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TMI Blog2016 (7) TMI 1481X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 23-07-2014 for the assessment year 2009-10. The assessee has filed Cross Objection against the aforesaid order of Commissioner of Income Tax (Appeals). 2. The brief facts of the case as emanating from records are: The assessee is engaged in providing software services to Barclays Group worldwide. The assessee company has been set up as an offshore technology centre in India. The software services provided by the assessee include development, maintenance and enhancement of software for new technologies and platforms and upgradation, modification of existing software applications and systems. The software services rendered by assessee are to support internal software related requirements for the Barclays Group and not for sale to third party. During the period relevant to the assessment year 2009-10, the assessee filed its return of income declaring total income of ₹ 4,13,16,515/-. Since, the assessee had entered into international transactions with its Associated Enterprise (AE), the same were referred to Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP) under the provisions of section 92CA of the Income Tax Act, 1961 (hereinafter referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 LGS Global Limited 20.51% 16.13% 8 Sasken Communication Technologies 24.22% 26.37% 9 Larsen Toubro Limited 17.54% 20.70% Arithmetic mean 27.68% 27.59% The operating margin of the assessee was determined at 15.34%. Consequent to the determination of ALP on the basis of set of comparables selected by TPO, the TPO made an upward adjustment of ₹ 17,46,58,918/- to the value of international transactions in respect of software development services rendered by the assessee to its AEs. On the basis of order of TPO final assessment order was passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(3) of the Act on 05-04-2013. 4. Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). Before the Commissioner of Income Tax (Appeals) the assessee inter alia challenged the action of TPO in including/excluding certain companies in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 Mindtree Limited 6.34% 8 Akshay Software Technologies Limited 10.60% 9 Lanco Global Systems Limited 12.98% 10 Persistent Systems Private Limited 11.89% 11 Quintegra Solutions Limited -8.02% 12 Thirdware Solutions Limited 18.06% 13 Zylog Systems Limited 10.20% 14 Maveric Systems Limited 12.47% 15 Evoke Technologies Private Limited 18.39% Arithmetic Mean 16.94% 6. The Commissioner of Income Tax (Appeals) further directed the Assessing Officer to rework margins of the comparable companies, if necessary, by following safe harbour rules issued by the CBDT and to grant working capital adjustment. Against these findings of the Commissioner of Income Tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set as comparable to the Respondent, Inclusion of companies in the comparable set that were rejected by Dispute Resolution Panel ('Hon'ble DRP') in the AY 2008-09 in Respondent's own case 4. erred on the facts and in circumstances of the case, and in law, by objecting the appropriate order given by CIT(A) to include companies in the comparable set. Further, based on the facts and circumstances of the case, the Hon'ble CIT(A) and consequently the learned AO and learned TPO has: Non consideration of contemporaneous data 5. erred on the facts and in circumstances of the case, and in law, in conducting an analysis based on information subsequently available for determining arm's length price which was not available at the time of complying with the transfer pricing regulations. Non-consideration of multiple year data 6. erred on the facts and in circumstances of the case, and in law, in not considering multiple year data (i.e. Financial Year 2008-09 and prior two years) for determining the arm's length price. Use of inappropriate filters for screening of companies 7. erred, in law and in facts, by applying certain inappropriate fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in assessee's own case for immediately preceding year has directed to exclude the aforesaid companies from the list of comparables. The main grouse of the Department is with respect to removal of Infosys Technologies Limited from the list of comparables. The scale of operation of said company is very huge and is thus not comparable. Further, the aforesaid companies are functionally different from the assessee. The ld. AR of the assessee further contended that the Tribunal in assessee's own case for assessment year 2008-09 has excluded Infosys Technologies Limited from the list of comparables. The ld. AR contended that if the above 3 companies are removed from the list of comparables the assessee would fall within 5% range allowed under proviso to section 92C(2) of the Act. 11. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. Although, several grounds have been raised by the Department and the assessee in grounds of appeal and Cross Objection, respectively, however, at the time of making submissions the ld. DR could not controvert the reasons give by the Commissioner of Income Tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Unadjusted Operating margin (OP/OC) FY 2007-08 18.51% FY 2008-09 62.29% FY 2009-10 23.13% FY 2010-11 -11.70% FY 2011-12 4.55% - On review of the financial statement of Bodhtree from FY 2007-08 to FY 2011-12, it is clearly evident that the operating margin of Bodhtree for FY 2008-09 is abnormally high. Infosys Technologies Limited At the outset, it is admitted that this company was considered as comparable by the Respondent in its TP report. However, having regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered it as a comparable concern. In our view, the plea of the assessee for exclusion of Infosys Technologies Ltd. cannot be shut out merely because the said concern was initially adopted by the assessee as a comparable in its Transfer Pricing Study. However, we may wish to point out that the cause and justification for its exclusion is liable to be demonstrated by the assessee. In the present case, it has been pointed out by the assessee that the said concern