TaxTMI 
TaxTMI 
2016 (2) TMI 932
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....l Transactions of the Appellant Company by Rs. 1,62,50,500/- by rejecting the benchmarking analysis conducted by the Appellant Company. 2.1 The learned Assessing Officer (AO) / Dispute Resolution Panel (DRP) erred in rejecting some of the companies considered as comparable by the Appellant Company without giving sufficient reasons for such rejection. 2.2 The learned AO / DRP erred in not appreciating that the activities of the above companies carried on during the said previous year were comparable to the Appellant Company and such companies should not be rejected for functional differences 2.3 The learned AO / DRP erred in rejecting some of the companies considered as com parable by the Appellant Company by applying the RPT criterion and by not appreciating that such companies did not have substantial transactions exceeding the threshold of 25% with the related parties during the relevant previous year and the RPT transactions were primarily in the nature of Investments. 3.1 The learned AO / DRP erred in considering additional six companies to the final list of comparable companies. 3.2 The learned AO / DRP erred in not appreciating that some of the said six compani....
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....employees while calculating operating profits from as well as operating costs related to the International transaction of export of services and erred in not appreciating that such expenses did not form part of the "Service Provider costs" as per the terms of the Inter-company services agreement. 5.1 The learned AO / DRP erred in holding that the Appellant Company had not discharged its onus to file requisite information pertaining to its claim of risk adjustment. 5.2 The learned AO / DRP erred in not appreciating that the Appellant Company had already submitted that it was not required to bear risks such as marketing risk, R & D Risk, Revenue Recovery Risk as well as warranty risk etc which are borne by the comparable companies. Further the Appellant Company had also furnished suitable working for appropriate risk adjustment in its submission by giving the details of market returns, returns from risk-free Government securities and also had submitted the working of risk adjustment by applying the Capital Asset Pricing Model (CAPM). 5.3 The learned AO / DRP erred in holding that the Appellant Company had assumed more critical risks as compared to the Associated Enterprise a....
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....he learned AO / DRP erred in not appreciating that the effective tax rate in USA was higher than the applicable tax rate in India and the organization of the Associated enterprise of the Appellant Company was significantly stronger and substantially larger as compared to the Appellant Company. Further the Associated Enterprise had incurred operating losses during the year under consideration. 11. The Ld. AO has erred in law and on facts in levying interest under section 234B of the Act. 12. The Ld. AO has erred in law and on facts in levying interest under section 234C of the Act given the fact that no interest is leviable as per returned income. 13. On the facts and in the circumstances of the case, the learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 14. The Appellant submits that the above grounds are independent and without prejudice to one another. The Appellant Company craves leave to add to, alter, amend, modify and/ or delete any or all of the Grounds of Appeal, either before or during the hearing of the appeal.' 3. The assessee has filed several grounds of appeal, but all relating to the issue of transfer pricing....
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....date. After considering the submissions of the assessee together with the facts of the case, the TPO was of the view that the companies selected by the assessee were not comparable and tabulated the details in respect of each of the companies as provided at pages 24 to 27 of the order of TPO with final comments of the TPO. The perusal of the said details reflect that the TPO only accepted some of the companies and after including the companies selected by him, which in turn, were show caused to the assessee, the final set of comparables for benchmarking the international transactions were zero downed to 12 companies as enlisted under para 10 of TPO's order. The arithmetic mean of the margins of final set of comparables i.e. OP over OC worked out at 25.47% as compared to 13.46% worked out by the assessee in respect of its international transaction. So in this regard, adjustment over operating income was proposed to be Rs. 2,29,68,091/-. Further, the assessee had asked for risk adjustment on account of various factors. However, after considering the details including the transfer pricing report of the assessee, the TPO vide para 15 observed that the assessee was risk bearing enti....
