TMI Blog2017 (1) TMI 1734X X X X Extracts X X X X X X X X Extracts X X X X ..... No.1109/Bang/2011] - - - Dated:- 25-1-2017 - Shri sunil kumar yadav, judicial member and shri a.k. Garodia, accountant member Revenue by : Sheri M.K. Biju, Addl. CIT (ITAT)-3, DR Assessee by : Shri Chavali Narayan, CA ORDER Sunil Kumar Yadav, This appeal is preferred by the revenue against the order of CIT(Appeals) inter alia on the following grounds:- 1. The order of the Learned CIT(A) in so far as it relates to the following grounds is opposed to law and facts of the case. 2. The CIT(A) erred in holding that expenditure traveling and communication expenses of ₹ 87,69,553/- are to be excluded from total turnover as well for the purpose of computation of deduction u/s 10A while such exclusion is permitted to arrive at the export turnover only as per the definitions given in Sec.10A of the I.T. Act, 1961 and total turnover has not been defined in the section. 3. The learned CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from the appellant company. 4. In the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenues' should not be used as a comparability criterion. b. The learned CIT(A) has erred in law and facts, by not accepting Respondent's plea that companies having economic performance contrary to the industry behaviour (e.g. companies which showed a diminishing revenue trend and or under-utilisation of assets, etc) should not be rejected. c. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that certain comparable companies identified in the transfer pricing documentation, where consolidated results had been used for analysis should not be rejected. The Respondent had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide/ segmental revenues. d. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) should not be rejected. 4. The learned CIT(A) has erred in law by upholding the TPO's approach of exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds in revenue s appeal and the grounds raised in the CO of the assessee are concerned, they all relate to the inclusion/exclusion of the comparables taken by the TPO for computing the ALP with respect to international transactions. 7. During the course of hearing, the ld. counsel for the assessee has filed a chart detailing the profile, related party transactions (RPT), turnover, etc. of the comparables. 8. The facts in brief borne out from the record are that the assessee is a captive service provider engaged in the business of developing, testing, customizing and maintaining high quality software for its Associated Enterprises (AE). The assessee company filed its return of income on 28.10.2005 declaring a taxable income of ₹ 97,52,862 us. 10A of the Act. During the course of assessment proceedings, having noted the international transactions undertaken by the assessee, the AO made a reference u/s. 92CA of the Act to the TPO for determination of the arm s length price (ALP) of the international transactions of the assessee company. For the purpose of establishing the ALP of its international transactions with its AEs, the assessee had undertaken TP study, carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esult in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise these grounds at an earlier stage is neither wilful nor wanton but due to the reasons stated above. Further the above ground has been raised based on the following rulings: DCIT Vs. Textron Global Technology Centre Private Limited (IT(TP)A No. 29/Bang/12) ITO Vs. Colt Technology Services India Private Limited (IT(TP)A No. 609/Del/2011 ) ITO Vs Sunquest Information Systems (India) Private Limited (ITA No. 1 032/Bang/ 2011) The Hon'ble ITAT had rejected certain companies as comparables in the aforementioned rulings. No prejudice would be caused to the Appellant by reason of the above additional grounds being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon'ble Tribunal. The Petitioner states and submits that the issues raised in the additional ground above are legal issues and arise out of the order of the lower authorities. Reliance is based on the decisions of the Hon'ble Supreme Court in the case of Jute Corporation of India vs. C.I.T. (187 ITR 688) and Nationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables. In support of these contentions, he relied upon the order of the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. (supra). 15. The ld. DR, on the other hand, has placed heavy reliance upon the order of TPO with the submission that the TPO has rightly taken 17 comparables for determination of the ALP with respect to international transactions undertaken by the assessee with its AE. 16. It was also contended on behalf of the ld. DR that the profile of McAfee Software (India) Pvt. Ltd. is different from the assessee, therefore reliance cannot be placed upon the order of the Tribunal, while approving exclusion of the comparables made by the CIT(Appeals). 17. Having carefully examined the orders of lower authorities in the light of the order of the Tribunal and the chart filed before us, we find that the TPO has taken the following 17 comparables:- 1. Bodhtree Consulting Ltd. 2. Sankhya Infotech Ltd. 3. Visual Soft Technologies Limited (Seg) 4. LGS Global Ltd. (Lanco Global Solutions Ltd.) 5. R S Software (India) Ltd. 6. Sasken Communication Technologies Ltd. 7. Sasken Network Systems Ltd. 8. Geometric Software Solutions Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged in development of software products and has also revenue from sale of software license. Besides it earns extra-ordinary profits due to ownership of significant intangibles. With regard to Exensys Software Solutions Ltd., it was contended that this company is functionally different and deals in software products and extra ordinary events of amalgamation. It owns brand worth 5 crores and engaged in R D and owns software products. 21. The ld. counsel for the assessee further contended that these comparables were examined by the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. (supra). Copy of the order of the Tribunal is available at pages 566 to 586 of the compilation. 