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TMI Blog2016 (11) TMI 1748X X X X Extracts X X X X X X X X Extracts X X X X ..... e said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. Geometric Software Solutions Company Ltd. issue should also go back to the TPO to adjudicate the justification of its exclusion on the point of RPT filter. Tata Elxsi Ltd. cannot be included in the list of comparables as it is functionally different and has incomparable size to that of the assessee. iGate Global Solutions Ltd., Flextronics Software Systems Ltd., L T Infotech Ltd., Satyam Computer Services Ltd. and Infosys Technologies Ltd., be excluded as their turnover exceeds 10 times of the turnover of the assessee. Four Soft Ltd. - Tribunal in the aforesaid order has applied RPT filter and excluded this company from the list of comparables, but RPT of this company was not mentioned in the order. Therefore, in the absence of complete details, it is not proper to fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT(A) erred in excluding iGate Global Solutions Ltd ., M/s L T Infotech Ltd , Satyam Computers Ltd., lnfosys Technologies Ltd , M/s. Flextronics Software Systems Ltd. from the list of comparables in the segment by holding that the size, turnover of the company are deciding factors for treating a company as a comparable. 3. The learned CIT(A), on the facts and in the circumstances of the case. erred in holding that M/s. Bodhtree Consulting Ltd and Geometric Software Solutions Co. Ltd. cannot be taken as comparables, without appreciating that the companies qualify all the quantitative and qualitative filters applied by the TPO in selection of these companies as comparables. 4. The learned CIT (A) has erred in directing inclusion of the M/s. VJIL Consulting Ltd., as a comparable without calling for a remand report from the TPO to ascertain the reasons for rejection of the comparable by the TPO. 5. The learned CIT(A) has erred in directing inclusion of the M/s. VJIL Consulting Ltd., without appreciating the TPO's conclusion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) - IV, Bangalore ( learned CIT(A) ) erred in upholding the learned Additional Director of Income-tax (Transfer Pricing) - I, Bangalore ( learned TPO )'s approach of rejecting the economic analysis undertaken by the Respondent and conducting a fresh economic analysis for determining the arm's length price. 2. That the learned CIT(A) erred in upholding the learned TPO's approach of disregarding application of multiple year/ prior year data as used by the Respondent in the transfer pricing documentation ( TP documentation ) and holding that current year (i.e. Financial Year 2004-05) data for companies should be used for comparability. 3. That the learned CIT(A) erred in upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm's length price, ignoring the fact that this data was not available to the Respondent at the time of complying with the TP documentation requirements. 4. That the learned CIT(A) erred in upholding the learned TPO's approach of collecting selective information of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Respondent in respect of its software development services. 12. That the learned CIT(A) erred in confirming the action of the learned TPO of accepting Sankhya Infotech Limited which fails the test of comparability, as comparable to the Respondent in respect of its software development services. 13. That the learned CITCA) ought to have held that Four Soft Limited fails the test of comparability on account of having related party transactions 15% and is also functionally different as comparable to the Respondent in respect of its software development services. 14 That the learned C1T(A) erred in rejecting the Respondent's approach of applying the R D expenses 3% of total sales filter and including certain companies (Four Soft Limited, Visualsoft Technologies Limited, Sasken Communication Technologies Limited and Flextronics Limited) which are not comparable to the Respondent in respect of its software development services. 15. That the learned C1T(A) ought to have held that Visualsoft Technologies Limited fails the test of comparability as comparable to the Respondent in respect of its software development services. 16. That the learned C1T(A) ought to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed PLI as OP/TC. Database used by the assessee as well as TPO is Prowess Capitaline Plus. While preparing TP study, comparables selected for software development services by the assessee were 87, whereas the TPO has selected the comparables for computing the ALP as 17. 8. During the course of hearing, the ld. counsel for the assessee has filed a chart detailing the comparables taken by the TPO. In this chart, the assessee has also sought the inclusion of 2 more comparables. The TPO has taken the following 17 comparables:- 1. Bodhtree Consulting Ltd. 2. Lanco Global Systems Ltd. 3. Exensys Software Solutions Ltd. 4. Sankhya Infotech Ltd. 5. Sasken Network Systems Ltd. 6. Four Soft Ltd. 7. Thirdware Solution Ltd. 8. R S Software (India) Ltd. 9. Geometric Software Solutions Company Ltd. 10. Tata Elxsi Ltd. 11. Visualsoft Technologies Ltd. 12. Sasken Communication Technologies Ltd. 13. iGate Global Solutions Ltd. 14. Flextronics Software Systems Ltd. 15. L T Infotech Ltd. 16. Satyam Computer Services Ltd. 17. Infosys Technologies Ltd. 9. The CIT(Appeals) has rejected 10 comparables out of the aforesaid 17 comparables. The rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sulting Ltd. was chosen as a comparable company by the assessee in its TP study and same was accepted as a comparable by the TPO also. Even before the DRP, the assessee did not challenge the inclusion of this company as a comparable. However, in the CO filed before the Tribunal, the assessee has sought to challenge the inclusion of this company as a comparable in ground No.5(d). The law by now is well settled that assessee is entitled to raise 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Indian software industry uses two different models for revenue recognition. 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 (FPP). Under 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 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 model. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins 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. 33. The ld. counsel for the assessee filed before us a chart showing the fluctuation margins of Bodhtree Consulting Ltd., 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 than 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Solutions 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. 15. Since the Tribunal has already examined the reasonableness of exclusion of this company, we find no justification to deal with the issue again. Accordingly, following the aforesaid order of the Tribunal, we approve the exclusion of this company i.e., Exensys Software Solution Ltd. (supra) from the list of comparables. 16. With respect to Sankhya Infotech Ltd., the ld. counsel for the assessee further contended that this comparable was also examined by the Tribunal in the case of Syassaris Software P. Ltd. (supra) in paras 22 to 24 at pages 16 to 19. 