TMI Blog2015 (11) TMI 1674X X X X Extracts X X X X X X X X Extracts X X X X ..... d to take into account the same along with all the relevant material and to decide the percentage of risk adjustment in accordance with law. Interest under Section 234B - Held that:- The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (2001 (10) TMI 4 - SUPREME Court) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. Additional Ground on Depreciation Adjustment - Held that:- Admit the additional ground raised for grant of depreciation adjustment and remit the matter to the file of the TPO to consider and examine the assessee's claim for adjustment towards depreciation as relying on case of 24/7 Customer.com Pvt. Ltd. [2013 (1) TMI 45 - ITAT BANGALORE] - I.T. (T.P) A. No.133/Bang/2014 - - - Dated:- 6-11-2015 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For The Appellant : Shri K.R. Vasudevan, Advocate. For The Respondent : Shri D. Sudhakara Reddy, CIT-III (D.R.) ORDER Per Shri Jason P. Boaz, A.M. : This appeal by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct dt.25.3.2013 determining the income of the assessee at ₹ 31,30,33,121 which included, inter alia, the proposed T.P. Adjustment of ₹ 24,15,96,448. 2.3 Aggrieved by the aforesaid draft order of assessment dt.25.3.2013 for the Assessment Year 2009-10, the assessee filed its objections thereto before the DRP, Bangalore. The DRP vide its order under Section 144C(5) rws 144C(8) of the Act dt.18.11.2013 confirmed the additions / disallowances made by the TPO/A.O and rejected the objections raised by the assessee. In consequence thereof, the Assessing Officer passed the final order of assessment under Section 143(3) rws 144C of the Act dt.31.12.2013 assessing the taxable income of the assessee at ₹ 31,30,33,121 which included the T.P. Adjustment of ₹ 24,15,96,448. 3.1 Aggrieved by this final order of assessment for Assessment Year 2009-10 dt.31.12.2013, the assessee is in appeal before this Tribunal. Before proceeding to deal with the grounds of appeal, the brief facts relating to the Transfer Pricing issue is summarized hereunder :- 3.2 The assessee is engaged in the business of provision of software development services of electronic integrated circuit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5. Tata Elxsi Ltd. (Seg.) 3,78,43,03,000 3,14,63,15,000 20.28% 6. Sasken Communication Technologies Ltd. (Seg.) 4,05,31,20,000 3,18,69,97,000 27.91% 7. Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8. Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.81% 9. Mindtree Ltd. (Seg.) 7,93,22,79,326 5,74,06,73,058 5.52% 10. L T Infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11. Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparability analysis based on application of additional filters in determining the arm s length price. b. the learned AO/ learned TPO erred in including companies in the comparability analysis which do not satisfy the test of comparability. The following comparable companies selected by the learned TPO ought to be rejected as they are not comparable to the Appellant. Sl. No Name of Companies Rejection Reason 1 Bodhtree Limited - Engaged in development of proprietary software which is not similar to the Appellant - Abnormally fluctuating margins for the period from financial year (FY) 2004-05 to FY 2010-11. 2 Infosys Limited - Has high sales turnover as compared to the Appellant - Revenue is driven by brand value as against that of the Appellant 3 Larsen and Toubro Infotech Limited - Engaged in product development, infrastructure management services along with software development services and hence no segmental information is available. - Has high sales turnover as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing issues :- i) Ground No.6 : Kals Information Systems Ltd. should be rejected as a comparable. ii) Ground No.7 : Grant of depreciation adjustment. TRANSFER PRICING ISSUES. 5.1 In the course of proceedings before us, the learned Authorised Representative for the assessee submitted a chart, explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO in the list of comparable companies to the assessee. The learned Authorised Representative also submitted that he would put forth submissions only on the comparability of the individual companies selected by the TPO in the final set of comparables and also on the inclusion of two of the companies selected by the TPO. 5.2 In this context, it was submitted that only the following grounds of appeal in respect of TP Issues are being pressed and would require consideration and adjudication by the Bench :- i) Grounds at S.No.5 pertaining to the grant of risk adjustment. ii) Grounds No. 2(b) related to the exclusion of individual companies selected by the TPO. iii) Ground No.6 : Addl. Ground raised in respect of exclusion of Kals Information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of M/s. Airbus India Operations Pvt. Ltd. (supra). 1. Bodhtree Consulting Ltd. 2. Infosys Technologies Ltd. 3. Kals Information Systems (Seg.) 4. Persistent Systems Ltd. 5. Mindtree Ltd. 6. Tata Elxsi Ltd. (Seg.) 7. L T Infotech Ltd. 8. Sasken Communication Technologies Ltd. 9. Zylog Systems Ltd. We now proceed to determine the comparability of each of the above companies objected to by the assessee. 7. KALS Information Systems Ltd. (KALS) 7.1 This company was selected by the TPO as a comparable to the assessee, in spite of the assessee objecting to its inclusion of this company, on the ground that this company, being in product development, is not functionally comparable to a software development services provider like the assessee. It is submitted by the learned Authorised Representative that KALS is a product development company with significant inventory and many products as per details in its website and therefore being functionally dis-similar from the assessee in the case on hand, it ought to be excluded from the list of comparables to the assessee. In support of this proposition, the learned Authorised Representative fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006- 07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to end web solutions, consultancy and design and development of software using latest technology and therefore should be excluded as a comparable to the assessee in the case on hand who is purely a software development service provider. In support of its above contentions, the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd., for Assessment Year 2009-10 in IT(TP)A No.35/Bang/2014 dt.10.10.2014. 