TMI Blog2017 (4) TMI 762X X X X Extracts X X X X X X X X Extracts X X X X ..... Per INTURI RAMA RAO, AM : This is an appeal is filed by the revenue and the cross objections by the assessee directed against the order of the CIT(A)-IV, Bengaluru, dated 23/01/2013 for the assessment year 2005-06. 2. Briefly facts of the case are as under: The assessee is a company duly incorporated under the provisions of the Companies Act, 1956. This is wholly owned subsidiary of M/s.Electronics for Imaging Inc.(EFI group), USA. It is engaged in the business of software development and marketing support services to Associated Enterprises (AEs). 3. Return of income for the assessment year 2005-06 was filed on 25/10/2005 declaring total income of ₹ 14,27,123/-. The assessee-company also reported the following international transactions with its Associated Enterprises (AE): Provision for Software development and related services - ₹ 12,74,70,626/- Interest paid ₹ 1,42,784/- The assessee-company sought to justify the consideration received for international transactions with its AEs to be at arm s length price. The assessee-company also submitted transfer pricing study report adopting gross profit margin by cost as the profit level in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of determining the Arm s length price (ALP). While doing so, the TPO applied the following filters: Companies whose software development service income Rs.l cr. were excluded Companies whose Software Development Service is less than 75% of the total income were excluded. Companies who have more than 25% related party transactions(sales as well as expenditure combined) of the sales were excluded. Companies who have less than 25% of the sales as export sales were excluded Companies who have diminishing revenues/persistent losses for the period under consideration were excluded. Companies having different financial year ending (ie, not March 31, 2005) or data is not available for 12 months, were rejected. Companies whose employee cost to sales is less than 25% were excluded. Companies whose onsite income is more than 75% were excluded. The TPO finally selected the following comparables: Sl. No. Name of the Company Operating Margin on Cost Adjusted Margin on Cost 1 Bodhtree Consulting Ltd 24.85% 23.49% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 14,74,18,369/- 16.7 Price Received vis-a-vis the Arms Length Price: The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms length Price @124.90% of operating cost Rs.14,74,18,369/- Price received ₹ 12,94,86,518/- Shortfall being adjustment u/s 92CA Rs.1,79,31,851/- 5. After receipt of the TPO s order, the AO passed the assessment order on 31/12/2008 incorporating the adjustments proposed by the TPO and also made addition on account of restricting the benefit u/s 10A by reducing export turn over by telecommunication expenses and foreign exchange loss incurred in foreign exchange. 6. Being aggrieved, an appeal was preferred before the CIT(A)-IV, Bengaluru. It was contended before the CIT(A) inter alia that the very reference made by the AO to TPO is invalid in law. However, the CIT(A), after upholding the validity of reference to the TPO, held that the TPO was justified in rejecting the TP study report submitted by the assessee-company. 6.1 On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO to recompute the deduction allowable u/s 10A of the I.T.Act after reducing the telecommunication charges and exchange fluctuation loss from the total turnover also. 7. The Ld. CIT(A) ought to have appreciated that there is no provision in section 10A which requires the concerned expenses . which are required to be reduced from the export turnover as per clause (iv) of the Explanation to Section 10A to be reduced from the total turnover also. 8. The Ld. CIT(A) ought to have considered the fact that the jurisdiction High Court decision relied upon by him has not been accepted by the department and appeals have been filed before the Hon'ble Supreme Court which is still pending. 9. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. 10. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 8. Ground Nos.1, 9 and 10 are general nature and do not require any adjudication. 9. Ground Nos.2 to 5 challenges the direction of the CIT(A) to exclude certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the directors, Company intends to consolidate in the BPO segment. Since segmental information is not available, this company is to be rejected as a comparable. Even if this company is to be accepted, we wish to submit that, the margins in the software service segment would be negative / very low given the statement by the directors that they intend to achieve positive growth in the solutions segment. Further, it is mentioned on the company website, that the company has products of its own named Exensys Suite . It has Exensys range of products like exensys financials, SD, Procurement, HRP, Manufacturing, Costing, Services, QC and asset management module. This view is further fortified if one looks at page 31 of the Annual Report of the company. Company has Brands worth of ₹ 5 crores under the Fixed Assets schedule. This makes it very clear that company is predominantly a product based company and not a Software Services Company. 2.7 Your honour would appreciate that it is important that the companies selected as the final comparables should be engaged in the similar activities as that of EFI India (software development services). EFI India has all its revenues fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by the assessee are made for the first time before the Tribunal. The Tribunal being the final fact finding authority is bound to take note of the objections of the assessee. As the material relied upon by the learned Counsel for the assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, we deem it fit and proper to remand this issue to the file of the Assessing Officer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz., Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 17. Having heard both parties and having considered the material available on record, we find that there is no dispute tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software India P. Ltd. vs. ACIT (TS-136-ITT-2016(Bang). 10.2 After hearing rival submissions and perusing material on record, we are of the considered opinion that as held in the case of M/s.Societe Generale Global Solution Centre Pvt. Ltd . (supra) and NTT Data Global Delivery Services Ltd. (supra) , turnover is not a relevant criteria for the purpose of deciding the comparability. From a bare perusal of rule 10B(2) of the IT Rules, it is clear that the rule does not specify that turnover is not one of the factors for deciding the comparability. Respectfully following the above decision, we hold that M/s.iGate Solutions and L T Infotech cannot be excluded from the list of comparables. 