TMI Blog2016 (9) TMI 1434X X X X Extracts X X X X X X X X Extracts X X X X ..... Bang/2014 - - - Dated:- 8-9-2016 - SHRI A.K. GARODIA, ACCOUNTANT MEMBER SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER For The Revenue : Shri G.R. Reddy, CIT-I(DR), Dr. P.K. Srihari, Addl. CIT(DR) For The Assessee : Shri S. Raghunathan, Advocate ORDER Per Asha Vijayaraghavan, Judicial Member These are appeals filed both by the revenue and the assessee arising from the assessment order dated 29.1.2013 passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [ the Act ]. ITA No.1776/Bang/2013 2. The revenue in its appeal has raised the following grounds:- 1. The order of the DRP is opposed to law and the facts and circumstances of the case. 2. The DRP erred in directing the AO to follow the ratio of the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude ₹ 2,59,83,333 being the telecommunication charges and travel expenses of ₹ 16,08,944 incurred in foreign currency from-the total turnover- also while computing the deduction u/s 10A of the LT. Act as the decision of the High Court is binding, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm s length price (ALP) to the extent of ₹ 4,51,80,222. The final set of comparables selected by the TPO is as under:- Sl No. Name of the comparable Sales (in Rs.) Cost (in Rs.) Margin 1 Kals Information Systems Ltd. 2,14,04,686 1,87,93,813 13.89% 2 Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd. 4,05,31,20,000 3,18,69,97,000 27.91% 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Kals Information Systems Ltd. selected by the TPO has two segments viz., development of software software products and training services. Hence this company was also engaged in the development of software products. This company s inventory was 52.79% of the total current assets and it incurs business promotion expenses at 4.36% of sales. The turnover of this company was ₹ 2.14 crores. It was therefore contended that this company was not functionally comparable with that of assessee. Reliance was placed on the decision of the Tribunal in the case of M/s. Unisys India Pvt. Ltd. in IT(TP)A No.67/Bang/2015 [para 33 of the order] and in the case of M/s. CISCO Systems (India) Pvt. Ltd. in ITA No.271/Bang/2014 [para 26.3 of the order] wherein it was held that this company is functionally different as it is a software product company. The relevant observations of the Tribunal are as follows:- 26.3 As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of Trilogy e-business Software India (P.) Ltd. (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. shall not be regarded as a comparable. 11.1.2 Apart from the functionally dissimilarity, the ld. counsel submitted that the turnover of this company is 10 times more than the assessee company. In this regard, he invited our attention to the decision of the Tribunal in the case of ACIT v. M/s. McAfee Software (India) Pvt. Ltd. In IT(TP)A No. 04/Bang/2012, order dated 18.03.2016 , wherein it has been held as follows:- 7. Both Revenue appeal and Assessee s appeal are interrelated. Revenue is mainly aggrieved on the RPT filter adopted by Ld.CIT(A) at 0% where as the Co-ordinate Benches have been accepting upto 15% and in some orders up to 25%. Depending on the facts of each case in each year, the RPT filter is being used / ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores or say 201 Crores. There can be margin of variation. These are broad parameters so that no fixed formula can be adopted on uniform basis across all areas of functions. The same principles will also apply to related party transactions. In all the captive service providers, RPT is at 100%. So, some broad parameters, given the fact of the case, can only be considered. Considering these observations, Learned Counsel fairly admitted that they will not context the RPT filter and turnover filter issue and restricted the agreements to only the comparability of the cases on functionality. Accordingly, the issues on RPT, turnover filter and risk adjustment are considered not pressed. 11.1.3 Following the decision of the co-ordinate Bench of the Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra) , we direct that Kals Informations Systems Ltd. be excluded from the final list of comparables on the functional comparability. (2) Bodhtree Consulting Ltd. 11.2.1 The ld. Counsel for the assessee submitted that this company is in the business of software products and engaged in providing open and end to end web solutions, data warehousing, software consultancy and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factually it is shown that the said company is a software product company and not a software development services company. 11.2.2 In view of the co-ordinate Bench of the Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra) , we direct Bodhtree Consulting Ltd. to be excluded from the list of comparables. (3) Tata Elxsi Ltd. 11.3.1 The ld. counsel for the assessee submitted that Tata Elxsi Ltd. is not a comparable with the assessee company since this company provides product design service, innovation design engineering services, visual computing labs, systems integration and support. The R D expenses of this company was 3.26% of the total turnover and cost of goods sold was 10.64% of the cost base. The turnover criterion of this company was of ₹ 378.43 crores. In support of its contentions, reliance was placed on the decision of the co-ordinate Bench of this Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra) and other cases. 