TMI Blog2015 (5) TMI 649X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to be excluded from the final set of comparables. E-Zest Solutions Limited. notably, Symphony Services Pune Pvt. Ltd. (2015 (5) TMI 258 - ITAT PUNE) was also a concern which was engaged in provision of software development and related services to its associated enterprises on cost plus markup basis. The Tribunal vide its order dated 30-04-2014 (Supra) considered the inclusion of E-Zest Solutions Ltd. for the purpose of comparability analysis of the transaction of development services for the very same assessment year, i.e. 2008-09, which is also the year before us. Following the aforesaid discussion which squarely covers the controversy in the present case, we direct that E-Zest Solutions be excluded from the final set of comparables. Kals Information Systems Limited is liable to be excluded from the list of comparables on account of functional dissimilarities for the purposes of benchmarking international transactions of provision of software development services. Bodhtree Consulting Ltd., the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the model being pursued by assessee as the revenue is being recognized based on the cost plus ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documented in the transfer pricing study report Erred in making transfer pricing adjustment to Appellant's international transactions in the nature of provision of software development services rejecting the analysis undertaken by the Appellant to determine arm's length price for its international transactions pertaining to provision of software development services to the Associated Enterprise ('AE') 2. Non consideration of contemporaneous data Erred in conducting an analysis based on information subsequently available for determining arm's length price which was not available at the time of complying with the transfer pricing regulations. 3. Non-consideration of multiple year data Erred in not considering multiple year data (ie Financial Year 2007-08 and prior two years) for determining the arm's length price. 4. Rejection of certain comparable companies identified by the Appellant as comparables in the transfer pricing study Erred in rejecting certain companies from the set of comparables identified by the Appellant for determining the arm's length price. 5. Considering additional companies as comparable to the Appellant Erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 (and related interest thereon under section 244A) Erred in recovering an amount of ₹ 3,416,409 (and related interest thereon under section 244A) stating it to be refund allowed earlier, which was never received by the Appellant. 14. Initiation of penalty proceedings under section 271(1)(c) of the Act Without prejudice to the above grounds, even if the adjustment is sustained, the learned AO has erred in initiating penalty proceedings against the Appellant under section 271(1)(c) of the Act for furnishing of inaccurate particulars of its income on account of transfer pricing adjustment, without appreciating the fact that, the transfer pricing adjustment made by the learned TPO is on account of difference of opinion as to selection of comparable companies, incoherent approach of the learned TPO, differences in interpretation of the provisions, etc. 15. Erroneous levy of interest under section 234B of the Act Without prejudice to the above grounds, even if the adjustment is sustained, the learned AO has erred in levying interest under section 234B of the Act on account of unanticipated additions made to the total income of the Appellant on account of transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction of provision of software development services at a figure higher than their stated value by a sum of ₹ 7,30,96,801/-. The Assessing Officer passed a draft assessment order u/s.143(3) r.w. 144C(1) of the Act dated 02-11-2011 proposing to make an addition of ₹ 7,30,96,801/- to the returned income on account of transfer pricing adjustment determined by the TPO. The assessee chose to file objections to the Dispute Resolution Panel (in short the DRP ) against the draft assessment order dated 02.11.2011. The DRP, after considering the contentions raised by the assessee passed certain directions u/s.144C(5) of the Act dated 24-08-2012 as a consequence of which the Assessing Officer referred the matter again to the TPO. In conformity with the directions of the DRP, a revised adjustment to the stated value of the international transactions of provision of software services was carried out which resulted in a total adjustment of ₹ 6,13,78,174/-. The Assessing Officer passed an order u/s.143(3) r.w.s. 144C(13) of the Act on 24-09-2012, wherein the stated value of the impugned international transaction was enhanced by ₹ 6,13,78,174/-, thus resulting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price. The TPO accepted the selection of TNMM as the most appropriate method for determining the arm's length price of the international transaction of providing of software development services to the Barclays Bank PLC, UK. However, the TPO applied certain different filters for selecting the comparable concerns and in this process rejected certain concerns selected by the assessee as comparables and also added some other comparables. Notably, the TPO used the single financial year data of the comparables pertaining to the financial year under consideration. In nutshell, the TPO selected the following set of 13 concerns as comparables with their respective PLIs as under : Sr. No. Name of the comparable OP/OC Working capital adjusted margin 1 Bodhtree Consulting Ltd 19.14 17.00 2 E-infochip Ltd 30. 32 26.61 3 eZest Solutions Ltd 28.58 28.01 4 Goldstone Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,78,174/-. 9. At the time of hearing the Ld. counsel has referred to the relevant material placed in the Paper Book and the Ld. CIT-DR has supported the order of the Assessing Officer by referring to the discussions made in the respective orders of the authorities below. 10. At the time of hearing, the Ld. Representative for the assessee submitted that although assessee has preferred various objections against the assessment, as is emerging from the aforesaid Grounds of Appeal, but he has confined his objections to the inclusion of the following concerns :- Infosys Technologies Ltd., Bodhtree Consulting Ltd., E-Zest Solutions Ltd., FCS Software Solutions Ltd., and Kals Information Systems Ltd. in the final set of comparables. In deference to the aforesaid, the appeal was heard only on the aforesaid points. 