9911796707
TMI Blog2016 (11) TMI 1748X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparables in the segment by holding that the size, turnover of the company are deciding factors for treating a company as a comparable. 3. The learned CIT(A), on the facts and in the circumstances of the case. erred in holding that M/s. Bodhtree Consulting Ltd and Geometric Software Solutions Co. Ltd. cannot be taken as comparables, without appreciating that the companies qualify all the quantitative and qualitative filters applied by the TPO in selection of these companies as comparables. 4. The learned CIT (A) has erred in directing inclusion of the M/s. VJIL Consulting Ltd., as a comparable without calling for a remand report from the TPO to ascertain the reasons for rejection of the comparable by the TPO. 5. The learned CIT(A) has erred in directing inclusion of the M/s. VJIL Consulting Ltd., without appreciating the TPO's conclusion that the company was an inappropriate comparable for the purpose of determining the arm's length price as it did not satisfy the qualitative filters applied for the purpose of comparability analysis. 6. The learned CIT(A), on the facts and in the circumstances of the case, erred in holding that M/s. Tata Elxsi Ltd., ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned CIT(A) erred in upholding the learned TPO's approach of disregarding application of multiple year/ prior year data as used by the Respondent in the transfer pricing documentation ("TP documentation") and holding that current year (i.e. Financial Year 2004-05) data for companies should be used for comparability. 3. That the learned CIT(A) erred in upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm's length price, ignoring the fact that this data was not available to the Respondent at the time of complying with the TP documentation requirements. 4. That the learned CIT(A) erred in upholding the learned TPO's approach of collecting selective information of the companies by exercising powers granted to him under section 133(6) of the Act that was not available to the Respondent in the public domain and relying on the same for comparability purposes. 5. That the learned CIT(A) erred in upholding the learned TPO's approach of ignoring the limited risk nature of the services provided by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave held that Four Soft Limited fails the test of comparability on account of having related party transactions> 15% and is also functionally different as comparable to the Respondent in respect of its software development services. 14* That the learned C1T(A) erred in rejecting the Respondent's approach of applying the R&D expenses> 3% of total sales filter and including certain companies (Four Soft Limited, Visualsoft Technologies Limited, Sasken Communication Technologies Limited and Flextronics Limited) which are not comparable to the Respondent in respect of its software development services. 15. That the learned C1T(A) ought to have held that Visualsoft Technologies Limited fails the test of comparability as comparable to the Respondent in respect of its software development services. 16. That the learned C1T(A) ought to have held that companies with related party transactions> 15% are not comparable to the Respondent in respect of its software development services. 17. That the learned C1T(A) ought to haw held that companies which fail the test of comparability on the basis of functional difference, could not be taken as being comparable to the Respondent in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling the comparables taken by the TPO. In this chart, the assessee has also sought the inclusion of 2 more comparables. The TPO has taken the following 17 comparables:- 1. Bodhtree Consulting Ltd. 2. Lanco Global Systems Ltd. 3. Exensys Software Solutions Ltd. 4. Sankhya Infotech Ltd. 5. Sasken Network Systems Ltd. 6. Four Soft Ltd. 7. Thirdware Solution Ltd. 8. R S Software (India) Ltd. 9. Geometric Software Solutions Company Ltd. 10. Tata Elxsi Ltd. 11. Visualsoft Technologies Ltd. 12. Sasken Communication Technologies Ltd. 13. iGate Global Solutions Ltd. 14. Flextronics Software Systems Ltd. 15. L&T Infotech Ltd. 16. Satyam Computer Services Ltd. 17. Infosys Technologies Ltd. 9. The CIT(Appeals) has rejected 10 comparables out of the aforesaid 17 comparables. The rejected comparables are as under:- 1. Flextronics Software Systems Ltd. 2. L&T Infotech Ltd. 3. Infosys Technologies Ltd. 4. Satyam Computer Services Ltd. 5. iGate Global Solutions Ltd. 6. Exensys Software Solutions Ltd. 7. Thirdware Solutions Ltd. 8. Bodhtree Consulting Ltd. 9. Geometric Software Solutions Ltd. 10. Tata Elxsi Ltd. 10. Against the rejection of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll settled that assessee is entitled to raise an objection regarding comparability at any stage of proceedings and even in a case where the assessee has not raised objection for including the same as a comparable before the lower authorities, or the assessee had chosen in its TP study a company which it seeks to exclude as a comparable. The Special Bench of Chandigarh Tribunal in DCIT v. Quark Systems P. Ltd. (2010) 38 SOT 307 has held that the Tribunal is a fact finding body and therefore has to take into account all the relevant material and determine the question as per the statutory regulations and that tax payer is not estopped from pointing out a mistake in the assessment, though such mistake is a result of evidence adduced by the tax payer. We therefore proceed to determine the comparability of Bodhtree Consulting Ltd. In this regard, we find that ITAT Hyderabad Bench in Ivy Computech (P) Ltd. v. ACIT, (2014) 43 taxman.com 183 (Hyd) Trib. Has taken the view that Bodhtree Consulting Ltd. should not be regarded as a comparable in the case of software development service provider. The ld. counsel for the assessee also brought to our notice that comparability of this company wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject Model (FPP). Under the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below: 3. Revenue Recognition : Revenue from software development is recognised based on software developed and billed to clients. From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Project model. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year, for which the revenue may have been recognised in the earlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the profitability margin of such entity. Merely because of such fluctuations, an entity engaged in the development of software, being functionally comparable to the assessee, cannot be rejected only on this ground." 14. The learned counsel for the assessee drew our attention to the fact that Bodhtree Consulting admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gins of Bodhtree Consulting Ltd., which are as follows:- 34. As can be seen from the above analysis, this company has erratic margins and growth over the years. The margins of Bodhtree are consistently changing. This reflects that the revenue recognition policy followed by Bodhtree is not proper and is resulting in consistent change in margins. Further, the growth rate over the years is also fluctuating to extremes. Further, growth in revenues is not supported by growth in expenses. In some cases, expense growth is higher than the revenue growth. Also salary cost ratio is widely fluctuating. These circumstances are peculiar in nature and require further analysis, without which this company should be rejected as a comparable. 21. Contention of the Ld. DR that assessee was into software product development cannot be accepted since the TPO himself had considered assessee to be into software development services. This is clear from the segmental results compiled by him at para 2 of his order which has been reproduced by us at para six above. Accordingly we are of the opinion that the decision of the coordinate bench in M/s. Kodiak Networks India Pvt. Ltd., would apply on all four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nableness of exclusion of this company, we find no justification to deal with the issue again. Accordingly, following the aforesaid order of the Tribunal, we approve the exclusion of this company i.e., Exensys Software Solution Ltd. (supra) from the list of comparables. 16. With respect to Sankhya Infotech Ltd., the ld. counsel for the assessee further contended that this comparable was also examined by the Tribunal in the case of Syassaris Software P. Ltd. (supra) in paras 22 to 24 at pages 16 to 19. 17. Having carefully examined the contentions of the assessee, we find that undisputedly, Sankhya Infotech Ltd. was examined by the Tribunal and the Tribunal following the view taken in the case of Kodiak Network India Ltd. (supra) has directed the TPO to exclude this company from the list of comparables. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:- "24. We have perused the orders and heard the rival contentions. In the case of M/s. Kodiak Networks India Pvt.Ltd., this Tribunal at para 29 to 31 of its order held as under : Sankhya Infotech Limited ('Sankhya') 29. It was submitted by the learned counsel for the Assessee that San ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Accordingly we direct exclusion of M/s. Sankhya Infotech Ltd, from the list of comparables." 18. Since this comparable was examined by the Tribunal in the aforesaid case, we find no justification in re-examining the case. Accordingly, we exclude Sankhya Infotech Ltd. from the list of comparables. 19. With regard to Thirdware Solutions Ltd., it was again submitted by the ld. counsel for the assessee that this comparable was also examined by the Tribunal in the case of Syassaris Software P. Ltd. (supra) in para 31 at pages 21 to 25 of its order. 20. From the order of the Tribunal, we find that undisputedly Thirdware Solutions Ltd. was examined by the Tribunal in the light of earlier order of Tribunal in the case of Kodiak Network India Ltd. (supra) and it was excluded from the list of comparables. The relevant observations of the Tribunal is extracted hereunder for the sake of reference:- "31. We have perused the orders and heard the rival contentions. This Tribunal's decision in the case of M/s. Kodiak Networks India P. Ltd, (supra) has held as under at paras 20 to 24 of its order : 20. As regards grounds No. 3 to 6 are concerned, Thirdware Solutions Ltd., and Geome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no change in the facts and profile of the assessee, we find no justification to take a contrary view. Accordingly, we approve exclusion of this comparable from the list of comparables. 22. With regard to Geometric Software Solutions Company Ltd., the ld. counsel for the assessee has contended that comparability of this company was examined by the Tribunal in the case of Net Devices India Pvt. Ltd. in IT(TP)A No.1099/Bang/2011 & CO No.19/Bang/2011 in para Nos.18.3.1. to 18.3.3 of the order and the matter was restored to the AO/TPO for verification of applicability of RPT filter for its exclusion. The RPT in this case was considered to be 22%, but no datas are available. 23. The ld. DR in the light of non-availability of data before us has argued that this issue may be sent back to the AO/TPO for verification of the facts in the light of RPT filter for its exclusion. 