TaxTMI 
TaxTMI 
2015 (5) TMI 649
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....er referred to as 'Act'), against the order dated 24 September 2012 passed by the Assistant Commissioner of Income-tax, Circle 1(1) (hereinafter referred to as 'AO') under section 143(3) of the Act in pursuance of the directions dated 24 August 2012 issued by the Dispute Resolution Panel (hereinafter referred to as 'DRP'), on the following grounds which are independent of and without prejudice to one another: On the facts and in the circumstances of the case and in law, the DRP and consequently, the AO have: I. Grounds of objections in respect of transfer pricing adjustment 1. General ground challenging the transfer pricing adjustment of INR 61,378,174 consequential to non consideration/ acceptance of comparability analysis as documented in the transfer pricing study report Erred in making transfer pricing adjustment to Appellant's international transactions in the nature of provision of software development services rejecting the analysis undertaken by the Appellant to determine arm's length price for its international transactions pertaining to provision of software development services to the Associated Enterprise ('AE') 2. ....
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....ntioned in the show cause notice) instead of 27.28% as per the Transfer pricing order. 11. Denial of benefit of +1-5% range while computing the adjustment amount Erred in computing the arm's length price of software development services as the mean arm's length price determined, without taking into account the lower 5% variation from the mean arm's length price determined. II Other grounds of appeal 12. Non-granting of credit for payment of advance tax and taxes deducted at source Erred in non-granting credit for advance tax payments and taxes deducted at source aggregating to Rs. 32,760,251 claimed by the Appellant in its revised return of income filed on 21 August 2009. 13. Erroneous recovery of an amount of Rs. 3,416,409 (and related interest thereon under section 244A) Erred in recovering an amount of Rs. 3,416,409 (and related interest thereon under section 244A) stating it to be refund allowed earlier, which was never received by the Appellant. 14. Initiation of penalty proceedings under section 271(1)(c) of the Act Without prejudice to the above grounds, even if the adjustment is sustained, the learned AO has erred in initiating penalty....
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.... to determine the arm's length price of such international transactions, the Assessing Officer referred the matter to the Transfer Pricing Officer (in short 'TPO') in terms of section 92CA(1) of the Act. The only issue which is in dispute before us is with regard to the transaction of Provision of software services to Barclays Bank PLC, London for a stated consideration of Rs. 72,62,70,500/-. The TPO passed an order u/s.92CA(3) of the Act on 28-10-2011 accepting all the international transactions of the assessee to be at an arm's length price except those relating to the Provision of software services to the Barclays Bank PLC, UK. In its order dated 28-10-2011 the TPO determined the arm's length price relating to the international transaction of provision of software development services at a figure higher than their stated value by a sum of Rs. 7,30,96,801/-. The Assessing Officer passed a draft assessment order u/s.143(3) r.w. 144C(1) of the Act dated 02-11-2011 proposing to make an addition of Rs. 7,30,96,801/- to the returned income on account of transfer pricing adjustment determined by the TPO. The assessee chose to file objections to the Dispute Resolution Panel ....
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....essee, it selected the Transactional Net Margin Method (TNMM) as the most appropriate method in order to benchmark the international transaction relating to the provision of software development services. Assessee used the Operating Profit/Operating Cost as the Profit Level Indicator (PLI). By selecting comparable concerns using certain filters, the arithmetic mean PLI of the comparable concerns was worked out at 14.41% after considering the multiple financial year data of the comparables. Assessee's PLI was computed at 14.94% and after taking the benefit of +/-5% provided u/s.92C(2) of the Act, assessee contended that its international transaction of provision of software development services was at an arm's length price. The TPO accepted the selection of TNMM as the most appropriate method for determining the arm's length price of the international transaction of providing of software development services to the Barclays Bank PLC, UK. However, the TPO applied certain different filters for selecting the comparable concerns and in this process rejected certain concerns selected by the assessee as comparables and also added some other comparables. Notably, the TPO used the s....