10.3 As regards Sathyam Computers, this company cannot be taken into the list of comparables as it is alleged that this company is engaged in the manipulation of its financial data and therefore, financial data is unreliable. The ratio of the coordinate bench in the case of Sunquest Information Systems (India) Pvt.Ltd. (supra) is squarely applicable to the facts of the case. Therefore, we direct the AO/TPO to exclude this company from the list of comparables and confirm the finding of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development company y and respectfully following the same, we hold that Infosys Ltd. cannot be with that of the present assessee-company. Therefore, we direct the AO to exclude this company from the list of comparables. 10.8 Flextronics was excluded by the CIT(A) on the ground that its turnover is more than ₹ 200 crores. However, learned authorised representative of the assessee argued that this company also requires to be excluded on the ground of functionality as it is found that this company has got substantial R D expenditure. Reliance in this regard is placed on the decision in the case of Sunquest Information Systems (India) Pvt. Ltd. (supra) and M/s.Intoto Software India Pvt. Ltd. (supra). Learned DR had not brought on record anything controverting the findings of the co-ordinate benches in the cases cited supra. Therefore, respectfully following the ratio of the decision in the above case, we direct the AO/TPO top exclude this company from the list of comparables. 10.9 Tata Elexsi was excluded by the CIT(A) on the ground of turnover exceeding more than ₹ 200 crores. However, the learned authorized representative of the assessee argued that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bodhtree Consulting Ltd. In this regard, we find that ITAT Hyderabad Bench in Ivy Computech (P) Ltd. v. ACIT, (2014) 43 taxman.com 183 (Hyd) Trib. Has taken the view that Bodhtree Consulting IT(TP)A No.1302/Bang/2011 CO No.92/Bang/2012 Ltd. should not be regarded as a comparable in the case of software development service provider. The ld. counsel for the assessee also brought to our notice that comparability of this company with software development provider was considered by this Tribunal in Mindtech India Ltd. v. DCIT, ITA No.70/B/2014 for AY 2009-10, order dated 21.8.2014 and it was held as under:- 14. The next aspect that was canvassed by the learned counsel for the assessee was with regard to the exclusion of the following comparables from the list of final comparables chosen by the TPO : 1. Bodhtree Consulting Ltd : As far as this company is concerned, the submission of the learned counsel for the assessee was that this company made extra ordinary profits during the previous year. Our attention was drawn to the fact that the operating profit / operating cost of this company jumped from 17% for F Y 2007-08 to 56% in FY 2008- 09. It dipped in FY 2009-10 to 40% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue may have been recognised in the earlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the profitability margin of such entity. Merely because of such fluctuations, an entity engaged in the development of software, being functionally comparable to the assessee, cannot be rejected only on this ground. 14. The learned counsel for the assessee drew our attention to the fact that Bodhtree Consulting admittedly follows a fixed price project model whereby revenues from software development is recognized based on software and billed to clients. In such business model expenditure for developing software would be billed in an earlier year but the revenue would be recognized in a subsequent year. It was his submission that this fact is recognized by the DRP in its order. According to him this circumstance would be sufficient to show that the margin reflected of this company does not reflect the normal business condition. 15. The learned DR placed reliance on the reason given by the DRP in its order. 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be rejected as a comparable. 35. We are of the view that the basis on which the assessee seeks to exclude Bodhtree Consulting Ltd. in this year is acceptable and accordingly Bodhtree Consulting Ltd. is directed to be excluded from the list of comparable companies. We hold accordingly. Learned DR had not controverted the findings of the Tribunal. Hence, we have no option but to follow the decision of the coordinate bench. Accordingly, we uphold the exclusion of this company from the list of comparables. 12. Ground No.5 was not pressed by the revenue. Ground Nos.6, 7 and 8 relates to computation of deduction u/s 10A of the Act. The CIT(A) directed the AO to recomputed the deduction allowable u/s 10A of the Act after reducing the telecommunication charges and exchange fluctuation loss from total turnover also. 13. We heard rival submissions and perused material on record. The Hon'ble High Court of Karnataka in the case of Tata Elxi Ltd (349 ITR 98) held that expenses incurred towards freight, tele-communication charges, etc., should be excluded both from export turnover as well as from total turnover. The Hon'ble High Court held as follows: From the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d formula, export turnover is defined, and when the total turnover includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chose 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 Section 10-A, would be as under: Profits of the business of the undertaking X Export turnver (Export turnover + domestic tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth Price based on the data for the financial year 2004- 2005 of the comparable companies which was not available at the time when the Respondent undertook its transfer pricing documentation and reporting obligations; c. Holding that the Cost Plus Method ('CPM') adopted by the Respondent is not the most appropriate method ; d. Rejecting the comparables selected by the Respondent under CPM on unjustifiable grounds and rejecting the comparability adjustments made by the Respondent while computing ALP; and e. Adopting the Transactional Net Margin Method ('TNMM') without justifying how the same is the most appropriate method; 5. The learned CIT (Appeals) has erred in confirming the action of the Transfer Pricing Officer in: a. Adopting unjustifiable and inappropriate filters for rejecting some of the comparables selected by the Respondent; b. Adopting companies as comparables even though they are not comparable in respect of functions performed, risks assumed, asset utilised, size, turnover etc; c. Confirming the action of the Transfer Pricing Officer in adopting companies like Foursoft Ltd, Sankhya Infotech Ltd and Geometric Software Solutions Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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