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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
Per N.V. Vasudevan, Judicial Member These are appeals by the Revenue and assessee directed against the order dated 30.1.2013 of the CIT(Appeals)-IV, Bengaluru for the assessment year 2008-09.
In the appeal by the Revenue, grounds No. 1 to 8 read as follows:-
“1. The order of the ld. CIT(Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly in excluding M/s Flextronics Ltd., iGate Global Solutions Ltd., Infosys Technologies Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd. and Wipro Limited as comparables. 3. The learned CIT(A) in the facts and circumstances of the case erred in excluding the comparable company M/s Celestial Biolabs Ltd. on the basis of high profit margin. 4. The ld. CIT(A) erred in rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend. 5. The ld. CIT(A) erred in not appreciating that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party. 6. The ld. erred in rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services and thereby including M/s Indus Networks Ltd. as a comparable.
IT(TP)A Nos.437 & 457/Bang/2015 Page 3 of 54 7. The learned CIT(A) in the facts and circumstances of the case erred in holding that M/s. Avani Cincom Technologies can be taken as a comparable. 8. The learned CIT(A) in the facts and circumstances of the case erred in holding that M/s KALS Informations Systems Ltd. being functionally different, cannot be taken as comparable ignoring the fact that it qualifies all the quantitative and qualitative filters applied by the TPO.”
In the appeal filed by the assessee, there are about 8 grounds raised in the grounds of appeal. Grounds No. 1 to 7 are with reference to the addition made by the TPO to the total income of the assessee, consequent to determination of ALP of an international transaction carried out by the assessee with its AE under the provisions of 92 of the Income- tax Act, 1961 [“the Act”]. Ground No.8 is with regard to charging of interest u/s.234B of the Act. These grounds read as follows:
“1 Assessment and reference to Transfer Pricing Officer are bad in law a) The order issued by the Income-tax Officer - Ward 11(1) [‘AO’] under section 143(3) r.w.s. 92CA of the Income-tax Act, 1961 [‘the Act’] and the order passed by .the Commissioner of Income-tax (Appeals)-IV, Bangalore [‘the CIT(A)’] under section 250 of the Act, are bad in law and on facts and is in violation of the principles of natural justice. b) The AO has erred in making a reference to the Additional Commissioner of Income-tax, (Transfer Pricing) - I, Bangalore [‘TPO’], inter alia, since AMD India Private Limited [‘AMD India’ or ‘the Appellant’] has satisfied all the conditions as laid out in section 92C(3) of the Act. Accordingly, the order passed by the TPO is without jurisdiction.
IT(TP)A Nos.437 & 457/Bang/2015 Page 4 of 54 c) The order passed by the Ld. CIT(A) and AO is without jurisdiction, inter alia, insofar as it purports to give effect to an invalid order of the TPO. d) The Ld. CIT(A) erred in confirming the action of the AO/TPO in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act.
2 Determination of arm’s length price a) The Ld. CIT(A) and AO/TPO erred in rejecting the value of international transactions as recorded in the books of accounts, as the arm’s length price. b) The Ld. CIT(A) and AO/TPO erred in determining a new arm’s length price in substitution of the arm’s length price as determined by the Appellant. 3 The fresh comparable search undertaken by the TPO is bad in law The Ld. CIT(A) erred in law in holding that the fresh comparability analysis using non contemporaneous data conducted by the TPO and further substituting the Appellant’s analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the TPO is liable to be quashed. 4 Comparability Analysis adopted by the TPO for determination of arm’s length price a) The AO/TPO grossly erred on facts and the CIT(A) erred in confirming the benchmarking of transactions of software development services of the Appellant with companies operating as full fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-à-vis comparable companies.