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....ed that although assessee has preferred various objections against the assessment, as is emerging from the aforesaid Grounds of Appeal, but he has confined his objections to the inclusion of the following concerns :- Infosys Technologies Ltd., Bodhtree Consulting Ltd., E-Zest Solutions Ltd., FCS Software Solutions Ltd., and Kals Information Systems Ltd. in the final set of comparables. In deference to the aforesaid, the appeal was heard only on the aforesaid points. 11. The first point made by the Ld. Representative is against inclusion of Infoys Technologies Ltd., as a comparable concern. In this context, relevant facts are that the said concern was initially considered by the assessee in its Transfer Pricing Study as a comparable by using multiple financial year data of the said concern. However, before the lower authorities, assessee contended that the said concern was liable to be excluded from the list of comparables. Even before us, it is sought to be contended that assessee was not comparable with Infosys Technologies Ltd., as the said concern was large and much bigger company in the area of development of software and therefore such a concern cannot be equated with asses....
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....he assessee and should be excluded. In this context, reference has been made to the judgement of the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. vide ITA No.1204/2011dated 10-07-2013 :- "6. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . This is partly correct as the tribunal has stated that Infosys Technologies Ltd., should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk . . . . . . . . . " 13. On the other hand, the only point raised by the Ld. CIT-DR is that having selected the said concern as comparable in its Transfer Pricing Study, assessee is now precluded from seeking its exclusion from the list of comparables. 14. We have carefully considered the rival submissions. In so far as the objection of the Revenue to the effect that the said concern was initially included by the assessee in its Transfer Pricing Study as a comparable is concerned, the Ld. Representative has po....
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....ed enterprises as a captive service provider. The Tribunal had found on the basis of the differences in risk profile, nature of services, revenue earned, ownership of branded/proprietary products, expenditure on research and development etc., that the concern M/s. Infosys Technologies Ltd. was not comparable with Agnity India Technologies Pvt. Ltd. The Hon'ble High Court of Delhi affirmed the aforesaid finding of the Tribunal. In the present case too, the differences between assessee and Infosys Technologies Ltd. as tabulated above, have not been controverted by the Revenue and therefore in our view assessee has justifiably demonstrated that M/s. Infosys Technologies Ltd. was liable to be excluded from the final set of comparables. We hold accordingly. 15. The second concern which is liable to be excluded as per the assessee is E-Zest Solutions Ltd. On this aspect, the claim of the assessee is that the said concern was not includible as a comparable concern for the reason that the said concern was also in the business of providing ebusiness services which are more in the nature of Information Technology Enabled Services (ITES) and not comparable to the functions performed by the....
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....ssee as per his discussion in para 16.3 of the order. The TPO referred to the Profit & Loss Account of the concern and noted that it was a typical software developing company and rejected the plea of the assessee for excluding the same for the list of the comparables. 21 . Before us, the learned counsel for the assessee submitted that the said concern was functionally dissimilar and its services can be considered as Knowledge Process Outsourcing (KPO), which is quite distinct from that of the assessee. It is further pointed out that the said distinction has been appreciated by the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) whereby the said concern has been held to be functionally dissimilar to a concern which was undertaking functions similar to those performed by the assessee. Accordingly, reliance has been placed on the decision of the Bangalore Bench of the Tribunal in order to justify the exclusion of the said concern from the list of comparables. 22. On the other hand, the learned CIT-DR has referred to the argument setup by the TPO in his order which we have already adverted to in the earlier paragraphs of this order and is not ....
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....considered the inclusion of E-Zest Solutions Ltd. for the purpose of comparability analysis of the transaction of development services for the very same assessment year, i.e. 2008-09, which is also the year before us. Following the aforesaid discussion which squarely covers the controversy in the present case, we direct that E-Zest Solutions be excluded from the final set of comparables. 18. Thirdly, assessee has contended that the concern M/s. Kals Information Systems Ltd. be excluded from the final set of comparables. On this aspect also, the case set up by the assessee is that the decision of the Pune Bench of the Tribunal in the case of Symphony Services Pune Pvt. Ltd. (supra) fully covers the controversy. In the case of Symphony Services (supra), M/s. Kals Information Systems Ltd. was excluded from the list of comparables on the ground that the said concern was involved not only in the activity of providing of software development services but also in selling of software products. Symphony Services Pune Pvt. Ltd. was only engaged in providing software services. In the case of Symphony Services Pune Pvt. Ltd. (supra) as well as in the present case also, the TPO did not accep....
