TaxTMI 
TaxTMI 
2015 (7) TMI 1249
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee filed its return of income on 30.9.2009 declaring income of Rs. 47,88,62,424 under the normal provision of the Act and taxable income of Rs. 16,80,79,423 under MAT provisions. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny. 2.2 In the period under consideration, the assessee had reported the following international transactions :- Provision of Software Development Services Rs. 258,21,78,120. Provision of Order Gathering Services. Rs. 14,34,45,438 In view of the above international transactions entered into by the assessee, the Assessing Officer 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 necessary approval from the CIT-III, Bangalore. The TPO vide order under Section 92CA of the Act dt.11.1.2013 proposed a T.P. Adjustment of Rs. 28,11,31,440 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment under Section 143(3) r.w.s. 144C of the Act dt.14.3.2013 whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch arose on account of acquisition of the semiconductor business of Philips Electronics India Limited and Conexant Systems, Incunder a slump sale arrangement by executing a Business Transfer Agreement. Grounds of appeal relating to Transfer Pricing adjustment 6. The learned CIT(A) has erred in confirming the addition made by the AO/TPO to the total income of the Appellant on account of adjustment in the arm's length price of the income from provision of software development services transaction entered into by the Appellant with its Associated Enterprises ("AEs"); 7. The learned CIT(A) has erred in not considering the Appellant's contentions as per the grounds of appeal raised before him and providing grounds in his order in an incoherent manner. 8. The learned CIT(A) has erred in not passing a reasoned order on the contentions raised by the appellant regarding the final set of comparables to be used in determining the arm's length price of the impugned international transactions undertaken by the Appellant. 9. The learned CIT(A) haserred in upholding the action of TPO in determining the arm's length margin/price using only financial yea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed in profit and loss account. c) Goldstone Technologies Limited-TPO rejected as functionally different. However annual report proves otherwise d) KPIT Cummins Infosystems Limited-TPO rejected by stating that it fails 25% RPT filter. However the position is not same when consolidated results are given due consideration e) LGS Global Limited &Quintegra Solutions Limited-TPO rejected by stating that it fails 75% export earnings filter which is factually incorrect 14. The learned TPO had erred by wrongly computing the operating margins of some of the comparable companies identified in the Transfer Pricing Order under Section 92 CA(3) of the Act. Other Grounds On the facts and in the circumstances of the case and in law: 15. The learned CIT(A) erred in upholding the action of the learned AO in levying interest of Rs. 4,79,55,132 and Rs. 2,54,446 under section 234B and 234C of the Act respectively, by holding that such levy is mandatory, without properly adjudicating on the contentions raised by the Appellant in this regard; 16. The learned CIT(A) erred in upholding the action of the learned AO in initiating penalt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment of the learned DR that if depreciation is allowed on Goodwill than it would result in refunding taxes voluntarily paid by the Assessee. In our view such objections are not germane to deciding the question whether additional ground sought to be raised should be admitted for adjudication. In any event tax has to be levied and collected in accordance with law. Tax which is not due in law which was paid under a mistake cannot be said to be tax levied and collected in accordance with law. As we have already seen the law on the question of allowing depreciation on Goodwill was in a fluid state. With the decision of the Hon'ble Supreme Court in the case of Smifs Securities (supra) which decision was available only after the directions of the DRP were given, the law on the issue became clear. The learned DR's attempt to distinguish the facts of the Assessee's case and that of Smifs Securities Ltd. (supra) on the basis that in the case of the Assessee it was a slump sale whereas in the case of Smifs Securities Ltd.(supra) it was a case of amalgamation, in our view, cannot be accepted. The question is regarding the existence of goodwill and not the manner in which the Goodwill in questi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned Authorised Representative placed reliance on the decisions of various co-ordinate benches of the ITAT, Bangalore in the following cases :- i. Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011 dt.23.11.2012) ii. Assessee's own case in IT(TP)A No.1560/Bang/2012 dt.5.3.2015 for A.Y. 2008-09. iii. CISCO Systems Services BE India Branch in IT(TP)A No.271/Bang/2014 dt.17.10.2014 for A.Y. 2009-10. 6.2 In the light of the above observations, we now briefly examine the grounds of appeal raised at S.Nos. 6 to 14 raised on T.P. issues. 6.3.1 Ground Nos. 6 and 7 are general in nature and since these grounds have not been urged before us, the same are rendered infructuous and accordingly dismissed. 6.3.2 Ground Nos.8 and 10 to 14 were raised, inter alia, in respect of various aspects of comparability analysis adopted by the T.P.O. The learned Authorised Representative, however, submitted that these grounds would be pressed to the limited extent of the inclusion of certain companies as comparables by the TPO and the exclusion of certain other companies. The assessee in this appeal had also raised the issue of inclusion of certain comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ost, the assessee held its international transactions in the software development services segment to be at arm's length. 