TMI Blog2016 (1) TMI 1277X X X X Extracts X X X X X X X X Extracts X X X X ..... aving a turnover of more than ₹ 200 crores but are also functionally different as pointed out by the learned counsel for the assessee and hence, cannot be taken as a comparable to that of the assessee. We uphold the order of the CIT(Appeals) in directing the AO to include Maars Software International Ltd. as a comparable. The assessee provides software development services which include embedded and network management, technical documentation, system verification test and associated hardware design for the products developed by Infinera Corp., thus companies disimilar with that of assessee need to be deselected. - IT(TP)A No.294/Bang/2013, Cross Objn.No.152/Bang/2015 - - - Dated:- 20-1-2016 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Revenue : Dr. P.K.Srihari, Addl. CIT (DR) For The Assessee : Shri Eric Mehta, CA. Per Smt.ASHA VIJAYARAGHAVAN, JM: The appeal by the Department as well as the cross objections by the assessee are against the order of the CIT(A)-IV, Bangalore, dated 30/11/2012 for the assessment year 2008-09. 2. Brief facts of the case are that the assessee, a wholly owned subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the CIT(A) allowed this ground of appeal and directed the AO to exclude from the assessee s total turnover the communication expenses and foreign currency travel expenses which he has already excluded from the export turnover and to accordingly modify the computation of relief allowable u/s 10A. 5. Aggrieved, the department has come up in appeal in ground Nos.2 to 4 stating that the department has not accepted the decision in the case of Tata Elxsi Ltd., (supra) and an SLP had been filed before the Hon ble Supreme Court against the order which is pending. 6. We have heard the parties. We are bound to follow the order of the jurisdictional High Court in the case of Tata Elxsi Ltd. (supra) and hence we confirm the order of the CIT(A) and dismiss the department s grounds No.2,3 and 4. 7. With respect to transfer pricing issues, the CIT(A) held that the total turnover has the deciding factor for treating the company as comparable and accordingly excluded (i) Flextornics Software, (ii) iGate Global Solutions Ltd., (iii) Infosys Technologies Ltd., (iv) Persistent Systems Ltd., (v) Sasken Communications, (vi) Tata Elxsi Ltd., and (vii) Wipro Ltd., as comparable. Aggrieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buyer and seller and therefore comparability. 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. 13. It was further submitted that the TPO s range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than ₹ 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than ₹ 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Sec.92-B provides that international transaction means a transaction between two or more associated enterprises, ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm s length price in relation to the said international transaction in accordance with subsections (1) and (2), on the basis of such material or information or document available with him: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm s length price under section 92C:- 10B. (1) For the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hardware and software development activities and hence is functionally different from that of the assessee. The learned counsel for the assessee relied on the decision in the case of Apigee Technologies (India) Pvt. Ltd., in IT(TP)A No.870/Bang/2013 dated 23/09/2015 wherein it has been held as under: 9. The arithmetic mean of the comparables selected by the assessee was at 9.01%, whereas that of the TPO was at 23.65%. The ld. counsel for the assessee before us objected to the following comparables selected by the TPO on the ground of functional dissimilarity:- 1. Avani Cimcon Technologies Ltd. 2. Celestial Biolabs Ltd. 3. E-Zest Solutions Ltd. 4. Infosys Technologies Ltd. 5. Kals Info Systems Ltd. (Seg) 6. Persistent Systems Ltd. 7. Quintegra Solutions Ltd. 8. Tata Elxsi Ltd. 9. Thirdware Solutions Ltd. 10. Wipro Ltd. (Seg) 11. Lucid Software Ltd. In short, out of the 20 comparables selected by the TPO, the assessee objected to 11 comparables listed above as functionally dissimilar and not to be included in the TP study. 10. With respect Avani Cimcon Technologies Ltd., it was the assessee s submission that the assessee offers diversified o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tancy services in IT on various platforms and technologies. 6 Tata Elxsi Ltd. AS seen from the annual report, it has business units divided into Embedded product Design Services, Industrial Design Services, Animation and Visual Effects,Systems Integration services which are related to high-end hardware and software development activities. 7 Thirdware Solutions Ltd. As seen from the annual report, it earns revenue by rendering software development services, sale of user licences for software applications and also from sale of investments. 8 Lucid Software Ltd. It is a product company focusing on Advanced Non destructive Testing (NDT) technologies. As per the website, it is actively involved in R D activities with leading scientific and educational institutions. 13. The assessee placed reliance on the following decisions in support of its contentions:- - 3DPLM Software Solutions Ltd. IT(TP)A No.1303/Bang/2012 (AY 2008-09) - Trilogy E-Business Software India P. Ltd. (ITA No.1054/Bang/2011 (AY 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the assessee placed reliance on the following decisions:- - 3DPLM Software Solutions Ltd. IT(TP)A No.1303/Bang/2012 (AY 2008-09) - Trilogy E-Business Software India P. Ltd. (ITA No.1054/Bang/2011 (AY 2007-08) - Systech Integrators India Pvt. Ltd., ITA No.1283/Bang/2012 (AY 2008-09) - Telcordia Technologies India Pvt. Ltd., ITA No.7821/Mum/2011 (AY 2007-08) - Adaptec (India) Pvt. Ltd., ITA 1758/Hyd/2012 (AY 2008-09) - App Labs Technologies Pvt. Ltd., ITA No.94/Hyd/2013 (AY 2008-09) - CIT v. Agnity India Technologies Pvt. Ltd., ITA No.1204/2011, Delhi High Court. 