IT(TP)A Nos.437 & 457/Bang/2015 Page 5 of 54 b) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparable to the Appellant, without establishing functional comparability and the Ld.CIT(A) also erred in confirming the same. c) The AO/TPO erred on facts in arbitrarily rejecting companies having onsite revenues more than 75% of total sales and the Ld.CIT(A) also erred in confirming the same. d) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables and the Ld.CIT(A) also erred in confirming the same. e) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue and applying inconsistently such filter, without considering the specific segmental results and the Ld.CIT(A) also erred in confirming the same. f) The AO/TPO erred on facts in arbitrarily rejecting companies having export revenues less than 25% of total sales and the Ld.CIT(A) also erred in confirming the same. g) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability and the Ld.CIT(A) also erred in confirming the same. h) The AO/TPO erred on facts and in law in considering a set of ‘secret data’, i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6) of the Act, which is grossly unjustified. The Ld.CIT(A) also erred in confirming the same i) The AO/TPO cherry picked comparable companies by way of (a) a non-methodical search process, and (b) exercising non- uniformity in the application of filters and the Ld.CIT(A) also erred in confirming the same. j) Without prejudice to the above, the AO erred in incorrectly computing margins of the comparable companies and accordingly
IT(TP)A Nos.437 & 457/Bang/2015 Page 6 of 54 erred in computing the adjustment made to the total income of the Appellant while giving effect to the order of the Ld. CIT(A). 5 Erroneous data used by the AO/TPO a) The AO/TPO has erred in law and the CIT(A) further erred in confirming use of data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law and the CIT(A) further erred in confirming non-application of multiple-year data while computing the margin of alleged comparable companies. 6 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule l0B to account for, inter alia, differences in (a) accounting practices, (b) depreciation adjustments, (c) marketing expenditure adjustment, (d) research and development expenditure adjustment and (e) risk profile between the Appellant and the comparable companies. The Ld. CIT(A) erred in confirming the findings of the TPO/AO and not commenting on the depreciation adjustment claimed by the Appellant. 7 Variation of 5% from the arithmetic mean The AO/TPO erred in law and the Ld. CIT(A) erred in not granting the variation as per the proviso to Section 92C(2) of the Act. 8 Interest under section 234B of the Act On the facts, and circumstances of the case, and in law, the learned CIT(A) erred in not directing the learned AO on the specific ground taken in appeal that the learned AO had erred in levying interest under section 234B.
IT(TP)A Nos.437 & 457/Bang/2015 Page 7 of 54
The assessee has also filed an additional ground of appeal which reads as follows:-
“1. The lower authorities have erred in selecting Quintegra Solutions Ltd, Bodhtree Ltd, Thirdware Solutions Ltd and Lucid Software Ltd as comparables despite them being functionally different from the Appellant.”
In the application for admission of additional ground, the assessee has submitted that the assessee did not object to the aforesaid companies being chosen as comparable before the TPO. However, the functional profile of these companies were considered which came at a later point of time and it has been held that these companies are not comparable functionally or otherwise with a software service provider company such as the assessee. Hence the assessee has raised the aforesaid additional ground and prayed for admission of the same. The assessee has submitted that all facts are already available on record and it is a question of applying the decisions rendered in cases of companies engaged in software development services.
We have considered the request for admission of additional ground and are of the view that plea of the assessee deserves to be accepted, as it has been held by the Chandigarh Special Bench of the Tribunal in Quark Systems Pvt. Ltd., 38 SOT 307 (SB) (Chd) that the taxpayer can reject a company selected by it in its TP study as not being comparable, even if such a plea is raised for the first time before the Tribunal. The Special
IT(TP)A Nos.437 & 457/Bang/2015 Page 8 of 54
Bench further held that the taxpayer is not estopped from pointing out that
a particular company cannot be taken as a comparable, even though the taxpayer has chosen the said company as a comparable. Keeping in mind
the aforesaid decision of the Special Bench, we admit the additional ground
for adjudication.
Since the grounds raised by the Revenue and assessee are
common, we deem it appropriate to dispose of these grounds together.
The facts material for adjudication of these grounds are as follows.
AMD India Private Limited [‘AMD IPL’ or ‘the Appellant’ or
“Assessee”] was incorporated on March 15, 2004 and is a subsidiary of Advanced Micro Devices Inc., USA [‘AMD US’]. AMD IPL is a unit
registered under the Software Technology Park of India scheme and is
engaged in the provision of software development services to its Associated Enterprise [‘AE’]. AMD IPL is a captive service provider and is
being remunerated at ‘cost plus an arm’s length mark-up basis.
