TaxTMI 
TaxTMI 
2015 (8) TMI 227
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....P study report to bench mark its international transactions and arrived at 10.28% of mean margin in comparison to the assessee's operating margin at 10.28%. The comparables selected by the assessee are as under; Sl.No. Company Name Unadjusted average margin 3 years 1 Aarman Software Pvt.Ltd 57.64% 2 Akshay Software Technologies Ltd 5.93% 3 ApplabsTechnologies Pvt. Ltd 18.25% 4 Computech International Ltd 5.20% 5 Core Projects & Technologies Ltd 38.85% 6 iGate Global Solutions Ltd 5.10% 7 Mindtree Ltd 15.61% 8 Nihar Info Global Ltd -3.23% 9 Orient Information Technology Ltd -21.85% 10 Prithvi Information Solutions Ltd 14.09% 11 R.S.Software (India) Ltd 14.58% 12 R.Systems International Ltd 18.08% 13 SIP Technologies & Exports Ltd 18.10% 14 Silverline Technologies Ltd -26.25% 15 Sonata Software 7.38% 16 VJIL Consulting Ltd 8.46% 17 VMF Soft Tech 3.08% 18 Zylo Systems Ltd 18.53% Arithmetic Mean 10.98% 3. Out of the 18 comparables selected by the assessee 14 were rejected by the TPO. The T....
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.... the case in determining the Arm's Length Price ('ALP') of the international transaction of the Appellant and thereby making an adjustment of Rs. 34,218,209/- with respect to the software development services rendered by the tax payer u/s 92CA of the Income Tax Act. 1. The learned AO and TPO ought to have accepted the arm's length price as determined by the Appellant. 2. The learned TPO and the learned AO ought to have accepted the difference in risk profile of the appellant vis-a-vis the comparable companies. The learned TPO and the learned AO erred in not allowing the benefit of market risk adjustment to the Appellant. 3. The learned TPO and the learned AO erred in concluding that the Appellant is exposed to single customer risk without evaluating the business arrangement of the Appellant. 4. The learned TPO and the learned AO erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm's length price. 5. On the facts and circumstances of the case, the learned AO and the learned TPO erred in rejecting the Transfer Pricing ("TP") documentation without apprecia....
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....o the Appellant's business. 6.9 In accepting companies such as Celestial Labs Limited, Flextronics Software Systems Limited and Softsol India Limited which are functionally not comparable to the Appellant's business; 6.10 In accepting companies like Celestial Labs Limited and Infosys Limited which have abnormal/fluctuating profit margins. In doing so the learned AO have disregarded the various jurisdictional ITA T rulings in case of SAP LABS India Pvt. Ltd. Vs. ACIT (reference ITA. No. 398/Bang/2008), EGain Communication Private Limited (reference: ITA No. 1685/PN/07 - Pune); 6.11 In accepting companies like Flextronics Software Systems Limited Quintegra Solutions Limited, Sasken Communications Technologies Limited, Wipro Limited and R Systems International Limited without taking into consideration the peculiar economic circumstances surrounding their operations during the year under review; 6.12 In accepting companies having Related Party Transactions exceeding 10% such as Soft801 India Limited arid Infosys limited. In doing so the learned AO has disregarded the Delhi IT A T ruling in case of Sony India Pvt. Ltd. (reference ITA No.1189/Del/2005) 6.13 In upho....
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....ed in the year of transfer i.e. Assessment Yeat CA Y) 2004-05 but in the initial year i.e. AY 2000-01. I e. The learned AO has erred in concluding that the undertaking has been formed by the splitting up or the reconstruction of a business already in existence. f. The learned AO has erred in concluding that the undertaking of the Company has been formed out of plant and machinery previously used. g. The learned AO erred in not relying. on the decision of the Honorable Income Tax Appellate Tribunal, Bangalore in the Appellant's own case for AY 2004-05 vide order dated 10 August 20 I 0, wherein the Honourable Income Tax Appellate Tribunal has held that the appellant is eligible for tax benefit under section lOA. Ill. Interest under section 234B of the Act: Rs. 2,839,310 The Learned AO is not justified in levying interest under section 234B of The Act. Levy of interest under section 234B is consequential in nature. IV. Interest under section 234D of the Act: Rs. 897,122 The Learned AO is not justified in levying interest under section 234D of The Act. Levy of interest under section 2340 is consequential in nature. The appellant craves leave to add, alter....
