TaxTMI 
TaxTMI 
2015 (4) TMI 919
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....urance and finance industry. Assessee is registered as a 100% Export Oriented Unit (EOU) under the software technology park of India scheme. For the AY under consideration, assessee filed its return of income on 29/09/2009 declaring total income of Rs. 9,31,968 after claiming exemption u/s 10A of the Act. Assessee also declared book profit under the MAT provisions. As the tax payable under MAT provisions was higher than the tax payable under normal provisions, assessee also paid tax as per MAT provisions. During the scrutiny assessment proceeding, AO having noticed that assessee has entered into international transactions with its AE resulting in earning of revenue to the tune of Rs. 34,20,01,237, made a reference u/s 92CA to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP). In course of proceeding before TPO, assessee submitted its TP report along with other related documents and books of account. In the TP report, assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method and operating profit to operating cost as profit level indicator (PLI). Assessee searched the prowess and capital line data bases which yielded 15 compara....
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....im of deduction u/s 10A, the DRP allowed assessee's claim by directing AO to reduce the communication charges both from export turnover and total turnover while computing the deduction u/s 10A. In terms with the direction of the DRP, AO finalized the assessment u/s 143(3) read with section 92CA(3) and section 144C vide order dated 26/12/2013. 5. Being aggrieved with the directions of the DRP, both the assessee as well as revenue are before us. ITA No. 464/Hyd/14 - by assessee 6. Though assessee in the memorandum of appeal has raised 14 grounds but at the time of hearing, assessee has submitted modified grounds (termed as additional grounds) raising various issues on transfer pricing adjustment. In ground nos. 20 to 28, assessee has objected to selection of certain comparables by TPO and confirmed by DRP, which we propose to take up first. The comparables objected to by assessee are as under: S.No. Name of the comparable 1 Persistent Systems Pvt. Ltd. 2 R. Systems International Ltd. (seg.) 3 Sasken Communication Technologies Ltd. (seg.) 4 Thinksoft Global Services Ltd. 5 Thirdware Solutions Ltd. 6 Zylog Systems Ltd. 7 Bodhtree....
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.... Functionally dissimilar compared to the assessee as having product sales and is a provider of telecommunication software services and products to network equipment manufacturers, mobile terminal vendors and semiconductor companies around the world. Offers combination of R&D consultancy, wireless software products and software services. Works with network OEMs, Semiconductor vendors, terminal device OEMs and operators across the world. No segment data available. 8. The learned AR submitted that different benches of ITAT including the Hyderabad Benches from time to time and for different assessment years including the asst. year under consideration have considered comparability of the aforesaid companies with a software development service provider and held these companies not to be comparable. In support of such contention, the ld. AR relied upon the following decisions: 1. M/s 3DPLM Software Solutions Ltd. Vs. DCIT, IT(TP) NO. 1303/Bang/2012. 2. ACIT Vs. Hapag Lyoyd Global Services (TS 47 ITAT 2013 (Mum) TP) 3. Triology E Business V. DCIT, (TS 748 ITAT 2012 (Bang) TP) 4. Intoto Software Pvt. Ltd. Vs. DCIT (TS 141 ITAT 2013 (Hyd) TP) 5. NTT Data India En....
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....ng Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. 26.2 Infosys Ltd.:- As far as t....
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....red as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 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. 11.4 We have heard the rival submissions a....
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....No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be reject....
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....ble based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list....
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....ollowing the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable." 10.2 ITAT, Hyderabad Bench following the aforesaid decision of the ITAT, Bangalore Bench also excluded these four companies in case of M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT in ITA No. 243/Hyd/2014 dt. 14/11/2014. Respectfully following the decisions of the ITAT, we direct AO/TPO to exclude these four companies. As far as Comp-U Learn Global Tech India Ltd. is concerned, ITAT, Hyderabad Bench in case of M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT (supra) observed as under: "39. The assessee submitted before the DRP that Comp-ULearn Tech India Ltd. was engaged in the development of new software (product development) (page 7 of the Annual Report) in ITES call centre and BPO services (page 11 of Annual Report). It was further submitted that schedule XIII of the Annual Report shows software development expenditure at only 25% of the total expenditure. The TPO extracted the 133(6) notice and held that the company has nil onsite revenue and satisfied all the filters applied by the TPO. We are of the opinion that some more analysis has to be done and we direc....
