TaxTMI 
TaxTMI 
2014 (12) TMI 681
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....ftware design, development and testing for the FCG Group. For Assessment Year 2008-09, the assessee filed its return of income on 10.10.2008 declaring income of Rs. 85,087 after claiming deduction of Rs. 8,60,83,206 u/s.10A of the Act. The return was processed u/s.143(1) of the Act and the case was taken up for scrutiny. In the period under consideration, the assessee had reported the following international transactions : (i) Export of software development services : Rs. 60,98,90,327 (i) Reimbursements received : Rs. 6,19,98,883. In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under section 92CA of the Act to the Transfer Pricing Officer ('TPO' in short) for determining the Arms Length Price ('ALP') of these international transactions, after obtaining necessary approval from the CIT, Bangalore-I. The TPO vide order under section 92CA of the Act dt.28.10.2011 proposed a T.P. Adjustment of Rs. 5,96,07,719 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft assessment order under section 143(....
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....er and export earnings filter for computing the ALP which are unreasonable. 5. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, by exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 6. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, considering reimbursement received as operating income/operating cost for the purpose of computing the value of TP adjustment. 7. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, by not making suitable adjustments to account for the differences in the risk profile of the assessee vis-à-vis the comparables. The learned TPO, A.O. and Hon'ble DRP erred in adopting erroneous figures for computing the working capital adjustment. 8. The learned TPO, A.O. and Hon'ble DRP have erred, in law and in facts, by determining the arm's length margin/price using only FY 2007-08 data which was not available to the assessee at the time of complying with the transfer pricing documentation requirements. Grounds of objection relating to corpora....
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.... the above grounds of appeal at any time before, or at the time of, hearing of the appeal." The assessee has submitted submissions in paper books in support of the above grounds of appeal and also submitted an Index of case laws on which the assessee placed reliance. Transfer Pricing Issues 4.1 Now we proceed to examine the individual grounds of appeal. From a perusal of the grounds raised, at (1 to 8) above are issues for consideration with respect to the Transfer Pricing adjustment made by the Assessing Officer pursuant to the order of the TPO u/s. 92CA of the Act. 4.2 In the course of proceedings before us, the learned Authorised Representative submitted that the assessee does not wish to press the general grounds raised on T.P. matters and would make submissions only on the comparability of the individual companies selected by the TPO in the final set of comparables and the companies rejected by the TPO from out of the set of comparable companies chosen by the assessee. The learned Authorised Representative also submitted a chart, schematically explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TP....
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.... Name of the Company 1. Akshay Software Technologies Ltd. 2. Bodhtree Consulting Ltd. 3. FCS Software Solutions Ltd. 4. Goldstone Technologies Ltd. 5. ICRA Techno Analytics Ltd. 6. Indus Networks Ltd. 7. LGS Global Ltd. 8. Larsen & Toubro Infotech Ltd. 9. Mindtree Ltd. (Seg) 10. Melstar Information Technologies Ltd. 11. PSI Data Systems Ltd. 12. Powersoft Global Solutions Ltd. 13. SIP Technologies and Exports Ltd. 14. SynetareosTechnologies Ltd. 15. Computech International Ltd. 16. Karaturi Networks Ltd. After comparison of the average margin of these comparable companies, the assessee as per its T.P. Study held its international transactions with its Associated Enterprises ('AE') to be at arms length. 5.2 The TPO observed that the assessee had characterised itself as providing software development services to its Associated Enterprises (AEs). While accepting TNMM as the MAM, as adopted by the assessee, the TPO rejected the assessee's T P Study for various reasons set out in the show cause notice issued and embarked on a fresh search using the data bases ....
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.... in its chart. Companies incorrectly adopted as comparables by the TPO as per the contention of the assessee 7. Avani Cincom Technologies Ltd. 7.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segme....
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....the list of comparables for the reason that this company is into software products and is therefore functionally different from mere software services provider. The relevant observations at paras 7.6.1 and 7.6.2 of the order are extracted hereunder :- "7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is ....
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....riology E-Business Software India (P.) Ltd. (supra) at para 43 thereof had observed about this company that - "..... As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustments, the TPO has rendered this company as not qualifying for comparability We therefore accept the plea of the assessee in this regard." (iii) The co-ordinate bench of this Tribunal in its order in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company be excluded form the list of comparables, inter alia, on the ground that it is functionally dis-similar and different from the assessees providing software development services. 8.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. 8.4 We have carefully considered the rivalsubmisisons and perused and carefully considered the material on record....
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....co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India (P.) Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted from the list of comparables. The A.O./TPO are accordingly directed." Following the above decision of co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), we hold that this company is functionally different and cannot be considered as a comparable to the assessee in the case on hand, who is a software service provider and therefore direct the Assessing Officer to omit this company from the final list of comparables. 9. KALS Information Systems Ltd. 9.1 This is a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee and included this company in his final list of compa....
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.... been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India (P.) Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly.....
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.... Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 10.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 10.4 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09, had held that this company be omitted from the final set of comparables for the reason that this company is functionally different as it has its own intangibles, IPR, brand and has huge revenues from software products, whereas the assessee is a mere software services provider. The relevant observations at para 11.4 of the order, is extracted hereunder :- "11.4 We have heard the rival su....
