TMI Blog2020 (1) TMI 1030X X X X Extracts X X X X X X X X Extracts X X X X ..... TD. [ 2016 (6) TMI 1322 - ITAT BANGALORE] low turnover cap applied by the TPO in case of taxpayer is required to be restricted to ₹ 1 crore instead of ₹ 5 crores. Even by applying the rule of consistency, we are of the considered view that when there is no change in the business model of the taxpayer in AYs 2008-09, 2009-10 2012-13 as well as year under assessment for AY 2011-12, rule of consistency has to be followed and TPO is directed to apply the turnover cap of ₹ 1 crore as against cap of ₹ 5 crores applied by him. So far as, question of segmental information being not matching with entity level functions as has been held by ld. TPO is concerned, as per AS-17 on segment reporting, revenue derives from reportable segments should be at least 75% of the total external revenue as segmental results are not expected to match with entity-wise results. So, in these circumstances, Kals is ordered to be included in the final set of comparables. Melstar rejected as a comparable on the ground that it fails export filter - Detail of export sales was not available in public domain. So, when detail of export sales is not available Melstar cannot be rejected just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng invested in IPR and has created several IPs and is having revenue from licencing of product and royalties and having huge turnover of ₹ 645.39 crores which is 32 times of the taxpayer, it cannot be a suitable comparable vis- -vis the taxpayer who is a captive software service provider, hence ordered to be excluded. Sasken is not a suitable comparable vis- -vis the taxpayer on ground of functional dissimilarity and being into trademark products/patents having no segmental financials, hence ordered to be excluded as a comparable. CG Vak is shown to have the profit of ₹ 1,39,70,696/- for FY ending 31.03.2012 and ₹ 9,64,864/- for the year ending 31.03.2011. So, it has come on record that ld. DRP has lost sight of the actual figure showing profit by CG Vak and proceeded to reject the same on the basis of incorrect facts. So, the AO/TPO is directed to verify the facts and include CG Vak as a valid comparable vis- -vis the taxpayer. Kals - Annual report show that all the filters applied by the ld. TPO stood satisfied. So, in these circumstances, the ld. TPO/AO is directed to include Kals as a valid comparable. Infomile functionally similar to the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and proceeded to make transfer pricing adjustment on the basis of TPO's order. 4. The Ld. Transfer Pricing Officer has erred in facts and in law to reject, based on his subjective grounds and presumptions, the economic analysis conducted by the appellant for determination of the arm's length price. 5. In relation to quantitative search filters applied in benchmarking analysis, the Ld. TPO has erred in facts and circumstances by: a) Rejecting/modifying the filters applied by the Appellant in its TP study and thereby erroneously holding that the TP Study is defective and unreliable; b) Erroneous understanding of the purpose of Appellant's usage of multiple year data and erroneously stating had objected to using contemporaneous data, whereas the appellant has used only current year in respect of com parables; c) Erroneously rejecting the turnover filter applied by the Appellant and disregarding the contentions raised by Appellant w.r.t differences in scale of operations between the Appellant and the companies selected by Ld. TPO as comparables; d) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f) Erroneously accepting Igate Global Solutions Ltd in final comparable set used by Ld. TPO after accepting Appellant's contentions regarding its exclusion on the basis of dissimilar business activities as mentioned in the Annual Report and also expressly stating in his order that this company should be rejected; g) Erroneously accepting companies (i.e. Infosys Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd and Zylog Sytems Ltd) which are having high turnover and disregarding the Appellant's contentions w.r.t differences in functional profile arising due to differences in scale of operations; h) Erroneously accepting companies (i.e. Infosys Ltd, Sasken Communication Technologies Ltd) having intangibles/ intellectual property/patents in his final comparable set; i) Erroneously accepting companies which are functionally different or having very less revenue from software development activities (i.e. Wi pro Technologies Ltd and Zylog Systems Ltd.) in his final comparable set. 7. The Ld. TPO has erred in considering operating margin of the Appellant as 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitrarily without proper appreciation of the facts, law and commercial reality. 5. In relation to quantitative search filters applied in benchmarking analysis, the Ld. TPO/DRP has erred in facts and circumstances by: a) Rejecting/modifying the filters applied by the appellant in its TP study and thereby erroneously holding that the TP Study is defective and unreliable; b) Erroneous understanding of the purpose of appellant's usage of multiple year data and erroneously stating having objected to using contemporaneous data, whereas the appellant has used only current year in respect of comparables; c) Erroneously rejecting the turnover filter applied by the appellant and disregarding the contentions raised by appellant w.r.t differences in scale of operations between the appellant and the companies selected by Ld. TPO as comparables; d) Erroneous application of turnover filter applied by Ld. TPO without providing any evidence to support his rationale for not applying any upper cap filter, thereby comparing appellant having