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2017 (2) TMI 1211
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....ologies Ltd, Tata Elxsi Ltd and Wipro Ltd as comparables. 3. The Ld. CIT (A) erred in rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend. 4. The Ld. CIT (A) erred in not appreciating that the different year ending filter applied by the TPO is necessary to exclude companies which do not have the same or comparable financial cycle as the tested party. 5. The Ld. CIT(A) erred in rejecting the employee cost filter applied by the TPO to select companies which are predominantly into software development services. 6. The learned CIT(A), in the facts and circumstances of the case, erred in holding that M/s. Avani Cimcon Technologies, cannot be taken as a comparable. 7. The learned CIT(A), in the facts and circumstances of the case, erred in holding that M/s. KALS Information Systems, cannot be taken as a comparable. 8. The CIT(A) erred in directing the AO to recompute the deduction allowable u/s 10A of the I.T. Act after reducing the communication expenses of Rs. 20,46,519/- and expenses incurred in foreign currency of Rs. 6,15,235/- from the total turnover also. ....
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.... The Ld. CIT(A) erred in upholding the action of the Ld. AO/the Ld. TPO in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in differences in (a) marketing expenditure adjustment, (b) research and development expenditure adjustment; and (c) risk profile between Respondent and the comparable companies. 3. Reduction in deduction under Section 10A of the Act a) The learned CIT(A) has erred in upholding the action of the AO in computing the deduction under section 10A of the Act at Rs. 25,058,002. b) The learned CIT(A) erred in upholding the action of the AO in reducing communication expenses of Rs. 2,046,519 from the export turnover without considering the fact that the said communication expenses of Rs. 2,046,519 has already been reduced from both the export turnover and total turnover on the position that such expenses are attributable to the delivery of software outside India. c) The learned CIT(A) erred in upholding the action of the AO in reducing travel expenses incurred in foreign currency amounting to Rs. 615,235 from the export turnover, without considering the fact that the said travel expenses a....
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.... 5. During the course of hearing, the ld. counsel for the assessee has filed a chart with respect to the comparables along with complete details taken by the TPO for determining the ALP of the international transactions. 6. The facts in brief borne out from the record are that the assessee, a wholly owned subsidiary of Ketera Technologies Inc., USA, is engaged in the business of providing software development services to Ketera US, which is its Associated Enterprise (AE), for which it is remunerated on a cost plus 15% margin. It filed return of income and the case was taken up for scrutiny. During the course of assessment proceedings, the AO made a reference u/s. 92CA to the TPO for determination of the ALP of the assessee's international transaction with its AE. 7. The assessee has rendered to its AE software development services amounting to Rs. 17,07,19,114. As required under section 92D of the Act read with Rule 10D of Income-tax Rule, 1962 (the Rules), it had maintained the relevant documentation (TP study) and completed the ALP of the software development services rendered, using the transactional net margin method (TNMM) as the most appropriate method with a profit le....
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....r section 234B. 10. Aggrieved, the assessee preferred an appeal before the CIT(Appeals). Partly convinced with the arguments of the assessee, the CIT(Appeals) has excluded 13 comparables out of following 20 comparables adopted by the TPO:- Sl.No. Name of the company OP/TC % 1. Avani Cimcon Technologies 25.62 2. Bodhtree Consulting Ltd. 18.72 3. Celestial Labs Ltd., 87.94 4. e-zest Solutions Ltd. 29.81 5. Flextronics (Aricent) 7.86 6. iGate Global Solutions Ltd. 13.99 7. Infosys 40.37 8. KALS Information Systems Ltd (Seg) 41.94 9. LGS Global Ltd. 27.52 10. Mindtree Ltd. (seg) 16.41 11. Persistent Systems Ltd. 20.31 12. Quintegra Solution Ltd. 21.74 13. R Systems International Ltd (seg) 15.30 14. R S Software (India) Ltd 7.41 15. Sasken Communication Technologies Ltd (seg) 7.58 16. Tata Elxsi (seg) 18.97 17. Thirdware Solution Ltd. 19.35 18. Wipro Ltd. (Seg) 28.45 19. Softsol India Ltd. 17.89 20. Lucid Software Ltd. 16.50 AVERAGE 23.65 11. Aggrieved, the revenue is in appeal b....
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....es incorrectly adopted as comparables by the TPO as per the contention of the assessee. 7.0 Avani Cincom Technologies Ltd. 7.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. 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 ....
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....(supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Trilogy case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Trilogy case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Trilogy 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 Trilogy 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 automatic....
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.... the earlier year and hence the findings rendered by the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in other cases like Trilogy E-Business Software India Pvt. Ltd. (supra) are applicable to the year under consideration as well. 7.5 Per contra, the learned Departmental Representative supported the order of the TPO/DRP for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1 We have heard both parties and perused and carefully 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. Non-furnishing 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 substantia....
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....pany is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that - " ..... As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, 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 adjustments, the TPO has rendered this company as not qualifying for comparability. We therefore 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 servi....
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....s year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by coordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Trilogy E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed. 10. KALS Information Systems Ltd. 10.1 This is a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company 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 resp....
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....La-Vision' and b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details culled out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed ou....
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....d to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In vi....
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.... (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO's own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative suppo....
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....ssee as it performs a variety of functions under software development and services segment namely - a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telecordia Technologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore this company cannot be considered as a comparable to the assessee in the case on hand. (iii) Tata Elxsi Ltd. is predominantly engaged in product designing services and is not purely a software development service provider. In the Annual Report of this company the description of the segment 'software development services' relates to design services and are not to software services provided by the assessee. (iv) Tata Elxsi Ltd. invests substantial funds in research an....
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....his company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES norm....
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.... of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed. 17. Persistent Systems Ltd. 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be t....
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.... justification in taking a contrary view. Accordingly, we confirm the order of the CIT(A) who has rightly excluded these comparables from the final set of comparables. 16. So far as Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Sasken Communication Technologies Ltd. are concerned, it has been argued that these comparables were excluded by the CIT(Appeals) having applied the turnover filter. The turnover of these companies are more than 10 times the turnover of the assessee. This proposition of law has been laid down by the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. in IT(TP)A No. 04/Bang/2012, copy of which is placed on record. 17. The ld. DR, however, submitted that the turnover filter should not be applied as it cannot be criteria for exclusion of these comparables. 18. Having carefully examined the order of the Tribunal and the turnover of these comparables, we find that the turnover of these comparables is certainly 10 times more than the assessee. The Tribunal has been taking a consistent view that turnover filter will apply while selecting comparables in order to determine the ALP of the international transactions. We, however....