TMI Blog2018 (9) TMI 1973X X X X Extracts X X X X X X X X Extracts X X X X ..... there was a caption to this effect and therefore the comparability or otherwise of these two companies namely, M/s. Exensys Software Solutions Ltd. and M/s. Thirdware Solutions Ltd. has not been discussed at all. It is now settled principle, upheld in several decisions that companies cannot be excluded from the set of comparables only because of abnormal profits, and the matter of comparability analysis in such cases would require further investigation to ascertain the reasons for unusually high profits in order to establish whether the entities with such high profits can be taken as comparable or not. As observed in the earlier paragraphs, there is no discussion by the learned CIT (Appeals) in the impugned order on the issue of abnormal profits; even though there was a caption to this effect and therefore the comparability or otherwise of these two companies namely, M/s. Exensys Software Solutions Ltd. and M/s. Thirdware Solutions Ltd. has not been discussed at all Rejecting the diminishing revenue filter used by the TPO to exclude companies not reflecting the industry trend - On a perusal of the impugned order, we find that none of the comparable companies have been eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus need to be included. Computation of Deduction under Section 10A - HELD THAT:- Respectfully following the decision of the Hon'ble Apex Court in the case of HCL Technologies Ltd. [ 2018 (5) TMI 357 - SUPREME COURT] we direct the AO to allow assessee's claim for deduction under Section 10A. - I.T. (T.P) A. No.620/Bang/2013 - - - Dated:- 7-9-2018 - N.V. Vasudevan, Judicial Member And Jason P. Boaz, Accountant Member B.R. Ramesh, JCIT (DR) for the Appellant. T. Suryanarayana, Advocate for the Respondent. ORDER Jason P Boaz, This appeal by Revenue is directed against the order of Commissioner of Income Tax (Appeals)-IV, Bangalore dt.19.2.2013 for the Assessment Year 2005-06. 2. Briefly stated, the facts of the case are as under :- 2.1 The assessee, a resident private limited company, is part of the ABB Asea Brown Boveri Group and is engaged in the provision of software development and support services to its Associated Enterprises (AE). The assessee filed its return of income for Assessment Year 2005-06 on 28.10.2005 declaring total income of ₹ 3,35,741. The return was processed under Section 143(1) of the Income-tax Act, 1961 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of the margins of M/s Quintegra Solutions Ltd, by determining the same as average of margins of 6.85% and 10.68% for FY ended 30/09/2004 and 30/09/2005 respectively, without appreciating the fact that an average cannot represent the arm's length margin of any comparable company for the purposes of arm's length margin determination 6. The honourable CIT(A) erred in computation of the margins of M/s Quintegra Solutions Ltd, by determining the same as average of margins of 6.85% and 10.68% for FY ended 30/09/2004 and 30/09/2005 respectively, without appreciating the fact that the same is contradictory to the CIT(A)'s own decision in upholding the rejection by the TPO of multiple year's data and use of only current year's data for the purpose of TP analysis. 7. The hon'ble CIT(A) has erred in holding that, the different accounting year filter, was an inappropriate filter for the purposes of comparability analysis. 8. The hon'ble CIT(A), on the facts and in the circumstances of the case, erred in holding that M/s Tata Elxsi Ld., can not be taken as a comparable, being functionally different without appreciating the fact that it satisfies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to be reduced from the export turnover as per clause (iv) of the Explanation to Section 10A, to be reduced from the total turnover also. 17. The Ld. CIT (A) erred in not appreciating the fact that the jurisdictional High Court decision relied upon by him has not been accepted by the department and an appeal has been filed before Hon'ble Supreme Court which is still pending. 18. For these and such other grounds that may be urged at the time of hearing it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. 19. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 4. Grounds 1, 18 19, being general in nature, no adjudication is called for thereon. 5. Ground Nos.2 to 14 - Transfer Pricing Issues. Before proceeding to deal with the above grounds of appeal, the approach of the assessee and the TPO on Transfer Pricing Issues is summarized hereunder. 5.1 The assessee is engaged in the provision of software development services to its AEs. For the year under consideration, the assessee has reported, inter alia, internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer while passing the order of assessment for Assessment Year 2005-06. 5.3 In the impugned order, the learned CIT (Appeals), after considering the views of the TPO and the submissions of the assessee, disposed off the assessee's appeal excluding certain companies chosen by the TPO as comparables to the assessee. While deciding on the exclusion of the companies from the final set of 17 comparables companies chosen by the TPO, the learned CIT (Appeals) has adjudicated on the following issues. 5.4 Turnover and Abnormal Profits Filter. 5.4.1 Under the caption of Turnover and Abnormal Profits Filter , the learned CIT (Appeals) has discussed the exclusion of companies. Relying on the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. DCIT (2012) 53 SOT 159 (Bang), the learned CIT (Appeals) held that since the assessee's turnover was approx. ₹ 24.73 Crores, the turnover range of ₹ 1 Crore to ₹ 200 Crores be applied and consequently directed exclusion of the following seven companies (listed at para 103 of CIT (Appeals) order) which had turnover in excess of ₹ 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same without assigning any reasons. (ii) Akshay Software Technology Ltd., as it was rejected by wrongly applying the on - site filter. 