TMI Blog2015 (11) TMI 1136X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Turn Over Transfer pricing adjustment - assessee has raised objections against inclusion of 4 companies viz., Infosys Ltd., Persistent Systems Ltd., Tata Elxsi and Wipro Ltd. - Held that:- Infosys Technologies Ltd. is not functionally comparable with the assessee because it owns significant intangibles as well as brands earning revenue from software products apart from software development services. Since no separate segment of SDS and software products is available, therefore, this company cannot be considered as a good comparable for the purpose of ALP in respect of international transaction of rendering SDS. Accordingly, when this company is functionally not comparable with the assessee, we decline to interfere with the impugned order of the CIT(A) directing the AO/TPO to exclude this company on the basis of turnover filter Persistent Systems Ltd. be excluded from the list of comparables as relying on 3DPLM Software Solution Ltd. v DCIT [2014 (12) TMI 612 - ITAT BANGALORE] as it is engaged in product development and product design services while the assessee is a software development services provide. Also the segmental details are not given separately. Tata Elx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered as functionally comparable with the assessee. Accordingly, we do not find any error or illegality in the order of the CIT(A) and decline to interfere with the order of the CIT(A) qua this issue. KALS Information Systems Ltd. company was developing software products and was not purely or mainly a software service provider, hence functionally dissimilar. - IT(TP)A No.240/Bang/2013, IT(TP)A No.293/Bang/2013 - - - Dated:- 8-10-2015 - SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER and SHRI VIJAY PAL RAO, JUDICIAL MEMBER For The Assessee : Shri Padamchand Khincha, CA. For The Revenue : Shri Sunil Kumar Agarwal, JCIT(DR). ORDER Per VIJAY PAL RAO, JM: These cross appeals are directed against the order dated 27/12/2012 of the CIT(A)-IV, Bangalore, for the assessment year 2008-09. 2. First we take up the revenue s appeal wherein the revenue has raised the following grounds: 1) The order of the learned CIT(A) is opposed to law and facts of the case. 2) On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to exclude the reimbursement of expenses incurred towards telecommunication charges of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as directed by the CIT(A). 4.1 We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The AO, while computing deduction u/s 10A of the Income-tax Act, 1961, [ the Act for short], excluded tele-communication charges and insurance expenditure from the export turnover. On appeal, the CIT(A) directed the AO to exclude the said expenses from the total turnover as well and then re-compute the deduction under section 10A. 4.2 At the outset, we note that this issue is now covered by the decision of the Hon ble jurisdictional High Court in the case of ACIT vs. Tata Elxsi (349 ITR 98) wherein the Hon ble High Court has held as under: From the aforesaid judgments, what emerges is that. there should be uniformity in the ingredients of both the numerator and she denominator of the formula, since otherwise it would produce anomalies or absurd results. Sec. 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under s. 10A, would be as under : Profits of the business of the undertaking x Export turnover (Export turnover + domestic turnover) total turnover 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of s. 80HHC in interpreting s. 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the Revenue. The CIT(A) has decided the issue by following the judgment of the Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate method (MAP) in respect of 12 comparables selected by the assessee and arrived at average profit margin of 14.23% on the cost OP/TC as PLI. Hence, the assessee claimed that the margin earned by the assessee at 11.99% on operating cost was at arms length being within tolerance range of +/-5%. The TPO did not accept the TP analysis of the assessee. The TPO finally selected 20 comparables and arrived at mean margin of 23.65% and worked out the margin after working capital adjustment at 22.55%. The companies selected by the TPO as comparables and adjustment proposed under section 92CA are as under: Thus the TPO proposed a final adjustment of ₹ 1,76,64,444/- The assessee challenged the action of the AO/TPO before the CIT(A) and raised the objection in respect of comparable companies selected by the TPO. The objections raised by the assessee were based on the ground that these companies are having very high turnover in comparison to the turnover of the assessee and therefore, are not good comparables for determining the arms length price in respect of international transaction of the assessee. The CIT(A) accepted the objections raised by the assessee and directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorised representative of the assessee has submitted that at this stage the assessee would not raise the issue of comparability of other 5 companies on the ground of turnover. In view of the above facts, we will consider the comparability of 4 companies as raised by the assessee in the additional ground which are also common in ground No.3 of the revenue s appeal. I. Infosys Technologies Ltd.: We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The learned authorised representative of the assessee has relied upon various decisions of this Tribunal in support of the contention that these four companies are functionally not comparable with the assessee. The decisions relied upon by the learned authorised representative of the assessee are as under: 1. 3DPLM Software Solution Ltd. v DCIT - ITA No.1303/Bang/2012 AY: 2008-09 2 . NetHawk Networks Ind Pvt. Ltd, v ITO - ITA No. 7633/M/2012 AY: 2008-09 3. M/s. Mindteck (India) Ltd. v DCIT - IT(TP)A No. 70/Bang/2014 AY: 2009-10 4. M/s. NXP Semi Conductors India Pvt. Ltd. v DCIT TS- 102-ITAT-2015(Bang)-TP AY: 2008-09 5. M/s. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viders assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the 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 form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has restricted its objection in the additional ground only to functional dissimilarity and non comparability of certain companies, therefore, we do not propose to go into the issue of high turnover in rejecting the comparable. II. Persistent Systems Ltd. We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The comparability of this company has been examined and decoded by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra) in para.17 as under: 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee s objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. We find that a similar view has been taken by the Tribunal in the other decisions as relied on by the assessee. Following earlier decision of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. Accordingly, we are not inclined to interfere with the order of the CIT(A) in respect of this company. III. Tata Elxsi Ltd.: We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The comparability of this company has been examined and decided by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra) in paras.13 to 13.5 as under: 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt software development services relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- . Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm s length price for the assessee, hence, should be excluded from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO s own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in the TP analysis nor by the TPO while passing the TP order under section 92CA of the Act. However, the CIT(A) included the same in the list of comparables while passing the impugned order without giving any opportunity of being heard to the AO/TPO. Since comparability of this company has not been examined at the level of the TPO/AO, therefore, without going into merits of the issue of comparability, we set aside the issue of comparability of this company to the record of the AO/TPO for considering the functional and other criteria of comparability for including the said company in the list of comparables for determining the ALP in respect of international transaction of the assessee. We find that the assessee, in its TP analysis excluded this company for want of financial details and data in the public domain. It appears that during the appellate proceedings, the financial data were produced by obtaining directly from the company and therefore, these details including the functional comparability of the company are required to be examined. The ground No.4 of the revenue is allowed for statistical purposes. II. Avani Cincom Technologies Ltd. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er year (i.e. Assessment Year 2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that :- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a coordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof :- 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology EBusines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. The learned Authorised Representative submits that this company was selected as a comparable by the TPO not by any FAR analysis or as per the search process conducted by the TPO, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a company can be selected as a comparable only on the basis of FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned Authorised Representative als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the assessee s own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology EBusiness Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. A similar view has been taken by the Tribunal in other decisions relied upon by the assessee. Following the orders of this Tribunal, we hold that this company cannot be considered as functionally comparable with the assessee. Accordingly, we do not find any error or illegality in the order of the CIT(A) and decline to interfere with the order of the CIT(A) qua this issue. III. Celestial Biolabs Ltd. We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. At the outset, we note that the comparability of this company has been examined and decided by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra) in paras.9.1 to 9.4.2. as under: 9.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and therefore there cannot be an assumption that it would continue to be applicable for the period under consideration i.e. Assessment Year 2008-09. 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO s order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) in paras.10 to 10.4 as under: 10.1 This is a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 10.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee and ought to be rejected / excluded from the list of comparables for the following reasons :- (i) This company is functionally different from the software activity of the assessee as it is into software products. (ii) This company has been held to be functionally not comparable to software service providers for Assessment Year 2007-08 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee s own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s; 8) adopting companies as comparables even though they are not comparable to the appellant; 9) rejecting comparables proposed by the appellant on unjustified grounds; 10) not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justify the price paid/charged on the basis of any one comparable only; 11) not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies, including but not limited to risk adjustment. PRAYER 12. On an overall consideration of the facts of the case and the law applicable, the ALP as determined by the Transfer Pricing Officer, as adopted by the Assessing Officer and as modified by the CIT(A), being not correct, is to be quashed and the figures as determined and returned by the appellant being correct are to be accepted 13. The learned Assessing Officer has erred in levying interest under Section 234B. The appellant submits that each of the above grounds/subgrounds are independent and without prejudice to one another . 13. We have heard the learned authorised represen ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
