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2015 (5) TMI 390 - ITAT BANGALORE

2015 (5) TMI 390 - ITAT BANGALORE - [2015] 40 ITR (Trib) 574 (ITAT [Bang]) - Transfer pricing adjustment - selection of comparable - Held that:- Tata Elxsi Ltd. (seg), Sasken Communication Technologies Ltd.,Persistent Systems Ltd., Zylog Systems Ltd.,Mindtree Ltd. (seg), Larsen & Toubro Infotech & Infosys Ltd. be excluded from the list of comparable as having turnover of more than ₹ 200 Crores from the list of comparables since the assessee's turnover was less than ₹ 200 Crores.

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evenue break-up is not available - I.T. (T.P.) A. No.1009/Bang/2014 - Dated:- 24-4-2015 - Shri N.V. Vasudevan And hri Jason P. Boaz JJ. 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- .....

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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 CIT, for working out the Arm s Length Price ( ALP ) of these transactions. The TPO passed an order under Section 92CA of the Act dt.8.1.2013 in respect of international transactions entered .....

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n 92CA of the Act. Since the assessee indicated that it seeks to file an appeal before the CIT (Appeals), the Assessing Officer passed the final order of assessment under Section 143(3) rws 144C(3) rws 144C(4) of the Act vide order dt.22.4.2013, wherein the income of the assessee was determined at ₹ 22,02,79,262. In this order, the Assessing Officer made the following additions / disallowances to the returned income of ₹ 2,22,73,157 :- (i) T.P. Adjustment : ₹ 18,55,44,708. (ii) .....

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ounds :- 1. Transfer Pricing. 1. The ld. Assessing Officer, the ld. JCIT (Transfer Pricing Officer - II), Bangalore and the Hon'ble CIT (Appeals) have erred in law and facts of the case in proposing a transfer pricing adjustment under Section 92CA of the Income Tax Act, 1961 amounting to ₹ 12,03,07,763 in relation to the provision of software development services to the Associated Enterprises. 2. The ld. A.O., TPO and the Hon'ble CIT (Appeals) erred in disregarding the economic ana .....

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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 c .....

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cting Thinksoft Global Services Ltd. and FCS Software Solutions Ltd. on the ground that the working capital adjustment for these companies are substantial. 9. The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in restricting the working capital adjustment to the average cost of capital of the comparable companies selected instead of allowing the correct working capital adjustment in determination of arm s length price. In connection with the above, the ld. A.O. has erroneously comput .....

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al companies selected as comparable while determining the arm s length price. 12. The Hon'ble CIT (Appeals) has erred in not adjudicating on the ground of exclusion of travelling expenses form the export turnover while computing the eligible deduction under Section 10A of the Act. TRANSFER PRICING ISSUES (Grounds 1 to 11) 4.1 Before proceeding to deal with the above grounds of appeal on T.P. issues, the approach of the TPO vis-a-vis that of the assessee in its T.P. Study submitted before the .....

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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 .....

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ejected it and after conducting his own search for comparables, arrived at a final set of 11 comparable companies and their operating margins, the details of which are as under :- Sl.No. Name of the comparable Margin % 1 Kals Information Systems Ltd. 13.89 2 Akshay Software Technologies Ltd. 8.11 3 Bodhtree ConsultingLtd. 62.27 4 R S Software (India) Ltd. 9.97 5 Tata Elxsi Ltd. (seg) 20.28 6 Sasken Communication Technologies Ltd. 27.91 7 Persistent Systems Ltd. 41.40 8 Zylog Systems Ltd. 7.81 9 .....

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odified by the Assessing Officer under Section 154 rws 92CA of the Act vide order dt.18.6.2013 whereby the T.P. Adjustment was reduced from ₹ 18,55,44,708 to ₹ 12,71,38,857. 6. The assessee has preferred this appeal against the order of the CIT (Appeals) - IV dt.28.5.2014 for Assessment 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 compa .....

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bles 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 Larsen & Toubro Infotech Ltd. 1950.83 3 Mindtree Ltd. 793.22 4 Persistent Systems Ltd. 519.69 5 Sasken Communication Technologies Ltd. .....

