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Income Tax Appellate Tribunal, BANGALORE BENCH “ C ”
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Appellant By : Shri K.R. Vasudevan, Advocate. Respondent By : Shri Ganesh Rao, CIT (D.R) Date of Hearing : 1.4.2015. Date of Pronouncement : 24.04.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals) – IV, Bangalore dt.28.5.2014 for Assessment Year 2009-10.
The facts of the case, briefly, are as under :- 2.1 The assessee-company is engaged in the business of providing software development services to its overseas Associated Enterprises (‘AEs’), for which it is compensated by reimbursement of all relevant operating costs, plus mark up of a profit margin. For Assessment Year 2009-10, the assessee filed its return of income on 30.9.2009 declaring total income of Rs.2,22,73,157. The return was processed under Section 143(1) of the 2 IT(T.P)A No.1009/Bang/2014 Income Tax Act, 1961 (herein after referred to as 'the Act') and the case was selected for scrutiny. The Assessing Officer, observing that the assessee had entered into international transactions with its Associated Enterprises (AEs) in the year under consideration, made a reference to the Transfer Pricing Officer (TPO) on 24.10.2011, after obtaining the approval of the concerned CIT, for working out the Arm’s Length Price (‘ALP’) of these transactions. The TPO passed an order under Section 92CA of the Act dt.8.1.2013 in respect of international transactions entered into by the assessee with its AEs and proposed an adjustment of Rs.18,55,44,708 to the ALP of the international transactions of the assessee in respect of its provision of software development services. 2.2 On receipt of the TPO’s order under Section 92CA of the Act, the Assessing Officer passed a draft order of assessment under Section 143(3) rws 144C of the Act dt.19.2.2013 incorporating, inter alia, the T.P. Adjustment of Rs.18,55,44,708 proposed by the TPO in his order under Section 92CA of the Act. Since the assessee indicated that it seeks to file an appeal before the CIT (Appeals), the Assessing Officer passed the final order of assessment under Section 143(3) rws 144C(3) rws 144C(4) of the Act vide order dt.22.4.2013, wherein the income of the assessee was determined at Rs.22,02,79,262. In this order, the Assessing Officer made the following additions / disallowances to the returned income of Rs.2,22,73,157 :- (i) T.P. Adjustment : Rs.18,55,44,708. (ii) Disallowance of Excess claim of deduction u/s.10A : Rs.1,24,61,397. 2.3 Aggrieved by the order of assessment for Assessment Year 2009-10 dt.22.4.2013, the assessee preferred an appeal before the CIT (Appeals) – IV, Bangalore. The learned
3 IT(T.P)A No.1009/Bang/2014 CIT(A) disposed off the assessee's appeal vide order dt.28.5.2014 allowing the assessee partial relief. 3. Aggrieved by the order of the CIT (Appeals) – IV, Bangalore dt.28.5.2014, the assessee is in appeal before this Tribunal raising the following grounds :- “
1. Transfer Pricing.
1. The ld. Assessing Officer, the ld. JCIT (Transfer Pricing Officer – II), Bangalore and the Hon'ble CIT (Appeals) have erred in law and facts of the case in proposing a transfer pricing adjustment under Section 92CA of the Income Tax Act, 1961 amounting to Rs.12,03,07,763 in relation to the provision of software development services to the Associated Enterprises.
2. The ld. A.O., TPO and the Hon'ble CIT (Appeals) erred in disregarding the economic analysis performed by the appellant in the Transfer Pricing documentation justifying the arm’s length nature of the international transactions with the AEs.
3. The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in rejecting the TP documentation of the appellant contending the same is defective and not reliable.
4. The ld. A.O., TPO and the Hon'ble CIT (Appeals) erred in not considering multiple year/prior year data of comparable companies while determining arm’s length price.
5. The ld. A.O., TPO and the Hon'ble CIT (Appeals) erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining arm’s length price.
6. The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in rejecting companies selected as comparable by the appellant in the TP documentation and have erred in selecting / introducing companies which are not comparable to the appellant on conducting a fresh comparability analysis and on introduction of additional filters in determination of arm’s length price.
7. The Hon'ble CIT (Appeals) has erred in contending that the upper turnover threshold should be Rs.500 Crores in selecting / rejecting companies as comparable without taking into cognizance the turnover of the appellant and the precedence / observations of the Hon'ble ITATs inthis matter.
