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TMI Blog2016 (4) TMI 1304X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. Passing the Orders in the manner passed by them. The Orders being bad in law are liable to be quashed. b. passing the order without demonstrating that appellant had motive of tax evasion. c. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law. d. adopting a flawed process for issuing notices u/s. 133(6) and relying on the same without providing complete information or an opportunity to cross examine the companies concerned. GROUNDS ON COMPARABLES AND REJECTION OF TP ANALYSIS OF THE APPELLANT 4. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. computing the arm's length price based on the data for the Financial Year 2007-08 of the comparables, which was not available when the appellant undertook transfer pricing documentation and reporting obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 234B and 234D be deleted. The appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeals according to law. The appellant prays accordingly." 3. The grounds raised by the revenue in its appeal are as under:-- "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. 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 learned CIT (A), on the facts and in the circumstances of the case, erred in holding that the company VGL Softech Ltd. shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Bang/2012 dated 05.06.2015 for the same assessment year (copy available at pages 236 to 290 of PB), the Tribunal has decided similar issue under similar facts in favour of the assessee, by following various other Tribunal's orders and it was held by the Tribunal in that case that out of same 20 comparables considered by the TPO/AO in that case as in the present case, 12 comparables noted in para No. 25 of that Tribunal's order are to be excluded. It was further submitted that after these 12 comparables are excluded in the present case, the average arm's length margin on the basis of remaining 8 comparables comes to 14.35% and after adjustment of working capital margin, it goes further down to 13.86% as against margin reported by assessee of 9.60% being operating profit/operating cost of the assessee and therefore, the same is within +/- 5% range and hence, no TP adjustment is called for u/s. 92CA of the Act. 5. The ld. AR of the assessee has also submitted that additional grounds are also raised by the assessee which are as under:-- "1. The lower authorities have erred in selecting Quintegra Solutions Ltd., E-Zest Solutions Ltd., Thirdware Solutions Ltd., and Lucid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue's appeal, it was submitted by the ld. DR of Revenue that lease line charges of Rs. 6,41,835 and foreign exchange loss of Rs. 45,97,211 attributable to delivery of the product or software outside India should not be excluded from total turnover for the purpose of computing deduction u/s. 10A of the I.T. Act. 11. In the rejoinder, it was submitted by the ld. AR of assessee that as per judgment of Hon'ble High Court of Karnataka rendered in the case of CIT v. Tata Elxsi Ltd., 349 ITR 98 (Karn), total turnover is sum total of export turnover and domestic turnover and therefore, if an item is excluded from export turnover, total turnover also goes down by that amount as a consequence. 12. We have considered the rival submissions. We find that in the present case, the TPO has considered 20 comparables and worked out the average margin of total 20 comparables at 23.65% and thereafter, he allowed relief on account of working capital adjustment of 0.76% and worked out the adjusted mean margin of the comparables at 22.89%. The final set of these 20 comparables as per TPO at para 3.5.4 of the TPO's order passed u/s. 92CA of the I.T. Act is reproduced below:-- 13. Now, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost at 10.73% and accordingly the assessee claimed that margin of the assessee is within 5% range of the Arms'' Length Price (AL)/arithmetic mean of the comparables. The TPO rejected 16 out of 17 companies selected by t he assessee and carried out fresh search by applying the filter as under: * Companies whose data is not available for FY 2007-08 were excluded. * Companies whose software development service income is less than Rs. 1 crore were excluded. * Companies whose Software Development Service revenue is less than 75% of the total operating revenues were excluded. * Companies having more than 25% related party transactions (sales as well as expenditure combined) of the operating revenues were excluded. * Companies having less than 25% of the revenue as export sales were excluded. * Companies whose onsite income is more than 75% of the export revenues were excluded. * Companies whose employee cost to revenues is less than 25% of the revenues were excluded. * Companies who have diminishing revenues/persistent losses for the period under consideration were excluded. * Companies having different financial year (i.e., not March 31, 2008) or data of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment is called for. 20. On the other hand, the ld. DR submitted that TPO took segmental data in case of M/s. KALS Information Systems Ltd. (Seg.), M/s. Tata Elxsi Ltd. (Seg.) and M/s. Wipro Ltd. (Seg.), therefore, the objection raised by the assessee that these companies are functionally not comparable with the assessee is not sustainable. As regard M/s. Quintegra Solutions Ltd., the ld. DR submitted that it is assessee's own comparable included in the TP study report and therefore, the assessee cannot ask for rejection of the said company as comparable. He has relied upon the orders of authorities below. In rejoinder, the ld. AR has submitted that though M/s. Quintegra Solutions Ltd. was part of the TP study of the assessee but it was found that the said company is not comparable with the function of the assessee and therefore, it cannot be included in the list of comparables for determination of ALP. He has relied upon the decision of Special Bench of ITAT of Chandigarh Bench in the case of DCIT v. QUARK SYSTEMS (P.) Ltd. [2010] 38 SOT 307 (ITAT [Chand]). The ld. AR has further pointed out that in case of M/s. KALS Information Systems Ltd. (Seg.), M/s. Tata Elxsi Ltd. (Seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 products. The extract mentions that this company offers customised solutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology 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 Triology 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 that this company was selected as a comparable by the TPO not by any FAR analysis or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company was not selected IT(TP)A 1380/Bang/2012 Page 7 of 34 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 Triology E-Business Software India Pvt. Ltd. (ITA No. 1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 8.0 Bodhtree Consulting Ltd. 8.1 This company has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised by the learned Authorised Representative of the assessee in respect of this company at this stage of proceedings. 