8.2.1 We have heard the rival contentions of both parties in respect of this comparable company; M/s. Bodhtree Consulting Company, and perused and carefully considered the material on record; including the judicial pronouncement cited by the assessee in this regard. We find that the issue of comparability of this company i.e. Bodhtree has been considered and decided by the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. for Assessment Year 2009-10 (supra); wherein it has been held that this company being a software product company cannot be considered as comparable to a assessee that is a software development service provider and has held as under at paras 15 16 there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid company from the list of comparable companies for the purpose of computation of ALP. 8.2.2 Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. for Assessment Year 2009-10 (supra) and taking into the facts and circumstances under which this company was considered and later excluded from the list of comparables, for identical reasons, we hold and direct the TPO to exclude this company, Bodhtree , from the list of comparable companies to the assessee in the case on hand. 9. Exclusion of companies based on Turnover Filter . 9.1 The learned Authorised Representative for the assessee brought to the notice of the bench that the following 7 companies ought to be excluded from the list of comparables as their turnovers are in excess of the upper turnover filter of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile selecting comparable companies for comparability analysis held as follows:- (1) Turnover Filter The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of ₹ 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et s analysis, the turnover of ₹ 1 crore to ₹ 200 crores was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm s length price in an international transaction and it provides:- (1) that the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- ( a ) comparable uncontrolled price method; ( b ) resale price method; ( c ) cost plus method; ( d ) profit split method; ( e ) transactional net margin method; ( f ) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed or to be employed by the enterprise or having regard to any other relevant base; ( ii ) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; ( iii ) the net profit margin referred to in sub-clause ( ii ) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; ( iv ) the net profit margin realised by the enterprise and referred to in sub-clause ( i ) is established to be the same as the net profit margin referred to in sub-clause ( iii ); ( v ) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee s turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 .. 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013 . Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of ₹ 230 crores in the total segment revenue of ₹ 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% ( 75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO. Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the risk profile needs to be adjusted for proper comparability. The assessee also submits that the details of the computation of the risk adjustment has also been submitted. In support of its contentions for being allowed risk adjustment, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Intellinet Technologies India Pvt. Ltd. in ITA No.1217/Bang/2010 and Bearing Point Business Consulting Pvt. Ltd. in ITA No.1124/Bang/2011. 10.2 We find that the co-ordinate bench of this Tribunal in the case of Intellinet Technologies India Pvt. Ltd. (supra) and Bearing Point Business Consulting Pvt. Ltd. (supra) thereof have held that, in principle, risk adjustment must be granted, if warranted in the facts of the case, for bringing the comparables on par with the assessee company. Following the above decision and of the co-ordinate bench (supra), we also hold that in principle, the assessee must be granted risk adjustment, if so required in the peculiar facts of the case for bringing the comparable companies on par with the assessee. However, the quantum of risk adjustment to be granted, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal The assessee vide letter dt.10.9.2012 filed an application seeking leave to urge additional grounds under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 which are as under : Ground 1 : Transfer Pricing It is most humbly prayed that this Hon'ble Tribunal to permit the appellant to raise the following additional ground in continuation of the existing grounds of appeal and be read as Ground No.1.7 after Ground No.1.6 Ground No.1.7 Depreciation adjustment - The depreciation cost as a percentage of the gross block of the appellant during the financial year 2004 was 25% and the comparables reported an average depreciation cost as a percentage of the gross block of 10%. - The difference in the depreciation cost arises due to differences in the accounting treatment across the comparables and the appellant. - Considering the above fact, to achieve reliable comparability, the margins of the comparable companies post the adjustment of the depreciation should be considered. 19.2 .. 19.3 19.4 We have heard both parties and considered the rival submissions. We find force in the submissions of the learned Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the end of the day, the depreciation off sets each by itself. 19.8 In the interest of equity and natural justice, we feel constrained to admit the additional ground raised by the assessee on the issue of depreciation. However, mere claim for an adjustment will serve no purpose unless it is backed by proper details. The additional ground states that the depreciation of the assessee is a ratio of its gross block of 25% as against 10% of the comparable companies. The assessee has not stated the depreciation as a percentage of operational cost nor has any evidence been placed on record to show that the difference in depreciation is due to any operational reasons. As discussed (supra), there could be several reasons for difference in depreciation between companies like, rates of depreciation, age of the assets, etc. and therefore adjustment towards depreciation can be granted only if there are operational differences that affect comparability. We remit the issue of depreciation as raised by the assessee in the additional grounds (supra) to the file of the Assessing Officer / TPO with direction to examine and consider the claim for adjustment towards depreciation in the light of our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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