TaxTMI 
TaxTMI 
TaxTMI 
2015 (1) TMI 1360
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....tion undertaken by the assessee during the relevant previous year and if these grievances are addressed, the other grounds on the TP could be left for adjudication at a later stage, when found required. Accordingly, with regard to the issues raised by the assessee on its international transactions, we are adjudicating those relating to the selection of comparables by the Transfer Pricing Officer (TPO). 4. Facts apropos are that the assessee a software development company had filed its return for the impugned assessment year declaring income of Rs. 11,95,59,950/- after claiming deduction of Rs. 6,36,87,980/- u/s 10A of the Income tax Act, 1961 ( in short 'The Act') Act. Since assessee had international transaction with its associated enterprises it had filed along with its return of income an audit report, as stipulated u/s 92E of the Act. AO made a reference to the TPO for determining the ALP of the international transactions undertaken by the assessee. In the TP report given by the TPO on 12-10-2010 he has mentioned that the assessee is a part of one i2 group a leading provider of supply chain management software. The profile of the assessee as captured by the TPO at para-2 and 2....
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....474857 Operating profit (OP) 129328266 353504 52036426 181718196 OP as % of OC 12.54% 5.27% 328.21% 17.30% It is to be noted that the TP adjustment finally recommended by the TPO was confined to software development and services segment only. In so far as marketing services support was concerned, the turnover being less than Rs. 1.00 Crore, no adverse inference was drawn by the TPO. 5. In its TP study, assessee had selected 17 comparables from capital line and Prowess data base, considering itself to be a software development company. In addition to this, during the course of proceedings before the TPO, assessee has suggested six additional comparables. Thus, altogether the comparable companies selected by the assessee for justifying its profit margin were 23. Assessee had adopted the TNM Method for working out the margin on cost and this was not disputed by the TPO. However, out of 23 comparables companies considered by the assessee, TPO rejected 4 applying diminishing revenue filter, 7 based on onsite revenue filter and 4 as functionally dissimilar. This left 8 comparables out of the list considered by the assessee in the TP study. Along with these 8 companies....
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....). However, the DRP did not disturb the comparables considered by the TPO. In the result, the final assessment was completed making a TP addition of Rs. 16,41,97,667/-. 7. Now before us, learned AR assailing the selection of comparables done by the learned TPO, submitted that in the case of NXP Semiconductors India Pvt.Ltd.,Vs ACIT adjudicated by this Tribunal on 14- 11-2014 (in IT(TP)A No.1174(B)/2011) similar set of 26 comparables were considered by the TPO. According to him, but for 12 comparables all others were directed to be excluded by the Tribunal for functional dissimilarities. Learned AR placed on record a copy of the said order of the Tribunal. Further, as per the learned AR the said M/s NXP Semiconductors India Pvt .Ltd., (supra) was also doing software development services to its associated enterprises. According to the learned AR the profile of the assessee as well as M/s NXP Semiconductors India Pvt.Ltd., compared favourably. The turnover of the said M/s NXP Semiconductors India Pvt.Ltd. was Rs. 110.00 Crores whereas that of the assessee was Rs. 123Crores and, as per the learned AR both companies therefore, fell within the same band of turnover. According to him, M/....
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....f the opinion that such order of the Tribunal can be considered as a good precedent for adjudicating on the selection of comparables in the case of assessee also. 11. M/s Accel Transmatic Ltd, M/s Avani Cimcon Tech. Ltd., M/s Celestial Labs Ltd.and M/s KALS Information Systems Ltd, were 4 of the companies among the comparables considered in the case of M/s NXP Semiconductors India Pvt .Ltd. (Supra). Co-ordinate Bench at para-18 to 19 of its order dated 14-11-2014 held as under; 18. As far as comparable companies listed at Sl.No.1,2,3 and 12 of the final list of comparable companies chosen by the TPO viz., M/S.Accel Transmatic Limited (seg.), Avani Cincom Technologies Ltd., Celestial labs Limited and KALS Infosystems Ltd., are concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supra) are one and the same. This fact would be clear from the fact that th....
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....e to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it w....
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....sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pr....
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....ata for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical rese....