is functionally different and that it was a giant company in the area of development of software services and it assumed all the risks leading to higher profits, whereas the assessee was a captive unit servicing only its own affiliates and assumed only a limited risk. Quite clearly, the turnover of Infosys Technologies Ltd. stands at ₹ 15,051 crores (approx) whereas assessee's turnover from software development services is to the tune of ₹ 73 crores (approx). It is also clear from the Tabulation above, that the said concern is undertaking diversified activities whereas assessee is providing software services, at minimal risk as 100% activities are to its associated enterprise. In-fact, assessee has rightly re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products. Quite clearly the stand of the Revenue in the present case as well in the case of Symphony Services Pune Pvt. Ltd. (supra) is similar. It is also quite clear that the nature of service being rendered by the assessee and Symphony Services Pune Pvt. Ltd. (supra) are similar, namely rendering of software development services to its affiliates. The following discussion in the order of the Tribunal in case of Symphony Services dated 30-04-2014 (supra) brings out the salient features of the controversy : 13. The second point raised by the assessee is with regard to the adoption of Kals Information Systems Limited as a comparable concern while benchmarking the international transactions of the assessee. Before the TPO, assessee submitted that the said concern be excluded from the list of comparables on account of functional dissimilarities. The relevant discussion in this regard is contained in para 6.1 of the order of the TPO. The plea of the assessee was that the said concern was engaged in selling of software products, namely, Virtual Insure, La. Vision, CMSS, e-DMS and ERP SHINE , etc., which are all specialised software products developed for the respective sectors. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fully applicable to the facts of the present case inasmuch as similar functions were undertaken by Bindview India Pvt. Ltd. and therefore Kals Information Systems Limited is liable to be excluded from the lists of comparables. 15. A reference has also been made to the decision of the Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. vs. DCIT vide IT(TP)A No.1303/Bang/2012 dated 28.11.2013 wherein also the said concern, namely, Kals Information Systems Limited was not considered as a comparable on account of functional dissimilarities. The learned counsel pointed out that M/s 3DPLM Software Solutions Ltd. (supra) was also a concern engaged in the provision of software development and other related services, which is similar to the functions undertaken by the assessee. It was pointed out that the functions of Kals Information Systems Limited considered by the Bangalore Bench of the Tribunal is for the same assessment year as is in the present case and therefore the said decision also squarely applies to the facts of the present case. 16. The learned CIT-DR has defended the position of the TPO by relying on the discussion in the order of the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessee succeeds. 19. Following aforesaid precedent, as the facts and circumstances in the present case are similar, we direct that M/s. Kals Information Systems Ltd., be excluded from the final set of comparables. 14. The Co-ordinate Bench also considered the issue with respect to exclusion of Bodhtree Consulting Ltd. from the final set of comparables. The Tribunal after considering the facts of the case and the decisions on which the ld. AR of the assessee had placed reliance directed to exclude Bodhtree Consulting Ltd. from the list of comparables. The findings of the Tribunal are as under : '22. We have carefully considered the rival submissions with respect to Bodhtree Consulting Limited. The plea of the assessee is that the said concern is engaged in the sale of software products, apart from considering software services, and that no segmental data is available in this context; thus, it is functionally not comparable with the assessee's activities. In this regard, we have perused the discussion made by our Coordinate Bench in the case of NetHawk Networks India Pvt. Ltd. (supra) wherein the said concern has been found to be not exclusively engaged in rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of ₹ 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3 . . . . . . . . . . . . 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application. . . . . . . . . . . . . . . . . . . . . . . 23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The first is the Time and Material (T M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model, 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 recognized 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 Product mode. 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 recognized in the earlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the profitability margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins 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. 24. Though the aforesaid discussion by the Bangalore Bench of the Tribunal is in relation to the assessment year 2009-10, but the inferences drawn with regard to the variations in the profit margins of the said concern for different years is relevant in the present context also. Furthermore, the Tribunal also analysed and found that the said concern was following fixed price project method whereby revenue from software development services was being recognized based on the software developed and billed to the clients. In such a business model, the possibility of the expenditure not being booked on the basis of the matching principle cannot be ruled out, which would impart fluctuation in the margins over the years. In contrast, in the present case, the revenue is being recognized based on the cost plus markup basis. Clearly, the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the model being pursued by assessee and such distinction prevailed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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