9911796707
TMI Blog2015 (8) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transactions and arrived at 10.28% of mean margin in comparison to the assessee's operating margin at 10.28%. The comparables selected by the assessee are as under; Sl.No. Company Name Unadjusted average margin 3 years 1 Aarman Software Pvt.Ltd 57.64% 2 Akshay Software Technologies Ltd 5.93% 3 ApplabsTechnologies Pvt. Ltd 18.25% 4 Computech International Ltd 5.20% 5 Core Projects & Technologies Ltd 38.85% 6 iGate Global Solutions Ltd 5.10% 7 Mindtree Ltd 15.61% 8 Nihar Info Global Ltd -3.23% 9 Orient Information Technology Ltd -21.85% 10 Prithvi Information Solutions Ltd 14.09% 11 R.S.Software (India) Ltd 14.58% 12 R.Systems International Ltd 18.08% 13 SIP Technologies & Exports Ltd 18.10% 14 Silverline Technologies Ltd -26.25% 15 Sonata Software 7.38% 16 VJIL Consulting Ltd 8.46% 17 VMF Soft Tech 3.08% 18 Zylo Systems Ltd 18.53% Arithmetic Mean 10.98% 3. Out of the 18 comparables selected by the assessee 14 were rejected by the TPO. The TPO finally selected 20 companies as comparables including 4 companies from the list of assessee's comparables namely: a) iGate Global Solutions Ltd (Seg.) b) Mind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave accepted the arm's length price as determined by the Appellant. 2. The learned TPO and the learned AO ought to have accepted the difference in risk profile of the appellant vis-a-vis the comparable companies. The learned TPO and the learned AO erred in not allowing the benefit of market risk adjustment to the Appellant. 3. The learned TPO and the learned AO erred in concluding that the Appellant is exposed to single customer risk without evaluating the business arrangement of the Appellant. 4. The learned TPO and the learned AO erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm's length price. 5. On the facts and circumstances of the case, the learned AO and the learned TPO erred in rejecting the Transfer Pricing ("TP") documentation without appreciating the contentions, arguments, and evidentiary data put forward by the Appellant during the course of the proceedings before them, and in doing so have grossly erred: 6.1 In rejecting the comparability analysis carried in the TP documentation and conducting a fresh comparability analysis for determining the arm's leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margins. In doing so the learned AO have disregarded the various jurisdictional ITA T rulings in case of SAP LABS India Pvt. Ltd. Vs. ACIT (reference ITA. No. 398/Bang/2008), EGain Communication Private Limited (reference: ITA No. 1685/PN/07 - Pune); 6.11 In accepting companies like Flextronics Software Systems Limited Quintegra Solutions Limited, Sasken Communications Technologies Limited, Wipro Limited and R Systems International Limited without taking into consideration the peculiar economic circumstances surrounding their operations during the year under review; 6.12 In accepting companies having Related Party Transactions exceeding 10% such as Soft801 India Limited arid Infosys limited. In doing so the learned AO has disregarded the Delhi IT A T ruling in case of Sony India Pvt. Ltd. (reference ITA No.1189/Del/2005) 6.13 In upholding the actions of the learned TPO in applying the export filter for selection of software comparablbs. In doing so, the learned TPO erred in rejecting Aarman Software Private Limited and VMF Soft Tech Limited. 6.14 In applying the onsite filter for selection of software comparables with the use of the data obtained under section 133(6) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery previously used. g. The learned AO erred in not relying. on the decision of the Honorable Income Tax Appellate Tribunal, Bangalore in the Appellant's own case for AY 2004-05 vide order dated 10 August 20 I 0, wherein the Honourable Income Tax Appellate Tribunal has held that the appellant is eligible for tax benefit under section lOA. Ill. Interest under section 234B of the Act: Rs. 2,839,310 The Learned AO is not justified in levying interest under section 234B of The Act. Levy of interest under section 234B is consequential in nature. IV. Interest under section 234D of the Act: Rs. 897,122 The Learned AO is not justified in levying interest under section 234D of The Act. Levy of interest under section 2340 is consequential in nature. The appellant craves leave to add, alter and modify the above grounds during the course of the appeal. For the above and any other grounds which may be raised at the time, of hearing, it is prayed that the order of the Assessing officer b set aside". 5. Ground No.(i to vii) pertain to TP adjustment. In the course of hearing, learned AR of the assessee submitted that the assessee raised the objection against 13 companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under; "7.3 The learned Authorised Representative further submitted that the facts pertaining to this company has not changed from the earlier year (i.e. Assessment Year 2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that :- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like "DX Change, CARMA, etc.". 