8. The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in rejecting Thinksoft Global Services Ltd. and FCS Software Solutions Ltd. on the ground that the working capital adjustment for these companies are substantial.
9. The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in restricting the working capital adjustment to the average cost of capital of the comparable companies selected instead of allowing the correct working capital adjustment in determination of arm’s length price. In connection with the above, the ld. A.O. has erroneously computed the total taxable income by incorrectly computing the 4 IT(T.P)A No.1009/Bang/2014 transfer pricing relief granted by Hon'ble CIT (Appeals) in the order dt. July 4, 2014.
10. The ld. A.O. / TPO has not shared the details of computation of average cost of capital applied in the determination of working capital adjustment with the appellant.
The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in not providing appropriate adjustment towards the risk differential between the appellant and the entrepreneurial companies selected as comparable while determining the arm’s length price.
The Hon'ble CIT (Appeals) has erred in not adjudicating on the ground of exclusion of travelling expenses form the export turnover while computing the eligible deduction under Section 10A of the Act.” TRANSFER PRICING ISSUES (Grounds 1 to 11) 4.1 Before proceeding to deal with the above grounds of appeal
on T.P. issues, the approach of the TPO vis-a-vis that of the assessee in its T.P. Study submitted before the TPO is briefly summarised hereunder. 4.2 The assessee is engaged in the provision of software development services to its overseas AEs. For the year under consideration, the assessee has reported the following international transactions in its 92CE report. S.No. Type of Transactions Amount Rs.
1. Software Development Services (R) 196,67,62,168 2. Import of Capital Goods (Paid) 28,49,908 3. Interest on ECB Loans (Paid) 36,94,47,229
4. Cross charges of expenses 3,14,30,503 The assessee conducted its T.P. Study applying Transactional Net Margin Method (‘TNMM’) as the Most Appropriate Method (‘MAM’) and conducted its search for comparable companies using the Prowess and Capitaline data bases. On this basis, the assessee chose the following 13 companies as comparable to it.
5 IT(T.P)A No.1009/Bang/2014 S.No. Name of the comparable company 1. Akshay Software Technologies Ltd. 2 Helios & Matherson Information 3 iGate Global Solutions Ltd. 4 Mindtree Ltd. 5 Netripples Software Ltd. 6 Prithvi Information Solutions Ltd. 7 R S Software (India) Ltd. 8 Sagarsoft (India) Ltd. 9 Servealll Enterprise Solutions Ltd. 10 Thirdware Solutions Ltd. 11 SIP Technologies Exports Ltd. 12 VMF Soft Tech Ltd. 13 Zylog Systems Ltd.
4.3 As the profit margin of the assessee worked out @ 15.17% on cost was higher than the average profit margin of these 13 comparables @ 9.80% on cost, the assessee held its international transactions to be at arms length.
TPO’s Approach. 5.1 The TPO after examining the assessee's T.P. Study, rejected it and after conducting his own search for comparables, arrived at a final set of 11 comparable companies and their operating margins, the details of which are as under :- Sl.No. Name of the comparable Margin % 1 Kals Information Systems Ltd. 13.89 2 Akshay Software Technologies Ltd. 8.11 3 Bodhtree ConsultingLtd. 62.27 4 R S Software (India) Ltd. 9.97 5 Tata Elxsi Ltd. (seg) 20.28 6 Sasken Communication Technologies Ltd. 27.91 7 Persistent Systems Ltd. 41.40 8 Zylog Systems Ltd. 7.81 9 Mindtree Ltd. (seg) 5.52 10 Larsen & Toubro Infotech 24.72
6 IT(T.P)A No.1009/Bang/2014 11 Infosys Ltd. 45.61 Average Mean 24.32 5.2 The average mean margin of these 11 comparables was computed at 24.32%. After allowing working capital adjustment of 1.71%, the adjusted mean margin was worked out at 26.03%. The resultant shortfall in the price amounting to Rs.18,55,44,708 was taken as the T.P. Adjustment to the ALP of the international transactions of the assessee with its AEs. The T.P. Adjustment was subsequently modified by the Assessing Officer under Section 154 rws 92CA of the Act vide order dt.18.6.2013 whereby the T.P. Adjustment was reduced from Rs.18,55,44,708 to Rs.12,71,38,857.