22. From a perusal of the Tribunal orders, we find that the TPO has taken similar 17 comparables and had discussed all these comparables which were sought to be excluded by the assessee. The assessee also claims inclusion of LGS Global Ltd. (Lanco Global Solutions Ltd.), R S Software (India ) Ltd., Sasken Communication Technologies Ltd., Sasken Network Systems Ltd., L T Infotech Ltd. iGate Global Solutions Ltd. which were excluded by the CIT(Appeals). The CIT(A) has excluded the same by app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Ltd 29.44 26.94 17. Infosys Technologies Ltd., 42.83 4.96 Arithmetical Mean 26.59 23.74 The analysis of each of the comparable company is as under. Satyam Computers Ltd: 10.1. Out of the above comparables, Satyam Computer Services Ltd., was excluded by CIT(A) on the basis of non-reliability of financial data. Revenue has accepted the same and has not contested. So, the said company has been rightly excluded. Infosys Technologies Ltd., Exensys Software Solutions Ltd 10.2. Ld.CIT(A) has excluded Infosys and Exensys, on the basis of functional dissimilarity and having extraordinary event during the year. Exensys was having extraordinary profits by way of amalgamation of companies during the year. Infosys was excluded having different functionality of products, having high turnover and brand name. Following the decision of Agnity Technologies Vs. ITO of ITAT as approved by the Hon'ble Delhi High Court, Infosys cannot be considered as comparable. The same view was held by Coordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obal Centers (India) P.Ltd 43 Taxmann.com 100 Mumbai(SB), we, consider the same as comparable and retain it in the list. Sankhya Infotech Ltd., Thirdware Solution Ltd., Tata Elxsi Ltd., : 10.5. These three companies are rejected as comparables on functionality in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (paras 19-20, 22-26, 27-30 restively) and in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) at Para No. 13. The analysis by the Co-ordinate Benches is 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product developments. Since Assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the Assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : 23. The other companies which are objected to by the Assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO s Order, the said company has derived income from software licence also and AMCs. 25. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to Assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company s operations are functionally different as such, the same is not comparable. Further, Assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22: 22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the Assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suffice to say that Assessee s submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm s length margin accordingly. The ground No.8 and additional ground raised by Assessee are considered as allowed . In view of the above, the above three companies are to be excluded. Sasken Network Systems Ltd., R S Software (India) Ltd., Visualsoft Technologies Ltd., and Sasken Communication Technologies Ltd., 10.6 Since there is no objection from Assessee and was selected by TPO, the above companies are retained. Four Soft Ltd., 10.7. The objection by Assessee is that this company is a product company. was analysed and accepted in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) para 22. It was held that the said company ahs derived income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the Assessee company to bring them on par with the Assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables . Respectfully following, we exclude the same. 11. That leaves us with another ground in Revenue s appeal about granting deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old proviso says that at the option of the Assessee, the Assessee may adopt a price different from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean, ie.., the Assessee has an option to claim the tax payer s marginal relief at 5 per cent with reference to the arithmetical mean irrespective of the range of actual deviation between the margin disclosed by the Assessee and the average mean margin. Therefore, in effect, this marginal relief takes the character of a standard deduction of 5 per cent. For e.g., in a case, average mean of the arm s length price determined by the Transfer Pricing Officer/Assessing Officer is 20 per cent and that one disclosed by the Assessee is 10 per cent. The Assessee will get a standard deduction of 5 per cent and the Assessee s arm s length price will be increased to 15 per cent and thereafter the difference of 5 per cent between 20 per cent and 15 per cent alone shall be added as arm s length price adjustment. This is the theme of the old proviso. But under the newly substituted proviso, the marginal relief of 5 per cent will not Act as standard deduction. If the price determined by the average mean price is 20 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee remained that the said company owns brands worth ₹ 5 crores as against its turnover of ₹ 7.37 crores during the financial year 2004-05, hence the company is a brand owner of the products developed by it. The said company is also engaged in section R D and owns several software products such as X migrate, integration workbench, and report designer etc. Regarding Sankhya Infotech Ltd., it was submitted that they own the intellectual property rights in the form of software products developed by it and bears substantial risk associated with the success / failure of these products in the market. These submissions were made on the basis of its annual report for the relevant financial year. It was also submitted that as a part of its business operations the said company is engaged in and focuses on development of niche products for the transportation and aviation industry and accordingly spends heavily on development of software products. It was also submitted that the said company owns software products. This information was based on a review of the schedule 4 of its books of accounts on fixed assets. Regarding Thirdware Solutions Ltd. it was submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied upon by the Ld. DR having distinguishable facts are not helpful to the revenue. In the case of ST Microelctronics PVt. Ltd. (supra) the assessee tried to establish that the role of the assessee in producing semiconductor (IC) was limited qua the role performed by ST group which was not accepted by the Tribunal with this observation that the assessee had employed more than 1600 persons and it was having one of the largest design centres out of the Europe and thus the operations carried out by the assesee within India were to be compared with other assesses and not with ST group. Thus the assessee failed to establish that this case was not comparable with the ST group. The Tribunal observed further that the assessee could have produced the report of an expert indicating the work performed by it was negligible in comparison to other software development companies. Similarly in the case of Symantec Software Solutions Pvt. Ltd. (supra) relied upon by the Ld. DR the Tribunal did not find any merit and substance in the submission of the assessee for adjustment in respect of risk and functional differences. The Tribunal held that what is relevant is the margin/profit the assessee earn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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