TaxTMI 
TaxTMI 
2015 (10) TMI 485
X X X X Extracts X X X X
X X X X Extracts X X X X
....of income on 30.9.2009 declaring total income of Rs. 4,44,20,779 as Book Profits under MAT provisions and income of Rs. 34,848 under normal provisions of the Income Tax Act, 1961 (in short 'the Act') after claiming deduction of Rs. 5,05,29,384 under Section 10A of the Act. The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. 2.2 The Assessing Officer on observing that the assessee reported international transactions, made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determination of Arm's Length Price ('ALP') of the international transactions entered into by the assessee with its AE. The TPO passed an order under Section 92CA of the Act dt.11.1.2013 proposing an adjustment of Rs. 1,95,59,772 to the ALP of international transactions entered into by the assessee with its AE. Subsequently, the Assessing Officer completed the assessment under Section 143(3) rws 92CA of the Act vide order dt.5.3.2013 wherein the income of the assessee was determined at Rs. 1,95,94,620 which included the T.P. Adjustment of Rs. 1,95,59,772. Since the assessee decided to prefer an appeal in the matt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months)should not be rejected. ii. The learned CIT(A) has erred, in law and in facts, by upholding AO/TPO action in rejecting the comparable companies identified by the Appellant wherein consolidated results have been used for analysis. The Appellant had considered the consolidated results in only those cases where the software development services related income of the Indian company constituted more than 75 percent of the consolidated company-wide/ segmental revenues. iii. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant's plea that companies should not be rejected using employee cost greater than 25% of the total revenues as a comparability criterion. iv. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant's plea that rejecting companies using export sales less than 75% of the operating revenues as a comparability criterion in respect of the software development services transaction, is not appropriate. 5. The learned CIT(A) has erred, in law and in facts, b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....edings under Section 271(1)(c) of the Act in its case for Assessment Year 2009-10. This ground is not maintainable as no penalty has been levied on the assessee under Section 271(1)(c) of the Act for any cause of grievance to arise in the assessee's case and for us to adjudicate upon in the impugned order. This ground being not maintainable is dismissed accordingly. Transfer Pricing Issues. 10.1 In the year under consideration (i.e. Assessment Year 2009-10), the assessee reported the following international transactions it had entered into with its AE :- Sl.No. International Transactions Amount Rs. 1, Provision of software development services 29,13,15,514 2. Reimbursement of Expenses 1,65,24,195 10.2 The financials of the assessee as per its profit and loss account for the year under consideration are as under :- Operating Revenues Rs.29,13,15,514 Operating Expenses Rs.24,98,99,748 Operating profit Rs.4,14,15,766 Operating Profit on cost % 16.57% 10.3 The assessee undertook a T.P. Study in respect of the ALP of its international transactions with its AE. The assessee characterizing itself as a routine pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Akshay Software Technologies Ltd. 8.11 2. Bodhtree Consulting Ltd. 62.27 3. Kals Information Systems Ltd. 13.89 4. R S Software (India) Ltd. 9.97 5. Tata Elxsi Ltd. 20.28 6. Sasken Communication Technologies Ltd. 27.91 7. Persistent Systems Ltd. 41.40 8. Larsen & Toubro Infotech 24.72 9. Infosys Ltd. 45.61 10. Zylog Systems Ltd. 7.81 11. Mindtree Ltd. 5.52 Arithmetic Mean 24.32 11.2 After providing a negative working capital adjustment of 0.08%, the net adjusted margin was computed at 24.40% on operating cost. The Assessing Officer then proceeded to compute the ALP of the assessee's international transactions with its AE as under :- Software Development Services. Arm's Length Mean Margin on cost 24.32% Less : Working Capital Adjustment (Annex. C) (0.08%) Adjusted Margin 24.40% Operating Cost Rs.24,98,99,748 Arm's Length Price (ALP) @ 124.40% of Operating Cost. Rs.31,08,75,286 Price Received Rs.29,13,15,514 Shortfall being adjustment u/s.92CA Rs.1,95,59,772 The above shortfall of Rs. 1,95,59,772 was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is engaged in providing open and end-to-end web solutions, off shoring Data Management, Data Warehousing, Software Consultancy, design and development of solutions, using latest technologies." 13.2.2 The learned Authorised Representative further submitted that the website of 'Bodhtree' suggests that it is a global IT consulting and product engineering services provider with its key areas being product engineering, analytics, cloud and enterprise services. The services offered include:- • Product engineering - outsourced product development, Microsoft Share Point Services, SOA Services and Q&A managed testing services. • Analytic services - includes SAP BOBJ, OBIEE, Big Data, etc. • Cloud services - including cloud applications and platforms, social enterprise, etc. • Enterprise Services - including Oracle implementation services, R12 upgrade services, Oracle Enterprise integration services, etc. • Provides software solutions like Share Tree, Tele Tree, Seema Tree, Apps Scale and MIDAS. 'Outlook' Section of Annual Report at page 15 states that this company has ventured into new areas like business intelligence, spee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch of the Tribunal in the case of Wills Processing 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 serv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ifferentiate their products and services thereby enhancing customer experience and achieving greater operational efficiency (Page 13, Annual Report FY 2008-09). (b) Infosys also develops products like "Flypp", "Infosys Customer Self-Service Energy Manager", "Infosys Health Benefit Exchange", "Infosys iTransform - ICD - 10 Migration Suite", "Infosys mConnect", "Infosys Omni-Channel Personalization Engine", "Infosys Real Time Expert manager", "Infosys Supply chain Performance management Suite", "Infosys Trade origination System", "Infosys Transaction Reconciliation System".  