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TMI Blog2016 (11) TMI 1534X X X X Extracts X X X X X X X X Extracts X X X X ..... with law. This ground is accordingly, allowed for statistical purposes Computation of deduction u/s 10A - leased line charges, IPLC service charges (Leased Circuit) & foreign travel expenses exclusions - Held that:- The leased line charges, IPLC service charges (Leased Circuit) & foreign travel expenses ought not to have been excluded or Alternatively, if they are excluded from the export turnover similar exclusion be made in the Total turnover for arriving the deduction u/s 10A, which are in accordance with the decision in CIT v Tata Elxsi and accordingly we direct the AO to exclude them from the export turnover and also from the Total turnover, while computing the deduction u/s 10A. - I.T(TP).A No.1102/Bang/2011 - - - Dated:- 23-11-2016 - SHRI. VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER Assessee by : Shri. Chavali Narayan, CA Revenue by : Ms. Jahanzeb Akhtar, CIT - DR ORDER PER S. JAYARAMAN, ACCOUNTANT MEMBER : This appeal is filed by the assessee against the assessment order dt.20.09.2011, passed in pursuance to the directions of the DRP, for the assessment year 2007-08. 02. The assessee is a wholly owned subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any, incurred in foreign exchange in providing the technical services outside India should be excluded in arriving at the figure of export turnover, held that the expenditure incurred by the assessee on leased line charges at ₹ 2,502,447, IPLC service charges (Leased Circuit) at ₹ 1,332,376 foreign travel expenses at ₹ 23,129,06 require exclusion and accordingly reduced them from the export turnover but he has not reduced them from the Total turn over and , thus, arrived the deduction u/s 10A at ₹ 1,67,84,994/- which was lesser from the assessee's claim by ₹ 5,50,102/-. On an appeal, the DRP agreed with the view of the AO / TPO and rejected the assessee's contentions. 06. Aggrieved, the assessee filed this appeal before this Tribunal. Its effective grounds of appeal are as under : 07. Further, the assessee also filed an additional ground under Rule 11 of the ITAT Rules, which read as under : a) that the learned TPO / DRP has failed to appreciate the fact that the following companies are not functionally comparable to the Appellant and therefore erred in law and facts in considering them as comparable companies : i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly sought rejection of the following comparables based on functional difference and on the turnover filter relying on this Tribunal decisions reported in M/s Meriter LVS India (P) Ltd in IT(TP)A No 1231/Bang/2011 dt 16.10.2015 for ay 2007-08, M/s Actiance India Private Ltd in IT(TP)A No 1056/Bang/2011 dt 12.06.2015 for ay 2007-08, M/s Maxim India Integrated Circuit Design IT(TP)A.1102/Bang/2011 Page - 8 Pvt Ltd in IT(TP)A No 28/Bang/2012 dt 31.03.2016 for ay 2005-06 etc , which is schematically extracted as under : Sl No Name Assessee's reasons TPO's reasons 1. Avani Cimcon Technologies Ltd Super-normal profits, Functionally different, Revenue from software services software products and no segmental information available Based on information received u/s.133(6), it qualifies all the filters applied by the TPO 2. Celestial Labs Ltd Functionally different, Company is into Bioinformatics and has earned super normal profit Based on information received u/s.133(6), it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 Lucid Software Ltd Functionally different. Company deals with software products Pure software development service provider. It is considered comparable as it qualified all the filters applied by the TPO 11 Flextronics Software Systems Ltd (seg) Turnover filter. Contradiction between 133(6) reply and annual report Qualified all the filters applied hence to be accepted as comparable 12 Infosys Technologies Ltd Turnover filter. Functionally different, develops software products. Owns significant intangibles, brand value, market leader, substantial R D expenses It is into software development services and qualified all the filters applied hence to be accepted as comparable 13 Persistent Systems Ltd Turnover filter. Functionally different, engaged in software product designing and analytical services As per reply received u/s 133(6), it qualifies all filters applied by the AO 14 Sasken Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was IT(TP)A.1102/Bang/2011 Page - 12 rendering software development services only and it was held as follows:- 7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis. It was also highlighted that the margin of this company at 52.59% w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame has been written off in 10 years equally yearly installments from the year in which it is incurred. An amount of ₹ 11,692,020/- has been debited to the Profit and Loss Account as Deferred Revenue Expenditure (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R D activities is bad in law. 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool CELSUITE to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07- 08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally IT(TP)A.1102/Bang/2011 Page - 20 comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and IT(TP)A.1102/Bang/2011 Page - 21 nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services. 20. With regard to the inclusion of Helios Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive, the Pune Bench of the 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. 8 9. M/S.Ishir Infotech Ltd. And Lucid Software Ltd : 20. As far as comparable companies listed at Sl.No.11 14 of the final list of comparable companies chosen by the TPO viz., M/s.Ishir Infotech Ltd. And Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97.2 For a company to be included in the list of comparables, it is necessary that credible information is available about the company. Unless this basic requirement is fulfilled, the company cannot be taken as a comparable. It is true that ld. TPO is entitled to obtain information IT(TP)A.1102/Bang/2011 Page - 24 us/ 133(6), the object of which is primarily only to supplement the information already available on record, but not, as rightly submitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in ITA No. 5637/D/2011 149 agreement with ld. counsel for the assessee that this company cannot be included as a comparable in the set of comparables selected by ld. TPO on account of clear contradiction between contents of annual report and information obtained u/s 133(6). 