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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SMT. P. MADHAVI DEVI & SHRI ABRAHAM P GEORGE
Per Smt. P.MADHAVI DEVI, JM:
This appeal by the assessee is against the order of the Assessing Officer u/s 143(3) r.w.s.144C(13) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] dated 18/10/2010 for the assessment year 2006-07.
Brief facts of the case are that the assessee-company which is engaged in the business of software development
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 2 of 23 services, filed its return of income for the relevant assessment year on 27/11/2006 declaring an income of Rs.12,463/- after claiming exemption u/s 10A Act. During the assessment proceedings u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] Assessing Officer (AO) observed that the assessee had entered into international transactions with its Associated Enterprises (AE) for providing software development services for a sum of Rs.18,27,80,431/-. He therefore, referred the matter to the Transfer Pricing Officer (TPO) for determination of the ALP u/s 92CA of the Act. The TPO accepted the ‘TNMM’ selected by the assessee as the Most Appropriate Method (MAP) and proceeded to consider the comparables adopted by the assessee. The assessee had adopted 9 companies as comparables which were rejected by the TPO and the TPO adopted 20 companies as comparables and arrived at the average margin of the comparable companies at 20.68% and determined the transfer pricing adjustment of Rs.1,26,15,950/-. The AO passed the draft assessment order pursuant to the order u/s 92CA of the Act. The assessee filed objections to the draft assessment order before the DRP, which confirmed the draft assessment order and consequent thereto, AO passed the final assessment order against which the assessee is in appeal before this Tribunal.
Though the assessee has raised as many as 9 grounds of appeal, it is stated by the learned counsel for the assessee that IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 3 of 23 the issues raised in ground No.4 are all settled against the assessee in one or the other decisions and, therefore, the assessee is not agitating these grounds at this stage. It is stated by the learned counsel for the assessee that as far as transfer pricing adjustment covered under ground No.1 to 4 are concerned, the assessee is only challenging certain companies which have been adopted by the TPO as comparables. The learned counsel for the assessee has filed a chart before us showing the comparables accepted by the assessee and the comparables which are challenged by the assessee on one or the other ground and as to how they are covered in favour of the assessee by various decisions of this Tribunal and the High Court. The said chart is taken on record and both the parties are heard on the basis of the submissions in the chart.
Having regard to the rival contentions and the material on record, we find that the financial results of the assessee-company for the financial year 2005-06 are as under:
Description Amount Operating revenue Rs.18,27,92,804/- Operating Cost Rs.16,54,49,912/- Operating Profit (PBIT) Rs.1,73,42,892/- Operating Profit to Cost Ratio 10.48%
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 4 of 23 The TPO has adopted the following companies as comparables:
Sl. Name of company OP / TC Sales No (FY 2006-07) (Rs.Cr.) 1 Aztec Software Limited 18.09 128.61 2 Geometric Software Limited (Seg.) 6.70 98.59 3 Infosys Ltd 40.38 9028.00 4 KALS Info Systems Limited 39.75 1.97 5 Mindtree Consulting Ltd 14.67 448.79 6 Persistent Systems Ltd. 24.67 209.18 7 R.Systems International Ltd. (Seg.) 22.20 79.42 8 Sasken Communications Ltd. (Seg.) 13.90 240.03 9 Tata Elxsi Ltd (Seg.) 27.65 188.81 10 Lucid Software Ltd 8.92 1.02 11 Mediasoft Solutions Ltd 6.29 1.76 12 R S Software (India) Ltd 15.69 91.57 13 S I P Technologies & Exports Ltd 3.06 6.53 14 Bodhtree Consulting Ltd. 15.99 5.32 15 Accel Transmatic Ltd. (Seg.) 44.07 8.02 16 Synfosys Business solutions Ltd. 10.61 4.49 17 Flextronics Software Systems Ltd. 27.24 595.12 18 Lanco Global Solutions Ltd 5.27 35.63 19 Megasoft Ltd 52.74 56.15 20 iGate Global solutions Ltd.(Seg.) 15.61 527.91 Arithmetic Mean 20.68%
The assessee had challenged before the DRP the comparability of the companies taken by the TPO before the DRP. However, the TPO as well as the DRP have not accepted the assessee’s objections and have taken the said companies as comparables. The assessee is however, now accepting the following companies to be comparable to the assessee: i) Bodhtree Consulting Ltd. ii) Lanco Global Solutions iii) Mediasoft Solutions P.Ltd. iv) R Systems International Ltd. v) R S Software (India) Ltd. vi) SIP Technologies & Exports Ltd. vii) Synfosys Business Solutions Ltd. Viii) Lucid Software Ltd.
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 5 of 23 6. As regards other companies are concerned, the assessee is challenging them on the turnover filter and RPT filter and also on functional dissimilarity. In support of exclusion of these companies, the assessee is relying upon the decision of the co- ordinate bench of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., for assessment year 2006-07 in IT(TP)A No.1179/Bang/2010 dated 19/12/2014.