17. Having carefully examined the contentions of the assessee, we find that undisputedly, Sankhya Infotech Ltd. was examined by the Tribunal and the Tribunal following the view taken in the case of Kodiak Network India Ltd. (supra) has directed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 18. Since this comparable was examined by the Tribunal in the aforesaid case, we find no justification in re-examining the case. Accordingly, we exclude Sankhya Infotech Ltd. from the list of comparables. 19. With regard to Thirdware Solutions Ltd., it was again submitted by the ld. counsel for the assessee that this comparable was also examined by the Tribunal in the case of Syassaris Software P. Ltd. (supra) in para 31 at pages 21 to 25 of its order. 20. From the order of the Tribunal, we find that undisputedly Thirdware Solutions Ltd. was examined by the Tribunal in the light of earlier order of Tribunal in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 24. In view of the aforesaid decision, we do not find any infirmity in the action of the CIT(A) in excluding the aforesaid two companies from the list of comparable companies for determining ALP. Following the above decision we direct exclusion of Thirdware Solutions Ltd, from the list of comparables. 21. Since there is no change in the facts and profile of the assessee, we find no justification to take a contrary view. Accordingly, we approve exclusion of this comparable from the list of comparables. 22. With regard to Geometric Software Solutions Company Ltd., the ld. counsel for the assessee has contended that comparability of this company was examined by the Tribunal in the case of Net Devices India Pvt. Ltd. in IT(TP)A No.1099/Bang/2011 CO No.19/Bang/2011 in para Nos.18.3.1. to 18.3.3 of the order and the matter was restored to the AO/TPO for verification of applicability of RPT filter for its exclusion. The RPT in this case was considered to be 22%, but no datas are available. 23. The ld. DR in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. Ltd. (supra) in paras 35 to 37 at pages 26 to 29 of the order. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:- 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 regards ground No.7, TATA Elxsi Ltd., has to be excluded as this company was held to be not comparable with an 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.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005-2006 order dated 12.2.2014. The ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: 15.7. TATA ELXSI LIMITED : The objection of the assessee is that TATA Elxsi operating two segments system communication services and software development services. The TPO accepted the software development services segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to assessee services. Since, these aspects are not clear from the data furnished before us, we direct 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 restored 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 hence ought not to be excluded. 37. We have perused the orders and heard the rival contentions. Findings of the Tribunal as it appear at paras 18 and 19 in the case of M/s. Kodiak Networks India P. Ltd (supra) has been reproduced in para 35 above. Accordingly we direct exclusion of Tata Elxsi (seg) from the list of comparables. 27. We find that the Tribunal in the light of decision in Kodiak Network India Ltd. (supra) has he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is comparable from the list of comparables, but the assessee wants its exclusion by filing CO on the ground of RPT filter; but the datas are not available with regard to Four Soft Ltd. The ld. counsel for the assessee has placed reliance upon the decision of the Tribunal in the case of Syassaris Software P. Ltd. (supra). 31. We have carefully examined the order of Tribunal and we find that the Tribunal in the aforesaid order has applied RPT filter and excluded this company from the list of comparables, but RPT of this company was not mentioned in the order. Therefore, in the absence of complete details, it is not proper to follow the order of Tribunal blindly. We therefore set aside this issue to the file of TPO/AO to examine the justification of its inclusion/exclusion by applying the RPT filter in the light of available datas of this company. 32. With regard to VJIL Consulting Ltd., the ld. DR has contended that without confronting the report and datas to the TPO, the CIT(Appeals) has included this comparable in the list of comparables. The ld. DR has invited our attention to the order of TPO in which the TPO has categorically observed that details of the company were not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account for determination of ALP in the case of the assessee. 34. Having carefully examined the rival submissions in the light of TPO s order, we find that before the TPO, datas of this comparable were not available as the TPO has categorically observed in his order that the director of the company, Shri M. Mallesham, also expressed his inability to furnish further details due to pending court cases. In the absence of clear details, the TPO rejected this comparable. Now the details of this comparable are available and the CIT(A) has included the same in the list of comparables without confronting the audit report and datas to the TPO. We therefore find it proper to remit the matter to the TPO to reconsider the inclusion of this comparable in the list of comparables in the light of the order of the Tribunal in the case of Qualcomm India Pvt. Ltd. (supra). Accordingly adjudication of this comparable is restored to the TPO. 35. With regard to Melstar Information Technology Ltd., the CIT(Appeals) rejected the inclusion of this comparable in the list of comparables and the assessee is before us with the request that since this company is functionally comparable and passes all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary debit of Rs. 2.85 Cr and on the ground that the company s sales are diminishing. A perusal of the revenues of the previous financial years (page 81 of the TP order) demonstrates that the revenues are more or less consistent for the previous financial years and has only substantially decreased in the financial year 2004-05. The relevant extract of the Annual Report (Page 4) is reproduced below: C) Financial performance based on given indicators As per the audited financial results for the year ended 31.3.2005: If the above extraordinary expense of Rs. 2.85 Cr is excluded from the operating cost, the mark-up on the cost works out to 3.26%. The detailed working was also give as below:- 24. In view of the above, it was submitted that since Melstar is functionally comparable to the assessee and clears all the filters applied by the TPO, the same should be considered as comparable with Net Cost Plus margin of 3.26%. 25. The submissions are considered and found to be acceptable. As rightly pointed out by the learned counsel for the Assessee, Melstar passes all the tests of comparability adopted by the TPO. The extraordinary item of expenditure, if removed, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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