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....ovider to its associate enterprises. The total turnover of the assessee was Rs. 20.85 crores and the assessee had applied TNMM method as most appropriate method for benchmarking its international transactions vis-à-vis the set of comparables picked up by it. In the first round, the assessee had selected 15 companies, which had margins of 5.81% on account of OP/OC. The TPO had rejected 9 companies out of 15 companies and hence, only considered 6 companies selected by the assessee, but included 7 new companies. The DRP had directed the TPO to exclude FCS Software Solutions Ltd. and DRP also confirmed the rejection of 9 companies as made by the TPO. Hence, the DRP confirmed 11 companies in all, whose average mean was 22.84%, out of which working capital adjustment was directed to be allowed by the DRP at 1%. The learned Authorized Representative for the assessee further referred to the order of DRP at pages 2 and 5 to establish that the assessee was engaged in the business of software development, support and maintenance related to documentation and testing services. In other words, the assessee was a software development company. In this regard, the learned Authorized Represen....
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..... In respect of working capital adjustment, which was directed to be allowed by the DRP, the learned Authorized Representative for the assessee pointed out that the TPO did not follow OECD guidelines. Our attention was drawn to the order of Tribunal in assessee's own case for the preceding year, under which the directions have been given in this regard. 6. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of TPO and DRP. 7. We have heard the rival contentions and perused the record. The assessee has raised multiple grounds of appeal against the addition of Rs. 1,62,50,500/- made to the value of international transactions entered into by the assessee with its associate enterprises while providing software development services in the field of Automated Database creation and building Software Products to the tune of Rs. 20,85,85,805/-. The assessee was engaged in carrying out software development, support and maintenance, related documentation, and testing and relative services. The above said services were provided to its associate enterprise M/s. Emptoris INC. The assessee was 100% subsidiary of its associate enterpris....
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....before us was that the said companies selected by the TPO while benchmarking the international transactions of the assessee were not to be included in view of the Pune Bench of Tribunal in Barclays Technology Centre India (P.) Ltd.'s case (supra). 10. The assessee was providing software development services to its associate enterprises and the claim of the assessee before us was that the concern KALS Information Systems Ltd. was to be excluded from the list of comparables since the said concern was not only involved in the activity of providing software development services but was also engaged in selling of software products. 11. We find that Pune Bench of Tribunal in Barclays Technology Centre India (P.) Ltd.'s case (supra) i.e. a concern which was engaged in the activity of providing software development services to its associate enterprises in UK had also vide para 18 held that the concern M/s. KALS Information Systems Ltd. was to be excluded from the final set of comparables as it was functionally dissimilar. The relevant para 18 reads as under:- '18. Thirdly, assessee has contended that the concern M/s. Kals Information Systems Ltd. be excluded from the f....
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....to be made out that the assessee was functionally different inasmuch it was engaged in the provision of software development and other related services to its associated enterprises as well as to the non-associated enterprises and, was not involved in development and sale of software products. The TPO did not accept the plea of the assessee for the reason that the Annual Report of the said concern did not reflect about sale of software products after development and therefore, according to him, it was not functionally different. 14. Before us, the learned counsel for the assessee has vehemently pointed out that the plea of the assessee has been rejected by the income-tax authorities without 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 b....
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.... Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) relied upon by the assessee squarely cover the controversy relating to Kals Information Systems Limited. In the aforesaid two precedents, the said concern has been sought to be excluded from the list of comparables on account of functional dissimilarities. The Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) has considered the functions undertaken by the said concern during the previous year relevant to the assessment year under consideration before us, and it has been found that the said concern was engaged in the business of developing and selling software products 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 non-associated 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 (P.) Ltd. (supra) has also found the said concern to be functionally dissimilar from a concern....
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....sessee did not found favour with the income-tax authorities. As per the Revenue, a perusal of the Profit and Loss Account of the said concern did not reveal that it was involved in the activity of development and sale of software products also. 16. Before us, the Ld. Representative for the assessee submitted that the said concern was functionally dissimilar to the assessee and in this context, he relied upon the decision of the Pune Bench of the Tribunal in the case of Symphony Services Pune (P.) Ltd. vide ITA No.257/PN/2013 dated 30-04-2014 for A.Y. 2008-09. Relevant discussion in the order of Symphony Services Pune (P.) Ltd. (supra) with respect to E-Zest Solutions Ltd. reads as under : "19. The last point raised by the assessee is to exclude E-Zest Solutions Limited from the list of comparables for the purposes of benchmarking the international transactions of providing of software development services to the associated enterprises. On this aspect, the plea of the assessee before the TPO was that the said concern is functionally dissimilar because it is engaged in providing services which include e-business services, which are more in the nature of Information Technology E....
