assessee. 13.2.5 In the case of Goldstone Infratech Ltd., it was submitted that this company is functionally different from the assessee in the case on hand as it operates by leasing seats to other companies on hire basis and the income from such leasing activity is recognized as part of its BPO income. It was further submitted that this company i.e. Goldstone Infratech Ltd., had diminishing revenues over the last three years and therefore fails the filter applied by the TPO. In support of the assessee's contentions, for exclusion of the above five companies (supra) from the list of comparables to the assessee, the learned Authorised Representative relied on the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) for Assessment Year 2006-07. 13.3 Per contra, the learned Departmental Representative supported the TPO’s order including the above five companies as comparables to the assessee in the case on hand.
25 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement relied on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) after considering the comparability of the above five companies to companies rendering ITES to its AEs as in the assessee in the case on hand, has excluded them from the list of comparables holding a under at paras 24 and 25 of its order :- “ 24. We have considered the rival submissions. As far as comparable companies chosen by the TPO at S.No.1,3,6,7 & 8 viz., Maple ESolution Ltd., Datamatics Financial Services Ltd., Vishal Information Technological Services Ltd., Asit C.Mehta Financial Services Ltd., and Gold Stone Infratech Ltd., in the list of comparable companies chosen by the TPO, we find that the Hyderbad Bench of the ITAT in the case of HSBC Electronic Data Processing India Ltd. Vs. ACIT, by order darted 28.6.2013 considered comparability of these companies in the case of a company engaged in rendering IT enabled services to its AE similar to that of the Assessee in the present case. The tribunal held that the aforesaid companies are not comparable. The following were the relevant observations of the Tribunal. "8. The first objection is with reference to selection of comparable data by the TPO with reference to the following five companies- (a) Vishal Information Technologies Ltd. (b) Goldstone Infratech Ltd. (c) Datamatic Financial Services Ltd.(seg) (d) Maple e-Solutions Ltd. (e) Nucleus Netsoft & GIS(India) Ltd. (now known as (Asit C. Mehta Financial Services Ltd.) Vishal Information Technologies Ltd.
9. The assessee’s objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee’s case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the out-sourcing cost was at 88.64% of the 26 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Maersk Global Services Centre (India) Pvt. Ltd. (14 ITR(Trib) 541) the Mumbai Bench of the Tribunal has analysed and rejected this company as comparable for the reason that it has outsourced a considerable portion of it’s business and is functionally different. Moreover, it was also submitted that the DRP in the later year of 2008-09 vide its order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technology Ltd.) was not a suitable comparable and needs to be dropped from the final set of comparables. Based on the above submissions, it was submitted that this company cannot be used as a comparable and has to be excluded. 9.1. The learned Departmental Representative, however relied on the orders of the TPO. 9.2. After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee’s own case in the later year, as can be seen from the copy of the order placed on record, for assessment year 2008-09. In view of this, we direct the Assessing Officer to exclude this company from the list of comparables. Goldstone Infratech Ltd 10. The assessee’s objection for inclusion of this comparable is on the basis of the filter on foreign exchange earnings, diminishing revenue filter and functionality, being run on lease basis. It was submitted that this company was rejected in the case of Stream International Services Pvt. Ltd. V/s. ADIT(International Taxation) by the 27 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd Mumbai Bench of the Tribunal, vide its order dated 11.1.2013 in for assessment year 2006-07. 10.1. After considering the rival contentions, we are of the opinion that the business model of the above company is different from that of the assessee. In this case, the foreign exchange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. This issue was considered by the coordinate Bench (Mumbai Bench) of the Tribunal in the case of Stream International Services Ltd.(supra) wherein it was considered as under- “14. The inclusion of second case objected to by the Id. AR is that of Goldstone Infratech Limited (Seg) (earlier known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of ‘Companies with export revenues more than 25% of the revenues’. Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at Rs. 30.89 crore from three segments, viz., Telecommunication at Rs. 13.63 crore, BPO at Rs. 5.02 crore and Insulator at Rs. 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 of the paper book. Schedule forming part of the annual accounts of Goldstone Teleservices Limited divulges earnings in foreign currency at Rs. 4.24 lakh. Such detail is available at page 239 of the paper book. When we compare earning in foreign currency at Rs. 4.24 lakh with the earnings of BPO at Rs. 5.02 crore or for that purpose of the entity as a whole at Rs. 30.89 crore, it becomes manifest that this case does not pass through the filter adopted by the TPO, being, the ‘companies whose export revenues are more than 25% of the revenues’. Therefore, we are of the opinion, that this company cannot be considered as a comparable for the purpose of determining the ALP in this case. We direct the same to be excluded. Datamatic Financial Services Ltd.
