9911796707
TMI Blog2015 (2) TMI 944X X X X Extracts X X X X X X X X Extracts X X X X ..... deserves to be excluded even on the basis of the filter applied by the TPO. - Decided in favour of assessee. For inclusion of CG-VAK Software Systems Limited (Software Services Segment) the said concern cannot be excluded merely because of incurrence of loss in this year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. - Decided in favour of assessee. For inclusion of M/s. Thinksoft Global Services Limited The argument being set up by the lower authorities that the ‘Verification’ and ‘Validation’ are steps to test the efficiency of the software, but not a part of software development, in our view is a hairsplitting argument, which is not justified in the context of the present comparability analysis. Ostensibly, ‘Verification’ and ‘Validation’ are broadly speaking, a part and parcel of the process of software development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with sales/turnover in excess of ₹ 200 crores have been excluded - Held that:- In the present case it is axiomatic that so far as the issue of the adoption of Turnover filter of ₹ 200 crores to exclude the aforesaid four concerns in concerned, the same has been adopted by the TPO without giving the assessee any opportunity of being heard and therefore in our view the matter ought to be remanded back to the AO/TPO for consideration afresh. - Decided in favour of assessee for statical purposes. - ITA No.2536/PN/2012 - - - Dated:- 11-2-2015 - Shri G.S. Pannu And Shri R.S. Padvekar For the Appellate : Mr. (Dr.) Rakesh Gupta For the respondent Mr. A. K. Modi ORDER Per G. S. Pannu, AM The captioned appeal has been preferred by the assessee pertaining to the assessment year 2008-09, which is directed against the order of the Dy. Commissioner of Income Tax, Circle 1(2), Pune (in short the Assessing Officer ) passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short the Act ) dated 27.11.2012, which is in conformity with the directions given by the Dispute Resolution Panel, Pune (in short the DRP ) dated 18.09.2012. 2. In this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental financial information in its Annual Report, which was considered by the Ld. TPO; 2.3 rejecting the functionally comparable Software Services Segment of CG -VAK Software Exports Limited on the erroneous reasoning that the loss making companies/ segments cannot be considered to be comparable to the Appellant, since the Appellant is compensated on the basis of cost plus pricing mechanism; 2.4 rejecting the functionally comparable Thinksoft Global Services Limited on the basis of erroneous interpretation that it is engaged in software verification and validation activities which are not a part of software development process; and 2.5 rejecting certain companies functionally similar to that of the Appellant's business operations of provision of software services. Ground No. 3: Erroneous rejection of economic adjustment for differences in levels of risks Hon'ble DRP/ Ld. AO erred in not allowing an adjustment for the difference between the level of risk borne by the comparables and the Appellant, despite the fact that the Appellant has demonstrated these differences by submitting a detailed analysis of Functions performed, Assets employed and Risks assumed (&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raw the above grounds of appeal. 3. Although, assessee has raised multiple Grounds of Appeal but the substantive dispute is with respect to the action of the lower authorities in determining the arm's length price of assessee s international transactions with its associated enterprises at ₹ 40,85,97,054/- as against the stated value of ₹ 37,15,99,152/-, thereby resulting in an addition of ₹ 3,69,97,907/- to the returned income. 4. Briefly put, the facts and background of the case relevant to adjudicate the aforesaid controversy can be understood as follows. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is a wholly owned subsidiary of TIBCO US. The appellant company is registered as a 100% Export Oriented Unit (EOU) under the Software Technology Park of India (STPI) scheme and the profits earned by it enjoy a tax holiday in terms of section 10A of the Act. Broadly speaking, assessee company provides software research and development services to TIBCO US as per the design, production orders, plans, process specification and production schedules provided by TIBCO US. During the year under consideration, assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer has also considered the directions passed by the Dispute Resolution Panel, Pune (in short the DRP ) dated 18.09.2012, which were rendered in response to the assessee raising objections in respect of the Draft assessment order passed by the Assessing Officer in line with the order of the TPO dated 31.10.2011. The aforesaid addition is the subject-matter of dispute before us. 6. Before proceeding to adjudicate the specific issues raised before us, we may briefly touch-upon the relevant facts. In its Transfer Pricing Study, assessee had adopted the TNM method to benchmark its international transaction of software development services undertaken with its associated enterprise, and Operating Profits/Operating Cost was used as the Profit Level Indicator (i.e. PLI) for the said purpose. The assessee compared its PLI of 15.19% with arithmetic mean of the margins of the comparable cases selected at 14.84%; and, as assessee s PLI was higher than the arithmetic mean of the margins of the comparable cases, the stated value of the international transactions was said to be at arm's length price. The TPO has not disputed the adoption of TNM method as the most appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables at 26.45% was compared with the assessee s margin and accordingly, an upward adjustment of ₹ 3,69,97,907/- was made to the stated value of the international transactions to determine the arm's length price. In this background, now we may consider the various Grounds of Appeal raised by the assessee, as reproduced above. 