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M/s. ACI Worldwide Solutions Pvt. Ltd. (Formerly Visual Web Solutions Pvt. Ltd.) Versus Asst. Commissioner of Income Tax, Circle 12 (3) , Bangalore And Vica-Versa

2015 (11) TMI 66 - ITAT BANGALORE

Transfer pricing adjustment - selection of comprabales - Xcel Vision Technologies - Held that:- The learned CIT (Appeals) once he has applied certain filters like salary cost filter of 25%, RPT filter in excess of 0 %, turnover filter, etc., the filters should be consistently applied. Modifying them, as has been done by the learned CIT (Appeals) in the impugned order with respect to the salary cost filter of 25% of revenues, is arbitrary especially when the salary cost to this company is 24.70% .....

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ort oriented and has export turnover in excess of 75% of sales, its foreign currency expenses are less than 50% of sales and therefore the conclusion of the learned CIT (Appeals) to exclude this company by applying the on-site was incorrect. From the record it appears that these submissions/arguments put forth by the assessee have not been examined by the learned CIT (Appeals) and therefore, in the interest of justice and equity, we deem it fit to restore the matter to the file of the learned CI .....

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differentials, in its order in the assessee's own case for Assessment Year 2003-04, we restore this matter to the file of the Assessing Officer / TPO and direct them to examine and de novo adjudicate on the assessee's claim for grant of working capital and risk adjustment, taking into account the facts of the case for the year under consideration in the light of the Tribunalís order for Assessment Year 2003-04

M/s. Flextronics Software Systems Ltd.,Infosys Technologies Ltd., L&T Infot .....

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is company as laid out in para 16.2 of this order, it is evident from its diversified activities that this company is functionally different and dis-similar from the assessee in the case on hand, who is a mere provider of software development services.

Visualsoft Technologies Ltd. - CIT (Appeals), in our view from the facts recorded in the impugned order, has not factually brought out or established that the on-site revenue of this company was in excess of 75% of its revenues. In the .....

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essee for computing the ALP of its international transactions. - IT(TP)A No. 651/Bang/2012, IT(TP)A No.782/Bang/2012 - Dated:- 5-10-2015 - Shri George George K, Judicial Member And Shri Jason P. Boaz, Accountant Member For the Petitioner : Shri Padamchand Khincha, C. A. For the Respondent : Dr. P. K. Srihari, Addl. CIT (D.R.) ORDER Per Bench These are cross appeals, one by the assessee and the other by Revenue, directed against the order of the CIT (Appeals) -IV, Bangalore dt.21.3.2012 for Asses .....

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39;) and the case was subsequently taken up for scrutiny. Since the assessee reported that in the period under consideration it had entered into international transactions with its AE viz. transactions of rendering software development services, to the extent of ₹ 5,95,41,473, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ( TPO ) for determining the Arm s Length Price ( ALP ) of these international transactions, after obtaining approva .....

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Method ( MAM ). The TPO compared the industry average at US $ 144 per man day based on NASSCOM with the rate charged by the assessee. The ALP was determined at ₹ 8,28,77,500 and the T.P. Adjustment was completed as under :- S.No. Particulars Amount (Rs.) (A) ALP of the software development services 8,28,77,500 (B) Amount realized by the assessee from software development services rendered to the AE. 5,95,48,743 T.P. Adjustment (A-B) 2,33,35,757 2.3 The Assessing Officer completed the asse .....

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it Level Indicator ( PLI ) was adopted as operating profit to total cost. Applying various filters, the learned CIT (Appeals) proposed 17 companies as comparables to the assessee having an arithmetic mean margin of 29.3%. The list of proposed companies was as under :- S. No. Name of the Company OP/TC % 1. Lanco Global Systems Ltd. 19.10 2. Infotech Eneterprises Ltd. 43.22 3. Aviation Software Development Consultancy Ltd. 46.70 4. Flextronics Software Systems Ltd. 24.06 5. Geometric Software Solu .....

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equired the assessee to show cause as to why TNMM should not be taken as the MAM and why the ALP should not be computed adjusting the average margin of 29.30%. In response thereto, the assessee furnished its reply/objections thereto and made a fresh T.P. analysis adopting TNMM and adopting various filters and proposed the following three comparables :- S. No. Name of the company Margin % 1. Lanco Global Systems Ltd. 17.92 2. Motherson Sumi Infotech Designs (-) 10.12 3. Cherry Soft Technologies L .....

