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TMI Blog2016 (4) TMI 1250X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue : Smt. Vasundhara Sinha ORDER PER S. RIFAUR RAHMAN, A.M.: This appeal is preferred by the assessee against the order passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'Act') dated 12/10/2012 relating to AY 2008-09. 2. Brief facts of the case are, United Online Software Development (India) Pvt. Ltd., is a company engaged in the business of software development. The company provides software development and allied services in the area of Mail Plant, Web Mail platform and internet related software. This company in Hyderabad is registered as a 100% EoU under STPI Scheme of Govt. of India. This company is one of the group companies of United Online, US. This company was incorporated in 1999 under the Companies Act, 1956. The name of the company was changed from Juno India Pvt. Ltd. to United Online Software Development (India) Pvt. Ltd., with effect from 19/06/07. 2.1 During the relevant PY, the assessee company entered into international transaction with its AE, M/s United Online Inc., USA, for the provision of software development services and purchases as below: 1. Provision of software development services ₹ 21,69,90,553/- 2. Purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides contract research services and is also diversified into marketing and manufacturing activities. It is recognized as a research facility by the Dept. of Scientific and Industrial Research, GOI. Thus, the functional profile of Celestial is very much different from the assessee company. 3.2 Considering the above findings of DRP, the AO has reduced the adjustment u/s 92CA to ₹ 2,61,59,851/-. 4. Aggrieved with the above order, assessee is in appeal before us. 5. Grounds raised by the assessee are as under: TRANSFER PRICING MATTERS - Relating to determination of Arm's Length Price ("ALP") in respect of provision of software services to Associated Enterprises (" AEs") under Transactional Net Margin Method ("TNMM") Based on the facts and circumstances of the case and in law, the learned Assessing Officer (" AO") j learned Transfer Pricing Officer ("TPO") and the Hon'ble Dispute Resolution Panel ('DRP') erred in the following: Rejection of transfer pricing documentation maintained 1. Rejecting the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sk differences between the international transaction of the Appellant and the comparable companies in accordance with the provisions of Rule 10B(1)(e); Applicability of proviso to Section 92C(2) 11. Not allowing the option under the proviso to section 92C(2) of the act in limiting the adjustment at a variation of 5 percent to the arm's length price; Levy of interest under section 234B 12. Imposing interest under section 234B of the Act on the transfer pricing adjustments; CORPORATE TAX MATTERS Based on the facts and circumstances of the case and in law, the learned Assessing Officer ("AO") and the Hon'ble Dispute Resolution Panel ('DRP') erred in: 13. Reducing the communication charges of ₹ 251,725 from the export turnover considering it as attributable to the delivery of computer software outside India and further not reducing the same from the total turnover in computing the deduction u/s 10A of the Act; 14. Initiating the penalty proceedings u/s 271(1)(c) of the Act. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion are ₹ 13,149 crores as against ₹ 42 crores of Assessee. Though it is a fact that Assessee in the TP documentation, has selected Infosys Technologies Ltd. as comparable but that cannot prevent Assessee from objecting to the aforesaid company being selected as comparable, if there are valid reasons for doing so. In this context, the contention of the learned AR that Assessee has selected Infosys Limited on the basis of three years financial data, whereas the TPO considered only the current year data also needs to be appreciated. Therefore, considering the enormity of turnover of the company as well as other relevant factors, the aforesaid company cannot be treated as comparable to Assessee in any manner. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as stated below as well as that of the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd.,[2013] 85 CCH 146. a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.1978/H2011 c) M/s. Virtusa ( I) P. Ltd. ITA.No.1962/Hyd/2011 d) Telcordia Technologies India P. Ltd. ITA.7821/Mum/2011 e) Triology E-Business Sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Assessee rel ied upon the decision of the Bangalore Tribunal in the case M/s. Trilogy E-Business Software India Private Limited (supra) wherein at paras 46 and 47 of its order, the Tribunal has discussed the functional dissimi larity with Assessee therein and has directed that the company should be excluded from the list of comparables. Similarly, the Tribunal at Bangalore in the case of M/s. HCL EAI Services Ltd. vs. DCIT IT(TP) A. No. 1348/ Bang/2011 at para 17 at pages 24 to 26 of its order has discussed at length the reasons for not considering the said company as comparable to software development services company. The relevant portion of the order is reproduced hereunder : (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of Assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are into software development services to its parent companies. Assessee is also into similar type of activity. Therefore, the decision taken in M/s. Trilogy E-Business Software India Private Limited as well as M/s. HCL EAI Services Ltd. to exclude Kals Information Systems Ltd. appl ies to the facts of the case before us also. Similar view has been expressed by the Coordinate Bench of the Tribunal in the following cases : a) M/s. Conexant System India P. Ltd. ITA.No.1978/Hyd/2011. b) Intoto Software India P. Ltd. ITA.2102/H/2010 c) Bearing Point Business ITA.No.1124/Bang/2011 d) LG Soft India P. Ltd. ITA.1121/Bang/2011 e) Transwitch India P. Ltd. ITA.948/Bang/2011 f) CSR India P. Ltd. ITA.No.1119/Bang/2011 g) First Advantage ITA.No.1086/Bang/2012 Therefore, respectful ly following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude the company from the list of comparables." 