7.1 Thus, it was brought to the notice of the Tribunal that the said company is primarily engaged in the development of software products and particularly in customized software solution like DXchange, Carma etc. products. The Tribunal after considering the functions and the information available on the website of the company has concluded at para-7.6.1 and 7.6.2 as under; "7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd., dated 14-08-2014 in ITA No.271(B)/2014 and submitted that this company was found to be not comparable to a software development company. 8.1 On the other hand, learned DR relied upon the orders of the authorities below. 8.2 Having considered the rival submission as well as the relevant material on record, we note that the functional comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of M/s CISCO Systems India Pvt. Ltd(Supra) in para-26.1 as under; " 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company .was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the learned counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are Solutions Ltd (Supra), in para-9.4.1 & 9.4.2 as under; "9.4.1 We have heard both the parties and perused and carefully considered the material on record.While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the coordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O/TPO is accordingly directed". Following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate bench of this Tribunal we direct the AO/TPO to exclude this company from the list of comparables. 12. Kals Information Systems Ltd: The learned AR of the assessee submitted that this company is engaged in the business of development of software and software products. This company is also engaged in the provision of training services and software services. 12.1 The learned AR thus, submitted that this company is functionally not comparable with the business of the assessee. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) as well as in the case of Cisco Systems India Pvt. Ltd., (Supra). 12.2 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that the TPO has considered the segmental data of this company. Therefore, this company is a good comparable of the assessee. 12.3. We have considered the rival submissions as well as the relevant material on record. We find that the functional comparability of this company has been examined by this co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd.(Supra) and also i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable". Following the decision of the co-ordinate bench we direct the AO/TPO to exclude this company from the list of comparables. 13. Persistent Systems Ltd: The learned AR of the assessee submitted that this company is engaged in the software development a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of this Tribunal in case of 3DPLM Software Solutions Ltd.(Supra). 14.1 On the other hand, learned DR relied upon the orders of the authorities below. 14.2 Having considered the rival submissions and relevant material on record, we note that the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra), has examined the functional profile of this company inpra-18.3.1 to18.3.3 as under; "18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details 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 thecase of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems (Ind.) Pvt.Ltd (Supra) the Tribunal has analysed the functional comparability in para- 26.4 & 26.5 as under; "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4.This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. Following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this from the list of comparables. 17. Wipro Ltd: The learned AR of the assessee submitted that this company is a industry leader and also owns tangibles. He has further submitted that this company is engaged in product development and services. However, the segmental information is not available. He has pointed out that there is a amalgamation during the year and the software service revenue to the sales is less than 75%. He has relied upon the decision of co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra). 17.1 On the other hand, learned DR relied upon the orders of the authorities below and submitted that this company was found to be functionally similar to the software development service provided by the assessee. 17.2 We have considered the rival submissions and relevant material on record. We note that in case of 3DPLM Software Solutions Ltd, (Supra), this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing related party transactions of more than 15%. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra). 18.1 On the other hand, learned DR relied upon the orders of the authorities below and submitted that this company is functionally comparable with the assessee and filter of 15% of RPT was not applied by the TPO or by the assessee in selection of comparables. Thus, the learned DR has submitted that if this filter of 15% is applied, the same should be applied to all the comparables or the filter of 25% of related party should be applied in all the comparable cases. 