The assessee has preferred this appeal against the order of the CIT (Appeals) – IV dt.28.5.2014 for Assessment Year 2009-10. At the time of hearing, the learned Authorised Representative submitted that though the grounds raised
in respect of T.P. issues are from S.Nos.1 to 11, the grounds relating to the comparability of some of the comparable companies chosen by the TPO alone need to be adjudicated. Before us, the learned Authorised Representative has filed a chart in which the assessee challenges the action of the TPO in including certain companies in the final list of comparables. COMPANIES INCLUDED IN THE TPO’S FINAL LIST OF COMPARBALES WHICH THE ASSESSEE WANTS TO BE EXCLUDED
7. TURNOVER FILTER. 7.1.1 The learned Authorised Representative drew the attention of the Bench that out of the 11 comparables chosen by the TPO (supra), the following companies will have to be excluded as the turnover of these companies in excess of Rs.200 Crores and therefore
7 IT(T.P)A No.1009/Bang/2014 cannot be compared with the assessee whose turnover is less than Rs.200 Crores (viz. Rs.196.67 Crores). S.No. Name of Company Turnover (Rs. in Crores) 1 Infosys Technologies Ltd. 20264.00 2 Larsen & Toubro Infotech Ltd. 1950.83 3 Mindtree Ltd. 793.22 4 Persistent Systems Ltd. 519.69 5 Sasken Communication Technologies Ltd. 405.31 6 Tata Elxsi Ltd. 378.43 7 Zylong Systems Ltd. 734.93 7.1.2 In support of the proposition for exclusion of the above 7 companies, having turnover of more than Rs.200 Crores from the list of comparables since the assessee's turnover was less than Rs.200 Crores, the ld. A.R. placed reliance on the decision of the co-ordinate bench in the case of Genisys Integrating Systems (India) Ltd., in which was followed by another co-ordinate bench of this Tribunal in the case of M/s. Airbus India Operations Pvt. Ltd. V DCIT in IT(TP)A No.35/Bang/2014 dt.10.10.2014 for Assessment Year 2009-10. It is submitted that in the above decisions it was held that companies having turnover in excess of Rs.200 Crores cannot be comparable with companies whose turnover is less than Rs.200 Crores. The learned Authorised Representative submitted that in view of the above factual situation and judicial pronouncements, the seven companies listed above ought to be excluded from the list of comparables to the assessee. 7.2 Per contra, the learned Departmental Representative relied on the order of the TPO.
8 IT(T.P)A No.1009/Bang/2014 7.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that in the case of Airbus India Operations Pvt. Ltd. V DCIT in IT(TP)A No. 35/Bang/14 dt.10.10.2014 for Assessment Year 2009-10, which is also the year under consideration in the case on hand, the co-ordinate bench at paras 17 & 18 of its order has held that the aforesaid seven companies (listed at S.Nos.5 to 11 in the TPO’s final list of comparables) should be excluded from the list of comparables as the turnover of these companies is more than Rs.200 Crores while that of the assessee is that case was only Rs.31.83 Crores. 7.3.2 The relevant portion of the order in the case of Airbus India Operations Pvt. Ltd. (supra) at paras 17 & 18 thereof is extracted hereunder :-
“ 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 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;
9 IT(T.P)A No.1009/Bang/2014 (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that— (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained 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: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm’s length price under section 92C:-
10 IT(T.P)A No.1009/Bang/2014 “10B. (1) For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) ……. to (d) …….. (e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction. (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; 11 IT(T.P)A No.1009/Bang/2014 (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.”
A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO.
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 12 IT(T.P)A No.1009/Bang/2014 within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover 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 of the Tribunal in the case of Trilogy E- Business Software India Pvt.Ltd. (supra) and Assessee’s case for AY 06-07, we hold that the aforesaid companies (listed at S.No.5 to 11 of the final list of comparable companies set out in the chart given para-4 of this order) should be excluded from the list of comparable companies as the turnover of these companies are more than Rs.200 Crores compared to the turnover of the Assessee which is only Rs.31.83 Crores. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable.” 7.3.3 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) for Assessment Year 2009-10, we hold that the aforesaid seven companies (listed at S.Nos.5 to 11 of the TPO’s final list of comparables in the order under Section 92CA of the Act) and also listed out at para 7.1.1 of this order (supra), should be excluded from the list of comparable companies as the turnover of these companies is in excess of Rs.200 Crores compared to that of the assessee which is below Rs.200 Crores (i.e. Rs.196.67 Crores)
13 IT(T.P)A No.1009/Bang/2014 COMPANIES SOUGHT TO BE EXCLUDED FROM FINAL LIST OF COMPARABLES BY THE ASSESSEE ON GROUNDS OF BEING FUNCTIONALLY DIFFERENT.
