TaxTMI 
TaxTMI 
2016 (3) TMI 1210
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....atural justice. 2. The Honourable DRP and the learned AO/TPO erred in fact and in law in determining the Arm's Length Price ("ALP") by adopting the financial data for a single year [i.e. the financial year 2005-06] of the comparables as against multiple year data considered by the Appellant. 3. The learned TPO has erred in selecting companies as comparable to the Appellant despite such companies failing the test of comparability and reliability on some or all of the factors such as functional dissimilarity and product led revenues. 4. The learned TPO has erred in adopting a faulty process of selection of comparable companies without taking into account aspects such as the influence of extraordinary events, abnormality in the financial results of the concerned year, reliability of the financial data and the failure of his own filters. 5. The Honourable DRP and the learned AO/TPO erred in fact and in law in using selective information, which was not available in public domain, obtained under section 133(6) of the Income-tax Act, 1961 ("the Act") without any independent validation of the data provided and by ignoring the inconsistencies therein with the information available i....
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....e Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds, at any time before or at the time of hearing of the appeal. Each of the above objections is independent and without prejudice to the other grounds preferred by the Appellant." 3. Ground No. 1 is general in nature and does not require any specific adjudication. 4. At the time of hearing, the learned Authorised Representative of the assessee stated that the assessee does not press the concise Ground Nos.2, 5, 6 & 8 and pleaded that the same may be dismissed as not pressed. The learned Departmental Representative has raised no objection if the concise Ground Nos.2, 5 6 & 8 are dismissed as not pressed by the assessee. Accordingly, the concise Ground Nos.2, 5, 6 & 8 are dismissed being not pressed. 5. Ground Nos.3 & 4 are regarding the objections of the assessee against the comparables selected by the TPO for determination of Arm's Length Price ('ALP'). The assessee is part of Hewlett Packard Group (HP Group). Its ultimate Holding Company is Hewlett-Packard Company, USA. The assessee was established in Bangalore in the year 1988 and is engaged in the provisions of R & D s....
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....24.75 34.45 25.65 Ontrack Systems Ltd. 5.77 7.93 9.57 7.92 Onward Technbologies Ltd. -0.10 -0.17 3.64 1.40 Orient Information Technology Ltd. 7.36 10.35 -41.16 -7.09 Pentasoft Technologies 14.93 6.75 -- 11.98 Powersoft Global Solutions Ltd. 19.58 21.94 -- 20.90 Quintegra Solutions Ltd. 6.25 10.21 10.91 8.42 R S Software Ltd. -1.96 8.00 15.44 7.91 Saksoft Limited 9.37 24.48 23.11 20.39 Software Technology Group Intl. Ltd. 7.36 15.30 -- 11.19 Sonata Softwre Ltd. 6.09 6.50 3.63 5.02 Subex Systems Ltd. 6.45 5.62 3.97 5.51 Synfosys Business Solutions Ltd. -- 11.22 -- 11.22 Tata Elxsi Ltd. 14.37 19.03 20.38 18.29 Transworld Infotech Ltd. 33.88 26.30 -- 30.13 VMF Softech Ltd. -0.49 37.00 -- 18.07 Zensar Technologies Ltd. 5.50 7.76 18.64 11.21 Arithmetic Mean (%) 13.58 13.88 11.94 12.70 The TPO has rejected the T.P. Study analysis of the assessee and also rejected 33 comparables of the assessee. The reasons for rejecting the 33 comparables selected by the assessee are summarized by the TPO as under : Sl. No. Reason No. of companies 1. Companies which ....
