TMI Blog2019 (1) TMI 1691X X X X Extracts X X X X X X X X Extracts X X X X ..... :- 14-1-2019 - SHRI. A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI. LALIET KUMAR, JUDICIAL MEMBER For the Assessee : Shri. Suryanarayana J. Advocate For the Revenue : Shri. C. H. Sundar Rao, CIT DR ORDER PER LALIET KUMAR, JUDICIAL MEMBER : These are appeal and cross objection by the Revenue and the assessee respectively against the order of the CIT (A)-IV, Bengaluru, dt.13.03.2013, for the assessment year 2005-06. 02. Grounds of appeal filed by the Revenue are as under : 02. Grounds of appeal filed by the Assessee are as under : IT(TP)A.875/Bang/2013 By the Revenue : 04. Ground nos.1 to 4 pertains to the direction of the CIT (A) to recomputed the deduction allowable u/s.10A of the Act, after reducing the communication expenses amounting to ₹ 22,95,138/- from the total turnover also. The Ld. DR submitted that the CIT (A) was wrong in directing the AO to reduce the expenses deducted both from export turnover as well as from the total turnover for the purpose of computation of deduction u/s.10A of the Act. He further submitted that the CIT (A) had not ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isors (India) P. Ltd v. DCIT [56 taxmann.com 417, and our attention was drawn to paras 32 to 36, 43 and 44 09. On the other hand, the Ld. AR has drawn our attention to the recent judgment of the Hon ble jurisdictional High Court in the matter of Pr. CIT v. Softbrands India P. Ltd [94 taxmann.com 426] and also in the matter of Acusis Software India P. Ltd v. ITO [98 taxmann.com 183], wherein at para 14 and 15, it had approved the filter applied by the Tribunal i.e., the turnover of ten times of both sides of the assessee s turnover. 10. In rebuttal the Ld. DR submitted that the CIT (A) had not examined the functional profile of any of these comparables and had merely excluded them on the basis of turnover filter of 1 to 200 crores. It was also contended that the profile of these companies should be examined by the CIT (A), hence matter is required to be sent back to the file of the CIT (A) with a direction to examine the functional profile of these companies, 11. We have heard the rival submissions and perused the record. The Hon ble jurisdictional High Court in the matter of Acusis Software India p. Ltd (supra) had approved the order passed by the trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd software products, was not available. Similar submissions were made for the other company namely Thirdware Solutions Ltd. Lastly, the ld. AR relies upon the decision in ITO v. Net Devices India P. Ltd [TS-354-ITAT- 2016(Bang)-TP] Sysarris Software P. Ltd v. DCIT [67 taxmann.com 243] and ITO v. Sunquest Information Systems (India) P. Ltd [61 taxmann.com 81], wherein both Exensys Software Solutions Ltd and Thirdware Solutions Ltd. were part of the same booklet and the Tribunal after considering the profile of all these companies directed to exclude these two companies. 15. On the other hand the Ld. DR relied upon the order passed by the lower authorities. 16. We have heard the rival submissions and perused the record. The Tribunal for the same assessment year in the matter of Net Devices India p. Ltd (supra), at para 8.1 to 8.3 and 9.1 to 9.3, held as under : 8.1 Ground No.4 is regarding exclusion of the companies having more than 50% of profit margin. The learned Departmental Representative has submitted that the CIT (Appeals) has excluded two companies viz. Accentia Software Solutions Ltd. and Thirdware Solutions Ltd. on the ground that these compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has been sanctioned by the Honble High Court of Andhra Pradesh w.e.f. 1.4.2004 vide order dt.5.9.2005. Therefore, undisputedly there was an extra-ordinary event during the year under consideration in respect of this company. Further we find that the co-ordinate bench of this Tribunal in case of M/s. Textron Global Technology Centre Pvt. Ltd. in lT(TP)A No.29/Bang/2012 has considered the comparability of this company in paras 19 20 as under: Sankhya Infotech Limited ( Sankhya ) 19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: (1) SILICON' rm Training Suite of Products: The products are a comprehensive enterprise wide tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r company in the list of comparables The learned Authorised Representative of the assessee has submitted that this company is in the diversified activities and derive its income from sale of software license, software products apart from software development services. This company is engaged in the diversified activities of rendering application development, customer relationship management and ERP, software products. He has referred to the Annual Report of this company and submitted that this company is also engaged in the distribution of software products and providing trunky project which include a bundle of activities such as providing software product combined with implementation and customer services. In support of his contention, he has relied upon the following decisions i) M/s. McAfee Software ( India) Pvt . Ltd. in IT(TP)A Nos.4/Bang/2012 1388/Bang/2011. ii) M/s. Sunquest Information Systems (India) Pvt.Ltd. in IT(TP)A No. 1302/Bang/2012. iii) M/S. Symbol Technologies India Pvt. Ltd. in lT(TP)A No.391/Bang/2012. iv) Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Barig/2012. 