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TMI Blog2017 (2) TMI 1211X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3. The Ld. CIT (A) erred in rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend. 4. The Ld. CIT (A) erred in not appreciating that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party. 5. The Ld. CIT(A) erred in rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services. 6. The learned CIT(A), in the facts and circumstances of the case, erred in holding that M/s. Avani Cimcon Technologies, cannot be taken as a comparable. 7. The learned CIT(A), in the facts and circumstances of the case, erred in holding that M/s. KALS Information Systems, cannot be taken as a comparable. 8. The CIT(A) erred in directing the AO to recompute the deduction allowable u/s 10A of the I.T. Act after reducing the communication expenses of Rs. 20,46,519/- and expenses incurred in foreign currency of Rs. 6,15,235/- from the total turnover also. 9. The Ld. CIT(A) erred in not appreciating that there is no provision in section 10A which requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (a) marketing expenditure adjustment, (b) research and development expenditure adjustment; and (c) risk profile between Respondent and the comparable companies. 3. Reduction in deduction under Section 10A of the Act a) The learned CIT(A) has erred in upholding the action of the AO in computing the deduction under section 10A of the Act at Rs. 25,058,002. b) The learned CIT(A) erred in upholding the action of the AO in reducing communication expenses of Rs. 2,046,519 from the export turnover without considering the fact that the said communication expenses of Rs. 2,046,519 has already been reduced from both the export turnover and total turnover on the position that such expenses are attributable to the delivery of software outside India. c) The learned CIT(A) erred in upholding the action of the AO in reducing travel expenses incurred in foreign currency amounting to Rs. 615,235 from the export turnover, without considering the fact that the said travel expenses are not incurred for the purpose of rendering any technical services outside India. 4. Relief a) Respondent prays that directions be given to grant all such relief arising from the above grounds and also all r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies Inc., USA, is engaged in the business of providing software development services to Ketera US, which is its Associated Enterprise (AE), for which it is remunerated on a cost plus 15% margin. It filed return of income and the case was taken up for scrutiny. During the course of assessment proceedings, the AO made a reference u/s. 92CA to the TPO for determination of the ALP of the assessee's international transaction with its AE. 7. The assessee has rendered to its AE software development services amounting to Rs. 17,07,19,114. As required under section 92D of the Act read with Rule 10D of Income-tax Rule, 1962 (the Rules), it had maintained the relevant documentation (TP study) and completed the ALP of the software development services rendered, using the transactional net margin method (TNMM) as the most appropriate method with a profit level indicator (PLI) of net operating profit margin based on sales (OP/Sales). The appellant had used the Prowess database to conduct a search for comparable companies and had applied various quantitative and qualitative filters to arrive at a set of 11 comparable companies with an average profit margin of 10.24%. Since the appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial Labs Ltd., 87.94 4. e-zest Solutions Ltd. 29.81 5. Flextronics (Aricent) 7.86 6. iGate Global Solutions Ltd. 13.99 7. Infosys 40.37 8. KALS Information Systems Ltd (Seg) 41.94 9. LGS Global Ltd. 27.52 10. Mindtree Ltd. (seg) 16.41 11. Persistent Systems Ltd. 20.31 12. Quintegra Solution Ltd. 21.74 13. R Systems International Ltd (seg) 15.30 14. R S Software (India) Ltd 7.41 15. Sasken Communication Technologies Ltd (seg) 7.58 16. Tata Elxsi (seg) 18.97 17. Thirdware Solution Ltd. 19.35 18. Wipro Ltd. (Seg) 28.45 19. Softsol India Ltd. 17.89 20. Lucid Software Ltd. 16.50 AVERAGE 23.65 11. Aggrieved, the revenue is in appeal before the Tribunal. Through CO, the assessee has sought certain adjustments in determination of the ALP. 12. During the course of hearing, the ld. Counsel for the assessee has contended that exclusion of the comparables made by the CIT(Appeals) was squarely covered by the various orders of the Tribunal. With regard to (1) Avani Cincom Technologies (2) Celestial Biolabs Ltd. (3) eZest Solutions Ltd. (4) Infosys Ltd. (5) Kals Information Systems Ltd. (Seg) (6) Persistent Systems Ltd. (7) Tata Elx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any 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 the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions : i) Trilogy E-Business Software India Pvt. Ltd. V DCIT (ITA No.1054/Bang/2011) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Trilogy 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 Trilogy E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Trilogy E-Business Software India Pvt. Ltd. (supra) are identical to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctionally 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 has rendered this company as not qualifying for comparability. We therefore accept the plea of the assessee in this regard." (iv) The rejection/exclusion of this company as a comparable for Assessment Year 2007-08 for software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. in ITA No.112/Bang/2011, CSR India Pvt. Ltd. in IT(TP)A No.1119/Bang/2011 and by the ITAT, Delhi Bench in the case of Transwitch India Pvt. Ltd. in ITA No.6083/Del/2010. (v) 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 instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed. 10. KALS Information Systems Ltd. 10.1 This is a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 10.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee and ought to be rejected/excluded from the list of comparables for the following reasons :- (i) This company is functionally different from the software activity of the assessee as it is into software products. (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the margins, which is in contradiction to the TPO's own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices 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 to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons, Tata Elxsi Ltd. is clearly functionally different/dis-similar from the assessee and therefore ought to be omitted form the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the stand of the TPO in including this company in the list of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich this company cannot be taken 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extract the relevant observations of the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. (supra) hereunder:- "8. As a general proposition, various filters are required to be adopted in selecting a company as a comparable. This is part of FAR analysis. However, there cannot be rigid rule or percentage fixed in adopting various filters. Generally, a turnover filter is adopted to avoid selection of high end companies (big companies) with that of 'minnows' in the similar line of business. How to adopt the filter depends on each case. Say for example, in the TP analysis of a company having 20 Crores receipts, a company with 2 Crores to 200 Crores can be stated to be within the range i.e., factor of ten as upper and lower limits. In certain cases, the ITAT also accepted turnover filter of 1 Crore to 200 Crores. But the range cannot be fixed, as the facts may vary from case to case. Simply a comparable can not be excluded on upper turnover limit when infact in number of cases Assessees do not raise any objection on inclusion of companies with very small turnovers. The 200 Crores upper limit also cannot be considered in a case whose turnover is, say 300 Crores. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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