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....providing of I T enabled services and that the said company is into development 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 compar....
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....pra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 20. Respectfully following the decision of the Tribunal in similar set of facts, these companies are directed to be excluded from the list of comparables." 19. Respecfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP Therefore, we direct the exclusion of the above 4 companies from the list of comparables. 12. M/s E-Zest Solutions Ltd.M/s Persistent System Ltd. M/s Quintegra Solutions Ltd ad M/s Thirdware Solutions Ltd(Seg.) were also considered by the Tribunal in the case of M/s NXP Semiconductors India Pvt. Ltd.,(Supra). Paras-26 to 27 of the order in the case of M/s NXP Semicondutctors India Pvt.Ltd. is produced here under; As far as compara....
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....the decision of the coordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions 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 carefullyconsidered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO servi....
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....ent 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 Pvt. 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 factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand." "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 dev....
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....he principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. 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 omitted from the set of comparables for the year under consideration. It is ordered accordingly. 18. Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is func....
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....e assessee for the period under consideration. 18.3.1 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 development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in thecase of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principl....
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....ncern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's ITServices Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of so....
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.... application software segment of the said concern is not comparable to the assessee's segment of IT services. 20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." 29. Respecfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid c....
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....ion of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 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 operating 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. 12.4 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 dissimilar 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 2007-0....
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.... appropriate comparison. 13.4.2 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 co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (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 such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the coordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 14.0 (6) Tata Elxsi Ltd. 14.1 This company was 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 several counts like, functional dis-similarity, significant R&D activity, brand value, ....
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....nnual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007- 08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly." 25. Respecfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. Accordingly, we direct the exclusion of the above three companies from the list of comparables. 15. M/s Ishir Infotech Ltd, and M/s Lucid Software Ltd were directed to be excluded by the Tribunal in the order mentioned above, vide paras-20-22 & 23, reproduced here under; "20. As far as comparable companies listed at Sl.No.11 & 14 of the final list of comparable companies chosen by the TPO viz., M/S.Ishir Infotech Ltd. And Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of software develo....
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..../s NXP Semiconductors India Pvt.Ltd.(Supra) held it as a good comparable, but certain modification to the operating results of the said company were required. This is mentioned at para-22 - 23 of its order, which is reproduced hereunder; 22. As far as comparable companies listed at Sl.No.16 of the final list of comparable companies chosen by the TPO viz., M/S.Megasoft Limited is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supra) are one and the same. This fact would be clear from the fact that the very same 26 companies were chosen as comparable in the case of the Assessee as well as in the case of First Advantage Offshore Services Pvt.Ltd.(supra). In coming to the aforesaid conclusion, the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd.(supra) followed the decision rendered in the case of Trilogy E-Business Software India P....
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....comparable satisfied TPO's filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its software service segment. The product segment has employee cost of 27.65% whereas the software service segment has employee cost of 50%. Similarly, the profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both the segments are substantially different and therefore comparison at entity level is without basis and would vitiate the comparability (submissions on page 381 to 383 of the PB-I). It was further submitted that Megasoft Limited has provided seg....
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....gment, based on the comparables after excluding the above mentioned companies and proceed in accordance with law. For working out the working capital adjustment, the AO/TPO shall consider only the finally retained comparables. Ordered accordingly. 18. In the result, ground no.1 to 7 of the assessee are treated as partly allowed. 19. Now we take up the Corporate tax issues raised by the assessee in its ground nos.8 & 9. 20. Vide its ground no.8 grievance raised by the assessee is that foreign travel expenditure of Rs. 11,32,13,112/- was excluded from the export turnover, while computing the deduction u/s 10A of the IT Act. Assessee has also raised a grievance that telecommunication expenditure of Rs. 2,57,58,869/- though excluded from the export turnover was not excluded from the total turnover while computing such deduction. 21. Vis-à-vis the expenditure of foreign travel of Rs. 11,32,13,112/-, we are of the opinion that the definition of "export turnover" given in clause-iv of Explanation to Section 10A of the Act, does not give room to the interpretation sought by the assessee. Assessee has no case that such expenditure was not incurred in foreign exchange for providin....