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TMI Blog2018 (2) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... ial to show that the interest paid to AE @LIBOR +3% is arm’s length interest. We further note that this Tribunal has taken a consistent view that in the case of interest on ECB, LIBOR +1.5% can be taken as arm’s length interest therefore, the TPO applied the arm’s length interest at LIBOR +1.38% is within the justified range and we do not find any reason to interfere with the orders of the authorities below on this issue. The revenue’s appeal and C.O. of the assessee are partly allowed. - I.T. (T.P) A. No.1230/Bang/2013, C.O. No.164/Bang/2015 - - - Dated:- 25-10-2017 - Shri Arun Kumar Garodia, Accountant Member And Shri Vijay Pal Rao, Judicial Member For the Assessee : S/Shri P.K. Prasad Umashankar Gautam, Advocates. For the Revenue : Ms. Neera Malhotra, CIT (DR) (ITAT)-2, Bengaluru. ORDER Per Shri Vijay Pal Rao, J.M. : This appeal by the revenue and cross objection by the assessee are directed against the order dt.09.05.2013 of Commissioner of Income Tax (Appeals)-IV, Bengaluru for the Assessment Year 2008-09. 2. The revenue has raised the following grounds : 1. The order of the learned CIT(A) is opposed to law and facts of the cases. 2. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the circumstances of the case the learned CIT(A) has erred in holding that M/s KALS information Systems Ltd, cannot be taken as comparable as company carries inventories relying on website information which is unsupported by the annual report when there is no evidence to indicate sale of software products as well. 10. For these and other ground that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 11. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. 3. Ground No.1 is general in nature and do not require any specific adjudication. 4. Ground No.2 is regarding exclusion of communication expenses from both export turnover as well as total turnover while computing deduction under section 10A of the Act. 5. Having considered the rival submissions as well as the material on record, we find that the issue of expenditure incurred towards communication charges in foreign currency is reduced from export turnover an equal amount should also be reduced from total turnover while comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartmental Representative as well as learned Authorised Representative and considered the relevant material on record. It is now settled proposition on the point that the high profit or loss alone cannot be the criteria for inclusion or exclusion of an entity/company in the set of comparables however, if there is some extraordinary event or circumstances resulted the abnormal high profit or loss of a particular company then the said extraordinary event can be a relevant factor and ground for exclusion of the company from the set of comparables. Accordingly, to the extent of applying the high profit margin as a factor we decide this issue in favour of the revenue. The functional comparability of this company if required to be considered along with other comparable companies challenged by of the assessee. 12. Ground No.5 is regarding the employee cost filter applied by the TPO was rejected by the CIT (Appeals). 13. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. We find that the employee cost at 25% is very relevant factor and parameter for selecting the comparables to ensure tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no need of segmental details of this company. The learned Departmental Representative has further submitted that the CIT (Appeals) has rejected this company on the ground that this company is in the diversified activities and segmental details are not available which is contrary to the facts recorded by the TPO. 18. On the other hand, the learned Authorised Representative of the assessee has submitted that the CIT (Appeals) has considered the relevant facts regarding the functions and products of this company such as Dxchange, CARMA, etc as developed by this company. Further this company though claimed that it is pure software service provider however, this company offered software solutions, software development, consultancy and information technology to various clients. He has referred to the Annual Report of this company and submitted that this company derives revenue from various activities which includes software products such as portal builder solutions for destination, association, insurance for travel industry etc. He has relied upon decision dt.23.11.2012 of co-ordinate Bench of this Tribunal in the case of Triology e-Business Software India Pvt. Ltd. Vs. DCIT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not available to the Respondent in the public domain and relying on the same for comparability purposes. (corresponding to original cross objection 4) 5) That the learned CIT(A) erred in upholding the TPO s approach of ignoring the limited risk nature of the services provided by the Respondent and in not providing an appropriate adjustment towards risk differential, even when the fullfledged entrepreneurial companies are selected as comparables. (corresponding to original cross objection 5) 6) The Commissioner of Income Tax (Appeals) erred in law and on facts in upholding the approach of rejecting the comparability analysis of the Appellant in the TP Documentation and rejectingthe Research and Development Expenses filter applied by the Appellant. (corresponding to original cross objection 6 and 7) 7) The Commissioner of Income Tax (Appeals) has rightly rejected the application of employee cost filter in directing the inclusion of Indus Networks Ltd . as a comparable which was earlier excluded by applying the employee cost filter and the same should be upheld rejecting the ground by the revenue. (corresponding to original cross objection 7) 8) The Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment service. (corresponding to original cross objection 9) 14) The Commissioner of Income Tax (Appeals) erred in law and on facts by upholding the inclusion of Quintegra Solutions Ltd. on the grounds that it was a software development company and fails appellant s