During the previous year relevant to AY 2008-09, AMD IPL had, inter alia, rendered software development services amounting to Rs.
669,498,745 to AMD US. The Appellant had conducted a transfer pricing study [‘TP study’] in terms of section 92D of the Act. In the TP Study, in
respect of its software development services the Appellant arrived at a set of 20 comparable companies, having an average net cost plus margin of
14.53% as against that of 11.01% of the Appellant. Since the Appellant’s
IT(TP)A Nos.437 & 457/Bang/2015 Page 9 of 54 margin was in the 5% (as provided in the second proviso to section 92C(2) of the Act) range of the arithmetical mean of the comparables, the international transactions of the Appellant were claimed by the Assessee to be at arm’s length.
The financial results of the assessee in its software development services segment were as follows:-
Description Amount (Rs.) Operating revenues 669498745 Operating Expenditure (*) 603081554 Operating Profit 66417191 OP/TC 11.01%
Further to the above, the TPO issued a show-cause notice dated 14 October 2011, proposing to:
a) reject 11 out of 20 comparable companies identified by the Appellant in the TP Study; b) select 17 new companies and proposed to compare the same with the Appellant; c) determine the arm’s length margin of 32.07% (working capital adjustment not provided); and d) proposed a transfer pricing adjustment to the international transactions to the tune of Rs 126,991,063.
IT(TP)A Nos.437 & 457/Bang/2015 Page 10 of 54
In response to the above, the Appellant made detailed submissions
on 27 October 2011, placing on record, all legal and factual arguments before the TPO.
The TPO passed an order under section 92CA of the Act, on 28
October 2011, determining the mean margin of the comparables at 22.64% (after working capital adjustment of 1.01%) thereby proposing a transfer
pricing adjustment of Rs.70,120,473.
Subsequently, the AO issued a draft assessment order under section 143(3) read with 144C, dated 19 December 2011, proposing a
transfer pricing adjustment of Rs. 70,120,473 and disallowance of excess claim under section 10A of the Act of Rs. 970,832, thereby proposing to
determine the taxable income of the Appellant at Rs. 71,091,305. The draft
assessment order was served to the Appellant on 22 December 2011.
The Appellant filed a letter dated 1. January 2012, requesting the
AO to pass the final assessment order as the Appellant did not wish to file
objections before the Dispute Resolution Panel. Accordingly, the AO issued the assessment order under section 143(3) of the Act read with
144C of the Act, on 9 February 2012. The same was served on the Appellant on 18 February, 2012.
The comparable companies chosen by the TPO and the
determination of ALP were as follows:-
IT(TP)A Nos.437 & 457/Bang/2015 Page 11 of 54 Sl. Name of company OP / TC No % 1 Avani Cincom Technologies Ltd. 25.62 2 Bodhtree Consulting Ltd. 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd. 29.81 5 Flexitronics (Aricent) 7.86 6 iGate Global Solution ltd. 13.99 7 Infosys 40.37 8 Kals Information Systems Ltd. (Seg.) 41.94 9 LGS Global Ltd. 27.52 10 Mindtree Ltd. (Seg) 16.41 11 Persistent Systems Ltd. 20.31 12 Quintegra Solution Ltd. 21.74 13 R Systems International (Seg) 15.30 14 R S Software (India) Ltd. 7.41 15 Sasken Communication Technologies Ltd. (Seg) 7.58 16 Tala Elxsi (Seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd. 16.50 Arithmetic Mean 23.65
23.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Based on this, the arms length price of the software services rendered by the taxpayer to its AE is computed as under: Arithmetic mean PLI 23.65% Less: Working capital Adjustment(Annexure-C) 1.01% Adj.Arithmetic mean PLI 22.64%
IT(TP)A Nos.437 & 457/Bang/2015 Page 12 of 54 Arm’s Length Price: Operating Cost Rs.603091554 * Arms Length Margin 22.64% of the operating cost Arms Length Price (ALP) Rs.739610218 At 122.64% of operating cost * excluding Exchange loss, financial expenses
23.7 Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) Rs. 739619218 At 122.64% of operating cost Price charged in the Rs. 669498745 international transactions Shortfall being adjustment Rs.3,43,55,770 u/s.92CA
The above shortfall of Rs.3,43,55,770/- is treated as transfer pricing adjustment u/s 92CA.”