5.8 Having held as above, the learned CIT (Appeals) at para 164 of the impugned order, under the caption Summary of Comparables , has given the final set of comparables for computing the mean operating margin for determination of ALP as under :- Sl. No. Comparable Company OP/TC 1 Akshay Software Technologies Ltd. 07.72 2 Four Soft Ltd. 22.98 3 Lanco Global Systems Ltd. 13.65 4 Quintegra Solutions Ltd. 08.07 5 RS Software (India) Ltd. 08.07 6 Sankhya Infotech Limited 27.39 7 Sasken Communication Technologies Ltd. (Seg.) 14.42 8 Sasken Network Systems Ltd. 16.64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Turnover and functionally different. The assessee also prayed for upholding the inclusion of the following companies in the final set of comparables, for the reasons given hereunder :- Sl. No. Name of the company Reasons for Inclusion 1 Quintegra Solutions Ltd. Functionally comparable and its rejection on different accounting year is erroneous. 2 VJIL Consulting Ltd. Functionally comparable, passes all filters. Basis of rejections is erroneous. 3 Akshay Software Technologies Ltd. Functionally comparable, passes all filters. Basis of rejection is erroneous. 5.11.2 We have heard the rival contentions, perused and carefully considered the material on record; the TPO's order under Section 92CA of the Act, the order of assessment, the impugned order of the learned CIT (Appeals), the submissions put forth by both the learned Departmental Representative for revenue and the learned Authorised Representative of the assessee includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) was not justified in excluding the above 5 companies from the list of comparables on the ground that their turnover was above ₹ 200 Crores and cannot be compared with the assessee whose turnover is approximately ₹ 24.73 Crores. 6.3.2 The learned Departmental Representative also filed before us, written submissions to contend that in the Software Industry size has no influence on the margins earned by an entity. According to the learned Departmental Representative, economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. The learned Departmental Representative submits that in the software industry, size does not matter; what matters is the human capital. According to him the application of turnover filter might be justified for excluding companies with low turnover ; say ₹ 1 Crore or less, because the margins earned by these companies might fluctuate widely due to narrow capital base and lack of competitive strength, lack of operational efficiency and also lack of human resources. In support of his contentions, the learned Departmental Representative had prepared a chart of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in the case of Sysarris Software (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 243 (Bang. - Trib.), wherein the Tribunal; after noticing the decision of the Hon'ble High Court of Delhi in the case of Chryscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT (2015) 376 ITR 183 (Del) and the decision to the contrary of the Hon'ble Bombay High Court in the case of CIT v. Pentair Water India (P.) Ltd. ITA No.18 of 2015 dt.16.9.2015; held that since there were contrary views on the issue, therefore the view favourable to the assessee laid down in the case of Pentair Water India (P) Ltd. (supra) should be adopted. 6.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The co-ordinate bench of this Tribunal in the case of Dell International Services India (P.) Ltd. (supra) had upheld the applicability of the turnover filter, relying on the decision of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), holding as under at paras 39 to 42 thereof :- 27. Thus a sum of ₹ 13,68,82,572 was directed to be added to the total income of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over filter and excluding the five companies listed above (at para 6.1 of this order) from the list of comparable companies. 7. Ground No.3 - Abnormal Profits. 7.1 In Ground No.3 (supra), revenue assails the decision of the learned CIT (Appeals) in the impugned order in excluding companies with abnormal profit margins from the final set of comparable companies. Revenue contends that the learned CIT (Appeals) has sought to exclude companies with abnormal profits even without defining what constitutes abnormal profits filter and how the same is determined and thereby erred in excluding the comparable companies (i) Exensys Software Solutions Ltd. and (ii) Thirdware Solutions Ltd. 7.2.1 According to the learned Authorised Representative for the assessee, Exensys Software Solutions Ltd. is functionally different; has significant intangibles and it has no segmental details. Therefore, it was submitted that besides being a super profit company, there are many other reasons as to why this company should not be treated as comparable to the assessee. 7.2.2 As regards Thirdware Solutions Ltd., the learned Authorised Representative for the assessee contended that this company is fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und No.3 of Revenue's appeal is allowed for statistical purposes. 8. Ground No.4 8.1 In this Ground (supra), Revenue has assailed the decision of the learned CIT (Appeals) in rejecting the diminishing revenue filter used by the TPO to exclude companies not reflecting the industry trend. 