2016 (9) TMI 1434 - AT - Income Tax

Deduction u/s. 10A - exclude telecommunication charges and travel expenses incurred in foreign currency from the total turnover - Held that - Hon ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd.(2011 (8) TMI 782 - KARNATAKA HIGH COURT) wherein it was held that whatever is excluded from the export turnover has also to be excluded from the total turnover. Grievance of the Revenue that the decision of HC has not been accepted by the revenue and an appeal by the revenue has been filed before the Hon ble Supreme Court is of no relevance as law declared by the Hon ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee company is engaged in the business of development of software and provides sales & marketing support thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Exclusion of telecommunication charges and travel expenses from total turnover for deduction u/s 10A.
2. Selection of comparables for Transfer Pricing (TP) adjustment.

Issue-wise Detailed Analysis:

1. Exclusion of Telecommunication Charges and Travel Expenses from Total Turnover for Deduction u/s 10A:

3. The issue that arises for consideration in this appeal is as to whether the DRP was justified in directing the AO to exclude telecommunication charges of ?2,59,83,333 and travel expenses of ?16,08,944 incurred in foreign currency from the total turnover also while computing the deduction u/s. 10A of the Act, following the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd., 349 ITR 98 (Karn) wherein it was held that whatever is excluded from the export turnover, has also to be excluded from the total turnover.

4. The only grievance of the Revenue is that the decision of Hon'ble High Court of Karnataka in Tata Elxsi (supra) has not been accepted by the revenue and an appeal by the revenue has been filed before the Hon'ble Supreme Court. 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 find no infirmity in the directions of the DRP and uphold the same.

5. In the result, the appeal of the revenue is dismissed.

2. Selection of Comparables for Transfer Pricing (TP) Adjustment:

6. The assessee company is engaged in the business of development of software and provides sales & marketing support. It filed the return of income for the AY 2009-10 declaring a total income of ?34,21,148 after claiming deduction u/s. 10A amounting to ?11,24,01,664. In the scrutiny proceedings, the Assessing Officer observed that the assessee had international transaction exceeding ?15 crores and the case was referred to the TPO. The TPO in his order u/s. 92CA of the Act determined an adjustment to the arm’s length price (ALP) to the extent of ?4,51,80,222.

7. Further the TPO in his order dated 15.3.2013 passed u/s 92CA(5) r.w.s. 154 revised the adjustment to the ALP to an amount of ?3,16,01,043. The Assessing Officer passed a draft assessment order u/s. 143(3) r.w.s. 144C of the Act, against which the assessee appealed before the DRP. The DRP issued directions u/s. 144C(5) of the Act. Aggrieved by the order of the DRP, the assessee is in appeal before us.

8. Though several grounds are raised in the appeal by the assessee, the ld. counsel for the assessee pressed for only grounds Nos.3 (a), (d) & ground No.7. Thus, the other grounds are dismissed as not pressed.

9. As far as ground No.7 is concerned regarding deduction u/s. 10A of the Act, this issue has already been considered by us while dealing with the revenue’s appeal hereinabove, confirming the order of the DRP. Therefore, ground No.7 raised by the assessee on this issue is also dismissed.

Functional and Turnover Comparability:

10. Ground Nos. 3(a) & (d) raised by the assessee read as follows:-

“3(a) The AO/TPO erred on facts in benchmarking the transactions of the ‘limited risk’ software services of the Appellant with companies operating as full fledged entrepreneurs, without considering the differences in the functions performed, assets employed and risk undertaken.

3(d) The AO/TPO erred on facts in arbitrarily accepting companies without considering the differences in the turnover and size of the Appellant vis-à-vis the comparables.”

Exclusion of Specific Comparables:

11. The ld. counsel for the assessee has furnished a chart with respect to comparables selected by the TPO.

Kals Information Systems Ltd.:

11.1.1 It was submitted that Kals Information Systems Ltd. selected by the TPO has two segments viz., development of software & software products and training services. Hence this company was also engaged in the development of software products. This company’s inventory was 52.79% of the total current assets and it incurs business promotion expenses at 4.36% of sales. The turnover of this company was ?2.14 crores. It was therefore contended that this company was not functionally comparable with that of assessee. Reliance was placed on the decision of the Tribunal in the case of M/s. Unisys India Pvt. Ltd. in IT(TP)A No.67/Bang/2015 [para 33 of the order] and in the case of M/s. CISCO Systems (India) Pvt. Ltd. in ITA No.271/Bang/2014 [para 26.3 of the order] wherein it was held that this company is functionally different as it is a software product company.

11.1.2 Apart from the functionally dissimilarity, the ld. counsel submitted that the turnover of this company is 10 times more than the assessee company. In this regard, he invited our attention to the decision of the Tribunal in the case of ACIT v. M/s. McAfee Software (India) Pvt. Ltd. In IT(TP)A No. 04/Bang/2012, order dated 18.03.2016.

11.1.3 Following the decision of the co-ordinate Bench of the Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra), we direct that Kals Informations Systems Ltd. be excluded from the final list of comparables on the functional comparability.

Bodhtree Consulting Ltd.:

11.2.1 The ld. Counsel for the assessee submitted that this company is in the business of software products and engaged in providing open and end to end web solutions, data warehousing, software consultancy and design & development of software using latest technology. It is a product company. It has abnormal growth of 67% over previous year on account of launch of its product, MIDAS. The business promotion expenses was to the extent of ?11.16 lakhs. In view of the above, it was submitted that this company is not comparable with that of the assessee. Reliance was placed on the decision of M/s. CISCO Systems (India) Pvt. Ltd. (supra) wherein Bodhthree Consulting Ltd. was held not to be regarded as a comparable.

11.2.2 In view of the co-ordinate Bench of the Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra), we direct Bodhtree Consulting Ltd. to be excluded from the list of comparables.

