9911796707
TMI Blog2015 (7) TMI 1249X X X X Extracts X X X X X X X X Extracts X X X X ..... eclaring income of Rs. 47,88,62,424 under the normal provision of the Act and taxable income of Rs. 16,80,79,423 under MAT provisions. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny. 2.2 In the period under consideration, the assessee had reported the following international transactions :- Provision of Software Development Services Rs. 258,21,78,120. Provision of Order Gathering Services. Rs. 14,34,45,438 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of these international transactions, after obtaining necessary approval from the CIT-III, Bangalore. The TPO vide order under Section 92CA of the Act dt.11.1.2013 proposed a T.P. Adjustment of Rs. 28,11,31,440 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment under Section 143(3) r.w.s. 144C of the Act dt.14.3.2013 which was sent to the assessee; to which the assessee submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant Systems, Incunder a slump sale arrangement by executing a Business Transfer Agreement. Grounds of appeal relating to Transfer Pricing adjustment 6. The learned CIT(A) has erred in confirming the addition made by the AO/TPO to the total income of the Appellant on account of adjustment in the arm's length price of the income from provision of software development services transaction entered into by the Appellant with its Associated Enterprises ("AEs"); 7. The learned CIT(A) has erred in not considering the Appellant's contentions as per the grounds of appeal raised before him and providing grounds in his order in an incoherent manner. 8. The learned CIT(A) has erred in not passing a reasoned order on the contentions raised by the appellant regarding the final set of comparables to be used in determining the arm's length price of the impugned international transactions undertaken by the Appellant. 9. The learned CIT(A) haserred in upholding the action of TPO in determining the arm's length margin/price using only financial year 2008-09 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 10. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the position is not same when consolidated results are given due consideration e) LGS Global Limited &Quintegra Solutions Limited-TPO rejected by stating that it fails 75% export earnings filter which is factually incorrect 14. The learned TPO had erred by wrongly computing the operating margins of some of the comparable companies identified in the Transfer Pricing Order under Section 92 CA(3) of the Act. Other Grounds On the facts and in the circumstances of the case and in law: 15. The learned CIT(A) erred in upholding the action of the learned AO in levying interest of Rs. 4,79,55,132 and Rs. 2,54,446 under section 234B and 234C of the Act respectively, by holding that such levy is mandatory, without properly adjudicating on the contentions raised by the Appellant in this regard; 16. The learned CIT(A) erred in upholding the action of the learned AO in initiating penalty proceedings under section 271(1)(c) of the Act, by referring such proceedings as premature, without properly adjudicating on the contentions raised by the Appellant in this regard; The Appellant submits that each of the above grounds is independent and without prejudice to one another." 3.2 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and collected in accordance with law. Tax which is not due in law which was paid under a mistake cannot be said to be tax levied and collected in accordance with law. As we have already seen the law on the question of allowing depreciation on Goodwill was in a fluid state. With the decision of the Hon'ble Supreme Court in the case of Smifs Securities (supra) which decision was available only after the directions of the DRP were given, the law on the issue became clear. The learned DR's attempt to distinguish the facts of the Assessee's case and that of Smifs Securities Ltd. (supra) on the basis that in the case of the Assessee it was a slump sale whereas in the case of Smifs Securities Ltd.(supra) it was a case of amalgamation, in our view, cannot be accepted. The question is regarding the existence of goodwill and not the manner in which the Goodwill in question came to be created. The exclusion clause in the business transfer agreement on which the learned DR placed reliance, in our view is again not relevant. In our view the facts of the Assessee's case is identical to the facts of the case decided by the Hon'ble Supreme Court in the case of Smifs Securities Ltd.(supra). We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Services BE India Branch in IT(TP)A No.271/Bang/2014 dt.17.10.2014 for A.Y. 2009-10. 6.2 In the light of the above observations, we now briefly examine the grounds of appeal raised at S.Nos. 6 to 14 raised on T.P. issues. 6.3.1 Ground Nos. 6 and 7 are general in nature and since these grounds have not been urged before us, the same are rendered infructuous and accordingly dismissed. 6.3.2 Ground Nos.8 and 10 to 14 were raised, inter alia, in respect of various aspects of comparability analysis adopted by the T.P.O. The learned Authorised Representative, however, submitted that these grounds would be pressed to the limited extent of the inclusion of certain companies as comparables by the TPO and the exclusion of certain other companies. The assessee in this appeal had also raised the issue of inclusion of certain comparables proposed by it which were rejected by the TPO. In the course of hearings before us, the learned Authorised Representative submitted that the inclusion of these comparables in not being pressed. We, therefore, dismiss this claim of assessee's as infructuous and not requiring adjudication. As we will be examining and considering the comparability or othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he objections of the assessee, the TPO selected the final list of 11 comparables, which are as under :- Sl.No. Name of the Comparable Sales (in Rs.) Cost (in Rs.) Margin % 1. KalsInformationSystems Ltd. 2,14,04,686 1,87,93,813 13.89 2. Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11 3. BodhtreeConsulting Ltd. 16,05,75,212 9,89,56,821 62.27 4. R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97 5. Tata Elxsi Ltd. (Seg) 3,78,43,03,000 3,14,63,15,000 20.28 6. Sasken Communication Technologies Ltd. 4,05,31,20,000 3,18,69,97,000 27.91 7. Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40 8. Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.81 9. Mindtree Ltd. (Seg) 7,93,22,79,326 5,74,06,73,058 5.52 10. Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72 11. Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61 Average Mean 24.32 The average mean margin of the 11 comparable companies selected by the TPO was 24.32% whereas the average mean margin of the software development services segment of the assessee was 10.57% on total cost. After granting workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and included this company in his final set of comparables. 9.2 In the appeal 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 as it is into software products, unlike the assessee who is only a software service provider to its AEs. It was also submitted that this company being into development of software products and also being engaged in providing training was rejected as a comparable to a software service provider by the decision of a co-ordinate bench of this Tribunal in the case of M/s. Cisco Systems Services BE., India Branch (supra) for the same Assessment Year 2009-10; following the decision of the coordinate bench in the case of Triology E Business Software India Pvt. Ltd. (supra). The learned Authorised Representative prayed that in view of the above cited decision (supra), this company be excluded from the list of comparables. 9.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final list of comparables. 9.4.1 We have heard both parties and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessee who is merely a provider of software services. 10.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final set of comparables. 10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B. V. , India Branch (supra), for Assessment Year 2009-10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 20 of the order has held as under :- "20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though thesaid company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable to the assessee as it performs a variety of functions under software development and services segment; namely product design, innovation design engineering and visual computing labs, as is reflected in the Annual Report of the company and is not a pure software development service provider like the assessee. The learned Authorised Representative also submitted that the co-ordinate benches of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra) for Assessment Year 2009-10 has held that this company being into software products and various diversified activities is to be excluded from the list of comparables for a software service provider. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable. 11.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three subsegments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 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." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though thesaid company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.14.8.2014 is reproduced hereunder :- "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 this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings before us, the assessee objected to the inclusion of this company as a comparable on the ground that it being engaged in software development services and analytic services, and owning its own intangible assets, it is not a purely a software development service provider as is the assessee in the case on hand. The learned Authorised Representative submitted that a co-ordinate bench of this Tribunal in the assessee's own case in IT(TP)A No.1560/Bang/2012 for Assessment Year 2008-09 has excluded this company from the list of comparables to a purely software development service provider on the grounds of functional difference and therefore prayed that in this year also, this company ought to be excluded from the list of comparables since the assessee is only rendering software development services. 13.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that a co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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