9911796707
TMI Blog2014 (12) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... or the FCG Group. For Assessment Year 2008-09, the assessee filed its return of income on 10.10.2008 declaring income of Rs. 85,087 after claiming deduction of Rs. 8,60,83,206 u/s.10A of the Act. The return was processed u/s.143(1) of the Act and the case was taken up for scrutiny. In the period under consideration, the assessee had reported the following international transactions : (i) Export of software development services : Rs. 60,98,90,327 (i) Reimbursements received : Rs. 6,19,98,883. In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under section 92CA of the Act to the Transfer Pricing Officer ('TPO' in short) for determining the Arms Length Price ('ALP') of these international transactions, after obtaining necessary approval from the CIT, Bangalore-I. The TPO vide order under section 92CA of the Act dt.28.10.2011 proposed a T.P. Adjustment of Rs. 5,96,07,719 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft assessment order under section 143(3) r.w.s. 144C of the Act dt.15.12.2011 propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e unreasonable. 5. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, by exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 6. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, considering reimbursement received as operating income/operating cost for the purpose of computing the value of TP adjustment. 7. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, by not making suitable adjustments to account for the differences in the risk profile of the assessee vis-à-vis the comparables. The learned TPO, A.O. and Hon'ble DRP erred in adopting erroneous figures for computing the working capital adjustment. 8. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, by determining the arm's length margin/price using only FY 2007-08 data which was not available to the assessee at the time of complying with the transfer pricing documentation requirements. Grounds of objection relating to corporate tax matters. 9. In computing the deduction under section 10A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " The assessee has submitted submissions in paper books in support of the above grounds of appeal and also submitted an Index of case laws on which the assessee placed reliance. Transfer Pricing Issues 4.1 Now we proceed to examine the individual grounds of appeal. From a perusal of the grounds raised, at (1 to 8) above are issues for consideration with respect to the Transfer Pricing adjustment made by the Assessing Officer pursuant to the order of the TPO u/s. 92CA of the Act. 4.2 In the course of proceedings before us, the learned Authorised Representative submitted that the assessee does not wish to press the general grounds raised on T.P. matters and would make submissions only on the comparability of the individual companies selected by the TPO in the final set of comparables and the companies rejected by the TPO from out of the set of comparable companies chosen by the assessee. The learned Authorised Representative also submitted a chart, schematically explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO as comparable companies to the assessee. 4.3 The learned Authorised Representative also submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 4. Goldstone Technologies Ltd. 5. ICRA Techno Analytics Ltd. 6. Indus Networks Ltd. 7. LGS Global Ltd. 8. Larsen & Toubro Infotech Ltd. 9. Mindtree Ltd. (Seg) 10. Melstar Information Technologies Ltd. 11. PSI Data Systems Ltd. 12. Powersoft Global Solutions Ltd. 13. SIP Technologies and Exports Ltd. 14. SynetareosTechnologies Ltd. 15. Computech International Ltd. 16. Karaturi Networks Ltd. After comparison of the average margin of these comparable companies, the assessee as per its T.P. Study held its international transactions with its Associated Enterprises ('AE') to be at arms length. 5.2 The TPO observed that the assessee had characterised itself as providing software development services to its Associated Enterprises (AEs). While accepting TNMM as the MAM, as adopted by the assessee, the TPO rejected the assessee's T P Study for various reasons set out in the show cause notice issued and embarked on a fresh search using the data bases 'Prowess' and 'Capitaline'. After considering the objections of the assessee, the TPO selected the final list of 20 comparables which are as under : Sl.No. Name of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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." (iii) The co-ordinate bench of this Tribunal in its order in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company be excluded form the list of comparables, inter alia, on the ground that it is functionally dis-similar and different from the assessees providing software development services. 8.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. 8.4 We have carefully considered the rivalsubmisisons and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables by making the following observations at paras 9.4.1 and 9.4.2 of the order holding this company to be functionally dissimilar and different from a software service provider i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of M/s. 3DPLM Software Solutions Ltd. (supra), we hold that this company is functionally different and cannot be considered as a comparable to the assessee in the case on hand, who is a software service provider and therefore direct the Assessing Officer to omit this company from the final list of comparables. 9. KALS Information Systems Ltd. 9.1 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 and included this company in his final list of comparables. 9.2 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) The rejection of this company as a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 from the list of comparable companies. It is ordered accordingly." Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that this company being into software products is functionally different and cannot be considered as a comparable to the assessee in the present case who is a software service provider and therefore direct the A.O./TPO to exclude this company from the final list of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 10.4 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09, had held that this company be omitted from the final set of comparables for the reason that this company is functionally different as it has its own intangibles, IPR, brand and has huge revenues from software products, whereas the assessee is a mere software services provider. The relevant observations at para 11.4 of the order, is extracted hereunder :- "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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) has held that this company is not to be omitted from the list of comparables as it is not functionally comparable to a software service provider. 