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parable to the assessee :- S. No. Name of the Company Margin % 1. Lanco Global Systems Ltd. 23.01 2. Xcel Vision Technologies. 36.68 3. Kshema Technologies Ltd. 23.06 Average Margin 27.58 3.2.3 In his order, the learned CIT (Appeals) has rendered the following findings :- (a) Applying the Related Party Transaction ( RPT ) filter in excess of 0 %, the learned CIT (Appeals) directed the exclusion of the following companies from the list of comparables :- S. No. Name of the Company RPT % 1. Geometr .....

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₹ 200 Crores and excluded the following companies :- S. No. Name of the company Turnover (Rs. in Crores) i) Flextronic Software Systems Ltd. 234.88 ii) Infosys Technologies Ltd. 2603.59 iii) L&T Infotech Ltd. 266.69 iv) Satyam Computer Services Ltd. 1731.94 v) iFlex Solutions Ltd. 415.03 (c) The learned CIT (Appeals) excluded / rejected the following comparables proposed in the TPO s remand report dt.8.1.2010, based on the assessee's objections to their inclusion :- S. No. Name of .....

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ted to be not comparable as it has substantial onsite revenue. iii) Ennor Technologies Ltd. - Rejected as a comparable since it has outsourced its operations and its salary expenditure is only 0.19% of turnover. It may be noticed from the above, that the learned CIT (Appeals) has rejected some of the comparables on more than one ground. Revenue s appeal in IT(TP)A No.782/Bang/2012 for A.Y. 2002-03. 4.1 Revenue s Grounds of appeal : 1. The order of the learned CIT (Appeals), in so far as it is pr .....

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sfer pricing study as against nine comparables recommended by the TPO. 4. The learned CIT (Appeals) has erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as comparable, and accordingly erred in excluding M/s. Flextronics Software Systems Ltd., M/s. Infosys Technologies Ltd. M/s. L&T Infotech Ltd., M/s. Satyam Computer Services Ltd. and M/s. iFlex Solution Ltd. as a comparable in software development segment. 5. The learned CIT (Appe .....

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may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed in so far as the above mentioned issues are concerned and that of the Assessing Officer be restored. 9. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal. Assessee's appeal in IT(TP)A No.651/Bang/2012 for A.Y. 2002-03. 4.2 Aggrieved by the order of the CIT (Appeals) - IV, Bangalore dt.21.3.2012 for .....

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h price without demonstrating as to why it was necessary and expedient to do so. The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming the action of the Assessing officer. 4. The learned Commissioner of Income Tax (Appeals)-IV has erred in confirming the Order passed by the lower authortities: a. without demonstrating that appellant had motive of tax evasion. b. not appreciating that the charging or computation provision relating to income under the head Profits & Gai .....

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n unjustifiable grounds. 6. The learned Commissioner of Income Tax (Appeals) - IV has erred in: a. Performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis. b. selecting TNMM as the most appropriate method. c. adopting companies as comparables even though they are not comparable to the appellant. d. Not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justif .....

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ard to the appellant. b. not appreciating that insignificant related party transaction cannot be held to have significant influence on profitability of comparable companies. c. Adopting Kshema Technologies and Xcel Vision Technologies Limited as comparable. d. rejecting Cherry Soft Technologies Limited, which was proposed as comparable by the appellant under TNMM, on unjustifiable grounds. 8. Without prejudice to the above, the benefit of the +/-5% range as per the proviso to section 92C (2) sho .....

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e perused and carefully considered the material on record; including the judicial decisions cited and proceed to dispose off both Revenue s and assessee's appeals together hereunder :- 6.0 The Grounds raised by the assessee at S.Nos.1 to 4 and 9 are general in nature and not being urged before us in this appeal are rendered infructuous and accordingly dismissed. TRANSFER PRICING ISSUES (Grounds 5 to 8) 7.1 In the course of proceedings before us, the learned Authorised Representative for the .....

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h it contends were erroneously rejected by the learned CIT (Appeals). In support of the assessee's contention on comparables and filters adopted, the learned Authorised Representative placed reliance on the decisions of various benches of the Tribunal in the following cases :- i. 24/7 Customer.Com (P) Ltd. in ITA No.227/Bang/2010 for Assessment Year 2004- 05. ii. ACI Worldwide Solutions Pvt. Ltd. in ITA No.1276/Bang/2012 for Assessment Year 2003-04. iii. Phillips Software Centre Pvt. Ltd. in .....