18.2 We have considered the rival submissions as well as relevant material on record. The learned AR of the assessee has heavily relied upon the order of this co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) wherein the Tribunal has excluded this company on the ground of related party transaction in excess of 15% as it was considered in the case of 24/7 Customer.com Pvt.Ltd. The relevant finding of the Tribunal are in para-19.3 as under; "19.3 We have heard both parties and perused and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be properly examined at the level of TPO. Accordingly, we set aside the functional comparability and application of the RPT filter to the record of the TPO. Needless to say the assessee be given an appropriate opportunity of hearing. 18.4 We make it clear that the RPT filter if any is applied in this case, then, the same would be applicable in all the comparable companies to be considered for the purpose of determining the ALP. 19. Lucid Software and Mindtree: Though, these two companies were selected by the assessee itself and also accepted by the TPO , however, the assessee has raised the objections against the inclusion of M/s Lucid Software as well as M/s Mindtree by way of raising additional ground which was included as ground no.8 & 9. 19.1 The learned AR of the assessee has submitted that during the assessment proceedings, the assessee was not in a position to controvert the stand of the TPO to include these companies in the list of comparables, because the specific details were not available in the public domain. Further there are subsequent findings of this Tribunal on the functional comparability of these companies. Thus, the learned AR has submitted that these two com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he information obtained by the another TPO u/s133(6). Therefore, the functional comparability while considering the relevant facts and business profile of the said company was not examined by the Tribunal in the case of Wills Processing Services(I)Pvt. Ltd., which was followed in the case of NetHawk Networks India Pvt.Ltd.,(Supra). Further, the assessee has not produced any record before us to show the actual nature of activity and business functions of Bodhtree Consultancy Ltd. In the absence of relevant facts and record, we are not in a position to give any finding regarding the comparability of this company. Therefore, a lapse on the part of TPO in some other case cannot be a ground of rejection of this company in the present case. Accordingly, in the facts and circumstances of the case, we remit this issue to the record of the TPO/AO to re-examine the functional comparability of this company by verifying the relevant facts. 20. As regards the Lucid Software, we find that the functional comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions (Supra) in para-16.3 as under; "16.3 We have heard the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. Ground no.II is regarding the denial of deduction u/s 10A. 21.1 We have heard the learned AR as well as the learned DR and considered the relevant material on record. At the outset, we note that this issue has been considered and examined by this Tribunal in assessee's own case for the assessment year 2004-05 in ITA No.616/Bang/2009, by order dated 10-08-2010 in para-3 to 5 as under; " 3. Brief facts of the case are that the assesseecompany is engaged in the business of design, development and testing of software. It filed its return of income on 30-10-2004 declaring a total income of Rs. 1,43,781/- and claimed deduction of Rs. 2,47,82,817/- u/s10A of the Income-tax Act, 1961. The return of income was processed u/s 143(1) and a refund of Rs. 49,64,355/- was issued to the assessee-company. Subsequently, the assessee filed an application u/s 154 and pursuant to the same, further refund of Rs. 74,465/- was granted. Thereafter, proceedings u/s 143(3) were initiated. During the course of 143(3) proceedings, the AO observed from the appendix filed along with the return of income for the assessment year 2004-05, that the assessee-company has acquired from GE India Technology Centre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary period. He also placed reliance upon the decision f the Delhi Bench of the Tribunal in the case of Tech Books Electronics Services (P) Ltd Vs Addl.CIT (100 ITD 125) wherein it was held that merely because of change in ownership the exemption cannot be denied. Another decision relied upon by him is in the case of Kumaran Systems (P) Ltd., Vs ACIT (106 TTJ 494) wherein it was held that where a firm is converted into a company and there was change only in the composition of ownership and not the undertaking and business, the exemption allowed to the firm u/s 10A of the Act, could not be denied to the company merely because it had been separately granted recognition. 5. Having heard both sides and having considered the rival submissions, we find that the issue is squarely covered by the decisions relied upon by the learned counsel for assessee. The distinctions sought to be brought about by the learned Department Representative, in our opinion, re not relevant to the facts of the case before us. In view of the same, the appeal of the revenue is dismissed". Following the order of the co-ordinate bench of this Tribunal in assessee's own case (Supra), we decide this issue in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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