TMI Blog2017 (4) TMI 1375X X X X Extracts X X X X X X X X Extracts X X X X ..... round raised by revenue is dismissed. - I.T. (T.P) A. No.409/Bang/2016, I.T. (T.P) A. No.31/Bang/2016 - - - Dated:- 18-4-2017 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER Assessee By : Shri Padamchand Khincha, C.A. Respondent By : Ms. Neera Malhotra, CIT (DR) (ITAT)-2, Bengaluru. O R D E R Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed against the assessment order dt.16.11.2015 passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short DRP ) in the month of October, 2015 (as no specific date is given) for the Assessment Year 2011-12. There is a delay of 51 days in filing the appeal by the assessee. The assessee has filed application for condonation of delay which is supported by an Affidavit. 2. We have heard the learned Authorised Representative as well as learned Departmental Representative and carefully perused the petition for condonation of delay. The assessee has explained the cause of delay as stated in the Affidavit that the assessee company has been acquired by an American Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (Recd / receivable) Rs. SOFTWARE DEVELOPMENT SERVICES 187826736 Total : 187826736 To bench mark its international transactions, the assessee selected 7 comparables having mean margin of 11.90% in comparison to the assessee's profit margin of 13.42%. Thus the assessee claimed its international transactions at arm s length. The TPO rejected the TP Analysis of the assessee and carried out a fresh search. The TPO has selected 13 comparable companies as under : After allowing the working capital adjustment of 1.10%, the TPO has computed the adjusted mean margin at 23.72% and accordingly proposed an adjustment under Section 92CA of ₹ 1,77,59,652. The assessee challenged the action of the TPO before the Disput Resolution Panel (DRP). While deciding the objections of the assessee, the DRP has rejected 10 companies out of the set of 13 comparables selected by the TPO. The DRP has applied certain filters to reject these companies. Thus both the revenue as well as assessee have challenged the directions of the DRP and raised the following grounds : Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t comparable in respect of functions performed, risks assumed, assets utilized, size, etc.; d. Not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies, including the differences in functions performed, assets employed, risks undertaken and Working Capital employed; e. Not making any adjustments for qualitative and quantitative difference between the business of the assessee and those of the comparable companies; f. Not recognizing that the assessee was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account; g. The revised list of Comparable Companies of Transfer Pricing Officer/Assessing officer after Dispute Resolution Order of a mere 2 Comparable Companies cannot be deemed to representative of the software industry as a whole and hence the list merits rejection. [Reliance is placed on on SAP LABS India (P.) Ltd Vs. ACIT, Circle-12(3), Bangalore 398 and 418 ( Bang.) of 2008] The appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 21.2 as under : 9. The next ground in the assessee's appeal is regarding seeking exclusion of 4 comparable companies retained by the DRP. We will deal with the comparability of these 4 companies as under : (i) E-Just Solution Ltd. 9.1.1 The learned Authorised Representative has submitted that the assessee raised the objection before the DRP for exclusion of this company from the set of comparables but the DRP has not adjudicated the objections of the assessee. He has referred the objections raised before the DRP at page No. 1373 of the paper book as well as referred the relevant part of the Annual Report of this company at page Nos.39, 42 50 of the Annual Report. The learned Authorised Representative has submitted that this company is engaged in the diversified activity and reported the income under only one segment. Therefore it cannot be considered as a comparable of the assessee's software development services segment. He has relied upon the decision of the co-ordinate bench of this Tribunal dt.22.4.2016 in the case of Electronics for Imaging India Pvt. Ltd. Vs. DCIT in IT(TP)A Nos.227 285/Del/2013. 9.1.2 On the other hand, the learned Departmental R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat of the assessee. In support of his contention, he has relied upon the decision of this Tribunal dt.24.2.2016 in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) and submitted that this company was found to be not comparable with the software development services provider. He has further pointed out that in assessee's own case for the Assessment Year 2010-11, the DRP vide its order dt.24.11.2014 has excluded Persistent Systems and Solutions Ltd. from the list of comparables by holding that this company is not comparable to the assessee. 9.2.3 On the other hand, the ld. DR has submitted that the TPO as well as DRP has examined the functional comparability of these companies and found that these companies are comparable with the assessee. These two companies have satisfied all the filters applied by the TPO and DRP therefore the minor variation in the activity would not render these companies non-comparable when a comparable price is considered under TNMM. 9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the co-ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables. We further find from the Annual Report that there is no change in the activity and functions of thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2019 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. We further note that the DRP has not adjudicated the objections of the assessee whereas for the Assessment Year 2010-11, the DRP rejected this company as comparable. Accordingly, we set aside this issue to record of the A.O./TPO to verify the relevant facts and compare with the facts recorded by the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e objection of employee cost in paras 8 9 as under : 08. What is left for consideration is assessee s grievance regarding M/s. Akshay Software Technologies Ltd. DRP directed exclusion of the said company for a reason that its employee cost was more than 89% of its total operating expenditure. We find that assessee had employee cost in excess of 90% of its operating expenditure. In our opinion, it is normal to have a high percentage of employee cost in a software development company, especially so, when the company is involved in development of software for clients at the site of the clients. Reason given by the DRP, in our opinion, was not correct. Higher employee cost is a normal feature for a software development company for the simple reason that it is a skill oriented business. The skill-set required for the employees in the case of the assessee, required knowledge of Arabic also, making it all the more scarce. In any case, for A. Y. 2009-10, M/s. Akshay Software Technologies Ltd was considered as a proper comparable and not excluded. In his order dt.07.01.2015 for A. Y. 2009-10, after applying the onsite revenue filter of 50%, TPO himself had considered M/s. Akshay Soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost were not available. 