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.3 Ground No.6(1) to (f) are raised with respect to the action of the learned CIT (Appeals) in conducting a fresh T.P. analysis under TNMM and comparables selected thereunder. The assessee, we find, has not disputed before us the selection of TNMM as the MAM. With respect to the assessee's submissions on comparables and risk adjustment, the same are specifically examined and considered later. 7.4 Ground No.7(a) to (d) are raised in respect of the inclusion of certain companies as comparables .....

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of the Income Tax Act, 1961 w.r.e.f. 1.4.2002 by the introduction of the clarificatory amendment by way of insertion of Section 92C(2A) by Finance Act, 2012, the assessee is not entitled to the benefit of 5%. In this view of the matter, this ground raised by the assessee is not maintainable and is accordingly dismissed. 8. Related Party Filter ( RPT ) 8.1 Ground No.7(b) of the assessee's appeal and Ground No.5 of Revenue s appeal challenge the view of the learned CIT (Appeals) in directing .....

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eometric Software Solutions Company Ltd. 16.25 2. Mphasis BFL Ltd. 13.78 3. Orient Information Technologies Ltd. 3.19 4. Kshema Technologies Ltd. 0.91 5. Quinox Consultancy Services Ltd. 88.12 6. Motherson Sumi Infotech Ltd. 87.51 7. Aviation Software Devt. Consultancy Ltd. As per notes in Annual Report 8.3 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited and relied upon in the context of the application of the RPT fil .....

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e companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO s setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of s .....

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o not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the impact of the related party transactions vis-à-vis sales and not profit since profit of an enterprise is influenced by large number of other factors …. Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Offic .....

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/Bang/2013 dt.28.11.2013. ii) Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1338/Bang/2010; iii) Logica Pvt. Ltd. (TS-131-ITAT-Bang-TP). Following the decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra) and 3DPLM Software Solutions Ltd. (supra), we hold and direct that RPT filter should be considered at 15% of total revenues and companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. In this vi .....

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- 3.19%. 8.6 However in respect of the company, Aviation Software Development Consultancy Ltd., the learned CIT (Appeals) has merely observed that the RPT is as per Note in the Annual Report. In that view of the matter, the RPT of this company requires to be verified and on this limited issue its comparability is set aside to the file of the TPO. The TPO shall verify the details of RPT from the Annual Report of this company and if need be call for information under Section 133(6) of the Act so t .....

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r F.Y. 2001-02 was that the revenue from software service was ₹ 2,36,70,748 while the salary cost was ₹ 58,48,177 which constituted 24.70% of the turnover and therefore failed the salary cost filter of 25% adopted by the learned CIT (Appeals) himself. 9.1.2 It was submitted that the salary cost of the assessee in the case on hand was more than 60% of turnover and hence a company having 24.70% of salary cost is not comparable and ought to be excluded from the list of comparables. It w .....

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tmental Representative supported the orders of the learned CIT (Appeals) in including this company in the list of comparables to the assessee. 9.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On a perusal of the impugned order, we find at page 12 thereof in para 7 of the show cause notice, the filter clearly stated is that companies having employee cost to sales less than 25% were excluded. It is also seen at para 7 on page 22 of the impugned .....

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s almost 25%, hence the above company is retained as comparable. In our view, the learned CIT (Appeals) once he has applied certain filters like salary cost filter of 25%, RPT filter in excess of 0 %, turnover filter, etc., the filters should be consistently applied. Modifying them, as has been done by the learned CIT (Appeals) in the impugned order with respect to the salary cost filter of 25% of revenues, is arbitrary especially when the salary cost to this company is 24.70% of revenues, which .....

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and proposed the following three companies as comparables to the assessee :- (i) Lanco Global Systems Ltd.; (ii) Cherry Soft Technologies Ltd. and (iii) Motherson Sumi Infotech & Design Ltd. Out of the above three companies, Lanco Global Systems Ltd. found a place in the comparables selected by the learned CIT (Appeals) and the other two were rejected. 10.2 It is submitted that the learned CIT (Appeals) on the basis of figures in the Annual Report; that the assessee has domestic income to t .....

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ppeals) s on-site revenue filter of 75%, this company ought to be included in the list of comparables. 10.3 Per contra, the learned Departmental Representative supported the order of the learned CIT (Appeals) in rejecting this company as a comparable. 10.4 We have heard the rival contentions and perused and carefully considered the material on record. As seen from the record, the learned CIT (Appeals) applied the on-site revenue filter of 75%. According to the assessee, the company is export ori .....

