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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 ..... mber) For the Revenue : Swapna Das, JCIT(DR)(ITAT-2) Bengaluru For the Assessee : S. Raghunathan, Advocate ORDER Sunil Kumar Yadav (Judicial Member) This is an appeal by the assessee against the order of the CIT(Appeals) inter alia on the following grounds:- 1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. 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. Celestial Biolabs Ltd, M/s. Flextronics Ltd. iGate Global Solutions Ltd, Infosys Technologies Ltd, Mindtree Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd, Tata Elxsi Ltd and Wipro Ltd as comparables. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. CIT(A) erred on not drawing reference to the functional dissimilarity in respect of the following comparable companies, namely, (a) M/s. Celestial Biolabs Ltd., (b) Persistent Systems Ltd., (c) Sasken Communication Technologies Ltd., (d) Tata Elxsi Ltd. and (e) Wipro Ltd vis-a-vis the Respondent while rejecting the aforesaid companies. d) The Ld. CIT(A) erred in confirming the action of the Ld.AO/Ld. TPO on facts and in law in considering a set of 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. 2 Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The Ld. CIT(A) erred in upholding the action of the Ld. AO/the Ld. TPO in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in differences in (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 upholdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.99% 3 Infosys Ltd. 15,648 40.37% 4 Mindree Ltd (Seg). 572.97 16.41% 5 Persistent Systems Ltd. 382.88 20.31% 6 Sasken Communication Technologies Ltd. 335.80 7.58% 7 Tata Elxsi Ltd. (Seg) 342.86 18.97% 8 Wipro Ltd. (Seg) 11,956 28.45% 2. The AO/TPO erred in law in applying an arbitrary filter to reject companies having related party transactions greater than 25% of sales. Further, the Hon'ble CIT(A) also erred in upholding the related party transaction filter of 25%, disregarding the Appellant's ground for application of the related party transaction filter at a threshold of 10% or 15% of sales. PRAYER: The Petitioner prays that the above grounds be allowed by the Hon'ble Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detailed written submissions on 14.10.2011, placing on record all legal and factual arguments. 8. The TPO passed an order under section 92CA on 31.10.2011, computing the arithmetical mean margins of the 20 comparables selected by him at 23.95%, after allowing a negative working capital adjustment of 0.30%, and proposing a TP adjustment of ₹ 1,18,65,269. On receipt of the TPO s order, the AO issued a draft assessment order on 15.12.2011 incorporating the TP adjustment proposed by TPO and reducing the deduction claimed under section 10A. After the appellant filed a letter with the AO proposing to file an appeal with the CIT(Appeals), he passed the final assessment order under section 143(3) read with section 144C on 07.02.2012, determining the appellant's taxable income at ₹ 1,23,30,510. 9. In the final assessment order, the AO made the following adjustments to the appellant's returned income resulting in a demand of ₹ 23,89,664:- Reduction from export turnover communication expenses of ₹ 20,46,519 and travel expenditure of ₹ 6,15,235 incurred in foreign currency, without reducing the same from total turnover, thereby reducing the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermination 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 Elxsi Ltd. and (8) Wipro Ltd., the ld. Counsel for the assessee has contended that these comparables are functionally different and their profile were examined by the Tribunal in the case of M/s. Infineon Technologies India Pvt. Ltd. V. DCIT, 71 taxmann.com 139 (Bang. Trib) and it has been categorically held that these comparables are functionally different. The profile of the assessee and of M/s. Infineon Technologies India Pvt. Ltd. (supra) is almost similar and the assessment year is also for AY 2008-09. Therefore, the issue of determination of comparables on functional aspect is covered by this order of the Tribunal. 13. The ld. DR placed heavy reliance upon the order of the TPO. 14. Having carefully examined the order of the Tribunal in the case of M/s. Infine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) ii) Telecordia Technologies India Pvt Ltd V ACIT (ITA No.7821/Mum/2011) It was also submitted that this company has been held to be functionally not comparable to the assessee by a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013. 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer/TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. The learned Authorised Representative submits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Trilogy EBusiness Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Representative supported the inclusion of this company in the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and therefore there cannot be an assumption that it would continue to be applicable for the period under consideration i.e. Assessment Year 2008-09. 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. (ii) This company has been held to be functionally not comparable to software service providers for Assessment Year 2007-08 by the co-ordinate bench of this Tribunal in the assessee's own case. This company has been held to be different from a software development company in the decision of the Tribunal in the case of Bindview India Pvt. Ltd. V DCIT in ITA No.1386/PN/2010. (iii) The rejection of this company as a comparable has been upheld by co-ordinate benches of the Tribunal in the case of (a) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011). (b) LG Soft India Pvt. Ltd. (IT (TP) A No.112/Bang/2011) (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloping 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 company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly. 11.0 Infosys Technologies Ltd. 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 registered patents and several pending applications for grant of patents. In this regard, the co-ordinate 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore 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 Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- . Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment 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. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies) 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. Therefore, instead of a fixed 1cr 200 Crore range, what one has to consider is the turnover/receipts of Assessee and range of upper limit at ten times and lower limit also ten times..i.e., one tenth. Thus, for example the range for a 300 Crores company can be from 30 Crores (1/10th) to 3000 Crores (Ten times). Even this has some limitations. For example if range is considered say 2 to 200 Crores, a comparable company cannot be rejected if the turn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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