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TMI Blog2024 (10) TMI 765X X X X Extracts X X X X X X X X Extracts X X X X ..... ntions of the parties on the merit whether the said companies are required to be included or excluded, are reserved. - HON BLE MR JUSTICE VIBHU BAKHRU AND HON BLE MS. JUSTICE SWARANA KANTA SHARMA Advocates who appeared in this case: For the Appellant : Mr. Nageshwar Rao and Mr. Parth, Advs. For the Respondent : Mr. Indruj Singh Rai, SSC, Mr. Sanjeev Menon, JSC, Mr. Rahul Singh, JSC and Mr. Anmol Jagga, Advs. JUDGMENT VIBHU BAKHRU, J 1. The appellant has filed these appeals under Section 260A of the Income Tax Act, 1961 (hereafter the Act) impugning a common order dated 16.08.2021 (hereafter the impugned order) passed by the Income Tax Appellate Tribunal (hereafter the Tribunal) in ITA No. 5553/Del/2011 and ITA No. 5554/Del/2011. The appellant had preferred the said two appeals in respect of assessment year (hereafter AY) 2007-08 against two separate orders, both dated 31.10.2011, passed by the Assessing Officer (hereafter the AO) under Section 143 (3) read with Section 144C of the Act. 2. ITA No. 5553/Del/2011 was preferred by the appellant impugning the assessment of income of Alcatel Lucent Technologies India Pvt. Ltd. (hereafter ALTIPL) for the AY 2007-08. 3. The appellant pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s concerned, the DRP, upheld the action of the TPO but directed the TPO to grant the benefit of working capital adjustment. Accordingly, the ADIPL s enhanced income in the software development segment as proposed to be assessed was marginally reduced to Rs. 24,34,79,416/-. 11. The AO s final assessment orders dated 31.10.2011 in respect of ALTIPL and ADIPL were the subject matter of appeals before the Tribunal. 12. The appellant s challenge in the present appeals is confined to including certain uncontrolled entities as comparables for determining the ALP and excluding certain uncontrolled entities as comparables as suggested by the appellant. 13. On 01.02.2023, this Court framed the following common questions for consideration in the present appeals: (i) Whether the Tribunal misdirected itself on facts and in law, in not excluding the comparables Avani Cincom Technologies Ltd. and Ishir Infotech Ltd. in determining the Arm's Length Price concerning the international transactions undertaken by the appellant/assessee with an Associated Enterprise? (ii) Whether the Tribunal misdirected itself both on facts and in law in not including the comparable Akshay Software Technologies Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial year ending (i.e. not March 31, 2007) or data of the company does not fall within 12 month period i.e., 01-04-2006 to 31-03-2007, were rejected. Companies who have diminishing revenues / persistent losses for the period under consideration were excluded. Companies whose onsite income is more than 75% of the export revenues were excluded. Companies that are functionally different from that of taxpayer. 17. One of the comparable entities found by the TPO to be conforming to the above-mentioned filters is Avani. The said entity had reported sales of Rs. 3.55 crores and operating profit to total costs at 52.59% during the financial year 2006-07. The TPO found, on the basis of information available in the public domain, that Avani is a software development and consulting company. A notice under Section 133 (6) of the Act was issued to Avani. Avani replied to the said notice and the TPO found that it qualified the filters as applicable and therefore proposed its name as a comparable entity. The asseesees objected to the same on the ground that Avani s functional and risk profit was not similar to their profiles. The assessees claimed that Avani is a product company and owned produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee. Thus, based on the above argument, the Assessee is not in agreement with selection of Avani Technologies as comparable to the software development services of the Assessee. 18. Similar objections were also raised by the appellant in the case of ADIPL and the same were noted in paragraph 30 of the order dated 28.10.2010 passed by the TPO. The same is reproduced below: 30. Avani Cimcon Technologies Limited: the two arguments put forth by the assessee is that the company is functionally not comparable and data is not contemporaneously available. Apart from that assessee has also raised the issue that the company is actively into R D whereas the assessee company does not indulge in any R D. 19. The TPO rejected the objections raised by the appellant regarding inclusion of Avani as a functionally comparable entity. 20. The TPO relied solely on the information as available on the website of Avani; information and data available in its annual report; and the response of Avani to the notice issued under Section 133 (6) of the Act. The relevant extract of the order dated 26.10.2010 passed by the TPO is set out below: The company's main argument is that the company is into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der clause 4-C 4-D is either Nil or not applicable to the company. 21. The TPO rejected the assessee s objections in the case of ADIPL as well. The relevant extract of the order dated 28.10.2010 passed by the TPO rejecting the assessee s contentions is set out below: 31. The assessee s argument that this company is not functionally comparable was not found to be correct. The company provides state of the art technology solutions and services to organizations in different verticals like financial services, insurance solutions, etc. Simply because the company does not have any operations in the telecommunication space does not make it non comparable with the assessee. TNMM as a method allows broad product comparability and significant functional comparability. In fact among all the methods TNMM is the method which allows more liberty in choosing the comparables in that significant product diversity and functional diversity is allowed under TNMM. TPO also verified R D expenses as a percentage of sale of the company in Prowess database. It was found that the company has no expenditure on R D activity during the year. The TPO also went into the income and expenditure statement in Prowes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CT Ltd. is not a right comparable, cannot be accepted. 