TMI Blog2014 (12) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... able - 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. Functionally dissimilar company – Celestial Biolabs Ltd. - KALS Information Systems Ltd. - Held that:- Following the decision in M/s. 3DPLM Software Solutions Ltd. (Successor to Delmia Solutions Private Ltd.) Versus Dy. Commissioner of Income Tax [2014 (12) TMI 612 - ITAT BANGALORE] - this company is held to be functionally dissimilar and different from a software service provider informatics as it is into bio software products and is not comparable to a mere software service provider - the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09 – thus, this company is functionally different and cannot be considered as a comparable to the assessee who is a software service provider and AO is directed to omit this company from the final list of comparables. Functionally dissimilar company – Infosys Technologies Ltd. – Held that:- Following the decision in M/s. 3DPLM Software Solutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the AO/TPO for examination of the computation given by the assessee on the percentage of RPT and for fresh adjudication – Decided in favour of assessee. Risk Adjustment – Held that:- The TPO has not allowed any adjustment by observing that this has been considered and discussed in detail in the order for earlier years – as held in Intellinet Technologies India (P.) Ltd. v. ITO [2012 (6) TMI 237 - ITAT BANGALORE] - the TPO ought to have given risk adjustment to the margins of the comparables for bringing them on par with the assessee and remanded the issue back to the file of the TPO – thus, the matter is remitted back to the AO/TPO for market risk adjustment. Reimbursement of Expenses incurred not to be considered for computing ALP – Held that:- The breakup of the expenses are not given in detail, in the absence of which it is not clear whether it is actually incurred – following the decision in LG Soft India (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle - 12(2) [2013 (9) TMI 191 - ITAT BANGALORE] - there appears to be need of examination and discussion of the same – the matter is to be remitted back to the AO/TPO for detailed examination and verification – De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer Pricing Officer ('TPO' in short) for determining the Arms Length Price ('ALP') of these international transactions, after obtaining necessary approval from the CIT, Bangalore-I. The TPO vide order under section 92CA of the Act dt.28.10.2011 proposed a T.P. Adjustment of ₹ 5,96,07,719 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.15.12.2011 proposing the above T.P. Adjustment of ₹ 5,96,07,719 to the ALP of international transactions in respect of software development services rendered by the assessee in accordance with the proposal in the TPO's order under section 92CA of the Act. Apart from this, the Assessing Officer also recomputed the deduction under section 10A of the Act. 2.2 Aggrieved by the aforesaid draft assessment order dt.15.12.2011 for Assessment Year 2008-09, the assessee filed its objections before the DRP, Bangalore. The DRP vide its order under section 144C(5) r.w.s. 144C(8) dt.20.4.2012 confirmed the additions/disallowances made by the Assessing Officer/TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... file of the assessee vis- -vis the comparables. The learned TPO, A.O. and Hon'ble DRP erred in adopting erroneous figures for computing the working capital adjustment. 8. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, by determining the arm's length margin/price using only FY 2007-08 data which was not available to the assessee at the time of complying with the transfer pricing documentation requirements. Grounds of objection relating to corporate tax matters. 9. In computing the deduction under section 10A of the Act. a. The learned A.O. has erred in excluding telecommunication expenditure of INR 7,982,783 incurred in connection with the delivery of computer software outside India from the export turnover of units claiming deduction under section 10A of the Act when such items were not in the first place, included in the export turnover of the said Units. b. Without prejudice to ground (a) above, the learned A.O. has erred in excluding telecommunication expenditure incurred in connection with the delivery of computer software outside India form the export turnover of units claiming deduction under section 10A of the Act to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish to press the general grounds raised on T.P. matters and would make submissions only on the comparability of the individual companies selected by the TPO in the final set of comparables and the companies rejected by the TPO from out of the set of comparable companies chosen by the assessee. The learned Authorised Representative also submitted a chart, schematically explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO as comparable companies to the assessee. 4.3 The learned Authorised Representative also submitted that the facts of the case on hand are similar to the cases of Curam Software International (P.) Ltd. v. ITO [2014] 149 ITD 458 (Bang.), Yodlee Infotech (P.). Ltd. [IT (TP) A No.1538 (Bang.) of 2012] and 3DPLM Software Solutions Ltd. v. Dy. CIT of the co-ordinate bench of this Tribunal by its order dt.31.7.2013, 30.8.2013 and 28.11.2013 to which both of us were party. It was submitted that the set of comparables chosen by the TPO in the cited case (supra) is exactly the same as those selected in the case on hand and therefore he relies on the decisions in the cited case. 4.4 In the light of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Technologies Ltd. 11. PSI Data Systems Ltd. 12. Powersoft Global Solutions Ltd. 13. SIP Technologies and Exports Ltd. 14. SynetareosTechnologies Ltd. 15. Computech International Ltd. 16. Karaturi Networks Ltd. After comparison of the average margin of these comparable companies, the assessee as per its T.P. Study held its international transactions with its Associated Enterprises ('AE') to be at arms length. 