9.2 The learned Departmental Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R. Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B. On the basis of the above, it was argued by the Ld. DR that if the comparables are following the different accounting year in comparison to assessee then the AO / TPO/ CIT (A) can deduce the corresponding accounts for the accounting year used by the assessee representing different quarter in the same accounting year. 19. It was further submitted that on the basis of rejection of the comparable by the TPO and inclusion by the CIT (A) on account of different accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve engineering. It is also engaged in the business of reselling software products and in the developing of products and thereafter licensing them. Since there is no segmental break-up available in its Annual Report for FY 2004-05 with respect to the above varied activities, it ought to remain rejected as it is functionally dissimilar to the Assessee. Thus, it is submitted that the CIT(A) rightly excluded it following the decision of this Hon'ble Tribunal in SAP labs India P Ltd v. ACIT (judgment dated 30.08.2010 in ITA No. 398/Bang/2008). In any event and as urged in Ground No.12 of the cross-objections, Geometric Ltd. has RPTs in excess of 15% of sales and, therefore, ought to be rejected in view of this Honble Tribunal's decisions in 24/7 Customer Pvt. Ltd. [ITA No.227/Bang/2010] (para 13) and in the Assessee's own case for AYs 2006-07 (ITA No.1274/Bang/2010) and 2007-08 (ITA No.973/Bang/2010). 25. We have heard the rival contentions of the parties and perused the record. The Tribunal in the matter of ABB Global Industries P. Ltd (97 taxmann.com 475) had held as under at para 11.4.1 : 11.4.1 As regards M/s. Geometric Software Solutions Co. Ltd., th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.4.3 : 18.4.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that the functional comparability has been considered by this Tribunal in assessee's own case for the Assessment Year 2006-07 vide order dt.30.6.2015 in ITA No.1485/Bang/2010 in para 13 to 18 as under: 13. Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz., 2006-07 in the case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the TribunalIT(T.P)A No.1099/Bang/2011 C.O. No.19/Bang/2012 has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 13 of its order, has held as under: 12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): Xxxxxx Xxxxxx 17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005- Respectfully following the decision of the coordinate bench, we reject the ground raised by the Revenue. 28. Ground no.13 of the Revenue is with respect to exclusion of VJIL consulting Ltd., by the CIT (A). In this regard, it was submitted by the Revenue that the CIT (A) has taken into account the consumable software product as well as the amount IT(TP)A.875/Bang/2013 CO.175/Bang/2018 Page - 20 paid by the comparable to VAT Department in UK on sales amounting to ₹ 1.2 crores. 29. On the other hand the Ld. AR had submitted that the consumable software products are not in the nature of software products as required to be understood and further the comparable VJIL, in response to 133(6) proceedings had clarified that amount of ₹ 1.2 crores was deposited in UK towards the VAT. It was the contention of the assessee that in UK, VAT is leviable on both sale of product as well as on the services and therefore the conclusion drawn by the CIT (A) is correct. 30. In this regard the Ld. AR relied upon the decision of the Delhi Tribunal in Qualcomm India P. Ltd v. ACIT [ITA No.5239/Del/2010, dt.10.06.2013], to support that the order pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware). Under the heading Administrative Selling Expenses , VAT on sales is mentioned as ₹ 1,19,40,117/-. On the basis of this the TPO has not considered this company as a good comparable, whereas the CIT (A) in para 5.151, at page.49, had rejected the case of TPO by observing that the VAT might indicate sales and there was no evidence of sale of the product. 