9911796707
TMI Blog2016 (10) TMI 1190X X X X Extracts X X X X X X X X Extracts X X X X ..... e erred in law and on facts in rejecting, without appropriate reasons, the detailed benchmarking analysis conducted by the Appellant and embarking on a fresh search for comparables. 3. The Honorable DRP and the learned AO/TPO erred in fact and in law in determining the Arm's Length Price ("ALP") by adopting the financial data for a single year (i.e. the financial year 2007-08) of the comparables as against multiple year data considered by the Appellant. 4. The Honorable DRP and the learned AO/TPO erred in fact and in law in using selective information, which was not available in public domain, obtained under section 133(6) of the Income tax Act, 1961 ("the Act") and identifying additional comparables based on the same. 5. The Honourable DRP/Leanred AO has erred in law and on facts in upholding the ALP of 21.48 percent as proposed by the TPO, for the software development services rendered by the Appellant. 6. The Honorable DRP and the learned AO/TPO has erred in determining the ALP based on companies, which are not comparable to the Appellant due to various factors such as functional comparability, product/intangible led revenues, different busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Transfer Pricing Officer ('TPO'). 4. The profile of the assessee, financial results as well as international transactions are recorded by the TPO in paras 2.1 & 2.2 as under : 2.1 Profile of the taxpayer M/s. Tektronix Engineering Development (India) Pvt. Ltd., is a subsidiary of M/s. Tektronix Inc., USA. The taxpayer provides Tektronix group affiliates with engineering and software development services with a mark-up. 2.2 Financial Results of the Company The financials of the taxpayer for the F.Y. 2007-08 as per P & L a/c are as under: Operating Revenues* Rs. 280068145 Operating Expenses** Rs. 244939626 Operating Profit Rs. 35128519 Op Profit on sales % Rs. 12.54% Op Profit on cost % 14.34% *Excluding other income, interest income **Excluding bad debts written off and finance cost/interest 2.3 International transactions As per the Transfer Pricing (TP) document furnished for the A.Y.2008-09, the taxpayer company has entered into the following international transactions with its Associated Enterprises (AEs): International Transactions Sl. no Type of transaction Amount Amount received 1 Software development services 28,00,68, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsulting Ltd. & Lucid Software Ltd. were also part of the set of comparables for the Assessment Year 2006-07. The ld. DR has submitted that in assessee's own case for the Assessment Year 2006-07, the Tribunal vide its order dt.20.2.2015 in Tektronix Engg. Devt. India (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 223/69 SOT 1 (URO) (Bang. - Trib.) has not disturbed these two companies as the comparability of these companies was not challenged by the assessee therefore these two companies were accepted as comparable to the assessee. The ld. DR has thus contended that when these companies were accepted as functionally comparable for the Assessment Year 2006-07 and there is no material change in the business profile and activities of these two companies as well as the assessee for the year under consideration then these two companies cannot be excluded from the set of comparables. 9. The ld. AR of the assessee has submitted in the rejoinder of that if the other comparable companies are excluded from the set of comparables then without prejudice to the right of the assessee to challenge the functional comparability of these two companies, the assessee would not press the exclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment services to its AEs, like the assessee in the case on hand. At paras 7.6.1 and 7.6.2 of its order, the co-ordinate bench held as under :- "7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding this company in the list of comparable companies. 6.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements relied upon by the assessee. We find that this company; i.e. Bodhtree Consulting Ltd. has been excluded from the list of comparables for providers software development services in the judicial decisions cited by the assessee (supra at para 6.1.2 of this order). The relevant portion at para 15 of the order in the case of NXP Semi-conductors India (P.) Ltd. (supra) is extracted hereunder :- "15. Bodhtree Consulting Ltd. 15.1 This company has been selected as a comparable by the TPO. The assessee has objected to the inclusion of this company as a comparable, both before the DRP and this Bench, on the grounds that this company is functionally different as it has software products and a hybrid service business model. In the proceedings before us, the learned Authorised Representative placed reliance on the decision of the co-ordinate benches of this Tribunal in the cases of Mindtech (India) Ltd. (supra) and CISCO Systems (India) Pvt. Ltd., in IT(TP)A No. 271/Bang/2014 dt.14.8.2014, both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly." The relevant portion of the order in the case of CISCO Systems (India) Pvt. Ltd. (supra) at para 26.1 is extracted 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, order dated 6.11.2013. In this case, the Tribunal followed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason that it is functionally different form the assessee and as it fails the employee cost filter. 7.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable as this company is into bio-informatics, software product/services and in this context placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for A.Y. 2008-09. 7.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company as a comparable. 7.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for A.Y 2008-09 has held that this company be excluded from the list of comparables as it is functionally different from a provider of software development services to its AEs holding as under at paras 9.4.1 to 9.4.2 thereof which is extracted hereunder :- "9.4.1 We have heard both the parties and perused and carefully considered the material o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Ltd. (S. No. 4 in the chart) 8.1 This company was selected by the TPO as a comparable inspite of the assessee's objections to its inclusion as a comparable on the ground that it was functionally different from the assessee. The TPO rejected the assessee's objections on the ground that as per the information received under Section 133(6) of the Act this company is engaged in software development services and qualifies all the filters applied. 