TMI Blog2015 (7) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee failed to adduce any evidence to support its claim. Considering the submissions made that the assessee was not afforded any opportunity of being heard in the matter and that the DRP dismissed its claim for lack of evidence being adduced, we deem it fit to remand the matter to the file of the Assessing Officer for de novo consideration of this issue and to decide thereon after affording the assessee adequate opportunity of being heard and to file details/evidence to support its claim in the matter. Interest under Section 234B - Held that:- The assessee denied itself liable to be charged interest under Section 234B of the Act. 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 CIT v. Anjum M.H. Ghaswala [2001 (10) TMI 4 - SUPREME Court] and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B and 234C of the Act, if any, while giving effect to this order. - IT (T.P.) Appeal No. 1487 (Bang.) of 2012 - - - D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions in respect of software development services rendered by the assessee as had been proposed by the TPO in her order under Section 92CA of the Act. 2.3 Aggrieved by the draft assessment order dt.12.12.2011 for Assessment Year 2008-09, the assessee filed its objections thereto before the DRP, Bangalore. The DRP vide its order passed under Section 144C(5) rws 144C(8) of the Act dt.26.6.2012 issued its directions confirming 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.7.9.2012, against which the assessee is in appeal before the Tribunal. 3. Before proceeding to deal with the grounds of appeal raised by the assessee, the brief facts related to the T.P. issues are summarised hereunder :- 3.1 The assessee, a domestic private limited company is engaged in the provision of software development services to its Associated Enterprises ('AEs'). For the year under consideration, the assessee had reported the following international transactions :- S. No. Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the ld. A.O. ought to have accepted the difference in risk profile of the appellant vis- -vis the comparable companies. The ld. TPO and the ld. A.O. erred in not allowing the benefit of market risk adjustment to the appellant. 4. The ld. TPO and the ld. A.O. erred in concluding that the appellant is exposed to single customer risk without evaluating the business arrangement of the appellant. 5. The ld. TPO and the ld. A.O. erred in not allowing the benefit of range of +/- 5% as provided in proviso to section 92C(2) of the Act to the appellant, while determining the arm's length price. 6. On the facts and circumstances of the case, the ld. A.O. and ld. 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lings in case of SAP LABS India Pvt. Ltd. v. ACIT (reference ITA. No. 398IBang/2008), E-Gain Communication Private Limited (reference: ITA No. 1685/PN/07 - Pune); 6.11 in accepting companies like Flextronics Software Systems Limited, Quintegra Solutions Limited, Sasken Communications Technologies Limited, Wipro Limited and R Systems International Limited without taking into consideration the peculiar economic circumstances surrounding their operations during the year under review; 6.12 in accepting companies having Related Party Transactions exceeding 10% such as Softsol India Limited and Infosys limited. In doing so the learned AO has disregarded the Delhi IT AT ruling in case of Sony India Pvt. 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 rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services outside India and hence, the same should not be reduced from the export turnover of the Company. 2. No corresponding reduction of expenses from the total turnover. 2.1 Notwithstanding and without prejudice to the above, the learned AO has erred in reducing the aforesaid expenditure only from export turnover without reducing the same from total turnover in computing deduction under section IOA of the Act. 2.2 The learned AO has further erred in ignoring the settled principle, enunciated by the jurisdictional High Court in the case of Tata Elxsi Ltd. (ITA No. 70 of 2009), dated 30th August, 2011, that for the purpose of calculation of deduction under section IOA of the Act, any expenditure reduced from export turnover, should also be reduced from total turnover. 3. Denial of IOA deduction on the VAT refund of ₹ 9,502 3.1 The learned AO has erred in treating VAT refund amounting to ₹ 9,502 as income from other sources. 3.2 The learned AO has erred in holding that 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of NXP Semi Conductors India (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 140 (Bang. - Trib.) In IT(TP)A No.1560/Bang/2012 dt.5.3.2015 which is also rendered for Assessment Year 2008-09. 5.3 At the outset, it needs to be examined whether the facts of the cases in the judicial pronouncements relied on by the assessee are comparable and similar to the facts of the case on hand. We find that for the for exclusion of certain companies from the TPO's list of comparables, the assessee has placed reliance on the decision of the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) and NXP Semi Conductors India (P.) Ltd. (supra). As pointed out by the learned Authorised Representative in the aforesaid decisions relied on (supra); both cases are also in respect of Assessment Year 2008-09, which is the year under consideration in the case on hand and in both the cited cases also, the TPO has characterised the assessees in both the cited cases as captive service providers; providing software development services to their AEs. 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... final list of comparables, has not been shared by the assessee. 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 is to be omitted from the list of comparables, inter alia, on the ground that this company is functionally dis-similar and different from the assessee which is a captive provider of software development services to its AEs. 6.