The assessee’s objection to inclusion of this comparable is on the basis of Related Party Transactions filter. It was submitted that RPT exceeds 25% of the sales and therefore, to be excluded. The assessee relied on the decision of the coordinate Bench of the Tribunal (Mumbai Bench) in the case of Stream International Services (supra), wherein, wherein with reference to this comparable company, it was held as under :
28 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd “11. The first is M/s. Datamatics Financial Services Limited. It can be observed that the TPO applied filter of “Companies with less than 25% related party transactions”. The learned Counsel for the assessee took us through the Annual accounts of Datamatics Financial Services Limited, and submitted that the gross income of this company for the year ending on 31.03.2006 was at Rs. 2.31 crore as against total expenses of Rs. 1.84 crore. Referring to pages 319 and 320 of the paper book, our attention was drawn towards Annexure-2 to demonstrate that the “Transactions with the Associated Parties within the meaning of section 92A and 92B of the Income-tax Act, 1961” showed one major transaction with Datamatics Limited towards ‘Reimbursement of expenses’ at Rs. 99.14 lakh. The learned AR contended that the transactions of Datamatics Financial Services Limited with other AEs amounted to Rs. 14.31 lakh making total of transactions with the AEs at Rs. 1.13 crore. It was submitted that the percentage of transaction with related parties is much more than 25%, being, the filter adopted by the TPO himself and hence the same should be excluded.
12. In the opposition, the learned Departmental Representative contended that the major transaction of Rs. 99.14 lakh of Datamatics Financial Services Limited with Datamatics Limited was towards ‘Reimbursement of expenses’. Since the reimbursement of expenses does not include any profit element, the Id. DR urged that the same be excluded. He stated that once this transaction is excluded, the other transaction of Rs. 14.31 lakh are less than 25% of the total transaction with related parties.
13. We do not find any force in the contention advanced by the learned Departmental Representative for the exclusion of transactions with Datamatics Limited towards ‘Reimbursement of expenses’ from the overall transactions entered into by Datamatics Financial Services Ltd. with its AEs. Section 92F(v) defines ‘transaction’ in the context of transfer pricing provisions to include an arrangement, understanding or action in concert whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceeding. There is no reference to any transaction having necessarily including profit element or mark-up so as to fall within the definition of ‘transaction’ under Chapter X of the Income-tax Act. Since the TPO applied filter of having companies with less than 25% related party transactions, it is not open to argue that the transactions of reimbursement of expenses duly reported by Datamatics Financial Services Limited as an ‘international transaction’ within the meaning of section 92B should be ignored simply because they represent reimbursement of expenses. If the contention of the Id. DR that the 29 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd reimbursement of expenses not involving profit element should not be construed as a transaction, is taken to a logical conclusion, it would mean that all such dealings will cease to be transactions for the purposes of Chapter-X of the Act. Once these dealings are not considered as ‘transactions’, these will also cease to be international transactions, going out of the purview of section 92 itself. Obviously, such a view point is contrary to the clear intention and the language of the relevant provisions. A pure reimbursement of expenses by one AE to another AE is very much a ‘transaction’ as per section 92F(v) and consequently is equally an international transaction as per section 92B requiring consideration as per section 92 of the Act. Be that as it may, the learned Departmental Representative could not demonstrate the fact that such reimbursement of expenses was without any markup. As the so called comparable case of Datamatics Financial Services Limited was included by the TPO in the final list of comparables, in our considered opinion, the same is liable to be excluded as it involves related party transactions at much higher level, as against the filter adopted by the TPO himself, being companies with less than 25% related party transactions. We order accordingly.” In view of the above, since this company fails in this filter adopted by the TPO, we direct the TPO to exclude this company from the list of comparables adopted. Maple e-Solutions Ltd.
