Contact us   Feedback   Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2017 (4) TMI 762 - ITAT BANGALORE

2017 (4) TMI 762 - ITAT BANGALORE - TMI - TPA - selection of comparable - criteria - Held that:- Product development company cannot be compared with that of software development company. Companies dissimilar or functionally different from the assessee software development company need to be rejected from final list of comparable. - 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 d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a Das, JCIT. For The Assessee : Shri Padamachand Khincha, CA. ORDER 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), U .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 indicator for the transfer pricing (TP) study. The assessee-company applied CPM method i.e. cost plus method which was considered to be most appropriate method for the purpose of bench marking its international transactions. The assessee-company s profit margin was .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

with its AEs are at arm s length. The assessee-company also chose the following 12 entities as comparables whose average profit margin was computed at 23.11%: Sl. No. Name of the Company 1 Transworld Infotech Ltd. 2 Virinchi Technologies Ltd. 3 Shree Tulsi Online. Com Ltd. 4 Fortune Infotech Ltd. 5 Software Technology Group International Ltd. 6 IEC Software Ltd 7 Zen Technologies Ltd. 8 IT Microsystems (India) Ltd. 9 Gebbs Infotech Ltd. 10 Tera Software Ltd. 11 IL & FS Education and Technol .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

fit by operating cost as profit level indicator [PLI]. Then the TPO proceeded to identify a different set of comparable entities for the 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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% 2 Lanco Global Solutions Ltd 13.65% 10.49% 3 Exensys Software Solutions Ltd 70.68% 64.50% 4 Sankhya Infotech Ltd 27.39% 22.28% 5 Sasken Network Systems Ltd 16.64% 15.05% 6 Foursoft Ltd 22.98% 22.48% 7 Thirdware Solutions Ltd 66.09% 65.64% 8 R S Software (India) Ltd 8.07% 7.73% 9 Geometric Software .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

er giving working capital adjustment of 1.69% adjusted arithmetical mean PLI was determined at 24.9%. On the above basis, the TPO computed TP adjustment as follows: Arms Length Price : Operating Cost ₹ 11,80,29,119/-* Arms Length Margin 24.90% of the Operating Cost Arms Length Price (ALP) @124.90% of operating cost ₹ 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ed, 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 the issue of selection of comparables, the CIT(A) has excluded the following companies : (i) Bodhtree Consulting Ltd - on the ground of functional .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

re from export turnover, the CIT(A) held that the same should be reduced from export turnover as well as total turnover on the reasoning of parity. Thus, the CIT(A) has partly allowed the appeal filed by the assesseecompany. 7. Being aggrieved, the revenue is in appeal in IT(TP)A No.462/Bang/2013 before us raising the following grounds of appeal: 1. The order of the Learned C1T (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

holding that M/s Tata Elxsi Ltd , cannot be taken as comparable, without appreciating the fact that the company qualifies all the qualitative and quantitative filters applied by the TPO in selection of this company as a comparable. 4. The learned CIT(A) in the facts and circumstances of the case erred in holding that M/s Bodhtree Consulting Ltd., cannot be taken as comparable, without appreciating the fact the company qualifies all the qualitative and quantitative filters applied by the TPO in s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

as Exensys Software Solutions, iGate Global Solutions Ltd., L&T Infotech Ltd. Satyam Computers Ltd., Thirdware Solutions, Infosys Technology Ltd., M/s.Flextronics SoftwaRe Systems Ltd., Tata Elxsi on the ground of turnover exceeding ₹ 200 crores. 9.1 The learned Departmental Representative vehemently contested that turnover is not a relevant criteria for deciding comparability of a company on the touchstone of provisions of rule 10B of the IT Rules,1962.. In this connection, he has rel .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d is a product based company. In this connection, he has invited our attention to page 154 of the paper book wherein it is stated as under: Exensys Software Solutions is engaged in various activities including BPO and is basically a product based company. This company is to be rejected for the following reasons: • During the year under consideration, Holool India Limited was amalgamated with Exensys Software. This has resulted in jump in revenues and profits. This is amply clear, if one ref .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

gment of the business in line with the industry growth rates, to consolidate in the BPO segment, and to expand strategic relationship to achieve the desirable growth rates". From the above, it is clear that the company operates in atleast two business segments viz software services and BPO services. As 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ew 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 al .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