24. We find force in the contention of the ld. DR. The relevant observations of the Tribunal in the case of Net Devices India Pvt. Ltd. (supra) in this regard is extracted hereunder for the sake of reference:- "18.3.1 The learned Authorised Representative of the assessee has submitted that the RPT of this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005-2006 order dated 12.2.2014. The ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: "15.7. TATA ELXSI LIMITED : The objection of the assessee is that TATA Elxsi operating two segments - system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and assessee's objection is that the software development services segment itself comprises of three sub-services 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 functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical facts and circumstances, we are of the view that TATA Elxsi Ltd., was rightly excluded from the list of comparable companies. 36. Per contra, Ld. DR submitted that Tata Elxsi (seg) was doing very similar work as that of the assessee and hence ought not to be excluded. 37. We have perused the orders and heard the rival contentions. Findings of the Tribunal as it appear at paras 18 and 19 in the case of M/s. Kodiak Networks India P. Ltd (supra) has been reproduced in para 35 above. Accordingly we direct exclusion of Tata Elxsi (seg) from the list of comparables." 27. We find that the Tribunal in the light of decision in Kodiak Network India Ltd. (supra) has held that Tata Elxsi Ltd. cannot be included in the list of comparables. We, therefore, following the order of Tribunal in the aforesaid case, approve the exclusion of Tata Elxsi ltd. from the list of comparables. 28. With regard to iGate Global Solutions Ltd., Flextronics Software Systems Ltd., L&T Infotech Ltd., Satyam Computer Services Ltd. and Infosys Technologies Ltd., our attention was invited to the fact that turnover of this company is more than 10 times of the turnover of the assessee. Therefore, the CIT(Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny was not mentioned in the order. Therefore, in the absence of complete details, it is not proper to follow the order of Tribunal blindly. We therefore set aside this issue to the file of TPO/AO to examine the justification of its inclusion/exclusion by applying the RPT filter in the light of available datas of this company. 32. With regard to VJIL Consulting Ltd., the ld. DR has contended that without confronting the report and datas to the TPO, the CIT(Appeals) has included this comparable in the list of comparables. The ld. DR has invited our attention to the order of TPO in which the TPO has categorically observed that details of the company were not furnished by the director of the company on account of pending court cases. In the absence of complete details, the TPO has excluded this company from the list of comparables, whereas the CIT(Appeals) has included this comparable without confronting the details placed before him to the TPO/AO. 33. The ld. counsel for the assessee, on the other hand, has contended that CIT(Appeals) has examined the datas, annual report of VJIL Consulting Ltd. in the light of TPO's observation and therefore he has rightly included this comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded the same in the list of comparables without confronting the audit report and datas to the TPO. We therefore find it proper to remit the matter to the TPO to reconsider the inclusion of this comparable in the list of comparables in the light of the order of the Tribunal in the case of Qualcomm India Pvt. Ltd. (supra). Accordingly adjudication of this comparable is restored to the TPO. 35. With regard to Melstar Information Technology Ltd., the CIT(Appeals) rejected the inclusion of this comparable in the list of comparables and the assessee is before us with the request that since this company is functionally comparable and passes all the filters applied by the TPO, the same may be included in the list of comparables. In support of his contentions, he has placed reliance upon the judgment of the Tribunal in the case of M/s. Novell Software Development (India) Pvt. Ltd. in IT(TP)A No.1105/Bang/2011 & 1047/Bang/2011. 36. The ld. DR has contended that the Tribunal has restored the consideration of this comparable to the TPO in the case of M/s. Novell Software Development (India) Pvt. Ltd. (supra), therefore, its inclusion can only be considered by the TPO in the light of direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s excluded from the operating cost, the mark-up on the cost works out to 3.26%. The detailed working was also give as below:- 24. In view of the above, it was submitted that since Melstar is functionally comparable to the assessee and clears all the filters applied by the TPO, the same should be considered as comparable with Net Cost Plus margin of 3.26%. 25. The submissions are considered and found to be acceptable. As rightly pointed out by the learned counsel for the Assessee, Melstar passes all the tests of comparability adopted by the TPO. The extraordinary item of expenditure, if removed, would render this company as a company revenues of which are not diminishing. Melstar therefore deserves to be included as a comparable company. We hold accordingly." 38. Following the view taken by the Tribunal in the case of M/s. Novell Software Development (India) Pvt. Ltd. (supra), we restore the matter to the file of AO/TPO to examine the claim of inclusion of this comparable in the light of annual report and other details. 39. The Revenue has also raised one more ground through ground No.10 that the CIT(A) has erred in allowing deduction u/s. 10A in respect of Unit-II without app ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