Aggrieved by the aforesaid order of the AO, the assessee filed appeal before the CIT(Appeals). The CIT(Appeals) accepted some of the contentions put forth by the assessee with regard to the application of turnover filter, high profit margin, etc. and excluded 10 of the comparables chosen by the TPO. As a result of such exclusion, the following companies alone were retained for the purpose of determining the profit margin (arithmetic mean):-
IT(TP)A Nos.437 & 457/Bang/2015 Page 13 of 54
Sl. Name of company OP on Cost as Adjusted per OGE to No Margin CIT(A) order 1 Bodhtree Consulting Ltd. 19.14% 20.15% 2 e-zest Solutions Ltd. 28.97% 29.22% 3 LGS Global Ltd. 26.66% 25.93% 4 Quintegra Solution Ltd. 23.06% 20.35% 5 R S Software (India) Ltd. 6.46% 7.73% 6 R Systems International Ltd. (Seg.) 16.87% 15.02% 7 Thirdware Solution Ltd. 21.92% 20.11% 8 Softsol India Ltd. 15.16% 13.22% 9 Lucid Software Ltd. 16.88% 16.79% 10 Helios & Matheson Information 33.67% 30.35% Technology Ltd. Average 20.88% 19.89%
It can be seen from the aforesaid chart that Helios & Matheson Information Technology Ltd. was retained as comparable by the CIT(Appeals), though the TPO did not include this company as a comparable in the final list of comparables. In para 98 of the CIT(Appeals) order, the reason given for including this company as a comparable is that this company qualifies the employee-cost filter. According to the CIT(A), for a company to be considered as a comparable company with a software development service provider company, the employee-cost should not be less than 25% of the sales of the company. This filter is an accepted filter in the case of companies engaged in software development services. The CIT(A) did not apply this filter because the application of this filter does not serve any useful purpose since the other filters like turnover and functionality are also applied in the case of assessee. It can thus be seen that the employee cost filter in the case of Helios & Matheson Information
IT(TP)A Nos.437 & 457/Bang/2015 Page 14 of 54
Technology Ltd. was less than 25% of the sales. If this filter is held to be a
valid filter, then this company should be excluded from the list of comparable companies.
Aggrieved by the order of the CIT(Appeals) accepting the
comparable companies chosen by the TPO, the Revenue has filed the appeal before the Tribunal. Aggrieved by the order of CIT(Appeals) not
accepting certain comparable companies chosen by the TPO and also
seeking inclusion of two companies chosen by the assessee viz., Birla Technologies Ltd. and Indium Software (India) Ltd., the assessee has filed
the appeal before the Tribunal.
We have heard the submissions of the ld. counsel for the assessee
and the ld. DR. The ld. DR besides relying on the order of CIT(A) in
support of the grounds of appeal raised by the assessee in its appeal, relied on the grounds raised by the Revenue in its appeal so far as it
relates to appeal by the Revenue.
The ld. counsel for the assessee filed before us a chart showing as to how companies retained by the CIT(A) have to be accepted and also
showing as to how some of the comparable companies included by the CIT(A) are validly excluded based on the decisions rendered by the
Tribunal in several cases. We shall deal with this argument by taking up individual companies chosen by the TPO and excluded by the
CIT(Appeals).
