TMI Blog2015 (5) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Appellant : Shri K.R. Vasudevan, Advocate. For the Respondent : Shri Ganesh Rao, CIT (D.R) ORDER Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals) - IV, Bangalore dt.28.5.2014 for Assessment Year 2009-10. 2. The facts of the case, briefly, are as under :- 2.1 The assessee-company is engaged in the business of providing software development services to its overseas Associated Enterprises ( AEs ), for which it is compensated by reimbursement of all relevant operating costs, plus mark up of a profit margin. For Assessment Year 2009-10, the assessee filed its return of income on 30.9.2009 declaring total income of ₹ 2,22,73,157. The return was processed under Section 143(1) of the Income Tax Act, 1961 (herein after referred to as 'the Act') and the case was selected for scrutiny. The Assessing Officer, observing that the assessee had entered into international transactions with its Associated Enterprises (AEs) in the year under consideration, made a reference to the Transfer Pricing Officer (TPO) on 24.10.2011, after obtaining the approval of the concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble CIT (Appeals) have erred in rejecting the TP documentation of the appellant contending the same is defective and not reliable. 4. The ld. A.O., TPO and the Hon'ble CIT (Appeals) erred in not considering multiple year/prior year data of comparable companies while determining arm s length price. 5. The ld. A.O., TPO and the Hon'ble CIT (Appeals) erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining arm s length price. 6. The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in rejecting companies selected as comparable by the appellant in the TP documentation and have erred in selecting / introducing companies which are not comparable to the appellant on conducting a fresh comparability analysis and on introduction of additional filters in determination of arm s length price. 7. The Hon'ble CIT (Appeals) has erred in contending that the upper turnover threshold should be ₹ 500 Crores in selecting / rejecting companies as comparable without taking into cognizance the turnover of the appellant and the preceden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee conducted its T.P. Study applying Transactional Net Margin Method ( TNMM ) as the Most Appropriate Method ( MAM ) and conducted its search for comparable companies using the Prowess and Capitaline data bases. On this basis, the assessee chose the following 13 companies as comparable to it. S.No. Name of the comparable company 1. Akshay Software Technologies Ltd. 2 Helios Matherson Information 3 iGate Global Solutions Ltd. 4 Mindtree Ltd. 5 Netripples Software Ltd. 6 Prithvi Information Solutions Ltd. 7 R S Software (India) Ltd. 8 Sagarsoft (India) Ltd. 9 Servealll Enterprise Solutions Ltd. 10 Thirdware Solutions Ltd. 11 SIP Technologies Exports Ltd. 12 VMF Soft Tech Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Year 2009-10. At the time of hearing, the learned Authorised Representative submitted that though the grounds raised in respect of T.P. issues are from S.Nos.1 to 11, the grounds relating to the comparability of some of the comparable companies chosen by the TPO alone need to be adjudicated. Before us, the learned Authorised Representative has filed a chart in which the assessee challenges the action of the TPO in including certain companies in the final list of comparables. COMPANIES INCLUDED IN THE TPO S FINAL LIST OF COMPARBALES WHICH THE ASSESSEE WANTS TO BE EXCLUDED 7. TURNOVER FILTER. 7.1.1 The learned Authorised Representative drew the attention of the Bench that out of the 11 comparables chosen by the TPO (supra), the following companies will have to be excluded as the turnover of these companies in excess of ₹ 200 Crores and therefore cannot be compared with the assessee whose turnover is less than ₹ 200 Crores (viz. ₹ 196.67 Crores). S.No. Name of Company Turnover (Rs. in Crores) 1 Infosys Technologies Ltd. 20264.00 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Sec.92-B provides that international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm s length price under section 92C:- 10B. (1) For the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) . to (d) .. (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee s turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FUNCTIONALLY DIFFERENT. 8. Bodhtree Consulting Ltd. 8.1 This company is listed at S.No.4 of the TPO s list of comparables extracted at paras 4.2 of this order (supra). The comparability of this company with a software development services company, such as the assessee in the case on hand, for Assessment Year 2009-10 was considered by a co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) wherein, following the decision of another co-ordinate bench of this Tribunal in the case of CISCO Systems India Pvt. Ltd. in IT(TP)A No.271/Bang/2014 for Assessment Year 2009-10 dt.14.8.2014, it was held as under at paras 15 16 thereof :- 15. The assessee company, Cisco Systems (India) Pvt. Ltd. is a wholly owned subsidiary of Cisco Group represented by Cisco Systems Management BV and Cisco Mauritius Inc., Mauritius. Cisco India is responsible for marketing of Cisco products in India and for providing services to its AEs namely CSJ, Cisco BV and CTI. The company is primarily engaged in the provision of contract software development services to Cisco Technology Inc., US [ CTI ]. Thus, Cisco India is engaged in Contract software development service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Ltd 7,34,93,51,475 6,81,69,98,160 7.81% 9 Mindtree Ltd. (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was ₹ 45,93,351. 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 TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de this company i.e. Kals Information Systems Ltd. from the list of comparable companies. It is ordered accordingly. 10. Infosys Technologies Ltd. Tata Elxsi Ltd. (Seg.) 10.1 The learned Authorised Representative submitted that though Infosys Technologies Ltd. and Tata Elxsi Ltd. (Seg) have to be excluded by applying the turnover filter, they are also additionally functionally different and not comparable to a company such as the assessee as has been held by different co-ordinate benches of this Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra), Cisco Systems (India) Pvt, Ltd. and the case of Airbus India Operations Pvt. Ltd. (supra) for Assessment Year 2009- 10. The learned Authorised Representative submits that in the factual matrix of the case and in view of the aforesaid decisions of the co-ordinate benches of this Tribunal (supra), these two companies sought to be excluded from the final list of comparables. 10.2.1 We have heard both the learned Authorised Representative and the learned Departmental Representative and have perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in 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 Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, 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 service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned, it is not in dispute before us that in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % ( 75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO. Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07. 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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