TaxTMI 
TaxTMI 
2015 (11) TMI 1674
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....Pte, Singapore, filed its return of income for Assessment Year 2009-10 on 30.9.2009 declaring total income of Rs. 7,14,36,670. The case was taken up for scrutiny. In the period under consideration, the assessee had reported the following international transactions :- Sl. No. Type of Transactions Paid (Rs.) Received (Rs.) 1. Purchase of Fixed Assets-Testing Equipment. 16957440 2. Software R&D and IT 1478729220 3. Marketing support services. 23211099 4. Reimbursement of Expenses. 123402721 Total 140360161 1501970319 Total International transactions Rs. 1,64,23,30,480 2.2 In view of the above international transactions entered into by the assessee, the Assessing Officer ('A.O') made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of these international transactions after obtaining the necessary approval from the CIT -I, Bangalore. The TPO vide order under Section 92CA of the Act dt.29.1.2013 proposed a T.P. Adjustment of Rs. 24,15,96,448 to the ALP of the assessee's international transactions in respect of the....
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....ing TNMM as the MAM, the TPO rejected the assessee's T.P. Study for various reasons set out in the show cause notice issued and embarked on a fresh search using the data bases 'Prowess' and 'Capitaline'. After considering the objections of the assessee, the TPO selected the final set of 11 comparables which are as under :- Sl. No. Name of the Comparable Sales (Rs.) Cost (Rs.) Margin 1. Kals Information Systems Ltd. 2,14,04,686 1,87,93,813 13.89% 2. Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3. Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4. R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5. Tata Elxsi Ltd. (Seg.) 3,78,43,03,000 3,14,63,15,000 20.28% 6. Sasken Communication Technologies Ltd. (Seg.) 4,05,31,20,000 3,18,69,97,000 27.91% 7. Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8. Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.81% 9. Mindtree Ltd. (Seg.) 7,93,22,79,326 5,74,06,73,058 5.52% 10. L & T Infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11. Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% Average Mean 2....
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....of Companies Rejection Reason 1 Bodhtree Limited - Engaged in development of proprietary software which is not similar to the Appellant - Abnormally fluctuating margins for the period from financial year (FY) 2004-05 to FY 2010-11. 2 Infosys Limited - Has high sales turnover as compared to the Appellant - Revenue is driven by brand value as against that of the Appellant 3 Larsen and Toubro Infotech Limited - Engaged in product development, infrastructure management services along with software development services and hence no segmental information is available. - Has high sales turnover as compared to the Appellant 4 Mindtree Limited - Has high sales turnover as compared to the Appellant 5 Persistent Systems Limited - Engaged in product development and has proprietary products licensed to customers which is not similar to the Appellant - Has high sales turnover as compared to the Appellant 6 Sasken Communications Technologies Limited - Engaged in high end software products and services which is not similar to the Appellant. - Has high sales turnover as compared to the Appellant - Develops and owns several patents and earns returns from it. 7 Tata Elxsi Limited....
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....re consideration and adjudication by the Bench :- i) Grounds at S.No.5 pertaining to the grant of risk adjustment. ii) Grounds No. 2(b) related to the exclusion of individual companies selected by the TPO. iii) Ground No.6 : Addl. Ground raised in respect of exclusion of Kals Information Systems Ltd. iv) Ground No.7 : Addl. Ground for grant of depreciation adjustment. 5.3 Consequently, since all the other grounds, at S.Nos.1, 2, 2(a), (c), 3 and 4 relating to T.P. Issues are not being pressed, the same are rendered infructuous and accordingly dismissed. 5.4 In the course of proceedings before us, the learned Authorised Representative submitted that the facts of the case on hand are similar, inter alia, to the case of M/s. Airbus India Operations Pvt. Ltd. in IT(TP) A No.35/Bang/2014 for Assessment Year 2009-10 in which the co-ordinate bench of this Tribunal vide its order dt.10.10.2014 has rendered its ruling. It was submitted that the set of comparables chosen by the TPO in the cited case (supra) is exactly the same as those selected in the case on hand and therefore the assessee places reliance on the decisions in the cited case (supra). 5.5 At the outset, it needs to be e....
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....ails in its website and therefore being functionally dis-similar from the assessee in the case on hand, it ought to be excluded from the list of comparables to the assessee. In support of this proposition, the learned Authorised Representative for the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. in IT(TP)A No.35/Bang/2014 dt.10.10.2014. 7.2.1 We have heard the rival contentions of both parties and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the issue of comparability of this company i.e. KALS vis-à-vis software development service providers has been considered by the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. for Assessment Year 2009-10 (supra) and at paras 21 & 22 thereof it has been held that this company is not comparable to a software development service provider as it was into development of software products, etc. The relevant portion of the co-ordinate bench; order at paras 21 and 22 thereof is extracted hereund....