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.... assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India(P.) Ltd. (supra) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. (vi) The co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) has held that this company is not to be omitted from the list of comparables as it is not functionally comparable to a software service provider. 11.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 11.4 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09, had held that this company be omitted from the final set of comparables for the reason that it is not functionally comparable to software servi....
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....d by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 12.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely - (a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telecordia Technologies (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore this company cannot be co....
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.... the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- "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 Authorised Representative 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 as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be e....
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....n of the Tribunal (supra), this company ought to be omitted from the list of comparables. 13.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 13.3 We have considered the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09, had held that this company is to be excluded from the final list of comparables as it is engaged in product development and its income is also from trading in software licences and is, therefore, not comparable to a software development service provider like the assessee in the case on hand. The relevant portion of the aforesaid order at para 15.3 of the order is extracted hereunder :- "15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development ser....
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.... hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 14.2 Per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 14.3 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09, had held that this company is to be excluded from the final set of comparables as it is engaged in development of software products, software service and therefore, cannot be comparable to a software service provider. In this view of the matter, we hold that this company is not functionally comparable to the assessee in the case on hand, who is only a software service provider. The relevant portion of the above mentioned order at para 16.3 thereof is extracted hereunder :- "16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software....
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.... as it qualified the functionality criterion. 15.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) The ITAT, Mumbai Bench in the case of Telecordia Technologies India (P.) Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. (iii) The co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held ....
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.... 16. Softsol India Ltd. 16.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable on the grounds that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that as per the company's reply to the notice under section 133(6) of the Act, the company has categorized itself as a pure software developer and therefore included this company as a comparable as the assessee was also a provider of software development services. Before us, in addition to the plea that the company was functionally different, the assessee submitted that this company was excluded from the list of comparables by the order of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 on the ground that the 'Related Party Transactions ('RPT) is in excess of 15%. The learned Authorised Representative submitted that for the current period under consideration, the RPT is 18.3% and therefore this company requires to be omitted from the list of comparables. 16.2 Per contra, the learned Departmental Re....
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....e contention of the learned Authorised Representative that these companies were rejected by the TPO on the ground that they fail the RPT filter of 15%. It is the learned Authorised Representative's submission that the RPT filter has been wrongly applied in the above three cases as the RPT in these cases are 11.35%, 5.03% and 7.43% of sales and they deserve to be included as comparables, even as per the RPT filter applied by the TPO. 17.3 We have heard both sides in the matter. From an appreciation of the material on record, we find that the TPO in his order under section 92CA of the Act has not explained as to how these companies fail the RPT filter. In this view of the matter, we deem it fit to restore the issue of comparability of these companies back to the file of the A.O./TPO to examine the computation given by the assessee on the percentage of RPT and decide the issue afresh after affording the assessee adequate opportunity of being heard and to make submissions in the matter. It is ordered accordingly. 18. Working Capital Adjustment 18.1 In ground of appeal at S.No.7, the assessee has submitted that while the TPO has granted the assessee working capital adjustme....
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.... not allowed any adjustment by observing that this has been considered and discussed in detail in the order for earlier years. We find that on similar facts, different co-ordinate benches of this Tribunal in the case of Intellinet Technologies India (P.) Ltd. v. ITO 53 SOT 92 and Bearing Point Business Consulting (P.) Ltd. (supra) have held that the TPO ought to have given risk adjustment to the margins of the comparables for bringing them on par with the assessee and remanded the issue back to the file of the TPO. Following the decisions in the aforementioned cases of the co-ordinate benches of this Tribunal (supra), we remand the issue of market risk adjustment to the file of the Assessing Officer/TPO for examining the issue in the light of the decisions cited. 20. Reimbursement of Expenses incurred not to be considered for computing ALP. 20.1 In the ground of appeal at S.No.6, the assessee submits that the A.O./TPO ought to have appreciated that reimbursements received by the assessee from its AEs are not in respect of any services rendered and hence should not be added back to the cost base for the purposes of mark up. It is submitted by the learned Authorised Representat....
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....ere appears to be examination and discussion of the same, we deem it fit to remand this issue to the file of the A.O./TPO for detailed examination and verification. We also hold that if the receipts are mere recovery of expenses incurred without any service element, then the same should not be considered as part of the cost base for computation of mark up. The A.O./TPO are accordingly directed. CORPORATE TAX ISSUES 21. Deduction u/s.10A of the Act. 21.1 Grounds at S. Nos. 9 and 10 are on the issue of reducing telecommunication expenditure of Rs. 79,82,783 incurred in connection with the delivery of computer software abroad and expenditure of Rs. 2,04,572 incurred in foreign currency from export turnover, while computing the deduction under section 10A of the Act. Ground No. 9(c) and 10(c) are the alternate plea of the assessee that if these expenses are to be excluded from 'export turnover', they are required to be excluded from 'total turnover' also. 21.2 We have heard both sides and carefully perused and considered the material on record. On this very issue, the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98,....