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....thout any justifiable reasons, as even on the basis of the information available in the public domain it is quite evident that Kals Information System Limited was a concern which was developing and selling software products, which was an activity quite distinct from the activity of software development undertaken by the assessee. In the course of hearing, the learned counsel has furnished the prints out from the Annual Report of Kals Information Systems Ltd. wherein various software products sold by the said concern have been detailed, which according to him, supports the plea of the assessee that the said concern was functionally different. Apart therefrom, the learned counsel has referred to the decision of the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. vs. DCIT vide ITA No.1386/PN/2010 dated 30.11.2011, which was also a concern engaged in rendering software development services for its parent company. The action of the TPO of selecting Kals Information Systems Limited as a comparable concern while applying the TNM method was rejected by the Tribunal on the basis that the said concern was engaged in development of software products and sale, which was func....
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....ucts and was not purely or mainly a software service provider. There is no dispute to the fact position that the appellant before us has undertaken mainly software development services for its associated enterprises and the nonassociated enterprises and that such activity is quite distinct from the developing and selling of software products. The Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) has also found the said concern to be functionally dissimilar from a concern which was engaged in the business of software development services, which is the case before us. Though, the decision of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) relates to the assessment year 2006-07 whereas the present case of the assessee is for assessment year 2008-09 yet there is no material on record to suggest that the activities carried out by Kals Information Systems Limited in the current assessment year are different from those noted by the Tribunal in the case of Bindview India Pvt. Ltd. (supra) for assessment year 2006-07. 18. Considering the aforesaid discussion, in our view, the concern i.e. Kals Information Systems Limited is liable to be excluded from....
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.... in development and sale of software products. The Ld. CIT-DR has opposed the plea of the assessee by referring to the stand of the TPO as contained in his order. 22. We have carefully considered the rival submissions with respect to Bodhtree Consulting Limited. The plea of the assessee is that the said concern is engaged in the sale of software products, apart from considering software services, and that no segmental data is available in this context; thus, it is functionally not comparable with the assessee's activities. In this regard, we have perused the discussion made by our Coordinate Bench in the case of NetHawk Networks India Pvt. Ltd. (supra) wherein the said concern has been found to be not exclusively engaged in rendering software development services. The relevant discussion in the case of NetHawk Networks India Pvt. Ltd. (supra) is as under : "C. Bodhtree Consulting Limited 21. On this comparable, case of the assessee is that the company is not a good comparable in view of the Software Products produced by the company. As such, no segmental data is adequately available too. Accordingly, we dismiss the argument of the Ld. DR in this regard. Ex consequenti, ....
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....ered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application........." 23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO." 23. There is no material placed before us which would require us to deviate from the conclusion drawn by the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. (supra) in the context of the exclusion of Bodhtree Consulting Ltd. from the final set of comparables. Moreover, the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. (supra) also considered the efficacy of inclusion of Bodhtree Consulting Ltd. on the basis of comparability analysis in the case of ....
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....eed 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 recognized 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 Product mode. 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 recognized 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 fluctuation, 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 admittedly follows a fixed price project model whereby revenues from software development is recognized based on software and billed to clients. In such business model expenditure for developing software would be billed in an earl....
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....o analysed and found that the said concern was following fixed price project method whereby revenue from software development services was being recognized based on the software developed and billed to the clients. In such a business model, the possibility of the expenditure not being booked on the basis of the matching principle cannot be ruled out, which would impart fluctuation in the margins over the years. In contrast, in the present case, the revenue is being recognized based on the cost plus markup basis. Clearly, the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the model being pursued by assessee and such distinction prevailed with the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. (supra) to exclude Bodhtree Consulting Ltd. from the list of comparables. Considering such difference, in our view, assessee is justified in asserting that the said concern be excluded from the list of comparables. We hold so. 25. The last point made by the Ld. Representative was for exclusion of M/s. FCS Software Solutions Ltd. from the final set of comparables. The Ld. Representative for the assessee pointed out that the said concern is fu....
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....ion will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Oth....