9911796707
TMI Blog2015 (7) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee filed its return of income declaring total income of Rs. 1,00,10,120. The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In the year under consideration, the assessee had reported the following international transactions:- (i) Provision of software services : Rs.37,61,50,003. (ii) Reimbursement of expenses (Received) : Rs. 2,26,20,160 (iii) Reimbursement of expenses (Paid) : Rs. 36,39,030. 2.2 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer (TPO') for determining the Arm's Length Price ('ALP') of these international transactions, after obtaining the approval of the CIT- III, Bangalore. The TPO vide order passed under Section 92CA of the Act dt.31.10.2011 proposed a T.P. Adjustment of Rs. 2,35,10,275 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment for Assessment Year 2008-09 under Section 143(3) rws 144C of the Act dt.12.12.2011 incorporating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the data bases 'Prowess' and 'Capitaline'. After considering the objections of the assessee, the TPO selected the final set of 20 comparable companies, which are as under :- Sl. No. Name of the company OP/TC % 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd. 29.81 5 Flextronics (Aricent) 7.86 6 iGate Global Solution Ltd. 13.99 7 Infosys 40.37 8 Kals Information Systems Ltd (Seg) 41.94 9 LGS Global Ltd. 27.52 10 Mindtree Ltd (seg) 16.41 11 Persistent Systems Ltd. 20.31 12 Quintegra Solution Ltd. 21.74 13 R Systems International (Seg) 15.3 14 R S Software (India) Ltd. 7.41 15 Sasken CommunicationTechnologies Ltd. (Seg) 7.58 16 Tata Elxsi (Seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd. 16.5 AVERAGE 23.65 3.4 The Average Mean Margin of the 20 comparable companies selected by the TPO was 23.65% whereas the margin of the assessee was 14.69% on total cost. After granting the assessee working capital adjustment of 2.19%, the TPO worked out the T.P. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. TPO erred in rejecting the T.P. documentation without appreciating the contentions, arguments, and evidentiary data put forward by the appellant during the course of the proceedings before them, and in doing so have grossly erred : 6.1 in rejecting the comparability analysis carried in the TP documentation and conducting a fresh comparability analysis for determining the arm's length price by the ld. TPO. 6.2 In adopting the arm's length mark up to be 23.65%, in respect of the international transaction pertaining to the rendering of software development services by the appellant; 6.3 in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Income- tax Act, 1961 ('the Act'), which in many instances are inconsistent with the data disclosed in audited reports. In doing so the learned TPO has erred in complying with the principles of natural justice. 6.4 in considering 25 percent as the threshold limit for the Related Party Transactions filter as this number is an arbitrary number that has been adopted without any judicial precedence or reasonable basis. 6.5 in rejectin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (reference ITA No.1189/Del/2005); 6.13 in upholding the actions of the learned TPO in applying the export filter for selection of software comparables. In doing so, the learned TPO erred in rejecting Aarman Software Private Limited and VMF Soft Tech Limited. 6.14 in applying the onsite filter for selection of software comparables with the use of the data obtained under section 133(6) of the Act, is not economically valid. In doing so, the learned TPO erred in rejecting companies such as Akshay Software Technologies Limited, Prithvi Information Solutions Limited, Silverline Technologies Limited, Zylog Systems Limited and VJIL Consulting Limited. 6.15 in not maintaining consistency in applying the filters of rejecting companies with abnormal fluctuating margin, diminishing revenue/persistent losses for the period under consideration, companies with peculiar economic circumstances, companies with different financial year ending, companies for which data are not available in database/public domain and companies with related party transactions exceeding 25%. 6.16 in accepting companies like Wipro Limited, Thirdware Solution Limited, Persistent Systems Limited, Quintegra Sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat VAT refund does not comprise income from business and profession and in denying IOA deduction on the same. 3.3 The learned AO has failed to give an opportunity to the assessee of being heard on the aforesaid issue. III. Erroneous double taxation of the VAT refund 1. The learned AO has erred in including the VAT refund twice in the computation of total income. This has resulted in double taxation of the VAT refund. 2. The appellant has also filed a rectification application with the AO on 8th October 2012 against the above under section 154 of the Act. IV. Interest under section 234B of the Act 1. The learned AO has erred in levying interest under section 234B amounting to Rs. 3,081,258. The levy of interest under section 234B of the Act is consequential in nature." 