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TMI Blog2015 (7) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 10A - Held that:- We find that the DRP had confirmed the Assessing Officer's finding on the ground that the assessee failed to adduce any evidence to support its claim. Considering the submissions made that the assessee was not afforded any opportunity of being heard in the matter and that the DRP dismissed its claim for lack of evidence being adduced, we deem it fit to remand the matter to the file of the Assessing Officer for de novo consideration of this issue and to decide thereon after affording the assessee adequate opportunity of being heard and to file details/evidence to support its claim in the matter. Interest under Section 234B - Held that:- The assessee denied itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of CIT v. Anjum M.H. Ghaswala [2001 (10) TMI 4 - SUPREME Court] and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B and 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO in her order under Section 92CA of the Act. 2.3 Aggrieved by the draft assessment order dt.12.12.2011 for Assessment Year 2008-09, the assessee filed its objections thereto before the DRP, Bangalore. The DRP vide its order passed under Section 144C(5) rws 144C(8) of the Act dt.26.6.2012 issued its directions confirming the additions/disallowances made by the TPO/A.O and rejected the objections raised by the assessee. In consequence thereof, the Assessing Officer passed the final order of assessment under Section 143(3) rws 144C of the Act dt.7.9.2012, against which the assessee is in appeal before the Tribunal. 3. Before proceeding to deal with the grounds of appeal raised by the assessee, the brief facts related to the T.P. issues are summarised hereunder :- 3.1 The assessee, a domestic private limited company is engaged in the provision of software development services to its Associated Enterprises ('AEs'). For the year under consideration, the assessee had reported the following international transactions :- S. No. International transactions Value (Rs.) 1 Provision of software development services 37,61,50,003 2 Reimbursement of Expenses (Received) 2,28, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76,70,376 Arm's Length Margin 121.46% of Operating Cost Arm's Length Price (ALP) Rs.42,22,80,439 Price Received Rs.39,87,70,164 Shortfall being adjustment u/s. 92CA Rs.2,35,10,275 3.5 Based on the above computation, the TPO proposed an adjustment of ₹ 2,35,10,275 which was incorporated by the Assessing Officer in the order of assessment. The order of assessment for Assessment Year 2008-09 was passed under Section 143(3) rws 144C of the Act vide order dt.7.9.2012 wherein the total income of the assessee was determined at ₹ 3,52,93,346 in view of the following additions/disallowances :- (i) disallowance of deduction u/s.10A : ₹ 17,63,449. (ii) Miscellaneous Income : ₹ 9,502. (iii) T.P. Adjustment : ₹ 2,35,10,275. 4.1 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.7.9.2012, the assessee has preferred this appeal arising the following grounds :- "I. Transfer Pricing. 1. The ld. Assessing Officer and the ld. Asst. Commissioner of Income Tax (Transfer Pricing - VI), Bangalore grossly erred inlaw and facts of the case in determining the Arm's Length Price of the international transactions of the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arcated based on Size. 6.6 in accepting companies like Infosys Limited and Wipro Limited as comparable companies even though the sales of Infosys and Wipro are driven based on brand developed by them. In doing so the learned TPO and the learned AO have ignored the adjudication of the Delhi Income Tax Appellate Tribunal (IT AT) in Agnity India Technologies India Pvt. Ltd. (reference: IT A No. 3 856(Del)/2010). 6.7 in accepting companies engaged in the provision of software product development like Avani Cimcon Technologies Limited, KALS Information Systems Limited, Persistent Systems Limited, Quintegra Solution Limited, Sasken Communication Technologies Limited, R Systems International Limited and Thirdware Solution Limited which are functionally not comparable to the Appellant's business. 6.8 in accepting Tata Elxsi Limited as a comparable company even though the company in its reply to the learned TPO under section 133(6) had mentioned that the company provides product design services, which is functionally not comparable to the Appellant's business. 6.9 in accepting companies such as Celestial Labs Limited, Flextronics Software Systems Limited and Softsol India Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segmental data pertaining to software development services is not available. 7. The learned TPO and the learned AO erred in disregarding the use of multiple year data, and ought to have accepted the use of contemporaneous data due to non-availability of current year data in the public domain at the time of preparing the documentation. II. Computation of deduction under section IOA of the Act 1. Reduction of expenses incurred in foreign currency from the export turnover 1.1 The learned Assessing Officer ("learned AO") has erred in re-computing the deduction under section IOA of the Act as ₹ 5,80,71,963 instead of ₹ 5,98,35,412. 1.2 The learned AO has erred in reducing the following expenses incurred in foreign exchange from the export turnover alone. Travel Expenses ₹ 53,68,970 Software expenses Rs.5,63,748 Employee Stock option plan ₹ 36,39,030 Internet charges- MPLS Rs.20,52,779 Others Rs.66,425 Total ₹ 1,16,90,952 1.3 The learned AO has erred in disregarding the submission made by the appellant that no part of the expenses incurred in foreign currency was incurred towards delivery of computer software outside India o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO as comparable companies to the assessee. The learned Authorised Representative also submitted that he would make submissions only in respect of the comparability of the individual companies selected by the TPO in the final set of comparables. 5.2 The learned Authorised Representative further submitted that the facts of the case on hand, inter alia, are similar to that of the case of 3DPLM Software Solutions Ltd. v. Dy. CIT [2014] 42 taxmann.com 333 (Bang. - Trib.) of the co-ordinate bench of this Tribunal which was also for Assessment Year 2008-09, the year under consideration in the case on hand. It was submitted that the set of comparables chosen by the TPO in the cited case (supra) is exactly the same as those selected in the case on hand and therefore for the above reasons the assessee places reliance on the decisions rendered in the cited case. The learned Authorised Representative also submitted that in respect of the exclusion of M/s. Bodhtree Consulting Ltd., the assessee places reliance on the decision rendered by the co-ordinate bench in the case of NXP Semi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced before us. 6. Avani Cincom Technologies Ltd. 6.1 This company was selected by the TPO as a comparable, inspite of the objections of the assessee that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO rejected the assessee's objections on the ground that this comparable company had categorised itself as a pure software developer, just like the assessee. In selecting this company as a comparable, the TPO had relied on information submitted by this company collected under Section 133(6) of the Act. 6.2 Before us, the learned Authorised Representative reiterated the assessee's objections to the inclusion of this company on the ground that this company is functionally different to the assessee as it is into software products. It is also submitted that segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained 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 comparables, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial 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." 