7.2 The TPO, while accepting TNMM as the MAM, as adopted by the assessee, rejected the assessee's T.P. Study for various reasons and embarked on a fresh search, using the data bases, 'Prowess' and 'Capitaline.' After issuing a show cause notice to the assessee proposing to adopt a fresh set of comparable companies and considering the objections of the assessee, the TPO selected the final list of 11 comparables, which are as under :- Sl.No. Name of the Comparable Sales (in Rs.) Cost (in Rs.) Margin % 1. KalsInformationSystems 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. BodhtreeConsulting 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. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'s set of comparables for the reason that it is functionally different from the assessee; since it is a product development company having significant inventories, and has significant number of products as per details published on its website; besides being engaged in providing training. It was also submitted that the Pune Bench of the ITAT in the case of Bind View India P. Ltd. in ITA No.1386/PN/10 had held that this company is into development of software products and is not comparable to providers of software development services, as is the assessee in the case on hand. The TPO, however, rejected the objections put forth by the assessee and included this company in his final set of comparables. 9.2 In the appeal 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 as it is into software products, unlike the assessee who is only a software service provider to its AEs. It was also submitted that this company being into development of software products and also being engaged in providing training was rejected as a comparable to a software service ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, 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 Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sentative contended that this company is not functionally comparable to the assessee in the case on hand as its activities are diversified. It commands substantial brand value, owns IPRs and is a market leader in software development activities, whereas the assessee is merely a software service provider which does not possess any brand value or own any IPRs or intangibles. In support of the assessee's arguments, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench in the case of Cisco Systems Services BE., India Branch (supra) for Assessment Year 2009-10 wherein this company was excluded from the final list of comparables, as it was held to be functionally different from an assessee who is merely a provider of software services. 10.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final set of comparables. 10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B. V.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Tribunal in the case of Cisco Systems Services BE, India Branch (supra), we direct the Assessing Officer/TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider. 11. Tata Elxsi Ltd. 11.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several counts, like functional dis-similarity, as it is a product company, has significant R&D activity, brand value, size, etc. The TPO however rejected the assessee's objections and included this company in the set of comparables. 11.2 In appellate proceedings before us, the learned Authorised Representative submitted that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment; namely product design, innovation design engineering and visual computing labs, as is reflected in the Annual Report of the company and is not a pure software development service provider like the assessee. The learned Authorised Representative also....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided 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. ..... 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd CISCO Systems (India) Pvt. Ltd., in IT(TP)A No.271/Bang/2014 dt.14.8.2014, both for Assessment Year 2009-10, wherein this company was excluded from the list of comparables. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables. 12.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparable companies. 12.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited by the ld. A.R. We find that this company has been excluded from the set of comparables for software development service companies in both the aforesaid decisions cited by the assessee. In M/s. Cisco Systems Services BE., India Branch (supra) in the relevant portion of the order at para 20 thereof it has been held as under :- "20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ranch (supra) for Assessment Year 2009-10, we direct the TPO to exclude this company which is factually shown to be a software product company, and not a software development service provider, from the list of comparables in the case on hand where the assessee is a provider of software development services. 13. Persistent Systems Ltd. 13.1 This company was selected by the TPO as a comparable in spite of the assessee's objections that this company being engaged in software product designing and analysis service and owning intangible assets is functionally different from the assessee who is rendering purely software development services. It was also contended that segmental results were not available. The TPO rejected the assessee's objections on the ground that it is mainly a software development services company. The TPO therefore included this company in the list of comparables as it qualified the functionality criterion. 13.2 In proceedings before us, the assessee objected to the inclusion of this company as a comparable on the ground that it being engaged in software development services and analytic services, and owning its own intangible assets, it is not a pu....