5.2 The TPO observed that the assessee had characterised itself as providing software development services to its Associated Enterprises (AEs). While accepting TNMM as the MAM, as adopted by the assessee, the TPO rejected the assessee's T P Study for various reasons set out in the show cause notice issued and embarked on a fresh search using the data bases 'Prowess' and 'Capitaline'. After considering the objections of the assessee, the TPO selected the final list of 20 comparables which are as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in para 4.1 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 Study. The learned Authorised Representative also submitted a chart, schematically explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected or rejected by the TPO as comparable companies to the assessee. We now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart. Companies incorrectly adopted as comparables by the TPO as per the contention of the assessee 7. Avani Cincom Technologies Ltd. 7.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the earlier year and hence the findings rendered by the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in other cases like Triology E-Business Software India(P.) Ltd. (supra) are applicable to the year under consideration as well. 7.4 Per contra, the learned Departmental Representative supported the order of the TPO/DRP for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.5 We have carefully considered the rivalsubmisisons and perused and carefully considered the material on record and the judicial decisions cited. We find that the co- ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables for the reason that this company is into software products and is therefore functionally different from mere software services provider. The relevant observations at paras 7.6.1 and 7.6.2 of the order are extracted hereunder :- 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 and included this company in the final list of comparables. 8.2 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) The co-ordinate bench of this Tribunal in its order in the case of Triology E-Business Software India (P.) Ltd. (supra) at para 43 thereof had observed about this company that - ..... As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify eliminate and make adjustment of the profit margins so that the difference in functional compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessment Year 2007-08 (supra) as wellas in the case of Triology E-Business Software India(P.) Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India (P.) Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted from the list of comparables. The A.O./TPO are accordingly directed. Following the above decision of co-ordinate bench of this Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09, had held that this company be omitted from the final set of comparables for the reason that it is not functionally comparable to software service providers as it is into development of software products, etc. The relevant observations at para 10.4 of the order, is extracted hereunder :- 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India (P.) Ltd. (supra) have held that this company was de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agnity India Technologies (P.) Ltd. [IT Appeal No.3856 (Delhi) of [2010] at para 5.2 thereof was that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive software service providers assuming limited risk. The learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09, had held that this company is to be excluded from the final list of comparables as this company is functionally dis-similar and different as it owns significant intangibles and has huge revenue's from software products unlike the assessee who is a mere provider of software services. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 10.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 11.2 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 its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies (P.) Ltd. (supra) in 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 Technologies India(P.) Ltd. (supra) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable 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. Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that this company being into software development, etc is functionally different and cannot be considered as a comparable to the assessee in the present case who is a software service provider and therefore direct the A.O./TPO to omit this company from the final list of comparables. 12. Tata Elxsi Ltd. 12.1 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. 12.2 Before us it was reiterated by the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra), for Assessment Year 2008-09, had held that this company is to be excluded from the final list of comparables as it is predominantly engaged in product designing services and therefore cannot be comparable to a software development service provider. In this view of the matter, this company is, therefore, not functionally comparable to the assessee in the case on hand who is merely a software service provider. The relevant portion of the aforesaid order at paras 13.4.1 and 13.4.2 are extracted hereunder :- '13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account for software development services and product development services. (ii) In the case of E-Gain Communications (P.) Ltd. v. ITO [2008] 23 SOT 385, the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. (iii) The co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd.(supra) had held that this company is to be omitted from the final set of comparables as it is also engaged in product development and its income includes revenue from sale of software licenses and therefore cannot be a comparable for pure software service provider. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 13.