TMI Blog2016 (1) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction of 5% applying proviso to Section 92C(2) - Held that:- AR fairly conceded that the proviso to Sub-section (2) of Section 92C of the Act could not be considered as a standard deduction. We therefore allow ground taken by the Revenue. Assessee is an off-shore development centre had international transactions with its AE during the relevant previous year in the software development segment, thus companies functionally dissimilar with that of assessee need to be deselected from final list - IT (TP) Appeal Nos. 1360 (Bang.) of 2011 & 85 (Bang.) of 2012 - - - Dated:- 22-1-2016 - N.V. Vasudevan, JUDICIAL MEMBER And Abraham P. George, Accountant Member Padamchand Khincha, CA for the Appellant. G.R. Reddy, CIT-DR for the Respondent. ORDER Abraham P. George, Accountant Member These are appeals filed by assessee and the Revenue respectively and directed against an order dt. 01.11.2009 of CIT-IV, Bangalore. 2. Appeal of the Revenue is taken up first for disposal. Revenue has altogether raised six grounds of which grounds 1, 5 and 6 are general in nature needing no specific adjudication. Vide its ground 2, Revenue is aggrieved that CIT(A) directed e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 12,06,21,350/- ₹ 37,92,270/- ₹ 12,49,80,135/- Operating Profit (PBIT) (-) ₹ 2,34,39,707/- (-) ₹ 32,73,220/- (-) ₹ 2,72,79,442/- OP on cost (-) 19.43% (-) 21.83% 7. Whole of the operating revenue from software development segment came out of transactions with its AE's abroad. AO referred the issue of benchmarking the international transactions of the assessee to the TPO, in accordance with Section 92CA of the Act, TPO was of the opinion that the CUP method could not be accepted since comparable data on hourly rates charged by independent enterprises, engaged in similar services could not be reliably obtained from data information available in the public domain. TPO opted for the TNMM. He made a search using capitaline and prowess data bases and arrived at a set of 17 comparables, List of comparables arrived at by the TPO and their profits to cost ratio stood as under : Sl. No. Company Name Sales (Rs. cr.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.45 32.19 70(15%) 24.91 5.45 15. L T Infotech 562.45 10.33 Nil 46.8 8.32 16. Salyam 3464.2 29.44 Nil 67.1 1.94 17. Infosys 6859.7 42.83 212(3%) 254.07 3.7 Avg. 26.59% 3.59% 5.17% 8. On the arithmetic mean PLI of 26.59% of the comparables, AO made a negative working capital adjustment of 3.49% and arrived at adjusted arithmetic mean PLI of 23.10%. Though the assessee had sought for a risk adjustment citing that it was providing services to a single customer, TPO was of the opinion that the business environment of the assessee as well as its comparables did not have significant differences, warranting any such adjustment. As per the TPO assessee could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egmental results of the said company was available. We are of the opinion that CIT (A) had directed exclusion of Exensys Software Solution 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. 11. Vide its ground 3 Revenue is aggrieved that CIT (A) directed exclusion of Infosys Technologies, iGate Global Solution Ltd, Flextronics Software Systems Ltd, (seg) and L T Infotech Ltd, as comparables by applying the turnover filter. 12. CIT (A) had held that assessee's turnover being only ₹ 9.77 crores could not be comparable with companies having huge turnover. He went by the decision of a coordinate bench of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) and directed exclusion of companies having turnover in excess of ₹ 200 crores from the list of comparables. By virtue of this direction above mentioned companies went out of the list of comparable. 13. Now before us, Ld. DR strongly assailing the order of CIT (A) placed strong reliance once again on the decision of Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore allow ground taken by the Revenue. 17. Now we take up the appeal of the assessee. Assessee in its appeal has raised altogether nineteen ground of which grounds 1 to 18 are on matter relation to TP. Ld. Counsel for the Assessees at the out set submitted that if his ground relating to exclusion of certain comparables selected by the TPO admission of ten new Comparables, along with its ground for risk adjustment were considered, other grounds relating to TP matter could be adjudicated at a later stage in proceedings when these were relevant. 18. Accordingly we are confining ourselves to the grounds relating to exclusion of certain comparables and inclusion of new comparables and risk adjustments sought by the assessee. 19. Ld. AR submitted that out of the comparables selected by the TPO, M/s. Flextronics Software Systems Ltd. M/s. L T Info Tech Ltd., iGate Solutions Ltd., and M/s. Infosys Ltd. went out on application of turnover filter. Insofar as Bodhtree Consulting Ltd. was concerned, as per the Ld. AR, coordinate bench of this Tribunal in the case of Dy. CIT v. Kodiak Networks India (P.) Ltd. IT(TP) Appeal No. 532 (Bang.) of 2013 and CO. 119/Bang/2015, dated 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT Hyderabad Bench in Ivy Computech (P.) Ltd. v. ACIT (2014) 43 taxmann.com 183 (Hyd.) Trib. Has taken the view that Bodhtree Consulting Ltd., should not be regarded as a comparable in the case of software development service provider: The ld. Counsel for the assessee also brought to our notice that comparability of this company with software development provider was considered by this Tribunal in Mindtech India Ltd. v. DCIT ITA No. 70/B/2014 for AY 2009-10, order dated 21.8.2014 and it was held as under:- 14. The next aspect that was canvassed by the learned counsel for the assessee was with regard to the exclusion of the following comparables form the list of final comparables chosen by the TPO: 1. Bodhtree Consulting Ltd. : As far as this company is concerned, the submission of the learned counsel for the assessee was that this company made extraordinary profits during the previous year: Our attention was drawn to the fact that the operating profit/operating cost of this company jumped from 17% for FY 2007-08 to 56% in FY 2008-09. It dipped in FY 2009-10 to 40% and in FY 2010-11 it became (-) 2% and 5% in FY 2011-12 and finally touched (-) 9% in FY 2012-13. Our attentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctuation in the profitability margin of such entity. Merely because of such fluctuations, an entity engaged in the development of software, being functionally comparable to the assessee, cannot be rejected only on this ground. 