TMI Blog2015 (4) TMI 803X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly companies selected/ rejected for comparables. Risk adjustment - We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and perused and carefully considered the material on record. While the submission of the assessee may be based on principles, we find that it has merely put forth its claim but has not filed any basis of the quantification of the risk adjustment either before the authorities below or before us. In this view of the matter, the assessee's claim for risk adjustment is rejected. Interest u/s 234B & 234D - The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala 252 ITR 1. In this view of the matter, we uphold the action of the Assessing Officer in charging the assessee the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under Sections 234B and 234D of the Act, if any, while giving effect to this order. Penalty proceedings under Section 271(1)(c) of the Act - This ground is not maintainable in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f NXP BV, a Netherlands company. For Assessment Year 2008-09, the assessee filed its return of income declaring income of ₹ 32,37,84,304. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny. 2.2 In the period under consideration, the assessee had reported the following international transactions :- Provision of Software Development Services Rs.253,89,24,193. Provision of Order Gathering Services. Rs.13,80,51,438 Purchase of assets. Rs.37,73,264 Receipt of Services. Rs.17,75,56,409 Reimbursement of expenses (received) Rs.81,01,426 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ( TPO ) for determining the Arm s Length Price ( ALP ) of these international transactions, after obtaining necessary approval from the CIT-III, Bangalore. The TPO vide order under Section 92CA of the Act dt.31.10.2011 prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nents and computer server racks (or 19 inch heavy racks) as plant and machinery instead of computers and consequently applying lower rate of depreciation of 15% on the adjusted opening balance, resulting in a disallowance of ₹ 11,337,971. 3.3 Separately, the learned AO has treated the additions to networking equipments, appearing in computer block as plant and machinery and consequently applying lower rate of depreciation of 15% resulting in a disallowance of ₹ 533,667. Transfer pricing matters 4. The learned AO / Transfer Pricing Officer ( TPO ) have erred, in law and in facts, in making an addition of ₹ 20,53,68,934 to the total income of the Appellant on account of adjustment in the arm s length price of the software development services transaction entered by the Appellant with its associated enterprise. 5. The learned AO / TPO have erred, in law and in facts, in disregarding the economic analysis undertaken by the Appellant without proper justification and conducting a fresh economic analysis for the determination of the arm s length price in connection with the impugned international transaction and holding that the Appellant s internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts, in computing the arm s length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act. Common grounds of appeal relating to corporate tax and transfer pricing matters. 13. The learned AO erred in levying interest of ₹ 3,76,27,691 and ₹ 428,083 u/s 234B and 234D of the Act respectively. 14. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act. 3.2 The assessee filed additional grounds of appeal vide letter dt.19.12.2013 on the issue of depreciation on goodwill arising out of acquisition of business under slump sale agreement. 3.3 In the course of appellate proceedings, the assessee filed submissions in paper books in support of the grounds of appeal raised and also a compendium of case laws, on which the assessee placed reliance. 4. The grounds raised at S.Nos.1 2, are general in nature and not being specifically urged before us, are dismissed as infructuous. CORPORATE TAX 5.1 The Grounds raised at S.Nos.3.1 to 3.3, relate to the claim of depreciation on net working equipment. In the course of appellate proceedings, the Assessing Officer noticed from Form 3C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity of being heard to the Assessee. Before DRP the Assessee has explained the nature of the components and racks on which depreciation was claimed at 60% and as to how they were in the nature of Computers . These submissions have not been considered by the DRP. In the circumstances, we are of the view that this issue also requires to be examined afresh by the AO after due opportunity to the Assessee of being heard to the Assessee. We hold and direct accordingly. The relevant ground of appeal is treated as allowed for statistical purpose. 5.3.2 Following the above decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra), we remand the issue back to the file of the Assessing Officer for fresh consideration, after affording the assessee adequate opportunity of being heard and to file details / submissions required. It is ordered accordingly. Consequently, the Grounds at S.Nos.3.1 to 3.3 are treated as allowed for statistical purposes only. TRANSFER PRICING ISSUES (Ground Nos.4 to12) 6.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected by the TPO, no adjudication on the above grounds 8 to 12 are necessary. 7.1 As per the T.P. Study carried out by the assessee, for the software development service segment, adopting TNMM as the Most Appropriate Method ( MAM ) and taking itself as the tested party, the assessee selected a set of 23 companies as comparables with an average profit margin of 14.84% on cost. The assessee's list of comparables, as per its T.P. Study, are as under :- Sl.No. Name of the Company Weighted average of operating profits on operating costs (%) 1. Akshay Software Technologies Limited 6.60 2. Aztecsoft Limited 18.16 3. Goldstone Technologies Ltd. 11.50 4. Helios Matheson Information Technology Ltd. 38.40 5. Indium Software (India) Ltd. 11.09 6. Infosys Technologies Ltd. 39.96 7. KPIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Bodhtree Consulting Ltd 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd. 29.81 5 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alore in the cases of Curram Software International Pvt. Ltd. (supra) and Yodlee Infotech Pvt. Ltd. (supra) : (i) Infosys Technologies Ltd. (ii) Tata Elxsi Ltd. (seg.) (iii) Wipro Ltd. (seg.) 8.3 It was also submitted by the learned Authorised Representative that the following 7 companies are liable to be rejected as comparables as they are functionally different from the assessee, based on the decision of a co-ordinate bench of the ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra);- i) Bodhtree Consulting Ltd; ii) e-Zest Solutions Ltd. iii) Persistent Systems Ltd. iv) Quintegra Solutions Ltd. v) Thirdware Solutions Ltd. vi) Softsol India Ltd. vii) Lucid Software Ltd. We now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart. 9. Avani Cincom Technologies Ltd. 9.1 This company was selected by the TPO as a comparable. The assessee objects to its inclusion as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Triology case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software India Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables for the reason that it is functionally different from the assessee and that it fails the employee cost filter. The TPO, however, did not accept the assessee's objections and included this company in the final list of comparables. 