11.3.2 In the case M/s. CISCO Systems (India) Pvt. Ltd. (supra) , this Tribunal at para 26.4 26.5 held that Tata Elxsi Ltd. should not be regarded as a comparable. The relevant observations are as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices, 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 heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable. 11.3.4 In view of the decision of the co-ordinate Bench of this Tribunal in the case of M/s. CISCO Systems (India) Pvt. Ltd. (supra) , we direct that Tata Elxsi Ltd. be excluded from the final list of TPO s comparables. (4) Sasken Communication Technologies Ltd. (Seg) 11.4.1 The ld. counsel for the assessee submitted that this company is not functionally comparable since it has different functional profile i.e., product company and focus on R D and hardware. It incurred losses on impa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its order has held as under:- 20. We have to hold that assesseee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line of argument of the learned DR. Coming to the arguments of the learned AR that M/s Tata Elxsi Ltd., M/s Sasken Communication Ltd., M/s Persistent Systems Ltd., M/s L T Infotech and M/s Infosys Ltd., had turnover in excess of ₹ 200 Crores and were to be excluded, we are of the opinion that turnover filter can be applied for selection of comparables. This has been the view consistently taken by the Co-ordinate Benches of this Tribunal in a number of cases. In the case of M/s Genisys Pvt Ltd Vs DCIT(2011)64 DTR 225 it was held by this Tribunal as under at paras-8 to 09 of its order; 8. According to learned counsel for the assessee size is an important facet of an enterprise level difference. He submitted that comparables should have something similar or equivalent and should possess same or almost the same characteristics. To use a simile, he submitted that a Maruti 800 car cannot be compared to Benz car, even though both are cars only. He submitted that unusual patt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar observations were also made by ICAI in para 15.4 of TP guidance note. He submitted that TPO s range of ₹ 1 crore to infinity has resulted in selection of companies like M/s Infosys which is having a turnover of ₹ 9,028 crores which is 1,1007 times bigger than the assessee company which has a turnover of ₹ 8.15 crores. He further submitted that NASSCOM has also categorized the companies based on the turnover as follows : 1. Greater than USD 1 billion (approx. ₹ 50,000 crores) 2. Between USD 100 million to USD 1 billion (Rs. 500 crores to ₹ 5,000 crores) and 3. Others having less than USD 100 million (Rs. 500 crores). Thus, the learned counsel for the assessee submitted that an appropriate turnover range should be applied in selecting a comparable of uncontrolled companies and the assessee has accordingly, applied the turnover range of ₹ 1 crore to ₹ 200 crores based on Dun and Bradstreet s analysis. He submitted that in the alternative, the categories recognized by NASSCOM may also be applied in selecting comparables. 8.3 The learned Departmental Representative rebutted this argument and submitted that the Act or Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012 it was held as under; 5.1 We have heard the rival submissions and perused the materials on record. The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of ₹ 1 Crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidelines note has observed that the transaction entered into by a ₹ 1000 Crores company cannot be compared with the transaction entered into by a ₹ 10 Crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The TPO s range had resulted in selection of companies as comparable such as Infosys which was 277 times bigger than that of the assessee. The Bangalore Bench of the Tribunal in the case of M/s Genisys Integrating Systems (Ind.) Pvt.Ltd., Vs DCIT ITA No.1231/Bang/2010 relying on Dun and Bradstreet s analysis had held that turnover range of ₹ 1 Crore to 200 Crore is appropriate. The said proposition has followed by the earlier Benches of this Tribunal in the following cases: (i) M/s Kodiak Networks (I) Pvt. Ltd., Vs ACIT ITA No.1413/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (Ind.) Pvt. Ltd., Vs 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 learned 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 5) Sasken Communication Tech.Ltd., 343.57 Crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts 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. 36. As far as Persistent Systems Ltd., a comparable by the Assessee in his TP study but was objected to by the Assessee before TPO as not comparable, this Tribunal in the case of IT(TP) A.No.108(Bang) 2014 order dated 12.12.2014 in the case of Yodlee Infotech Pvt.Ltd. Vs. ITO held as follows:- 5.12 This Tribunal in the case of 3DPLM Software Solutions Ltd. Vs DCIT [IT(TP)A 1303/Bang/2012 dated 28-11-2013] had also held that Persistent Software Systems Pvt. Ltd., was in product designing services and into software product development. In the same decision it was also held that M/s. Infosys Technologies Ltd, had considerable intangibles like IPR, and was also into software product development. It was also held that M/s. Tata Elxsi Ltd., was developing niche products and into product designing services. Hence, these companies would in any case have to be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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