The objection of the assessee with reference to this company is with regard to the financials of the company, on the ground of unreliability of data. It was submitted that selection of this company was rejected in the case of CRM Services India Pvt. Ltd in and also in the case of Stream International Services (supra). Further, the assessee also relied on the DRP order in assessment year 2007-08, with reference to the above company. 12.1. We have considered the rival sub missions. We agree with the objections of the assessee. In the case of Stream International Services P. Ltd. (supra), it is held with reference to this company as under : “18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed — one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal — that the case of Maple eSolutions Limited has been directed to be excluded from the list of comparables. As the assessment year under consideration is 2006-2007 and the Delhi Bench of the Tribunal has also considered the same assessment year while directing the exclusion of the case of Maple e Solutions Limited from the list of comparables, we are unable to accept the contention of the Id. DR in this 30 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd regard. It is more so because no contrary view has been brought by the Ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from the final list of comparables." Since the DRP in assessee’s own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee’s objection in this regard and direct the Assessing Officer to exclude this company from the comparables adopted. Nucleus Netsoft & GIS(India) Ltd.
The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discussed above. It was submitted that this company is functionally different and fails under the employee cost filter. It was further submitted that there is a scheme of amalgamation of earlier company by the orders of the Hon’ble High Court of Judicature of Bombay, on 22.2.2006 and in view of amalgamation, the financials have changed and the business model also changed. Referring to the annual report placed on record, it was submitted that as against Rs.24.02 lakhs of employee costs for the year ending 31st March, 2005, the employee cost has increased to Rs.132.59 lakhs. Further, the data processing charges is also to the extent of Rs.1.04 crores, which indicates that the assessee is outsourcing the work. Accordingly, it cannot be selected as a comparable. Due to amalgamation during the year, the assessee’s business model has changed and because of employee cost filter also, this comparable has to be excluded. 13.1 After considering the rival submissions, we are of the opinion that this company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company.
14. In view of the foregoing discussion, we agree with the assessee’s objection that the above five comparables should be excluded.
The facts and circumstances and the Assessment year for which the aforesaid companies were not considered as comparable are identical to the case decided by the Hyderbad Bench of ITAT and that of the case of the Assessee. Respectfully following the decision of the Hyderbad Bench of ITAT, we direct the TPO to exclude the aforesaid companies from the list of comparable while arriving at the arithmetic mean of comparable. The relevant grounds of appeal of the Assessee are allowed.”
31 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd 13.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that the following five companies be excluded from the set of comparable companies for the ITES segment of the assessee :- i) Maple eSolutions Ltd. ii) Datamatics Financial Services Ltd. iii) Vishal Information Technologies Ltd. iv) Asit C Mehta Financial Services Ltd. v) Goldstone Infratech Ltd. It is accordingly ordered.