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....l comparability of this company with that of a software development company. The Tribunal also relied upon the decisions of the co-ordinate bench of this Tribunal in the case of Trilogy e-business Software India Pvt.Ltd Vs DCIT(ITA No.1054/B/2011) and in case of Telecordia Technologies India Pvt.Ltd vs ACIT (ITA No.7821/M/2011). The assessee in case of 3DPLM Software Solutions Ltd (Supra) also explained certain facts before the Tribunal in para-7.3 is as under; "7.3 The learned Authorised Representative further submitted that the facts pertaining to this company has not changed from the earlier year (i.e. Assessment Year 2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that :- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like "DX Change, CARMA, etc.". 7.1 Thus, it was brought to the notice of the Tribuna....
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....3DPLM Software Solutions Ltd (Supra) we direct the AO/TPO to exclude this company from the list of comparables. 8. Bodhtree Ltd: The learned AR of the assessee submitted that this company is in the business of software products and engaged in providing open and end to end as well as software consultancy and design, development and software. He has referred and relied upon the decisions of the co-ordinate bench of this Tribunal in case of M/s CISCO Systems India Pvt. Ltd., dated 14-08-2014 in ITA No.271(B)/2014 and submitted that this company was found to be not comparable to a software development company. 8.1 On the other hand, learned DR relied upon the orders of the authorities below. 8.2 Having considered the rival submission as well as the relevant material on record, we note that the functional comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of M/s CISCO Systems India Pvt. Ltd(Supra) in para-26.1 as under; " 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company .was also included by the assessee. The assessee, h....
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....d. (Supra). 9.1 On the other hand, learned DR relied upon the orders of the authorities below and submitted that the objections of the assessee were duly considered by the TPO/DRP and this company was found to be a good comparable of the assessee. 9.2 We have considered the rival submissions and the material on record. At the outset, we note that the functionally comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra), in para-9.4.1 & 9.4.2 as under; "9.4.1 We have heard both the parties and perused and carefully considered the material on record.While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for the earlier year. It is evidently clear from this that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assess....
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....ness of software development and therefore, it is functionally comparable. 10.2 Having considered the rival submissions as well as relevant material on record, at the outset, we note that the functional comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) in para-14.4 as under; "14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate ben....
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....t turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any....
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..... It is ordered accordingly. The decision rendered as aforesaid pertains 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. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies". Following the findings of the co-ordinate bench of this Tribunal we direct the AO/TPO to exclude this company from the list of comparables. 12. Kals Information Systems Ltd: The learned AR of the assessee submitted that this company is engaged in the business of development of software and software products. This company is also engaged in the provision of training services and software services. 12.1 The learned AR thus, submitted that this company is functionally not comparable with the business of the assessee. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) as well as in the case of Cisco Syste....
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.... 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 rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software produ....
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.... we direct the TPO/AO to exclude this company from the list of comparables. 14. Quintegra Solutions Limited: The learned AR of the Assessee submitted that this company is engaged in product engineering services and this is not purely a software development service provider. He has further pointed out that this company is also engaged in research and development activity which resulted in creation of intellectual property rights (IPR). This company has also experienced an abnormal economic event. In support of his contention, he has relied upon the decision of this Tribunal in case of 3DPLM Software Solutions Ltd.(Supra). 14.1 On the other hand, learned DR relied upon the orders of the authorities below. 14.2 Having considered the rival submissions and relevant material on record, we note that the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra), has examined the functional profile of this company inpra-18.3.1 to18.3.3 as under; "18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in....
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....er hand, learned DR relied upon the orders of the authorities below and submitted that TPO has considered the segmental data of this company pertaining to software development services therefore, this company is a good comparables. 15.2 We have considered the rival submissions as well also relevant material on record. We note that the functional comparability has been considered and decided by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) as well as in case of Cisco System (Ind.) Pvt. Ltd (Supra). In the case of Cisco Systems (Ind.) Pvt.Ltd (Supra) the Tribunal has analysed the functional comparability in para- 26.4 & 26.5 as under; "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the ....
