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TMI Blog2015 (11) TMI 1136X X X X Extracts X X X X X X X X Extracts X X X X ..... se of computation of deduction u/s 10A without appreciating the fact that the statute allows exclusion of such of expenditure only from export turnover by way of specific definition of export turnover as envisaged by subclause (4) of Explanation 2 below sub-section (8) of section 10A and the total turnover has not been defined in this section. 3) On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Flextronics Ltd., M/s iGate Global Solutions Ltd., M/s.Infosys Technologies Ltd., M/s. Mindtree Ltd., M/s.Persistent Systems Ltd., M/s.Sasken Communications Technologies Ltd., M/s.Tata Elxsi Ltd. and M/s Wipro Ltd. as comparables. 4) On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that M/s VGL Softech Ltd. should be considered as a comparable in the case of the assessee since the assessee itself had not selected the said company as an uncontrolled comparable. 5) On the facts and in the circumstances of the case the learned CIT(A) has erred in holding that M/s Avani Cimcon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at export profits. In the case of s. 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in s. 10A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component, or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. 'The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in s. 10A, there is nothing in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., M/s Tata Elxsi and M/s Wipro Ltd., from the set of comparables selected by the Transfer Pricing Officer (TPO). The revenue has challenged the impugned order of the CIT(A) excluding these companies from the list of comparables by applying turnover filter. It is pertinent to note that the assessee has also raised additional ground whereby objects the inclusion of four companies viz., Infosys Ltd., Persistent Systems Ltd, Tata Elxsi and Wipro Ltd., on the ground of being functionally different from the assessee. Thus, we will take up and dispose of the ground No.3 of the revenue's appeal and the additional ground raised by the assessee in its appeal together being common in nature. 6. The assessee has raised the additional ground as under: "Infosys Ltd. Persistent Systems Ltd. Tata Elxsi Ltd and Wipro Ltd are to be excluded from the list of comparables on the ground of being functionally different apart from failing the upper turnover filter of Rs. 200 crores." Brief facts relating to the ground of the revenue and the additional ground of the assessee are that the assessee is a private limited company incorporated on 14th August, 2003 under the provisions of the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded a new comparable viz., M/s VGL Software Ltd. The exclusion of 3 more comparables and inclusion of one in the said comparables are challenged by the revenue in ground Nos.4 to 7 which we will deal in the later part of this order. Thus, after exclusion of the 12 comparables and inclusion of a new company in the list of comparables by the CIT(A), the remaining set of comparables with operating margin(OM) are as under: 7. Since the assessee has filed an additional ground and raised a common issue as raised by the revenue in ground No.3 therefore, in the facts and circumstances, we admit the additional ground raised by the assessee for adjudication of the same on merits. We further note that the additional ground raised by the assessee raising objections against inclusion of 4 comparables of companies on the ground of functional dissimilarity which has already been considered and decided by this Tribunal in a series of decisions. We further note that the decisions relied upon by the assessee in support of its additional ground are for the same assessment year as well as in respect of the assessee having international transaction in SDS. Therefore, in view of various decisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Ltd. in IT(TP)A No.1303/Bang/2012 dated 28/11/2013 in para.11.1 to 11.4 as under: "11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." As it is clear from the finding of the Tribunal that the comparability of this company has been examined in a series of decisions and by following the earlier decisions of this Tribunal, the co-ordinate bench has held that Infosys Technologies Ltd. is functionally dissimilar from the assessee providing software development services. We further note that a similar view has been taken by the Tribunal in other decisions relied upon by the assessee. Accordingly, following the earlier decisions of the Tribunal, we hold that Infosys Technologies Ltd. is not functionally comparable with the assessee because it owns significant intangibles as well as brands earning revenue from software products apart from software development services. Since no separate segment of SDS and software products is availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of TelecordiaTechnologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore this company cannot be considered as a comparable to the assessee in the case on hand. (iii) Tata Elxsi Ltd. is predominantly engaged in product designing services and is not purely a software development service provider. In the Annual Report of this company the description of the segment 'software development services' relates to design services and are not to software services provided by the assessee. (iv) Tata Elxsi Ltd. invests substantial funds in research and development activities which has resulted in the 'Embedded Product Design Services Segment' of the company to create a portfolio of reusable software components, ready ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the assessee. Accordingly, following earlier decision of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. We are, therefore, not inclined to interfere with the order of the CIT(A) in respect of this company. IV. Wipro Ltd.: We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The comparability of this company has been examined and decoded by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra) in paras.12 to 12.5 as under: 12.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons :- (i) This company owns significant intangibles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f registered patents and several pending applications for grant of patents. In this regard, the coordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (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 such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. We find that a similar view has been taken by the Tribunal in the other decisions as relied on by the assessee. Following the earlier decision of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. Accordingly, we decline to interfere with the order of the CIT(A) in respect of this company. 9. In view of the above findings, the additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology EBusiness Software India Pvt. Ltd. (supra) can be applied to the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incom Technologies Ltd. in the final set of comparables. 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 included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bioinformatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Triology E-Business Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that - " ..... As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustments, the TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 coordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology EBusiness Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed. A similar view has been taken by the Tribunal in other decisions relied upon by the assessee. Following the orders of this Tribunal, we ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (IA No.6083/Del/2010) (iv) The facts pertaining to this company has not changed from Assessment Year 2007-08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the case on hand and hence ought to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative drew our attention to various parts of the Annual Report of this company. (v) This company is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. 'Virtual Insure' and 'La-Vision' and b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ATING TO PROCEDURE 1) The Order of the learned Commissioner of Income Tax (Appeals) - IV, to the extent prejudicial to the appellant, is bad in law. 2) The learned Assessing Officer has erred in making a reference to the Transfer Pricing Officer for determining the arm's length price without demonstrating as to why it was necessary and expedient to do so. The learned Commissioner of Income Tax (Appeals)-IV has erred in confirming the action of the Assessing Officer. GROUNDS RELATING TO TRANSFER PRICING -LEGAL ISSUES The learned Assessing Officer, learned Transfer Pricing Officer arid the Commissioner of Income Tax (Appeals) - IV erred in: 3) passing the order without demonstrating that the appellant had motive of tax evasion; 4) not appreciating that the charging or computation provisions relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; 5) adopting a flawed process for issuing notices u/s 133(6) and relying on the same without providing complete information and an opportunity to cross examine the companies concerned. GROUNDS ..... X X X X Extracts X X X X X X X X Extracts X X X X
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