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TMI Blog2015 (10) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT MUMBAI] had omitted this company from the list of comparables to a software development service provider as it was established to be in software product company. Infosys Technologies Ltd. (‘Infosys’) be omitted from the list of comparables to a mere software development service provider since it was found to be functionally dis-similar and different, being a market leader engaged in software products, owned significant IPRs and intangibles, had significant R&D activities, brand attributable profits etc. Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of CISCO India Pvt. Ltd. (2014 (11) TMI 849 - ITAT BANGALORE) for Assessment Year 2009-10, we hold that ‘Infosys’ cannot be regarded as a comparable to a captive software development service provider, like the assessee in the case on hand, and consequently direct the Assessing Officer / TPO to exclude this company from the list of comparables. Tata Elxsi Ltd. (Seg.) being into software development service segments such as embedded product design services, industrial design and engineering services, systems integrating services, Visual Computing Labs , etc. cannot be regarded as comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation of Arm s Length Price ( ALP ) of the international transactions entered into by the assessee with its AE. The TPO passed an order under Section 92CA of the Act dt.11.1.2013 proposing an adjustment of ₹ 1,95,59,772 to the ALP of international transactions entered into by the assessee with its AE. Subsequently, the Assessing Officer completed the assessment under Section 143(3) rws 92CA of the Act vide order dt.5.3.2013 wherein the income of the assessee was determined at ₹ 1,95,94,620 which included the T.P. Adjustment of ₹ 1,95,59,772. Since the assessee decided to prefer an appeal in the matter before the CIT (Appeals), the Assessing Officer passed the final order of assessment under Section 143(3) of the Act dt.15.5.2013. 3. Aggrieved by the order of assessment for Assessment Year 2009-10 dt.15.5.2013, the assessee preferred an appeal before the CIT (Appeals) IV, Bangalore. The learned CIT (Appeals) disposed off the appeal by order dt.18.8.2014 allowing the assessee partial relief. 4. Both the assessee and revenue are aggrieved by the order of the CIT (Appeals) IV, Bangalore dt.18.8.2014 for Assessment Year 2009-10 and have filed separate appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituted more than 75 percent of the consolidated company-wide/ segmental revenues. iii. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant s plea that companies should not be rejected using employee cost greater than 25% of the total revenues as a comparability criterion. iv. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant s plea that rejecting companies using export sales less than 75% of the operating revenues as a comparability criterion in respect of the software development services transaction, is not appropriate. 5. The learned CIT(A) has erred, in law and in facts, by upholding the action of AO/ TPO in accepting/ rejecting certain comparable companies based on unreasonable comparability criteria. 6. The learned CIT(A) has erred, in law and facts, by considering incorrect receivables and payables in computing the working capital adjustment and further erred, by restricting the benefit on account of working capital adjustment to 1.71 percent. 7. The learned CIT(A) has erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions it had entered into with its AE :- Sl.No. International Transactions Amount Rs. 1, Provision of software development services 29,13,15,514 2. Reimbursement of Expenses 1,65,24,195 10.2 The financials of the assessee as per its profit and loss account for the year under consideration are as under :- Operating Revenues Rs.29,13,15,514 Operating Expenses Rs.24,98,99,748 Operating profit Rs.4,14,15,766 Operating Profit on cost % 16.57% 10.3 The assessee undertook a T.P. Study in respect of the ALP of its international transactions with its AE. The assessee characterizing itself as a routine provider of software development services to its AE, took itself as the tested party, and adopted TNMM as the Most Appropriate Method ( MAM ) to determine the ALP. In order to identify companies comparable to the assessee, the assessee conducted its search on Prowess and Capitaline databases. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons with its AE in the software development services segment being at Arm s Length. 11.1 The TPO rejected the assessee's T.P. Study for the reasons given in the show cause notice and taking TNMM as the MAM carried out a fresh search using the data bases Prowess and Capitaline and applying various filters. Based on this study, the TPO rejected 13 of the 21 companies selected by the assessee as comparables. The TPO s finally selected 11 comparables in the final set of comparables, 8 being those chosen by the assessee and 3 fresh comparables, with an average Mean Margin of 24.32 % on operating cost. The TPO s final list of comparable is as under : Sl.No. Comparable Margin (%) (Unadjusted) 1. Akshay Software Technologies Ltd. 8.11 2. Bodhtree Consulting Ltd. 62.27 3. Kals Information Systems Ltd. 13.89 4. R S Software (India) Ltd. 9.97 5. Tata Elxsi Ltd. 20.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive submitted that, inter alia, the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. in IT(TP)A No.271/Bang/2014 for Assessment Year 2009-10; wherein that company like the assessee, in the case on hand, was also rendering software development services to its AEs and in which case the TPO had selected the very same final set of 11 comparable companies having the same average mean margin of 24.32%. In view of the facts and circumstances of the cited case, in which the order of the co-ordinate bench is also for Assessment Year 2009-10, we find that the similarity and applicability of the findings therein would be similar to those of the case on hand. 13. Bodhtree Consulting Ltd. ( Bodhtree ) 13.1 This company was selected by the TPO as a comparable inspite of the assessee's objections to its inclusion in the final list of comparables. The learned CIT (Appeals) upheld the TPO s action in selecting this company as a comparable. 13.2 Before us, the learned Authorised Representative of the assessee contended that this company ought to be excluded from the final set of comparables as it was fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as a comparable to the assessee in the case on hand. 13.5.