re is abnormal increase in the profit and turnover. In support of this, he relied on the decision of the co-ordinate bench in the case of (i) DCIT vs. Kodiak Networks India Pvt. Ltd. in IT(TP)A No.532/Bang/2013 dated 30/07/2015, (ii) ITO vs. Vendio Technolgoies India Pvt. Ltd. in IT(TP)A No.1374/Bang/2011 dated 19/09/2014; (iii) ITO vs. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 dt.11/06/2015; (iv) IVY Comptech Pvt Ltd. (2014) 43 taxmann.com 183)(Hyd); and (v) M/ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a result of which there were abnormal profits. The relevant part of the decision in the case of Intoto Software India Pvt. Ltd., (supra) is extracted below: 17. Having heard both parties and having considered the material available on record, we find that there is no dispute that the assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i.e., Exensys Software Limit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ies and having considered the material available on record, we find that there is no dispute that the assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i.e., Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Highe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n amalgamation. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables. 10.1 iGate Solutions and L&T Infotech were excluded by the CIT(A) on the ground that turnover is more than ₹ 200 crores. The learned AR of the assessee seeks to exclude this company from the list of comparables on the ground that turnover is more than 10 times the turnover of that of the assessee-company. Reliance in this regard is placed on the decision in the case of McAfee Softwar .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 (Indi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the assessee that this company is functionally different from that of the assessee-company as it is engaged in the business of information services, consulting and outsourcing company. It also it derives income from sale of licenses. Reliance in this regard was placed on the decisions of the co-ordinate bench in the case of Kodiak Networks India Pvt. Ltd. (supra), Sunquest Information Systems (India) Pvt Ltd.(supra) and Hyderabad bench of Tribunal in the cases of Intoto Software India Pvt.Ltd.( .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on the ground of functionality. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables. 10.6 Infosys Technologies was excluded from the list of comparables by the CIT(A) on the ground that its turnover exceeds ₹ 200 crores. However, it is contested by the learned authorised representative of the assessee that this company is functionally different from that of the assessee-company as it enjoys high brand value and has placed reliance on the decision of the c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

with high brand value cannot be compared with that of 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 excl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 company is functionally different as it is engaged in diverse activities that are dissimilar to those rendered by the assesseecompany. Reliance in this regard is placed on the decision of coordinate bench in the case of Kodiak Networks India Pvt. Ltd. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

anagement, i-publishing, Data cleansing etc. Learned authorised representative of the assessee placed reliance on the decision of the coordinate bench in the case of Kodiak Networks India Pvt. Ltd.(supra). The relevant part of the judgment is extracted below: 32. In the C.O. the Assessee has also prayed for exclusion of Bodhtree Consulting Ltd., which was considered as a comparable company by the TPO/DRP. Bodhtree Consulting Ltd. was chosen as a comparable company by the assessee in its TP study .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

including the same as a comparable before the lower authorities, or the assessee had chosen in its TP study a company which it seeks to exclude as a comparable. The Special Bench of Chandigarh Tribunal in DCIT v. Quark Systems P. Ltd. (2010) 38 SOT 307 has held that the Tribunal is a fact finding body and therefore has to take into account all the relevant material and determine the question as per the statutory regulations and that tax payer is not estopped from pointing out a mistake in the a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 co .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

unal, Mumbai, in the case of Maersk Global Centres (India) P. Ltd., in ITA.7466/Mum/2012, dt 07.03.2014 for AY 2008-09 had an occasion to consider the question as to whether companies having abnormal profits should be excluded as a comparable. The Special Bench took the view that it has to be shown that the high profit margin does not reflect the normal business conditions and only in such circumstances, high profit margin companies can be excluded. Our attention was drawn to the DRP's obser .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ity or otherwise of this entity, it is important to first note that the Indian software industry uses two different models for revenue recognition. The first is the Time and Material (T&M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model (FPP .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

it is seen that this entity is engaged in building revenues through Fixed Price Project model. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year, for which the revenue 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 functi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t 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 deal with the question as to whether high profit margin making companies sho .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ecision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ee. We hold and direct accordingly." 33. The ld. counsel for the assessee filed before us a chart showing the fluctuation margins of Bodhtree Consulting Ltd., which are as follows:- 34. As can be seen from the above analysis, this company has erratic margins and growth over the years. The margins of Bodhtree are consistently changing. This reflects that the revenue recognition policy followed by Bodhtree is not proper and is resulting in consistent change in margins. Further, the growth rat .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cordingly 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote 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 a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

dertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in said formula, export turnover is defined, and when the total turnover includes export turno .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ld 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 (Ex .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

id down by the Hon'ble jurisdictional High Court, we do not interfere with the order of the CIT(A). 14. In the result, appeal filed by the revenue is partly allowed for statistical purposes. 15. Cross Objections are filed by the assessee. The assessee raised the following grounds of cross objections: General Grounds 1. The Order of the learned Commissioner of Income Tax (Appeals) - IV, Bangalore [CIT (Appeals)], to the extent prejudicial to the Respondent is bad in law. 2. The learned CIT (A .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

opted; b. Passing the order without demonstrating that the Respondent had evasion; c. Relying upon replies received under section 133(6) without giving an opportunity to the Respondent to cross examine the parties involved, despite a specific request so made; and d. Not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ndent 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 me .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version