The learned Departmental Representative, however, placed reliance upon the findings of the TPO as well as the DRP for not excluding these companies from the final list of comparables.
Having regard to the rival contentions and the material on record, we find that the assessment year before us in the case of the assessee well as in the case of M/s.Ariba Technologies India Pvt. Ltd., (cited supra) is assessment year 2006-07. However, to apply the decision of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., we have to see whether the activities of both the companies are similar. We find that both the assessee as well as M/s.Ariba Technologies India Pvt. Ltd., are 100% captive service providers and are also engaged in the business of software development services rendering such services to its AE or group companies. Further, we find that the TPO has adopted the very same 20 companies as comparables in the case of the assessee as well as M/s.Ariba Technologies India Pvt. Ltd.,. Therefore, it is clear that the revenue itself has IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 6 of 23 accepted both the companies to be comparable to each other. Therefore, the decision of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., is applicable to the facts of the case before us as well.
Coming to the issue of comparability of the companies in the final list, we find that as regards Infosys Ltd., which is at serial No.3 of the final list of comparables, the assessee is seeking exclusion of the said company on the following grounds:
(i) Its turnover is more than Rs.200 crores.
(ii) It has much turnover and is giant in the area of software development, holds intangibles, has brand value and assumes all risks, leading to higher profit and is therefore functionally not comparable.
We find that the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., has considered all these objections of the assessee therein and at para.9 of its order, has upheld the turnover filter by following the decision of the Tribunal in the case of Trilogy E-Business Software India (P) Ltd., For the sake of convenience and ready reference the said findings are reproduced hereunder:
“9. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Triology E- Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follows:
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 7 of 23 “(1) Turnover Filter
11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Q 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:-
Size criteria in terms of Sales, Assets or Number of Employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability.
The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]:
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 8 of 23 “Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a Rs 1,000 crore company cannot be compared with the transaction entered into by a Rs 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate.”
13. It was further submitted that the TPO’s range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies.
14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, wherein relying on Dun and Bradstreet’s analysis, the turnover of Q 1 crore to Q 200 crores was held to be proper. The following relevant observations were brought to our notice:-
“9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 9 of 23 Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.”
15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases:
1.M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2.M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/ Bang/20l0). 3.Electronic for Imaging India Private Limited (ITA No.171/ Bang/2010). 16. It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee.
The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Q 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard.
We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm’s length price. Sec.92-B provides that “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 10 of 23 expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm’s length price in an international transaction and it provides:- (1) that the arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :—
(a)comparable uncontrolled price method; (b)resale price method; (c)cost plus method; (d)profit split method; (e)transactional net margin method; (f)such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price.
(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that— (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 11 of 23 in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm’s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:
Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm’s length price under section 92C:- “10B. (1) For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a)……. to (d)…….. (e)transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii)the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv)the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v)the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 12 of 23 (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
(3) An uncontrolled transaction shall be comparable to an international transaction if— (i)none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii)reasonably accurate adjustments can be made to eliminate the material effects of such differences.
(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into :
Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.”
A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO.
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 13 of 23 In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee’s turnover is Q 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz.,
Turnover Q (1)Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3)Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09crores (8) Infosys Technologies Ltd. 13149 crores”
Respectfully following the aforesaid decision of the Tribunal in the case of Triology E-Business Software India Pvt.Ltd. (supra), we hold that the following companies (1) Flextronics Software Systems Ltd. 595.12 crores (2) iGate Global Solutions Ltd. 527.91 crores (3) Mindtree Ltd. 448.79 crores (4) Persistent Systems Ltd. 209.18 crores (5) Sasken Communication Technologies Ltd. 240.03 crores (6) Infosys Technologies Ltd. 9028.00 crores whose turnover is above Rs.200 Crores should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable.”
10. Further as regards the assessee’s objection as regards size and diversity of activities of Infosys Technologies Ltd., is concerned, the learned counsel for the assessee has placed
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 14 of 23 reliance upon the judgment of the Hon’ble High Court of Delhi in the case of Agnity India Technologies Pvt. Ltd. in dated 10/07/2013 for assessment year 2006-07. The copy of the said order is placed before us at pages 298 to 303 of the paper book filed before us. On perusal of the said decision, we find that the Hon’ble High court, at paras.6 to 8 of its decision has held as under:
“6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent- assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted.
7. Learned counsel for the appellant Revenue during the course of hearing, drew our attention to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable when the wage and sale ratio was between 30% to 60%. By applying this filter, several companies were excluded. This is correct as it is recorded in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies as comparable to work out the mean.
8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 15 of 23 and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order.”
Respectfully following the same, we direct the AO to exclude Infosys Ltd., from the final list of comparables both on the ground of size and diversity of activities as well as turnover of more than Rs.200 crores.