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10, following the decisions of the Mumbai Benches of the ITAT in Nethawk Networks Pvt. Ltd. in ITA No.7633/Mum/2012 dt.6.11.2013 and Wills Processing Services (I) Pvt. Ltd. in ITA No.4547/Mum/2012 had omitted this company from the list of comparables to a software development service provider as it was established to be in software product company. At para 26.1 of its order, the coordinate bench held 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO however overruled the assessee's objections and included this company in the list of comparables. The learned CIT (Appeals) upheld the TPO s decision. 14.2.2 Before us, the learned Authorised Representative for the assessee reiterated the assessee's objections to the inclusion of Infosys in the final set of comparables as it was functionally dis-similar and different form the assessee who is a captive software service provider to its AE. It was submitted that Infosys was a market leader by virtue of its scale of operations, brand attributable profits, owning of significant IPRs ; and intangibles and having significant R D activities. 14.2.3 In written submissions before us, the learned Authorised Representative contends that :- Company should be rejected as functionally different The company provides solutions that span the entire software life cycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. The company also offers software products for the banking industry, business consulting and business pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Indian Patent Office. (Page 13, Director s Report) SET Labs is also engaged in collaborative R D efforts like (Page 20, Annexure to Director s Report): BT (British Telecom) Innovates SET Labs are jointly working on development and for taking to market a product called Real-time Biz Intelligence Plus (RTBI Plus) Nomura Securities partnered Infosys regarding Interest Rate Risk Analysis Application. Infosys makes substantial expenditure on R D year on year as can be seen from the table below (Page 20, Annexure to Director s Report): In Rs. Crore 2009 2008 Revenue expenditure 236 201 Capital expenditure 31 -- Total 267 201 R D expenditure/Total revenue 1.3% 1.3% Further, the company has already acquired a number of patents and many other applications are pending with the Trademark offices. The relevant screenshot of the Annual Report is provided below for your ready r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.5 86 0.5 7.0 Brand Building and marketing expenses. 77 0.4 70 0.4 10.0 Commission Charges 21 0.1 14 0.1 50.0 Professional charges 21 0.1 18 0.1 16.7 Others 40 0.2 36 0.2 11.1 Total : 933 4.6 730 4.7 27.8 14.2.4 The learned Authorised Representative prays that in view of the elaborate reasons given above, this company i.e. Infosys should be excluded for the final list of comparables to the assessee. In support of this proposition, the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10 wherein this company Infosys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 14.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of CISCO India Pvt. Ltd. (supra) for Assessment Year 2009-10, we hold that Infosys cannot be regarded as a comparable to a captive software development service provider, like the assessee in the case on hand, and consequently direct the Assessing Officer / TPO to exclude this company from the list of comparables. 15. Tata Elxsi Ltd. (Seg.) 15.1 This company selected by the TPO as a comparable overruling the objections of the assessee to its inclusion as a comparable, on grounds that this company was a product company and into systems integration and support services and was therefore functionally different from the assessee. The learned CIT (Appeals) upheld this decision of the TPO. 15.2 Before us, the learned Authorised Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10 has held 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 services activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tune of ₹ 230 crores in the total segment revenue of ₹ 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 taxpa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unique and requires to be decided independently and that the directions issued are beyond the mandate of the provisions of Section 251(1)(a) of the IT Act which does not empower the CIT (Appeals) to set aside the issue. 5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored. 6. The appellate craves to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 18. The Grounds at S.Nos.1, 5 6 , being general in nature and not urged before us, no adjudication is called for thereon. 19.0 Grounds at S.Nos.2 to 4 :- Foreign Exchange Gain/Loss. 19.1 In these grounds, the Revenue assails the decision of the learned CIT (Appeals) in the impugned order in holding that foreign exchange gain/loss is operating in nature without appreciating that such gain/loss through attributable to the operating activity of the assessee is not derived from the operating activity but is only incidental to it. Revenue also assailed the decision of the learned CIT (Appeals) in following the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Mindteck (India) Ltd. in IT(TP)A No.70/Bang/2014 dt.21.8.2014 wherein at para 11 thereof it has been held as under :- 11. We have considered the rival submissions. It is not disputed by the Revenue that the foreign exchange fluctuation has arisen as a result of the realization of the consideration for rendering software development services. It is therefore incurred in the normal course of business and therefore there is no reason why it should be excluded from determining the operating revenue for the purpose of calculation of operating margin. In our view, the analogy drawn by the DRP regarding exclusion of interest expenses while computing operating margins is not proper. In our view, foreign exchange gain on realization of consideration for rendering software development services should be regarding as part of the operating revenue. Following the decision of the ITAT, Bangalore Bench in the case of SAP Labs (supra), we hold that the operating revenue for the assessee be computed by including the foreign exchange gain. Following the decision of the co-ordinate benches of this Tribunal in the case of Sap Labs India (Pvt.) Ltd. (surpa), Triology E Business S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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