8. At the time of hearing, the Ground No.3 relating to erroneous rejection of economic adjustment differences in levels of risk; Ground No.4 in relation to non-consideration of multiple year data of the comparable cases; Ground of No.5 relating to non-allowing the benefit + / - 5% have not been pressed and Ground No.1 is stated to be general Ground which does not require to any specific adjudication and accordingly, the aforesaid Grounds of Appeal Nos.1, 3, 4 5 are dismissed. 9. Before us, the specific arguments put-forth are a manifestation of Ground No.2 raised according to which assessee contends that the TPO/AO erred in accepting certain comparables and/or rejecting certain comparables in order to benchmark the international transactions of Provision of software development services. At the time of hearing, appellant has furnished volu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not uncommon for even a software development service provider to call their services as product , thus such companies continue to be service providers. The DRP has also affirmed the stand of the TPO, against which assessee is in appeal before us. 11. On this aspect, the learned counsel for the assessee has reiterated the submissions put-forth before the lower authorities by pointing out that the applications software segment of the said concern was into development and sale of software products, which is an activity distinct from providing software development services undertaken by the assessee. Our attention has been drawn to pages 1086 and 1087 and pages 1092 to 1096 of the Paper Book wherein are placed relevant extracts of the Annual Report of the said concern for financial year 2007-08 and the website extract respectively to support the pleas raised before the lower authorities. It has also been pointed out that the activities of said concern were considered by the Pune Bench of the Tribunal in the case of Bindview India P. Ltd. vide ITA No.1386/PN/2010 order dated 30.11.2011, wherein it has been held that the said concern was functionally different from a software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of providing services are also to be solely owned by the associated enterprise. Thus, the assessee has been correctly understood to be a mere software development service provider. 14. With respect to Kals Information System Ltd. (applications software segment), the point raised by the assessee is that this concern is engaged in development of software products and not purely/mainly in software development services. In this connection, the Bangalore Bench of the Tribunal in the case of Trilogy E-Business Software India P. Ltd. (supra) held that the said company was developing software products and was not purely/ mainly a software development service provider. Accordingly, the Bangalore Bench of the Tribunal held that the said concern was not comparable to the assessee before them, which was undertaking activities similar to the case before us, namely, software development services. In-fact, the Pune Bench of the Tribunal in the case of Bindview India P. Ltd. (supra) also considered a somewhat similar situation and, found M/s Kals Information System Ltd. (applications software segment) to be incomparable to a concern which was Providing software development services, as is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. It was also explained that the said concern was rendering E-learning and Digital Consulting Services which constitute 30% of the total revenue and such activity involves provision of training solution to the clients and not rendering of software services. Only 44% of the income of the concern pertained to IT consulting services, which again included application maintenance services. On the basis of the aforesaid analysis, assessee asserted that the said concern is liable to be excluded from the list of comparables. 18. As per discussion in para 15.7 of the order of TPO, it is noticeable that assessee raised other grounds also to support the exclusion of the said concern from the final set of comparables. It was pointed out that the business model of the said concern was not comparable to the assessee as the said concern was engaged in providing / supplying man power resources to its clients which required IT as well as IT enabled services. The aforesaid aspect was asserted on the basis of the statements in the Annual Report of the said concern. The TPO has reproduced the submissions of the assessee before him which inter alia, also include an extract from the An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices is less than 75%, which is a filter applied by the TPO himself. Since the said concern fails the said filter, it is liable to be excluded. 