11. The first point made by the Ld. Representative is against inclusion of Infoys Technologies Ltd., as a comparable concern. In this context, relevant facts are that the said concern was initially considered by the assessee in its Transfer Pricing Study as a comparable by using multiple financial year data of the said concern. However, before the lower authorities, asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Trademark Office. The company also owns proprietary product-Finacle, which addresses core banking, treasury, wealth management, consumer and corporate e-banking, mobile banking and web-based cash management requirements The appellant does not own any intangibles/proprietary products 12. In the course of hearing, the Ld. Counsel also pointed out that although assessee had considered the said concern as a comparable in its Transfer Pricing Study, however, having regard to the various judicial pronouncements thereafter assessee wishes to submit that the said concern is not functionally comparable with the assessee and should be excluded. In this context, reference has been made to the judgement of the Hon ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. vide ITA No.1204/2011dated 10-07-2013 :- 6. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . This is partly correct as the tribunal has stated that Infosys Technologies Ltd., should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leadi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern is undertaking diversified activities whereas assessee is providing software services, at minimal risk as 100% activities are to its associated enterprise. In-fact, assessee has rightly relied upon the judgement of the Hon ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) wherein in a somewhat similar situation the action of the Tribunal in excluding Infosys Technologies Ltd., from the list of final comparables was affirmed. In the case of Agnity India Technologies Pvt. Ltd. (supra), assessee was a wholly owned subsidiary of a USA company, and was engaged in providing software development services for its associated enterprises as a captive service provider. The Tribunal had found on the basis of the differences in risk profile, nature of services, revenue earned, ownership of branded/proprietary products, expenditure on research and development etc., that the concern M/s. Infosys Technologies Ltd. was not comparable with Agnity India Technologies Pvt. Ltd. The Hon ble High Court of Delhi affirmed the aforesaid finding of the Tribunal. In the present case too, the differences between assessee and Infosys Technologies Ltd. as tabulated above, have n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of Information Technology Enabled Services (ITES) and not comparable to the functions performed by the assessee. It was also pointed out to the TPO that the e-business consultancy and technology consultancy services being provided by the said concern do not pertain to software development services but are ITES services. Assessee also submitted before the TPO that the said concern does not provide any segmental data and being a highly diversified company, it is not possible to segregate data relating to the segment of software development services being undertaken by the said concern. 20. The TPO has considered the submissions of the assessee as per his discussion in para 16.3 of the order. The TPO referred to the Profit Loss Account of the concern and noted that it was a typical software developing company and rejected the plea of the assessee for excluding the same for the list of the comparables. 21 . Before us, the learned counsel for the assessee submitted that the said concern was functionally dissimilar and its services can be considered as Knowledge Process Outsourcing (KPO), which is quite distinct from that of the assessee. It is further pointed out that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in rendering of software development services, as is the assessee before us. Following the ratio of the decision of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) we hold that E-Zest Solutions Limited is liable to be excluded from the list of comparables for the period under consideration. We hold so. Thus, on this aspect assessee succeeds. 17. Notably, Symphony Services Pune Pvt. Ltd. (supra) was also a concern which was engaged in provision of software development and related services to its associated enterprises on cost plus markup basis. The Tribunal vide its order dated 30-04-2014 (Supra) considered the inclusion of E-Zest Solutions Ltd. for the purpose of comparability analysis of the transaction of development services for the very same assessment year, i.e. 2008-09, which is also the year before us. Following the aforesaid discussion which squarely covers the controversy in the present case, we direct that E-Zest Solutions be excluded from the final set of comparables. 18. Thirdly, assessee has contended that the concern M/s. Kals Information Systems Ltd. be excluded from the final set of comparables. On this aspect a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionally different inasmuch it was engaged in the provision of software development and other related services to its associated enterprises as well as to the non-associated enterprises and, was not involved in development and sale of software products. The TPO did not accept the plea of the assessee for the reason that the Annual Report of the said concern did not reflect about sale of software products after development and therefore, according to him, it was not functionally different. 