14. The learned counsel for the assessee drew our attention to the fact that Bodhtree Consulting admittedly follows a fixed price project modal whereby revenues from software development is recognised based on software and billed to clients. In such business model expenditure for developing software would be billed in an earlier year but the revenue would be recognized in a subsequent year. It was his submission that this fact is recognized by the DRP in its order. According to him this circumstance would be sufficient to show that the margin reflected of this company does not reflect the normal business condition. 15. The learned DR placed reliance on the reason given by the DRP in its Order. 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had on occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d considered assessee to be into software development services. This is clear from the segmental results compiled by him at para 2 of his order which has been reproduced by us at para six above. Accordingly we are of the opinion that the decision of the coordinate bench Kodiak Networks India (P.) Ltd. (supra) would apply on all four squares. We therefore direct exclusion of M/s. Bodhtree Consulting Ltd., from the list of comparables. 22. Arguing for exclusion of M/s. Sankhya Infotech Ltd., Ld. AR submitted that the said company also appeared in the list of comparables in the case of Kodiak Networks India (P.) Ltd. (supra). According to him, Tribunal had directed its exclusion at para 25 of its order mentioned supra. 23. Per contra, Ld. DR took the same pleading as he took in the case of M/s. Bodhtree Consulting Ltd. 24. We have perused the orders and heard the rival contentions. In the case of Kodiak Networks India (P.) Ltd., this Tribunal at paras 29 to 31 of its order held as under : Sankhya Infotech Limited ('Sankhya') '29. It was submitted by the learned counsel for the assessee that Sankhya is engaged in the business of development of software produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , from the list of comparables. 25. Vis- -vis Foursoft Ltd., Ld. AR submitted that the said company was also rejected by this Tribunal in the case of Kodiak Networks India (P.) Ltd. (supra) Ld. AR also submitted that said company was also hit by RPT filter of 15% and reliance was placed a decision of coordinate bench in the case of 24/7 Customer.com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344/28 taxmann.com 258 (Bang.). 26. Ld. DR made similar submissions as she had made in the case of M/s. Bodhtree Consulting Ltd. 27. We have perused the orders and heard the rival contentions. This Tribunal had in the case of Kodiak Networks India (P.) Ltd. (supra) had held as under at para 22 of its order : 22. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. by the ITAT Bangalore ITA No. 1302/BNG/2011 for AY 05-06 order dated 11-6-2015. The following were the relevant observations of the Tribunal. 22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- 15.4 FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in the product development having I.P. rights, the same is not comparable. 15.5 THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is reproduced hereunder : '18. As regard ground No. 7, TATA Elxsi Ltd., has to be excluded as this company was held to be not comparable with as 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 v. 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 segment in his T.P. analysis and assessee's objection is the software development services segment itself comprises of three sub-services namely (a) product design services (b) design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts, 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. Finding of the Tribunal as it appear at paras 18 and 19 in the case of 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. 38. Vis-a-vis Sathyam Computers Service Ltd, Ld. AR submitted that its turnover exceeded ₹ 200 crores and by virtue of turnover filter it had to be excluded. Further as per the Ld. AR its financial statements were not reliable. 39. Ld. DR made the very same submissions as for Bodhtree Consulting Ltd. 40. We have perused the orders and heard the rival contentions. This Tribunal in the case of ITO v. Sunquest Information Systems (India) (P.) Ltd. [IT Appeal No. 299 (Bang) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en similar freedom to consider fresh set of comparables. 43. We have perused the orders and heard the rival contentions. We find that assessee had in its submissions dt. 19.07.2012 before the CIT (A) prayed for inclusion of above mentioned companies. CIT (A) had not given any findings in this regard. In our opinion by virtue of the decision of Special Bench in the case of Quark Systems (P.) Ltd. (supra) assessee can seek inclusion of a fresh set of comparables since TP study is an evolving area. However there is much strength in the argument of the Ld. DR that similar freedom should be granted to the TPO also. Accordingly ewe direct the TPO to consider the fresh set of comparables sought to be included by the assessee mentioned at para 41 (supra) and redo the analysis of the arms length, pricing of the international transactions undertaken by the assessee. TPO is free to select his own set of comparables also except those which we have specifically directed to be excluded. 44. Coming to the pleading of the assessee that risk adjustment for under utilization of capacity should be given, we find that CIT (A) had not dealt with this issue of risk adjustment. However the TPO' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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