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....ernational ltd., it is the contention of the assessee that the company cannot be selected as a comparable as it has a different financial year ending than assessee. As can be seen from the P&L account statement of R Systems International Ltd. for the AY 2008-09, a copy of which has been placed before us by ld. AR, the company follows 31st December as its year ending whereas assessee is having its year ending on 31st March. The ITAT Mumbai Bench in case of ACIT vs. Hapag Lloyd Global Services Pvt. Ltd. ITA No. 8499/Mum/10 having found that this company has a different financial year ending than assessee, observed as under: "7.2 The learned Departmental Representative contended that Unless the financial year-end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in case of Sandstone Advisors (P) Ltd. Vs. ACIT, [2013] 32 taxmann.com 216, the Tribunal after considering the prescription of Rule 10B(4) and an another case of Pune Bench of the Tribunal in Honeywell Automation India Ltd. Vs. DCIT (IT Appeal No.....
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.... is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand." 10.7 The ld. DR has not brought any material to our notice to demonstrate that the aforesaid finding of the coordinate bench will not be applicable to AY under consideration. Therefore, following the view expressed by the ITAT Bangalore Bench, we exclude this company from the list of comparables. 10.8 As far as I-Gate Global Solutions Ltd. is ....
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....PO to exclude this company from the list of comparables. 10.10 As far as Sasken Communication Technologies Ltd is concerned, the main thrust of the learned AR's contention is the company is also developing products and segmental details are not available relating to costs. On a perusal of the extracts of annual report of the aforesaid company submitted before us by ld. AR it is seen that the company is involved in providing software development services as well as development of software products also. From the breakup of revenue earned during the relevant FY, it is seen that as against revenue of Rs. 40531.20 lakhs earned from software development services, Rs. 6146.43 lakhs were from software products. Though, it appears that substantial revenue is earned from software development services, however, the cost relating to earning of such revenue has to be taken into account. It is the contention of the assessee that segmental details of cost is not available from the annual report. Since the entire annual report has not been placed before us, we are not in a position to give a conclusive finding in this regard. We, therefore, remit the issue relating to comparability of this com....
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....ith export earnings. 15. The learned DR, on the other hand, relied on the orders of the TPO and DRP. 16. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. We agree with the submissions of the ld. AR that every expenditure debited to the P&L account cannot be considered as operational in nature. From the observations made by TPO, it appears, he has rejected assessee's claim only for the reason that no such entries were found in the annual report. The TPO has not properly examined the nature of expenditure. However, at the same time, assessee has to demonstrate that such expenditure was not claimed in any preceding assessment years. Therefore, considering the facts of the case, we are inclined to remit this issue back to the file of AO/TPO for deciding the issue afresh after providing reasonable opportunity of hearing to assessee. This ground is allowed for statistical purposes. 17. In ground No. 15, assessee has raised the non-exclusion of a reasonable amount of employee cost from the operating cost while calculating the operating margin. 18. It was contended by assessee before DRP th....
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....12, did not furnish any such calculation. Further, the DRP observed that assessee though explained the risk assumed by it and the AE, but, it did not quantify how each type of risk or the difference in each risk affect the profitability of each of the comparable companies based on the data for FY 2008-09. Ultimately, the DRP rejected assessee's claim for risk adjustment. 23. As far as working capital adjustment is concerned, TPO while computing the ALP made negative working capital adjustment of (-)3.64% which enhanced the arm's length margin of the comparable companies to 25.67%. Before the DRP while objecting to negative working capital adjustment made by TPO, it was submitted by assessee that the TPO considered the closing balances of trade receivables and trade payables instead of average balances current assets and liabilities. Assessee submitted, the TPO ought to have considered entire current assets and liabilities without restricting himself to trade receivables and payables. The DRP however did not find merit in the objections of assessee. The DRP observed that there is no uniformity when definition of items receivables and payables is concerned, as debtors inventories ....
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...., assessee has submitted any computation made on a scientific basis towards risk adjustment. Though benefit of risk adjustment can be given in an appropriate case, but, it has to be on the basis of facts and evidence and cannot be granted in a routine manner. Though, it may be true, in case of a captive service provider AE takes all major risks. But, at the same time assessee also bears single customer risk, as in the event of any loss or damage to the business of AE assessee is also likely to suffer. Moreover, assessee has to demonstrate risk assumed by each of the comparable companies vis-à-vis the assessee. The basis for adjustment towards risk must come from assessee's side. As assessee has not properly established its case either before the TPO or DRP by bringing facts and materials on record, we are inclined to remit this issue back to the file of AO/TPO for deciding afresh after affording an opportunity of being heard to assessee. While doing so, AO/TPO must also examine assessee's claim in respect of working capital adjustment. Ground No. 16 & 17 are allowed for statistical purposes. 27. In course of hearing, ld. AR submitted before us that the TPO has not exclude....