Bodhtree Consulting Ltd. 8.1 This company is listed at S.No.4 of the TPO’s list of comparables extracted at paras 4.2 of this order (supra). The comparability of this company with a software development services company, such as the assessee in the case on hand, for Assessment Year 2009-10 was considered by a co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) wherein, following the decision of another co-ordinate bench of this Tribunal in the case of CISCO Systems India Pvt. Ltd. in IT(TP)A No.271/Bang/2014 for Assessment Year 2009-10 dt.14.8.2014, it was held as under at paras 15 & 16 thereof :-
15. The assessee company, Cisco Systems (India) Pvt. Ltd. is a wholly owned subsidiary of Cisco Group represented by Cisco Systems Management BV and Cisco Mauritius Inc., Mauritius. Cisco India is responsible for marketing of Cisco products in India and for providing services to its AEs namely CSJ, Cisco BV and CTI. The company is primarily engaged in the provision of contract software development services to Cisco Technology Inc., US [“CTI ]. Thus, Cisco India is engaged in Contract software development services, Product replacement services, Administrative and other support services and Management services to its AEs. The segmental financials for the F.Y. 2008-09 were as under:-
Description Software Marketing Product Admin & Manage- Other Development & Sales Replacement Other ment Services Services Support Services Services Revenue 9654304981 5270847929 2463723146 1491900613 1250254745 54441247 Total Cost 8904581852 4213518148 2413930963 1374404584 1136594862 51245935 Operating 749723129 1057329781 49792183 117496029 113659883 3195312 Profit Mark up on 8.42% 25.09% 2.06% 8.55% 10.00% Cost 14 IT(T.P)A No.1009/Bang/2014 Mark up on 7% VAE
The issue raised by the Assessee in Ground No. B 1 to 17 relates to the determination of Arm’s Length Price (ALP) in respect of receipts by the Assessee from it’s AE in respect of transaction of rendering software development services. In support of the claim of the Assessee that the price paid as above was at Arm’s Length, the Assessee filed a Transfer Pricing analysis. The Assessee adopted TNMM as the most appropriate method. The Profit Level Indicator (PLI) chosen was Operating profit to operating cost. The assessee proposed 17 comparable companies out of which the TPO accepted 5 comparable companies and rejected the 12 comparables. On his own, the TPO selected 6 companies and arrived at a final set of 11 comparables and their operating margins as follows:-
Sl. Name of the Comparable Sales Cost Margin No. (in Rs.) (in Rs.) 1 Kals Information Systems Ltd 2,14,04,686 1,87.93,813 l3.89% 2 Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd. 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.81% 9 Mindtree Ltd. (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11 Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% Average mean 24.32%”
8.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra), and after taking note that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable to a software development service provider as is the assessee in the case on hand, for identical reasons, we direct the TPO to exclude this company i.e. Bodhtree Consulting Ltd. from the final list of comparable companies. It is ordered accordingly.
KALS Information Systems Ltd. 9.1 This company is listed at S.No.1 in the TPO’s final list of comparables listed out at para 4.2 of this order (supra). The comparability of this company with a software 15 IT(T.P)A No.1009/Bang/2014 development service provider, such as the assessee in the case on hand, for Assessment Year 2009-10 was considered by a co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra), wherein, following the decision of another co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10, at paras 21 and 22 thereof it was held as under :-
“ 21. KALS INFORMATION SYSTEMS LTD.: This company is listed at Sl.No.3 in the final list of comparables chosen by the TPO which is set out in para-4 of this order. The comparability of this company with a software development services company such as the Assessee for AY 09-10 was considered by this Tribunal in the case of M/S.Cisco Systems (India) Pvt.Ltd., IT (TP) A.No.271/Bang/2014 for AY 09-10 order dated 14.8.2014. This Tribunal held as follows:
“26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- “(d) KALS Information Systems Ltd.
