9911796707
TMI Blog2015 (4) TMI 803X X X X Extracts X X X X X X X X Extracts X X X X ..... - it is predominantly engaged in a variety of functions like product designing services and not purely software development services. Accordingly companies selected/ rejected for comparables. Risk adjustment - We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and perused and carefully considered the material on record. While the submission of the assessee may be based on principles, we find that it has merely put forth its claim but has not filed any basis of the quantification of the risk adjustment either before the authorities below or before us. In this view of the matter, the assessee's claim for risk adjustment is rejected. Interest u/s 234B & 234D - The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala 252 ITR 1. In this view of the matter, we uphold the action of the Assessing Officer in charging the assessee the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under Sections 234B and 234D of the Act, if any, whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a subsidiary of NXP BV, a Netherlands company. For Assessment Year 2008-09, the assessee filed its return of income declaring income of ₹ 32,37,84,304. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny. 2.2 In the period under consideration, the assessee had reported the following international transactions :- Provision of Software Development Services Rs.253,89,24,193. Provision of Order Gathering Services. Rs.13,80,51,438 Purchase of assets. Rs.37,73,264 Receipt of Services. Rs.17,75,56,409 Reimbursement of expenses (received) Rs.81,01,426 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') for determining the Arm's Length Price ('ALP') of these international transactions, after obtaining necessary approval from the CIT-III, Bangalore. The TPO vide order under Section 92CA of the Act dt.31.10.2011 proposed a T.P. Adjustment of ₹ 20,53,68,934 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in a disallowance of ₹ 11,337,971. 3.3 Separately, the learned AO has treated the additions to networking equipments, appearing in 'computer' block as 'plant and machinery' and consequently applying lower rate of depreciation of 15% resulting in a disallowance of ₹ 533,667. Transfer pricing matters 4. The learned AO / Transfer Pricing Officer ("TPO") have erred, in law and in facts, in making an addition of ₹ 20,53,68,934 to the total income of the Appellant on account of adjustment in the arm's length price of the software development services transaction entered by the Appellant with its associated enterprise. 5. The learned AO / TPO have erred, in law and in facts, in disregarding the economic analysis undertaken by the Appellant without proper justification and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transactions are not at arm's length. 6. The learned AO / TPO have erred, in law and in facts, in determining the arm's length margin/ price using only financial year 2007-08 data. 7. The learned AO / TPO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in levying interest of ₹ 3,76,27,691 and ₹ 428,083 u/s 234B and 234D of the Act respectively. 14. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act." 3.2 The assessee filed additional grounds of appeal vide letter dt.19.12.2013 on the issue of depreciation on goodwill arising out of acquisition of business under slump sale agreement. 3.3 In the course of appellate proceedings, the assessee filed submissions in paper books in support of the grounds of appeal raised and also a compendium of case laws, on which the assessee placed reliance. 4. The grounds raised at S.Nos.1 & 2, are general in nature and not being specifically urged before us, are dismissed as infructuous. CORPORATE TAX 5.1 The Grounds raised at S.Nos.3.1 to 3.3, relate to the claim of depreciation on net working equipment. In the course of appellate proceedings, the Assessing Officer noticed from Form 3CD that while the assessee had claimed depreciation on net working equipment at 25% therein, the assessee had classified the same as "Computers" and claimed depreciation @ 60% thereon for the purposes of computation of income for tax purposes. The As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the DRP. In the circumstances, we are of the view that this issue also requires to be examined afresh by the AO after due opportunity to the Assessee of being heard to the Assessee. We hold and direct accordingly. The relevant ground of appeal is treated as allowed for statistical purpose." 5.3.2 Following the above decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra), we remand the issue back to the file of the Assessing Officer for fresh consideration, after affording the assessee adequate opportunity of being heard and to file details / submissions required. It is ordered accordingly. Consequently, the Grounds at S.Nos.3.1 to 3.3 are treated as allowed for statistical purposes only. TRANSFER PRICING ISSUES (Ground Nos.4 to12) 6.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart 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. The learned Authorised Representative also submitted that he would only press those grounds on the comparability of individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elected a set of 23 companies as comparables with an average profit margin of 14.84% on cost. The assessee's list of comparables, as per its T.P. Study, are as under :- Sl.No. Name of the Company Weighted average of operating profits on operating costs (%) 1. Akshay Software Technologies Limited 6.60 2. Aztecsoft Limited 18.16 3. Goldstone Technologies Ltd. 11.50 4. Helios & Matheson Information Technology Ltd. 38.40 5. Indium Software (India) Ltd. 11.09 6. Infosys Technologies Ltd. 39.96 7. KPIT Cummins Infosystems Ltd. 13.20 8. Lanco Global Systems Ltd. 13.28 9. L & T Infotech Ltd. 11.35 10. Maars Software International Ltd. 15.58 11. Melstar Information Technologies Ltd. 3.46 12. Mindtree Limited 16.98 13. Persistent Systems Pvt. Ltd. 24.34 14. Quintegra Solutions Ltd. 15.18 15. R S Software (India) Ltd. 14.11 16. SIP Technologies and Exports Ltd. 18.37 17. Sasken Communication Technologies Ltd. 17.88 18. Satyam Computers Services Ltd. 29.43 19. TVS Infotech Ltd. -21.27 20. VJIL Consulting Limited 5.85 21. VMF Softech Limited 4.32 22. Visualsoft Technologies Limited 16.76 23. Zylog Systems Limited 16.87 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each of the companies selected or rejected by the TPO as comparable companies to the assessee. 8.1 The learned Authorised Representative submitted that the following three companies are liable to be rejected as comparables as they are functionally different from the assessee; based on the rulings in the decisions of co-ordinate benches of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra); Curram Software International Pvt. Ltd. (supra) and Yodlee Infotech Pvt. Ltd. (supra). These companies are :- (i) Avani Cincom Technologies. (ii) Celestial Biolabs Ltd. (iii) KALS Information Systems Ltd. 8.2 The learned Authorised Representative further submitted that the following three companies are liable to be excluded from the final list of comparables as they are functionally different from the assessee and based on the rulings of co-ordinate benches of ITAT, Bangalore in the cases of Curram Software International Pvt. Ltd. (supra) and Yodlee Infotech Pvt. Ltd. (supra) : (i) Infosys Technologies Ltd. (ii) Tata Elxsi Ltd. (seg.) (iii) Wipro Ltd. (seg.) 8.3 It was also submitted by the learned Authorised Representative that the following 7 companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008-09, has remanded the matter of examination of the comparability of this company to the file of the Assessing Officer / TPO afresh; holding as under at para 9.5.1 to 9.5.2 of its order :- " 9.5.1 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 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. 