8.4.2 It is also seen from the submissions made before us that the assessee has only pointed out fluctuating margins in the results of this company over the years. This, in itself, cannot be reason enough to establish differences in functional profile or any clinching factual reason warranting the exclusion of this company from the list of comparables. In this view of the matter, the contentions of the assessee are rejected and this company is held to be comparable to the assessee and its inclusion in the list of comparable companies is upheld. 9. Celestial Biolabs Ltd. 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 that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Bind view India Pvt. Ltd. V DCIT in ITA No. 1386/PN/2010. (iii) The rejection of this company as a comparable has been upheld by coordinate benches of the Tribunal in the case of-- (a) Triology 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) CSR India Pvt. Ltd. IT (TP) A No. 1119/Bang/2011) and (d) Transwitch India Pvt. Ltd. ITA No. 6083/Del/2010) (iv) 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 case on hand and hence ought to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative drew our attention to various parts of the Annual Report of this com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07-08 (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 from 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 IT(TP)A 1380/Bang/2012 Page 24 of 34 and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company is functionally dissimilar 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. 12. Wipro Ltd. 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 dis-similarity, brand value, size, etc. The TPO, IT (TP) A 1380/Bang/2012 Page 26 of 34 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 coordinate 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." 13. Tata Elxsi Ltd. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 13.5 The Hon'ble Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and prayed that in view of the above reasons, this company i.e. e-Zest software 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 company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest software Ltd., is rendering product development services and high end technical services which 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 Information Systems (India) (P.) Ltd. (supra) tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative, the Pune Bench of the Tribunal in the case of E-Gain Communications (P.) 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. 16. Lucid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that-- (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a coordinate bench of the Tribunal in the assessee's own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 17. Persistent Systems Ltd. 17.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) 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. 18. Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had any influence on the pricing or the margin earned. 18.2 Before us, the assessee objected to the inclusion of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company in the set of comparables to the assessee for the period under consideration. 18.4 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 the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted from the list of comparables, as in the case on hand. 18.5 We also find from the Annual Report of Quintegra Solution Ltd. that there have been acquisitions made by it in the period under consideration. It is settl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P.) Ltd. (supra). As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the co-ordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand. 23. Thus, it is clear from the findings of the Co-ordinate Bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) that except Bodhtree Ltd. all other 12 companies were found to be not good comparables of the software development services as provided by assessee. 24. As regard the objection of the ld. DR that Quintegra Solution Ltd. has been selected by the assessee itself, we notice that the functional comparability of this company has been examined by the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) and it was found that the said company is engaged in the different field of services i.e. product designing and analytic services as well as in proprietary of software product and are in research and development activity which has resulted in creation of its intellectual property rights. Therefore, the said company is not functionally comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee on page 11 of written submissions filed before us on the date of hearing is reproduced hereinbelow:-- 15. As per the above working, even if we consider the operating margin without excluding the working capital adjustment, the same is 14.35% which is within +/- 5% range of the assessee's operating profit reported at 9.60% and therefore no TP adjustment is called for. We hold accordingly. 16. This takes care of all the main grounds of the assessee's appeal as well as additional grounds 1 & 2. Regarding additional ground No. 3 of the assessee, in respect of inclusion of one more comparable i.e., Indium Software India Ltd., we hold that no adjudication is called for on this aspect in the facts of the present case because even without including this comparable, no TP adjustment is justified as per our decision above by following the decision of the coordinate Bench of the Tribunal rendered in the case of Kodiak Networks India Pvt. Ltd. v. DCIT (supra). 17. Regarding various grounds being ground No. 1 to 10 of Revenue's appeal regarding exclusion of various comparables, we find that regarding various comparables noted in ground No. 2 of Revenue's appeal i.e., M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 41.94% computed by the TPO, but when this comparable is being excluded, the difference in margin rate of this comparable is immaterial. 22. Now we will decide ground Nos. 11 & 12 of Revenue's appeal in respect of deduction u/s. 10A of the I.T. Act. 23. The claim of Revenue is that lease line charges of Rs. 6,41,835 and foreign exchange loss of Rs. 45,97,211 should be excluded from the export turnover but should not be excluded from the total turnover for the purpose of computing deduction u/s. 10A of the I.T. Act. In this regard, we find that this issue is squarely covered in favour of assessee by judgment of Hon'ble jurisdictional High Court rendered in the case of CIT v. Tata Elxsi Ltd. (Supra), wherein it was held by the Hon'ble jurisdictional High Court that total turnover is sum total of export turnover and domestic turnover. Hence, when these two items of expenses are to be excluded from export turnover, it automatically gets excluded from total turnover because it cannot be said that these expenses are part of domestic turnover and therefore, when export turnover is reduced, total turnover is automatically reduced because total turnover as per this judgment o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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