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 13.3 We have considered the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cases of LG Soft India(P.) Ltd. (supra) and CSR India(P.) Ltd. v. ITO and by the Delhi Bench of the Tribunal in the case of Transwitch India (P.)Ltd. v. Dy.CIT [2012] 53 SOT 151 (iii) The co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) has held that this company is to be omitted from the set of comparables as it is functionally different i.e. it is engaged in development of software products and cannot be comparable to a software service provider. The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal and other cases cited above, it is clear that this company, being into product development, cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 14.2 Per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 14.3 We have heard the rival contentions and perused and carefully conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore direct the A.O./TPO to exclude this company from the final set of comparables. 15. Persistent Systems Ltd. 15.1.1 This company was selected by the TPO as a 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 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. 15.1.2 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India(P.) Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee in the case on hand and therefore direct the A.O./TPO to exclude this company from the final list of comparables. 16. Softsol India Ltd. 16.1 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 that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that as per the company's reply to the notice under section 133(6) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany cannot be considered as a comparable to the assessee in the present case as it fails the RPT filter of 15% applied and therefore direct the A.O./TPO to exclude this company from the final list of comparables. 17. Companies the assessee wants to be included in the list of comparables. 17.1 The learned Authorised Representative of the assessee submitted that the following companies which were in the assessee's list of comparables (i.e. the company at S.No.1) and those which were originally proposed by the TPO, but ultimately not included in the final set of comparables (i.e. at S.Nos. 2 3) be included in the final set of comparables. Those are as under :- (i) ICRA Techno Analytics Ltd. (ii) Aditya Birla Minacs IT Services Ltd. (iii) Aditya Birla Minacs Technologies Ltd. 17.2 It is the contention of the learned Authorised Representative that these companies were rejected by the TPO on the ground that they fail the RPT filter of 15%. It is the learned Authorised Representative's submission that the RPT filter has been wrongly applied in the above three cases as the RPT in these cases are 11.35%, 5.03% and 7.43% of sales and they deserve to be included a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the co-ordinate benches of this Tribunal 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 assessee and remanded this matter to the file of the TPO with direction to consider all the contentions of the assessee and the material on record before coming to a decision in the matter. The learned Authorised Representative submitted that the aforesaid decision has been followed in many other cases by the Tribunal, including the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09. 19.2 We have heard both the learned Authorised Representative and learned Departmental Representative in the matter and perused and carefully considered the material on record. As regards risk adjustment, the TPO has not allowed any adjustment by observing that this has been considered and discussed in detail in the order for earlier years. We find that on similar facts, different co-ordinate benches of this Tribunal in the case of Intellinet Technologies India (P.) Ltd. v. ITO 53 SOT 92 and Bearing Point Business Consulting (P.) Ltd. (supra) have held that the TPO ought to have given risk adjustment t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n detail and it is not clear whether it is the reimbursement of expenses incurred on behalf of the AE. Since the issue is not clear and there is no detailed discussion of the break up of expenses, we deem it fit and proper to remit the issue to the file of the Assessing Officer/TPO for detailed verification. We make it clear that if the receipts are mere recovery of expenses without any service then the same should not be added back to the cost base for the purpose of mark up. It is ordered accordingly. Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of LG Soft India (P) Ltd. (supra), we hold that since the break up of the said expenses are not given in detail and it is not clear whether it is the reimbursement of expenses incurred on behalf of the AE and there appears to be examination and discussion of the same, we deem it fit to remand this issue to the file of the A.O./TPO for detailed examination and verification. We also hold that if the receipts are mere recovery of expenses incurred without any service element, then the same should not be considered as part of the cost base for computation of mark up. The A.O./TPO are accordingly d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;, includes 'export turnover'. If what is excluded in computing the 'export turnover' is included while arriving at the 'total turnover', when the 'export turnover' is a component of 'total turnover', such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the 'total turnover' means, then, when the 'total turnover' includes 'export turnover', the meaning assigned by the legislature to the 'export turnover' is to be respected and given effect to, while interpreting the 'total turnover' which is inclusive of the 'export turnover'. Therefore the formula for computation of the deduction under section 10A, would be as under : Profits of the business x Export turnover of the undertaking (Export turnover + domestic turnover) Total Turnover. In the light of the above facts and respectfully following the decision of the Hon'ble Karnataka High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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