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Income Tax Appellate Tribunal, BANGALORE BENCH “ A ”
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Appellant By : Shri G.R. Reddy, CIT (D.R) Respondent By : Shri K.R. Vasudevan, Advocate. Date of Hearing : 29.6.2015. Date of Pronouncement : 10.07.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by Revenue is directed against the order of the Commissioner of Income Tax (Appeals) – IV, Bangalore dt.28.5.2014 for Assessment Year 2009-10.
The facts of the case, briefly, are as under :- 2.1 The assessee-company is engaged in the business of providing software development services to its overseas Associated Enterprises (‘AEs’), for which it is compensated by reimbursement of all relevant operating costs, plus mark up of a profit margin. For Assessment Year 2009-10, the assessee filed its return of income on 30.9.2009 declaring total income of Rs.2,22,73,157. The return was processed under Section 143(1) of the Income Tax Act, 1961 (herein after referred to as 'the Act') and the case was selected 2 IT(T.P)A No.1027/Bang/2014 for scrutiny. The Assessing Officer, observing that the assessee had entered into international transactions with its Associated Enterprises (AEs) in the year under consideration, made a reference to the Transfer Pricing Officer (TPO) on 24.10.2011, after obtaining the approval of the concerned CIT, for working out the Arm’s Length Price (‘ALP’) of these transactions. The TPO passed an order under Section 92CA of the Act dt.8.1.2013 in respect of international transactions entered into by the assessee with its AEs and proposed an adjustment of Rs.18,55,44,708 to the ALP of the international transactions of the assessee in respect of its provision of software development services. 2.2 On receipt of the TPO’s order under Section 92CA of the Act, the Assessing Officer passed a draft order of assessment under Section 143(3) rws 144C of the Act dt.19.2.2013 incorporating, inter alia, the T.P. Adjustment of Rs.18,55,44,708 proposed by the TPO in his order under Section 92CA of the Act. Since the assessee indicated that it seeks to file an appeal before the CIT (Appeals), the Assessing Officer passed the final order of assessment under Section 143(3) rws 144C(3) rws 144C(4) of the Act vide order dt.22.4.2013, wherein the income of the assessee was determined at Rs.22,02,79,262. In this order, the Assessing Officer made the following additions / disallowances to the returned income of Rs.2,22,73,157 :- (i) T.P. Adjustment : Rs.18,55,44,708. (ii) Disallowance of Excess claim of deduction u/s.10A : Rs.1,24,61,397. 2.3 Aggrieved by the order of assessment for Assessment Year 2009-10 dt.22.4.2013, the assessee preferred an appeal before the CIT (Appeals) – IV, Bangalore. The learned CIT(A) disposed off the assessee's appeal vide order dt.28.5.2014 allowing the assessee partial relief.
Aggrieved by the order of the CIT (Appeals) – IV, Bangalore dt.28.5.2014, Revenue is in appeal before this Tribunal raising the following grounds :-
1. “ The order of the learned CIT (Appeals) is opposed to law and facts of the case.
2. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in directing the Assessing Officer to exclude the reimbursement of certain expenses both from the export turnover as well as from total turnover for the 3 IT(T.P)A No.1027/Bang/2014 purpose of computation of deduction under Section 10A, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by sub- clause (4) of Explanation 2 below sub-section (8) of Section 10A and the total turnover has not been defined in this section.
3. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in directing the Assessing Officer to compute deduction under Section 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s. Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court.
4. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in holding that size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding the comparables Persistent Systems Ltd., Zylog Systems Ltd., Mindtree Ltd. (Seg.), Larsen and Toubro Infotech, Infosys Ltd. in software development segment.
5. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
6. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.”
4. The Grounds at S.Nos.1, 5 and 6 of Revenue’s appeal are general in nature and therefore no adjudication is called for thereon.