The assessee is also seeking exclusion of Flextronics Software Systems Ltd., iGate Global Solutions Ltd. (segment), Mindtree Consulting Ltd., Persistant Systems Ltd., and Sasken Communication Ltd., from the final list of comparables on the ground that their turnover is more than Rs.200 crore. We find that following the decision of the co-ordinate bench in the case of M/s.Ariba Technologies India Pvt. Ltd., (supra) we have already directed the AO to exclude Infosys Ltd., from the final list of comparables on the ground of turnover being more than Rs.200 crore. Respectfully following the same, we direct the AO to exclude these other companies also from the list of comparables on the same ground.
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 16 of 23 12. The assessee further seeks exclusion of KALS Info Systems Ltd., Accel Transmatics Ltd. (segment), Tata Elxsi Ltd. (segment) from the final list of comparables on the ground of functional dissimilarity. It is stated by the learned counsel for the assessee that KALS Info Systems Ltd., is a product company and is also having extraordinary high profit and therefore it has to be excluded from the list of comparables. As regards Accel Transmatics Ltd., is concerned, the learned counsel for the assessee submitted that this is a product company and therefore is functionally dissimilar. As regards Tata Elxsi Ltd., is concerned, it is stated by the learned counsel for the assessee that software development business segment of this company is involved in many non-comparable activities such as hardware design, industrial design and engineering and visual computing and therefore it has to be excluded. In support of his contention, he placed reliance upon the decision of this Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., The learned Departmental Representative, on the other hand while supporting the orders of the authorities below, submitted that as far as KALS Info Systems Ltd., is concerned, the AO had called for information u/s 133(6) of the Act wherein the company itself had stated that major portion of its activity is software development only. Therefore, according to the learned Departmental Representative, the said company is comparable to IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 17 of 23 the assessee. He has drawn our specific attention to page 105 of the transfer pricing order where this fact is recorded by the TPO.
13. Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz., 2006-07 in the case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 & 13 of its order, has held as under:
“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 IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 18 of 23 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.” 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
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 19 of 23 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 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.”
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 InfoSystems Ltd. And Accel Transmatic Ltd. be excluded from the list of 20 comparable arrived at by the TPO.” …………………………………………. 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 IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 20 of 23 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.”
15. 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. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable.”
18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. Respectfully following the same, we direct the AO to exclude these companies from the final list of comparables.
Further, as regards Mega Soft Ltd., Aztec Software Ltd., and Geometric Software Ltd.(segment) are concerned, it is stated by the learned counsel for the assessee that RPT of these companies is 17.08%, 17.78% and 19.34% respectively. He stated that this Tribunal, in a number of cases has been holding
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 21 of 23 that if the RPT are more than 15%, then such comparable companies have to be excluded from the final list of comparables. In support of this contention also, the learned counsel for the assessee has placed reliance upon the decision of the co-ordinate bench of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd..
The learned Departmental Representative, however, supported the orders of the authorities below.
On going through the decision of the Tribunal, in the case of M/s.Ariba Technologies India Pvt. Ltd., we find that at para.15 of its order, the Tribunal has held as under:
“15. 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 Logica Private Ltd., (supra). Respectfully following the decision of the Tribunal referred to above in the case of Logica Pvt.Ltd..(supra), we direct that the company viz., Lucid Software be excluded from the list of 20 comparable arrived at by the TPO. ”
As facts and circumstances before us are similar, respectfully following the same, we direct the AO to exclude these companies also from the final list of comparables.
It is stated by the learned counsel for the assessee that if the above companies are excluded from the final list of comparables, the average arithmetical mean of the remaining companies would be 11% and after working capital adjustment it would come be 8.11%, whereas the assessee’s operating margin
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 22 of 23 on cost was 10.48% and therefore, the international transaction is at arms’ length price being within + or -5 of the average arithmetical mean of the comparable companies. The working of the said computation is filed before us. We direct the AO to verify the same and if found to be correct, then no adjustment is called for.
17. As regards ground Nos.5 to 8 are concerned, we find that these are against the reduction of telecommunication expenses and traveling expenditure incurred in foreign currency from the export turnover only while computing the deduction u/s 10A of the Act. The learned counsel for the assessee submitted that the assessee is praying for the alternative relief of excluding the said expenditure both from export turnover as well as total turnover as held by the Hon’ble High Court of Karnataka in the case of CIT vs. Tata Elxsi (349 ITR 98).
18. Having regard to the rival contentions and the material on record, we find that this issue is covered in favour of the assessee by the judgment of the Hon’ble High Court of Karnataka (cited supra) and respectfully following the same, we direct the AO to exclude telecommunication expenses as well as travelling expenditure incurred in foreign currency both from export turnover as well as total turnover for the purpose of computing deduction u/s 10A of the Act.
IT(TP)A No.1485/Bang/2010 M/s.Net Devices India Pvt. Ltd. Page 23 of 23 19. As regards ground No.9 relating to charging of interest u/s 234B is concerned, we find that it is only consequential in nature. The AO is directed to give consequential relief, if any, to the assessee.
In the result, the assessee’s appeal is treated as partly allowed.
Pronounced in the open court on 30th of June, 2015.