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TMI Blog2015 (5) TMI 148X X X X Extracts X X X X X X X X Extracts X X X X ..... ms Ltd.(Application Software Segment) be excluded from the final set of comparables as the said company was developing software products and was not purely/ mainly a software development service provider. E-infochips Ltd.cannot be excluded from the final set of comparables on the ground that the instant assessment year is an "exceptional year of business". It would not be appropriate to compare each and every single item of income and expense in the financial statements in order to measure its comparability. Moreover, we find that for assessment year 2010-11 also, the said concern has been found to a good comparable by the DRP in terms of order dated 29.12.2014. Thus the said concern is liable to be included in the final set of comparables. Persistent Systems Ltd., IT Services Segment of Mindtree Ltd.and Larsen and Toubro Infotech Ltd., the order of the TPO as well as the show-cause notice issued by him in the course of Transfer Pricing proceedings show that no opportunity was allowed to the assessee before applying the turnover filter - we therefore remand the matter back to the file of the Assessing Officer/TPO for consideration afresh. Sasken Communications Technologi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;) pursuant to the directions of the Hon'ble Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted by the Appellant and thereby making a transfer pricing adjustment of ₹ 3,61,96,655/- to the income of the Appellant by holding that the international transaction of provision of software development services of the Appellant does not satisfy the aim's length principle envisaged under the Income-tax Act, 1961 ('the Act'). Ground No.2: Erroneous treatment of Foreign Exchange gain/loss The Ld. AO/Ld. Transfer Pricing Officer ('Ld.TPO') erred in considering foreign exchange loss/gain as operating cost/income while computing the operating margins of the comparables for computation of the arm's length price of the transaction of provision of software development service. The Hon'ble DRP erred in interpreting the appellant's objection towards treatment of foreign exchange gain/loss as objection to consider foreign exchange gain/loss as operating, whereas the Appellant had objected to the treatment of the same as operating item, as considered by the Ld.AO/Ld. TPO. In doing so, the Hon'ble DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and ITA No.1346/PN/2010 (AY 2006-07)] and Bindview (India) Pvt. Ltd. (ITA No.1386/PN/2010) on account of similar reasons; 4.3. rejecting the functionally comparable E-Infochips Ltd., which was duly approved as a comparable by the Hon'ble DRP for the AY 2008-09, on the basis of erroneous reasoning that the year under consideration is an exceptional year based on its financial results; 4.4. rejecting the functionally comparable Avani Cimcon Technologies Ltd. ('Avani'), based on erroneous reason, i.e. unavailability of audited annual accounts for the Financial Year ('FY') 2008-09, despite the fact that the available audited financials for FY 2009-010 had all the financial details pertaining to FY 2008-09; 4.5. rejecting the functionally comparable Software Services Segment of Sasken Communications Ltd., on the erroneous basis of business restructuring of its non comparable segment; 4.6. rejecting the following functionally comparable companies by applying the turnover filter of ₹ 2 to ₹ 200 crores, without giving any opportunity to the Appellant, of being heard: Persistent Systems Ltd., IT Services Segment of Mindtree Ltd., an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to tax holiday under section 10A of the Act Hon'ble DRP/Ld.AO erred in ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits derived from the software development services and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions. The above grounds are without prejudice to each other. Your Appellant craves leave to add, amend, alter, modify and/or substitute, and to withdraw the above grounds of appeal. 3. In this appeal, assessee has raised multiple Grounds of Appeal as aforestated but the sum and substance of the dispute arises from an addition of ₹ 3,61,96,655/- made to the returned income on account of determination of the arm's length price of assessee's international transactions entered with its associated enterprises. 4. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is a wholly owned subsidiary of TIBCO US. The assessee company is primarily engaged in providing software research and development services to TIBCO US as per the design, production orders, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. It is also to be noted that the Assessing Officer passed his order dated 10.12.2013 (supra) after considering the directions of the Dispute Resolution Panel (in short the DRP ) dated 09.12.2013 which were rendered in response to assessee raising objections to the draft assessment order passed by the Assessing Officer dated 19.03.2013 which was also in line with the order of the TPO dated 29.01.2013 (supra). In this background, the rival counsels have been heard with respect to the addition of ₹ 3,61,96,655/- made to the returned income on account of the determination of arm's length price. 