9911796707
TMI Blog2016 (1) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... n excess of 200 crores from the list of comparables - appeal of revenue stands dismissed Liable for a standard deduction of 5% applying proviso to Section 92C(2) - Held that:- AR fairly conceded that the proviso to Sub-section (2) of Section 92C of the Act could not be considered as a standard deduction. We therefore allow ground taken by the Revenue. Assessee is an off-shore development centre had international transactions with its AE during the relevant previous year in the software development segment, thus companies functionally dissimilar with that of assessee need to be deselected from final list X X X X Extracts X X X X X X X X Extracts X X X X ..... referred the issue of benchmarking the international transactions of the assessee to the TPO, in accordance with Section 92CA of the Act, TPO was of the opinion that the CUP method could not be accepted since comparable data on hourly rates charged by independent enterprises, engaged in similar services could not be reliably obtained from data information available in the public domain. TPO opted for the TNMM. He made a search using capitaline and prowess data bases and arrived at a set of 17 comparables, List of comparables arrived at by the TPO and their profits to cost ratio stood as under : Sl. No. Company Name Sales (Rs. cr.) OP to Total Cost% Product sales (Rs./% of sales) RPT(Rs. cr.) % of RPT over Sales 1. Bodhtree consulting ltd 3.87 24.85 Nil 0 0 2. Lanco Global Systems ltd* 6.11 13.65 Nil 0 0 3. Exensys Software Solutions ltd 7.3 70.68 Nil 0 0 4. Sankhya Infotech ltd 12.99 27.39 Nil 0 0 5. Sasken Network Systems ltd* 14.44 16.64 Nil 1.1 7.62 6. Four soft ltd 15.94 22.98 2.57(16%) 3.17 19.89 7. Thirdware Solution limited 29.11 66.09 2.7(9%) 2.58 8.86 8. R S Software (India) Ltd* 81.69 8.07 Nil 6 7.34 9. Geom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or abnormal loss by itself would not be a reason for exclusion of a company from the list of comparables which was otherwise similar to the tested party. However what we find in the case of Exensys Software Solution Ltd, is that there was an amalgamation of one company named Holool India Ltd. with Exensys Software Solutions Ltd, during the relevant previous year which was clearly mentioned in its annual report. Further the said company also had earnings from BPO services, and segmental results were not available. Thus it was not a case where exclusion was directed by the CIT (A) solely for a reason of abnormal profits. Such directions were given considering the fact that such profits arose out of an extraordinary event of amalgamation. This has not been rebutted by the Revenue. Revenue has also not produced anything to show that segmental results of the said company was available. We are of the opinion that CIT (A) had directed exclusion of Exensys Software Solution Ltd. from the list of comparables correctly. We do not find any ground to interfere with the decision of the CIT (A) Ground.2 of the Revenue stands dismissed. 11. Vide its ground 3 Revenue is aggrieved that CIT (A) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s confliction opinions of two non-jurisdictional High Courts, we prefer to go by the view more favourable to the assessee. We cannot say that turnover is having no relevance, especially when the assessee was having a turnover below ₹ 10 crores and was being compared with entities having turnover well exceeding ₹ 200 crores. We are therefore convinced that CIT (A) was justified in direction exclusion of companies having turnover in excess of ₹ 200 crores from the list of comparables. Ground 3 of the Revenue stands dismissed. 16. Vide its ground 4, Revenue is aggrieved that assessee is liable for a standard deduction of 5% applying proviso to Section 92C(2) of the Act. Ld. AR fairly conceded that the proviso to Sub-section (2) of Section 92C of the Act could not be considered as a standard deduction. We therefore allow ground taken by the Revenue. 17. Now we take up the appeal of the assessee. Assessee in its appeal has raised altogether nineteen ground of which grounds 1 to 18 are on matter relation to TP. Ld. Counsel for the Assessees at the out set submitted that if his ground relating to exclusion of certain comparables selected by the TPO admission of ten new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an objection regarding comparability at any stage of proceedings and even in a case where the assessee has not raised objection for including the same as a comparable before the lower authorities, or the assessee had chosen in its TP study a company which it seeks to exclude as a comparable. The Special Bench of Chandigarh Tribunal in DCIT v. Quark Systems (P.) Ltd. (2010) 38 SOT 307 has held that the Tribunal is a fact finding body and therefore has to take into account all the relevant material and determine the question as per the statutory regulations and that tax payer is not estopped from pointing out a mistake in the assessment, though such mistake is a result of evidence adduced by the tax payer. We therefore proceed to determine the comparability of Bodhtree Consulting Ltd. In this regard, we find that ITAT Hyderabad Bench in Ivy Computech (P.) Ltd. v. ACIT (2014) 43 taxmann.com 183 (Hyd.) Trib. Has taken the view that Bodhtree Consulting Ltd., should not be regarded as a comparable in the case of software development service provider: The ld. Counsel for the assessee also brought to our notice that comparability of this company with software development provider was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Fixed Price Project Modal, the total contract price is agreed upon between the parties, Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below: 3. Revenue Recognition: Revenue from software development is recognised based on software developed and billed to clients. From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Project Modal. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year, for which the revenue may have been recognised in the earlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the profitability margin of such entity. Merely because of such fluctuations, an entity engaged in the development of software, being functionally comparable to the assessee, cannot be rejected only on this ground." 