27. Rule 10D(3) specifies the information and documents that are to be maintained by a person who is entering into international transactions. These are official publications, published accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately ₹ 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 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 operating 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. 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 development and product design services while the assessee is a software development services provider. We find that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out by assessee for which necessary adjustment was required to be made in accordance with Rule 10B(3) of Income Tax Rules. However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables. If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee's own study, then the AO / TPO has to be given a chance for verification, in view of judgment of Hon'ble Punjab Haryana High Court in the case of Quark Systems India P. Ltd (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd back to the AO / TPO for consideration afresh as per law. Ordered ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit 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 Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 15. Wipro Limited 13.1 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 or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd, E-Zest Solutions Ltd, Infosys Technologies Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Wipro Ltd (seg), Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Flextronics Software Systems Ltd (seg), Helios Matheson Information Technology Ltd, Ishir Infotech Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd (Seg), Tata Elxsi Ltd (seg) and Thirdware Solutions Ltd. In so far as Megasoft Solutions Ltd is concerned, we direct the TPO to rework its segmental results and consider its comparability only with regard to the software development services segment. 11. Quintegra Solutions Ltd and other comparables : For exclusion of Quintegra Solutions Ltd and Lucid Software Ltd on the basis of functional difference and for the exclusion of Infosys Technologies Ltd, Wipro Ltd (seg), Flextronics Software Systems Ltd (seg), Persistent Systems Ltd, Sasken Communication Technologies Ltd (Seg), Tata Elxsi Ltd (seg), iGate Global solutions Ltd (seg) and Mind tree Consulting Ltd on the basis of turn over filter, the assessee placed relied on the decision of the coordinate bench of this Tribunal in the case of M/s. Actiance India P. Ltd v. ITO in IT(TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks. (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 200 crores against the assessee's miniscule turnover of ₹ 13.11 crores. According to him, in the case of Triology E- Business Software India Ltd (supra), it was held clearly that companies having turnover in excess of ₹ 200 crores could not be considered with companies having turnover much below ₹ 100 crores. Coordinate benches have held that companies having turnover up to ₹ 200 crores companies could not be compared with companies having turnover in excess of ₹ 200 crores. 13. Thereafter, the Tribunal considered the decision of Triology E-Business Software India Ltd v DCIT 140 ITD 540 Bang and the relevant portion is extracted ) as under : 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d profits by way of a mark-up on costs incurred, in provision of the software development services. However, the independent companies have to bear the vagaries of the economic and business factors that are prevailing in the industry and thus could either incur losses or earn profits based on market conditions. Rule 10B (1)(e)(iii) provides that an adjustment should be made to the profit margin of independent comparable companies to take into account the differences in functions and risks. The OECD Transfer Pricing guide lines also recognize adj ustments to be made to account for difference s between controlled and uncontrolled situations that would significantly affect the price charged or return required by independent enterprises. Accordingly, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in terms of risks assumed is made. I n the submissions made to the T PO, it has compute d the adj ustment for the risk difference of the assessee vis-a- vis of the comparable companies by placing re liance on the methodology of risk adjustment as stated in the decision of the Hon'ble Bangalore Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made in accordance with law. This ground is accordingly, allowed for statistical purposes. Following the above decision , we direct the TPO to consider all the contentions of the assessee and after taking into account all the relevant material decide the percentage of risk adjustment to be made in accordance with law. This ground is, accordingly, allowed for statistical purposes. 16. With regard to the grounds on Corporate Tax matters : In those grounds, the assessee pleaded that the leased line charges, IPLC service charges (Leased Circuit) foreign travel expenses ought not to have been excluded or Alternatively, if they are excluded from the export turnover similar exclusion be made in the Total turnover for arriving the deduction u/s 10A, which are in accordance with the decision of the Hon'ble Jurisdictional High Court in CIT v Tata Elxsi 349 ITR 98 and accordingly we direct the AO to exclude them from the export turnover and also from the Total turnover, while computing the deduction u/s 10A. Thus, the corresponding grounds are allowed . 17. In the result, the assessee's appeal is treated as allowed . Order pronounced in the open court on 23r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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