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TMI Blog2020 (5) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... old that 15% tolerance range of related party is reasonable and proper in the case of the assessee. By applying this filter the companies which are having the related party transaction upto 15% will be restored to the set of comparable however, subject to our finding on the functional comparability of those companies. High profit margin was taken by the CIT(A) for exclusion of certain companies namely Exensys Solutions Ltd., and Thirdware Solutions Ltd. - This issue is now settled that high profit or loss cannot be a criteria for inclusion or exclusion of companies in the set of comparables - if the high profit or loss is by the reason of some extraordinary circumstances then those extraordinary circumstances which has led to the high profit or loss can be considered as a criteria for inclusion or exclusion of the companies in the list of comparables. Therefore, the mere high profit margin or loss cannot be considered as a parameter or criteria for selection of comparable companies as held by the special bench of this Tribunal in case of Maersk Global Centres (India) (P.) Ltd. Vs ACIT [ 2014 (3) TMI 891 - ITAT MUMBAI] Functional dissimilarity - Referring to software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer(TPO) viz., M/S.Bodhtree Consulting Ltd., and M/S.Thirdware Solutions Ltd. The Tribunal omitted to adjudicate on the exclusion of the aforesaid two comparable companies. The Tribunal by its order dated 1.1.2019 recalled all the orders with a direction to the parties to file fresh Form No.36 in the name of the new entity and decide the appeals afresh. This is how these three appeals are listed for hearing before us. The parties submitted before us that the arguments advanced would be the same as was submitted when the appeal was originally heard and decided and that only on the exclusion of the two companies M/S.Bodhtree Consulting Ltd., and Thirdware Solutions Ltd., the arguments would be advanced. Accordingly, we proceed to decide these appeals on all aspects of the case as was done by the Tribunal in its order dated 28.4.2017 and further take for consideration and decision the case of the Assessee for exclusion of Bodhtree Consulting Ltd., and Thirdware Solutions Ltd. Cross appeals - IT(TP)A Nos. 1041 1106/Bang/2011 2. The assessee is a subsidiary of Exeter Educational Management Systems Inc. USA and provides software development services for the administrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etric Software Solutions Company Ltd. 20.34 10 Tata Elxsi Ltd. 24.35 11 Visualsoft Technologies Ltd. 23.52 12 Sasken Communication Technologies Ltd. 14.42 13 iGate Global Solutions Ltd. 4.32 14 Flextronics Software Systems Ltd. 32.19 15 L T Infotech Ltd. 10.33 16 Satyam Computer Services Ltd. 29.44 17 Infosys Technologies Ltd. 42.83 Arithmetical Mean 26.59 3. The working capital adjusted Arithmetic Mean profit margin of the above comparables was arrived at by the TPO at 29.09%. The TPO computed the addition to be made to the total income on account of determination of ALP at ₹ 1,52,11,661/- as follows: Computation of arm's length price by TPO and the adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an profit margin of the 4 comparable companies that remained was 23.03% and therefore the addition made consequent to determination of ALP still remained but at a reduced sum of ₹ 27,89,013. Aggrieved by the order of the CIT(A) to the extent of relief allowed the revenue is in appeal and to the extent of the addition being sustained the Assessee is in appeal before the Tribunal in IT(TP)A.No.1379/ and 1041/Bang/2011 respectively. 7. We shall first take for consideration, the revenue s appeal wherein the grievance is against exclusion of companies by application of RPT filter of 0%. It is the plea of the revenue that the threshold limit for application of the RPT filter should be 15% of the total revenue from SWD services should be with related party and only then a company can be regarded as not comparable by application of the RPT filter. So also the revenue is aggrieved by exclusion of companies by application of high turnover and abnormal profits filter. There is one corporate tax issue raised by the revenue in its appeal and the same is in relation to expenditure incurred on travelling and technical fees and other expenses were directed to be excluded both from the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irdware Solutions Ltd. 10. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. This issue is now settled that high profit or loss cannot be a criteria for inclusion or exclusion of companies in the set of comparables. However, if the high profit or loss is by the reason of some extraordinary circumstances then those extraordinary circumstances which has led to the high profit or loss can be considered as a criteria for inclusion or exclusion of the companies in the list of comparables. Therefore, the mere high profit margin or loss cannot be considered as a parameter or criteria for selection of comparable companies as held by the special bench of this Tribunal in case of Maersk Global Centres (India) (P.) Ltd. Vs ACIT (147 ITD 83) (Special Bench, Mumbai) . 11. In Assessee s appeal, the assessee in seeking exclusion of 10 companies out of 17 selected by the TPO. At the time of hearing the ld. AR of the assessee has said at bar that the assessee does not press ground no. 5 wherein the assessee is seeking inclusion of certain companies in the set of comparables. Thus in view of the statement of the ld. AR of the assessee the ground no. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of 10 companies have been examined by the coordinate bench of this Tribunal in the case of ITO Vs M/s. Net Devices India Pvt. Ltd. (supra). While deciding the appeal vide order dated 25.05.2016 the Tribunal has dealt with the functional comparability of 8 companies in para 9.1 to 9.3, 11.1 to 18.5.3 as under:- Thirdware Solutions Pvt. Ltd. 9.1 There is no dispute that the high profit margin or loss cannot be a ground for exclusion or inclusion of a particular company in the list of comparables. The learned Authorised Representative of the assessee has submitted that this company is in the diversified activities and derive its income from sale of software license, software products apart from software development services. This company is engaged in the diversified activities of rendering application development, customer relationship management and ERP, software products. He has referred to the Annual Report of this company and submitted that this company is also engaged in the distribution of software products and providing trunky project which include a bundle of activities such as providing software product combined with implementation and customer services. In support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Delhi Bench of this Tribunal in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856/Del/2010 which has been upheld by the Hon'ble Delhi High Court reported in 219 Taxman 26 in paras 5 to 8 which are as under : 5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent- assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondent-assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:- Basic Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100 percent services are provided to AEs Nature of Services Diversified-consulting, application design, development, re-engineering and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant Revenue during the course of hearing, drew our attention to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable when the wage and sale ratio was between 30 percent to 60 percent. By applying this filter, several companies were excluded. This is correct as it is recorded in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L T Infotech Ltd. and Infosys Technologies as comparable to work out the mean. 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L T Infotech Ltd. which gives us the figure of 11.11 percent, which is less than the figure of 17 percent margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are without prejudice to the grounds mentioned in Appeal No. CO 19/Bang/12 filed on July 12,2012. Transfer Pricing Related 1. That the ld. ITO, Ward 12(1), Bangalore and the learned CIT (Appeals) erred in confirming the action of the ld. JDIT (TPO)-II of accepting Bodhtree Consulting Limited as a comparable that fail the test of comparability on application of related party transaction filter of 15% and thus not comparable to the Appellant in respect of its software development services. 2. The ld. A.O/TPO erred in considering Flextronics Software Systems Ltd. (Seg.) that fails the test of comparability due to functional dissimilarity and thus not comparable to the Appellant in respect of its software development services. The appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 14. First we take up the additional grounds raised by the assessee in respect of the exclusion of Bodhtree Consultancy Ltd. Flextronics Software Systems (Seg. ). 15.1 The learned Authorised Representative of the assessee has s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted that in view of the decisions of the co-ordinate benches of this Tribunal, this company cannot be considered as good comparable and the same shall be excluded from the set of comparables. 16.2 On the other hand, the learned Departmental Representative has submitted that this company was found to be comparable by the authorities below and even otherwise from the Annual Report of this company the RPT are less than 15% and therefore when the company itself has reported the RPT as less than 15% then the same cannot be excluded from the set of comparables merely on assumption of wrong facts. 16.3 We have heard the rival submissions as well as considered the relevant material on record. There is no dispute that as per the Annual Report of this company, the RPT has been reported only to the extent of ₹ 10,73,871 in the nature of manager remuneration to the Managing Director and therefore the said transaction is almost NIL and in any case is less than 15% of the total sales. The learned Authorised Representative of the assessee has placed reliance on the decision of the Hyderabad Bench of ITAT in the case of NTT Data India Enterprise Application Services Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned Authorised Representative were not examined by the Tribunal then the question of giving any finding on the said issue did not arise. In the case of M/s. Mc Afee Software (India) Pvt. Ltd. (supra), the Tribunal has not gone into the fact of the RPT and even no record relating to the said fact has been examined but the Tribunal has just reproduced the submissions of the assessee as pleaded in case of NTT Data India Enterprise Application Services Pvt. Ltd. (supra) and therefore it is a clear case of assumption of unexamined facts. Accordingly, we are of the view that when the relevant record showing the RPT at 34.68% as claimed by the learned Authorised Representative of the assessee is not available or produced either before the authorities below or before us, then this objection of the assessee cannot be accepted for want of the supporting evidence. However, in the interest of justice, we set aside this issue to the record of the A.O./TPO to verify the fact as alleged by the assessee and if need arises the information under Section 133(6) of the Act may also be called for and decide the RPT issue. 