9911796707
TMI Blog2018 (9) TMI 1973X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to the Transfer Pricing Officer (TPO) under Section 92CA of the Act for determination of the Arm's Length Price (ALP) of the international transactions entered into by the assessee with its AEs in the year under consideration. 2.2 The TPO passed an order under Section 92CA of the Act dt.4.8.2008 proposing a Transfer Pricing Adjustment of Rs. 1,47,92,474 to the ALP of international transactions entered into by the assessee in respect of its software development services. After receipt of the TPO's order, the Assessing Officer proceeded to complete the assessment under Section 143(3) of the Act vide dt.10.12.2008, whrein the assessee's income was determined at Rs. 1,65,96,800 including, inter alia, the Transfer Pricing Adjustment of Rs. 1,47,92,474 proposed by the TPO. 2.3 Aggrieved by the order of assessment dt.10.12.2008 for Assessment Year 2005-06, the assessee carried the matter in appeal to the CIT (Appeals) - IV, Bangalore. The learned CIT (Appeals) disposed off the appeal vide the impugned order dt.19.2.2013 granting the assessee partial relief. 3. Revenue, being aggrieved by the order of the CIT (Appeals) -IV, Bangalore dt.19.2.2013, has preferred this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that M/s. Bodhtree Consulting Ltd and Geometric Software Solutions Co. Ltd. can not be taken as comparables, without appreciating the fact that the companies qualifies all the qualitative and quantitative filters applied by the TPO in selection of these companies as comparables. 10. The learned CIT (A) has erred in directing inclusion of the M/s. VJIL Consulting Ltd. as a comparable, rejecting the TPO's conclusion that the company does not satisfy the qualitative filters applied for the purpose of comparability analysis without appreciating the fact that it is an inappropriate comparable for the purpose of determining the arm's length price. 11. The learned C1T(A) erred in directing inclusion of M/s Akshay Software Technologies Ltd., without recording any finding as to how the same qualifies through the filters ( qualitative and quantitative) applied for the purposes of comparability analysis without appreciating the fact that the profile of the company shows that it is a predominantly onsite company and thus not a suitable comparable. 12. The CIT(A) erred in not appreciating that if any filter or criteria applied by the taxpayer for search of comparables is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M) and arrived a set of 45 comparables (listed at page 19 of the TPO's order under Section 92CA of the Act) with average Mean Margin of 9.97%. The assessee's profit margin being higher at 16.17%, the assessee concluded that its transactions in the software development services segment are at Arm's Length. 5.2 The TPO rejected the assessee's TP Study for various reasons mentioned in his TP Study and conducted his own comparability analysis, applying various filters, and selected the following set of 17 comparable companies; as listed at para 15 on page 151 of his order :- Sl. No. Company Name 1 Bodhtree consulting Ltd.* 2 Lanco Global Systems Ltd.* 3 Exensys Software Solutions Ltd. 4 Sankhya Infotech Ltd. 5 Sanken Network Systems Ltd.* 6 Four Soft Ltd.** 7 Thirdware Solution Limited 8 R.S. Software (India) Ltd.* 9 Geometric Software Solutions Co. Ltd. 10 Tata Elxsi Limited (seg.) 11 Visual soft Technologies Ltd. (seg.)* 12 Sasken communication Technologies Ltd. (seg.)* 13 Igare (seg.)* 14 Flextronics (seg.) 15 L & T Infotech* 16 Satyarn* 17 Infosys* The Arithmetic Mean of these 17 comparables was computed at 26.59%. After allowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nover filter adopted by the learned CIT (Appeals). 5.5 Different Accounting Year Filter. 5.5.1 The learned CIT (Appeals) has disapproved the application of this filter by holding that in the absence of evidence to show that there has been a significant impact on margins due to different reporting OR accounting periods the said filter cannot be applied. In that view of the matter, the learned CIT (Appeals) directed the inclusion of Quintegra Solutions Ltd., as a comparable in the final set of comparables and also directed that the operating margin be adopted at 8.77%; being the average of margins of 6.85% and 10.68% for the Financial Years ended 30.9.2004 and 30.9.2005 respectively. 5.6 Apart from the above, the learned CIT (Appeals) has discussed the functional comparability and other criteria of certain companies and has directed their exclusion as under :- (i) Tata Elxsi Ltd. on ground of not being functionally comparable; (ii) Bodhtree Consulting Ltd.; on grounds of not being functionally comparable and also for non-availability of segmental details; (iii) Geometric Software Solutions Ltd., on grounds of not being functionally comparable and also for non-availability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable. 5 Tata Elxsi Ltd. Functionally different and segmental details are not available. 6 i-Gate Global Solutions Ltd. HighTurnover. 7 Flextronics Software Systems Ltd. High Turnover and functionally different. 8 L & T Infotech Ltd. High Turnover. 9 Satyam Computer Services Ltd. High Turnover and unreliable data. 10 Infosys Technologies Ltd. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable. According to the learned Departmental Representative, therefore, the learned CIT (Appeals) was not justified in excluding the above 5 companies from the list of comparables on the ground that their turnover was above Rs. 200 Crores and cannot be compared with the assessee whose turnover is approximately Rs. 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 Rs. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ergent view of two non-jurisdictional High Courts and also the decision of this Tribunal 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 Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the learned CIT (Appeals) in applying the upper turnover 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 Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. We hold and direct accordingly. Consequently, Ground 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 De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken as the margin in this case. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecting their exclusion from the set of comparables. 11.2 Per contra, the learned Authorised Representative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assails the decision of the learned CIT (Appeals) in including this company in the set of comparables. 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 substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to that of the assessee. Though this decision (supra) is for assessment year, 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 subm ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