Apex Knowledge Solutions Pvt. Ltd. 14.1 The assessee submitted that this company being engaged in electronic publishing services and GIS including data conversion, data entry imaging, etc. is functionally different from an ITES provider, as is the assessee in the case on hand, and therefore prayed that this company be excluded from the list of comparables. In support of this proposition, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra). 14.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including the company in the list of comparables to the assessee in the case on hand. 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decision cited and relied upon by the assessee. We find that 32 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) has considered the comparability of this company, namely, Apex Knowledge Solution Pvt. Ltd. in the ITES Segment and held that it is not functionally comparable to ITES provider as it provides services such as e-publishing knowledge based services, etc. At paras 26 & 27 of its order, the co-ordinate bench has held as under :- “ 26. The learned counsel further submitted that the comparable company chosen by the TPO viz., Apex Knowledge Solution Pvt.Ltd., should be excluded from the list of comparable companies chosen by the TPO. In this regard our attention was drawn to the decision of the ITAT Bangalore Bench in the case of Google India Pvt.Ltd. Vs. DCIT (AY 06-07) order dated 19.10.2012.
We have considered the submission of the learned counsel for the Assessee. We find that in the case of Google India Pvt.Ltd. (supra), this tribunal in the case of TP adjustment in IT enabled services segment of an Assessee for AY 06-07 considered the comparability of the company M/s.Apex Knowledge Solution Pvt.Ltd. in the IT Enabled Services segment. The tribunal in para-16 of its order held that the said company is not functional comparable as it provides services such as E-publishing knowledge based services etc. In view of the above, we direct the TPO to exclude the aforesaid company also from the final list of comparable companies for the purpose of determining the ALP.”
14.3.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra), for Assessment Year 2006-07, we hold and direct that this company, namely, Apex Knowledge Solutions Pvt. Ltd. be excluded from the list of comparables for the ITES segment of the assessee in the case on hand. Additional Grounds of Appeal
15. In the course of proceedings before us, the assessee had raised additional grounds regarding the comparability of the following companies :-
33 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd (i) That the TPO had erred in selecting the following two companies as comparable to the assessee. (a) Spanco Telesystems & Solutions Ltd. (b) Allsec Technologies Ltd. (ii) That the TPO had erred in not selecting Genisys International Corp. Ltd. as a comparable to the assessee. 16.0 Ground No.1 : Spanco Telesystems & Solutions Ltd.(‘Spanco’) & Allsec Technologies Ltd. 16.1 It is the submission of the assessee that the TPO has selected/retained the two companies, namely, Spanco Telesystems & Solutions Ltd.(‘Spanco’) & Allsec Technologies Ltd., as comparable companies to the assessee only because they were selected as comparables by the assessee itself. It was submitted by the learned Authorised Representative of the assessee that at the time of the T.P. Study, based on the details available in the public domain, the assessee had selected these two companies as comparables. However, it subsequently came to light that various Tribunals have held that these two companies are not comparables for companies in the ITES sector and therefore had raised additional grounds in this regard. In support of the assessee's contention that these two companies are to be excluded from being adopted as comparables to companies in the ITES sector in the year under consideration, the learned Authorised Representative placed reliance on the decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07 wherein ‘Spanco’ was excluded from 34 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd the list of comparables on the ground that it had acquired Intelenet BPO Services Ltd. in Nov., 2005 and was also a super profit making company, and Allsec Technologies Ltd. was excluded on grounds of having super normal profits and for entering into new areas of business. 16.2 Per contra, the learned Departmental Representative supported the TPO’s order in including these two companies in the list of comparables to the assessee in the case on hand. 16.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement cited by the assessee. We find that the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. (supra) has excluded these two companies from the set of comparables for the ITES segments holding as under at paras 14(4), 14(6) and 15 of its order :-
“ 14……… 4 . S p a n c o L t d . T he learned counsel f or the assessee s ubmission is to e xclude the said company f rom the list of comparables on the ground that this company acquired Intelenet BPO Services P vt. Ltd. in No v. 2005 and also a super normal prof it making comp any. He re lied on th e f ollowing case la w:
1. 1. Bangalo re IT AT order in the case o f Google India P vt. Ltd. vide 1368/Bang/20 10 where this company is rejected as comparable to IT ES.
2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 11 and 15.