5. At the time of hearing, it was a common point between the parties that the substantive issues in this year, which arise from the order of the TPO dated 29.01.2013 (supra) are primarily similar to those considered by the Tribunal in the assessee's own case for the immediately preceding assessment year 2008-09 vide ITA No.2536/PN/2012 dated 11.02.2015. Before we proceed to adjudicate the specific dispute raised before us, it would be appropriate to observe that in its Transfer Pricing Study assessee had benchmarked its international transactions relating to the Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30.66 3. KALS Information Systems Ltd. (Application Software Segment) 41.91 40.46 4. L G S Global Ltd. 20.50 14.76 5. Goldstone 3.94 3.94 30.07 7. On the basis of the above, the TPO adopted the arithmetic mean of the PLI of the comparables at 31.21% (i.e. after working capital adjustment) and compared it with assessee's PLI of 18.72% and accordingly an adjustment of ₹ 3,61,96,655/- has been made to the stated value of the international transactions in order to determine the arm's length price. 8. The aforesaid approach of the TPO is quite pari-materia to the approach adopted by him in the assessee's own case for assessment year 2008-09 (supra). 9. At the time of hearing, in so far as the Ground of Appeal No.1 is concerned, no specific arguments were advanced as it is general in nature. 10. With regard to the issues raised in Ground of Appeal Nos.2 and 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 11.02.2015 (supra) has excluded the said concern from the final set of comparables. It has also been pointed out that for assessment year 2010-11 in assessee's own case the said concern has been excluded from the final set of comparables as per the order of the DRP, a copy of which has been placed in the Paper Book at pages 1674 to 1738. 13. The Ld. CIT-DR appearing for the Revenue has not contested the assertions of the assessee that under similar circumstances, the said concern has been directed to be excluded from the final set of comparables by the Tribunal in the assessee's own case vide order dated 11.02.2015 (supra). 14. We have carefully considered the rival submissions. In this context, we have perused the order of the Tribunal in the assessee's own case dated 11.02.2015 (supra) wherein the following discussion is relevant :- 23. We have carefully considered the rival submissions. In fact, the TPO has reproduced in para 15.7 the written submissions of the assessee on this aspect. The first plea raised by the assessee was that income earned by the said concern from rendering of application support services and infrastructure management services, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been duly categorized as ITES by the CBDT's Circular dated 26.09.2000 itself, which has been reproduced by the TPO in the impugned order. Therefore, even the said segment is not to be included as part of the software development services, as asserted by the assessee. Once the segment of application support and infrastructure management services are removed along with the exclusion of E-learning and Digital consulting segment, then the income of the said concern from software development services falls below 75% of its total income and therefore, it deserves to be excluded even on the basis of the filter applied by the TPO. Thus, on this aspect, assessee succeeds. 15. Ostensibly, the Tribunal has excluded the said concern on the ground that its income from software development services was below 75% of the total income. The fact-situation noted by the Tribunal in its order dated 11.02.2015 (supra) continues to hold in the present year also. For this, the Ld. Representative for the assessee has referred to the submissions made before the lower authorities based on the relevant extract of the Annual Report of the said concern placed at pages 1739 to 1742 of the Paper Book. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for assessment year 2008-09 on the ground that it was functionally different. It was also a common point between the parties that the facts and circumstances in this year remain the same and therefore in view of the precedent in the assessee's own case, the said concern is liable to be excluded. 19. Apart from the aforesaid, in the course of hearing, the Ld. Representative also pointed out that for the very same assessment year 2009- 10, the said concern has been found to be incomparable to a concern rendering software development services in the case of PTC Software (India) Pvt. Ltd. vs. DCIT vide ITA No.336/PN/2014 dated 31.10.2014. 