TaxTMI 
TaxTMI 
2016 (11) TMI 114
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....iture only from export turnover by way of specific definition of export turnover as envisaged by Sub-clause (4) of Explanation 2 below Sub-section (8) of Section J OA and the total turnover has not been defined in this Section. 3. On the facts and in the circumstances of the case the learned CITCA) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding MIs Celestial Blolabs Ltd., MIs Flextronics Software Ltd. M/s. iGate Global Solutions Ltd., MIs lnfosys Technologies Ltd., M/s. Mindtree Consulting Ltd., M/s. Persistent Systems Ltd., M/s. Sasken Communication Technologies Ltd., M/s. Tata Elxsi Ltd. and MIs Wipro Limited as comparables. 4. On the facts and in the circumstances of the case the learned CITCA) erred in rejecting diminishing revenue filter used by the TPO to exclude companies that do not reflect normal industry trend. 5. On the fact and in the circumstances of the case the learned CITCA) has erred in holding that the TPO was not justified in applying the employee cost filter and directed to include M/s. Indus Networks Ltd. ;which was excluded in the software development....
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....e Hon'ble jurisdictional High Court reads as follows:- "...........Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court; ........In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be unifor....
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....context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". Respectfully following the judgment of Hon'ble jurisdictional High Court, We do not find any error or illegality in the impugned order of CIT (Appeals) qua this issue. 7. Ground Nos.3 to 10 are regarding the Transfer Pricing Adjustment made by the Transfer Pricing Officer ('TPO') and certain comparables selected by the TPO were excluded by the CIT (Appeals). The assessee is a company incorporated under the provisions of the Companies Act, 1956, and is a wholly owned subsidiary of PMC-Sierra Mauritius Limited which is, in turn, a subsidiary of PMC-Sierra Inc., USA. The assessee is engaged in the business of providing contract software development services as well as contract sales support services to the PMC-Sierra Group. The assessee is compensated with a mark-up on the cost incurred for provision of the software development services. During the year under consideration the assessee has carried out international transactions by the assessee which are reported as under : Particulars Amount (In Rs.) Outcome of Transfer Pricing Order. Provision of s....
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.... 38.58 8. Kals Information Systems Ltd. (Seg) 41.94 29.10 9. LGS Global Ltd. 27.52 26.75 10. Mindtree Ltd. (Seg) 16.41 15.72 11. Persistent Systems Ltd. 20.31 20.91 12. Quintegra Solution Ltd. 21.74 18.89 13. R Systems (India) Ltd. 15.30 13.77 14. R S Software (India) Ltd. 7.41 9.16 15. Sasken Communication Technologies Ltd. (Seg) 7.58 7.41 16. Tata Elxsi (Seg) 18.97 19.05 17. Thirdware Solutions Ltd. 19.35 17.21 18. Wipro Ltd. (Seg) 28.45 29.90 19. Softsol India Ltd. 17.89 15.79 20. Lucid Software Ltd. 16.50 18.11 Mean (Average) 23.65 22.98 Thus the TPO has determined the mean margin of the assessee at 23.65% and after working capital adjustment at 22.98%. Accordingly, the TPO proposed an adjustment under Section 92CA of the Act of Rs. 4,03,93,704. The assessee challenged the action of the TPO/A.O before the CIT (Appeals) against the selection of various companies selected by the TPO. The CIT (Appeals) applied a turnover filter with the range of Rs. 1 Crore to Rs. 200 Crores and consequently excluded 8 companies as under : 1. Flextronics Ltd. 2. iGate Global Solutions Ltd. 3. Infosys Technologies Ltd. 4. Mindtree....