16. The assessee s reliance on 3DPLM Software Solutions Ltd. IT(TP)A No.1303/Bang/2012 (AY 2008-09) is well taken and hence the 11 companies identified by the assessee referred to in paras 12 and 14 hereinabove are functionally different. We therefore direct the TPO to exclude the aforementioned 11 comparables from the list of comparables for the TP study. 10. With respect to Wipro Ltd., the learned counsel for the assessee stated that though the turnover of Wipro Ltd., is more than ₹ 200 crores, it is also functionally different being product development company. He referred to the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenues over a period of time may not necessarily be performing badly, if it still had a good profit margin achieved through cost efficiency. Growth of the Indian software industry cannot be attributed solely to existing companies, but also to new companies set up. Considering these aspects, I uphold the appellant s arguments on this issue. 14. Ground No.7 states that the CIT(A) erred in not appreciating that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party. 15. The CIT(Appeals) on this issue held as under:- 138. There is force in the appellant s contention that AS-21 issued by the ICAI on consolidation of accounts as well as section 212 of the Companies Act permit differences in the dates of financial year closure of companies within a six-month time frame. I am inclined to agree with the appellant that where the accounting period of a comparable exceeded the financial year by not more than six months relative to the accounting year of the appellant, it should be considered as a comparable, so long as these companies, even through having different financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere it was held that the TPO had wrongly objected that taxpayer did not exclude companies having low employee cost, also suggests that use of low employee cost as a filter may be inappropriate in cases where TNMM had been used as the most appropriate method to determine the ALP. 148. For the above reasons, I hold that the TPO was not justified in applying the employee cost filter in some cases, while disregarding it in respect of others. As the suitability of the filter for judging the comparability of entities under the TNMM is not established, I am unable to accept its use in the present case. I therefore direct the AO to include for TP analysis Maars Software International Ltd. that was excluded by the TPO on the basis of the employee cost filter. However, M/s CGVAK Software Exports Ltd., which was also excluded on this filter, cannot be considered a comparable in view of its negative operating margin during the year. 19. We uphold the order of the CIT(Appeals) in directing the AO to include Maars Software International Ltd. as a comparable. Ground No.8 is dismissed. 20. Ground No.9 states that the CIT(A) erred in holding that M/s.Bodhtree Consulting Ltd., being func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. 22. Following the decision of the Tribunal in the case of Cisco Systems India Pvt. Ltd. (supra), this issue is decided against the assessee. Ground No.9 raised by the Revenue is allowed. 23. With respect to ground No.10 challenging the order of the CIT(A) that he erred in holding that M/s.Celestial Labs being functionally different, cannot be taken as a comparable, the learned counsel for the assessee has relied on the following decisions of this Tribunal: i. 3DPLM Software Solutions Ltd. in IT(TP)A No.1303/Bang/2012 ii. Apigee Technologies (India) P.Ltd., in IT(TP)A No.870/Bang/2013; iii. Symbol Technologies India Pvt. Ltd., in IT(TP)A No.15/Bang/2013 iv. Bearingpoint Property Services Pvt. Ltd., in IT(TP)A No1380/Bang/2012 v. GXS India Technology Centre in IT(TP)A No.1444/Bang/2012 24. M/s.Celestial Biolabs Ltd., is functionally dissimilar i.e. it is into bio-informatics software product/services and in the development of products in the field of bio-technology, pharmaceuticals and hence is not comparable to that of the assessee-company. This Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) regarding comparability of this company, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g/2011 and by the ITAT, Delhi Bench in the case of Transwitch India Pvt. Ltd. in ITA No.6083/Del/2010. (v) The facts pertaining to this company has not changed from Assessment Year 2007-08 to Assessment 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pigee Technologies (India) P.Ltd., in IT(TP)A No.870/Bang/2013; iii. Symbol Technologies India Pvt. Ltd., in IT(TP)A No.15/Bang/2013 iv. Bearingpoint Property Services Pvt. Ltd., in IT(TP)A No1380/Bang/2012 v. GXS India Technology Centre in IT(TP)A No.1444/Bang/2012 27. M/s.Lucid Software is a product company focusing on Advanced Non-destructive Testing (NDT) Technologies. The company is actively involved in R D activities with leading scientific and educational institutions and hence is not comparable to that of the assessee. 28. This Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) regarding comparability of this company viz., Lucid Software, has held as follows:- 16. Lucid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that 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. 29. Following the decision of the coordinate Bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), this company has to be rejected as a comparable. Hence, ground No.11 by the Revenue is rejected. 30. Ground No.12 is that the CIT(A) erred in includi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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