10.2 The learned Authorised Representative contended before us that this company is not functionally comparable, as it is into bio-informatics, software product / services and the segmental break up is not provided. In support of its claim, the learned Authorised Representative placed reliance on the decision of a co-ordinate bench of this Tribunal in the case of Triology E-Busienss Software India Pvt. Ltd. (supra) wherein at para 43 thereof it was observed of this company that - 43 .. As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with that of the assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference is fractional compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Pvt. 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. 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly. 11.4.2 Following the above decision of the co-ordinate bench of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 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 that the breakup of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 12.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider. 13. Wipro Limited. 13.1 This company was selected as a comparable by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (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 such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision 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. 13.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the TPO to exclude this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. 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 functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- . Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord, including the judicial decisions cited by the ld. A.R. We find that this company has been excluded from the set of comparables for software development service companies in both the aforesaid decisions cited by the assessee. In Mindtech (India) Ltd., the relevant portion of the order at para 16 thereof it has been held as under :- 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself 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. 15.3.2 It is also seen that the decision relied on by the co-ordinate bench of this Tribunal in the above mentioned case; CISCO Systems (India) Pvt. Ltd. (supra), has been in relation to Assessment Year 2008-09 and therefore we find merit in the contention of the assessee that the finding rendered in the above cited decision applies to the facts and circumstances of the case on hand, which is for Assessment Year 2008-09. In this view of the matter, following the above decision of the co-ordinate bench of the Tribunal, we direct the TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly. 16. E-Zest Solutions Ltd. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the 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 Information Systems (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. 16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the A.O. / TPO to exclude this company from the list of comparables as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development 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. 17.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different from the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly. 18. Luc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 18.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different; (being engaged in software product development) from the assessee in the case on hand who is rendering only software development services. It is ordered accordingly. 19. Persistent Systems Ltd. 19.1 This company was selected by the TPO as a comparable in spite of the assessee's objections that this company being engaged in software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 comparables for the year under consideration. It is ordered accordingly. 19.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different (viz. being engaged in product development and product design services) from the assessee in the case on hand which is rendering software development services. It is ordered accordingly. 20. Quintegra Solutions Ltd. 20.1 This case was selected as a comparable by the TPO in spite of the objections of the assessee that this company is functionally different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 20.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different being engaged in product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that this company is to be omitted from the list of comparables to the assessee in the case on hand. 21.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, and 24/7 Customer.com Pvt. Ltd. in ITA No.227/Bang/2011, we direct the A.O / TPO to exclude this company from the list of comparables as it has RPT of 18.30% which is in excess of 15%. It is ordered accordingly. 22. Assessee's plea for companies to be included in the list of comparables. 22.1 In the course of appellate proceedings, the learned Authorised Representative submitted that the following companies selected by the assessee for inclusion in the list of comparables were wrongly rejected by the TPO :- i) Indium Software (India) Ltd. ii) VMF Softech Ltd. iii) KPIT Cummins Infosystems Ltd. 22.2 It is the contention of the assessee that the TPO rejected the first two companies on the ground that they fail the export revenue filter of 25% adopted by the TPO and the third company on the ground that its RPT was in excess of 25%. The learned Authorised Representative contends that the filters have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. It was submitted that 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. 23.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and perused and carefully considered the material on record. While the submission of the assessee may be based on principles, we find that it has merely put forth its claim but has not filed any basis of the quantification of the risk adjustment either before the authorities below or before us. In this view of the matter, the assessee's claim for risk adjustment is rejected. Consequently, Ground No.11 raised by the assessee is dismissed. 24. In Ground No.13, the assessee has denied itself liable in respect of the interest it has been charged under Sections 234B and 234D of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala 252 ITR 1. In this view of the matter, we uphold the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial on record of the AO that the facts with regard to the business transfer by PEIL to the Assessee and its valuation were filed before the AO in the course of assessment proceedings. The fact that there was a sum of ₹ 140 crores shown as goodwill consequent to the business transfer agreement has also been acknowledged by the AO in the order of assessment. As to how the goodwill was valued and whether it was used for the purpose of business are all extraneous considerations at this stage of admission of additional ground of appeal. The argument of the learned DR that if depreciation is allowed on Goodwill than it would result in refunding taxes voluntarily paid by the Assessee. In our view such objections are not germane to deciding the question whether additional ground sought to be raised should be admitted for adjudication. In any event tax has to be levied and collected in accordance with law. Tax which is not due in law which was paid under a mistake cannot be said to be tax levied and collected in accordance with law. As we have already seen the law on the question of allowing depreciation on Goodwill was in a fluid state. With the decision of the Hon ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
