TaxTMI 
TaxTMI 
2017 (1) TMI 1518
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....Panel (Hon'ble DRP') is bad in law. 2. Transfer Pricing - Adjustment made on Software Development Services Segment The learned AO/TPO has erred in law and on facts in making transfer adjustment of Rs. 10,343,472 to the international transaction of provision of Software Development Services by the Assessee to AE on the basis of various presumptions and surmises: 1. The learned AO / TPO has erred in law and on facts in rejecting following . comparables selected by the Assessee for Software Development Services Segment on the basis of various presumptions and surmises: a) Birla Technologies Ltd. b) CG- Yak Software & Exports Ltd. c) Computech International Ltd. d) Goldstone Technologies Ltd . e) Sagarsoft (India) Ltd. ll. The learned AO/TPO has erred In law and on facts in selecting following additional comparables for Software Development Services Segment without carrying out a methodical and scientific search of comparables and on the basis of various presumptions and surmises: a) Persistent Systems & Solutions Ltd b) LGS Global Ltd. c) Sonata Software Ltd d) Igate Global Solutions Ltd. ....
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....lication of plus-minus 5% variation while computing arm's length price under section 92C. 5. Corporate Tax - Ad-hoc Disallowance of Expenditure. 1. The learned AO has erred in law and on facts in ad-hoc disallowance of ¼ of the expenditure of PSE unit." 3. Although the assessee has raised multiple Grounds of appeal, but the substantive dispute involve three issues, which we shall deal in seriatim. The appellant before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of research and development of telecommunication software and sales, marketing and customer support services. For the assessment year 2009-10, it filed a return of income declaring a total income at Rs. 44,97,156/-, which was subsequently revised to Rs. 46,21,652/-. In the ensuing assessment, it was noticed that assessee had undertaken international transactions within the meaning of section 92B of the Act with its Associated Enterprise (AE) and, therefore, reference was made to the Transfer Pricing Officer under section 92CA(1) of the Act for determination of their arm's length price. The Transfer Pricing Officer has passed ....
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....the comparable concerns identified, it was asserted by the assessee that the stated value of the transactions was at an arm's length price as per Indian Transfer Pricing Regulations. The Transfer Pricing Officer has not differed with the selection of TNMM or the PLI factor or the computation of assessee's margin. However, the Transfer Pricing Officer culled out the filters enumerated in para 5.2 of his order, and differed with the assessee on the selection of the comparable concerns. The Transfer Pricing Officer selected the following set of comparables whose average margin was determined at 23.23%:- S.No. Name of theCompany OP/TC% 1. Akshay Software Technologies Ltd. 12.48 2. Neilsoft Ltd. 8.47 3. Aztechsoft Software Tech 1.21 4. Indium Software Ltd -9.53 5. PSI Data System Ltd -3.06 6. Persistent Systems & Solutions Ltd. 30.86 7. LGS Global 21.35 8. Sonata Software Ltd. 29.51 9. Igate Global Solutions Ltd. 23.64 10. Bodhtree Consulting Ltd. 64.89 11. Genesys International Corp 58.47 12. FCS Software Solutions 40.5 Arithmatic Mean 23.23 ....
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....mparable to the margin of the assessee in its software development segment. Without prejudice, the Ld. Representative for the assessee pointed that even if the said concern was to be retained in the final set of comparables, the margin of the said concern taken by the Transfer Pricing Officer at 30.86% is wrong, inasmuch as, while computing such margin the Transfer Pricing Officer has not considered the foreign exchange loss as a part of the operating costs and that if the said correction is undertaken, the margin of the said concern will reduce to 18.31%. 3.3 On the other hand, the Ld. Departmental Representative has not disputed the factual matrix asserted by the Ld. Representative for the assessee, but vehemently pointed out that the Transfer Pricing Officer has not applied any upper turnover filter and, therefore, it would be wrong to exclude the said concern by applying turnover filter because it would mean applying the turnover filter on a selective basis. 3.4 We have carefully considered the rival submissions. The strategy and the filters applied by the Transfer Pricing Officer have been elucidated in para 5.2 of his order, which does not entail application of any uppe....
