TaxTMI 
TaxTMI 
2015 (7) TMI 124
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....ance services rendered by the Appellant to its parent company, viz., Fiserv Global Services Inc., USA. 2. That on facts and in circumstances of the case and in law, the AO erred in making a reference to the TPO under Section 92CA of the Income Tax Act, 1961 ("Act") without recording reasons on the basis which the AO considered it "necessary or expedient" to refer the international transaction entered into by the Appellant with its associated enterprise ("AE"). 3. That on facts and in circumstances of the case and in law, the AO and Dispute Resolution Panel ("DRP") erred in partly confirming the action of the Transfer Pricing Officer ("TPO") in making an addition to the extent of Rs. 19,04,65,871/- to the income of the Appellant without appreciating that the Appellant had computed arm's length price in respect of international transaction entered into by the Appellant with its Associated Enterprise ("AE") using the most appropriate method (i.e. the transactional net margin method), maintained all the information and documentation required under section 92D of the Act, used information/data available in the database (Prowess database and Capitaline database) all the ....
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....ces provided by the Appellant and other material facts related to the functional and risk profile of the Appellant. 8. That the AO and DRP erred in confirming the action of the TPO in selecting the following companies which were not functionally comparable to the Appellant for the purposes of benchmarking the international transaction entered into by the Appellant: a) Bodhtree Consulting b) Comp-U-Tech Indian Ltd. c) Sonata Software Ltd. d) Infosys e) LGS Global Services Ltd. f) Thirdware Solutions 9. That the AO and DRP erred in confirming the action of the TPO in selecting the following companies whose turnover exceeded Rs. 500 crores and those comparables which are making abnormally high profits or are functionally dissimilar: a) Igate Global Solutions Ltd. b) Infosys Technologies Ltd. c) Mindtree Limited d) Sasken Communications Technologies Ltd. e) Zylog Systems Ltd. 10. That the AO and DRP erred in confirming and not setting aside the action of the TPO in applying -c. flawed and inconsistent search process for its benchmarking analysis by ....
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....3,31,108 Liability written back 1,220,804 Loss on settlement of forward contracts 5,686,215 Recruitment expenses 3,483,159 Reimbursement of expenses 3,601,498 5. The arm‟s length price of the international transactions representing software development services provided to the associated enterprises (AE) is determined by applying transactional net margin method (TNMM), which is stated to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the company is arrived at 15.00% on cost; whereas the average PLI of the comparables is arrived at 9.54% as per the analysis in the TP document. It is further seen that average Profit Level Indicator (PLI) was directed on the basis of 29 comparables selected by the tax payers. The mean margin of the comparables selected by the assessee as stated above was 9.54% and since the profit margin of the assessee was within +/= 5% range of the mean margin of the comparables, no transfer pricing adjustment was offered in the return of income. The results as submitted ....
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....Adjustment u/s 92CA 19,04,65,871 8. During the course of hearing, the learned counsel for the assessee submitted that all his contentions vis-à-vis grounds raised in the memo of appeal be confined to the exclusion of the following comparables from the list which was finally selected by the DRP: a) Bodhtree Consulting Ltd. b) Infosys Ltd. c) Thirdware Solutions d) Sonata Software e) Mindtree Ltd. f) Kals Information Systems; and treatment of foreign exchange fluctuation gain/loss as operating item 9. We have considered the rival submissions and perused the material on record. Taking up the each of the comparables contested and disputed by the appellant in this appeal. BODHTREE CONSULTING LTD: 10. The learned AR submitted that this comparable be excluded on the ground that this company has experienced abnormally high increasing sales/profitability for the year under consideration i.e. F.Y. 2008-09. The Ld. AR further submitted that Bodhtree is a provider of innovating consulting and technology services. The company has niche strengths in building and managing a business oriented I....
