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2015 (7) TMI 566 - ITAT BANGALORE

2015 (7) TMI 566 - ITAT BANGALORE - TMI - Transfer pricing adjustment - selection of comparable - Held that:- We direct the AO/TPO to exclude these companies [Flextronics Software Systems Ltd., iGate Global Solutions Ltd.,Mindtree Ltd.,Persistent Systems Ltd., Sasken Communication Technologies Ltd.,Tata Elxsi Ltd.,Wipro Ltd. and Infosys Technologies Ltd. from the list of comparables. It is submitted by the learned counsel for the assessee that if all the above companies are excluded from the lis .....

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clusion of the companies raised in the additional ground of appeal as comparable companies for the purpose of determination of the ALP of the international transaction, as it would only result in academic exercise. In view of the same, the additional grounds of appeal are not admitted. - Decided partly in favour of assessee. - Stay Petn.No.30/Bang/2014 (In IT(TP)A No.30/Bang/2014) - Dated:- 30-6-2015 - Smt. P. Madhavi Devi and Shri Jason P.boaz, JJ. For the Petitioner : Shri K.R.Vasudevan, Advoc .....

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he relevant assessment year declaring nil income after claiming deduction u/s 10A of the Act. During the assessment proceedings u/s 143(3) of the Act, the Assessing Officer (AO) observed that the assessee had entered into an international transaction with its Associated Enterprises (AE) for software development services. Therefore, the said transaction was referred to the Transfer Pricing Officer (TPO) u/s 92CA of the Act for determination of the arms length price (ALP) of the international tran .....

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DRP confirmed the adjustment proposed by the TPO as incorporated by the AO in the draft assessment order. Consequent thereto, the AO passed the final assessment order against which the assessee is in appeal before us. 3. The learned counsel for the assessee, at the time of hearing, submitted that though the assessee has raised as many as 7 grounds of appeal, the assessee does not wish to press grounds No.1 to 3, 4.1 to 4.4, 4.11 and 5 to 7. These grounds are accordingly rejected as not pressed. .....

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r ground on the comparable companies. However, he prayed that the additional grounds of appeal be admitted and considered on merits. The learned Departmental Representative, however, opposed the admission of the additional grounds of appeal. 4. Brief facts of the case relevant to the adjudication of the transfer pricing adjustment are as under: The assessee is primarily engaged in rendering software development services to its AE. During the financial year 2008-09, the assessee has entered into .....

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ng report and therefore submitted that no adjustment was called for. The TPO, however, rejected the comparable companies selected by the assessee and proposed 11 companies as comparable to the assessee. Based on the same, the TPO determined arm s length margin (after working capital adjustment) to be 22.78% and proposed the transfer pricing adjustment of ₹ 5,32,53,612/-. 5. Before us, the learned counsel for the assessee has filed a chart containing the details of all the 11 companies adop .....

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refuse to interfere with the orders of the authorities below on the comparability of KALS Information Systems Ltd. The other comparable companies which are being challenged by the assessee are as under: i) Bodhtree Consulting Ltd. ii) Tata Elxsi Ltd. iii) Sasken Communication Technologies Ltd. iv) Persistent Systems Ltd. v) Zylog System Ltd. vi) Mindtree Ltd. vii) Larsen and Turbo Infotech viii) Infosys Technologies Ltd. Amongst these companies, the assessee is seeking exclusion of Tata Elxsi Lt .....

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a Operations Pvt. Ltd., in IT(TP)A No.35/Bang/2014, he prayed that these companies be excluded from the list of comparables. Further, as regards Tata Elxsi Ltd, Infosys Technologies Ltd and Bodhtree Consulting Ltd., he submitted that these companies are functionally dissimilar to the assessee and therefore on this ground also, these companies should be excluded from the list of comparables. As regards Infosys Technologies Ltd., the learned counsel for the assessee submitted that it possesses sig .....

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ed all the above objections of the assessee in a comprehensive manner and thereafter only has upheld the adjustment proposed by the TPO and therefore no interference is called for. He has taken us extensively through the order of the DRP to convince us that the order of the TPO needs to be upheld. 7. Having regard to the rival contentions and the material on record, we find that of the assessee is 100% capital service provider providing software development and testing services in pursuance of t .....

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of transaction Amount (Rs.) 1 Software Development Services (Recd) 68,00,66,852 The assessee accepted TNMM as the Most Appropriate Method (MAP) for determination of the ALP. 8. As regards the comparables adopted by TPO, we find that the same is annexed as annexure B to the TP order which is reproduced hereunder for ready reference: 1 Akshay Software Technologies Ltd. Sales 122321483 cost 113149350 op profit 91,72,133 op/cost% 8.11% 2 Bodhtree Consulting Ltd. sales 160575212 cost 102646525 less .....

