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TMI Blog2018 (11) TMI 1120X X X X Extracts X X X X X X X X Extracts X X X X ..... Following all we are of the view that inclusion of company should be directed to be considered afresh by the CIT(Appeals) and if the assessee satisfies this filter and otherwise found to be functionally comparable and not excludible on applying other filters, then company be adopted as a comparable. Deduction u/s. 10A - Held that:- The decision of the Hon’ble High Court of Karnataka in the case of Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) on this issue holding that whatever is excluded from the total turnover while computing deduction u/s. 10A. Disallowance of software expenses on the ground that while making payment for use of software, no tax was deducted at source - Held that:- No merits in this ground raised by the assessee in view of the decision in the case of CIT Vs. Samsung Electronics Ltd. (2009 (9) TMI 526 - KARNATAKA HIGH COURT) wherein it was held that payments made for right to use software was payment in the nature of royalty and therefore there was obligation to deduct tax at source while making payment for such use and that the disallowance u/s.40(a)(ia) of the act for non deduction of tax at source was proper. Consequently the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparable companies chosen by the assessee in its TP study and on his own made a search of the database and identified 17 more companies resulting in a set of 20 comparable companies. The average arithmetic mean of the 20 comparable companies chosen by the TPO was as follows:- Sl. No. Name of the company OP/TC % 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd. 18.72 3 Celestial Biolabs 87.94 4 e-Zest Solutions Ltd. 29.81 5 Flextronics (Aricent) 7.86 6 iGate Global Solution Ltd. 13.99 7 Infosys 40.37 8 KALS Information Systems Ltd. (Seg) 41.94 9 LGS Global Ltd. 27.52 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions. 5. Aggrieved by the aforesaid addition made consequent to the determination of ALP, the assessee filed appeal before the CIT(Appeals). The CIT(Appeals) excluded 9 out of 20 comparable companies, chosen by the TPO, the details of which are as follows:- Sl. No. Name of the company Turnover (Rs.Crore) OP/TC (%) 1 Celestial Biolabs Ltd. 20.21 87.94 2 Flextronics Ltd. 954.42 7.86 3 iGate Global Solutions Ltd. 781.56 13.99 4 Infosys Technologies Ltd. 15,672.00 40.37 5 Mindtree Consulting Ltd. (segment) 572.97 16.41 6 Persistent Systems Ltd. 383.41 20.31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e turnover also would come down reducing profit margin. He also relied on the decision of Delhi Bench of ITAT in the case of Sony India (P.) Ltd. v. DCIT 120081 114 ITD 448 (Del) wherein it was held that the objection of assessee on inclusion of a comparable when the distinctive differences like size and turnover materially affect performance or prices of products, should be accepted. Reliance was also placed on the decision in the case of Deloitte Consulting India Pvt. Ltd. v. DCIT (ITA No 1082/Hyd/2010) wherein it was held that in the event of use of the TPO's filter of a turnover of less than ₹ 1 crore, it would be appropriate to reject companies having higher sales turnover as well to neutralise the impact of both low and high turnover companies and to provide a more reliable result. 7. With regard to companies which were loss making or making super profits, he held that such companies should also be excluded, as these losses or profits could be due to other factors. 8. The CIT(Appeals) also excluded M/s. Indus Networks Ltd. as a comparable company. This company was chosen as comparable company by the assessee in its TP study, but was rejected by the TPO as a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyee cost is not a very credible or rational selection criterion and. as employee cost is low or similar throughout India, this is not a factor which would make a material difference. He was of the view that when TNMM is adopted as the most appropriate method for determination of ALP, only the net margin of the tested party has to be considered relative to an appropriate base (total cost in this case), without looking into individual elements of cost, as all direct and indirect costs of operation are aggregated, irrespective of their classification and composition. 9. The CIT(Appeals) also held that Avani Cincom Technologies Ltd. and KALS Information Systems Ltd. cannot be taken as a comparable company by following the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software (I) P. Ltd. v. DCIT in ITA No.1054/Bang/2011 and the reason given in the said order of the Tribunal is that both the aforesaid companies were software services company as well as software products company and the segmental details of software services and software products was not available. 10. The CIT(Appeals) also excluded Bodhtree Consulting Ltd. as a comparable company for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the diminishing revenue filter used 1w the I-130 to exclude companies that do not reflect the normal industry trend. 4. The Ld.CIT(A) erred in not appreciating the fact that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party . 5. The Ld. CIT(A) erred in including M/s. Indus Networks Ltd as a comparable rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services. 6. The Ld. CIT(A) erred in rejecting the employee cost filter applied by the TPO) to select companies which are predominantly into software development services . 7. The learned CIT (A), on the facts and in the circumstances of the case. erred in holding that M/s. Avani Cimcon Technologies and KA LS Information Systems cannot be taken as comparables. 8. The learned CIT (A). on the facts and in the circumstances of the case. erred in holding that M/s. Bodhtree Consulting Ltd being functionally different. cannot be taken as comparables. 