IT(TP)A Nos.437 & 457/Bang/2015 Page 15 of 54 16. (1) Avani Cincom Technologies Ltd. (2) KALS Information Systems Ltd. (3) Celestial Labs Ltd. The comparability of these companies with a software development service provider such as the assessee was considered in several decisions of the ITAT. These have been listed in the chart filed by the assessee before us. We, however, find that making a reference to all those decisions will not be of any help and making a reference to one such decision would be sufficient. In the case of 3DPLM Software Solutions Ltd. v. DCIT, IT(TP)A No.1303/Bang/2012 for A.Y. 2008-09, order dated 28.11.2013, this Tribunal has held as under on choosing this company as a comparable:-
“7.0 Avani Cincom Technologies Ltd. 7.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO
IT(TP)A Nos.437 & 457/Bang/2015 Page 16 of 54 under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions : i) Trilogy E-Business Software India Pvt. Ltd. V DCIT (ITA No.1054/Bang/2011) ii) Telecordia Technologies India Pvt Ltd V ACIT (ITA No.7821/Mum/2011) It was also submitted that this company has been held to be functionally not comparable to the assessee by a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013. 7.3 The learned Authorised Representative further submitted that the facts pertaining to this company has not changed from the earlier year (i.e. Assessment Year 2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that :- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like “DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a co-ordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof :- “ 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the
IT(TP)A Nos.437 & 457/Bang/2015 Page 17 of 54 set of comparables in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Trilogy case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Trilogy case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Trilogy case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Trilogy E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Trilogy E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee
IT(TP)A Nos.437 & 457/Bang/2015 Page 18 of 54 information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly.”
The learned Authorised Representative submits that this company was selected as a comparable by the TPO not by any FAR analysis or as per the search process conducted by the TPO, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a company can be selected as a comparable only on the basis of FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned Authorised Representative also submitted that he has brought on record sufficient evidence to show that the functional profile of this company remains unchanged from the earlier year and hence the findings rendered by the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in other cases like Trilogy E-Business Software India Pvt. Ltd. (supra) are applicable to the year under consideration as well. 7.5 Per contra, the learned Departmental Representative supported the order of the TPO / DRP for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final
IT(TP)A Nos.437 & 457/Bang/2015 Page 19 of 54 list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Trilogy E- Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables.” …….. “9. Celestial Biolabs Ltd. 9.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007- 08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing
IT(TP)A Nos.437 & 457/Bang/2015 Page 20 of 54 that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that – “ ….. As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustments, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the assessee in this regard.”
(iv) The rejection / exclusion of this company as a comparable for Assessment Year 2007-08 for software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. in ITA No.112/Bang/2011, CSR India Pvt. Ltd. in IT(TP)A No.1119/Bang/2011 and by the ITAT, Delhi Bench in the case of Transwitch India Pvt. Ltd. in ITA No.6083/Del/2010. (v) The facts pertaining to this company has not changed from Assessment Year 2007-08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of
IT(TP)A Nos.437 & 457/Bang/2015 Page 21 of 54 comparability in the instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and therefore there cannot be an assumption that it would continue to be applicable for the period under consideration i.e. Assessment Year 2008-09. 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO’s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis- similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co- ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the
IT(TP)A Nos.437 & 457/Bang/2015 Page 22 of 54 assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Trilogy E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed. 10. KALS Information Systems Ltd. 10.1 This is a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007- 08 and qualifies as a comparable by the service income filter. 10.2 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 for the following reasons :- (i) This company is functionally different from the software activity of the assessee as it is into software products. (ii) This company has been held to be functionally not comparable to software service providers for Assessment Year 2007-08 by the co-ordinate bench of this Tribunal in the assessee's own case. This company has been held to be different from a software development company in the decision of the Tribunal in the case of Bindview India Pvt. Ltd. V DCIT in ITA No.1386/PN/2010. (iii) The rejection of this company as a comparable has been upheld by co-ordinate benches of the Tribunal in the case of – Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011). LG Soft India Pvt. Ltd. (IT (TP) A No.112/Bang/2011)
IT(TP)A Nos.437 & 457/Bang/2015 Page 23 of 54 CSR India Pvt. Ltd. (IT (TP) A No.1119/Bang/2011) and Transwitch India Pvt. Ltd. (IA No.6083/Del/2010) (iv) The facts pertaining to this company has not changed from Assessment Year 2007-08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the case on hand and hence ought to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative drew our attention to various parts of the Annual Report of this company. (v) This company is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. ‘Virtual Insure’ and ‘La-Vision’ and b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details culled out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company,
IT(TP)A Nos.437 & 457/Bang/2015 Page 24 of 54 as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company’s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly.”
Respectfully following the aforesaid decision rendered by the coordinate Bench of this Tribunal, we direct exclusion of the aforesaid three companies from the list of comparable companies.
