TMI Blog2015 (8) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... arable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also, thus we direct the TPO/AO to exclude this company from the list of comparables. E-Zest Solutions Ltd. is engaged in the business of consultancy services and technical services which is categorized as KPO services hence, it is functionally not comparable to the assessee Infosys Technologies Ltd. cannot be considered as good comparables of the assessee because this company own intangibles apart from the industry leader in the field. Kals Information Systems Ltd was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Persistent Systems Ltd. in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company ought to be omitted from the set of comparables for the year under consideration Quintegra Solutions Limited be excluded from the list of comparables in the case on hand since it is engaged in proprietary software product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. Lucid Software be omitted from the list of comparables for the period under consideration in the case on hand as , is engaged in the software product development and not software development services, it is functionally different and dis-similar Denial of deduction u/s 10A - Held that:- Following the order of the co-ordinate bench of this Tribunal in assessee’s own case we decide this issue in favour of the assessee and direct the AO to allow the claim of deduction u/s 10A of the IT Act, 1961 as where a firm is converted into a company and there was change only in the composition of ownership and not the undertaking and business, the exemption allowed to the firm u/s 10A of the Act, could not be denied to the company merely because it had been separately granted recognition. - Decided in favour of assessee. - IT(TP)A No.1444(Bang) 2012 - - - Dated:- 31-7-2015 - SHRI ABRAHAM P GEORGE AND SHRI VIJAY PAL RAO, JJ. For The Assessee : Shri K.R.Vasudevan, Advocate For The Revenue : Shri Sunil Kumar Aggarwal, JCIT ORDER PER SHRI VIJAYPAL RAO, JM: This appeal by the assessee is directed against the assessment order passed u/s 143(3) r.w.s.144C(13) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VMF Soft Tech 3.08% 18 Zylo Systems Ltd 18.53% Arithmetic Mean 10.98% 3. Out of the 18 comparables selected by the assessee 14 were rejected by the TPO. The TPO finally selected 20 companies as comparables including 4 companies from the list of assessee s comparables namely: a) iGate Global Solutions Ltd (Seg.) b) Mindtree Consulting Ltd (Seg.) c) R.S.Software (India)Ltd. and d) R.S.Systems International (Seg.) 3.1 Thus, the TPO calculated the mean margin of 20 comparables at 23.65%. There is no dispute regarding the most appropriate method being adopted by the assessee as well as the TPO as TNMM. The comparable companies selected by the TPO for determination of ALP are as under; Sl.No Company Name Unadjusted margins FY: 2007-08 1 Avani Comcon 25.62% 2 Bodhtree Ltd 18.72% 3 Celestial Biolabs Ltd 87.94% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing - VI), Bangalore ( Transfer Pricing Officer or TPO ) grossly erred in law and facts of the case in determining the Arm's Length Price ('ALP') of the international transaction of the Appellant and thereby making an adjustment of ₹ 34,218,209/- with respect to the software development services rendered by the tax payer u/s 92CA of the Income Tax Act. 1. The learned AO and TPO ought to have accepted the arm's length price as determined by the Appellant. 2. The learned TPO and the learned AO ought to have accepted the difference in risk profile of the appellant vis-a-vis the comparable companies. The learned TPO and the learned AO erred in not allowing the benefit of market risk adjustment to the Appellant. 3. The learned TPO and the learned AO erred in concluding that the Appellant is exposed to single customer risk without evaluating the business arrangement of the Appellant. 4. The learned TPO and the learned AO erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm's length price. 5. On the facts and circumstances of the case, the learned AO a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad mentioned that the company provides product design services, which is functionally not comparable to the Appellant's business. 6.9 In accepting companies such as Celestial Labs Limited, Flextronics Software Systems Limited and Softsol India Limited which are functionally not comparable to the Appellant's business; 6.10 In accepting companies like Celestial Labs Limited and Infosys Limited which have abnormal/fluctuating profit margins. In doing so the learned AO have disregarded the various jurisdictional ITA T rulings in case of SAP LABS India Pvt. Ltd. Vs. ACIT (reference ITA. No. 398 /B a n g/2 00 8), EGain Communication Private Limited (reference: ITA No. 16 8 5/P N /0 7 - Pune); 6.11 In accepting companies like Flextronics Software Systems Limited Quintegra Solutions Limited, Sasken Communications Technologies Limited, Wipro Limited and R Systems International Limited without taking into consideration the peculiar economic circumstances surrounding their operations during the year under review; 6.12 In accepting companies having Related Party Transactions exceeding 10% such as Soft801 India Limited arid Infosys limited. In doing so the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the undertaking and cannot be denied merely on change in ownership thereof. i d. The learned AO has failed to appreciate that the undertaking was not formed in the year of transfer i.e. Assessment Yeat CA Y) 2004-05 but in the initial year i.e. AY 2000-01. I e. The learned AO has erred in concluding that the undertaking has been formed by the splitting up or the reconstruction of a business already in existence. f. The learned AO has erred in concluding that the undertaking of the Company has been formed out of plant and machinery previously used. g. The learned AO erred in not relying. on the decision of the Honorable Income Tax Appellate Tribunal, Bangalore in the Appellant's own case for AY 2004-05 vide order dated 10 August 20 I 0, wherein the Honourable Income Tax Appellate Tribunal has held that the appellant is eligible for tax benefit under section lOA. Ill . Interest under section 234B of the Act: ₹ 2,839,310 The Learned AO is not justified in levying interest under section 234B of The Act. Levy of interest under section 234B is consequential in nature. IV. Interest under section 234D of the Act: ₹ 897, 1 22 The Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparing the functional similarity of Avani Cimcon for the AY: 2008-09 has concluded that this company cannot be treated as a functionally similar to software development company. 