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....t of fluctuating margin. Apart from the above, reference was also made to another decision in the case of Mindteck in ITA No. 17/Bangalore/2014 dated 21.10.2014 wherein ITAT has excluded Bodhtree Consulting Ltd. from the list of final comparables on account of fluctuations in margins over the years. 10.3 The ld AR also relied on the decision of the ITAT Bangalore Bench in M/s. Softtek India Private Limited Vs. ITO, ITA No.222/Bang/2014 for the Assessment Year 2009-10, wherein the Tribunal excluded Bodhtree Consulting Ltd. as a comparable since it is functionally different and engaged in developing software products and segmental data is available in public domain. 10.4 The learned DR supported the order of DRP and the TPO. 10.5 Having considered rival submissions, we find that the issue regarding the exclusion of the instant comparable stands examined by a coordinate bench of this Tribunal in the case of M/s. Softek India Pvt. Ltd. vs. ITO, ITA No. 222/Bang/2014 for assessment year 2009-10 wherein in an order dated 31.10.2014 it was held as under: "4.3 Having regard to the contentions of the rival parties and also the material on record, we f....
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....ecision 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." 10.7 Having considered the above, we hold that since the assessee company is engaged in software development services; whereas M/s. Bodhtree Consulting Ltd. was engaged into software product development, we find force in the argument of the ld counsel for the assessee that M/s. Bodhtree Consulting Ltd. is functionally different from assessee company. 10.8 Accordingly, we direct the exclusion of M/s Bodhtree Consulting Ltd. from the final list of comparables. INFOSYS LTD.: 11. Before the TPO the assessee objected to the use of this comparable on the ground that this comparable is having huge premium because of its brand value, which is not in the case with the assessee and turnover of the comparable is also very huge....
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..... NIL." 11.2 He has referred to following decision: a) Aginity Technologies ITA No. 3856/D/2010 b) CIT v. Aginity Technologies 262 CTR 291 (Del) c) Atrenta (India) Pvt. Ltd. d) Toluna India Pvt. Ltd. vs. ACIT (formerly Greenfield Online (P) Ltd. 166 TTJ 128 (Del) e) Cordys R&D (India) Pvt. Ltd. ITA N. 1092/Hyd/2010 dated 3.1.2014 wherein the ITAT excluded Infosys Technologies as it is not functionally different but is a giant company in the field of software development services having considerable brand value and assumed all risks related to business. Further, appeal of Revenue against this order has been dismissed by the Hon‟ble Andhra Pradesh High Court vide an Order dated 18.06.2014 in ITA No. 371/2014. 11.3 On the other hand the ld DR relied on findings of DRP. 11.4 We have considered rival submissions, perused the material on the record. In the case of Agnity Technologies, ITA No.3856/Del/2010, a coordinate Bench has held as under:- "It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of softwa....
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....the appellant are akin and therefore, do not warrant any different conclusion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant M/S THIRDWARE SOLUTIONS: 12. The DRP repelled the objection of the assessee by holding as under: "On the perusal of annual report, its clear that this entity is in exports are software services exports. Further, when details of purchase are analyzed, it is seen that majority of expenses are in the form of software services charges and salaries. These clearly establish that the exports are software services exports Page 27-33 of annual report gives details unit wise breakup of income and expenses perusal of the same also clearly establishes that the company is providing software developing services. Sale of license is only Rs. 2.32 crores which is only 3% of total sales. Further, study of underlined portions the relevant extracts of the annual report given below clearly shows that is a software services company: As per page 9 of annual report: The company‟s earning are a significant extent export oriented and the comp....