13.2 Before us, the ld.AR of the assessee has submitted that this company has shown purchase and employee cost under a composite head which is 83.91% of the sale. Therefore this company satisfied the employee cost of 25% of total sales. The learned Authorised Representative has pointed out that in case of service provider the major component is employee cost and there is hardly any purchases therefore even if the employee cost is not separately reported, the composite of purchase and employee cost constitute 83.91% of sales. Thus he has submitted that this company should be included in the list of comparables. 13.3 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that there is no dispute that this company has not reported employee cost separately and therefore it is not possible to ascertain the employee cost and to apply employee cost filter. Further this company has also shown its goodwill in its balance sheet and therefore the intangible assets renders this company non-comparable to the assessee. 13.4 We have considered the rival submissions as well as the relevant mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of the Annual Report and submitted that the income from software development is ₹ 81.40 Crores out of total revenue of ₹ 141 Crores. Therefore this company fails this filter. 16.3 In a rejoinder the ld. DR has submitted that the TPO has considered only Information Technology transactions segment and therefore it satisfies software development services income filter as well as employee cost filter. 16.4 We have considered the rival submissions as well as the relevant material on record. As per the segmental reporting at page 53 of the Annual Report the income from Information Technology Services is ₹ 81.40 Crores out of the total income of ₹ 141 Crores. Therefore the revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy the filter of information technology revenue applied by the TPO itself. Accordingly, we do not find any reason to interfere with the order of the DRP for this issue. (ii) Icra Techno Analytic Ltd. 17.1 We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. The DRP has rejected this company by recording the fact a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the facts recorded by the DRP as well as by the co-ordinate bench of this Tribunal are not correct. Accordingly, in view of the decision of the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in the order of the DRP on this issue. (iii) Infosys Ltd. 18. We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. At the outset, we note that the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in para 17 as under : (2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is ₹ 21,140 crores, which is 442 times higher than the assessee. Following the decision of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) , we do not find any reason to interfere with the directions of the DRP on this issue. (iv) L T Infotech Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of all the comparables. In view of the facts recorded by the DRP as well as the decision of the coordinate bench, we do not find any reason to interfere with the directions of the DRP. (v) Tata Elxsi Ltd. (Seg.) : 20. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. The DRP has rejected this company by discussing the fact at page 16 as under : We further note that the DRP has also recorded the fact that export revenue of this company is 73.30% which is less than 75% applied by the TPO. Therefore this company does not qualify the export earning filter applied by the TPO. Further the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in paras 30 to 33 as under : 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP. In view of the facts recorded by the DRP as well as thedecision of the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in the directions of the DRP to exclude this company form the set of comparables. 21. The revenue is also seeking inclusion of the following companies which were rejected by the DRP. (i) Evoke Technology Pvt. Ltd. (ii) Mindtree Limited (Seg.) (iii) R S Software India Pvt. Ltd. 21.1 At the time of hearing, the learned Authorised Representative of the assessee has submitted that the assessee has no objections if these three companies are restored to the set of comparables as the assessee did not raise any objection before the DRP but the DRP rejected this company suo moto. 21.2 In view of the fact that both the revenue as well as the assessee are seeking inclusion of these companies in the set of comparables, we set aside the directions of the DRP qua these comparables and restore these three companies to the set of comparables. Therefore even if we apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2. After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at ₹ 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case may be, computer software exported, to the total turnover of the business carried over by the undertaking is applied to the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export. In other words the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried on by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follows : Profits derived from export of articles or things or computer software. Profits of the business of the undertaking. Export turnover in respect of the articles or things or computer software. Total turnover of the business carried on by the undertaking The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula. A construction of a statutory provision which would lead to an absurdity must be avoided. The Special Bench of the Tribunal, in the case of ITO Vs. Sak Soft Ltd. (2009) 313 ITR (AT) 353 (Chennai) (SB) (2009-TIOL-187-ITAT-MAD-SB) also had an occasion to consider the meaning of the word total turnover . After referring to the various judgments of the High Court as well as the Supreme Court held as under : 53. For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10-B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded, both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula .. The formula for computation of the deduction under section 10A would be as under : Profits of the business x export turnover / Total turnover From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, themeaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore the formula for computation of the deduction under section 10A, would be as under : Profits of the business of the undertaking x Export turn over (Export turnover + domestic turn over) Total Turnover 11. In that view of the matter, we do not see any error committed by the Tribunal in foll ..... X X X X Extracts X X X X X X X X Extracts X X X X
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