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....27.91 15.61 0 15.61 19. Lanco Global Systems Ltd. 35.63 5.27 0 5.27 20. Megasoft Ltd. 56.15 52.74 0 52.74 Average 20.68 % 20.71 % In the above list of comparables, the companies at S.Nos.1, 3 12, 14, 16 & 19 are common as were accepted by the TPO from the list of assessee's comparables. Thus the TPO has arrived at Arithmetic Mean (AM) margin of comparables at 20.71%. The TPO has also allowed working capital adjustment of 2.19% and the adjusted AM was computed at 18.49%. Accordingly, the TPO proposed an upward adjustment of Rs. 54,25,32,620 under Section 92CA of the Act. The assessee challenged the action of the TPO/A.O in selecting the list of comparables but could not succeed as DRP has upheld the action of the TPO/A.O. 6. Before us the assessee has raised the objections in respect of six comparables selected by the TPO and another comparable being Tata Elxsi Ltd. (Seg.) which was selected by the assessee but the assessee is seeking exclusion of the same by filing the additional ground which we will deal with separately. 7. We will deal with the functional comparability of the companies selected by the TPO one by one as unde....
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....of the assessee where the international transactions are only in the software development services. We note that the Tribunal in the case of Goldman Sachs Services Pvt. Ltd. (supra), has examined the functional comparability of this company in paras 8.1 to 8.5.2 as under : " 8.1 Accel Transmatics Ltd. The assessee contends that this company is not a pure software development service company but rather it is a product development company and has a different functional profile from the assessee who is providing only software development to its AEs. It is submitted that this company is engaged in business application products in the healthcare and education segments which operate the products 'Healthspace' and Prodigy' respectively for which it received and would continue to receive royalty. It is also submitted that in the period under consideration, this company has ventured into the area of developing animation and gaming software and offers 2D, 3D animation, visual effects and gaming solutions. 8.2 KALS Infosystems Ltd. The assessee contends that this company is into product development and is a product oriented company. It was submitted that this company deals wit....
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....so pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited v. DCI, ITA No. 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionaly different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company ....
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....ies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin" Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50 We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini I....
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....ot report separate segmental results. This company is also a product oriented company. The learned Authorised Representative has further submitted that the functional comparability of this company has been examined and decided by the Hyderabad bench of the Tribunal dt.29.11.2013 in ITA No.1445/Hyd/2010 in the case of CES Pvt. Ltd. Vs. DCIT and the finding of the Tribunal has been confirmed by the Hon'ble High Court of Andhra Pradesh & Telangana in ITA No.442 of 2014. 11.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that merely because there is an amalgamation ipso facto will not make a particular company functionally dis-similar if the functional and business profile of the company is similar to that of the assessee. 11.3 Having considered the rival submissions as well as the relevant material on record, at the outset, we note that the functional comparability of this company has been examined by the Hyderabad Benches of this Tribunal in the case of CES Pvt. Ltd. (supra) at page 14 of the order as under : " 2. Flextronics Software Systems Ltd. The learned counsel for the assessee submission is ....
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....ment services to its AEs. It is submitted that this company has three divisions; one of which, is, XIUS Division is completely into product development and has various products such as XIUS WISE, XIUS Voise, XIUS Roaming, XIUS Infinet, etc. customises its own products and only passes on right in the form of licenses. The learned Authorised Representative also submitted that this company fails the Related Party Transaction (RPT) filter of 15% and is a super profit company. In support of the assessee's contentions, that this company, being into products and product development should be excluded from the list of comparables, as it is functionally different from companies into provision of software development services, the learned Authorised Representative placed reliance on the decision of the Hyderabad bench of the ITAT in the case of CES Pvt. Ltd. in ITA No. 1445/Hyd/2010 for Assessment Year 2006-07. 10.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparable companies to the assessee in the case on hand. 10.3.1 We have heard both parties and perused and carefully considered the material on recor....
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.... list of comparables. 14.1 Persistent System Ltd.: This company is selected by the TPO. The assessee objected the inclusion of this company on the ground of functionally different and engaged in the product development and design services. The learned Authorised Representative of the assessee has submitted that the functional comparability of this company has been examined by the Hyderabad Tribunal in the case of CES Pvt. Ltd. (supra) and the finding of this Tribunal has been upheld by the Hon'ble High Court of Andhra Pradesh & Telangana in ITA No. 442 of 2014. 14.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below. 14.3 Having considered the rival submissions as well as the relevant material on record, we note that the functional comparability of this company has been examined by the Tribunal in the case of CES Pvt. Ltd. (supra) and held as under : "3. Persistent Systems Ltd. The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that in this company substantial acquisition of Norwest Capita Partners took placed on 22-11-2005 and hence cannot be take....