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....te justified inasmuch as the Transfer Pricing Officer has applied a filter to exclude concern where RPTs exceed 25% of total revenues. Therefore, on the basis of the aforesaid factsituation, as also the decision of the Hon'ble Delhi Bench of the Tribunal in the case of M/s. Fiserv India Pvt. Ltd. (supra), the said concern is liable to be excluded from the final set of comparable. We hold so. 5. The next plea of the assessee is for exclusion of Igate Global Solutions Ltd. from the final set of comparables. On this aspect, the plea of the assessee is that the said concern is functionally dissimilar inasmuch as its activities are in the nature of ITE services, which is quite different from rendering of pure software development services. In support of such claim, the Ld. Representative for the assessee referred to the Annual Report of the said concern, copies of which has been placed in the Paper Book at pages 38 to 52. The stand of the Revenue, as emerging from the order of the Transfer Pricing Officer, is that the said concern is comparable because it is rendering software related services. 5.1 In our considered opinion, the assessee has to succeed on this aspect. We say s....
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.... the previous year. Our attention was drawn to the fact that the operating profit / operating cost of this company jumped from 17% for F Y 2007-08 to 56% in FY 2008-09. It dipped in FY 2009-10 to 40% and in FY 2010-11 it became (-) 2% and 5% in FY 2011-12 and finally touched (-) 9% in FY 2012-13. Our attention was drawn to the fact that the Special Bench of the Tribunal, Mumbai, in the case of Maersk Global Centres (India) P. Ltd., in ITA.7466/Mum/2012, dt 07.03.2014 for AY 2008-09 had an occasion to consider the question as to whether companies having abnormal profits should be excluded as a comparable. The Special Bench took the view that it has to be shown that the high profit margin does not reflect the normal business conditions and only in such circumstances, high profit margin companies can be excluded. Our attention was drawn to the DRP's observation in its order on the issue which is as follows : " Bodhtree : The assessee has objected to selection of this entity on the basis of following objections: * The entity has fluctuating margins * The company is more of a product company rather than software service company. The Panel....
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....ess condition. 15. The learned DR placed reliance on the reason given by the DRP in its order. 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding F....
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....been placed in the Paper Book, shows that the said concern is a geospatical services and content provider, which specializes in land based technologies. It is also observed that the said concern is the exclusive reseller of Navteq data for the Enterprise space in India. The skill-sets available with the said concern include urban planners, cartographers, remote sensing scientists, etc. The fact that the said concern is an IT enabled service provider is affirmed by the decision of the Hyderabad Bench of the Tribunal in the case of M/s. Capital IQ Information Systems Pvt. Ltd. (supra), which has been rendered for assessment year 2009-10, which is also the year before us. In the case of Symphony Marketing Solutions India Pvt. Ltd.(supra) also, the said concern has been evidently accepted as an ITES provider, which is quite distinct from the tested transaction of Provision of software development services in the instant case. Considering the aforesaid fact position, in our view, inclusion of Genesys International Corporation in final set of comparables for benchmarking assessee's segment of Provision of software development services is not tenable and is hereby set-aside. Thus, on this....
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.... us and, therefore, on this count itself, in our view, the said concern deserves to be excluded from the final set of comparables. We hold so. 10.3 Apart from the aforesaid, the plea of the assessee is for inclusion of certain concerns, which according to the assessee have been wrongly excluded by the income-tax authorities while benchmarking the segment of software development services. On this aspect, the first plea of the assessee is with respect to the exclusion of Sagarsoft (I) Ltd. it is pointed out that the said concern has been excluded by the Transfer Pricing Officer on the ground that it does not comply with the export turnover filter. The Ld. Representative for the assessee pointed out with reference to the extracts from the Annual Report of the said concern that 90% of its operating revenues are by way of export earnings and, therefore, the said concern has been wrongly excluded by the Transfer Pricing Officer. 10.4 On the other hand, the Ld. CIT-DR points out that the said aspect may be verified by the Transfer Pricing Officer and a decision be taken afresh. 10.5 We have carefully considered the rival submissions and find that one of the filters applied by the....
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..... (supra) at para 22 of its order held as under:- 22. Vis-à-vis inclusion of M/s. CC -VAK Software & Exports Pvt. Ltd., which was not accepted by the TPO and DRP, we are of the opinion, by virtue of this Tribunal's Co-ordinate Bench decision in the case of M/s. Cisco systems Pvt. Ltd. vs. DCIT (ITA No.271(B)/2014 dated 14/08/2014) it has to be considered as functionally comparable to the assessee. Relevant para-27.8 of this Tribunal is re-produced hereunder; 27.8 CG-VAK Software & Exports Ltd. (D)(i) As far as this company is concerned, the TPO rejected the same by applying the 25% employee cost filter. According to the TPO, usually software development services are high-end services performed by skilled and professional employees and hence the cost of rendering such high-end services is also high as they comprise of high salaries and better welfare facilities, compared to low-end services. Therefore, the filter of employee cost of more than 25% of turnover was considered by the TPO while choosing the comparable. {ii) The submission of the Id. counsel for the assessee was that in the case of assessee, this test is satisfied. In this regard, our attention was draw....