2.2 Ld. AR also relied on the decision of Invensys Development Centre India Pvt. Ltd., 1692/H/12 AY 2008-09, wherein the Tribunal held as follows: "4.4.4 We have heard both parties and carefully considered the material on record. We find from the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany fit for comparabi lity analysis for determining the ITA No.1658/Hyd/2011 & 1239/Hyd/2013 M/s. United Online Software Development (India) Pvt. Ltd., Hyderabad 15 arms length price for Assessee, hence, should be excluded from the list of comparable parties. " Following the decision of the ITAT Mumbai Bench as aforesaid and also considering the fact that the company itself in the information provided in response to the notice issued u/s 133(6) of the Act has admitted that it cannot be considered as comparable with other assessees, we direct exclusion of the aforesaid company from the list of comparables while determining ALP." 3.2 Ld. AR also relied on the decision of the Tribunal in case of Invensys Development Centre India Pvt. Ltd., (supra) wherein the it has held as follows: "4.5.4 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 detai ls in the Annual Report show that the segment "software development services" relates to design services and are not similar to software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , however, brushed aside the objections of the assessee and included this company in the set of comparables. 4.6.2 Before us, the learned Authorised Representative of the assessee contended that this company i .e. Wipro Ltd., is not functional ly comparable to the assessee for the following reasons :- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation 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 a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming l imited risk; 18 ITA.No.1692/Hyd/2012 M/s. Invensys Development Centre India (P) Ltd., Hyderabad. (iii) The Coordinate Bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functional ly comparable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not own any intangibles, following the aforesaid decision of the co-ordinate benches cited 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." 4.2 The ld. AR also relied on the following cases: 1. 3DPLM Software Solutions Ltd, (TS-359-ITAT-2013(Bang)- TP) AY 2008-09. 2.. Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 - AY 2008-09. 4.3 Ld. DR relied on the orders of revenue authorities. 4.4 In view of the above, 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. 5. AVANI CINCOM TECHNOLOGIES LIMITED : 5.1 Objecting to the aforesaid company as comparable, the ld. AR of the assessee submitted that this company is into software products and company's website gives details that company develops and sells customized software solutions like DX change, CARMA, etc. and relied on the decision of the Tribunal in assessee's own case for AY 2007-08 wherein the Tribunal held as follows: 7.1. Assessee has basicall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hyd/2012 M/s. Invensys Development Centre India (P) Ltd., Hyderabad. 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. Apart from placing rel iance on the judicial decisions cited above, including assessee's own case for Assessment Year 2007-08, assessee has brought on record evidence that this company is functionally dissimilar and different from 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 assessee, following the decisions of the co-ordinate benches of this Tribunal in assessee's own case for Assessment Year 2007- 08 in ITA No.1780/hyd/2011, and the findings in the above cited cases wherein this company was excluded, we direct the A.O./TPO to exclude this company from the l ist of comparables." 5.3 The ld. AR also relied o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co., which is addressed to ACIT (TP), Hyderabad (Refer pages 563 & 564 of the paper book). M/s Gokhale & Co., submits details about the Bodhtree e paper solutions. 6.5 After analyzing the above submissions, we are of the view that the submissions on profile of the company, it is mentioned as "we also provide product engineering and enterprise services to fortune 500 firms". This also will be categorized as software services and cannot be categorized as software product. The auditor of this company submitted the letter before TPO, which was part of assessment proceedings. These submissions are made by ld. AR as additional evidence and we direct AO/TPO to analyse this comparable with the submissions of the assessee after giving them an opportunity of being heard. In case, this comparable is found to be into software products, it may be eliminated from the list of comparables. 7. E-Zest Solutions Ltd. 7.1 Objecting to the said company as comparable as this company is engaged in e-business consultancy services and also in BPO services, the ld. AR relied on the decision of the coordinate bench of Hyderabad in case of Invensys Development Centre P. Ltd. (supra) wherein the bench hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarding exclusion of LGS Global Ltd., Avani Cincon, Kals Information Systems and Bothtree Consultants, we are of the opinion that the company having similar functions can only be compared with the assessee and as per various decisions of the Tribunal as relied upon by the Ld. A.R., these companies were into development of the product also in addition to the business of providing services. 16. Ld. D.R. had argued that the TPO had taken segmental figures only to make the comparison. Therefore, we hold that this issue can be examined by the Assessing Officer afresh to ascertain as to whether segmental data relating to the provision of services were used or consolidated results were used for making comparison. 17. As regards the last argument of the Ld. A.R. regarding inclusion of finance and bank charges in operating expenses while computing the margin and comparables, we are in agreement with the argument of the Ld. A.R. that finance and bank charges form part of operating expenses and need to be included while calculating margin of comparables. 18. Therefore, in view of the facts and circumstances of the present case and in view of the discussions made above and in view of va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/Bang/2012 Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 9.2 Ld. AR also relied on the decision in the case of Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 AY 2008-09. 9.3 Ld. DR relied on the orders of revenue authorities. 9.4 Respectfully following the said decision, we direct the AO/TPO to exclude the said company as comparable from the list of comparables. 10. Qunitegra Solutions Ltd. 10.1 Objecting to the aforesaid company as comparable, the ld. AR relied on the decision of the coordinate bench of ITAT Banlgaore in case of IDPLM Software Solutions Ltd. (supra) wherein the bench held as follows: "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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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