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2015 (3) TMI 883 - ITAT HYDERABAD

2015 (3) TMI 883 - ITAT HYDERABAD - TMI - Transfer pricing adjustment - selection of comparables - Held that:- As relying on CISCO Systems (India) Pvt. Ltd. Vs. DCIT, Bangalore [2014 (11) TMI 849 - ITAT BANGALORE] Infosys Ltd., Kals Information Systems Ltd. and Bodhtree Consulting Ltd. companies not to be comparable with a captive software development service provider.

As far as Tata Elxsi Ltd. (segment) is concerned,on going through the segmental details of services provided as conta .....

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resh after affording due opportunity of being heard to assessee.

Non-consideration of provision for bad and doubtful debts as part of operating cost while computing margins of comparables - Held that:- In principle we agree with the contention of ld. AR that provision for bad and doubtful debts and bad debts should form part of the operating expenditure. As relying on Kenexa Technologies (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle -2(1), Hyderabad [2014 (11) TMI 587 - .....

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enses from export turnover as well as total turnover while computing deduction u/s 10B of the Act. - ITA No. 58/Hyd/2014 - Dated:- 20-3-2015 - Shri P.M. Jagtap And Shri Saktijit Dey JJ. For the Appellant : Shri Utpal Sen/Abhiroop Bhargav For the Respondent : Smt. G. Aparna Rao ORDER PER SAKTIJIT DEY, J.M.: This appeal of the assessee is directed against the assessment order passed u/s 143(3) read with section 144C in consequence upon the directions of the Dispute Resolution Panel (DRP). The appe .....

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12%. For the assessment year under consideration, assessee originally filed its return of income on 26/09/2009 declaring total income of ₹ 1,00,45,150. Later, assessee filed revised returns of income on 10/10/2009 & 19/12/2009 declaring total income ₹ 1,01,01,040 and ₹ 33,81,240 respectively after claiming deduction u/s 10B of the IT Act. In course of assessment proceeding, AO noticing that assessee has entered into international transactions with its AEs during the releva .....

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s length margin of price charged to its AE assessee has undertaken economic analysis through an external consultant. In the TP study assessee was taken as the tested party. Transaction Net Margin Method (TNMM) was adopted as most appropriate method with operating profit to total cost as the profit level indicator (PLI). A search was undertaken in prowess and capitaline databases in software development segment, which yielded 16 comparable companies with average arithmetic mean of 12.05%. As mar .....

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r data, multiple year data have been considered while selecting comparables. 3. After rejecting the TP report, TPO undertook a search himself by applying some of the filters applied by assessee as well as some additional filters which yielded 17 comparables with arithmetic mean PLI of 22.03%. After allowance of 0.32% towards working capital adjustment, the adjusted arithmetic mean PLI was worked out to 21.71% and the ALP of international transaction was determined at ₹ 47,29,94,465 as agai .....

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10. Persistent Sys 18.49 11. RS Software (India) Ltd. 9.99 12. R Systems International Ltd. (Seg.) 17.53 13. Sasken Communication Technologies Ltd. 17.30 14. Tata Elxsi Ltd. (seg.) 22.82 15. Thinksoft Global 20.80 16. Thirdware Solutions 22.28 17. Zylog Systems Ltd. 15.00 374.59 22.03 4. In pursuance to the order of TPO, AO passed draft assessment order proposing addition of ₹ 2,28,17,229 being TP adjustment. AO also recomputed deduction u/s 10B by reducing lease line/ communication charg .....

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on corporate tax issues. As far as transfer pricing issues are concerned, ld. AR confined his argument to selection of certain companies as comparables as raised in ground Nos. 4 and 6 and issue of non-consideration of bad debt as part of the operating cost as raised in ground No. 9. In view of the above, rest of the grounds raised on TP issues are dismissed as not pressed. At the outset, we will take up the issues relating to selection of comparables as raised in ground No. 4 & 6. Out of t .....

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s of the assessee. ii) Significant brand presence in the market and incurs substantial advertisement and marketing and distribution expenses. iii) Established player and market leader with assets valuing INR 3779 cr and has employed 27639 employees. iv) Engaged in the development of products-develops Finacle 2. Bodhtree Consulting Ltd. Functionally different: Engaged in e sale of products. 3. KALS Inf. Systems Ltd. (seg). Functionally different: This company is a full-fledged software product de .....

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s Pvt. Ltd. Vs. DCIT in ITA No. 243/Hyd/14. 2. CISCO Systems (India) Pvt. Ltd. Vs. DCIT, Bangalore in IT(TP) No. 130/Bang/14 dated 14/08/14. 3. CIT Vs. Agnity India Technologies Ltd., 219 Taxman 26 (Del.) 8. The ld. DR, however, supported the order of the DRP/TPO. 9. We have considered the submissions of the parties and perused the orders of the departmental authorities as well as other materials on record. There is no dispute to the fact that TPO has classified assessee as a software developmen .....

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. The coordinate bench in case of M/s CISCO Systems (India) Pvt. Ltd. Vs. DCIT (supra) after examining in detail, excluded Infosys Ltd., Bodhtree Consulting Ltd., and Kals Information Systems. The relevant observations of the ITAT Bangalore Bench in respect to each of the aforesaid companies are reproduced hereunder for the sake of clarity: 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this compan .....

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al followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of .....

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tself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this c .....

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f turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 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 ubmit t .....

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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) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies .....

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urred 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 su .....

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stablish 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 Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen th .....

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arable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). Th .....

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The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TP .....

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establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful c .....

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e, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable. 10. ITAT, Hyderabad Bench following the aforesaid decision of the ITAT, Bangalore Bench also excluded these three companies in case o .....

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ed by Tata Elxsi Ltd. as contained in annual report, a copy of which is at page 707 of the assessee s paper book vis-à-vis, the functions of the assessee as enumerated in TP study, a copy of which forms part of assessee s paper book, we are of the view that unless proper analysis is made with regard to the functions of both the companies it cannot be said that services performed/provided by Tata Elxsi Ltd. is high end services whereas services provided by assessee are low end services. As .....

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dated 14/08/14. However, on perusal of the said decision, it is noticed that Tata Elxsi Ltd. was excluded as a comparable basically for the reason that in the immediately preceding AY in assessee s own case, Tata Elxsi Ltd. was considered as un comparable. However, that is not the case with assessee before us. 15. In Ground No. 9, assessee has raised the issue of nonconsideration of provision for bad and doubtful debts as part of operating cost while computing margins of comparables. 16. The ld. .....

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to and including FY 2008-09 and if these expenses are incurred at almost consistent level in terms of its ratio with the turnover. Otherwise, according to TPO, it has to be treated as extraordinary expenses which shall be excluded from the calculation of the total operating expenses. He submitted, as provisions for doubtful debts are closely interlinked with the business operations for each relevant year and constitute operating expense, the same must not be treated as extraordinary and should .....

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rovision for bad and doubtful debts and bad debts should form part of the operating expenditure. In this connection, we rely on the observations of the coordinate bench in case of M/s Kenexa Technology Pvt. Ltd. Vs. DCIT (supra), which are as under: 41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: "106.2 Thus, creation of unpaid liability and .....

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ng business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Tra .....

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