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....t pressed. The assessee has also filed an additional ground along with a petition for admission of the additional ground seeking exclusion of E-Zest Solution Ltd. which was selected by the TPO 8.1 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record on the admissibility of the additional grounds. The learned Authorised Representative has submitted that the functional comparability of the company has been examined by this Tribunal in various cases and it was found that this company is not a good comparable. The learned Authorised Representative has also relied upon the decision of the Special Bench of ITAT, Chandigarh in the case of Quark Systems Ltd. 38 SOT 307 and submitted that even if the assessee has taken a particular company as comparable in the TP study, the assessee is entitled to point out before this Tribunal that the said enterprise has wrongly been taken as comparable. The learned Authorised Representative has contended that the TPO has not applied the employee cost filter and therefore some of the companies selected by the TPO failed the test of employee cost factor of 25%. In....
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....td. 38 SOT 307 in paras 30 and 38 as under : "30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT(A) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept above contention. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant with this new branch of law when proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This has not been done in this case. We would only say that prima facie, as per the material, to which reference has ....
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....carefully considered the relevant material on record. The CIT(A) has directed the AO/TPO to exclude 5 comparable companies on the ground that their turnover exceeds Rs. 200 crores. The details of the companies are as under:- Sr No. Name of the company Turnover (Rs. in crores) 1 iGate Solutions Ltd. 406 2 Flextronics Software System Ltd. 457.45 3 L&T Infotech Ltd. 562.45 4 Satyam Computer Services Ltd. 3462.2 5 Infosys Technologies Ltd. 6859.7 12. It is pertinent to note that the CIT(A) has applied turnover slab of Rs. 1 crore to Rs. 200 crores for excluding these companies, whereas there is an inherent difficulty in applying such a turnover slab of Rs. 1 crore to Rs. 200 crores because the said classification on the basis of slab of the turnover gives unrealistic results, as an entity having Rs. 1 crore turnover can be compared with any entity having Rs. 200 crores turnover, but at the same time an entity having Rs. 200 crores turnover cannot be compared with an entity having Rs. 201 crores turnover. Thus, as it is clear from the above illustration that it gives ambiguous result as two entities having difference of Rs. 1 crore cannot be considered as comp....
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.... Technology Ltd. (Seg.), Persistent Systems Ltd. and Tata Elxsi Ltd. will not be excluded due to high turnover. Therefore except these 3 companies, other 5 companies are required to be excluded from the list of comparables and to that extent we confirm the order of the CIT (Appeals) on this issue. For the remaining companies, the learned Authorised Representative of the assessee has submitted that an identical set of 20 companies was considered by the co-ordinate bench of this Tribunal for the same assessment year 2008-09 in the case of Telelogy India Pvt. Ltd. Vs. DCIT vide order dt.9.3.2016 in IT(TP)A No.1599/Bang/2012. Thus the learned A.R. has submitted that except the comparability of Indus Network Ltd. which was included by the CIT (Appeals) in the set of comparables the functional comparability of all other companies have been examined by this Tribunal. 10. We have considered the rival submissions as well as the relevant material on record. The ld. D.R. has submitted that the TPO has already examined the functional comparability of these companies and it was found that the main activity of all these companies are software development services and therefore in significant re....
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..... The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial....
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....emonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology EBusiness Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstr....
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....arefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Nonfurnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected IT(TP)A 1380/Bang/2012 Page 7 of 34 on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's....
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....he assessee had accepted the TPO's proposal for inclusion of this company in the set of comparables and had not objected to its inclusion even before the DRP, the objections raised by the assessee in this regard, at this stage, ought to be rejected. 8.4.1 We have heard both parties and perused and carefully considered the material on record. Admittedly, there is no disputing the fact that the assessee had never objected to the inclusion of this company in the set of comparbales in earlier proceedings before the TPO and the DRP. It is also seen that even in the grounds of appeal raised before us, the assessee has not raised any grounds challenging the inclusion of this ompany in the list of comparbales. In fact in the assessee's own case for Assessment Year 2007-08, this company was selected as a comparable by the assessee itself. We, therefore, find no merit in the contentions raised by the learned Authorised Representative of the assessee in respect of this company at this stage of proceedings. 8.4.2 It is also seen from the submissions made before us that the assessee has only pointed out fluctuating margins in the results of this company over the years. This, in itself, ....