As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: “16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development 16 IT(T.P)A No.1009/Bang/2014 services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.” Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.
We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.” Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable.”
Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid company from the list of comparable companies for the purpose of computation of ALP.” 9.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) and after taking note that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable to a software development service provider, as is the assessee in the case on hand, for identical reasons, we direct the TPO to exclude this company i.e. Kals 17 IT(T.P)A No.1009/Bang/2014 Information Systems Ltd. from the list of comparable companies. It is ordered accordingly.
Infosys Technologies Ltd. & Tata Elxsi Ltd. (Seg.) 10.1 The learned Authorised Representative submitted that though Infosys Technologies Ltd. and Tata Elxsi Ltd. (Seg) have to be excluded by applying the turnover filter, they are also additionally functionally different and not comparable to a company such as the assessee as has been held by different co-ordinate benches of this Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra), Cisco Systems (India) Pvt, Ltd. and the case of Airbus India Operations Pvt. Ltd. (supra) for Assessment Year 2009- 10. The learned Authorised Representative submits that in the factual matrix of the case and in view of the aforesaid decisions of the co-ordinate benches of this Tribunal (supra), these two companies sought to be excluded from the final list of comparables. 10.2.1 We have heard both the learned Authorised Representative and the learned Departmental Representative and have perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) excluded these two companies as comparable to an assessee who is purely a software development service provider, holding as under at paras 19 & 20 thereof :- “ 19. The next submission of the learned Counsel for the Assessee was that though, Infosys Technologies Ltd., & Tata Elxsi Ltd. (seg.) have to be excluded by applying the Turnover filter, they are also additionally functionally not comparable as held by this Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra) and Cisco Systems (India) (supra). We have considered his submission and we find that in the case of Cisco Systems (India) (supra), this tribunal has also held that the aforesaid two companies are also not functionally comparable to a company such as the Assessee rendering purely software 18 IT(T.P)A No.1009/Bang/2014 development services. The following were the relevant observations of the Tribunal. “26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, by order dated 28.11.2013 with regard to this comparable has held as follows:- “11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; 19 IT(T.P)A No.1009/Bang/2014 (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY’, a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) for Assessment Year 2007- 08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.” The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies.” 26.3 ……..
20 IT(T.P)A No.1009/Bang/2014 “26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee’s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables.
21 IT(T.P)A No.1009/Bang/2014 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge :
1. 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs.
2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services.
3. The contribution of the embedded services segment is to the tune of Rs.230 crores in the total segment revenue of Rs.263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services.
4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07."
21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:”
22 IT(T.P)A No.1009/Bang/2014 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable.”
Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid two companies from the list of comparable companies for the purpose of computation of ALP.” 10.2.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) and other Tribunal decisions referred to above, and taking note of the facts and circumstances under which the aforesaid two companies [viz. Infosys Technologies Ltd. and Tata Elxsi Ltd. (Seg.)] were considered to be comparable with a software development service provider, such as is the assessee in the case on hand, for identical reasons we direct the TPO to exclude aforesaid two companies from the list of comparables. It is ordered accordingly. 11. In view of our findings above, the T.P. issues raised by the assessee at S.Nos.1 to 11 stands disposed off. This observation of ours is in view of the submissions urged before us by the learned Authorised Representative in respect of grounds at S.Nos.6 & 7 of this appeal. Consequently, since the grounds raised
at S.Nos.1 to 5 and 8 to 11, being general and not urged specifically before us in appeal proceedings by the learned Authorised Representative, they are rendered infructuous and are accordingly dismissed.
12. Ground No.12 – Deduction u/s.10A of the Act. 12.1 In this ground, the assessee contends that the learned CIT(A) had not adjudicated on the ground of excluding of travelling expenses from the export turnover while computing the eligible deduction u/s.10A of the Act. This being the case, we deem it fit to 23 IT(T.P)A No.1009/Bang/2014 remit this issue to the file of the learned CIT(A) to consider and adjudicate the matter in accordance with law after affording the assessee adequate opportunity of being heard and to file details / submissions required in this regard. It is ordered accordingly.
13. In the result, the assessee's appeal for Assessment Year 2009-10 is partly allowed. Order pronounced in the open court on 24th April, 2015.