22. On this aspect, the learned CIT-DR submitted that in the Pie chart of different business segments depicted by the said concern at page 25 of its Annual Report, the segment of E-learning and Digital Consulting has also been considered as a software development activity and therefore, the same cannot be excluded as an IT enabled service. On the other aspects, the order of TPO is relied upon to support the case of the Revenue. 23. We have carefully considered the rival submissions. In fact, the TPO has reproduced in para 15.7 the written submissions of the assessee on this aspect. The first plea raised by the assessee was that income earned by the said concern from rendering of application support services and infrastructure management services, which constitute 11% and 15% respectively of the total revenue, are in the nature of IT enabled services and not linked to the software development services. On this basis, it was sought to be pointed out that if the aforesaid income streams are excluded from the segment of software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port and infrastructure management services are removed along with the exclusion of E-learning and Digital consulting segment, then the income of the said concern from software development services falls below 75% of its total income and therefore, it deserves to be excluded even on the basis of the filter applied by the TPO. Thus, on this aspect, assessee succeeds. 26. The next plea of the assessee is for inclusion of CG-VAK Software Systems Limited (Software Services Segment) in the final set of comparables. As per the discussion contained in para 15.11 of order of the TPO, the said concern has been excluded from the list of comparables on the ground that it has incurred a loss, whereas assessee s business model is cost plus mark up. Hence, according to the TPO, the said concern was not comparable to the assessee. 27. On this point, the learned representative for the assessee submitted that the said concern was functionally comparable to the assessee and therefore, it could not have been rejected merely because it had incurred a loss in this year. It was pointed out that the said concern was not a consistently loss making concern and therefore, it could have been excluded f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss has arisen in the un-controlled transaction on account of an abnormal fact-situation, etc. In such situations, ostensibly, the un-controlled transaction would not reflect a normal business situation. In the present case, the comparable in question has incurred a loss; notably, incurrence of loss in business operations is a normal incident of business and there is nothing to suggest in the present case that it has been incurred in any abnormal situation. It is also not the case of the Revenue that the said concern is a consistently loss making concern. Therefore, the said concern cannot be excluded merely because of incurrence of loss in this year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. Thus, on this aspect, assessee succeeds. 30. The next plea of the assessee is for inclusion of M/s. Thinksoft Global Services L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T-DR also referred to para 5.6 of the order of DRP, wherein the plea of the assessee has been rejected on the ground that assessee could not substantiate that similar services were rendered by it as part of its software development services. According to the learned CIT-DR, the DRP has observed that even if such activity was carried on by the assessee, the same was only in a negligible proportion, whereas the primary activity of the assessee was to carry out the process of software development for its associated enterprise. 33. We have carefully considered the rival submissions. We have also perused the orders of TPO as well as the DRP in this context. Although, the order of the TPO is quite sketchy on this point, but the DRP has discussed the matter in a slight detail. One of the observations of the DRP is that the primary activity of the appellant is to carry out part of the process of software development for its parent company and therefore, the finding of the TPO that Thinksoft Global Service Limited, is a functionally different company, appears to be correct . In our considered opinion, the aforesaid finding of the DRP goes to show, in the context of the fact situation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development work. Secondly, the TPO noted that the said concern incurred losses for the preceding as well as the current assessment year. Thirdly, the TPO noted that the major area of revenue generation of the said concern was from SAP consulting and implementation, which is quite different from the functions undertaken by the assessee. 35. On this aspect, assessee has attempted to assail the reasons being advanced by the TPO. With regard to the difference in functions, the point made by the assessee was that the factum of the said concern earning major income from SAP consulting and implementation was not supported with any facts and figures; that, it was a mere passing reference in the Annual Report of the said concern and therefore, it cannot be considered as a valid reason for rejection of the said concern on the basis of it being functionally incomparable. 