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....re accept the plea of the assessee in this regard." (iv) The rejection / exclusion of this company as a comparable for Assessment Year 2007-08 for software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. in ITA No.112/Bang/2011, CSR India Pvt. Ltd. in IT(TP)A No.1119/Bang/2011 and by the ITAT, Delhi Bench in the case of Transwitch India Pvt. Ltd. in ITA No.6083/Del/2010. (v) The facts pertaining to this company has not changed from Assessment Year 2007- 08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and therefore there cannot be an assumption that it would continue to be applicable for the period un....
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....in the set of comparables on grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 10.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee and ought to be rejected /excluded from the list of comparables for the following reasons:- (i) This company is functionally different from the software activity of the assessee as it is into software products. (ii) This company has been held to be functionally not comparable to software service providers for Assessment Year 2007-08 by the co-ordinate bench of this Tribunal in the assessee's own case. This company has been held to be different from a software development company in the decis....
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.... to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of coordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is IT(TP)A 1380/Bang/2012 Page 9 of 34 functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the coordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly." "11.0 Infosys Technolo....
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.... designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative 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 Lt....
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....e supported the action of the TPO in including this company in the list of comparables. 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the coordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang....
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.... the 'Embedded Product Design Services Segment' of the company to create a portfolio of reusable software components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons, Tata Elxsi Ltd . is clearly functionally different/dis-similar from the assessee and therefore ought to be omitted form the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the stand of the TPO in including this company in the list of comparables. 13.4 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment " software development services" relates to design services and are not similar to software development services performed by the assessee. 13.5 The Hon'ble Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd . (supra) has held that Tata Elxsi Ltd . is not a software development service provider and therefore it is not....
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....y has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available 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 coordinate bench in the case of Capital IQ Information Systems (India) (P.) Ltd . v. Dy. CIT (International Taxation) [2013] 32 taxmann.com 21 (Hyd. - Trib.) and prayed that in view of the above reasons, this company i.e. e- Zest software 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 ma....
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.... from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns 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 (P.) 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 factua....
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....ng this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India (P.) Ltd. (supra), CSR India (P.) Ltd. (supra); the ITAT, Mumbai Bench in the case of Telcordia Technologies India (P.) Ltd (supra) and the Delhi ITAT in the case of Transwitch India (P.) Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. ....
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....e company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitt....
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....nd also mitigate risks." (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solution Ltd. being functionally different and possessing its own intangibles/IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.4 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 product engineering services and is not purely a software developme....
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....ned Authorised Representative submitted that for the current period under consideration, the RPT is 18.3% and therefore this company requires to be omitted from the list of comparables. 19.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables as this company was a pure software development service provider like the assessee. 19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 has excluded this company from the set of comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra). As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the co-ordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand. 23. Thus, it is clear from the findings of the Co-ordinate Bench of the....
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....ctual Property Rights (IPRs) then, even if these companies are selected by the assessee in its T.P. Analysis the same shall be excluded from the comparables. The comparability of these companies was already tested by this Tribunal, then the same cannot be included in the list of comparables. Accordingly, by following the earlier order of the Tribunal as well as Special Bench decision in the case of Quark Systems Pvt. Ltd. (supra). We admit the additional grounds raised by the assessee. In view of the findings of the co-ordinate bench of the Tribunal in the case of Kodiak Network India Pvt. Ltd. (supra), we hold that 12 companies out of 13 sought by the assessee are required to be excluded from the list of comparables where as the company Bodhtree Consulting Ltd. is accepted as a good comparable of software development services provided by the assessee. Accordingly, we direct the TPO/A.O to exclude 12 companies as mentioned in para 25 of the order of the co-ordinate bench (supra) from the set of comparables and recomputed the ALP after considering the claim of risk adjustment as well as the benefit of tolerance range of + / - 5% as per the proviso to section 92C(2)." Accordingly by....