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in the case of M/s. Airbus India Operations Pvt. Ltd. V DCIT in IT(TP)A No.35/Bang/2014 dt.10.10.2014 for Assessment Year 2009-10. It is submitted that in the above decisions it was held that companies having turnover in excess of ₹ 200 Crores cannot be comparable with companies whose turnover is less than ₹ 200 Crores. The learned Authorised Representative submitted that in view of the above factual situation and judicial pronouncements, the seven companies listed above ought to be .....

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der has held that the aforesaid seven companies (listed at S.Nos.5 to 11 in the TPO s final list of comparables) should be excluded from the list of comparables as the turnover of these companies is more than ₹ 200 Crores while that of the assessee is that case was only ₹ 31.83 Crores. 7.3.2 The relevant portion of the order in the case of Airbus India Operations Pvt. Ltd. (supra) at paras 17 & 18 thereof is extracted hereunder :- 17. We have considered the rival submissions. The .....

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es, 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 .....

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nsaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm s length price .....

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deemed to be the arm s length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordan .....

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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 :- .....

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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 adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit .....

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fic characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; ( .....

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being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the .....

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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 choosin .....

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, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1)Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores (8) Infosys Technologies Ltd. 13149 crores 18. Respectfully following the aforesaid decisi .....

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e the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 7.3.3 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) for Assessment Year 2009-10, we hold that the aforesaid seven companies (listed at S.Nos.5 to 11 of the TPO s final list of comparables in the order under Section 92CA of the Act) and also listed out at para 7.1.1 of this order (supra), should be excluded from the list of c .....

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re 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 .....

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services, Administrative and other support services and Management services to its AEs. The segmental financials for the F.Y. 2008-09 were as under:- Description Software Development Marketing & Sales Services Product Replacement Services Admin & Other Support Services Management Services Other Revenue 9654304981 5270847929 2463723146 1491900613 1250254745 54441247 Total Cost 8904581852 4213518148 2413930963 1374404584 1136594862 51245935 Operating Profit 749723129 1057329781 49792183 1 .....

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the most appropriate method. The Profit Level Indicator (PLI) chosen was Operating profit to operating cost. The assessee proposed 17 comparable companies out of which the TPO accepted 5 comparable companies and rejected the 12 comparables. On his own, the TPO selected 6 companies and arrived at a final set of 11 comparables and their operating margins as follows:- Sl. No. Name of the Comparable Sales (in Rs.) Cost (in Rs.) Margin 1 Kals Information Systems Ltd 2,14,04,686 1,87.93,813 l3.89% 2 A .....

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5.52% 10 Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11 Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% Average Mean 24.32% 8.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra), and after taking note that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable to a software development service provider as is the assessee in the case on hand, for id .....

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nch 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. (supra) for Assessment Year 2009-10, at paras 21 and 22 thereof it was held as under :- 21. KALS INFORMATION SYSTEMS LTD.: This company is listed at Sl.No.3 in the final list of comparables chosen by the TPO which is set out in para-4 of this order. The comparability of this company with a softw .....

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ase of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- (d) KALS Information Systems Ltd. 46. As far 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 debite .....

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s: 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 and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on .....

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d should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that .....

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o above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid company from the list of comparable companies for the purpose of computation of ALP. 9.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) and after taki .....

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hnologies 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 .....

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in the case of Airbus India Operations Pvt. Ltd. (supra) excluded these two companies as comparable to an assessee who is purely a software development service provider, holding as under at paras 19 & 20 thereof :- 19. The next submission of the learned Counsel for the Assessee was that though, Infosys Technologies Ltd., & Tata Elxsi Ltd. (seg.) have to be excluded by applying the Turnover filter, they are also additionally functionally not comparable as held by this Tribunal in the case .....

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pute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- 11.0 Infosys Technologies Ltd. 11.1 Th .....

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he assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software 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 w .....

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ence 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 I .....

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d., 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 hear .....

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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 break up 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. The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assess .....

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his 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 e .....

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ponse to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment re .....

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ing such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to .....

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ices segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of ₹ 230 crores in the total segment revenue of ₹ 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the .....

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arable, 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 a .....

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/S.Tata Elxsi Ltd. should not be regarded as a comparable. 20. Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid two companies from the list of comparable companies for the purpose of computation of ALP. 10.2.2 Fo .....

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