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Income Tax Appellate Tribunal, BANGALORE BENCH “ C ”
Before: SMT. P. MADHAVI DEVI & SHRI JASON P. BOAZ
Appellant By : Shri Nageshwar Rao, Advocate. Respondent By : Smt. Jahanzeb Akhtar, CIT-III, Bangalore. Date of Hearing : 22.6.2015. Date of Pronouncement : 22.7.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.20.10.2014 for Assessment Year is 2009-10.
The facts of the case, briefly, are as under :- 2.1 The assessee is engaged in the business of development of software and indenting sale of application embedded business and industrial software. The assessee company, formerly known as Phillips Semi-conductors India Pvt. Ltd. was incorporated on 18.7.2006 as a 100% EOU set up under the STPI Scheme; is a private limited company registered in India and is a subsidiary of NXP BV, a Netherlands company. For Asst. Year 2009-10, the 2 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 assessee filed its return of income on 30.9.2009 declaring income of Rs.47,88,62,424 under the normal provision of the Act and taxable income of Rs.16,80,79,423 under MAT provisions. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny. 2.2 In the period under consideration, the assessee had reported the following international transactions :- Provision of Software Development Services Rs.258,21,78,120. Provision of Order Gathering Services. Rs.14,34,45,438 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer (‘TPO’) for determining the Arm’s Length Price (‘ALP’) of these international transactions, after obtaining necessary approval from the CIT-III, Bangalore. The TPO vide order under Section 92CA of the Act dt.11.1.2013 proposed a T.P. Adjustment of Rs.28,11,31,440 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment under Section 143(3) r.w.s. 144C of the Act dt.14.3.2013 which was sent to the assessee; to which the assessee submitted that it would not be filing its objections thereto before the Dispute Resolution Panel. In this view of the matter, the Assessing Officer concluded the final order of assessment under Section 143(3) rws 144C of the Act vide order dt.30.4.2013 determining the assessable income of the assessee at Rs.76,22,25,096; which included the T.P. Adjustment of 3 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 Rs.28,11,31,440 to the ALP of international transactions in respect of the software development services rendered by the assessee as proposed by the TPO in the order under Section 92CA of the Act. 2.3 Aggrieved by the assessment order for Assessment Year 2009-10 dt.30.4.2013, the assessee filed an appeal before the CIT (Appeals) – IV, Bangalore. The learned CIT (Appeals) disposed off the assessee's appeal vide order dt.20.10.2014 allowing the assessee partial relief. 3.1 Aggrieved by the order of the CIT (Appeals) –IV, Bangalore dt.20.10.2014 for Assessment Year 2009-10, the assessee has preferred this appeal raising the following grounds :-
“ General Grounds 1. The order of the learned CIT(A) is based on incorrect interpretation of law and therefore is bad in law. 2. The learned CIT(A) erred in upholding the enhancement of the total income of the Appellant to Rs. 76,22,25,096 by the AO/TPO as against returned income of Rs 47,88,62,424. Grounds of appeal relating to Corporate Tax adjustments:
3. The learned CIT(A) has erred in law and on facts by not adjudicating on the additional ground for claim of depreciation on goodwill on the basis that such claim was not made before the AO despite the fact that depreciation is a mandatory allowance to be given by the AO even though not claimed by the Appellant in the return of income or during the assessment proceedings.
4. The learned CIT(A) has erred in law and on facts by rejecting the additional ground for claim of depreciation on goodwill on the basis that the Appellant has an alternative remedy of filing rectification before the AO disregarding the fact that such an application was already filed with the AO.
5. The learned CIT(A) has erred in law, and on facts, in not allowing depreciation on goodwill as per Section 32(1)(ii) of the Act, amounting to Rs 145,211,874ie 25 percent of the total goodwill amounting to Rs 58,08,47,497, which arose on account of acquisition of the semiconductor business of Philips Electronics India Limited and Conexant Systems, Incunder a slump sale arrangement by executing a Business Transfer Agreement.
4 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 Grounds of appeal relating to Transfer Pricing adjustment
6. The learned CIT(A) has erred in confirming the addition made by the AO/TPO to the total income of the Appellant on account of adjustment in the arm’s length price of the income from provision of software development services transaction entered into by the Appellant with its Associated Enterprises (“AEs”);
7. The learned CIT(A) has erred in not considering the Appellant’s contentions as per the grounds of appeal raised before him and providing grounds in his order in an incoherent manner.