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....ongly taken by the Transfer Pricing Officer to exclude this company based on the employee cost filter. It is pointed out that the employee costs incurred by the said concern are not separately shown in the P&L account as Employee expenses, but it has been considered as a part of software development expenses and, therefore, it would be inappropriate to reject the concern by applying employee cost filter. On this aspect of the matter, we deem it fit and proper to restore the matter to the file of Assessing Officer/Transfer Pricing Officer for the purpose of culling out appropriate facts and to thereafter decide the matter afresh. Needless to mention, the Assessing Officer/Transfer Pricing Officer shall provide a reasonable opportunity of being heard to the assessee and, thereafter, decide on this aspect afresh, as per law. Thus, on this aspect assessee succeeds for statistical purposes. 13. The last point made by the assessee in the context of software development services is for the inclusion of Goldstone Technologies Ltd., which according to the assessee has been wrongly excluded by the Transfer Pricing Officer. The Ld. Representative for the assessee pointed out that the said ....
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....rs in para 6.1 of his order and thereafter, selected the following set of comparables, whose margin was determined at 23.63%: S.No. Name of the comparable Margin 1. ICRA Techno Analytics 10.01 2. Informed Technology 23.13 3. Rev IT System 27.69 4. Nittany Outsourcing Services Pvt. Ltd. 32.22 Arithmetical Mean 23.26 Since the margin of the assessee was 12%, the Transfer Pricing Officer worked out an adjustment of Rs. 22,37,025/- to the stated value of the transactions in order to compute its arm's length price. 14.1 With respect to the aforesaid, the first plea of the assessee is that the Transfer Pricing Officer has erred including the Informed Technologies Ltd. in the final set of comparables. According to the appellant, the said concern is functionally dissimilar as it is not providing any Call Centre services. At the time of hearing the Ld. Representative for the assessee referred to pages 84 to 94 of the Paper Book, wherein is placed an extract from the Annual Report of the said concern to point out the dissimilarity in functions performed. 14.2 The Ld. CIT-DR, on the other hand, pointed out tha....
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....ear 2007-08, the said concern was included as a comparable; and, that it is not a persistently loss making concern, so to be rejected for the reason that it has incurred losses in this year. The Ld. Representative for the assessee pointed out that the said concern has been considered to be a good comparable by the Hyderabad Bench of the Tribunal in the case of M/s. Capital IQ Information Systems (India) Pvt. Ltd. in ITA No.124& 170/Hyd/ 2014 dated 31/07/2014 for assessment year 2009-10 and the following discussion is relevant:- "(a) Allsec Technologies Limited:- 23. As far as this company is concerned, its comparable nature was analysed by the coordinate Bench of the Tribunal in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), in its order dated 6.6.2014. As seen from the TPO's order on comparables selected by the tax payer, this company is rejected as it fails export sales filter which was determined at 74.45% of its service revenue. On similar reason, the coordinate Bench in the above referred case has analysed and directed the TPO to include the said comparable, by stating as under- "9.1. This case was included by the assessee in the list of compara....
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....nclude a particular case in the list of comparables, it will also modify the filter or ceiling in such filter to suit its interest. Equally, if both the sides want to exclude a case, they will modify the filter accordingly. The nutshell is that some sort of cherry-picking is done by both the sides. 9.2. The exclusion of this case has been done by increasing the limit in filter to 75% as against 25% applied by the assessee because the percentage was 74.45%. If the actual ratio in this case had been more than 75%, and the Revenue hell bent on excluding this case, then it would have resorted to increasing the ceiling in the filter to 80% or still more so as to ensure that it remains outside the limit set by it. As the ratio of 75% is not something which is scientifically proven and the export revenue of Allsec Technologies is 74.45% as against the TPO's filter of 75%, we are of the considered opinion that the same cannot be excluded for such a minuscule difference if it is otherwise comparable. It is patent that the TPO has not disputed the otherwise functional comparability of this case with that of the assessee. If we consider the case of Allsec Technologies on a criter....