TMI Blog2014 (12) TMI 612X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally dissimilar and different from the assessee and hence is not comparable - the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also thus, this company cannot be considered as a comparable to the assessee Decided in favour of assessee. Bodhtree Consulting Ltd. Held that:- The assessee had never objected to the inclusion of this company in the set of comparbales in earlier proceedings before the TPO and the DRP - the assessee has only pointed out fluctuating margins in the results of this company over the years - This, in itself, cannot be reason enough to establish differences in functional profile or any clinching factual reason warranting the exclusion of this company from the list of comparables - the contentions of the assessee are rejected and this company is held to be comparable to the assessee and its inclusion in the list of comparable companies is upheld. Functionally dissimilar company Celestial Biolabs Ltd. - KALS Information Systems Ltd. - Held that:- As decided in assessees own case for the earlier assessment year, decided in Delmia Solutions Pvt. Versus Deputy Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent services and high end technical services which come under the category of KPO services in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) [2014 (3) TMI 626 - ITAT HYDERABAD] it has been held that KPO services are not comparable to software development services and are therefore not comparable. Thirdware Solutions Ltd. (Segment) Held that:- This company is to be excluded from the final list of comparables as it is engaged in product development and its income is also from trading in software licences and is, therefore, not comparable to a software development service provider like the assessee thus, this company cannot be considered as a comparable to the assessee. Quintegra Solutions Ltd. Held that:- Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider - this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs in 24/7 Customer. Com (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 11(2), Bangalore [2013 (1) TMI 45 - ITAT BANGALORE] it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,99,954 (ii) Reimbursement of Expenses (Revised) 5,35,79,970 (iii) Reimbursement of Expenses (Paid) 2,15,05,395 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference u/s.92CA of the Act to the Transfer Pricing Officer ( TPO ) for determining the Arms Length Price ( ALP ) of these international transactions, after obtaining necessary approval from the CIT, Bangalore-I. The TPO vide order u/s.92CA of the Act dt.31.10.2011 proposed a T.P. adjustment of ₹ 3,81,72,484 to the ALP of international transactions in respect of Software Development Services rendered by the assessee. The Assessing Officer then issued a draft assessment order under section 143(3) r.w.s 144C of the Act dt.23.11.2011 proposing the incorporation of the T.P. adjustment of ₹ 3,81,72,484 to the ALP of international transactions in respect of software development services rendered by the assessee as had been proposed in the TPO s order under section 92CA of the Act. 22. Aggrieved by the Draft assessment order for Assessment Year 2008-09 dt.23.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23.65%, in respect of the international transaction pertaining to the rendering of software development services by the Appellant; 6.3 in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Income-tax Act, 1961 ( the Act ), which in many instances are inconsistent with the data disclosed in audited reports. In doing so the learned TPO has erred in complying with the principles of natural justice. 6.4 in considering 25 percent as the threshold limit for the Related Party Transactions filter as this number is an arbitrary number that has been adopted without any judicial precedence or reasonable basis. 6.5 in rejecting the upper limit for sales turnover filter proposed by the appellant without providing any empirical analysis. In doing so, the learned TPO erred in not appreciating that the software industry is clearly demarcated based on size. 6.6 in accepting companies like Infosys Limited and Wipro Limited as comparable companies even though the sales of Infosys and Wipro are driven based on brand developed by them. In doing so the learned TPO and the learned AO have ignored the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies such as Akshay Software Technologies Limited, Prithvi Information Solutions Limited, Silverline Technologies Limited, Zylog Systems Limited and VJIL Consulting Limited. 6.15 in not maintaining consistency in applying the filters of rejecting companies with abnormal fluctuating margin, diminishing revenue/ persistent losses for the period under consideration, companies with peculiar economic circumstances, companies with different financial year ending, companies for which data are not available in database/ public domain and companies with related party transactions exceeding 25%. 6.16 in accepting companies like Wipro Limited, Thirdware Solution Limited, Persistent Systems Limited, Quintegra Solutions Limited Tata Elxsi Limited which owns intangible assets. 6.17 in accepting companies like Igate global solutions Limited, Thirdware solution Limited, E-Zest Solutions Limited and Wipro limited where segmental data pertaining to software development services is not available. 7. The learned TPO and the learned AO erred in disregarding the use of multiple year data, and ought to have accepted the use of contemporaneous data due to nonavailability of current year d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or thereon. Ground Nos.3 4 : These grounds are raised in respect of the grant of suitable adjustments towards differences in the risk profile between the assessee and the comparable companies. This ground was argued before us by the learned Authorised Representative and this issue is separately discussed in the later part of this order. Ground No.5 : This ground raised by the assessee is in respect of being given the benefit of + / - 5% while computing the ALP. Before us this ground was not pressed. Even otherwise, the retrospective amendment to section 92C(2A) of the Act brought about by the Finance Act, 2012 has settled the issue and therefore the benefit of 5% is not allowable to the assessee. In this view of the matter, this ground raised by the assessee is dismissed. Ground No.6.1 : This ground is raised in