TMI Blog2015 (7) TMI 1249X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest 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 ]. In this view of the matter, we uphold the action of the Assessing Officer in charging the assessee the said interest. - I.T. (T.P.) A. No. 1634/Bang/2014, S.P. No. 37/Bang/2015 - - - Dated:- 22-7-2015 - P. Madhavi Devi (Judicial Member) And Jason P. Boaz (Accountant Member) For the Appellant : Nageshwar Rao, Advocate For the Respondent : Jahanzeb Akhtar, CIT-III, Bangalore ORDER Jason P. Boaz (Accountant Member) This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.20.10.2014 for Assessment Year is 2009-10. 2. The facts of the case, briefly, are as under :- 2.1 The assessee is engaged in the business of development of software and indenting sale of application embedded business and industrial software. The assessee company, formerly known as Phillips Semi-conductors India Pvt. Ltd. was incorporated on 18.7.2006 as a 100% EOU set up under the STPI Scheme; is a priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Assessment Year 2009-10, the assessee has preferred this appeal raising the following grounds :- General Grounds 1. The order of the learned CIT(A) is based on incorrect interpretation of law and therefore is bad in law. 2. The learned CIT(A) erred in upholding the enhancement of the total income of the Appellant to ₹ 76,22,25,096 by the AO/TPO as against returned income of ₹ 47,88,62,424. Grounds of appeal relating to Corporate Tax adjustments: 3. The learned CIT(A) has erred in law and on facts by not adjudicating on the additional ground for claim of depreciation on goodwill on the basis that such claim was not made before the AO despite the fact that depreciation is a mandatory allowance to be given by the AO even though not claimed by the Appellant in the return of income or during the assessment proceedings. 4. The learned CIT(A) has erred in law and on facts by rejecting the additional ground for claim of depreciation on goodwill on the basis that the Appellant has an alternative remedy of filing rectification before the AO disregarding the fact that such an application was already filed with the AO. 5. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es based on unreasonable comparability criteria: Companies accepted by TPO based on unreasonable comparability criteria (a) Bodhtree Consulting Ltd.-Supernormal profits, exceptional year of operations and Functionally different. (b) Tata Elxsi Ltd.- Functionally different since software development segment of the said company includes a) product design services b) innovation design c) visual computing labs. Further break up is not available. (c) Infosys Ltd.- Functionally different since it owns IPs and has registered significant number of patents. Also, the margin is high due to brand s reputation in the market. (d) Persistent Systems Ltd.- Engaged in product development and analytics services and segmental information to bifurcate revenues, costs and profits between these two segments are not available. Companies rejected by TPO based on unreasonable comparability criteria a) Aztecsoft Limited TPO rejected by stating that it fails export earnings filter which is factually incorrect. b) SIP Technologies and Exports Limited -TPO rejected by stating that it fails the RPT filter which is factually incorrect. c) CG Vak Software Expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or adjudication afresh. 5.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and have perused and carefully considered the submissions on record on this issue. We find that the same issue was before the coordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08. In its order in IT(TP)A No.1174/Bang/2011 dt.14.11.2014, the co-ordinate bench of this Tribunal had admitted this additional ground of appeal for adjudication and remanded the matter to the file of the Assessing Officer for examination and consideration of the issue raised holding as under at paras 49 50 thereof :- 49. We have given a very careful consideration to the rival submissions. It is clear from the material on record of the AO that the facts with regard to the business transfer by PEIL to the Assessee and its valuation were filed before the AO in the course of assessment proceedings. The fact that there was a sum of ₹ 140 crores shown as goodwill consequent to the business transfer agreement has also been acknowledged by the AO in the order of assessment. As to how the goodwill was valued and whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial already available on record and such other material that the AO may require and such other material as the Assessee may rely upon to substantiate its claim for depreciation on goodwill. The AO will afford opportunity of being heard to the Assessee. For statistical purpose, the additional ground is treated as allowed. 5.3 Following the above decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra), we remand the matter to the file of the Assessing Officer for his examination and consideration of the issue in the light of the directions issued by the Tribunal at paras 49 and 50 of its order for Assessment Year 2007-08 in the assessee's own case (supra). TRANSFER PRICING ISSUES (Ground Nos.6 to14) 6.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO as comparable companies to the assessee. The learned Authorised Representative also submitted that he would only press those grounds on the comparability of individual companies selecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issues raised in the above grounds 8 to 14 are necessary. 7.1 As per the T.P. Study carried out by the assessee, for the software development service segment, adopting TNMM as the Most Appropriate Method ( MAM ) and taking itself as the tested party, the assessee selected a set of 21 companies as comparables with an average profit margin of 14.13% on cost. The assessee's list of comparables, as per its T.P. Study, are as under :- Sl.No. Name of the Comparable 1. Akshay Software Technologies Ltd. 2. Ancent Software International Ltd. 3. Aztecsift Ktd, 4. CG-VAK Software Exports Ltd. 5. Goldstone Technologies Ltd. 6. Helios Matheson Information Technology Ltd. 7. Indium Software (India) Ltd. 8. Infosys Technologies Ltd. 9. KPIT Cummins Infosystems Ltd. 10. La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,31,20,000 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. Larsen and Toubro 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 Average Mean 24.32 The average mean margin of the 11 comparable companies selected by the TPO was 24.32% whereas the average mean margin of the software development services segment of the assessee was 10.57% on total cost. After granting working capital adjustment of 1.71%, the TPO computed the T.P. Adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... final set of comparables. 9.2 In the appeal 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 as it is into software products, unlike the assessee who is only a software service provider to its AEs. It was also submitted that this company being into development of software products and also being engaged in providing training was rejected as a comparable to a software service provider by the decision of a co-ordinate bench of this Tribunal in the case of M/s. Cisco Systems Services BE., India Branch (supra) for the same Assessment Year 2009-10; following the decision of the coordinate bench in the case of Triology E Business Software India Pvt. Ltd. (supra). The learned Authorised Representative prayed that in view of the above cited decision (supra), this company be excluded from the list of comparables. 9.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final list of comparables. 9.4.1 We have heard both parties and perused and carefully considered the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from an assessee who is merely a provider of software services. 10.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final set of comparables. 10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B. V. , India Branch (supra), for Assessment Year 2009-10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 20 of the order has held as under :- 20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though thesaid company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised Representative submitted that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment; namely product design, innovation design engineering and visual computing labs, as is reflected in the Annual Report of the company and is not a pure software development service provider like the assessee. The learned Authorised Representative also submitted that the co-ordinate benches of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra) for Assessment Year 2009-10 has held that this company being into software products and various diversified activities is to be excluded from the list of comparables for a software service provider. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable. 11.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Flextronics Software Systems Ltd., : The learned TPO. .. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the 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 subsegments 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. 21. We have hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices BE., India Branch (supra) in the relevant portion of the order at para 20 thereof it has been held as under :- 20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though thesaid company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.14.8.2014 is reproduced hereunder :- 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices company. The TPO therefore included this company in the list of comparables as it qualified the functionality criterion. 13.2 In proceedings before us, the assessee objected to the inclusion of this company as a comparable on the ground that it being engaged in software development services and analytic services, and owning its own intangible assets, it is not a purely a software development service provider as is the assessee in the case on hand. The learned Authorised Representative submitted that a co-ordinate bench of this Tribunal in the assessee's own case in IT(TP)A No.1560/Bang/2012 for Assessment Year 2008-09 has excluded this company from the list of comparables to a purely software development service provider on the grounds of functional difference and therefore prayed that in this year also, this company ought to be excluded from the list of comparables since the assessee is only rendering software development services. 13.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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