6.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 7. Celestial Biolabs Ltd. 7.1 This comparable was selected as a compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India Pvt. Ltd. in ITA No. 1054/Bang/2011, we hold that this company ought to be omitted from the list of comparables. The A.O./TPO are acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he record that the TPO has included this company in the list of comparbales 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 Solutions 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) 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India (P.) 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." 9.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to exclude this company from its list of comparables. 10. KALS Information Systems Ltd. 10.1 This company was selected as a comparable by the TPO inspite of the assessee's objections to its inclusion on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (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." 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to exclude this company form the list of comparables. 11. Persistent Systems Ltd. 11.1 This company was selected as a comparable by the TPO inspite of the objections of the assessee to its inclusion on the grounds that being into software product design and analytic services, it is functionally different from the assessee in the case on hand who is a captive software service provider to its A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch has held as under :- "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, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. 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." 11.4.2 Following the above decision of the co-ordinate bench of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables to the assessee in the case on hand. 12. Quintegra Solutions Limited. 12.1 This company was selected as a comparable by the TPO inspite of the assessee's objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se on hand. At paras18.3.1 to 18.3.3 of its order, the co-ordinate bench has held as under :- "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 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 Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) 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. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Year 2008-09 has held that this company is to be omitted from the set of comparables as it is functionally different and dis-similar from a captive software service provider, as is the assessee in the case on hand. At paras 13.4.1 and 13.4.2 of its order, the co-ordinate bench has held as under :- '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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company in the list of comparables to the assessee. 14.3.1 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 Ltd. (supra) for Assessment Year 2008-09 has directed exclusion of this company from the list of comparables to a pure software service provider, like the assessee in the case on hand, as it is functionally different; being engaged in product development and earns revenue from sale of licenses and subscription, etc. holding as under at para 15.3 of its 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. (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the co-ordinate bench in its order (supra) has held as under :- "12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration is to be omitted from the list of comparables holding as under at para 19.3 thereof :- "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 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." 16.3.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to omit this company from the list of comparables. 17. The assessee preferred additional grounds of appeal at S.Nos.8 & 9 seeking the exclusion of the following two companies from the list of comparables :- (i) Lucid Software Ltd. (ii) Bodhtree Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 dis-similar 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record, including the judicial decisions cited by the ld. A.R. We find that this company has been excluded from the set of comparables for software development service companies in both the aforesaid decisions cited by the assessee. In Mindtech (India) Ltd., the relevant portion of the order at para 16 thereof it has been held as under :- 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. 15.3.2 It is also seen that the decision relied on by the co-ordinate bench of this Tribunal in the above mentioned case; CISCO Systems (India) Pvt. Ltd. (supra), has been in relation to Assessment Year 2008-09 and therefore we find merit in the contention of the assessee that the finding rendered in the above cited decision applies to the facts and circumstances of the case on hand, which is for Assessment Year 2008- 09. In this view of the matter, following the above decision of the co-ordinate bench of the Tribunal, we direct the TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly." 19.3.2 Followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y evidence to support its claim. Considering the submissions made that the assessee was not afforded any opportunity of being heard in the matter and that the DRP dismissed its claim for lack of evidence being adduced, we deem it fit to remand the matter to the file of the Assessing Officer for de novo consideration of this issue and to decide thereon after affording the assessee adequate opportunity of being heard and to file details/evidence to support its claim in the matter. III. Double Deduction of VAT Refund. 21. In this ground, the assessee contends that the Assessing Officer has included VAT refund twice in the computation of income, resulting in double taxation of VAT refund. It is also submitted that a rectification application on this issue is pending before the Assessing Officer. In the above factual situation of the matter, we direct the Assessing Officer to examine the issue and decide the matter on merits, after granting the assessee reasonable opportunity of being heard and submit evidence to support its claim, before deciding the matter. IV. Interest under Section 234B of the Act. 22. In this ground, the assessee denied itself liable to be charged interest unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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