4.2 The assessee vide letter dt.18.5.2015 has filed additional grounds of appeal at s.Nos.8 and 9 relating to T.P. issues; seeking exclusion of Lucid Software Ltd. and Bodhtree Consulting Ltd. from the list of comparables to the assessee. The assessee has filed detailed paper books in support of the grounds of appeal raised and also submitted copies of judicial decisions on which the assessee places rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We also find that the 20 comparables chosen by the TPO are the same in both the cited cases as also in the case on hand. It is also seen that various parameters of comparability are also similar; in that the TPO has adopted TNMM as the MAM in these cases, the PLI has been adopted at Operating Profit to Total Cost (OP/TC). In these circumstances as laid out above, we agree with the contentions of the learned Authorised Representative that the decisions rendered in the cited cases (supra) are applicable for considering the comparability of the companies in the assessee's case also. 5.4 In the light of the above observations, we now briefly examine the grounds of appeal raised by the assessee. As mentioned earlier, the learned Authorised Representative submitted that he would make submissions only on the comparability of the individual companies selected by the TPO in the final set of comparables. Therefore, only the grounds at S.Nos.6.6 to 6.11, 6.16 and 6.17 and the additional grounds at S.Nos.8 & 9 require adjudication. Therefore, since all the other grounds raised on Transfer Pricing issues i.e. at S.Nos.1 to 6.5, 6.12 to 6.15 and 7 are not pressed, they are rendered infructu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f software development services to its AEs and directed that this company be omitted from the list of comparables. At paras 7.6.1 and 7.6.2 of its order, the co-ordinate bench held as under :- "7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company, being into bio-informatics and software products and services, is to be omitted from the list of comparables as it was functionally dis-similar and different from a captive software service provider. At paras 9.4.1 and 9.4.2 of the above order, the co-ordinate bench held as under :- "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 to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gorised as Knowledge Process Outsourcing ('KPO') services. It is also submitted that this company has not provided segmental data in its Annual Report. It was further submitted that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to providers of software development services and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be excluded from the list of comparables. 8.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables. 8.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has omitted this company from the list of comparables on the ground that the KPO services rendered by it are not comparable to those rendered by a captive provider of software development services. At para 14.4 of its order, the co-ordinate bench has hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company being functionally dis-similar and different cannot be comparable to a captive software service provider, and therefore omitted it from the list of comparables. 9.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables to the assessee. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 and held that this company i.e. Infosys Technologies Ltd. is functionally dis-similar and different from a captive software service provider and therefore directed that this company be excluded from the list of comparable. At para 11.4 of its order, the co-ordinate bench has held as under :- "11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company i.e. KALS Information Systems Ltd. being into software products is functionally different from a captive software service provider, as is the assessee in the case on hand. At para 10.4 of its order, the co-ordinate bench has held as under :- "10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s. 133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h that this company i.e. Persistent Systems Ltd. is functionally dis-similar and different from a captive software service provider like the assessee and therefore requires to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 wherein this company was omitted from the list of comparables to software development services providers on being found to be functionally different. 11.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 11.4.1 We have heard the rival submissions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company is to be excluded from the list of comparables to a captive software service provider, as is the assessee in the case on hand, since it is functionally different; being into product de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 where this company was excluded from the list of comparables on the ground of functional differences from a captive software service provider. 12.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company as a comparable to the assessee. 12.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has omitted this company i.e. Quintegra Solutions Ltd. from the list of comparables since it is into product engineering services; is engaged in proprietary software products, has substantial R&D activity which has resulted in creation of IPRs and its own intangible assets thereby making it functionally different from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Authorised Representative contended that this company i.e. Tata Elxsi Ltd., is not functionally comparable to the assessee as it performs a variety of functions under software development services segment, namely product design, innovation design engineering, visual computing labs etc. as per the details reflected in its Annual Report; whereas the assessee in the case on hand is a captive software service provider. In support of its plea for excluding this company from the limit of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein this company was omitted from the list of comparables on grounds of being functionally different and dis-similar to a captive software service provider. 