20. In this context, the following discussion in the order of the Tribunal in the assessee's own case for assessment year 2008-09 dated 11.02.2015 (supra) is relevant :- 10. The first plea of the assessee is with respect to M/s Kals Information System, (applications software segment), a concern which has been included as a comparable by the TPO for the purposes of comparability analysis. According to the assessee, the inclusion of said concern as a comparable is wrong because the said concern is functionally different from the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised before the lower authorities. It has also been pointed out that the activities of said concern were considered by the Pune Bench of the Tribunal in the case of Bindview India P. Ltd. vide ITA No.1386/PN/2010 order dated 30.11.2011, wherein it has been held that the said concern was functionally different from a software development service provider. A reference has also been made to the decision of the Bangalore Bench of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. vide ITA No.1054/Bang/2011 order dated 23.11.2012, wherein also said concern was held to be not comparable to a software development service provider. 12. On the other hand, the learned CIT-DR has reiterated the stand of the lower authorities by pointing out that mere ownership of software products would not make a concern functionally non-comparable to a software development service provider, who did not own any software product. According to him, such difference is not a material difference contemplated under the TNM method for the purposes of comparability analysis. Apart therefrom, it has been pointed out that the said concern vide a communication dated 13.01.2009 addressed to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, software development services. In-fact, the Pune Bench of the Tribunal in the case of Bindview India P. Ltd. (supra) also considered a somewhat similar situation and, found M/s Kals Information System Ltd. (applications software segment) to be incomparable to a concern which was Providing software development services, as is the case of the assessee before us. Moreover, the material relied upon by the assessee before the lower authorities, copies of which have also been placed in the Paper Book filed before us, supports the assertions of the assessee that the said concern is engaged in development and sale of software product, etc., which is distinct from the software development services rendered by the assessee to its associated enterprise. Thus, we are inclined to uphold the plea of the assessee that the M/s Kals Information System Ltd. (applications software segment) is functionally incomparable to the assessee. 15. The attempt by the learned CIT-DR to support the stand of the TPO on the basis of a communication received by Addl.CIT (TP), Hyderabad regarding Kals Information System Ltd., in our view, is untenable. Ostensibly, such an information was not available in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accepted as a good comparable by the TPO himself. The Ld. Representative for the assessee submitted that only reason advanced by the TPO is that the PBIT/cost ratio in the current assessment year is only 4.87% which is quite low in comparison to the preceding and succeeding years. The Ld. Representative pointed out that the TPO has not substantiated on the basis of the Annual Report of the said concern as to how the year under consideration was exceptional. Therefore it could not be said that the margin declared for the year under consideration was not comparable. In this context, the Ld. Representative has referred to pages 554 to 564 of the Paper Book wherein is placed a copy of the Annual Report of the said concern to point out that the only reason attributed for the decline in the margin is purported to be the slow- down in the US economy. The Ld. Representative pointed out that the said reason is applicable all across and the same applies even to the operations of the assessee, which is rendering comparable services to its associated enterprises in the USA. Therefore, it is sought to be contended that the said concern is not a consistent loss maker and rather the lower profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not a normal business condition then we are of the view that the said concern should not be included in the list of comparables for the purposes of determining the arm's length price of the international transactions. Otherwise, the entity which satisfies the comparability analysis even if it has a low margin which is reflective of a normal business condition, should not be rejected solely on the basis of that there is a dip in the profit margin in comparison to other years. In the instant case, having regard to the discussion in the order of the TPO in para 11(xiii), no cause has been identified for the decline in margin to 4.87% as compared to the other assessment years, except for the purported mention in the Annual Report of the slow-down in the US economy. In our considered opinion, the said reason alone cannot be a ground to say that the said concern is to be excluded because such a reason would be applicable to all the concerns operating in such environment, and is not specific to E-infochips Ltd.. Therefore, in our view, the TPO has not demonstrated that the lower profit margin of the said concern in this year is attributable to any abnormal business condition wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas assessee was not show-caused on this aspect in the course of the proceedings. The Ld. Representative pointed out the inconsistency on the part of the TPO, whereby the same filter has not been applied in the subsequent assessment year 2010-11, and the above concerns have been accepted in the final set of comparables. Nevertheless, the Ld. Representative pointed out that a similar situation had arisen in the assessee's own case for assessment year 2008-09 wherein also the TPO had not show- caused the assessee before applying the turnover filter of ₹ 200 crores and excluding certain concerns from the final set of comparables; and, the Tribunal in its order dated 11.02.2015 (supra) has set-aside the impugned matter back to the file of the Assessing Officer/TPO for consideration afresh. It was therefore contended that the assessee would be satisfied if the matter is restored back to file of the lower authorities for consideration afresh. 