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.... para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2.The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3.The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4.This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted....
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....ns 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. Following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this from the list of comparables. 17. Wipro Ltd: The learned AR of the assessee submitted that this company is a industry leader and also owns tangibles. He has further submitted that this company is engaged in product development and services. However, the segmental information is not available. He has p....
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....ies in the case on hand for the year under consideration. 17.3 As it was found that this company owns Intellectual Property Rights in the form of registered patents and several pending applications for grant of patents. Therefore, the said company owning intangibles cannot be compared to low risk captive services provider. Following the finding of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 18. Softsol India Ltd: The learned AR of the assessee submitted that this company is engaged in the software development services and also having related party transactions of more than 15%. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra). 18.1 On the other hand, learned DR relied upon the orders of the authorities below and submitted that this company is functionally comparable with the assessee and filter of 15% of RPT was not applied by the TPO or by the assessee in selection of comparables. Thus, the learned DR has submitted that if this filter of 15% is applied, the same should be applied to all the compara....
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....ase. Thus, if the filter of RPT at 15% is applied in a particular comparable then, this filter should also applied to all other comparables companies. The assessee has also disputed functional comparability of this company and contended that this company is engaged in the software product development. However, the relevant record has not been produced before us to show the functional profile and the revenue generated activity of this company. In view of the facts and circumstances of the case, we are of the considered opinion that the functional comparability as well as the applicability of RPT filter is required to be properly examined at the level of TPO. Accordingly, we set aside the functional comparability and application of the RPT filter to the record of the TPO. Needless to say the assessee be given an appropriate opportunity of hearing. 18.4 We make it clear that the RPT filter if any is applied in this case, then, the same would be applicable in all the comparable companies to be considered for the purpose of determining the ALP. 19. Lucid Software and Mindtree: Though, these two companies were selected by the assessee itself and also accepted by the TPO , however, ....
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....ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd., (Supra) accepted the comparables of this company, whereas in case of NetHawk Networks India Pvt.Ltd., it was rejected as comparable. 19.5 It is pertinent to note that in the case of NetHawk Networks India Pvt. Ltd (Supra) the functional profile of the company per se was not examined by the Tribunal but, the Tribunal has followed the decision in case of Wills Processing Services (I)Pvt. Ltd. The relevant part of the finding was also reproduced which suggests that the TP analysis of the company was analysed in the said case on the ground that the TPO used the information obtained by the another TPO u/s133(6). Therefore, the functional comparability while considering the relevant facts and business profile of the said company was not examined by the Tribunal in the case of Wills Processing Services(I)Pvt. Ltd., which was followed in the case of NetHawk Networks India Pvt.Ltd.,(Supra). Further, the assessee has not produced any record before us to show the actual nature of activity and business functions of Bodhtree Consultancy Ltd. In the absence of relevant facts and record, we are not in a position to give ....
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....ct the AO/TPO to exclude this company from the list of comparables. 20.2 Since most of the comparables selected by the TPO has been rejected by us in the foregoing findings therefore, the assessee as well as the TPO are at liberty to consider as many as possible companies as comparable for the purpose of determining the ALP, subject to the parameters on the basis of which the earlier companies selected by the TPO are rejected. Thus, the AO/TPO are directed to re-compute the ALP by doing a fresh exercise of selecting the suitable comparables apart from the comparables which are accepted by both the parties in the present of comparables. 21. Ground no.II is regarding the denial of deduction u/s 10A. 21.1 We have heard the learned AR as well as the learned DR and considered the relevant material on record. At the outset, we note that this issue has been considered and examined by this Tribunal in assessee's own case for the assessment year 2004-05 in ITA No.616/Bang/2009, by order dated 10-08-2010 in para-3 to 5 as under; " 3. Brief facts of the case are that the assesseecompany is engaged in the business of design, development and testing of software. It filed its return of ....