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in selecting this company as a comparable to the assessee in the case on hand. 6.4.1 We have heard the rival contentions and have perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is functionally dis-similar and different from the assessee who is a provider of software development services to its AEs and directed that this company be omitted from the list of comparables. At paras 7.6.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable was selected as a comparable by the TPO overruling the objections of the assessee that this company is functionally different from the assessee and that it fails the employee cost filter. 7.2 Before us, the learned Authorised Representative of the assessee contended that this company is not functionally comparable to the assessee in the case on hand as it is into bio-informatics, software products and services and the segmental break up is not provided. The learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in its order in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, has held that this company be omitted from the list of comparables. 7.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparables to the assessee. 7.4.1 We have heard the rival submissions and perused and carefully considered the material on record, including the judicial decisions 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 had held that this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of comparables. The A.O./TPO are accordingly directed. 7.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables. 8. e-Zest Solutions Ltd. 8.1 This company was selected as a comparable by the TPO after rejecting the assessee's objections that it was functionally different from the assessee. The TPO selected this company on the ground that as per the information furnished by this company under Section 133(6) of the Act, it is engaged in software development services and satisfies all the filters. 8.2 Before us, the learned Authorised Representative of the assessee reiterated the assessee's contention that this company be excluded from the list of comparables as it was functionally different from the assessee. It was submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', which are high end ITES normally categorised as Knowledge Process Outsourcing ('KPO') services. It is also submitted that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n hand. The A.O./TPO is accordingly directed. 8.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer to exclude this company i.e. e-Zest Solutions Ltd., from the list of comparables. 9. Infosys Technologies Ltd. 9.1 This company was selected as a comparable by the TPO inspite of the objections of the assessee to its inclusion on grounds of size, turnover and brand attributable profit margin. The TPO was of the view that turnover and brand aspects were not materially relevant in the software development segment. 9.2 Before us, the learned Authorised Representative contended that this company is functionally different from the assessee in the case on hand as it commands substantial brand value, owns IPRs and intangibles of its own and is a market leader in software development activities, whereas the assessee is merely a captive software service provider catering to its AEs, does not possess its own IPRs or intangibles and has no brand value of its own. The learned Authorised Representative submitted that the co-ordinate bench of this T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been provided in the Annual Report of the company with respect to revenues from software services and software products. 10.2 Before us, the learned Authorised Representative of the assessee contended that this company ought to be rejected from the list of comparables since it is functionally different; being into software products, whereas the assessee in the case on hand was a captive software service provider to its AEs. 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 being into software products is functionally dis-similar and different from captive software service providers and directed that it be excluded from the list of comparables. 10.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables to the assessee. 10.4.1 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand who is a captive software service provider to its AEs. It was also pointed out that segmental data of this company was not available. The TPO rejected the assessee's objections and included this company as a comparable on the ground that it is mainly a software development company and as per details furnished in response to information called for under Section 133(6) of the Act, software development constitutes 96% of its revenues. 11.2 Before us, the assessee objected to the inclusion of this company in the list of comparables for the reason that it is functionally different from a captive software service provider like the assessee in the case on hand, as it is engaged in software designing services, product designing services and analytic services. It was also pointed out by the learned Authorised Representative that page 60 of its Annual Report for F.Y. 2007-08 indicates that this company is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. The learned Authorised Representative prays that in view of the above it is clearly establish that this company i.e. Persistent Systems Ltd. is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a comparable by the TPO inspite of the assessee's objections that this company is functionally different and also since there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections, holding that this company qualifies all the filters applied. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee had not adduced any evidence to show that this event had any influence on the pricing or the margin earned. 12.2 Before us, the assessee objected to the inclusion of this company in the list of comparables on the ground that it was functionally different and also that there were other factors for which this company cannot be considered as a comparable to the assessee in the case on hand who was a captive software service provider to its AEs. It is submitted that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and its Annual Report states that it is engaged in proprietary software products and in research and development activities which has resulted in creation of its own IPRs. In support of its plea for exclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 12.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the Assessing Officer/TPO to omit this company from the list of comparables. 13. Tata Elxsi Ltd. (Seg.) 13.1 This company was selected as a comparable by the TPO overruling the objections of the assessee to the inclusion of this company on several counts like functional dis-similarity, having significant R D activity, brand value, size, etc. 13.2 Before us, the learned Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008- 09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.' 13.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 14.3.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 15. Wipro Limited (Seg.) 15.1 This company was selected as a comparable by the TPO inspite of the objections by the assessee to its inclusion in the list of comparables on several grounds like functional dis- similarity, brand value, size, turnover etc. 15.2 Before us, the learned Authorised Representative of the assessee contended that this company namely, Wipro Ltd., is not functionally comparable to the assessee as it owns significant intangibles in the nature of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 15.4.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to omit this company from the list of comparables. 16. Softsol India Ltd. 16.1 This company was selected as a comparable by the TPO inspite of the objections of the assessee to its being taken as comparable on the grounds that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that in the company's repl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o companies from the list of comparables :- (i) Lucid Software Ltd. (ii) Bodhtree Consulting Ltd. After hearing the rival submissions of both the learned Authorised Representative and learned Departmental Representative on the issue of admission of additional grounds of appeal filed by the assessee; we, in the interest of equity and justice, admit the additional grounds for consideration and the same are disposed off as hereunder. 18. Lucid Software Ltd. 18.1 This company was selected as a comparable by the TPO and its inclusion was not objected to by the assessee. Before us, the assessee has sought the exclusion of this company from the list of comparables on the ground that this company, i.e. Lucid Software Ltd., is into software product development and therefore is functionally different from the assessee who is a captive software development service provider to its AEs. The learned Authorised Representative submitted that for exclusion of this company from the list of comparables reliance is placed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany be omitted from the list of comparables for the period under consideration in the case on hand. 18.3.2 Following the above decision of the co-ordinate bench of the Tribunal (supra), we direct the Assessing Officer/TPO to exclude this company form the list of comparables. 19. Bodhtree Consulting Ltd. 19.1 This company was selected as a comparable by the TPO and the assessee did not object to the same before the TPO. Before us, the contention of the assessee is that this company is engaged in product development, ITES and other value added services, apart from provision of software development services and that the revenue generated by the company is not only from software development services. Also, no segmental data has been provided by the company in the Annual Report. It was further submitted that there is an abnormal fluctuation in the operating revenue vis- -vis operating cost on a year to year basis and also wide fluctuation in the year-on-year percentage change in operating revenue vis- -vis employee cost, which indicates that this company is facing higher risk, which is an contrast to the assessee which is a captive software service provider. It was also su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly. The relevant portion of the order in the case of CISCO Systems (India) Pvt. Ltd. (supra) at para 26.1 is extracted hereunder :- 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le companies to be applied to the assessee. It is ordered accordingly. 19.3.2 Following the above decision of the co-ordinate bench, we direct the Assessing Officer/TPO to exclude this company i.e. Bodhtree Consulting Ltd. form the list of comparables. II. Deduction under Section 10A of the Act. 20. Ground Nos. 1 to 3 : Computation of Deduction under Section 10A of the Act. 20.1 Ground No.1 is on the issue of reducing of expenses incurred in foreign currency from export turnover while computing the deduction under Section 10A of the Act. Ground No.2 is on the issue of reducing expenses incurred in foreign currency from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act. In proceedings before us, the learned Authorised Representative submitted that the assessee would be pressing only Ground No.2 (supra) and Ground No.1 is not pressed. 20.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98/204 Taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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