29. On the other hand, the Ld. CIT-DR appearing for the Revenue has not seriously contested the plea of the assessee for remanding the matter back to the file of the Assessing Officer/TPO for giving an opportunity of being heard befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as the issue of the adoption of Turnover filter of ₹ 200 crores to exclude the aforesaid four concerns in concerned, the same has been adopted by the TPO without giving the assessee any opportunity of being heard and therefore in our view the matter ought to be remanded back to the AO/TPO for consideration afresh. We hold so. Thus, on this aspect also assessee succeeds for statistical purposes. 31. Following the aforesaid precedent, we therefore remand the matter back to the file of the Assessing Officer/TPO for consideration afresh in the light of our discussion in the order of the Tribunal dated 11.02.2015 (supra). Thus, on this aspect assessee succeeds for statistical purposes. 32. By way of Ground of Appeal No.4.5, the appellant has assailed the action of the TPO in excluding Sasken Communications Technologies Ltd. from the final set of comparables. As per the discussion in para 11(viii) of the order of the TPO, it is noticed that the said concern has been excluded on the ground that during the year under consideration it has undertaken business restructuring. The Ld. Representative also pointed out that in the show-cause notice dated 31.10.2012 issued by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices segment is to be excluded from the list of comparables. In-fact, the business restructuring undertaken by the said concern does not effect the segment of Telecom Software Services which alone is stated to be comparable to assessee's activity of Provision of software design and development services to associated enterprises. Therefore, in our view, the reason advanced by the TPO to exclude the said concern is not sustainable. 36. On this aspect, assessee submitted that the turnover of Telecom Software Segment of the said concern is in excess of ₹ 200 crores and therefore if the criteria adopted by the TPO is to be applied, the said concern would be excludible. On the application of the turnover filter, we have already set-aside the matter back to the file of the TPO while considering the Ground of Appeal No.4.6 of the assessee in the earlier paras. Therefore, the aforesaid aspect of the matter shall be re-visited by the TPO/Assessing Officer in the light of our decision in Ground of Appeal No.4.6. As a consequence, the said dispute is also remanded back to the file of the Assessing Officer/TPO to be decided in the light of the decision consequent to our directio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas, the assessee is rendering services to the clients as an off-shore service provider. According to the TPO, the margins in the on-site service model and the off-shore business model are not comparable. 38. The stand of the assessee before the lower authorities as well as before us is that it is a contract service provider engaged in providing software development services and regardless of the location, it is being compensated on the basis of cost plus mark-up and therefore, it could not be a ground for rejection of the said concern from the list of comparables. Before us, it is submitted that the mix of on-site and off-site activities are business exigencies and that such a factor cannot be considered as a filter for evaluating exclusion or inclusion of a comparable concern. The learned representative for the assessee referred to the written submissions made before the DRP, wherein it was contended that assessee's agreement with associated enterprise, does not restrict provision of on-site services and that even if assessee would have provided on-site services to its associated enterprise, then also it would have been remunerated on same basis, i.e. cost plus fixed ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted enterprise does not rule out provision of on-site services does not distract from the fact that the tested transactions undertaken by the assessee involve off-shore rendering of services, which is incomparable to the on-site services being rendered by Akshy Software Technologies Limited to its clients abroad. 