TMI Blog2014 (12) TMI 893X X X X Extracts X X X X X X X X Extracts X X X X ..... iness Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore [2013 (1) TMI 672 - ITAT BANGALORE] - since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, the AO/TPO is directed to omit this company from the list of comparables. Celestial Biolabs Ltd. – Held that:- The assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee Following the decision in Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore [2013 (1) TMI 672 - ITAT BANGALORE] - 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 - this company ought to be omitted from the list of comparables. Lucid Software Ltd. – Functionally different unit - Held that:- Lucid Software Ltd., is engaged in the development of software products whereas the assessee, is in the business of providing software deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. – Held that:- The 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 - Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable - the company should be excluded from the list of comparable companies - The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Infosys Technologies Ltd. – Held that:- The assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore [2013 (1) TMI 672 - ITAT BANGALORE] is applicable - Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products - It is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Ground No. 1 to 15 raised by the Assessee in the grounds of appeal are with regard to the addition to the total income by way of adjustment to the Arms Length Price ( ALP ) to an international transaction carried out by the assessee u/s. 92CA of the Act. At the time of hearing of the appeal it was submitted that the comparable companies chosen by the TPO and the addition made by the AO in the draft assessment order which was confirmed by the DRP are identical to the case decided by the Tribunal in ITA No.1054/Bang/2011 for AY 07-08 in M/s. Trilogy E-Business Software India Pvt.Ltd. Vs. DCIT, Circle 12(4), Bangalore and 3DPLM Software Solutions Ltd. Vs. DCIT IT(TP) A.No.1303/Bang/2012 order dated 28.11.2013. It was also submitted that the business profile of the Assessee and that of the Assessee in the case of M/S.Trilogy E-Business Software India Pvt.Ltd. (supra) and 3DPLM Software India Pvt.Ltd. (supra) are also identical and that the decision rendered in 3DPLM Software India Pvt. Ltd., (supra) is also in relation to AY 08-09. This submission was found to be correct at the time of hearing. With this background we will now consider the factual basis of the present case and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Flextronics (Aricent) 7.86 6. iGate Global Solution Ltd. 13.99 7. Infosys 40.37 8. Kals Information Systems Ltd. (Seg) 41.94 9. LGS Global Ltd. 27.52 10. Mindtree Ltd. (seg) 16.41 11. Persistent Systems Ltd. 20.31 12. Quintegra Solution Ltd. 21.74 13. R Systems International (Seg) 15.30 14. R S Software (India) Ltd. 7.41 15. Sasken Communication Technologies Ltd. (Seg) 7.58 16. Tata Elxsi (Seg) 18.97 17. Thirdware Solution Ltd. 19.35 18. Wipro Ltd. (Seg) 28.45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 7. The ld. counsel for the assessee filed before a chart showing the companies out of the 20 comparable companies chosen by the TPO, that have to be excluded as laid down in decisions referred to in the chart rendered by the ITAT Bangalore Bench. We will deal with the submissions and the chart in the following paragraphs. 8. Companies listed at Sl.No.1, 3 and 8 have been regarded as functionally not comparable with companies providing software development services in the case of M/S.3DPLM Software Solutions Ltd. (supra). The following were the relevant observations of the Tribunal in this regard. Companies incorrectly adopted as comparables by the TPO as per the contention of the assessee. 7.0 Avani Cincom Technologies Ltd. 7.1 to 7.6.1 . 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id companies from the list of comparable. 10. It was next submitted by the learned counsel for the Assessee that the company at Sl.No.10 of the list of final comparable companies chosen by the TPO viz., M/S.Lucid Software Ltd., has to be excluded from the list of comparable companies on the ground that the said company functionally different from a company providing software development services. In this regard our attention was invited to the decision rendered by the Bangalore Bench of ITAT in the case of M/S.3DPLM Software Solutions Ltd. (supra) wherein it was held as follows: 16. Lucid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 11. Respectfully following the aforesaid decision of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that the aforesaid company should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 12. It was next submitted by the learned counsel for the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 13. Respectfully following the aforesaid decision of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that the aforesaid company should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 14. It was next submitted by the learned counsel for the Assessee that the company at Sl.No.12 of the list of final comparable companies chosen by the TPO viz., M/S.Persistent Systems Ltd., has to be excluded f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted 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 Pvt. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies. (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks. (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO s own filter since there have been acquisitions in this case, as is evidenced from the company s Annual Report for F.Y. 2007-08, the period under consideration. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that the aforesaid company should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 18. It was next submitted by the learned counsel for the Assessee that the company at Sl.No.17 of the list of final comparable companies chosen by the TPO viz., M/S.Soft Sol India Ltd., has to be excluded from the list of comparable companies on the ground that the said company functionally different from a company providing software development services. In this regard our attention was invited to the decision rendered by the Bangalore Bench of ITAT in the case of M/S.3DPLM Software Solutions Ltd. (supra) wherein it was held as follows: 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 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 the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. In this regard our attention was invited to the decision rendered by the Bangalore Bench of ITAT in the case of M/S.3DPLM Software Solutions Ltd. (supra) wherein it was held as follows: 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the assessee as 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. 21. Respectfully following the aforesaid decision of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that the aforesaid company should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 22. It was next submitted by the learned counsel for the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. 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. 11.3 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 company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO s own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Benchmark Prime Lending Rate for public sector banks as provided in the RBI Annual Report for FY 2007-08. The assessee submitted the relevant portion of the annual report as an annexure to our submissions dated October 13, 2011. From the table it was evident that the BPLR rate for the subject FY 2007-08 is 12.875 percent (average of 12.25 percent and 13.50 percent). Hence it was requested to the learned TPO to adopt the computation provided by the assessee for the working capital adjustment. The TPO, however, passed the TP order by applying a PLR of 12.68 percent as against 12.875 percent. 5.12.2. Computation of working capital adjustment The learned TPO computed the working capital adjustment of -1.70 percent. In computing the working capital adjustment the learned TPO considered the erroneous figures for computing the average working capital of BearingPoint. Particulars Amount as per your notice (Rs.) Amount in annexure to our submissions dated October 13, 2011 Working capital adjustment (Rs.) Sales 53,61,98,058 58,87,69,951 Operating cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept the above submissions, no other submissions were made on Gr.No.1 to 15. Grounds No.1 to 15 are decided as set out in the earlier paragraphs. 29. In ground No. 16, the Assessee has projected its grievance with regard to the action of the learned Assessing Officer and Honorable Dispute Resolution Panel excluding a sum of ₹ 1,26,19,649/- incurred on telecommunication charges, insurance expenses and travelling expenses from export turnover on the ground that these expenses are incurred in rendering technical services rendered to clients outside India while computing deduction under section 10A. It is the plea of the Assessee that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the Hon ble Karnataka High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the DRP, the DRP confirmed the order of the AO. 35. Before us, the ld. counsel for the assessee submitted that the additional liability was recognized only during the previous year and the AO did not dispute the fact that these were genuine business expenses, therefore, the claim of the assessee ought to have been allowed. Reliance was placed on the following decisions of the Tribunal:- (1) National Aluminum Co. Ltd. v. DCIT, 101 TTJ 948 (Cuttack) (2) Goetz India Ltd. v. DCIT, 115 ITD 119. In both these decisions, crystallization of liability during the previous year though the liability relates to an earlier period was allowed as a deduction. 36. The ld. DR relied on the order of the AO. 37. We have considered the rival submissions and are of the view that in the light of the admitted position that the expenditure in question was wholly and exclusively for the purpose of business and that the same was genuine, the fact that the expenditure relates to an earlier period cannot be a ground to deny the deduction, especially when factually crystallization of liability during the previous year has not been disputed. We therefore direct that the expenses claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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