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als) for examination afresh in the light of the submissions put forth by the assessee and to adjudicate thereon on the comparability of Cherry Soft Technologies Ltd. after affording adequate opportunity to the assessee of being heard and to submit details/submissions in this regard. It is ordered accordingly. 11. Working Capital and Risk Adjustment. 11.1 The assessee at Ground No.6(e) and(f) is aggrieved by the impugned order wherein the learned CIT (Appeals) has rejected its claim for working c .....

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6,253 only. It was prayed that in view of these factors, adjustment towards working capital and risk should be granted. The assessee further submitted that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2003-04 in ITA No.1270/Bang/2012 had allowed the assessee adjustment of 2% towards working capital and risk adjustment which atleast ought to be given. 1.2 We have heard the rival contentions and perused and carefully considered the material on record. W .....

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file of the Assessing Officer / TPO and direct them to examine and de novo adjudicate on the assessee's claim for grant of working capital and risk adjustment, taking into account the facts of the case for the year under consideration in the light of the Tribunal s order for Assessment Year 2003-04 (supra) after affording the assessee adequate opportunity of being heard and file details/submissions in this regard. It is ordered accordingly. 12. In the result, the assessee's appeal for As .....

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Representative placed reliance on the decision of Capgemini India Pvt. Ltd. V ACIT in ITA No.786/Bang/2011 and sought the reinstatement of the following companies, which had turnover in excess of ₹ 200 Crores, in the list of comparables :- Turnover (Rs. in Crores) (i) M/s. Flextronics Software Systems Ltd. Rs.234.88 (ii) Infosys Technologies Ltd. Rs.2,603.59 (iii) L&T Infotech Ltd. Rs.266.69. (iv) Satyam Computer Services Ltd. Rs.1,731.94 (v) iFlex Solutions Ltd. Rs.415.03. 14.2.1 Per .....

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200 Crores was proper. The learned Authorised Representative submitted that the above proposition, for application of the turnover filter at ₹ 1 Crore to ₹ 200 Crores was followed by other benches of this Tribunal in many cases including Triology E-Business Solutions India Pvt. Ltd. in ITA No.1054/Bang/2011 dt.23.11.2012. It was submitted that the above 5 companies listed at para 14.1 (supra) have turnovers in excess of ₹ 200 Crores in the period under consideration and theref .....

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otech Ltd., on the ground that it is into and has software products and therefore being functionally different; (iv) Satyam Computer Services Ltd.; for the reason that its financials are not reliable. (v) Infosys Technologies Ltd.; on the grounds that it is functionally different and dissimilar as it owns IPRs, has brand value attributable to profits etc. whereas the assessee is mere provider of software development services. 14.3.1 We have heard the rival submissions and perused and carefully c .....

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ands disposed off along with the assessee's ground at S.No.7(b) at para 8.3 to 8.5 of this order, wherein the following companies have been excluded from the set of comparable companies as they have RPT in excess of 15%, by following the decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2012 :- (i) Geometric Software Solutions Ltd. 16.25%. (ii) Quinnox Consulting Services Ltd. 88.12% (iii) Motherson Sumi Infotech and Designs Ltd. .....

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, it ought to be included in the list of comparables. 16.2 Per contra, the learned Authorised Representative submitted that the learned CIT (Appeals) has correctly excluded this company from the list of comparables. The learned Authorised Representative drew the attention of the Bench to the observations of the learned CIT (Appeals) at page 19 of the impugned order; that from the Annual Report it is evident that Geometric Software Solutions Ltd. is a specialist in product life cycle management s .....

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the assessee in the case on hand. It was also submitted that this company also ought to be excluded from the list of comparables to the assessee for the reason that it has RPT of 16.25% which is in excess of the 15% filter applied and followed by various co-ordinate benches of this Tribunal including 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010. 16.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. Fo .....

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diversified activities that this company is functionally different and dis-similar from the assessee in the case on hand, who is a mere provider of software development services. Consequently, Ground No.6 raised by Revenue is dismissed. 17. Ground No.7 : Visualsoft Technologies Ltd. 17.1 In this Ground, Revenue contends that this company ought to be included in the list of comparables as it passes the on-site revenue filter of 75% applied by the learned CIT (Appeals). 17.2 Per contra, the learn .....

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td. is predominantly engaged in on-site development of software and also observed that the assessee is also into R&D activities. It was submitted by the learned Authorised Representative that the learned CIT (Appeals) had correctly excluded this company from the list of comparables on the grounds of being functionally different due to on-site development and R & D activities. 17.3 We have heard the rival contentions and perused and carefully considered the material on record; we find fro .....

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