Bodhtree Consulting Ltd. : As far as this company is concerned, the Mumbai Tribunal in the case of Nethawk Networks India (P.) Ltd. v. ITO, ITA No.7633/Mum/2012 for A.Y. 2008-09, order dated 6.11.2013, held that this company is not functionally comparable with a software development service provider. Following were the relevant observations of the Tribunal in this regard:-
IT(TP)A Nos.437 & 457/Bang/2015 Page 25 of 54 “C. Bodhtree Consulting Limited 21. On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too. 22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of the Tribunal in the case of M/s. Wills Processing Services (I) P Ltd (supra) wherein it was mentioned that the TPO described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under: 29.1 The Id Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables.
IT(TP)A Nos.437 & 457/Bang/2015 Page 26 of 54 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3 ** ** ** 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application .........” 23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO. Accordingly, we dismiss the argument of the Ld DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean.”
Respectfully following the aforesaid decision of the ITAT Mumbai Bench of the Tribunal, we hold that the aforesaid company be excluded from the list of comparable companies.
(1) E-Zest Solutions Ltd. (2) Quintegra Solutions Ltd. As far as these companies are concerned, this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) held as follows:-
IT(TP)A Nos.437 & 457/Bang/2015 Page 27 of 54 “14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in ‘e-Business Consulting Services’, consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing (‘KPO’) services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company’s website which should be considered while evaluating the company’s functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO.
IT(TP)A Nos.437 & 457/Bang/2015 Page 28 of 54 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed. 18. Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had any influence on the pricing or the margin earned. 18.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that,
IT(TP)A Nos.437 & 457/Bang/2015 Page 29 of 54 (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : “ Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies.” (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : “ Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company …………… have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks.” (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO’s own filter since there have been acquisitions in this case, as is evidenced from the company’s Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand
IT(TP)A Nos.437 & 457/Bang/2015 Page 30 of 54 and therefore ought to be excluded from the list of comparables for the period under consideration. 18.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.5 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider.”
IT(TP)A Nos.437 & 457/Bang/2015 Page 31 of 54 21. Respectfully following the aforesaid decision of the Tribunal, we direct the AO that the aforesaid companies be excluded from the list of comparables.
(1) Flextronics Software Systems Ltd. (2) iGate Global Systems Ltd. (3) Infosys Technologies Ltd. (4) Mindtree Ltd. (Seg.) (5) Sasken Communication Technologies Ltd. (Seg.) All these companies have been excluded from the list of comparables on the ground that these companies have a turnover filter above Rs.200 crores and cannot be compared with the assessee, whose turnover is only Rs.66.94 crores.
For the sake of reference, we may refer to the decision of this Bench in the case of Trilogy e-business Software India Pvt. Ltd. v. DCIT, ITA No.1054/Bang/2011 dated 23.11.2012, the relevant observations therein are as follows:-
“(1) Turnover Filter
The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of RS. 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
IT(TP)A Nos.437 & 457/Bang/2015 Page 32 of 54 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.” 12. 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)]: “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.”
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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, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet’s analysis, the turnover of RS. 1 crore to RS. 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 & 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
IT(TP)A Nos.437 & 457/Bang/2015 Page 34 of 54 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. 1171/Bang/2010). It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee. 16. 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 RS. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. 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 expense incurred or to be
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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.
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(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 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
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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.
(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
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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
IT(TP)A Nos.437 & 457/Bang/2015 Page 39 of 54 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. 20. 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 RS. 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, ITA No.1231/Bang/2010) . 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 Rs. (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. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores.”
Respectfully following the aforesaid decision, we direct the aforesaid companies be excluded from the list of comparables.