25. The learned counsel for the assessees has assailed the impugned order on, essentially, two fronts. First, he submitted that the conclusion that Avani is functionally comparable to the assessee is ex facie erroneous. According to the learned counsel for the assessee, the Tribunal proceeded on the assumption that Avani is not a product company but is engaged in software development for its clients / customers. He referred to the images taken from the website of Avani, which indicated to the contrary. 26. The learned counsel for the assessee also referred to the earlier decision of the Tribunal in Infogain India (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle 11(1), New Delhi: [2020] 116 taxmann.com 386 (Delhi Trib.). However, the said decision was completely overlooked as is apparent from the plain reading of the orders dated 26.10.2010 and 28.10.2010 passed by the TPO in respect of ALTIPL and ADIPL respectively. The TPO had not accepted that Avani was functionally dissimilar to the appellant on the assumption that Avani is engaged in software development for its clients. In its order dated 26.10.2010 (in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t System/ eCRS DXchange DXchange is an OTA (Open Travel Alliance) compliant XML web services based Data Exchange Middleware Server. It is fully scalable and easily configurable. It provides travel organizations/Web Portals the ability to bundle XML requests to multiple suppliers in a single request, aggregate and consume XML or any form of online data from suppliers. For suppliers, DXchange enables them to expose their Inventory System /CRS as OTA compliant Web Services in a costs effective and secure manner giving them a wider reach. Additionally, it can support other standards with minimal customization. DXchange is available in three versions: Lite, Professional and Enterprise. It is platform Independent and can connect to heterogeneous systems. It is hosted at the customer s site and is sold as an annual license fees model, instead of transaction based fees / commissions model, DXchange is available on net and Java platforms. With CARMA one can create template-based multilingual campaigns with repeated periodic scheduling. These can be sent off in the form of Email, Print (PDF, Bulk print). It is backed up by an ergonomic and well-organized content management system and a full- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other means of sharing information. CMS Travel Portal It is totally customizable solution for small to large enterprises/portals to launch their web sites as quickly and as cost efficiently as possible. An ideal implementation of this system would be the front-end system to a booking engine. The CMS can be used to update marketing content on a day-to-day or a weekly basis. CMS Destination Portal It is a templated solution which allows you to manage your destination content with rich media. It has built-in modules to display complete information about the destination allowing the users to have a more complete view of what destination is, what are the destination s values, easily find places to stay, what to do, what activities are there, property-wise web pages, brochures, tickets and loads of information modules about the destination. It provides a complete travel experience to the users and allows them to navigate and book their entire travel package with the travel products available with for sell, like airlines, hotels, vehicles, restaurants and excursions. Having a continuously updated website is a mandatory requirement to survive and grow in the dynamic highly competitive env ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the agility to insert complex pricing and markup strategies. 28. Avani s website clearly indicated that one of its products DXchange is available in three versions. The software is to be hosted on the customers site and its revenue model is the annual licence fee model. Avani s Content Management System is also available in four separate versions. The TPO had disregarded the information available on the website of Avani on the assumption that Avani s response was to the contrary. The TPO had reasoned that the information available on the website may not be relevant to the financial year 2006-07 and may contain forward looking statements but Avani s response to the notice under Section 133 (6) of the Act was unambiguous. 29. Avani in its response to the notice under Section 133 (6) of the Act had stated that it was a Pure Software Development Service Provider . However, this statement cannot be construed to mean that Avani does not sell software products developed by it. The point is not whether Avani is a software development company but whether it develops customised software for each of its companies on sells/licences software, products, developed by it, to its customers. 30. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's contention that the high operating margins of this company were on account of difference in its asset base. It is further relevant to note that this company, apart from rendering software development services, is also engaged into the sale of software products and the accounts maintained by it are on entity level without there being any segregation for software development segment. As the TPO has considered the entity level figures of this company for making a comparison with the assessee company, such a course of action cannot be permitted because of the inclusion of profit from sale of software products into the overall profitability of this company. Neither separate profits are available, nor there is any measure provided for segregating profit on sale of software products from the overall profit of this company for finding out a comparable segment similar with that of the assessee company. As the profits of the software development portion cannot be ascertained, we hold that it cannot be considered as comparable on entity level. We, therefore, order for the exclusion of this company from the final set of comparables. 55. Respectfully following the same, we direct the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is not denied that the Tribunal has also followed the same decision in other cases as well. 37. The decision in the case of Infogain India (P) Ltd. v. Deputy Commissioner of Income Tax, Circle 11(1), New Delhi (supra) was cited before the Tribunal. However, it appears that the Tribunal has not considered the same. 38. It is also material to note that in Infogain India (P) Ltd. v. Deputy Commissioner of Income Tax, Circle 11(1), New Delhi (supra) the Tribunal had noted that the annual report of Avani shows that the company derives its revenue from both software development services and sale of software products. In view of the above, the TPO and the Tribunal, have erred in not excluding the Avani as a comparable entity for the purpose of determining the ALP. ISHIR INFOTECH LTD. 39. The assessees objected to the inclusion of Ishir Infotech Ltd. (hereafter Ishir) as a comparable entity on two grounds. First, that it had failed the employee cost filter. The TPO issued a notice under Section 133 (6) of the Act to the said company and based on the information received in response thereto, had determined that it not only qualified the 25% employee cost filter but other filters as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of data, already the TPO has given detailed submission. 