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....excluded from comparables. Reliance was placed on the decision in the case of Capital IQ Information Systems (India) (P) Ltd. vs. DCIT 57 SOT 14(Hyd) (pages 891-916 of Paper Book Vol 3 at page 907) wherein it is held that extraordinary events will have impact on profitability. 12.3 It was further stated that even otherwise, its related party transactions exceeded 15% of revenues, which makes it an unviable comparable. Reference was drawn on the following decisions wherein RPT filter of 15% has been approved: a) Benetton India (P) Ltd. vs. ITO 144 TTJ 229 (Del) (pages 458 & 474 (Tab 1 of Vol. 4) b) ITA vs. CRM Services : ITA No. 4068/Del/2009 (para 12 (Tab2 of Vol.) c) Delmia Solutions (P) Ltd. vs. DCIT ITA NO. 845/Bang/2011 (para 3.5.2 (Tab 3 of Vol 4) d) LG Soft India Pvt. Ltd. vs. DCIT: ITA ON. 1121/Bang/2011 (para 3.8.2 (Tab 4 of Vol. 4) 12.4 Having considered the rival submission we find that assessee is not having any license sale of its products and, the annual report of the Thirdware does not reveal the bifurcation of sale of Rs. 47 crores and Rs. 16 cores from SEZ of STPI Units. Infact, a coordinate Bench of the Tribunal i....
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....difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue 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 has exercised this power to call for details with regard to the various companies." 12.5 Therefore we direct the exclusion of this company from the list of comparables. SONATA SOFTWARE: 13. The assessee‟s objection to include this company was dealt by the TPO as under:- "Assessee objected on the use of this comparable on the ground th....
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....bmitted as under: "As per segmental results of Sonata Software, the company deals in software products (tab 6 of Vol 4) Extraordinary events: During the relevant previous year, it is also set up a new subsidiary in Dubai which acquired major business in Dubai (Tab 6 of Vol 4) Refer Capital IQ vs. DCIT: Capital IQ vs. DCIT wherein it is held that extraordinary events will have impact on profitability. Failure of RPT filter: Even otherwise, it can be seen that its related party transaction exceeds 25% of the revenues, which makes it an unviable comparable. It is seen from the annual report that the RPT to sales ratio is more than 40% during the relevant previous year. Therefore, it fails the 25% filter applied by the TPO." 13.3 Having considered the rival submissions, we find that in the instant case, aggregate related party transactions are roughly around 95 crores which is approximately about 40% of the total service income of Rs. 243.57 crores.As such, the said comparable is not a valid comparable and hence is directed to be excluded as it fails the RTP filter of 25% applied by the TPO. Mindtree 14. But we find tha....
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....ere cancelled and extinguished from the effective date of the scheme. b) All the assets and liabilities of MindTree Technologies Private Limited are recorded in the books of the company at their carrying amounts as on April 1, 2008. c) Pursuant to the scheme of amalgamation approved by the Hon‟ble High Court of Karnataka, the goodwill of Rs. 22,32,36,589/- resulting from the amalgamation was set off against the securities premium account of the company. If the treatment specified by AS-14 had been followed, the goodwill balance of Rs. 22,32,36,589 would have been amortized as per the company‟s accounting policy." 14.3 In view of the aforesaid fact, we direct in the interest of justice that this fact may be taken into account to adjudicate whether this event of amalgamation will effect in treating this company as a comparable to the assessee company. The precedents relied upon on by the learned counsel for the assessee may be taken into account before the TPO decides whether to include the company as comparable or not. Kals Information System 15. The DRP repelled the objection of the assessee as under: "Annual repo....
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....vices revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal‟s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA 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 b....
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....3) 155 TTJ (Mum) 386: ITAT held that forward contracts for hedging of foreign currency exposure on export and import of diamonds with AEs had nexus with export and import activity e) Curam Software International (P) Ltd. v. ITO: [2014] 149 ITD 458 f) CISCO Systems (India) Pvt. Ltd. v. DCIT (TS-246-ITAT-2014(Bang)-TP] 17. Having considered the rival submissions, we find that the issue is no longer res-integra and stands concluded by the decision of the Coordinate Bench in the case of Westfalia Separator India Pvt. Ltd. vs. ACIT ITA No. 4446/D/02 for Assessment year 2003-04 wherein it has been held as under: "We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to ....