3. Mumbai IT AT order in T eva India P vt. Ltd. Vs. DCIT Mum bai.” “ 14……………. 6 . Al l s e c T e c h n o l o g i e s L t d .
35 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd T he learned counsel f or the assessee s ubmission is to e xclude the said company from the list of comparables on the ground that this company is ha vin g super no rmal prof its. Further it has been experiencin g extra ordinary e vents. During the F Y 2005-06, this company had gone for a IPO during t he relevant previous year and also the company h ad entered into a s hare purchase agreement with shareholder of B2K Corporation P vt. Ltd., which is enga ged in the business of inbound and outbound voice, email chat services and information technology se rvices. He relied on the f ollowin g case la w:
1. 1. Bangalo re IT AT order in the case o f Google India P vt. Ltd. vide 1368/Bang/20 10 where th is co mpany is rejected as comparable to IT ES.
2. Hyderabad IT AT order in the case of Capital IQ Inf ormation Systems (India) Ltd. vide Para 11 and 15.
3. Mumbai IT AT order in T eva India P vt. Ltd. Vs. DCIT Mum bai.” “ 15. W e have considered the above objections and as coordinate benches have already decided that these companies are not to be selected on various reasons, we uphold the objections of Assessee and direct the T PO/AO to work out the arithmetic mean of PLI on the balance of companies. Grounds raised by Assessee on this issue are allo wed.”
16.3.2 Following the aforesaid decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. for Assessment Year 2006-07 (supra), for the factual reasons cited therein and also brought before us, we hold and direct that these two companies namely, Spanco and Allsec Technologies Ltd. are to be excluded from the set of comparable companies for the ITES segment of the assessee.
Ground No.2 : Genisys International Corp. Ltd. 17.1 In the Ground at S.no.2 of the additional grounds of appeal
, the assessee has submitted that this company; namely, Genisys International Corp. Ltd., should be included as a comparable. From the details before us, we find that the assessee has failed to 36 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd adduce any evidence to support its claim. Evidently, this company was neither selected as a comparable company in the set of 49 comparables chosen by the assessee nor those chosen by the TPO. Therefore, this company did not come to be selected in the search process of either the TPO or the assessee. That being the case, we find that the assessee has not brought on record any factual evidence to establish its claim that this company satisfies all the conditions and filters for comparability. In this view of the matter, the contentions of the assessee for inclusion of this company as a comparable are not acceptable and we, therefore, dismiss this ground raised by the assessee.
18. Ground Nos. 14 & 15 : Computation/Deduction u/s. 10A of the Act. 18.1 In Ground No.14, the assessee challenges the action of the authorities below (i.e. the Assessing Officer and the DRP) in excluding expenses incurred in foreign currency towards data communication and lease line charges from export turnover while computing the deduction under Section 10A of the Act. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover, while computing the deduction under Section 10A of the Act, the assessee in Ground No.15 has also made an alternate plea that the expenses that are reduced from export turnover should also be reduced from total turnover, placing reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT V Tata Elxsi Ltd. (2012) 349 ITR 98 (Kar). 18.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra), we 37 IT (T.P) A No.1423/Bang/2010 Goldman Sachs Services Pvt Ltd are of the view that it would be just and appropriate to direct the Assessing Officer that data communication charges and lease line charges incurred in foreign currency are to be excluded from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act, as has been prayed by the assessee in its alternate plea at Ground raised at No.15. In view of the acceptance of the alternate plea of the assessee, we are of the view that no adjudication is called for on Ground No.14 as to whether the aforesaid expenditure are required to be excluded from export turnover.
19. Grounds at S.Nos.16 & 17 are regarding the assessee denying its liability for the charging of interest under Sections 234B, 234C and 234D of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B, 234C and 234D of the Act, if any, while giving effect to this order.
20. In the result, the assessee's appeal for Assessment Year 2006-07 is partly allowed. Order pronounced in the open court on 7th Sept., 2015.