8. The learned CIT(A) has erred in not passing a reasoned order on the contentions raised by the appellant regarding the final set of comparables to be used in determining the arm’s length price of the impugned international transactions undertaken by the Appellant.
9. The learned CIT(A) haserred in upholding the action of TPO in determining the arm’s length margin/ price using only financial year 2008-09 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.
10. The learned CIT(A) has erred in upholding the TPO’s action of not grantingappropriate comparability adjustments to account for differences between the Appellant and the comparables, disregarding the detailed submissions filed by the Appellant.
11. The learned CIT(A) erred in rejecting certain comparables considered by the Appellant in the comparability analysis by upholding the approach of TPO in applying arbitrary filters. (a) Ancent Software International Ltd and VMF Softech Ltd- Erroneously rejected based on low turnover filter of Rs. I crore.
12. The learned CIT(A) erred in wrongly rejecting the objections of the appellant and also upholding inclusions of companies which are not comparable with the Appellant.
13. The learned CIT(A) has erred by upholding the approach of TPO by accepting/ rejecting certain companies based on unreasonable comparability criteria: Companies accepted by TPO based on unreasonable comparability criteria a) Bodhtree Consulting Ltd.-Supernormal profits, exceptional year of operations and Functionally different. b) Tata Elxsi Ltd.- Functionally different since software development segment of the said company includes a) product design services b) innovation design c) visual computing labs. Further break up is not available. c) Infosys Ltd.- Functionally different since it owns IPs and has registered significant number of patents. Also, the margin is high due to brand’s reputation in the market.
5 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 d) Persistent Systems Ltd.- Engaged in product development and analytics services and segmental information to bifurcate revenues, costs and profits between these two segments are not available. Companies rejected by TPO based on unreasonable comparability criteria a) Aztecsoft Limited– TPO rejected by stating that it fails export earnings filter which is factually incorrect. b) SIP Technologies and Exports Limited -TPO rejected by stating that it fails the RPT filter which is factually incorrect. c) CG Vak Software & Exports Limited & Maars Software International Limited-TPO rejected by stating that it fails employee cost < 25% filter. Information on employee cost not disclosed in profit and loss account. c) Goldstone Technologies Limited-TPO rejected as functionally different. However annual report proves otherwise d) KPIT Cummins Infosystems Limited-TPO rejected by stating that it fails 25% RPT filter. However the position is not same when consolidated results are given due consideration e) LGS Global Limited &Quintegra Solutions Limited-TPO rejected by stating that it fails 75% export earnings filter which is factually incorrect 14. The learned TPO had erred by wrongly computing the operating margins of some of the comparable companies identified in the Transfer Pricing Order under Section 92 CA(3) of the Act.
Other Grounds On the facts and in the circumstances of the case and in law: 15. The learned CIT(A) erred in upholding the action of the learned AO in levying interest of Rs. 4,79,55,132 and Rs. 2,54,446 under section 234B and 234C of the Act respectively, by holding that such levy is mandatory, without properly adjudicating on the contentions raised by the Appellant in this regard; 16. The learned CIT(A) erred in upholding the action of the learned AO in initiating penalty proceedings under section 271(1)(c) of the Act, by referring such proceedings as premature, without properly adjudicating on the contentions raised by the Appellant in this regard; The Appellant submits that each of the above grounds is independent and without prejudice to one another.”
6 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 3.2 In the course of appellate proceedings, the assessee filed submissions in paper books in support of the grounds of appeal raised, a chart, and also a compendium of case laws, on which the assessee placed reliance.