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 set of comparables in the case of Triology E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly." 9.4.2 Following the above cited decision of the co-ordinate bench of ITAT, Bangalore in the case of Curram Software International Pvt. Ltd. (supra), we direct the Assessing Officer / TPO to examine the comparability of this company afresh by considering the observations made by the Tribunal in paras 9.5.1 to 9.5.3 of the cited order (reproduced supra). The Assessing Officer / TPO is directed to make available to the assessee information obtained under Section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and make submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. 10. Celestial Biolabs Ltd. 10.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables for the reason that it is functionally different from the assessee and that it fails the employee cost filter. The TPO, however, did not accept the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 has excluded this company as a comparable, observing that it was developing software products and was not purely a software service provider and at para 10.4 thereof it was held as under :- "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, 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 Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. 12.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final set of comparables. 12.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 11.4 of the order has held as under :- "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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded from the list of comparables holding as under at paras 12.4.1 and 12.4.2 of its 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 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. 12.4.2 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable. 14.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that since this company being predominantly engaged in product design services, it cannot be considered comparable to a pure software service provider and excluded it from the list of comparables holding as under at paras 13.4.1 and 13.4.2 of its order, which is extracted hereunder :- "13.4.1 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. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Tel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71/Bang/2014 dt.14.8.2014, both for Assessment Year 2009-10, wherein this company was excluded from the list of comparables. It was submitted by the learned Authorised Representative that though these cited decisions were rendered for Assessment Year 2009-10, the facts and circumstances of the case are similar for Assessment Year 2008-09 as well and applies to the year under consideration. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparable companies. 15.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited by the ld. A.R. We find that this company has been excluded from the set of comparables for software development service companies in both the aforesaid decisions cited by the assessee. In Mindtech (India) Ltd., the relevant portion of the order at para 16 thereof it has been held as under :- "16. We have considered the rival submissions. The Special Bench of the ITAT in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation 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. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Year 2008-09 had excluded this company from the list of comparables holding that this company is into rendering of product development services and high end technical services in the category of KPO Services and therefore cannot be considered as comparable to an assessee rendering purely software development services. The relevant portion of the order of the co-ordinate bench at para 14.4 thereof is as under :- "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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparables to a pure software development service provider since this company is functionally different as it is engaged in product development and earns revenue from sale of licenses and subscription. The relevant portion of the above order at para 15.3 thereof 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 rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company being engaged in product development and product design and analysis service is functionally different from a pure software service provider and therefore excluded it from the list of comparables for software development services; holding as under at para 17.3 of its order :- "17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils 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. 18.3.2 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of comparables holding as under at para 19.3 thereof :- "19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 has excluded this company from the set of comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2011. As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the co-ordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand." 21.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, and 24/7 Customer.com Pvt. Ltd. in ITA No.227/Bang/2011, we direct the A.O / TPO to exclude this company from the list of comparables as it has RPT of 18.30% which is in excess of 15%. It is ordered accordingly. 22. Assessee's plea for companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as comparables. It was submitted that it is essential for appropriate risk adjustments to be made to bridge the disparities in the risk profile between a risk free entity like the assessee and risk bearing entities among the comparables selected by the TPO. The learned Authorised Representative submitted that in similar factual positions, co-ordinate benches of this Tribunal have held that the single customer risk borne by a captive service provider is only an 'anticipated risk' vis-à-vis the 'existing market risk' borne by independent comparables and that the TPO ought to have given risk adjustment to the margins of the comparables to bring them on par with the assessee. It was submitted that this matter was remanded back to the file of the TPO with the direction to consider all the contentions of the assessee and the material on record before coming to a decision in the matter. 23.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and perused and carefully considered the material on record. While the submission of the assessee may be based on principles, we find that it has merely put forth its claim but ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative in the matter and have perused and carefully considered the submissions on record on this issue. We find that the same issue was before the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08. In its order in IT(TP)A No.1174/Bang/2011 dt.14.11.2014, the co-ordinate bench of this Tribunal had admitted this additional ground of appeal for adjudication and remanded the matter to the file of the Assessing Officer for examination and consideration of the issue raised holding as under at paras 49 & 50 thereof :- " 49. We have given a very careful consideration to the rival submissions. It is clear from the material on record of the AO that the facts with regard to the business transfer by PEIL to the Assessee and its valuation were filed before the AO in the course of assessment proceedings. The fact that there was a sum of ₹ 140 crores shown as goodwill consequent to the business transfer agreement has also been acknowledged by the AO in the order of assessment. As to how the goodwill was valued and whether it was used for the purpose of business are all extraneous considerations at this stage of admission of additional ground of ..... 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