Company is engaged in significant R&D Infosys is engaged in significant Research & Development (R&D) that has led to creation of significant Intellectual Property (IP). In this regard, the Annual Report reports as below (Page 19, Annexure to Director's Report): "Research and development of new solutions and services, designs, frameworks, processes and methodologies continue to be of top priority for us. The intellectual property (IP) created has led to enhance quality, productivity and customer satisfaction. This year we started focusing on creating significant IP to help the company's non-lin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith the International Institute of Information Technology, Hyderabad (IIIT-H) to sponsor research in unstructured data analytics, inference and diagnostics tools and the development of next generation business intelligence tools. We have also partnered with The University of Southern California (USC) Viterbi School of Engineering for joint research.  Company has significant intangible assets As per Annual Report of FY 2008-09, the company claims itself as the most reputed and admired company in India (Page 14, Director's Report). "We were ranked 14th among the most respected companies in the world by Reputation Institute. We were ranked second in the Global Sourcing list of 100 best performing IT service providers. Hays Group and CEO magazine ranked us among the best companies in the world for leaders. " Infosys is also spending substantial amounts for branding activities. During FY 2008-09, it had incurred an amount of INR 77 crore for brand building and marketing activities, as evident from the relevant screenshot of the Annual Report below: 2.c Selling and marketing expenses. We incurred selling and marketing expenses at 4.6% of our total revenues, comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ia) Pvt. Ltd. (supra) has held as under :- " 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies L t d . 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that 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 Aut....
X X X X Extracts X X X X
X X X X Extracts X X X X
....epresentative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. in IT(TP)A No.271/Bang/2014 dt.14.8.2014. 15.3 Per contra, the learned Departmental Representative supported the decision of the authorities below in selecting this company to be a comparable to the assessee. 15.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied upon by the assessee. We find that a co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra), following the decision in that assessee's own case for Assessment Year 2007-08 (ITA Noi.1076/Bang/2011 dt.29.3.2013) has held 'Tata Elxsi' being into software development service segments such as embedded product design services, industrial design and engineering services, systems integrating services, Visual Computing Labs , etc. cannot be regarded as comparable to a pure software development service provider, like is the assessee in the case on hand. At para 26.4 of its order the co-ordinate bench in CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10 has hel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....siness 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 breakup is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the case. 2. The CIT (Appeals) erred in holding that foreign exchange loss/gain is operating in nature without ascertaining the nexus of the forex gain/loss with the business activity of the taxpayer and without appreciating that such loss/gain though attributable to the operating activity is not derived from the operating activity. 3. The CIT (Appeals) erred in concluding that forex gain/loss are to be treated as operating in nature without appreciating that though they may be incidental to the operating activity, they cannot be deemed as operating in nature since, they are not critical to operational activities of the business conducted by the taxpayer. 4. The CIT (Appeals) erred in law as well as on facts by directing the TPO to decide the case of the assessee, by applying the principles emerging from the orders of the Delhi Bench of the Hon'ble Tribunal in Haworth (India) Pvt. Ltd. V DCIT 11 ITR (Trib) 757 and the Bangalore Bench of the Hon'ble Tribunal in Triology E-Business Software V DCIT 23 ITR (Trib) 464 without appreciating that in transfer pricing every case is unique and requires to be decided independently and that the directions issued are beyond t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ign exchange gain/loss has arisen as a consequence of the realization of the consideration for rendering software development services and therefore there is no reason for its exclusion from the operating revenues for the purpose of calculating the operating margin of the assessee. We find that this proposition has been upheld by a co-ordinate bench of this Tribunal in the case of Amba Research India Pvt. Ltd. in IT(TP)A No.1376/Bang/2014 dt.17.4.2015 wherein at para 5.7 thereof it has been held as under :- " 5.7 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We observe that it has not been disputed that the foreign exchange gain has arisen as a consequence of the realization of the consideration for rendering ITES services and therefore there is no reason for its exclusion from the operating revenues for the purpose of calculating the operating margin of the assessee. We find that this proposition has been upheld by a co-ordinate bench of this Tribunal in the case of Mindteck (India) Ltd. in IT(TP)A No.70/Bang/2014 dt.21.8.2014 wherein at para 11 thereof it has bee....