8.2 On a perusal of the impugned order, we find that none of the comparable companies have been either excluded OR included by the learned CIT (Appeals) due to decision on this filter. As such, this ground No.4 is academic, needs no adjudication and is accordingly dismissed as infructuous. 9. Ground Nos. 5 o 7 - Different Accounting Year - Quintegra Solutions Ltd. 9.1 In these grounds (supra), Revenue has assailed the decision of the learned CIT (Appeals) in disapproving the application of the different accounting year filter and thereby including M/s. Quintegra Solutions Ltd. as a comparable company. Revenue assails the order of the learned CIT (Appeals) directing the TPO to adopt the margin at 8.77%, being the average of the margins of M/s. Quintegra Solutions Ltd. for the F.Y. ending 30.09.2004 and 30.9.2005. Before us, the learned Departmental Representative argued that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this view of the matter, we do not agree with the decisions of the learned CIT (Appeals) on both disapproving of the different accounting year filter and in adopting the average of two years margin, and consequently set aside the orders of the learned CIT (Appeals) on this issue and restore that of the TPO. The ground Nos.5 to7 of Revenue are allowed. 10. Ground No.8 - Exclusion of Tata Elxsi Ltd. 10.1 In this ground (supra), Revenue assails the decision of the learned CIT (Appeals) in excluding this company from the list of comparables. Revenue contends that this company satisfies all the qualitative and quantitative filters applied by the TPO and therefore the learned CIT (Appeals) erred in excluding it from the list of comparables. 10.2 Per contra, the learned Authorised Representative for the assessee contends that this company is functionally different and performs diverse functions such as development of niche products. In support of this contention, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench in the assessee's own case for Assessment Year 2009-10 in IT(TP)A Nos.49 97/Bang/2014 and also on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Tribunal in the case of Logica Pvt. Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- 14. As far as comparable at Sl.No.6 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- 7.7. Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive of the assessee contended that these two companies are functionally different from the assessee in the case on hand. It was submitted that Bodhtree Consulting Ltd., is engaged in product development and ITES and has a different revenue recognition policy on account of which its margins have widely fluctuated over various years. As regards Geometric Software Solutions Ltd., it was submitted that this company is functionally dissimilar, performing diverse functions and segmental details are not available. In support of the assessee's contentions, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Net Devices India (P.) Ltd. (supra). 11.3.1 We have considered the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement cited (supra). We find that in the cited case, namely Net Devices India Pvt. Ltd. (supra), Bodhtree Consulting Ltd. has been excluded on the basis of RPT Filter. As this is not a ground in the case on hand, this decision would not be of any help to the assessee. In the assessee's own case for Assessment Year 2009-10 (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables. According to Revenue, the learned CIT (Appeals) erred in doing so since this company failed to satisfy the qualitative filters applied by the TPO and therefore was not an appropriate comparable to the assessee in the case on hand. 12.2 Per contra, the learned Authorised Representative of the assessee supported the decision of the learned CIT (Appeals) in including this company in the set of comparables and in support of the assessee's contentions placed reliance on the decision of the Delhi Bench of ITAT in the case of Qualcomm India (P.) Ltd. v. Asstt. CIT (2013) 37 taxmann.com 306 (Delhi Trib.). 12.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited (supra). The learned CIT (Appeals), in the impugned order, has observed that the TPO, after selecting this company as a comparable in the show cause notice has rejected this company in the final order, without assigning any proper reasons. The only reason given by the TPO for rejecting this company is that the company has paid substantial amount as VAT, which indicated that this company is not into software development serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it does support the finding of the learned CIT (Appeals) and also revenue has not brought on record any contrary decision or evidence to controvert the same. In this view of the matter, we find no reason to interfere with or deviate from the decision of the learned CIT (Appeals) in including this company; Akshay Software Technologies Ltd., in the list of comparables. Consequently, Ground No.11 of Revenue's appeal is dismissed. 14. Ground Nos.12 to 14 (supra), are conceptual grounds, academic in nature and not having been urged before us, are dismissed as infructuous. 15. Ground Nos.15 to 17 - Computation of Deduction under Section 10A of the Act. 15.1 The learned Departmental Representative of Revenue was heard in support of the grounds raised (supra). 15.2 The learned Authorized Representative for the assessee submitted that there was no error on the part of the learned CIT (Appeals)-1, in allowing the assessee's claim for deduction under Section 10A of the Act by relying on the judgment of the Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. (349 ITR 98)(Kar). It was further submitted that this issue is now covered in favour of the assessee by the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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