4. The grounds raised at S.Nos.1 & 2, are general in nature and not being specifically urged before us, are dismissed as infructuous. CORPORATE TAX ISSUES
5. Ground Nos. 3 to 5 – Depreciation on Goodwill 5.1 In appellate proceedings before us, it was submitted that the same issue of depreciation on Goodwill was before the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Years 2007-08 and 2008-09 and the co-ordinate benches had remanded the matter back to the file of the Assessing Officer for adjudication afresh. 5.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and have perused and carefully considered the submissions on record on this issue. We find that the same issue was before the co- ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08. In its order in IT(TP)A No.1174/Bang/2011 dt.14.11.2014, the co-ordinate bench of this Tribunal had admitted this additional ground of appeal for adjudication and remanded the matter to the file of the Assessing Officer for examination and consideration of the issue raised holding as under at paras 49 & 50 thereof :-
7 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 “ 49. We have given a very careful consideration to the rival submissions. It is clear from the material on record of the AO that the facts with regard to the business transfer by PEIL to the Assessee and its valuation were filed before the AO in the course of assessment proceedings. The fact that there was a sum of Rs.140 crores shown as goodwill consequent to the business transfer agreement has also been acknowledged by the AO in the order of assessment. As to how the goodwill was valued and whether it was used for the purpose of business are all extraneous considerations at this stage of admission of additional ground of appeal
. The argument of the learned DR that if depreciation is allowed on Goodwill than it would result in refunding taxes voluntarily paid by the Assessee. In our view such objections are not germane to deciding the question whether additional ground sought to be raised should be admitted for adjudication. In any event tax has to be levied and collected in accordance with law. Tax which is not due in law which was paid under a mistake cannot be said to be tax levied and collected in accordance with law. As we have already seen the law on the question of allowing depreciation on Goodwill was in a fluid state. With the decision of the Hon’ble Supreme Court in the case of Smifs Securities (supra) which decision was available only after the directions of the DRP were given, the law on the issue became clear. The learned DR’s attempt to distinguish the facts of the Assessee’s case and that of Smifs Securities Ltd. (supra) on the basis that in the case of the Assessee it was a slump sale whereas in the case of Smifs Securities Ltd.(supra) it was a case of amalgamation, in our view, cannot be accepted. The question is regarding the existence of goodwill and not the manner in which the Goodwill in question came to be created. The exclusion clause in the business transfer agreement on which the learned DR placed reliance, in our view is again not relevant. In our view the facts of the Assessee’s case is identical to the facts of the case decided by the Hon’ble Supreme Court in the case of Smifs Securities Ltd.(supra). We are also of the view that the Assessee was also in the business of Semiconductors and the claim of the Assessee of having acquired goodwill on purchase of the said business with all existing contracts will result in creation of Goodwill to the Assessee. We are therefore of the view that the additional ground sought to be raised by the Assessee should be admitted for adjudication. We hold accordingly.
50. On the merits of the additional ground, we are of the view that the issue should be remanded to the AO for consideration. We do so keeping in mind the objection raised by the DR regarding valuation of the goodwill, its use etc. The AO shall examined the question of allowing depreciation on goodwill in the light of the material already available on record and such other material that the AO may require and such other material as the Assessee may rely upon to substantiate its claim for depreciation on goodwill. The AO will afford opportunity of being heard to the Assessee. For statistical purpose, the additional ground is treated as allowed.”
5.3 Following the above decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra), we remand the matter to the file of the Assessing Officer for his examination and consideration of the issue in the light of the directions issued by the Tribunal at paras 49 and 50 of its order for Assessment Year 2007-08 in the assessee's own case (supra).
8 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 TRANSFER PRICING ISSUES (Ground Nos.6 to14) 6.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO as comparable companies to the assessee. The learned Authorised Representative also submitted that he would only press those grounds on the comparability of individual companies selected by the TPO in the final set of comparables and companies erroneously rejected by the TPO. In support of assessee's contentions, the learned Authorised Representative placed reliance on the decisions of various co-ordinate benches of the ITAT, Bangalore in the following cases :- i. Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011 dt.23.11.2012) ii. Assessee's own case in IT(TP)A No.1560/Bang/2012 dt.5.3.2015 for A.Y. 2008-09. iii. CISCO Systems Services BE India Branch in IT(TP)A No.271/Bang/2014 dt.17.10.2014 for A.Y. 2009-10. 6.2 In the light of the above observations, we now briefly examine the grounds of appeal raised at S.Nos. 6 to 14 raised on T.P. issues. 6.3.1 Ground Nos. 6 and 7 are general in nature and since these grounds have not been urged before us, the same are rendered infructuous and accordingly dismissed. 6.3.2 Ground Nos.8 and 10 to 14 were raised, inter alia, in respect of various aspects of comparability analysis adopted by the T.P.O. The learned Authorised Representative, however, submitted that these grounds would be pressed to the limited extent of the inclusion of certain companies as comparables by the TPO and the exclusion of certain other companies. The assessee in this appeal had also raised the issue of inclusion of 9 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 certain comparables proposed by it which were rejected by the TPO. In the course of hearings before us, the learned Authorised Representative submitted that the inclusion of these comparables in not being pressed. We, therefore, dismiss this claim of assessee's as infructuous and not requiring adjudication. As we will be examining and considering the comparability or otherwise of the individual companies as raised by the assessee before us, there is no requirement of specific adjudication on specific issues raised in these grounds. 6.3.3 Ground No.9 is raised in relation to the learned CIT (Appeals)’s upholding the use of current year’s date for transfer pricing documentation requirements. The learned Authorised Representative conceded that this issue is covered against the assessee by the decisions of various Tribunals. As the learned Authorised Representative has confined the urging of his submissions in appellate proceedings before us only to the issue of comparability of individual companies selected by the TPO, no specific adjudication on the specific issues raised in the above grounds 8 to 14 are necessary. 7.1 As per the T.P. Study carried out by the assessee, for the software development service segment, adopting TNMM as the Most Appropriate Method (‘MAM’) and taking itself as the tested party, the assessee selected a set of 21 companies as comparables with an average profit margin of 14.13% on cost. The assessee's list of comparables, as per its T.P. Study, are as under :-
10 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 Sl.No. Name of the Comparable 1. Akshay Software Technologies Ltd.