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.... concern has not provided any segmental data in its Annual Report. Before us, it is sought to be contended that the KPO services are not comparable to the software development services being rendered by the assessee and therefore concerns which render KPO services cannot be considered as functionally comparable to the concerns who render software development services. For the said proposition, reliance has been placed on the decision of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) which has indeed been rendered in the context of the same comparable, which is the subject-matter of consideration before us, i.e. E-Zest Solutions Limited. 24. We find that the factual assertions made by the assessee before the TPO as well as before us with regard to the functions being performed by E-Zest Solutions Limited have not been controverted by the Revenue. Ostensibly, E-Zest Solutions Limited is rendering product development services and technology services, and the latter falls in the category of KPO services and the same have not been held by the Bangalore Bench of the Tribunal to be similar to a concern engaged in rendering of software developme....
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....recognized based on software developed and billed to the clients. It has been explained that in such a situation, expenditure for developing software would be billed in an earlier year but the income would be recognized in a subsequent year. This business model results in fluctuation in margins over the years. The counsel for the assessee submitted that the Pune Bench of the Tribunal in the case of QLogic (India) (P.) Ltd. v. DCIT (ITA No.227/PN/2014) for assessment year 2009-10 dated 21.10.2014 has excluded the said concern from the list of comparables in a similar situation by following the decision of the Bangalore Bench of the Tribunal in the case of M/s. Mindteck (India) Ltd., vide I.T.(TP).A.No.70/Bang/2014 dated 21-08-2014. The decision of the Mumbai Bench of the Tribunal in the case of NetHawk Networks India (P.) Ltd. vide ITA No.7633/M/2012 dated 06-11-2013 for assessment year 2008-09 has also been relied upon for excluding the said concern from the final set of comparables. 21. On the other hand the Ld. CIT-DR appearing for the Revenue has defended the inclusion of Bodhtree Consulting Ltd., by referring to the discussion in para 14.1 of the order of TPO. As per the TPO....
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....pment services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under: "29.1 The ld Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, thi....
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....ditions and only in such circumstances, high profit margin companies can be excluded. Our attention was drawn to the DRP's observation in its order on the issue which is as follows : "Bodhtree : The assessee has objected to selection of this entity on the basis of the following objections : The entity has fluctuating margins. The company is more of a product company rather than software service company. The Panel has considered the objections of the assessee. Insofar as the contention regarding the rejection of this entity on the basis of fluctuating margin is concerned. In order to appreciate the compatibility or otherwise of this entity, it is important to first note that the Indian Software industry uses two different models for revenue recognition. The first is the Time and Material (T&M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model, the total contract price is agreed upon between the ....
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....en as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from F.Y.2003 to 2008 excluding F.Y.2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognitions method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly." 24. Though the aforesaid discussion by the Bangalore Bench of the Tribunal is in relation to the assessment year 2009-10, but the inferences drawn with ....
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....l information services comprising of photogrammetry, remote sensing cartography, data conversion related computed based services and other related services. Further, the business of the said concern required skilled manpower and scientists, civil engineers, etc. and the concern was also carrying out research and development services and owned intangibles. In view thereof, the Tribunal held that the said company is to be excluded from the final list of comparables. The Tribunal further placed reliance on the ratio laid down by Bangalore Bench of Tribunal in Symphony Marketing Solutions India (P.) Ltd. v. ITO [2013] 38 taxmann.com 55. The year before the Hyderabad Bench of Tribunal and the Bangalore Bench of Tribunal was assessment year 2008-09. The assessee is in appeal before us also against the order passed relating to assessment year 2008-09. Following the same parity of reasoning, where the concern selected by the TPO was not functionally similar to the assessee, the said concern is to be excluded from the final list of comparables and accordingly, we direct so. 16. Now, coming to the objections raised by the assessee with regard to inclusion of concern Goldstone Technologies....