Tata Elxsi Ltd.: Comparability of this company was considered by this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) and it was held as under:-
IT(TP)A Nos.437 & 457/Bang/2015 Page 40 of 54 “13. Tata Elxsi Ltd. 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely – a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telecordia Technologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore this company cannot be considered as a comparable to the assessee in the case on hand. (iii) Tata Elxsi Ltd. is predominantly engaged in product designing services and is not purely a software development service provider. In the Annual Report of this company the description of the segment ‘software development services’ relates to design services and are not to software services provided by the assessee. (iv) Tata Elxsi Ltd. invests substantial funds in research and development activities which has resulted in the ‘Embedded Product Design Services Segment’ of the company to create a portfolio of reusable software
IT(TP)A Nos.437 & 457/Bang/2015 Page 41 of 54 components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons, Tata Elxsi Ltd. is clearly functionally different / dis-similar from the assessee and therefore ought to be omitted form the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the stand of the TPO in including this company in the list of comparables. 13.4 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by the assessee. 13.5 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- “ …. 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 Authorised Representative 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 as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable portion.”
IT(TP)A Nos.437 & 457/Bang/2015 Page 42 of 54 As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.”
Wipro Ltd.: As far as this company is concerned, this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) held that this company is not comparable with software development service provider such as the assessee. The relevant observations are as follows:-
“12. Wipro Ltd. 12.1 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 grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons:- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation 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 a market leader assuming all risks leading to higher
IT(TP)A Nos.437 & 457/Bang/2015 Page 43 of 54 profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO’s own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 12.4 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison.
IT(TP)A Nos.437 & 457/Bang/2015 Page 44 of 54 12.5 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (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 such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration.”
Respectfully following the aforesaid decision, we direct that Wipro Ltd. be excluded from the list of comparable companies.
(1) Thirdware Solutions Ltd. (2) Lucid Software Ltd. Comparability of these companies with a software development service provider such as the assessee was considered by this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) and it was held as under:-
“15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of Rs.500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :-
IT(TP)A Nos.437 & 457/Bang/2015 Page 45 of 54 (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04-ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.
IT(TP)A Nos.437 & 457/Bang/2015 Page 46 of 54 16. Lucid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that – (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. Ltd. [ IT(TP)A No.1119/Bang/2011 ] and by the Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (ITA No.6083/Del/2010). (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development.
IT(TP)A Nos.437 & 457/Bang/2015 Page 47 of 54 The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.”
IT(TP)A Nos.437 & 457/Bang/2015 Page 48 of 54 29. Respectfully following the aforesaid decision, we direct that the aforesaid companies be excluded from the list of comparable companies.
Persistent Technologies Ltd.: As far as this company is concerned, this Bench in the case of 3DPLM Software Solutions Ltd. (supra) held that this company is not functionally comparable with a software development service provider such as the assessee. Following are the relevant observations:-
“17. Persistent Systems Ltd. 17.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand.
IT(TP)A Nos.437 & 457/Bang/2015 Page 49 of 54 (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in ‘Outsourced Software Product Development Services’ for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.3 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.4 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.”
IT(TP)A Nos.437 & 457/Bang/2015 Page 50 of 54
In view of the aforesaid decision, we direct that Persistent
Technologies be excluded from the list of comparables.
Helios & Matheson Information Technology Ltd. : This company was a comparable included by the CIT(Appeals) in the impugned order.
The application of employee cost filter of 25% of the sale is an accepted filter. In the case of First Advantage Offshore Services, ITA
No.1086/Bang/2011, this Tribunal has held that the aforesaid filter is a valid filter and has to be accepted for choosing comparables. In the light of the
aforesaid decision and in view of the admitted factual position that the
employee cost in the case of this company was less than 25% of its sales, this company has to be excluded from the list of comparables. We hold
and direct accordingly.