2. Ancent Software International Ltd.
3. Aztecsift Ktd, 4. CG-VAK Software & Exports Ltd.
5. Goldstone Technologies Ltd.
Helios & Matheson Information Technology Ltd.
7. Indium Software (India) Ltd.
Infosys Technologies Ltd.
9. KPIT Cummins Infosystems Ltd.
10. Larsen & Toubro Infotech Ltd.
11. LGS Global Ltd.
12. Maars Software International Ltd.
13. Mindtree Ltd.
14. Persistent Systems Pvt. Ltd.
15. Quintegra Solutions Ltd.
R S Software (India) Ltd.
Sasken Communication Technologies Ltd.
SIP Technologies & Exports Ltd.
Softsol India Ltd.
20. VMF Soft Tech Limited 21. Zylog Systems Ltd.
Since the average profit margin of the assessee was 10.57% on total cost, the assessee held its international transactions in the software development services segment to be at arm’s length. 7.2 The TPO, while accepting TNMM as the MAM, as adopted by the assessee, rejected the assessee's T.P. Study for various reasons and embarked on a fresh search, using the data bases, ‘Prowess’ and ‘Capitaline.’ After issuing a show cause notice to the assessee proposing to adopt a fresh set of comparable companies and considering the objections of the assessee, the TPO selected the final list of 11 comparables, which are as under :-
11 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 Sl.No. Name of the Comparable Sales (in Rs.) Cost (in Rs.) Margin % 1. KalsInformationSystems 2,14,04,686 1,87,93,813 13.89 Ltd.
2. Akshay Software 12,23,21,483 11,31,49,350 8.11 Technologies Ltd.
3. BodhtreeConsulting Ltd. 16,05,75,212 9,89,56,821 62.27 4. R S Software (India) 1,49,57,12,634 1,36,01,02,589 9.97 Ltd.
5. Tata Elxsi Ltd. (Seg) 3,78,43,03,000 3,14,63,15,000 20.28 6. Sasken Communication 4,05,31,20,000 3,18,69,97,000 27.91 Technologies Ltd.
Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40 8. Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.81 9. Mindtree Ltd. (Seg) 7,93,22,79,326 5,74,06,73,058 5.52 10. Larsen and Toubro 19,50,83,81,374 15,64,12,76,626 24.72 Infotech 11. Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61 Average Mean 24.32 The average mean margin of the 11 comparable companies selected by the TPO was 24.32% whereas the average mean margin of the software development services segment of the assessee was 10.57% on total cost. After granting working capital adjustment of 1.71%, the TPO computed the T.P. Adjustment of Rs.20,53,68,934 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2009-10. 7.3 As mentioned in the pre-paras of this order, in the course of proceedings before us, the learned Authorised Representative submitted that he would make and put forth arguments / contentions only on the issue of comparability or otherwise of individual companies, which in the assessee's opinion are incorrectly included or excluded by the TPO 12 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 in the final set of comparable companies. In this context, the learned Authorised Representative also submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected or rejected by the TPO as comparable companies to the assessee. 8.0 The learned Authorised Representative submitted that the following five companies are liable to be rejected as comparables as they are functionally different from the assessee; based on the rulings in the decisions of co-ordinate benches of this Tribunal in the cases of (i) Triology E-Business Software India Pvt. Ltd. (supra) and (ii) the assessee's own case for Assessment Year 2008-09 and (iii) Cisco Systems Services BE, India Branch (supra). These companies are 1. Kals Information Systems Ltd.