12. As far as the assessee s CO is concerned, grounds No. 1 to 8 raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on the decision of the Hon ble High Court in the case of Chrys Capital Ltd.,82 Taxmann.com 167(Del). Similar objection was raised by the Revenue in one of the case decided by this Tribunal in Autodesk India Pvt.Ltd. Vs. DCIT in IT IT(TP)A Nos. 540 541/Bang/2013 order dated 06.2018 . The following discussion on the issue of application of turnover filter, would be some relevance. On the various aspects of application of turnover filter, this Tribunal has already pronounced a decision which is as follows:- 17. The first issue to be decided in Revenue s appeal is the application of turnover filter for exclusion of companies that are otherwise found to be functionally comparable. The Grievance of the revenue in this regard is projected in Gr.No.2 of the Grounds of appeal raised by the revenue in its appeal. The basic facts to be noticed with regard application of turnover filter are that the Assessee s turnover for the relevant previous year was ₹ 10.65 crores. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than ₹ 1 Crore. The contention of the Assessee before the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.3 2. M/S. Societe Generale Global Solution Centre Pvt.Ltd. Vs. DCIT IT(TP) A.No.1188/Bang/2011 for AY 2007-08 order dated 22.4.2016 10 5. Willis Processing Services (I) (P)Ltd. Vs. DCIT (2013)30 Tamann.com 350 (Mumbai-Tribunal) for AY 2007-08 order dated 1.3.2013 47 6. Capgemini India ITA No.7861/Mum/2011 for 4.3 Pvt. Ltd. Vs. ACIT AY 2007-08 order dated 28.2.2013 17.2. The learned DR also filed before us a note contending that in software industry, size has no influence on the margins earned by an entity. According to him economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. According to him, in software industry, size does not matter, what matters is the human capital. According to him application of the filter of turnover might be justified for excluding companies with low turnover of say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational (supra), the tribunal took note of a divergent view expressed by ITAT Bangalore Bench in the case of Robert Bosch Engineering and Business Solutions Ltd. Vs. DCIT ITA No.1519/Bang/2013 order dated 13.9.2017 after considering the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The Tribunal in the case of Dell International (supra) also took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores only should be taken into consideration for the purpose of making TP study. 42. The Assessee s turnover was around ₹ 110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than ₹ 200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above ₹ 200 crores from the list of comparable companies is held to correct and such action does not call for any interference. 17.4. His submission was that the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital (supra) was not on the application of turnover filter. He brought to our notice that the relevant substantial question of law in the case of Chryscapital decided by the Hon ble Delhi High Court was (i) whether comparables can be rejected on the ground that they hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to him therefore it was not a case of merely dismissal of appeal u/s.260A of the Act as unadmitted on the ground that no substantial question of law arose for consideration but was precedent in so far as the Hon ble Court has expressed a clear opinion on the issue. 17.5. The learned counsel for the Assessee also drew our attention to a decision of the Hon ble Delhi High Court rendered in the case of PCIT Vs. New River Software Services (P) Ltd. In ITA No.924/2016 order dated 22.8.2017 wherein the Hon ble Delhi High Court followed the decision of the Hon ble Bombay High Court rendered in the case of Pentair (supra) and held that Infosys BPO was rightly excluded as not being a comparable company. Our attention was also drawn by him to a decision of the Hon ble Punjab Haryana High Court in the case of CIT Vs. Mercer Consulting (I) (P) Ltd. (2016) 76 Taxmann.com 153 (Punjab Haryana) wherein the Hon ble Court held that a giant company cannot be compared with a company which was a captive service provided assuming limited risks. 17.6. As far as the decisions of the Tribunal rendered on the application of turnover filter that are contrary to the decision rendered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curiam any provision in a statute, rule or regulation, which was not brought to the notice of the Court. A decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench; or if the decision of a High Court is not in consonance with the views of this Court. It must immediately be clarified that the per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam. It was therefore submitted by him that the earliest view rendered by the ITAT Bangalore Bench in the case of Genisys Integrating (supra) should be followed. 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as by application of the filters referred to in those grounds, none of the companies were excluded or included by the CIT(Appeals). 20. Ground No.7 raised by the is with regard to exclusion of comparable M/s. Avani Cincom Technologies and KALS Information Systems Ltd. These companies have been excluded by the CIT(Appeals) by following the decision of Tribunal in the case of Trilogy e-business Software (I) P. Ltd. (supra) . These companies were found to be engaged in both the software development and software products and segmental details of these companies were not available. We therefore uphold the order of CIT(Appeals) in this regard. 21. In ground No.8 raised by the revenue, the challenge is to the exclusion of Bodhtree Consulting Ltd. from the list of comparable companies. It is clear from a reading of para 128 of the CIT(Appeals) order that this company in its reply to the TPO u/s. 133(6) of the Act has accepted that it is in ITeS and software development. In view of the above, we find no infirmity in the conclusions of CIT(Appeals) and ground No.8 raised by the revenue is dismissed. 