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2016 (9) TMI 1434

v. Tata Elxsi Ltd.(2011 (8) TMI 782 - KARNATAKA HIGH COURT) wherein it was held that whatever is excluded from the export turnover, has also to be excluded from the total turnover. Grievance of the Revenue that the decision of HC has not been accepted by the revenue and an appeal by the revenue has been filed before the Hon'ble Supreme Court is of no relevance as law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. - Transfer pricing addition - comparable selection criteria - functional similarity - Held that:- The assessee company is engaged in the business of development of software and provides sales & marketing support thus companies functionally dissimilar with that of assessee need to be deselected from final list. - IT(TP)A No.1776/Bang/2013, IT(TP)A No.24/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 asse .....

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Karnataka which is the jurisdictional High Court is binding on us. We therefore find no infirmity in the directions of the DRP and uphold the same. 5. In the result, the appeal of the revenue is dismissed. ITA No.24/Bang/2016 6. The assessee company is engaged in the business of development of software and provides sales & marketing support. It filed the return of income for the AY 2009-10 declaring a total income of ₹ 34,21,148 after claiming deduction u/s. 10A amounting to ₹ 11,24,01,664. In the scrutiny proceedings, the Assessing Officer observed that the assessee had international transaction exceeding ₹ 15 crores and the case was referred to the TPO. The TPO in his order u/s. 92CA of the Act determined an adjustment to 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 .....

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romotion 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. (supra). The following were the relevant observations of the Tribunal:- (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that t .....

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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 / approved. Learned Counsel fairly admitted that Coordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 ( Sunquest) has followed the other decisions on the issue and held that in various other cases companies having related party transaction upto 15% of total revenues can be .....

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dered. 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 design & development of software using latest technology. It is a product company. It has abnormal growth of 67% over previous year on account of launch of its product, MIDAS. The business promotion expenses was to the extent of ₹ 11.16 lakhs. In view of the above, it was submitted that this company is not comparable with that of the assessee. Reliance was placed on t .....

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bmitted 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 follows:- 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 .....

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lip;………………………………… 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 impairment of assets and business restructuring expenses. It owns intangibles, 23 in US and 8 in India. Its t .....

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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 pattern, stray cases, wide disparities have to be eliminated as they do not satisfy the test of comparability. Companies operating on large scale bene .....

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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 Rules does not provide for the turnover filter. He submitted that as rightly pointed out by the TPO in the case of service sector, the size of the company does not matter because, the infr .....

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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/Bang/2010 (ii) M/s Genisys Microchip(I) Pvt. Ltd., Vs DCIT ITA No.1245/Bang/2010 (iii) Electronic for Imaging Indi Pvt.Ltd., -ITA No.1171/Bang/2010 & (iv) M/s Trilogy E-Business Software .....

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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 6) Tata Elxsi Ltd., 262.58 Crores 7) Wipro Ltd., 961.09 Crores 8) Infosys Tech.Ltd., 13149 Crores Accordingly, we have no qualms in directing the TPO to exclude M/s Tata Elxsi Ltd., M/s Sasken Communication Pvt. Ltd., M/s Persistent System Ltd., M/s L&T Infotech Ltd. and M/s Infosys Tech.Ltd., from the selected comparables. 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 developm .....

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les 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 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 learn .....

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ystems 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 excluded from the comparables being functionally different. 37. Following the said decision, we direct that Persistent Systems Ltd., be excluded from the final list of comparable companies chosen by the TPO. 12.3 Following the decisions of the Tribunal in the case of Yodlee Infotech Ltd. (supra) and Unisys India Pvt. Ltd. (supra), we direct that Sasken Communication Technologies Ltd. (seg), Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd. be excluded from the final list of TPO s comparables. 13. With respect to the other comparables viz., Akshay Software Technologies Ltd., R S Software (India) Ltd., Zylog Systems Ltd. and Mindtree Ltd., the ld. counsel for the assessee has submitted that these comparables chosen by the TPO have been accepted by the .....

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