2. Bodhtree Consulting Ltd.
Tata Elxsi Ltd.
4. Persistent Systems Ltd.
Infosys Technolgoies Ltd.
We now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart.
KALS Information Systems Ltd. 9.1 This is a company selected as a comparable by the TPO. The assessee had objected to the inclusion of this company in the TPO’s set of comparables for the reason that it is functionally different from the assessee; since it is a product development company having significant inventories, and has significant number of products as per details published on 13 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 its website; besides being engaged in providing training. It was also submitted that the Pune Bench of the ITAT in the case of Bind View India P. Ltd. in had held that this company is into development of software products and is not comparable to providers of software development services, as is the assessee in the case on hand. The TPO, however, rejected the objections put forth by the assessee and included this company in his final set of comparables. 9.2 In the appeal before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee and ought to be rejected / excluded from the list of comparables as it is into software products, unlike the assessee who is only a software service provider to its AEs. It was also submitted that this company being into development of software products and also being engaged in providing training was rejected as a comparable to a software service provider by the decision of a co-ordinate bench of this Tribunal in the case of M/s. Cisco Systems Services BE., India Branch (supra) for the same Assessment Year 2009-10; following the decision of the co- ordinate bench in the case of Triology E Business Software India Pvt. Ltd. (supra). The learned Authorised Representative prayed that in view of the above cited decision (supra), this company be excluded from the list of comparables. 9.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final list of comparables. 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 14 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 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. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though thesaid company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.14.8.2014 is reproduced hereunder :- 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.
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 repot, 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, 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 15 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 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.” 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.” 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.
Infosys Technologies Limited. 10.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the final set of comparables on the grounds of scale of operations, owning significant intangibles, significant R&D activities and its brand value attributable to profit margin. The TPO, however, rejected the assessee's objections as he was of the view that turnover and brand value aspects were not materially relevant in the software development services segment.
16 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 10.2 In appellate proceedings before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand as its activities are diversified. It commands substantial brand value, owns IPRs and is a market leader in software development activities, whereas the assessee is merely a software service provider which does not possess any brand value or own any IPRs or intangibles. In support of the assessee’s arguments, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench in the case of Cisco Systems Services BE., India Branch (supra) for Assessment Year 2009-10 wherein this company was excluded from the final list of comparables, as it was held to be functionally different from an assessee who is merely a provider of software services. 10.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final set of comparables. 10.4.1 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 Cisco Systems Services B. V. , India Branch (supra), for Assessment Year 2009-10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 20 of the order has held as under :-
“ 20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though thesaid company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals
17 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 Information Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.14.8.2014 is reproduced hereunder :-
26.2 Infosys Technologies Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. v. DCIT, by order dated 28.11.2013 with regard to this comparable has held as follows:- “11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY’, a commercial application product used in designing high performance structural systems.
18 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.” The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies.” 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra), 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.
Tata Elxsi Ltd. 11.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several counts, like functional dis-similarity, as it is a product company, has significant
19 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 R&D activity, brand value, size, etc. The TPO however rejected the assessee's objections and included this company in the set of comparables. 11.2 In appellate proceedings before us, the learned Authorised Representative submitted that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment; namely product design, innovation design engineering and visual computing labs, as is reflected in the Annual Report of the company and is not a pure software development service provider like the assessee. The learned Authorised Representative also submitted that the co-ordinate benches of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra) for Assessment Year 2009-10 has held that this company being into software products and various diversified activities is to be excluded from the list of comparables for a software service provider. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable. 11.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra) for Assessment Year 2009-10 has held that since this company being predominantly engaged in product design services and other diversified activities, it cannot be considered comparable to a 20 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 pure software service provider and excluded it from the list of comparables holding as under at paras 20 of its order, which is extracted hereunder :-
“ 20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though thesaid company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.14.8.2014 is reproduced hereunder :- 26.4 Tata Elxsi Ltd. :- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in order dt.29.3.2013. Following were the relevant observations of the Tribunal :-
II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd., : The learned TPO. …..
On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge :
1. 1. The company's software development and services segment constitutes three sub- segments i) product design services; ii) engineering design services and iii) visual computing labs.
2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services.
3. The contribution of the embedded services segment is to the tune of Rs.230 crores in the total segment revenue of Rs.263 crores. Even if we consider the other two sub-segments 21 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services.
