TMI Blog2017 (12) TMI 1728X X X X Extracts X X X X X X X X Extracts X X X X ..... Prasad Umashankar, Advocates. Respondent By : Shri B.R. Ramesh, JCIT (D.R) ORDER Shri Jason P Boaz, This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-IV, Bangalore dt.5.8.2014 for the Assessment Year 2009-10. 2. Briefly stated, the facts of the case are as under :- 2.1 The assessee is a company engaged in the provision of software development services and shared services (ITES) to its Associated Enterprise ( AE ) i.e. ADC Telecommunications Inc., USA, which is its holding company. For Assessment Year 2009-10, the assessee filed its return of income on 30.09.2009 declaring income of ₹ 1,04,430, after claiming deduction of ₹ 1,44,70,511 under Section 10A of the Income Tax Act, 1961 (in short 'the Act'). The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In view of the international transactions entered into by the assessee in the year under consideration, as reported in Form 3CEB, the Assessing Officer made a reference to the Transfer Pricing Officer ( TPO ) for determining the Arm s Length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding that current year (i.e. Financial Year 200809) data for companies should be used for comparability. c. Upholding the learned TPO s approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm s length price. d. Arbitrarily arriving at a set of companies as comparable to the software development and shared services of the Appellant, on rejecting companies that are otherwise functionally comparable to the Appellant and on inclusion of companies that otherwise fail the test of comparability. Information Technology Exclusion i. KALS Information Systems Limited ii. Bodhtree Consulting Limited iii. Tata Elxsi Limited iv. Persistent Systems Limited v. Larsen Toubro Infotech Limited vi. Infosys Technologies Limited Inclusion i. ThinksoftGlobalServices Ltd ii. FCS Software Solutions Ltd Information Technology enabled Services Exclusion i. Infosys BPO Limited ii. Aditya Birla Minacs Worldwide Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP Study for both software development services and ITES segments for the reasons enumerated in his order under Section 92CA of the Act. After carrying out a fresh comparability analysis, applying certain filters and considering the assessee's objections, the TPO selected his own final set of comparables for both segments as under :- 5.4.1 Final set of 11 comparables for Software Devt.Services Segment. 5.4.2 After allowing working capital adjustment of 0.14%, the TPO worked out the proposed Transfer Pricing Adjustment of ₹ 1,50,87,408 for the software development services as under : 5.5.1 Final set of 8 comparables for ITES Segment. 5.5.2 After allowing working capital adjustment of 0.09%, the TPO worked out the proposed TP Adjustment of ₹ 1,23,13,265 for the ITES Segment as under :- 6. Assessee's Plea for Exclusion of 6 companies from list of comparables. 6.1 The assessee has prayed for exclusion of the following 6 companies from the final set of comparables selected by the TPO :- i) KALS Information Systems Ltd. ii) Bodhtree Consulting Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 M/s. Trilogy e-business Software India Pvt. 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 this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect the TPO to exclude it from the final set of comparables. 8. Bodhtree Consulting Ltd. ( Bodhtree ) 8.1 This company, Bodhtree was included in the final set of comparables by the TPO despite the objections of the assessee that it has fluctuating profit margins and this was a year in which it earned super normal profits. The TPO s action was upheld by the learned CIT (Appeals). Before us, apart from the aforesaid objections, it was also contended that Bodhtree is functionally dissimilar to the assessee, as apart from software development it also provides end-to-end web solutions,is engaged in software products, off-shoring data management and data warehousing. In support of the assessee's plea for exclusion of this company Bodhtree from the TPO s final set of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. for Assessment Year 2009-10 (supra), wherein it was excluded as it was not considered a good comparable to companies engaged in rendering software development services, like the assessee in the case on hand. 8.2 Per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is a software product company and not a software development services company. 8.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that Bodhtree which is a software product company, should not be considered as comparable to the assessee in the case on hand; who is merely providing software development services to its AEs and accordingly direct the TPO to exclude it from the final set of comparables. 9. Tata Elxsi Limited ( Tata ) 9.1 This company, Tata was included by the TPO in the final set of comparables despite the assessee's objections to its inclusion on grounds of being functionally different as it is a software product company. The learned CIT (Appeals) upheld the action of the TPO in including this company in the list of comparables. Before us, the learned Authorised Representative contended that Tata ought to be excluded from the final set of comparables for the reasons that apart from software development services, it was also engaged in product and design services, innovation design and enginee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cs 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. 9.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that Tata Elxsi Ltd. is to be excluded from the list of comparables, it being functionally different from the assessee in the case on hand, who is merely providing software development services to its AEs. 10. Infosys Technologies Limited ( Infosys ) 10.1 This company, Infosys was included in the final set of comparables by the TPO rejecting the assessee's objections to its inclusion on grounds of its scale of operations, owning of significant intangibles, brand value, significant R D activities and being functionally different. The learned CIT (Appeals) upheld the action of the TPO. Before us, the learned Authorised Represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.2 Before us, the learned Authorised Representative contended 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. The decision rendered as aforesaid pertains 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 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. 