14. Before us, the learned counsel for the assessee has vehemently pointed out that the plea of the assessee has been rejected by the income-tax authorities without any justifiable reasons, as even on the basis of the information available in the public domain it is quite evident that Kals Information System Limited was a concern which was developing and selling software products, which was an activity quite distinct from the activity of software development undertaken by the assessee. In the course of hearing, the learned counsel has furnished the prints out from the Annual Report of Kals Information Systems Ltd. wherein various software products sold by the said concern have been detailed, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s 3DPLM Software Solutions Ltd. (supra) relied upon by the assessee squarely cover the controversy relating to Kals Information Systems Limited. In the aforesaid two precedents, the said concern has been sought to be excluded from the list of comparables on account of functional dissimilarities. The Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) has considered the functions undertaken by the said concern during the previous year relevant to the assessment year under consideration before us, and it has been found that the said concern was engaged in the business of developing and selling software products and was not purely or mainly a software service provider. There is no dispute to the fact position that the appellant before us has undertaken mainly software development services for its associated enterprises and the nonassociated enterprises and that such activity is quite distinct from the developing and selling of software products. The Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) has also found the said concern to be functionally dissimilar from a concern which was engaged in the business of softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of M/s. Mindteck (India) Ltd., vide I.T.(TP).A.No.70/Bang/2014 dated 21-08-2014. The decision of the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. vide ITA No.7633/M/2012 dated 06-11-2013 for assessment year 2008-09 has also been relied upon for excluding the said concern from the final set of comparables. 21. On the other hand the Ld. CIT-DR appearing for the Revenue has defended the inclusion of Bodhtree Consulting Ltd., by referring to the discussion in para 14.1 of the order of TPO. As per the TPO, the material on record does not justify the assertions of the assessee that the said concern was engaged in development and sale of software products. The Ld. CIT-DR has opposed the plea of the assessee by referring to the stand of the TPO as contained in his order. 22. We have carefully considered the rival submissions with respect to Bodhtree Consulting Limited. The plea of the assessee is that the said concern is engaged in the sale of software products, apart from considering software services, and that no segmental data is available in this context; thus, it is functionally not comparable with the assessee s activities. In this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of ₹ 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3......... 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application......... 23. Considering the above, we are of the opinion that Bodhtree Consulting Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise of this entity, it is important to first note that the Indian Software industry uses two different models for revenue recognition. The first is the Time and Material (T M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below : 3. Revenue Recognition : Revenue from software development is recognized based on software developed and billed to clients. From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Product mode. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year for which the revenue may have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears to us that the revenue recognitions method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly. 24. Though the aforesaid discussion by the Bangalore Bench of the Tribunal is in relation to the assessment year 2009-10, but the inferences drawn with regard to the variations in the profit margins of the said concern for different years is relevant in the present context also. Furthermore, the Tribunal also analysed and found that the said concern was following fixed price project method whereby revenue from software development services was being recognized based on the software developed and billed to the clients. In such a business model, the possibility of the expenditure not being booked on the basis of the matching principle cannot be ruled out, which would impart fluctuation in the margins over the years. In contrast, in the present case, the revenue is being recognized based on the cost plus markup basis. Clearly, the revenue re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss whether the profit margin of 57.02% pertaining to the said concern can be construed as abnormally high. 28. We have carefully considered the rival submissions. The argument of the assessee in order to exclude FCS Software Solutions Ltd. from the final set of comparables is based on twin grounds. Firstly, it is contended that the said concern has declared an abnormally high profit margin of 57.02% for the financial year under consideration; and, secondly, that the margins of the said concern widely fluctuate in over the years. In the context of the exclusion of abnormal profit making concerns, the following discussion made by the Special Bench of the Tribunal in the case of Maersk Global Centrea (India) Pvt. Ltd. (supra) is worthy of notice : In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mediately preceding year. On the contrary the expenditure incurred on development of software for the year under consideration stood at ₹ 30.44 crores as against ₹ 104.35 crores in the immediately preceding year. It is pointed out that the ratio of software development expenditure to total income has fallen drastically from 72.75% to 35.10%, which shows that the current year has witnessed abnormal events. All the aforesaid factual aspects of the matter have not been disputed by the Revenue before us. From the aforesaid analysis, it is clear that the operating margins of the said concern do not reflect a consistent trend over the years, and in any case, the current year s operations in comparison to the earlier years are quite abnormal. Considering the entirety of circumstances, in our view, the financial results declared by the said concern do not reflect a normal business trend and therefore in our view the said concern is liable to be excluded from the final set of comparables. We hold so. 30. At the time of hearing, it was stated by the Ld. Representative for the appellant that if assessee was to succeed on its plea of the exclusion of (i) Infosys Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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