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....isk Profile Operate as full-fledged risk taking entrepreneurs. Operate at minimal risks as the 100% services are provided to AEs. Nature of Services Diversified-consulting, application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book) Contract Software Development Services. Revenue Rs. 9,028 Crores Rs. 16.09 Crores Ownership of branded/proprietary products Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect. Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite 'Finacle') Onsite v. Offshore As much as half of the software devt. Services rendered by Infosys are onsite (i.e. services performed at the customer's location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its services, income from onsite services.) The appellant provides only offshore services (i.e. remotely from India) Expenditure on Advertising/Sales promotion and brand building Rs. 61 Crores Rs. Nil (as pe....
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....rables with that of the international transactions of the assessee and therefore the same cannot be considered as good comparable for the purpose of determination of ALP. The learned Authorised Representative has relied upon the decision of the Special Bench of Chandigarh Bench of the Tribunal in the case of Quartk Systems P. Ltd. (2010) (Chd.) (SB) 38 SOT 307 and submitted that the Special Bench has held that the tax payee can seek the rejection of a company selected by it in the T.P. Study as not being comparable even such a plea is raised for the first time before the Tribunal. Thus the learned Authorised Representative has submitted that when the functional comparability of this company has been considered and decided by various decisions of this Tribunal, then this company cannot be considered in the list of comparables for the purpose of determining the ALP only because the assessee has selected the same. He has also relied upon the decision of the Tribunal in the case of Goldman Sachs Services Pvt. Ltd. (supra) as well as Ariba Technologies India Pvt. Ltd. (supra) and submitted that this company shall be excluded from the list of comparables on the ground of functional dis-s....
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....arties and perused and carefully considered the material on record; including the judicial pronouncement cited by the assessee. We find that a co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) for Assessment Year 2006-07 has excluded this company i.e. M/s. Tata Elxsi Ltd. from the set of comparable companies which are mere providers of software development services, as is the assessee in the case on hand. At paras 17 and 18 of its order, the co-ordinate bench has held as under :- "17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica Pvt. Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- "14. As far as comparable at Sl. No. 6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) whe....
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....os. 9 & 10 are regarding the exclusion of expenditure incurred by the assessee in foreign currency from export turnover. 18.2 We have heard the rival submissions as well as considered the relevant material on record. This issue is now covered by the judgement of Hon'ble jurisdictional High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others 349 ITR 98 had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the 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 t....
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.... said formula, 'export turnover' is defined, and when the total turnover includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same." Following the judgment of the Hon'ble High Court, we direct the Assessing Officer to exclude the expenditure in the foreign currency from total turnover as well. 19.1 Ground No. 11 is regarding the disallowance of computer software expenses by treating the same as capital in nature. 19.2 We have heard the rival submissions as well as considered the relevant material on record. The learned Authorised Representative of the a....
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.... the right to use the application software should be treated as revenue expenditure, the Hon'ble DRP has erred in law and on facts in upholding the learned AO's action of not providing appropriate depreciation at the rate of 60 per cent on the amount considered as capital in nature. In the said order, the AO has not considered depreciation and has disallowed the entire amount of Rs. 10,916,141. 11. Without prejudice to our contention that expenses incurred on right to use the application software should be treated as a revenue expenditure, the Hon'ble DRP has erred in law and on facts in upholding the learned AO's action of not providing appropriate deduction under section 10A of the Act in respect of the above additions made to the net profits of the Company." 32. The DRP after considering the issue held that the expenditure on acquisition of software has resulted in enduring benefits of capital nature to the assessee. That expenditure which increases the efficiency and capacity of the apparatus established to earn profit is capital in nature. The DRP also held that the expenditure results in increasing the data storage, processing and retrieval capacity of the assessee and this....
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....usiness operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. In fact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though ....