22. Ground Nos.9 to 12 raised by the revenue reads as follows:- 9. The CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed that it had been claiming depreciation on the software products developed by it and was amortising the expenses incurred on product development. In the search strategy adopted by the Assessee, in the TP documentation, all companies which were incurring advertising, marketing, and distribution expenses of more than 3% of their total sales had been eliminated in order to select comparables which did not hold marketing intangibles. It was the plea of the Assessee that Lucid had incurred selling, marketing, and distribution expenses to the tune of ₹ 12.11 lakh, which constituted 5.95% of its total sales, which clearly established that Lucid had invested amounts in brand building and marketing which made it incomparable to the appellant. These arguments were rejected by the CIT(A) as follows: 134. I am unable to agree with the appellant's contentions. The company's total turnover for FY 2007-08 was ₹ 2,34,71,583 and total cost was ₹ 2,01,46,551. Schedule-E to the balance sheet shows that of the total cost, the company spent ₹ 11,41,177 or 6% on product development, which is not abnormally high. It is clear from the Schedule that the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue from sale of licences was a mere ₹ 39,16,427, which was less than 1% of the total revenue. The CIT(A) also held that there was no basis to say that sale of software licences or of investment was the primary activity of the company or that it is functionally different from the Assessee. 27. The ld. counsel for the assessee, brought to our notice the decision of ITAT Bangalore Bench in the case of SAP Labs (I) P. Ltd. v. ACIT for AY 2008-09 in ITA No.981/Bang/2013 , order dated 06.04.2008, wherein these three companies viz., Lucid Software Ltd., Quintegra Solutions Ltd., and Thirdware Solutions Ltd., were excluded from the list of comparable companies in the case of a software development service provider such as the assessee. Following were the relevant observations of the Tribunal:- 48.3 We have heard the rival submissions and perused the material on record. The comparability of Lucid Software Ltd. had come up for consideration before co-ordinate bench of this Tribunal in the case of M/s. Hewlett-Packard (India) Software Operation P. Ltd. (supra). The relevant portion is extracted hereunder: 11. Lucid Software Ltd. 11.1 This company was selecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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. 11.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment year 2008-09, we direct the Assessing Officer/TPO to exclude this company from the list of comparables in the case on hand. Respectfully fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vis-a-vis M/s. Quintegra Solutions Ltd, findings of this coordinate bench in the case of M/s. Broadcom Communications Technologies P. Ltd (supra), appears at para 13 which is reproduced hereunder : 13. Quintegra Solutions Ltd. 13.1 This company was selected as a comparable by the TPO inspite of the objection of the assessee to its inclusion in the list of comparables on the ground that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied. 13.2 Before us, the assessee objected to the inclusion of this company as a comparable on the ground that it is functionally different as it is engaged in product engineering services and not in software development services. It was also submitted that this company was engaged in developing proprietary software products and has IPR's and is functionally different from a provider of software development services, as is the assessee in the case on hand. In support of its contentions, the assessee relied on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider.- 13.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of 3DPLIVI Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand. Respectfully following the ratio of the decision of the co-ordinate bench in the case of M/s.Hewlett-Packard (India) Software Operation P.Ltd (supra) we direct the AO/TPO to exclude Quintegra Solutions Ltd. from the list of comparables. Thidware Solutions Ltd. 45. This company was selected by the TPO, but contested by the assessee-company before the TPO on the ground that it its turnover is more than Rs.,500 crores. 45.1 On appeal, the Id.CIT(A) deleted this company from the list of comparables by applying turnover filter of range of ₹ 200 crores to ₹ 2000 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of comparables for providers of software development services. 16.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables. 16.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied upon. 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 had held that since this company is engaged in product 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es fall under the category of KPO services. Therefore, should be excluded. Further, no segmental data is provided in the annual report of the company for the year under consideration. Reliance in this regard was placed on the decision of the co-ordinate bench of Tribunal in the case of M/s. Hewlett-Packard (India) Software Operation P. Ltd. vs. Asst.CIT in IT(TP)A No.1682/Bang/2012 dated 26/08/2015. 38.3 We heard rival submissions and perused the material on record. The comparability of M/s.E-Zest Solutions Ltd., had come up for consideration before co-ordinate bench of this Tribunal in the case of M/s. Hewlett-Packard (India) Software Operation P.Ltd (supra). The relevant portion is extracted hereunder: 22. Vis-a-vis M/s. e-Zest Solutions Ltd, findings of this coordinate bench in the case of M/s. Broadcom Communications Technologies P. Ltd (supra), appears at para 8 which is reproduced hereunder : 8. e-Zest Solutions Ltd. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 8.4.2 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 omit this company from the list of comparables in the case on hand. Respectfully following the ratio of the decision of the co-ordinate bench in the case of M/s.Hewlett-Packard (India) Software Operation P. Ltd (supra) we direct the AO/TPO to exclude E-Zest Solutions Ltd., from the list of comparables. 30. Following the aforesaid decision of the Tribunal, we direct exclusion of e-Zest Solutions Ltd. 31. Ground No.11 becomes academic in view of the exclusion of the company stated in the said ground by application of turnover filter. 32. Ground No.12 in the CO has already ..... X X X X Extracts X X X X X X X X Extracts X X X X
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