8.2 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 was submitted that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for A.Y. 2008-09, has held that this company is to be excluded from the list of comparables to a provider of software development services as it is rendering product development services and high and technical services which come under the category of KPO services. 8.3 Per contra, the learned Departmental Representative supported the order of the TPO including this company in the list of comparables. 8.4.1 We have heard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO, however, brushed aside the assessee's objections on the ground that turnover and brand aspects were not materially relevant in the software development services segment. 9.2 Before us, the learned Authorised Representative contended that this company ought to be omitted from the list of comparables as it is not functionally comparable to the assessee since it commands substantial brand value, owns IPR's and is a market leader in software development activities, whereas the assessee in the case on hand is merely a provider of software services to its AEs and does not possess any brand value or own any intangibles or IPR's. In support of this proposition, the learned Authorised Representative placed reliance on the decision of a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra). 9.3 Per contra, the learned Departmental Representative supported the order of the TPO/DRP in including this company in the list of comparables to the assessee. 9.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that a co-ordinate be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the rejection of this company as a comparable to providers of software development services has been upheld by a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra). 10.3 Per contra, the learned Departmental Representative supported the TPO's action in including this company in the final list of comparables. 10.4.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decision relied on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables as it was into development of software products and hence not comparable to a provider of software services; observing as under at para 10.4 of the order :- "10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s. 133(6) of the Act. This information which was not in the pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is into development of software products and therefore is functionally different from provider of software development services. 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 the rival contentions and perused and carefully considered the material on record; including the decision relied on by the assessee. We find that the co-ordinate bench in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 excluded this company from the list of comparables observing that this company, being into development of software products, is functionally different from a provider of software development services, as is the assessee's in the case on hand and therefore ought to be excluded from the list of comparables. At para 16.3 of this order the co-ordinate bench held as under :- "16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable to a provider of 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 case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company, being engaged in product development and product design services, is to be omitted from the list of comparables to providers of software development services. 12.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparables. 12.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables as it is functionally different from a provider of software development services, being engaged in product development and product design services. At para 17.3 of this order the co-ordinate bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding this company in the list of comparables. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company, being engaged in product engineering services, having substantial R&D activity resulting in the creation of proprietary software products and IPR's, is functionally different from a mere provider of software development services is to be omitted from the set of comparables; observing as under at paras 18.3.1 to 18.3.3 of the order :- "18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable as it has related party transactions (RPT) of 18.3%; thereby failing the RPT filter of 15%. 14 3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables. 14.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the set of comparables observing/holding as under at para 19.3 of the order :- "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 comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No. 227/Bang/2011. As the facts for this year are similar and material on record also ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development holding as under at paras 13.4.1 and 13.4.2 of its order extracted hereunder :- "13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct development and earns revenue from sale of licenses it is to be omitted from the list of comparables for software development services, holding as under at para 15.3 of the order :- "15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, 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." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of 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 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." 17.4.2 Following the above decision of the co-ordinate bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount, the ld. AR has submitted that this is a loss on realization amount in the EEFC Account and therefore it is in the nature of revenue and an allowable claim. 14. On the other hand, the ld. DR has referred to the relevant finding of the DRP at page 48 and submitted that the Assessing Officer as well as DRP has disallowed the claim for want of necessary details of bifurcation of the different head of the receivable on which the assessee has claimed foreign exchange loss. Thus the ld. DR has submitted that despite the sufficient opportunity given the assessee failed to produce any supporting evidence that this loss is in revenue account and not in capital account. 15. We have considered the rival submissions as well as the relevant material on record. At the outset we note that the Assessing Officer as well as DRP has disallowed the claim of the assessee on the ground that the assessee has failed to furnish the necessary details and supporting evidence to show that the loss is revenue in nature. Though the assessee has contended that the amounts are revenue receivables and therefore loss is also an allowable loss however we find that the necessary details and supporting eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X
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