filter of research and development expenses to sales less than 3%, whereas this comparable should have been excluded on the grounds that it was functionally dissimilar being a company which is into niche area of Information Technology. (corresponding to original cross objection 9) 15) The Commissioner of Income Tax (Appeals) erred in law and on facts by excluding Tata Elxsi Ltd. only on the ground of application of turnover filter, whereas this comparable should also have been excluded on further grounds that it was functionally dissimilar being engaged in providing high-end hardware and software development activities. (corresponding to original cross objection 9) 16) The Commissioner of Income Tax (Appeals) erred in law and on facts by upholding the inclusion of Thirdware Solutions Ltd. on the grounds that it was a software development company and fails appellant s filter of research an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies has been considered by the co-ordinate Bench of this Tribunal vide order dt.29.4.2015 in the case of Infor (Bangalore) Pvt. Ltd. Vs. ACIT in IT(TP)A No.1550/Bang/2012. As regards the company Softsol India Limited , the functional comparability of this company has been considered by the co-ordinate Bench of this Tribunal vide decision dt.22.4.2016 in the case of M/s. Electronics Imaging India Pvt. Ltd. Vs. DCIT in IT(TP)A No.227 285/Bang/2013. 25. On the other hand, the learned Departmental Representative has relied upon the order of the TPO and submitted that comparability of the companies have to be examined on the basis of FAR Analysis and not by following the precedence in the case of other assessees. 26. Having considered the rival submissions as well as the relevant material on record, at the outset, we note that co-ordinate Bench of this Tribunal in the case of Infor (Bangalore) P. Ltd. Vs. ACIT (supra) while considering an identical set of 20 companies selected by the TPO in the said case has held that 11 companies, as disputed before us by the assessee, are not functionally comparable in paras 23 to 36 as under : 23. What we find is that TPO had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology 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. 25. No doubt in the said case one of the reason why Avani Cincom Technologies was directed to be excluded was non-furnishing of information obtained u/s.133(6) of the Act. However, it is also clearly mentioned at 7.6.2 that the said company was functionally dissimilar. Same view was also taken by the coordinate bench in the case of Triology E- Business Software India P. Ltd v. DCIT [(2013) 140 ITD 540]. 24. Observation of this Tribunal with regard to Celestial Biolabs Ltd, as it appears in the case of 3DPLM Software Solutions Ltd (supra) is reproduced hereunder : 9.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q InformationSystems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed. 26. Vis-a-vis Infosys Technologies Ltd, findings of the Tribunal appears at para 11.1 to 11.4 of the order in the case of 3DPLM Software Solutions Ltd, (supra), and this is reproduced hereunder : 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 Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 27. With regard to Kals Information Systems Ltd, (seg) findings of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any 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 that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details culled out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and careful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which 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 inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies. (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : Quintegra has taken various measures to preserve its intellect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 30. Vis-a-vis Tata Elxsi Ltd, (seg), findings in the case of 3DPLM Software Solutions Ltd (supra), appear at para 13.1 to 13.4.2 which is reproduced hereunder : 13.1 This company was 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 several counts like, functional dis-similarity, significant R D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm s length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 32. On comparability of Wipro Ltd, in the case of 3DPLM Software Solutions Ltd (supra), findings of the Tribunal appear at para nos.12.1 to 12.4.2 of the order which reads 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 dissimilarity, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne 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 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. 33. Coming to Lucid Software Ltd, this has been dealt with at para 16.1 to 16.3 of the order in the case of 3DPLM Software Solutions Ltd, (supra), and this is reproduced hereunder : 16.1 This company was selected as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dissimilar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008- 09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of ₹ 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3 ... 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included this company as a comparable as the assessee was also a provider of software development services. Before us, in addition to the plea that the company was functionally different, the assessee submitted that this company was excluded from the list of comparables by the order of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (ITA No. 845/Bang./2011) on the ground that the 'Related Party Transactions ('RPT') is in excess of 15%. The learned Authorised Representative submitted that for the current period under consideration, the RPT is 18.3% and therefore this company requires to be omitted from the list of comparables. 19.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables as this company was a pure software development service provider like the assessee. 19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007- 08 in ITA No.845/Bang/2011 has excluded this company from the set of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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