17. Flextronics Software India Pvt. Ltd. 17.1 The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables. . Respectfully following, we exclude the same. In view of the facts as recorded and considered by the co-ordinate benches of this Tribunal that this company is in the activity of software development services as well as software products and further also incurred R D expenditure. Therefore, the same was found to be dis-similar to this pure software development services provider in the capacity of captive service provider. By following the earlier order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information SILICON TM QT (Online Assessment System) SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: 2. Activities The company as engaged in the business of development of Software Products Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken from the Annual Report of this company and therefore this objection was not raised by the assessee before the TPO. 18.3.3 Having considered the rival submissions as well as the relevant material on record, We note that the assessee has submitted computation of RPT of this company at page No.561 of the paper book wherein the assessee has calculated this percentage by considering the various transactions with the Related Parties which consists of software development services charges and marketing expenses. Therefore, this issue requires a proper examination and verification of the fact as produced by the assessee. Accordingly, in the facts and circumstances of the case, we set aside this issue of comparability of this company to the record of the A.O./TPO for proper verification of the facts as contended and produced by the assessee before us and then decide the issue after giving an opportunity of hearing to the assessee. Tata Elxsi Ltd. (Seg.) 18.4.1 The learned Authorised Representative of the assessee has submitted that this company is functionally different from the assessee as this company is engaged in the diversified activity of software development segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the comparability of the aforesaid company, the Tribunal held as follows:- 14. As far as comparable at Sl.No.6 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- 7.7. Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the 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 AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd. Infosys Technologies Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore the grievance as projected by the Revenue in ground No.3 is misconceived. On the facts of the present case, we are of the view that the CIT(A) rightly excluded Exensys Software Solutions Ltd., Infosys Technologies Ltd., and Satyam Computers Ltd., from the list of comparable companies. It is clear from the record that this issue was also involved in the case of Agnity India Technologies Pvt Ltd Vs. ITO (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been made. Therefore the learned Authorised Representative has submitted that there is a mistake in para 8.3 of the order as a wrong part of the earlier order in the case of Textron Global Technology Centre Pvt. Ltd. has been reproduced. 7. On the other hand, the learned Departmental Representative has not disputed that certain mistakes have crept in the impugned order regarding wrong comparable companies were mentioned as well as irrelevant portion of the earlier order was reproduced. 8. Having considered the rival submissions and relevant material on record, we find that there is a mistake in paras 8.1 to 8.3 of the impugned order regarding name of the comparable company Exensys Software Solutions Ltd. which is at Sl.No.3 of TPO s set of comparables whereas in the finding of the Tribunal name of the company has wrongly mentioned as Accentia Software Solutions Ltd. Therefore there is an apparent mistake in the paras 8.1 to 8.3 of the order which requires to be rectified. Accordingly, the name mentioned in paras 8.1 to 8.3 as Accentia Software Solutions Ltd. be read as Exensys Software Solutions Ltd. We further note that in para 8.3 there is a mistake in reproductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 172/Bang/2013. iii) M/s. Symbol Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. iv) Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 8.3 We have considered the rival submissions as well as relevant material on record. We note that though the CIT (Appeals) has finally concluded that this company has abnormal profit and accordingly directed the TPO/A.O to exclude the same form the set of comparables, however, as it is manifest from the Annual Report of the company that during the year under consideration this company entered into a scheme of amalgamation with M/s. Holool India Ltd. The scheme of amalgamation has been sanctioned by the Hon'ble High Court of Andhra Pradesh w.e.f. 1.4.2004 vide order dt.5.9.2005. Therefore, undisputedly there was an extra-ordinary event during the year under consideration in respect of this company. Further we find that the co-ordinate bench of this Tribunal in case of M/s. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012 has considered the comparability of this company in paras 14 as under : 14. Ground No.3 raised by the Revenue is misconceived and the issue does not arise out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding the eligibility of deduction u/s. 10A in respect of the amount of provision for management charges payable to its AE has been reversed during the year under consideration. The ld. AR of the assessee has submitted that the assessee made provision for management charges payable to its parent company in the earlier years however during the year under consideration the assessee has reversed the said provision amounting to ₹ 8,01,775/- and therefore the assessee claimed the deduction u/s. 10A in respect of the said amount. The AO disallowed the claim of the assessee on the ground that reversal of management charges provision is not an income derived from export of computer software hence, 10A deduction cannot be allowed on the same. The CIT(A) did not adjudicate this issue while passing the main order therefore, the assessee filed a petition u/s. 154 but CIT(A) has rejected the claim of the assessee on the reason that the reversal of provision is merely an accounting entry which does not result in business income and therefore the AO was justified in excluding the said income from the business profits for computing deduction u/s. 10A. 19. Before us, the ld. AR of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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