36. In this context, we have perused page 1194 of the Paper Book, wherein is placed the relevant contents of the Directors report of said concern for the year under consideration. The Directors report, while giving an overview of the activities of the concern, states that the major area of revenue generation continues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is rendering services to the clients as an off-shore service provider. According to the TPO, the margins in the on-site service model and the off-shore business model are not comparable. 38. The stand of the assessee before the lower authorities as well as before us is that it is a contract service provider engaged in providing software development services and regardless of the location, it is being compensated on the basis of cost plus mark-up and therefore, it could not be a ground for rejection of the said concern from the list of comparables. Before us, it is submitted that the mix of on-site and off-site activities are business exigencies and that such a factor cannot be considered as a filter for evaluating exclusion or inclusion of a comparable concern. The learned representative for the assessee referred to the written submissions made before the DRP, wherein it was contended that assessee s agreement with associated enterprise, does not restrict provision of on-site services and that even if assessee would have provided on-site services to its associated enterprise, then also it would have been remunerated on same basis, i.e. cost plus fixed mark-up by the associated e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... site services does not distract from the fact that the tested transactions undertaken by the assessee involve off-shore rendering of services, which is incomparable to the on-site services being rendered by Akshy Software Technologies Limited to its clients abroad. 41. Before parting on this issue, we may also make a reference to the decision of Hyderabad Bench of the Tribunal in the case of DCIT Vs. M/s. Hellosoft India Pvt. Ltd. (ITA No.645/Hyd/2009, for assessment year 2005-06, dated 15.01.2013) relied upon by the assessee before us, and the following discussion has been referred to:- 12. In view of the aforesaid, we uphold the decision of the CIT(A) in excluding companies whose turnover is more than ₹ 100 crores. Similarly the CIT(A) is equally correct in not sustaining the rejection of comparables selected by the assessee by applying employee cost to sale filter as relevant data / information for this filter are not available. Moreover, it is also a fact that part of the employee cost is included by many companies under different other heads. Selection of comparables applying the onsite income filter also stands on the same footing as relevant data / informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the decision in the case of Akshy Software Technologies Limited (supra), no way contradicts our conclusion on this aspect in the earlier paras. Therefore, in our view, the TPO was justified in excluding Akshy Software Technologies Limited from the final set of comparables. Thus, on this aspect, the assessee has to fail. 43. The next point raised by the assessee is against the action of the TPO in rejecting M/s. R.S. Software (India) Limited from the final set of comparables. In para 15.4, the TPO has discussed the aspect regarding the exclusion of M/s. R.S. Software (India) Limited from the final set of comparables. According to the TPO, the said concern was predominantly an on-site service provider and therefore, it was excludible. Secondly, the TPO also observed that the said concern was engaged in research and development work as mentioned in its Annual accounts. In this context, we find that the rival stands are similar to the case of Akshy Software Technologies Limited, which also was rejected by the TPO on the ground that it was rendering services to its clients on an on-site basis, which was different from the assessee. In the earlier paras, we have upheld the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnish arguments against the order of the TPO and therefore it amounted to allowing an opportunity of being heard and there was violation of the principles of natural justice. 46. We have carefully considered the rival submissions on the above aspect. It is quite evident that at the level of TPO, no opportunity was allowed to the assessee before excluding the aforesaid four concerns from the list of comparables by applying a Turnover limit of ₹ 200 crores. In-fact, the showcause notice issued by the TPO dated 05.10.2011 did not contain any issue regarding exclusion of the aforesaid four comparables and/or application of Turnover filter of ₹ 200 crores. In-fact, it is also evident from the order of the TPO that no reason has been assigned to adopt the Turnover filter of ₹ 200 crores, especially when no such filter has been applied by the TPO himself in assessment year 2010-11, as asserted by the assessee before us. In our considered opinion, such an approach impinges on the principles of natural justice and the assessee is rightfully aggrieved. In so far as the opportunity of raising objections before the DRP is concerned, in our view, the same cannot take the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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