6. On the other hand, learned DR has relied upon the orders of the authorities below and submitted that this company fulfills all filters and category of software solutions and software development company. 7. We have considered the rival submissions as well as the relevant material on record. At the outset we note that in the case of 3DPLM Software Solutions Ltd.,(Supra) the co-ordinate bench of this Tribunal had the occasion to examine the functional comparability of this company with that of a software development company. The Tribunal also relied upon the decisions of the co-ordinate bench of this Tribunal in the case of Trilogy e-business Software India Pvt.Ltd Vs DCIT(ITA No.1054/B/2011) and in case of Telecordia Technologies India Pvt.Ltd vs ACIT (ITA No.7821/M/2011). The assessee in case of 3DPLM Software Solutions Ltd (Supra) also explained certain facts before the Tribunal in para-7.3 is as under; 7.3 The learned Authorised Representative further submitted that the facts pertaining to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered in the immediately preceding year is applicable in this year also. Since the functional profirs and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee s own case for AY: 2007-08 in ITA No.845/Bang/2011 dated 22.2.2013 and in the case of Trilogy e-Business Software India Pvt. Ltd (ITA No.1054/Bang/201) we direct the AO/TPO to omit this company from the list of comparables . Following the order of the co-ordinate bench f this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) we direct the AO/TPO to exclude this company from the list of comparables. 8. Bodhtree Ltd: The learned AR of the assessee submitted that this company is in the business of software products and engaged in providing open and end to end as well as software consultancy and design, development and software. He has referred and relied upon the decisions of the co-ordinate bench of this Tribunal in case of M/s CISCO Systems India Pvt. Ltd., dated 14-08-2014 in ITA No.271(B)/2014 and submitted that this company was fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in case of Cisco System (Ind.)Pvt. Ltd.(Supra)we direct the AO/TPO to exclude this company from the list of comparables. 9. Celestial Labs Ltd ., The learned AR of the assessee submitted that this company is engaged in the product development in the field of biotech and pharmaceuticals etc. This company has also incurred R D expenditure which is morethan 3% of the sales. Therefore, this company cannot be treated as functionally similar to the assessee for the purpose of determining the ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd. (Supra). 9.1 On the other hand, learned DR relied upon the orders of the authorities below and submitted that the objections of the assessee were duly considered by the TPO/DRP and this company was found to be a good comparable of the assessee. 9.2 We have considered the rival submissions and the material on record. At the outset, we note that the functionally comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra), in para-9.4.1 9.4.2 as under; 9.4.1 We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in the business of consultancy services and technical services which is categorized as KPO services hence, it is functionally not comparable to the assessee. Further, this company has not provided segmental data as part of its annual report and financial reports, therefore, this company cannot be considered as a good comparable of the assessee. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra). 10.1 On the other hand, learned AR relied upon the order of the authorities below and submitted that this company is mainly in the business of software development and therefore, it is functionally comparable. 10.2 Having considered the rival submissions as well as relevant material on record, at the outset, we note that the functional comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) in para-14.4 as under; 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on 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 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 mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 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 Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as 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 . Following the findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 13.3 It is clear from the finding of this Tribunal that this company is engaged in the product developing and product design services which is similar with the software development services provided by the assessee. Accordingly, following the decision of the co-ordinate bench of this Tribunal (Supra) we direct the TPO/AO to exclude this company from the list of comparables. 14. Quintegra Solutions Limited : The learned AR of the Assessee submitted that this company is engaged in product engineering services and this is not purely a software development service provider. He has further pointed out that this company is also engaged in research and development activity which resulted in creation of intellectual property rights (IPR). This company has also experienced an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntellectual property rights. Following the finding of the coordinate of this Tribunal (Supra) we direct the AO/TPO to exclude this company from the list of comparables. 15. Tata Elxsi Ltd; The learned AR of the assessee has submitted that software segment of this company comprises the activity of product designing services and therefore, this company is not purely software development service provider. He has further submitted that this company had significant intangible and R D expenditure and also fails on site filter of more than 75%. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra). 15.1 On the other hand, learned DR relied upon the orders of the authorities below and submitted that TPO has considered the segmental data of this company pertaining to software development services therefore, this company is a good comparables. 15.2 We have considered the rival submissions as well also relevant material on record. We note that the functional comparability has been considered and decided by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities 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.The product design services sub-segment is into embedded software development. Thus this seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Tribunal in case of 3DPLM Software Solutions Ltd (Supra) and submitted that this company was found to be functionally dissimilar to that of pure software development service provider. 16.1 On the other hand, learned DR relied upon the orders of the authorities below. We have considered the rival submissions and carefully perused the material on record. We note that the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra), haws considered the functional comparability of this company in para-15.3 as under; 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered 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 coordinate 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. 17.3 As it was found that this company owns Intellectual Property Rights in the form of registered patents and several pending applications for grant of patents. Therefore, the said company owning intangibles cannot be compared to low risk captive services provider. Following the finding of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y transactions from 5% to 25% depending upon case to case and facts and circumstances of the each case. It is not clear from the orders of the authorities below whether any related party filter was applied by the TPO. Further, the tolerance range of related party transactions has to be determined depending upon the availability of number of comparables. If the no of comparables are abundance then, this tolerance range of related party transactions can be fixed at a lower level to say 10% to 15% as against the case where number of comparables are very few, the tolerance range can be relaxed upto 25%. This view of varying the range of RPT percentage has been considered by this Tribunal in number of cases depending upon the peculiar facts of each case. Thus, if the filter of RPT at 15% is applied in a particular comparable then, this filter should also applied to all other comparables companies. The assessee has also disputed functional comparability of this company and contended that this company is engaged in the software product development. However, the relevant record has not been produced before us to show the functional profile and the revenue generated activity of this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the TPO or before the DRP. Then, he assessee cannot be allowed to raise this objections at this stage. He has further contended that the facts relevant to the comparability of functions have not been examined by the TPO or by the DRP. Therefore,the facts which has been contended now were not raised before the authorities below and therefore, the same were not examined by the TPO/DRP. 19.3 We have considered the rival submission and the relevant material on record. There is no dispute that these two companies were selected and included in the list of comparables by the assessee itself for the purpose of bench marking its international transactions in the TP study report. 19.4 We further note that as far as the Mindtree is concerned, the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd., (Supra) accepted the comparables of this company, whereas in case of NetHawk Networks India Pvt.Ltd., it was rejected as comparable. 19.5 It is pertinent to note that in the case of NetHawk Networks India Pvt. Ltd (Supra) the functional profile of the company per se was not examined by the Tribunal but, the Tribunal has followed the decision in case of Wills Proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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. 20.1 Thus, it is clear from the examination of the fact that this company was found to be functionally not comparable with the software development service provider company. Accordingly, following the order of the co-ordinate bench of this Tribunal(Supra), we direct the AO/TPO to exclude this company from the list of comparables. 20.2 Since most of the comparables selected by the TPO has been rejected by us in the foregoing findings therefore, the assessee as well as the TPO are at liberty to consider as many as possible companies as comparable for the purpose of determining the ALP, subject to the parameters on the basis of which the earlier companies selected by the TPO are rejected. Thus, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e preferred an appeal before the CIT(A) who allowed the same holding that the undertaking has existed in the same shape and form and has carried on the same business both before and after change in ownership and the mere fact of change of ownership cannot be taken to mean that the undertaking itself has been formed from the splitting up of re-construction of an existing business. Aggrieved, the revenue is in appeal before us. 4. The learned departmental representative strongly supported the order of the AO while the learned counsel for assessee supported the order of the CIT(A) and also placed reliance upon the decision of the B Bench of this Tribunal in the case of Dy.CIT Vs M/s L.G Soft India Pvt.Ltd in ITA Nos.623 847/Bang/2010 dated 19-05-2010 wherein it has been held that where an undertaking existed in the same place, form and substance and did carry on the same business before and after the change in the legal character of the form of organization, the assessee is eligible for deduction u/s 10A of the Act. He also placed reliance upon the decision of the Calcutta High Court in the case of CIT Vs P.K.Engg Forging (P) Ltd, reported in 87 Taxmann. 101, wherein while co ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
