TaxTMI 
TaxTMI 
2015 (11) TMI 1308
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....consequential. Ground No.8 with regard to initiation of penalty proceedings u/s. 271(1)(( c) of the Act cannot be subject matter of appeal. Ground No.9 & 10 are general in nature and calls for no specific adjudication. Ground No.4 is with regard to exclusion of foreign currency expenses and communication charges from the export turnover/total turnover. Ground No.5 is with regard to the Revenue authorities in not allowing set-off of current year unabsorbed depreciation against the adjustment made to the business income. 3. Grounds 2.5 to 7 and ground No.3 raised by the Assessee are with regard to the addition to the total income by way of adjustment to the Arms' Length Price ("ALP") to an international transaction carried out by the assessee u/s. 92CA of the Act. At the time of hearing of the appeal it was submitted that the comparable companies chosen by the TPO and the addition made by the AO in the draft assessment order which was confirmed by the DRP are identical to the case decided by the Tribunal in. July Sytstems & Technologies (P) Ltd., Vs. ITO (2014) 33 ITR (TRIB) 643 (ITAT Bang)., 3DPLM Software Solutions Ltd. Vs. DCIT 2014 12 TMI 612- ITAT Bangalore, Element K.India P....
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....opted as the Profit Level Indicator ("PLI"). The PLI of the assessee was arrived at as follows: Operating Revenue Rs.18,58,84,791 Operating Cost Rs.17,68,70,698 Operating Profit Rs.90,14,093 Op.pr/cost% 5.09% 7. The TPO arrived at a final set of 26 comparables. The set of 20 comparables is as follows: Sl. No Name of company OP/TC Turnover Rs. in Crores 1 Accel Transmatic Ltd (Seg.) 21.11% 9.68 2 Avani Cimcon Technologies Ltd 52.59% 3.55 3 Celestial Labs Ltd 58.35% 14.13 4 Datamatics Ltd 1.38% 54.51 5 E-Zest Solutions Ltd 36.12% 6.26 6 Flextronics Software Systems Ltd (Seg.) 25.31% 848.66 7 Geometric Ltd (Seg.) 10.71% 158.38 8 Helios & Matheson Information Technology Ltd 36.63% 178.63 9 iGate Global Solutions Ltd 7.49% 747.27 10 Infosys Technologies Ltd 40.30% 131.49 11 Ishir Infotech Ltd 30.12% 7.42 12 KALS Information Systems Ltd (Seg.) 30.55% 2.00 13 LGS Global Ltd (Lanco Global Solutions Ltd) 15.75% 45.39 14 Lucid Software Ltd 19.37% 1.70 15 Mediasof....
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....ed as transfer pricing adjustment u/s 92CA." 9. Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 10. The ld. counsel for the assessee brought to our notice that out of the 26 comparable companies chosen by the TPO, the following companies will have to be excluded as the turnover of these companies are more than Rs. 200 crores and cannot be compared with the Assessee whose turnover is less than Rs. 200 crores: (1) Flextronics Software Systems Ltd. (2) iGate Global Solutions Ltd. (3) Mindtree Ltd. (4) Persistent Systems Ltd. (5) Sasken Communication Technologies Ltd. (6) Infosys Technologies Ltd. (7) Tata Elxsi Ltd. (8) Wipro Ltd.(seg.) 11. Our attention was drawn to t....
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....of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability." 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: "Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate." 13. It was further submitted that the....
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.....00 crores only should be taken into consideration for the purpose of making TP study." 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Rs. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's len....
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.... (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:" 18. Rule 10B of the IT Rules, 1962 prescribes rul....
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....ties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years....
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....companies from the list of comparable. 14. Improper selection of comparables: It was submitted by the learned counsel for the Assessee that the following two companies are not functionally comparable with that of the Assessee:- a) KALS Information Systems Limited b) Accel Transmission Limited. In this regard our attention was drawn to the decision of the Hon'ble ITAT Bangalore Bench in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) wherein these companies were held to be not functionally comparable with that of a pure software developer like the Assessee. 15. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Trilogy E-Business Software India Pvt.Ltd.(supra): "(d) KALS Information Systems Ltd. 3. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351....
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....ent service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activiti....
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....a of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius- BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business....
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....e development services." 18. In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison. 19. The learned counsel for the Assessee brought to our notice that the comparable company chosen by the TPO at sl.No.14 of the chart given in para-4 of this order viz., Lucid Software Limited, has to be excluded as functionally not comparable with that of the assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. in ITA No.7821/MUM/2011, which was followed by the ITAT Bangalore Bench in the case of Logica Private Ltd. ITA No.1129/Bang/2011 for AY 07-08, wherein it was held as under:- "7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party....
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....ric Software Ltd. and 21.97% in the case of Ishir Infotech Ltd.) and in view of the decision of the Tribunal in the case of 24 X 7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010, followed by this Tribunal in the case of Logica Private Ltd. (supra) wherein it was held that where the RPT exceeds 15%, such companies should not be taken as comparable companies. Following the said decision, we hold that companies at Sl.Nos. 7 & 11 referred to above of the list of the comparable companies chosen by the TPO be excluded from the list of comparable companies while working out the ALP. 22. As far as comparables at Sl.Nos. 2 &, 3 of the list of comparables chosen by the TPO are concerned, this Tribunal in the case of Trilogy EBusiness Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies. The following are the relevant observations of the Tribunal in this regard:- (b) Avani Cimcon Technologies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveal....
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....pany ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. (c) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- i. In the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act." ii. As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expe....
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....derabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard.' " 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner ....
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.... for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable." 23. Respectfully following the decision referred to above, we hold that the aforesaid companies list at Sl.No.2 & 3 of the list of comparables chosen by the TPO be excluded from the list of comparables. 24. As far as Helios & Matherson I....
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....able on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 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....
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.... In the present case the Assessee has chosen to object to this company being chosen as a comparable and the decision of the tribunal cited by the learned counsel for the Assessee supports his plea. There is no contrary decision brought to our notice to take a different view. We may also add that comparability and non-comparability of companies in the matter of determination of ALP is not dependent upon any concession either at the instance of the Assessee or the revenue. At any stage it can be demonstrated that a company chosen as a comparable is in fact not comparable and that which has been accepted as non-comparable is in fact comparable. 28. With regard to the objection of the leaned DR that the functional profile of the company E-Zest Solutions Ltd. in AY 07-08 has to be compared with that in AY 08-09 decided by the Tribunal, we accept the said prayer and for this limited purpose direct the TPO/AO to examine as to whether there is any change in the profile of the said company so that it can be regarded as comparable with an Assessee rendering software development service such as the Assessee. 29. The TPO is directed to compute ALP after excluding the comparable companies....