13.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited by the assessee. We find that the co-ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer/TPO to exclude this company from the list of comparables to the assessee. 14. Thirdware Solutions Ltd. 14.1 This company was selected as a comparable by the TPO inspite of the assessee's objections to its inclusion on the ground that its turnover was in excess of Rs. 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable on the ground that apart from software development services, it is in the business of product development; trading in software and giving licenses for the use of software. The learned Authorised Representative also pointed out from the Annual Report that this company has not provided any separate segmental profit and loss account for software development services and product development services. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein it was held to be not comparable to a purely software development service provider. 14.2 Per contra, the learned Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and technology related intangibles; has huge brand value, is a market leader in size and turnover which render it not functionally comparable to a captive provider of software development services. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, wherein this company was held to be functionally different and dis-similar and not comparable to a captive provider of software development services. 15.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 15.4.1 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be excluded from the list of comparables as it is functionally different and dis-similar from a captive software development service provider, as is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 133(6) of the Act it had categorised itself as a pure software developer and included this company as a comparable as the assessee was also a provider of software development services. Before us, the learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company was to be excluded from the list of comparables as its Related Party Transaction ('RPT') is in excess of 15%, by following the decision of another co-ordinate bench in the case of 24/7 Customer.Com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344/[2012] 28 taxmann.com 258 (Bang.). It was prayed that in view of the above, this company be excluded from the list of comparables. 16.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 16.3.1 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company, since it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in software product development and therefore was held to functionally different and dis-similar from providers of software development services. 18.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables to the assessee. 18.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company is to be excluded from the list of comparables as this company i.e. Lucid Software Ltd., being engaged in development of software products, was functionally different from a provider of software development services, as is the assessee in the case on hand. At para 10.3 of its order the co-ordinate bench has held as under :- "16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of NXP Semi Conductors (P.) Ltd. (supra) for Assessment Year 2008-09 has held that this company is not comparable to companies engaged in software development services and prayed that in view of the above, this company be excluded from the list of comparables to the assessee. 19.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparables. 19.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in the case of NXP Semi Conductors (P.) Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparable companies to those engaged in provision of software development services, like the assessee in the case on hand, since Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open and end-to-end web solutions, software consultancy and design and development of software using latest technology. At paras 15.3.1 and 15.3.2 of the above order, the co-ordinate bench has held as under :- "15.3.1 We have heard both parties and perused and carefully cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, 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 notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect the Assessing Officer that travel, interest charges - MPLS, etc incurred in foreign currency are to be excluded from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act, as has been prayed by the assessee in its alternate plea at Ground raised at No.2. In view of the acceptance of the alternate plea of the assessee, and also since the Ground No.1 is not pressed in this appeal, it is rendered infructuous and is accordingly dismissed. 20.3.1 In Ground No.3, under the computation of deduction under Section 10A of the Act, the assessee contends that the Assessing Officer has erred in treating VAT refund as 'income from other sources' while computing the deduction under Section 10A of the Act. It is the contention of the assessee that VAT Refund does not constitute 'income from other sources' and has to be treated as 'income from business'. It is also contended that the assessee was not afforded opportunity of being heard on this issue. 20.3.2 On an appreciation of the material on record, we find that the DRP had confirmed the Assessing Officer's finding on the ground that the assessee failed to ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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