Inclusion of two comparables chosen by the assessee
Birla Technologies Ltd.: The TPO rejected this company as a
comparable on the ground that it has zero export turnover. This was confirmed by the CIT(A). It has been pointed out before us that export
revenue of this company is 88.97% of its turnover and therefore it passes
the export revenue filter of 25% of the turnover and has to be selected as a comparable. Our attention was drawn to the decision of this Tribunal in the
case of IBM India Pvt. Ltd. v. JCT, 2014 46 taxman.com 129 (Bang. Trib), wherein it was held that this company passes the export revenue filter and
IT(TP)A Nos.437 & 457/Bang/2015 Page 51 of 54 has to be regarded as a comparable. Following were the relevant observations:-
“1. M/s Birla Technologies: The reason assigned by the TPO for excluding this company as comparable was that the exports sales were less than 25%. In this regard, the learned counsel for the assessee drew our attention to pages -689 to 698 and page 317 of T.P. Paper book, which is a compilation of the annual reports of various companies filed by the assessee. Perusal of page-698 shows that total income from software services/licence fee of assessee was Rs.24,12,30,696/-. It is also clear from the Director’s report that the entire income were derived from exports. It thus, appears that the reason assigned by the TPO for rejecting this company as comparable which was for the reasons that the company has export sales of less than 25% of the total sales is on an erroneous basis. We therefore, hold that this company should be taken as a comparable as there is no other basis for rejecting this company as comparable assigned by the TPO.”
Indium Software (India) Ltd.: This company was also rejected by the TPO and the CIT(A) confirmed the same on the ground that this company fails the export revenue filter. It has been pointed out before us by the ld. counsel for the assessee that export turnover filter of this company was 37.77% of its total turnover and therefore this company passes the export revenue filter of more than 25% of the turnover and has to be regarded as a comparable.
We therefore are of the view that it would be just and proper to direct the TPO to consider the aforesaid claim of the assessee and if found correct, to include the above two companies as a comparable.
IT(TP)A Nos.437 & 457/Bang/2015 Page 52 of 54
Now, we shall deal with the specific grounds raised by the Revenue.
As far as ground No.2 is concerned, we have already given reasons as to why size and turnover was a relevant criterion for choosing companies as a
comparable. The decisions referred to while deciding the relevant filter
have taken the view that turnover and size is a relevant criterion for deciding the comparables. Accordingly, this objection of the Revenue is
found to be without any merit.
As far as ground No.3 is concerned, this company was excluded as functionally not comparable in the case of 3DPLM Software Solutions Ltd.
(supra) and therefore it is not necessary to go into the grievance projected by the Revenue in this regard.
As far as ground Nos.4 & 5 are concerned, the grievance of the
Revenue is misconceived as the CIT(Appeals) did not apply any of the norms as stated in these grounds.
As regards ground No.6, we have already held, following the
decision of the Tribunal in the case of First Advantage Offshore Services (supra) that 25% employee cost to sales is a valid filter and therefore
ground No.6 raised by the Revenue is without any substance.
As far as ground Nos.7 & 8 are concerned, we have already
excluded these companies following the decision of the Tribunal wherein
these companies were held to be not comparable. The grievance projected
IT(TP)A Nos.437 & 457/Bang/2015 Page 53 of 54
by the Revenue is therefore held to be without any merit. The TPO is directed to exclude the companies directed to be excluded in this order and compute the ALP and allow + / - 5% variation as provided in the second proviso to section 92C of the Act.
All other grievances projected by the assessee in its grounds of appeal Nos. 1 to 7, other than those decided in this order, are left open for consideration, as the decisions rendered in this order would bring the prince charged by the assessee in the international transaction within + / - 5% range of the arithmetic mean of comparables ultimately retained as given by the assessee in page 12 of the written submissions filed before us.
Thus grounds Nos.1 to 8 raised by the Revenue are dismissed, while ground Nos. 1 to 7 of the assessee’s appeal are treated as partly allowed.
In grounds No. 9 to 11, the Revenue has projected its grievance with regard to excluding the lease line expenses from the total turnover as well as the export turnover, following the decision of the CIT v. Tata Elxsi
Ltd., 349 ITR 98 (Karn).
The only grievance of the Revenue is that the decision of Hon'ble
High Court of Karnataka in Tata Elxsi (supra) has not attained finality and
a SLP by the department is pending before the Hon'ble Supreme Court.
IT(TP)A Nos.437 & 457/Bang/2015 Page 54 of 54 We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. We therefore hold that the order of CIT(A) does not call for any interference and accordingly the same is confirmed.
In the result, the appeal by the Revenue is dismissed, while the appeal by the assessee is partly allowed.
Pronounced in the open court on this 23rd day of June, 2015.
Sd/- Sd/-
( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 23rd June, 2015.
/D S/
Copy to: 1. Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.