This segment qualifies all the filters applied by the TPO."
We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below : 26.5 Following the aforesaid decision of the Tribunal, we hold that M/s. Tata Elxsi Ltd. ;should not be regarded as a comparable.” 11.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of M/s. Cisco Systems Services BE., India Branch (supra) for Assessment Year 2009-10, we direct the TPO to exclude this company from the list of comparables as it is predominantly engaged in a variety of functions like product designing services and not purely software development services like the assessee in the case on hand. It is ordered accordingly.
Bodhtree Consulting Ltd. 12.1 This company has been selected as a comparable by the TPO. The assessee has objected to the inclusion of this company as a comparable, both before the learned CIT (Appeals) and this Bench, on the grounds that this company is functionally different as it has software products was engaged in providing open and end to end web solutions, consultancy and a hybrid service business model. In the proceedings before us, the learned Authorised Representative placed reliance on the decision of the co-ordinate benches of this Tribunal in the cases of M/s. Cisco Systems Services BE., India Branch (supra) and CISCO Systems (India) Pvt. Ltd., in IT(TP)A No.271/Bang/2014 dt.14.8.2014, both for Assessment Year 2009-10, wherein this company was excluded from the list of 22 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 comparables. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables. 12.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparable companies. 12.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited by the ld. A.R. We find that this company has been excluded from the set of comparables for software development service companies in both the aforesaid decisions cited by the assessee. In M/s. Cisco Systems Services BE., India Branch (supra) in the relevant portion of the order at para 20 thereof it has been held as under :-
“ 20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though thesaid company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.14.8.2014 is reproduced hereunder :- “ 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee’s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai 23 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company.” “ 12.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. Cisco Systems Services BE., India Branch (supra) for Assessment Year 2009-10, we direct the TPO to exclude this company which is factually shown to be a software product company, and not a software development service provider, from the list of comparables in the case on hand where the assessee is a provider of software development services.
Persistent Systems Ltd. 13.1 This company was selected by the TPO as a comparable in spite of the assessee's objections that this company being engaged in software product designing and analysis service and owning intangible assets is functionally different from the assessee who is rendering purely software development services. It was also contended that segmental results were not available. The TPO rejected the assessee's objections on the ground that it is mainly a software development services company. The TPO therefore included this company in the list of comparables as it qualified the functionality criterion. 13.2 In proceedings before us, the assessee objected to the inclusion of this company as a comparable on the ground that it being engaged in software development services and analytic services, and owning its own intangible assets, it is not a purely a software development service provider as is the assessee in the case on hand. The learned Authorised Representative submitted that a co-ordinate bench of this Tribunal in the 24 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 assessee's own case in IT(TP)A No.1560/Bang/2012 for Assessment Year 2008-09 has excluded this company from the list of comparables to a purely software development service provider on the grounds of functional difference and therefore prayed that in this year also, this company ought to be excluded from the list of comparables since the assessee is only rendering software development services. 13.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that a co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09 has held that this company being engaged in product development and product design and analysis service is functionally different from a pure software service provider and therefore excluded it from the list of comparables for software development services; holding as under at para 17.3 of its order :- “ 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.”
25 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 13.3.2 Following the decision of the co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different (viz. being engaged in product development and product design services) from the assessee in the case on hand which is rendering software development services. It is ordered accordingly.
In Ground No.15, the assessee has denied itself liable in respect of the interest it has been charged under Sections 234B and 234C 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. In this view of the matter, we uphold the action of the Assessing Officer in charging the assessee the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under Sections 234B and 234C of the Act, if any, while giving effect to this order.
In Ground No.16, the assessee challenges the action of the Assessing Officer in initiating penalty proceedings under Section 271(1)(c) of the Act in its case for Assessment Year 2009-10. This ground is not maintainable as no penalty has been levied on the assessee under Section 271(1)(c) of the Act for any cause of grievance to arise in the assessee's case and for us to adjudicate upon in the impugned order. This ground being not maintainable is dismissed accordingly.
26 IT(T.P)A No.1634/Bang/2014 S.P. No.37/Bang/2015 16. In view of the assessee's appeal for Assessment Year 2009-10 being disposed off as above, the stay petition No.37/Bang/2015 is rendered infructuous and is accordingly dismissed. 17. In the result, the assessee's appeal for Assessment Year 2009-10 is partly allowed. Order pronounced in the open court on 22nd July, 2015.