turnover of ₹ 19.57 crores with giants having tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l business conditions like mergers/acquisition etc. during the year under consideration and for which appropriate adjustments cannot be taken out; e) Erroneously accepting companies which are functionally different or having very less revenue from software development activities (i.e., Infosys Ltd, L T Infotech, R S Software(India) Ltd., Sasken Communication Technologies Ltd, Spry Resources Pvt. Ltd., Tata Elxsi Ltd., Thirdware Solution Ltd. and Zylog Systems Ltd.) in his final comparable set. 7. The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring the appellant's contention with respect to erroneous computation of transfer pricing adjustment by making the adjustment at entity level instead of the adjustment being made only in respect of international transactions undertaken by the appellant. 8. The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring the idle capacity adjustment claimed by the appellant on account of the unutilized capacity during the year. 9. The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring appellant's contention as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer (TPO) rejected all the 4 comparables by applying various filters detailed in para 2.1 of the TP order, selected 6 new comparables with average margin of 32.97% and proposed the adjustment on account of arm s length as under :- Operational Cost 78,792,386 Arm s Length Price at a Margin of 32.97% 104,770,236 Price Received 87,162,752 105% of the Price received 91,520,890 Proposed Adjustment u/s 92CA 17,607,484 The above shortfall of ₹ 1,76,07,484/- is being proposed as an adjustment to the price shown by the taxpayer under the IT segment in its books of account. The assessing will accordingly enhance the income of the assessee by ₹ 1,76,07,484/-. This shall be treated as the cumulative adjustment u/s 92CA. 6. For AY 2012-13, the ld. TPO in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chmark the international transactions qua software development services. 10. Now, the only challenge made by the taxpayer is selection and rejection of comparables made by the TPO as well as ld. DRP. We would examine the suitability of comparables rejected as well as selected by the TPO for AYs 2011-12 2012-13 separately. ITA No.1286/Del/2016 (AY 2011-12) 11. The taxpayer challenged rejection of its comparables by the ld. TPO and thereby sought inclusion of its 4 comparables viz. CG Vak Software Exports Ltd., Kals Information Systems Ltd., Melstar Information Technologies Ltd. Virnichi Technologies Ltd. for benchmarking the international transactions and further sought exclusion of 5 comparables viz. Wipro Technologies Services Ltd., Infosys Ltd., I gate Global Solutions Ltd., Persistent Systems Ltd. Sasken Communication Technologies Ltd. to benchmark the international transactions qua software development services. 11.1 Ld. TPO after applying TNMM with OP/OC as PLI as MAM chosen 6 comparables with average margin of 32.97%, which are as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. Ld. TPO rejected Kals as a comparable chosen by the taxpayer on the ground that segmental information is not matching with entity level financials. There is no dispute as to the functional similarity between taxpayer and Kals. Ld. TPO also applied taxpayer s lower turnover cap and applied lower turnover cap of ₹ 5 crores. However, in AY 2012-13, AO accepted lower turnover cap of ₹ 1 crore and TPO himself applied lower turnover cap of ₹ 1 crore in taxpayer s own case for AY 2009-10. 16. Coordinate Bench of the Tribunal in case of M/s. Mercedes Benz Research Development India Pvt. Ltd. vs. ACIT in IT(TP) A.No.291/Bang/2015 order dated 28.04.2017 examined the issue as to how the turnover filter is applicable for inclusion and exclusion of any company as comparable by returning following findings :- 4. We have considered the rival submissions. We find that the learned DR is objecting to the application of turnover filter and the learned AR of the assessee is also not insisting on applying of turnover filter. But when the assessee is requesting for exclusion of this company and if it is seen that this company has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of consistency has to be followed and TPO is directed to apply the turnover cap of ₹ 1 crore as against cap of ₹ 5 crores applied by him. So far as, question of segmental information being not matching with entity level functions as has been held by ld. TPO is concerned, as per AS-17 on segment reporting, revenue derives from reportable segments should be at least 75% of the total external revenue as segmental results are not expected to match with entity-wise results. So, in these circumstances, Kals is ordered to be included in the final set of comparables. MELSTAR INFORMATION TECHNOLOGIES LTD. (MELSTAR) 19. Ld. TPO rejected Melstar as a comparable on the ground that it fails export filter. However, it is fairly conceded by ld. ARs for the parties to the appeals that detail of export sales was not available in public domain. So, when detail of export sales is not available Melstar cannot be rejected just like that. So, we direct the ld. TPO to rework the suitability of Melstar as a comparable vis- -vis taxpayer by supplying the copy of details of export sales of Melstar relied upon by him. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving patents; that its R D expenditure is ₹ 527 crores i.e. 2.1% of the revenue; that Infosys has goodwill worth ₹ 916 crores and intellectual property rights worth ₹ 12 crores. All the aforesaid facts highlighted by the taxpayer finds mention in the annual report, available at pages 432, 438 470 of the paper book, and has not been refuted by the ld. DR for the Revenue. From the perusal of annual report at pages 431 436 of the paper book, it has come on record that Infosys also deals in software products, namely, Finnacle . In these circumstances, Infosys, a giant company, cannot be a suitable comparable vis- -vis taxpayer who is a captive service provider having no expenditure on R D, having no goodwill and intellectual property rights as well as patents. 24. Coordinate Bench of the Tribunal in case of Clear 2 Pay India (P.) Ltd. vs.ITO (2018) 95 taxmann.com 284 (Delhi) examined the comparability of Infosys vis- -vis the routine software development service provider in AYs 2011-12 2012-13 and ordered to exclude the same by relying upon the case of CIT vs. Agnity India Technologies (P.) Ltd. (2013) 36 taxmann.com 289 rendered by Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant provides only offshore services (i.e., remotely from India) Expenditure on Advertising/Sales promotion and brand building ₹ 61 Crores Rs. Nil (as the 100% services are provide to AEs) Expenditure on Research Development ₹ 102 crores Rs. Nil Other 100% offshore (from India) 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh turnover of ₹ 1184.55 crores which is 59 times of the taxpayer. When we examine discussion made by the ld. TPO as to the suitability of I Gate as a comparable in the light of the argument addressed by the taxpayer in para 8.2 at page 25 of the TP order, he has ordered to exclude the same as a comparable by returning following findings :- Assessee objected on the inclusion of this comparable submitting that this is an ITES company and produced various snap shots from the Annual Report of the company proving that dominatently it is an ITES company. Assessee s claim is verified from the Annual Report and this company is taken out from the final list of comparables in assessee s case. 27. When ld. TPO himself has verified the claim of the taxpayer as to non-suitability of I Gate as a comparable vis- -vis the taxpayer and ordered to keep the same out of the final list, it appears that it has been erroneously included in the final set of comparables. Even otherwise, when we examine page 229 of the paper book Volume-3 which is fixed assets schedule, it has come on record that I Gate has goodwill worth ₹ 225.99 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on the grounds inter alia that it is functionally different; that it is into trademark products/patents; and that its segmental data is not available. Perusal of the annual report at pages 841, 850, 873, 911 922 of the paper book shows that it is into trademark products/patents for which segmental data is not available for standalone financials as is evident form page 946 of the paper book Vol.IV. 32. Suitability of Sasken has been examined by the coordinate Bench of the Tribunal in Clear 2 Pay India (P.) Ltd. (supra) for AYs 2011-12 2012-13 and has been ordered to be excluded as a comparable vis- -vis routine software development service provider by returning following findings :- 41. The ld.DR challenged exclusion of Sasken by ld. CIT (A) for the reason that the taxpayer has significant intangibles and research and development activities, Ld.DR contended that the Sasken is having no income from sale of licence and drew our attention towards page 324 of the paper book. However, when we examine Director s report available at page 300 of the annual report of Sasken, the contention raised by ld. DR is not sustainable. Operative part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of ₹ 1,39,70,696/- for FY ending 31.03.2012 and ₹ 9,64,864/- for the year ending 31.03.2011. So, it has come on record that ld. DRP has lost sight of the actual figure showing profit by CG Vak and proceeded to reject the same on the basis of incorrect facts. So, the AO/TPO is directed to verify the facts and include CG Vak as a valid comparable vis- -vis the taxpayer. KALS INFORMATION SYSTEMS LTD. (KALS) 35. This is taxpayer s comparable which the ld. TPO has rejected on the basis of different functional profile. When we examine order passed by the ld. DRP at page 22 of the DRP order, Kals has been found to be similar and ordered to include Kals as a valid comparable by returning following findings :- 7 Kals Information Systems Ltd. The company if functionally comparable and satisfies all filters proposed by the TPO. Moreover 80.86% of revenue is derived from software export Different functional profile. Hence rejected (Page No.5 of the show cause notice issued by the Ld. TPO dated 07.12.2015). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... INFOMILE TECHNOLOGIES (INFOMILE) 38. This is taxpayer s comparable rejected by the ld. TPO on the ground of functional dissimilarity. However, ld. DRP held Infomile functionally similar to the taxpayer and directed the TPO to include the same as a valid comparable if it meets the filter approved by the ld. DRP. So, we direct ld. TPO to reconsider Infomile as a comparable vis- -vis the taxpayer by providing an opportunity of being heard to the taxpayer. BELLS SOFTWARE LTD. (BELLS) 39. This is taxpayer s comparable rejected by the ld. TPO on the ground of functional dissimilarity. However, ld. DRP held Bells functionally similar to the taxpayer and directed the TPO to include the same as a valid comparable if it meets the filter approved by the ld. DRP. So, we direct ld. TPO to reconsider Bells as a comparable vis- -vis the taxpayer by providing an opportunity of being heard to the taxpayer. EXCLUSION OF COMPARABLES SOUGHT FOR BY THE TAXPAYER INFOSYS LTD. (INFOSYS) PERSISTENT SYSTEMS LTD. (PERSISTENT) 40. Since there is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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