46. The argument that the use of contemporaneous data should be resorted to is correct. The specified date itself is the due date of filing of return of income. The databases would have uploaded all the audited financial statements of the companies within 31st October every year. The AGM has to be held within 6 months of closing of the financial year. Within 30 days of holding the AGM, the audited financial statements have to be filed before ROC. It is based on the audited financial statements submitted before the ROC, the databases upload the data. Hence the assessee can very well adhere to the Rule of contemporaneous data as prescribed by the Rules. The argument of the assessee may hold good in the earlier years of Transfer Pricing audit conducted by the assessee, since in the earlier years in many instances data was not available for the current year in the case of most of the comparables. Over the years the databases also have been more regular in uploading the data so that financial statements of all listed companies and some of the unlisted companies are available to the general public (people associated with the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 42. The impugned order does not clearly address the challenge raised by the appellant. The Tribunal accepted the contention that Ishir is a comparable entity as it does not fail the employee cost filter as per the annual report. The relevant extract of the impugned decision is as under: Ishir Infotech Ltd. 24. The assessee contended that the comparable fails the employee cost filter as per annual report. However, the information provided u/s 133 (6) clears the employee filter. 43. The question whether the business model is different and therefore Ishir would not be an appropriate comparable uncontrolled entity has not been considered by the Tribunal. As noted above, the decision in the case of Infogain India (P) Ltd. v. Deputy Commissioner of Income Tax, Circle 11(1), New Delhi (supra) was cited before the Tribunal but the same has not been alluded to by the Tribunal, as well. 44. In view of the above, the impugned order insofar as it rejects the appellant s challenge to inclusion of Ishir as a comparable entity, is erroneous. In view of the above question no. (i) is answered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware industry and this distinction should not be made. As discussed under the head industry overview of software services sector , the business dynamics of onsite and offshore varies a lot. For the sake of clarity, the relevant portion of industry overview of software services sector is summarized as under:- a) The Indian software sector provides both on-site and offshore services. b) The Indian vendors have succeeded in raising the share of offshore revenue from 44% in 2000-0l to 64% in 2003-04 and to 71 % in 2004-05. c) There is a substantial rate difference between the ON SITE and OFFSHORE projects/ contracts. As per the industry reports (source: Annual report of Mphasis BFL FY 2004-05) in the year 2004-05 average rate per man hour in the case of offshore projects was US$18, whereas the same was considerably higher in the case of ONSITE projects at about US$66 per man hour. The profit margins also accordingly vary significantly; the offshore projects have much higher margins. The reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant before the Tribunal. Paragraph 6 of both the applications (which are similarly worded) filed by the assessee is relevant and is set out below: 6. Non adjudication of the following grounds of appeal raised by the applicant: 6.1. Ground of appeal no. 1.9 : including certain companies that are not comparable to Applicant in terms of functions performed, assets employed and risk assumed: During the course of hearing, the Applicant contested exclusion of comparables and submitted detailed contentions against each of such companies in comparable chart filed on 13.01.2021 by email and relied upon during the course of hearing on 22nd March 2021 (Copy of comparable chart filed on 13.01.2021 is enclosed as Annexure B). Applicant also submitted written submission by email on 31.03.2021, as directed by Hon ble Members at the time of hearing (Written submission filed by email on 31.03.2021 is enclosed as Annexure C) However, in the order, the Hon ble Tribunal has inadvertently not adjudicated upon exclusion of two comparables, i.e. Tata Elxsi Limited ( Tata Elxsi ) and Sasken Communication Technologies Limited ( Sasken ) on account of functional dissimilarity. 6.2. Applicant s content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentions against inclusion of Sasken Communication Technologies Limited Applicant made submissions against inclusion of Sasken Communication Technologies Ltd. during course of hearing and also filed contentions as part of written submission (Annexure C) and comparable chart (Annexure B): Functionally different: Applicant highlighted functional dissimilarity in comparable chart as part of Applicant's contention. (Kindly refer SI. No. 22 of Annexure B) wherein it was highlighted that the company was engaged in diverse services including complex IC design, hardware design, board support packages and modem solutions, silicon platform services, handset technology services. network and test lab services etc. Owns significant intangibles: Applicant highlighted significant intangibles in comparable chart as part or Applicant s contention. Kindly refer SI. No. 22 of Annexure B wherein Pg. 985 of Annual Report compilation is also highlighted. Kindly refer Pages 126-127 or appeal set wherein this aspect has been highlighted as part or DRP objections. Extraordinary year of operations: Applicant highlighted acquisition of 100% stake in Integrated Softech Solutions Pvt. Ltd. and the said com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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