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,12,76,626 op profit 3,86,71,04,748 op/cost 24.72% 6 Mindtree Ltd.(seg) sales 7932279326 cost 5740673058 proportionate unallocated cost 1776594553 op cost 7517267611 op profit 415011715 op/cost 5.52% 7 Persistent Systems Ltd. sales 5196910000 Total cost 4363630000 Add: Depreciation 29472000 Less: prov for bad debts 8747000 donation 1543000 forex net 71746000 exchange loss on derivatives 16272000 98308000 Cost 3675270000 op profit 1521640000 op/oc 41.40% 8 R S Software (India) Ltd. Sales 14957126 .....

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d. (segmental) sales 3784303000 segment revenue (software development services) 3784303000 segment result 3476378000 segment cost 307925000 unallocated cost 67065000 total cost 3146315000 op cost 3146315000 op profit 637988000 op/oc 20.28% 11 Zylog Systems Ltd. sales 7349351475 cost 6623293113 depreciation 193705047 total cost 6816998160 op cost 6816998160 op profit 532353215 op/oc 7.81 9. The companies which, according to the assessee, are to be excluded are as under: i) Bodhtree Consulting Ltd .....

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are similar to each other and whether the comparable companies adopted in the said case are also the same and the assessment year is also the same. We find that the assessment year in the case of Airbus India Operations Pvt. Ltd., (cited supra) is also 2009-10 and further that Airbus India Operations Pvt. Ltd., (cited supra) is also a wholly owned subsidiary of Airbus Invest SAS and that it is engaged in the business of rendering software engineering services and innovative technology services t .....

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adopted by the TPO in the case before us. Therefore, it is clear that services rendered by both the companies under the international transaction are similar and that the TPO has also adopted the very same companies as comparables in both the cases. Therefore, similarity of facts and circumstances is established. In the case before us, the assessee is seeking exclusion of Bodhtree Consulting Ltd., and Tata Elxsi Ltd., on the ground of functional dissimilarity and Sasken Communication Technologi .....

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Tribunal in the case of Airbus India Operations Pvt. Ltd., (cited supra) has considered the comparability of Bothdreee as under: 15. BODHTREE CONSULTING 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 software development services company such as the Assessee for AY 09-10 was considered by this Tribunal in the case of M/s. Cisco Systems (India) Pvt.Ltd., IT (TP)A No.271/ .....

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egard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software .....

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as this 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 co .....

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Tribunal in similar set of facts, we direct the AO/TPO to exclude the said company from the final list of comparable companies on the ground of functional dissimilarity. 12. As regards the application of the turnover filter of more than ₹ 200 crores, the assessee wants the following companies to be excluded: i. Mindtree Ltd ii. Persistent Systems Ltd. iii. Sasken Communication Technologies Ltd. iv. Infosys Technologies Ltd. v. Tata Elxsi Ltd. vi. Larsen & Toubro Infotech vii. Zylog Sy .....

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; 200 crores: (1) Mindtree Ltd. (2) Persistent Systems Ltd. (3) Sasken Communication Technologies Ltd. (4) Infosys Technologies Ltd. (5) Tata Elxsi Ltd. (6) Larsen & Toubro Infotech (7) Zylog System Ltd. In this regard, our attention was drawn to the decision of the ITAT Bangalore Bench in the case of Genisys Integrating Systems (India) Ltd., ITA No.1231/Bang/201,0 which was followed by the ITAT Bangalore Bench in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) for assessment .....

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ng comparable companies for comparability analysis held as follows:- (1) Turnover Filter The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of ₹ 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions .....

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tted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this .....

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comparability. 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: C .....

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urther submitted that the TPO s range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of ₹ 13,149 crores as compared to ₹ 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, .....

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ntifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not hav .....

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king the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of ₹ 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for t .....

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rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than ₹ 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 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 pro .....

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h 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 internation .....

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t 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, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, .....

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ng 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 accordance with the provisions contained in subsection (1) of section 92D and the rules made in this behalf; or (c) the information .....

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e 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 rea .....

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d to in subclause (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 margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin re .....

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g 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; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographica .....

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harged 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 international transaction has been entered into : Provided that data relating to a period not being more than two years prior .....

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al 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 i .....

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tronics 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 decision of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) and Assessee s case for AY 06-07, we hold .....

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f the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude these 7 companies from the final list of comparables on the ground of turnover filter of the ≥Rs.200/- crores. 13. In addition to the above, the assessee is also seeking exclusion of Infosys Ltd., & Tata Elxi from the list of comparables on the ground of functional dissimilarity and placed reliance upon the decision of this Tribunal in the case of Airbus India Operations Pvt. Ltd., (cited supra). We find that in Air .....

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in the case of Cisco Systems (India) (supra), this tribunal has also held that the aforesaid two companies are also not functionally comparable to a company such as the Assessee rendering purely software development services. The following were the relevant observations of the Tribunal. 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development serv .....

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n the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this com .....

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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 I .....

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company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental R .....

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ent 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. I .....

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far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 …….. 26.4 Tata Elxsi Ltd.:- As far as this company is 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. F .....

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prises 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 software services company because of its compl .....

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er "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of th .....

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regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. T .....

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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 earl .....

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als on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable. 20. Respectfully following the decision of the Tribunal referred to above and tak .....

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