5. Ground Nos.2 and 3 – Deduction u/s.10A of the Act. 5.1 In these grounds, Revenue assails the impugned order of the learned CIT (Appeals) in directing the Assessing Officer to exclude the reimbursement of telecommunication charges and travel expenses incurred in foreign currency from both export turnover as well as from total turnover for the purpose of computation of the deduction under Section 10A of the Act by relying on the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (349 ITR 98) (Kar). It is submitted that the learned CIT (Appeals) ought not to have followed the aforesaid decision of the Hon'ble Karnataka High Court since the same has not become final as the Department has challenged the said decision by way of SLP, which are pending before the Hon'ble Apex Court. The learned Departmental Representative was heard in support of the grounds raised.
4 IT(T.P)A No.1027/Bang/2014 5.2 Per contra, the learned Authorised Representative supported the impugned order of the learned CIT (Appeals) on this issue as being in order. 5.3 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter. We find that the issue before us is covered in favour of the assessee by the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra). Respectfully following the binding decision rendered by the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra), we are of the view that the learned CIT (Appeals) action, in directing the Assessing Officer that telecommunication charges and travel 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, was in order. Consequently, Revenue’s grounds at S.Nos.2 and 3 are dismissed. TRANSFER PRICING ISSUES (Grounds 1 to 11) 6.1 Before proceeding to deal with the above grounds of appeal on T.P. issues, the approach of the TPO vis-a-vis that of the assessee in its T.P. Study submitted before the TPO is briefly summarised hereunder. 6.2 The assessee is engaged in the provision of software development services to its overseas AEs. For the year under consideration, the assessee has reported the following international transactions in its 92CE report. S.No. Type of Transactions Amount Rs.
1. Software Development Services (R) 196,67,62,168 2. Import of Capital Goods (Paid) 28,49,908 3. Interest on ECB Loans (Paid) 36,94,47,229
4. Cross charges of expenses 3,14,30,503 The assessee conducted its T.P. Study applying Transactional Net Margin Method (‘TNMM’) as the Most Appropriate Method (‘MAM’) and conducted its search for comparable companies using the Prowess and Capitaline data bases. On this basis, the assessee chose the following 13 companies as comparable to it.
5 IT(T.P)A No.1027/Bang/2014 S.No. Name of the comparable company 1. Akshay Software Technologies Ltd. 2 Helios & Matherson Information 3 iGate Global Solutions Ltd. 4 Mindtree Ltd. 5 Netripples Software Ltd. 6 Prithvi Information Solutions Ltd. 7 R S Software (India) Ltd. 8 Sagarsoft (India) Ltd. 9 Servealll Enterprise Solutions Ltd. 10 Thirdware Solutions Ltd. 11 SIP Technologies Exports Ltd. 12 VMF Soft Tech Ltd. 13 Zylog Systems Ltd.
6.3 As the profit margin of the assessee worked out @ 15.17% on cost was higher than the average profit margin of these 13 comparables @ 9.80% on cost, the assessee held its international transactions to be at arms length.
TPO’s Approach. 7.1 The TPO after examining the assessee's T.P. Study, rejected it and after conducting his own search for comparables, arrived at a final set of 11 comparable companies and their operating margins, the details of which are as under :- Sl.No. Name of the comparable Margin % 1 Kals Information Systems Ltd. 13.89 2 Akshay Software Technologies Ltd. 8.11 3 Bodhtree ConsultingLtd. 62.27 4 R S Software (India) Ltd. 9.97 5 Tata Elxsi Ltd. (seg) 20.28 6 Sasken Communication Technologies Ltd. 27.91 7 Persistent Systems Ltd. 41.40 8 Zylog Systems Ltd. 7.81 9 Mindtree Ltd. (seg) 5.52 10 Larsen & Toubro Infotech 24.72 11 Infosys Ltd. 45.61 Average Mean 24.32
6 IT(T.P)A No.1027/Bang/2014 7.2 The average mean margin of these 11 comparables was computed at 24.32%. After allowing working capital adjustment of 1.71%, the adjusted mean margin was worked out at 26.03%. The resultant shortfall in the price amounting to Rs.18,55,44,708 was taken as the T.P. Adjustment to the ALP of the international transactions of the assessee with its AEs. The T.P. Adjustment was subsequently modified by the Assessing Officer under Section 154 rws 92CA of the Act vide order dt.18.6.2013 whereby the T.P. Adjustment was reduced from Rs.18,55,44,708 to Rs.12,71,38,857.