respect of the TPO rejecting the assessee T.P. Study and conducting a fresh search for deciding the comparable companies. As the learned Authorised Representative had submitted the assessee would not press the general grounds, no separate adjudication is called for thereon. We will, however, later in this order, be dealing with the assessee's submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee selected the following 18 companies as its set of comparables. Sl. No. Name of the company Average Margin 1. Akshay Software Technologies Ltd. 5.93 % 2. Aarman Software Pvt. Ltd. 57.64 % 3. ApplabsTechnologies Pvt. Ltd. 18.25 % 4. Computech International Ltd. 5.20 % 5. Core Projects Technologies Ltd. 38.85 % 6. I-gate Global Solutions Ltd. 5.10 % 7. Mind Tree Ltd. 15.61 % 8. Nihar Info Global Ltd. (-) 3.23 % 9. Orient Information Technology Ltd. (-) 21.85 % 10. Prithvi Information solutions Ltd. 14.09 % 11. R S Software (India) Ltd. 14.58% 12. R Systems International Ltd. 18.08 % 13. SIP Technologies Exports Ltd. 18.10 % 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tata Elxsi (Seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd. 16.50 AVERAGE 23.65 The Average Mean Margin of the 20 comparable companies selected by the TPO was 23.65 % whereas the Average Mean Margin of the assessee was 10.97% on total cost. The TPO accordingly worked out the T P adjustment of ₹ 3,81,72,484 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09. 6.0 As mentioned in para 4.2 to 4.4 of this order, in the course of proceedings before us, the learned Authorised Representative submitted that he would make and put forth arguments / contentions only on the comparability or otherwise of individual companies, which in his opinion, are incorrectly included by the TPO in the set of comparable companies, or are incorrectly excluded by the TPO from out of the set of comparable companies chosen by the assessee in its TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08 in ITA No.845/Bang/2011 dt.22.2.2013. 7.3 The learned Authorised Representative further submitted that the facts pertaining to this company has not changed from the earlier year (i.e. Assessment Year 2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that :- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a co-ordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof :- 9.5.2 As regards the submission of the learned Authorised Representative, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. The learned Authorised Representative submits that this company was selected as a comparable by the TPO not by any FAR analysis or as per the search process conducted by the TPO, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, followingthe decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 8.0 Bodhtree Consulting Ltd. 8.1 This company has been selected as a comparable company to the assessee by the TPO; the inclusion of which was not objected to by the assessee before both the TPO and the DRP. The assessee has not objected to the inclusion of this company in the list of comparables, as can be seen from the grounds of appeal raised in Form 36B before this Tribunal. 8.1 However in the course of proceedings before us, the learned Authorised Representative objected to the inclusion of this company as a comparable for the following reasons : (i) This company has reported abnormally fluctuating margins in the period from 2005 to 2011, which indicate abnormal business factors and abnormal profit margins and hence sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Celestial Biolabs Ltd. 9.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No.1119/Bang/2011) and (d) Transwitch India Pvt. Ltd. (IA No.6083/Del/2010) (iv) The facts pertaining to this company has not changed from Assessment Year 2007- 08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the case on hand and hence ought to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative drew our attention to various parts of the Annual Report of this company. (v) This company is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. Virtual Insure and La-Vision and b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellelctual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons :- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 13. Tata Elxsi Ltd. 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of TelecordiaTechnologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as fit for comparability analysis for determining the arm s length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q InformationSystems (India) (P) Ltd. Supra) that 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. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard, the learned Authorised Representative submitted that (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. Ltd. [ IT(TP)A No.1119/Bang/2011 ] and by the Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (ITA No.6083/Del/2010). (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case 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. 19. Softsol India Ltd. 19.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable on the grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isk adjustments to be made to bridge the disparities in the risk profile between a risk free entity like the assessee and risk bearing entities among the comparables selected by the TPO. 20.1.2 The learned Authorised Representative submitted that in similar factual positions, different co-ordinate benches of this Tribunal in the case of Intellinet Technologies India Pvt. Ltd. (ITA No.237/Bang/2010) and Bearing Point Business ConsultingPvt. Ltd. (ITA No.1124/Bang/2011) have held that the single customer risk borne by a captive service provider is only an anticipated risk vis- -vis the existing market risk borne by independent comparables. It is submitted that in the aforesaid decisions, it has been held that the TPO ought to have given risk adjustment to the margins of the comparables for bringing them on par with the Assessing Officer and this matter was remanded back to the file of the TPO with the direction to consider all the contentions of the assessee and the material on record before coming to a decision in the matter. 20.2 We have heard both the learned Authorised Representative and learned Departmental Representative in the matter and perused and carefully conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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