32. In our view the CIT (A) should have undertaken some elaborate exercise like calling upon the comparable company, namely VJIL to submit a categorical report to show whether the company is into sale of software product or not. Further we are in agreement with the contention that merely because the VAT is chargeable for sale of product and on services (both) and hence mentioning of VAT on sales, would not reflect the amount was actually paid on sale of product and was only paid on account of services. On both the aspects the necessary response should be sought by the CIT (A) by exercising his power u/s.133(6) of calling upon VJIL to disclose whether it is into sale of product or provider of services. We may point out that the coordinate bench in the matter of ABB Global Industries, had not examined these asp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act, 1956. Further, in support its contention that Sankhya is not functionally comparable, reliance is placed by the Assessee on the decisions of this Hon'ble Tribunal in ITO v. Net Devices India Pvt. Ltd. [TS- 354-ITAT-2016(Bang)-TP] (paras 18.1.1 - 18.1.3 at pages 33- 35), Sysarris Software P. Ltd v. DCIT [(2016) 67 taxmann.com 243 (Bang - Trib.)] (paras 22-24 at pages 7-8) and ITO vs. Sunquest Information Systems (India) P. Ltd. [(2015) 61 taxmann.com 81 (Bang - Trib.)] (paras 19- 20 at page 7). 34. The Ld. DR relies upon the order passed by the lower authorities. 35. We have heard the rival contention of the parties and perused the record. This comparable was considered by the Tribunal in the matter of Net Devices India P. Ltd [ITA.1099/Bang/2011, dt.25.05.2016 for the same assessment year]. In para 18.1.3 it was held as under : 18.1.3 We have considered the rival submissions as well as relevant material on record. At the outset, we note that the functional comparability of this company has been examined by the Tribunal in a series of the cases as relied upon by the learned Authorised Representative of the assessee. In the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee therein which was also in the business of software development. 20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies. A similar view has been taken by the Tribunal in the other decisions as relied upon by the ld. A.R. Following the earlier order of the Tribunal where it was found that this company is engaged in the business of development of software products and services as well as training, it cannot be considered as a good comparable of software development services provider. Accordingly, we direct the A.O/TPO to exclude this company from the list of comparables. Following the decision of the coordinate bench, we direct the TPO to exclude this company from the list of comparables. 36. The assessee has not pressed the ground pertaining to Melstar Information Technology Ltd, Hence this ground is not adjudicated by the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elaxed up to 25%. Therefore in the case of the assessee where neither the TPO nor the assessee has made out a case of exceptional difficulty in searching the comparable companies then the normal tolerance range of 15% shall be taken as proper. Hence we set aside the order of the CIT(A) qua this issue of related party transaction filter and also modify the order of the TPO on this issue and hold that 15% tolerance range of related party is reasonable and proper in the case of the assessee. 13. In our view, the RPT has no where been defined in the IT Act or in the Rules. The Delhi Tribunal, while deciding the RPT filter of 25% has relied upon the definition of associate enterprises, which in view of the Tribunal was akin to RPT (related party transaction) and further relied upon the definition of interested person given u/s.40A(2)(b) of the Act. The Transfer Pricing chapter was introduced under the Act, for the purpose of preventing the fiscal evasion or avoidance of tax and is a complete code in itself . As per Rule 10B(2), the FAR (Functions, Assets and Risk assumed) analysis is to carried out for comparable company viz a viz the tested company. If the FAR of the tested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons ; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of knowhow, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights ; or (h) ninety per cent. or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise ; or (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(77) of the Companies Act, 2013, as under: (77) ''relative'', with reference to any person, means any one who is related to another, if- (i) they are members of a Hindu Undivided Family ; (ii) they are husband and wife ; or (iii) one person is related to the other in such manner as may be prescribed ; On a perusal of the above definitions, the two enterprises are considered to be associated enterprises if one enterprise holds more than 26% of the shares in the other or one enterprise guarantees not less than 10% of the total borrowings of the other enterprise, or there is a commonality of the board members or board of directors. Thus the concept of an associated enterprise was brought in to address the management control of one enterprise with that of the other enterprise with whom the international transactions are being entered, whereas the term related party transactions is of wider import and it is working on transaction level instead of managing control level Under the Companies Act, 2013, related party transaction requires the mandatory disclosure in the financial statements of the company. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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