Ground No.4 : Turnover Filter.
8.1 In the Ground raised at S.No.4, Revenue contends that the learned CIT (Appeals) erred in holding that size and turnover are deciding factors for treating a company as a comparable and erred in excluding the following comparables in the software development segment by applying the turnover filter at Rs.500 Crores :- S.No. Name of the company Turnover (Rs. in Crores)
1. Persistent Systems Ltd. 519.69 2. Zylog Systems Ltd. 734.93 3. Mindtree Ltd. (Seg.) 793.22 4. Larsen & Toubro Infotech Ltd. 1,950.83
5. Infosys Technologies Ltd. 20,264.00 8.2 We have heard both the learned Departmental Representative for Revenue and the learned Authorised Representative of the assessee in respect of issue of the application of turnover filter. The assessee, in the case on hand, had also filed an appeal in IT(TP)A No.1009/Bang/2014 for the same Assessment Year 2009-10 against the impugned order of the learned CIT (Appeals) which was disposed off vide order dt.24.4.2015. In that appeal, the assessee in the ground raised at S.No.7 challenged the action of the learned CIT (Appeals) in applying the turnover filter at Rs.500 Crores for selecting/rejecting companies as comparables without taking cognisance of orders of the co-ordinate bench of the Tribunal. In this regard the assessee placed reliance on the decision of the co-
7 IT(T.P)A No.1027/Bang/2014 ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. V DCIT in IT(TP)A No.35/Bang/2014 dt.10.10.2014 for Assessment Year 2009-10 which followed the decision of another co-ordinate bench of the Tribunal in Genisys Integrating Systems (India) Ltd. in wherein it was held that companies having turnover in excess of Rs.200 Crores cannot be comparable with companies whose turnover is less than Rs.200 Crores. The turnover of the assessee in the case on hand was less than Rs.200 Crores; i.e. it was Rs.196.67 Crores. Following the decision of the co-ordinate bench of the Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra) and applying the turnover filter at Rs.200 Crores; the co-ordinate bench in the assessee's own case (supra) at para 7.1.1 thereof excluded the following seven companies :-
S.No. Name of Company Turnover (Rs. in Crores) 1 Infosys Technologies Ltd. 20264.00 2 Larsen & Toubro Infotech Ltd. 1950.83 3 Mindtree Ltd. 793.22 4 Persistent Systems Ltd. 519.69 5 Sasken Communication Technologies Ltd. 405.31 6 Tata Elxsi Ltd. 378.43 7 Zylong Systems Ltd. 734.93 8.3 On an appreciation of the facts of the case on hand, we find that all the five companies whose exclusion is objected to by Revenue, listed out at para 8.1 of this order (supra), have already been excluded by the co-ordinate bench in the assessee's appeal in the case on hand for the year under consideration by following, inter alia, the decision of the co-ordinate bench in the case of Genisys Integrating Systems (India) Ltd.(supra) and applying the turnover filter at Rs.200 Crores. Consequently, following the aforesaid
8 IT(T.P)A No.1027/Bang/2014 decision of the co-ordinate bench in the case of Genisys Integrating Systems (India) Ltd. (supra), we find no merit in the Ground No.4 raised by Revenue, and accordingly dismiss the same. 9. In the result, Revenue’s appeal for Assessment Year 2009-10 is dismissed. Order pronounced in the open court on 10th July, 2015.