41. Before parting on this issue, we may also make a reference to the decision of Hyderabad Bench of the Tribunal in the case of DCIT Vs. M/s. Hellosoft India Pvt. Ltd. (ITA No.645/Hyd/2009, for assessment year 2005-06, dated 15.01.2013) relied upon by the assessee before us, and the following discussion has been referred to:- 12. In view of the aforesaid, we uphold the decision of the CIT(A) in excluding companies whose turnover is more than ₹ 100 crores. Similarly the CIT(A) is equally correct in not sustaining the rejection of comparables selected by the assessee by applying 'employee cost to sale' filter as relevant data / information for this filter are not available. Moreover, it is also a fact that part of the employee cost is included by many companies under different other heads. Selection of comparables applying the 'onsite income' fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent footing. We are only trying to point out the aforesaid to say that the decision in the case of Akshy Software Technologies Limited (supra), no way contradicts our conclusion on this aspect in the earlier paras. Therefore, in our view, the TPO was justified in excluding Akshy Software Technologies Limited from the final set of comparables. Thus, on this aspect, the assessee has to fail. 41. Following the aforesaid precedent in the assessee's own case for assessment year 2008-09 (supra), we hereby affirm the action of the TPO in excluding (i) Akshay Software Technologies Ltd.; (ii) Thinksoft Global Services Ltd.; and, (iii) Zylog Systems Limited from the final set of comparables. Thus, on this aspect assessee fails. 42. By way of Ground of Appeal No.4.9, assessee has assailed the action of the TPO in excluding Helios and Matheson Ltd. from the final set of comparables. The TPO has excluded the said concern from the final set of comparables on the ground that the Annual Accounts of the said concern covered a period of 18 months whereas the comparable data should be for 12 months for reliable comparability. 43. In this context, the factual matrix is that assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n profit margins over a period of time should be excluded from the final set of comparables. In- particular, reliance has been placed on the decision of the Bangalore Bench of the Tribunal in the case of M/s Mindteck (India) Ltd. vs. DCIT vide IT(TP)A No.70/Bang/2014 dated 21.08.2014 wherein, under similar circumstances, M/s Bodhtree Consulting Ltd. has been held to be excludible from the final set of comparables on account of wide fluctuations in its margins over the years. Reliance has also been placed on the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. vs. ACIT vide ITA No.7466/Mum/2012 dated 07.03.2014 in this context. The Ld. Representative also pointed out that under identical circumstances M/s Bodhtree Consulting Ltd. has been found to be excludible by the Pune Bench of the Tribunal in the case of Q Logic (India) Pvt. Ltd. vs. DCIT vide ITA No.227/PN/2014 dated 21.10.2014 and also in the case of PTC Software (India) Pvt. Ltd. vs. DCIT vide ITA No.336/PN/2014 dated 31.10.2014. 45. The Ld. CIT-DR appearing for the Revenue vehemently pointed out that the said concern has been considered as a comparable by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal business phenomenon or whether it is a result of certain abnormal conditions prevailing in a particular year. In order to do so, the profit margins earned by such a concern in the proximate preceding and succeeding years would be required to be considered. In this background of the matter, assessee has furnished before us the operating margin trends of the said concern over six financial years i.e. for three preceding years, current year and the two succeeding financial years. On the basis of aforesaid tabulation, it is sought to be pointed out that there exists wide fluctuation in profit margins which ostensibly does not reflect a normal business phenomenon. We find that the Bangalore Bench of the Tribunal in the case of M/s. Mindteck (India) Ltd. (supra) considered a similar plea with respect to the exclusion of Bodhtree Consulting Ltd. on the ground of it being a abnormally high profit making concern. The assessment year before the Bangalore Bench was 2009-10, which is also the year before us. The operative part of the order of the Bangalore Bench reads as under :- 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as a comparable and therefore assessee cannot seek its exclusion at this stage. This aspect of the controversy has been considered by the Pune Bench of the Tribunal in the case of Q Logic (India) Pvt. Ltd. (supra) in the following words :- 16. In so far as the plea raised by the learned CIT-DR to the effect that the said concern was initially included by the assessee in its Transfer Pricing Study as a comparable is concerned, the appellant's Representative pointed out that in the Transfer Pricing Study, assessee had carried out the comparability analysis by adopting multiple year's data of the comparables which had off-set the wide fluctuations. However, the TPO has dis-agreed with the assessee on the adoption of multiple year's financial data of the comparables and instead, he has carried out the comparability analysis after adopting single year data of the comparables relatable to the period under consideration. It has also been submitted that the Chandigarh special Bench of the Tribunal in the case of DCIT vs. Quark Systems Private Ltd. (ITA No.100, 105/Chd/2009) (Chd) has held that if some inconsistency in a comparable exists, then it should be removed from th ..... 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