11.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 11.4 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09, had held that this company be omitted from the final set of comparables for the reason that it is not functionally comparable to software service providers as it is into development of software products, etc. The relevant observations at para 12.4.1 and 12.4.2 of the order which is extracted hereunder :- "12.4.1 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 dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 (P.) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 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.' Following the aforesaid decision of the co-ordinate bench of this Tribunal in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is to be excluded from the final list of comparables as it is engaged in product development and its income is also from trading in software licences and is, therefore, not comparable to a software development service provider like the assessee in the case on hand. The relevant portion of the aforesaid order at para 15.3 of the order is extracted hereunder :- "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 afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Year 2008-09, had held that this company is to be excluded from the final set of comparables as it is engaged in development of software products, software service and therefore, cannot be comparable to a software service provider. In this view of the matter, we hold that this company is not functionally comparable to the assessee in the case on hand, who is only a software service provider. The relevant portion of the above mentioned order at para 16.3 thereof is extracted hereunder :- "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case on hand. (ii) The ITAT, Mumbai Bench in the case of Telecordia Technologies India (P.) 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. (iii) The co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company be omitted from the list of comparables as it is engaged in product development and product design services and therefore cannot be comparable to a software service provider. 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. 15.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival contentions and peruse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment services. Before us, in addition to the plea that the company was functionally different, the assessee submitted that this company was excluded from the list of comparables by the order of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 on the ground that the 'Related Party Transactions ('RPT) is in excess of 15%. The learned Authorised Representative submitted that for the current period under consideration, the RPT is 18.3% and therefore this company requires to be omitted from the list of comparables. 16.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables as this company was a pure software development service provider like the assessee. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company is to be excluded from the final list of comparables for the reason that it fails the Related Party Transaction ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 92CA of the Act has not explained as to how these companies fail the RPT filter. In this view of the matter, we deem it fit to restore the issue of comparability of these companies back to the file of the A.O./TPO to examine the computation given by the assessee on the percentage of RPT and decide the issue afresh after affording the assessee adequate opportunity of being heard and to make submissions in the matter. It is ordered accordingly. 18. Working Capital Adjustment 18.1 In ground of appeal at S.No.7, the assessee has submitted that while the TPO has granted the assessee working capital adjustment, the computation has been wrongly made. 18.2 On a perusal of the TPO's order under section 92CA of the Act, it is seen that working capital adjustment has been granted to the assessee and there is no dispute that the assessee is entitled for working capital adjustment. The TPO is directed to recompute the eligible working capital adjustment based on the resultant set of comparables arising out of the findings rendered thereon in this order. 19. Risk Adjustment 19.1.1 In the grounds of appeal at S.No.7, the assessee has submitted that it has a limited risk profile vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benches of this Tribunal (supra), we remand the issue of market risk adjustment to the file of the Assessing Officer/TPO for examining the issue in the light of the decisions cited. 20. Reimbursement of Expenses incurred not to be considered for computing ALP. 20.1 In the ground of appeal at S.No.6, the assessee submits that the A.O./TPO ought to have appreciated that reimbursements received by the assessee from its AEs are not in respect of any services rendered and hence should not be added back to the cost base for the purposes of mark up. It is submitted by the learned Authorised Representative that in the TPO's order under section 92CA of the Act, while computing the ALP, the reimbursement of expenses received amounting to Rs. 6,19,98,883 was added to the revenue and expenses without assigning any reasons for his action. 20.2 Before us, the learned Authorised Representative contended that these transactions constituting receipt of reimbursement of expenses, are only pass through transactions and was routed through the Balance Sheet and therefore the TPO cannot route these transactions through the profit and loss account and since these do not involve any service or inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of computer software abroad and expenditure of Rs. 2,04,572 incurred in foreign currency from export turnover, while computing the deduction under section 10A of the Act. Ground No. 9(c) and 10(c) are the alternate plea of the assessee that if these expenses are to be excluded from 'export turnover', they are required to be excluded from 'total turnover' also. 21.2 We have heard both sides and carefully perused and considered the material on record. On this very issue, the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98, has held that while computing the deduction under section 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, then the same should also be excluded from the total turnover in the denominator. The relevant operative portion of the finding of the Hon'ble jurisdictional High Court is extracted and reproduced as under : "if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover in the denominator also. The reason being that the total turnover includes export ..... X X X X Extracts X X X X X X X X Extracts X X X X
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