14. The learned counsel for the assessee drew our attention to the fact that Bodhtree Consulting admittedly follows a fixed pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td., which are as follows:- 34. As can be seen from the above analysis, this company has erratic margins and growth over the years. The margins of Bodhtree are consistently changing. This reflects that the revenue recognition policy followed by Bodhtree is not proper and is resulting in consistent change in margins. Further, the growth rate over the years is also fluctuating to extremes. Further, growth in revenues is not supported by growth in expenses. In some cases expense growth is higher that the revenue growth. Also salary cost ratio is widely fluctuating. These circumstances are peculiar in nature and require further analysis, without which this company should be rejected as a comparable.' 21. Contention of the Ld. DR that assessee was into software product development cannot be accepted since the TPO himself had considered assessee to be into software development services. This is clear from the segmental results compiled by him at para 2 of his order which has been reproduced by us at para six above. Accordingly we are of the opinion that the decision of the coordinate bench Kodiak Networks India (P.) Ltd. (supra) would apply on all four squares. We therefore direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule VI of the Companies Act, 1956." 30. It was also brought to our notice that the Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 6091/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the assessee therein which was also in the business of software development. 31. The submissions made by the learned counsel for the assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies.' Accordingly we direct exclusion of M/s. Sankhya Infotech Ltd., from the list of comparables. 25. Vis-à-vis Foursoft Ltd., Ld. AR submitted that the said company was also rejected by this Tribunal in the case of Kodiak Networks India (P.) Ltd. (supra) Ld. AR also submitted that said company was also hit by RPT filter of 15% and reliance was placed a decision of coordinate bench in the case of 24/7 Customer.com (P.) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Ltd., Ld. DR submitted that the decision of the coordinate bench in the case of Kodiak Networks India (P.) Ltd. (supra), covered the said company also. Reliance was placed at paras 20 to 22 of the order of the Tribunal mentioned supra. 30. Per contra, Ld. AR raised similar plea as was made in the case of M/s. Bodhtree Consulting Ltd. 31. We have perused the orders and heard the rival contentions. This Tribunal's decision in the case of Kodiak Networks India (P.) Ltd. (supra) has held as under at paras 20 to 24 of its order : "20. As regards grounds No. 3 to 6 are concerned. Thirdware Solution Ltd., and Geometric Software Solutions Ltd., are concerned, were held to be functionally different from a company rendering software development services such as the Assessee in the case of Sunquest Information Systems (I) Pvt. Ltd. by the ITAT Bangalore ITA No. 1302/BNG/2011 for AY 05-06 order dated 11-6-2015. The following were the relevant observations of the Tribunal. 22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arm's length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. v. DCIT in ITA. No. 1252/Bang./2010 wherein these companies were directed to be excluded from the list of comparables. 21. The learned D.R. however, supported the Orders of the authorities below. 22. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced by us at para 31 above. Though Geometric Software Solutions Co. Ltd, finds a mention in para 20 of that order, there are no specific directions given by the Tribunal in relation to the said company. However we find that contention of the assessee that it was functionally dissimilar to that of the assessee was never examined by the lower authorities. We are therefore of the opinion that the question whether Geometric Software Solutions Co. Ltd, could be considered as a proper comparability of Geometric Software Solutions Co. Ltd., back to the file of AO/TPO for consideration afresh. 35. Vis-a-vis Tata Elxsi (seg), Ld. AR submitted that this company was also directed to be excluded by the coordinate bench in the case of Kodiak Networks India (P.) Ltd. (supra) vide paras 18 and 19 of the order which is reproduced hereunder : '18. As regard ground No. 7, TATA Elxsi Ltd., has to be excluded as this company was held to be not comparable with as Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a reasonable opportunity of being heard to the assessee. Keeping the assessee's objection and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the assessee. Further, we are unable to verify whether the segment profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to assessee services. Since these aspects are not clear from the data furnished before us we directed the TPO to examine and in case, the segmental profits of a particular service is not available, then to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is resorted to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to assessee." 19. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., was rightly excluded from the list of comparable companies.' 36. Per contra, Ld. DR submitted that Tata Elxsi (seg) was doing very similar work as that of the assessee and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so should be given similar freedom to consider fresh set of comparables. 43. We have perused the orders and heard the rival contentions. We find that assessee had in its submissions dt. 19.07.2012 before the CIT (A) prayed for inclusion of above mentioned companies. CIT (A) had not given any findings in this regard. In our opinion by virtue of the decision of Special Bench in the case of Quark Systems (P.) Ltd. (supra) assessee can seek inclusion of a fresh set of comparables since TP study is an evolving area. However there is much strength in the argument of the Ld. DR that similar freedom should be granted to the TPO also. Accordingly ewe direct the TPO to consider the fresh set of comparables sought to be included by the assessee mentioned at para 41 (supra) and redo the analysis of the arms length, pricing of the international transactions undertaken by the assessee. TPO is free to select his own set of comparables also except those which we have specifically directed to be excluded. 44. Coming to the pleading of the assessee that risk adjustment for under utilization of capacity should be given, we find that CIT (A) had not dealt with this issue of risk adjustment. However ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