10.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that Infosys Technologies Limited, is to be excluded from the list of comparables, it being functionally different from the assessee in the case on hand, who is merely providing software development services to its AEs. 11. Persistent Systems Limited ( Persistent ) 11.1 This company, Persistent was included by the TPO in the final list of comparables, rejecting the assessee's objections to its inclusion on grounds of being functionally different and for owning significant intangibles. The learned CIT (Appeals) u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in his TP study but was objected by the assessee before the TPO as not comparable, this Tribunal in the case of IT(TP)A No.108(Bang)/21014 order dated 12-12-2014 in the case of Yodlee Infotech Pvt. Ltd. v. ITO held as follows: 5.12 This Tribunal in the case of 3DPLM Software Solutions Ltd. v. Dy. CIT (IT(TP) A No. 1303(Bang)/2012 dated 28-11-2013) has also held that Persistent 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 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'. The ld. DR of the revenue supported the orders of the authorities below; 16. We have considered the rival submissions. We find that in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that application of RPT filter at 25% of turnover is reasonable. It was also pointed out that in the case of Novell Software Development (India) P. Ltd. (supra) relied upon by the assessee, the co-ordinate bench of this Tribunal noted that the RPT was generally applied by the Tribunal between 15% and 25%, but the RPT filter at 15% was applied in that case only because there was a large number of comparables, i.e. 26 comparables; unlike in the case on hand where there are only 11 comparables selected by the TPO out of which the inclusion of 6 comparables is being challenged by the assessee. 12.3 We have heard the rival contentions, perused and carefully considered the material on record. Before us, the learned Authorised Representative for the assessee could not controvert the submissions of the learned Departmental Representative for Revenue that various coordinate benches of this Tribunal have been consistently following application of RPT filter at 25% of turnover. Respectfully following the decision of the co-ordinate benches of this Tribunal in the case of ITO Vs. CAE Simulation Technologies Pvt. Ltd. in IT(TP)A Nos.100 141/Bang/2014 dt.1.9.2017 also for Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of ARM Embedded Technologies P. Ltd. in IT(TP)A No.1659/Bang/2014 dt.31.8.2015; where the assessee was engaged in, inter alia, provisions of software development and maintenance services to its AEs; just as in the case on hand, the Tribunal directed inclusion of the aforesaid two companies in the final set of comparables and set aside to the file of the TPO the computation of working capital adjustment on actual basis for working out the correct PLI of the final comparables. 13.4 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in excluding the above two companies from the list of comparables. 13.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find the very same issue, in similar circumstances of inclusion of the aforesaid two companies i.e. (i) Thinksoft Global Services Ltd. and (ii) FCS Software Solutions Ltd. in the final list as comparables to an assessee providing software development services to its AEs; just as in the case on hand, was considered by a co-ordinate bench of this Tribunal in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 26,536,978/- was exchange gain. Interest received from deposits with banks and others came to ₹ 29,15,080/- only. For better clarity this break-up is given hereunder : Other income Interest received on deposits with banks .. 2,371,740 Interest received from others .. 543,310 Profit on sale of fixed assets .. 6,276,773 Exchange gain (Net) .. 26,536,978 Miscellaneous income .. 10,000 35,738,801 We cannot say that the other income arose out of any financial services done by the assessee and would take away the sheen of its software services income. The amount, in our opinion, was insignificantly small and not enough to warrant a conclusion that its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside. 14. On going through the TPO s order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjustment to 1.71%. In all the cases relating to transfer pricing adjustment, this Tribunal has been directing to give working capital adjustment on actual basis and the TPO having arrived at 5.97% ought to have adopted the same instead of restricting it to 1.71%. In view of the same, we deem it proper to remand this issue to the file of the AO/TPO for working out the ALP after giving adjustment of working capital as per the calculation of the AO in annexure D annexed to the transfer pricing order. This ground of appeal is accordingly allowed. 25. Accordingly we direct the AO / TPO to correctly work out the PLI of the final comparables after giving due adjustment for the working capital on actual basis. Related ground of the assessee is therefore allowed. 13.5.2 Respectfully following the aforesaid decision of the coordinate bench of this Tribunal in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey were directed to be excluded from the final list of comparables in the ITES Segment. It was therefore prayed that these companies be excluded from the final set of comparables. 15.2 Per contra, the learned Departmental Representative for Revenue supported the orders of the authorities below in including the aforesaid 4 companies in the final set of comparables. 15.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that comparability of the above 4 companies (supra) with an ITES company was considered by a co-ordinate bench of this Tribunal in the case of Novo Nordisk India Pvt. Ltd. for the very same assessment year 2009-10 (supra) and the Bench directed that they were to be excluded from the final set of comparables by holding as under at paras 86 87 thereof :- 15.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Novo Nordisk India Pvt. Ltd. for Assessment Year 2009-10 (supra) which are rendered on similar / identical f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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