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....opment of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." Following the aforesaid decision of the Tribunal, we hold that K....
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....; wherein it has been held that this company being a software product company cannot be considered as comparable to a assessee that is a software development service provider and has held as under at paras 15 & 16 thereof :- " 15. BODHTREE CONSULTING LTD.: This company is listed at Sl.No.3 in the final list of comparables chosen by the TPO which is set out in para-4 of this order. The comparability of this company with a software development services company such as the Assessee for AY 09-10 was considered by this Tribunal in the case of M/s. Cisco Systems (India) Pvt.Ltd., IT (TP)A No.271/Bang/2014 for AY 09-10 order dated 14.8.2014. This Tribunal held as follows: "26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench ....
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....sessee brought to the notice of the bench that the following 7 companies ought to be excluded from the list of comparables as their turnovers are in excess of the upper turnover filter of Rs. 200 Crores and therefore cannot be comparable to the assessee whose turnover is approx. Rs. 150 Crores :- 1) Tata Elxsi Ltd. 2) Sasken Communication Technologies Ltd. 3) Persistent Systems Ltd. 4) Zylog Systems Ltd. 5) Larsen & Toubro Infotech Ltd. 6) Infosys Technologies Ltd. 7) Mindtree Ltd. In support of its contention, the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. for Assessment Year 2009-10 (supra). 9.2.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement cited and placed reliance upon by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. for Assessment Year 2009-10 (supra) has excluded the above 7 companies from the list of comparables on the ground that this turnover is in excess of the upper turnover filter of Rs. 200 Crores, holding as under a....
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.... comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- "Size criteria in terms of Sales, Assets or Number of Employees: The size 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 siz....
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....xcluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 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/B....
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....te method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (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 thi....
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....ly:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties 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 fro....
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....e of Trilogy EBusiness Software India Pvt.Ltd. (supra) and Assessee's case for AY 06-07, we hold that the aforesaid companies (listed at S.No.5 to 11 of the final list of comparable companies set out in the chart given para-4 of this order) should be excluded from the list of comparable companies as the turnover of these companies are more than Rs. 200 Crores compared to the turnover of the Assessee which is only Rs. 31.83 Crores. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 19. The next submission of the learned Counsel for the Assessee was that though, Infosys Technologies Ltd., & Tata Elxsi Ltd. (seg.) have to be excluded by applying the Turnover filter, they are also additionally functionally not comparable as held by this Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra) and Cisco Systems (India) (supra). We have considered his submission and we find that in the case of Cisco Systems (India) (supra), this tribunal has also held that the aforesaid two companies are also not functionally comparable to a company such as the Assessee rendering purely software development services. The fo....
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....t 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 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 compan....
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....rovided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of th....
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....the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable." 20. Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid two companies from the list of comparable companies for the purpose of computation of ALP." 9.2.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. for Assessment Year 2009-10 (supra) and taking note o....
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....ound, the assessee denies itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B of the Act, if any, while giving effect to this order. 12. Additional Ground on Depreciation Adjustment. 12.1 The assessee has submitted that the depreciation cost as a percentage of the cost of the assessee during the financial year is significantly different from that of the comparable companies. Therefore, in order to achieve reliable comparability, the margins of the comparable companies should be adjusted for differences in depreciation cost of the comparable companies and the tested party. In support of the above contention the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.com Pvt. Ltd. in ITA....
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....ular facts of the case. Hence, the additional ground raised by the assessee is as much as issue of fact as it is of principle. 19.5 Before us, the assessee has not been able to adduce any reason as to why this issue was not raised before the authorities below. It gives credence to the view of the learned Departmental Representative that this claim is only an afterthought, pursuant to the learned CIT (Appeals) confirming the adjustments proposed by the TPO. 19.6 Besides this, the adjustment for depreciation, sought for by the assessee, does not appear to be tenable even on merits. It has been stated in the additional grounds raised that while the depreciation of the assessee is 25% of its gross block, it is 10% of the gross block for the comparables. It is interesting to note that the assessee has compared the depreciation as a percentage of the gross block of the individual cases and not as a percentage to operating cost. 19.7 No case has been made out by the assessee that the difference in depreciation is due to any reason like capacity utilization, etc. The difference in depreciation could be due to many reasons as different companies have their own accounting problems in the ....