Tata Elxsi Ltd.:

11.3.1 The ld. counsel for the assessee submitted that Tata Elxsi Ltd. is not a comparable with the assessee company since this company provides product design service, innovation design engineering services, visual computing labs, systems integration and support. The R&D expenses of this company was 3.26% of the total turnover and cost of goods sold was 10.64% of the cost base. The turnover criterion of this company was of ?378.43 crores. In support of its contentions, reliance was placed on the decision of the co-ordinate Bench of this Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra) and other cases.

11.3.2 In the case M/s. CISCO Systems (India) Pvt. Ltd. (supra), this Tribunal at para 26.4 & 26.5 held that Tata Elxsi Ltd. should not be regarded as a comparable.

11.3.4 In view of the decision of the co-ordinate Bench of this Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra), we direct that Tata Elxsi Ltd. be excluded from the final list of TPO’s comparables.

Sasken Communication Technologies Ltd. (Seg):

11.4.1 The ld. counsel for the assessee submitted that this company is not functionally comparable since it has different functional profile i.e., product company and focus on R&D and hardware. It incurred losses on impairment of assets and business restructuring expenses. It owns intangibles, 23 in US and 8 in India. Its turnover criterion is ?405.31 crores. Reliance was placed on the decision of this Tribunal in the case of M/s. Yodlee Infotech Pvt. Ltd. v. ITO, IT(TP)A No.108/Bang/2014 dated 12.12.2014 at para 20 of the order.

Persistent Systems Ltd.:

11.5.1 It was submitted that this company is engaged in providing licensing of products and sale of products. It has revenue from export of services and products. This company is engaged in outsourced product development services for independent software vendors and enterprises. The income includes both software services and product sales and segmental details are not available. It owns intangibles of ?11.35 million and incurs marketing expenses. The turnover criterion is of ?519 crores. Hence it was submitted that this company is not comparable with that of the assessee.

Larsen & Toubro Infotech Ltd.:

11.6.1 It was submitted that this company is providing offshore operations but the comparable has majority of onsite revenue of 52.72% of the total revenue. It develops inhouse intangibles and owns intangibles of ?2,253 lakhs for FY 2008-09. The turnover criterion is of ?1,950.83 crores. Hence this company was sought to be rejected as a comparable.

Infosys Ltd.:

11.7.1 It was submitted that Infosys Ltd. has brand related profits. It has brand earnings of ?3,253 crores and owns significant intangibles. The onsite revenue is to the extent of 49.30% of total revenue. It had total turnover of ?20,264 crores as against ?40.36 crores of the assessee. It incurred sales and marketing expenses of 4.6% of the sales. Therefore, on these grounds, this company was sought to be rejected as a comparable.

Supporting Tribunal Decisions:

12. In support of its contentions for rejection of the comparables viz., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Larsen Toubro Infotech Ltd. and Infosys Ltd., reliance was placed on the decision of this Tribunal in the case of Yodlee Infotech Ltd. v. ITO, IT(TP)A No.108/Bang/2014 dated 12.12.2014, M/s. Unisys India Pvt. Ltd. v. D CIT in IT(TP)A No.67/Bang/2015 dated 30.09.2015 and M/s. CISCO Systems (India) Pvt. Ltd. (supra).

12.1 We find that in the case of Yodlee Infotech Ltd. (supra), this Tribunal at para 20 of its order has held as under:-

20. We have to hold that assesseee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line of argument of the learned DR. Coming to the arguments of the learned AR that M/s Tata Elxsi Ltd., M/s Sasken Communication Ltd., M/s Persistent Systems Ltd., M/s L&T Infotech and M/s Infosys Ltd., had turnover in excess of ?200 Crores and were to be excluded, we are of the opinion that turnover filter can be applied for selection of comparables. This has been the view consistently taken by the Co-ordinate Benches of this Tribunal in a number of cases.

12.2 Further, this Tribunal in the case of M/s. Unisys India Pvt. Ltd. (supra) with regard to the comparables viz., Infosys Ltd. and Persistent Systems Ltd., on the functional comparability has held at para 32 and 36 as follows:-

32. 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.

36. As far as Persistent Systems Ltd., a comparable by the Assessee in his TP study but was objected to by the Assessee before TPO as not comparable, this Tribunal in the case of IT(TP) A.No.108(Bang) 2014 order dated 12.12.2014 in the case of Yodlee Infotech Pvt.Ltd. Vs. ITO held as follows:-

37. Following the said decision, we direct that Persistent Systems Ltd., be excluded from the final list of comparable companies chosen by the TPO.

12.3 Following the decisions of the Tribunal in the case of Yodlee Infotech Ltd. (supra) and Unisys India Pvt. Ltd. (supra), we direct that Sasken Communication Technologies Ltd. (seg), Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd. be excluded from the final list of TPO’s comparables.

Acceptance of Remaining Comparables:

13. With respect to the other comparables viz., Akshay Software Technologies Ltd., R S Software (India) Ltd., Zylog Systems Ltd. and Mindtree Ltd., the ld. counsel for the assessee has submitted that these comparables chosen by the TPO have been accepted by the assessee.

Conclusion:

14. To summarise, the assessee has objected to the inclusion of 7 comparables out of 11 chosen by the TPO as comparable companies on the basis of functional dissimilarity and turnover criterion and these 7 comparables have been directed to be excluded from the final list of TPO’s comparables in the foregoing paragraphs. Accordingly, we direct the AO/TPO to recompute the ALP after exclusion of the 7 comparables.

15. In the result, the assessee’s appeal is allowed for statistical purposes.

16. Thus, the revenue’s appeal is dismissed and that of the assessee is allowed for statistical purposes.

Pronounced in the open court on this 8th day of September, 2016.