TaxTMI 
TaxTMI 
2018 (2) TMI 40
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....tion of deduction u/s 10A without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub-clause (4) of Explanation 2 below Sub-section (8) of Section 10A and the total turnover has not been defined in this Section. 3. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Flextronics Ltd., M/s iGate Global Solutions Ltd., M/s Infosys Technologies Ltd., M/s Mindtree Consulting Ltd., M/s Persistent Systems Ltd., M/s Sasken Communication Technologies Ltd. M/s Tata Elxsi Ltd. and M/s Wipro Ltd. in Software development segment as comparables. 4. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that M/s Celestial Biolabs Ltd in Software segment should be excluded from the list of comparables because of abnormal high profit margin, without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from ....
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....(Kar). The decision of Hon'ble jurisdictional High Court is a binding precedent for the Bangalore Bench of the Tribunal. Hence, this issue is decided against the revenue and in favour of assessee. 6. Ground No.3 is regarding exclusion of certain companies by the CIT (Appeals) on the ground of size and turnover. 7. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. The ld. DR has submitted that the turnover and size of the company are not relevant factors for inclusion or exclusion of the companies in the set of comparables. She has relied upon the decision of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) P. Ltd. Vs. DCIT 376 ITR 183 (Del). 8. On the other hand, the learned Authorised Representative has submitted that the assessee is not pressing the turnover and size of the company as a relevant factor for deciding the functional comparability however, the assessee is seeking exclusion of certain companies on the ground of functional dissimilarities as raised in the cross objections filed by the assessee. 9. Having considered the riv....
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....l cost and in case the employee cost is less than 25% of the total cost then it is a clear indication of outsourcing the business activities and therefore the said entity is having a different business model not similar to the general prevailing in the industry and the tested party. Therefore, we find the impugned order of CIT (Appeals) on this issue is erroneous and liable to be set aside. Hence the Ground No.5 is decided in favour of the revenue. 14. Ground Nos.6 & 7 are regarding exclusion of certain companies on the ground of diminishing revenue filter and different financial year. 15. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. The TPO applied the diminishing revenue filter as well as different financial year for rejecting certain companies. The CIT (Appeals) has reversed the order of the TPO and held that these companies cannot be excluded on these grounds. As regards the different financial year, we find that the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) P. Ltd. Vs. DCIT (supra) has held that if the financial data can reasona....
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....in the software development services however, from the Annual Report of this company it clear that it has been reported that this company is providing the services of diversified nature. The co-ordinate Bench of this Tribunal in the case of Triology e-Business Software India Pvt. Ltd. Vs. DCIT (supra) has considered the functional comparability of this company. We will deal with this issue while considering the cross objection of the assessee. 20. Ground No.9 is regarding Kals Info Systems Ltd.. This ground is common to the grounds raised by the assessee in Cross Objection therefore, we will deal with this issue along with other grounds of the cross objection of the assessee. 21. Ground Nos.10 & 11 are general in nature and does not require any specific adjudication. 22. In the cross objection, the assessee has raised the following grounds : 1) " That the learnedCommissioner of Income Tax (Appeals('CIT(A)') erred in upholding the rejection of the Respondent's TP documentation on the basis that the data used in the computation of the arm's length price was not reliable.(corresponding to original cross objection 1) 2) That the learned CIT(A) erred in uphold....
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....ales less than 25%, whereas this comparable should have been excluded on the grounds that it fails the Appellant's filter of related party transactions to sales less than 10%. (corresponding to original cross objection 8) 9) The Commissioner of Income Tax (Appeals) erred in law and on facts by excluding Avani Cimcon Technologies Ltd. only on the ground that its segmental details were not available, whereas this comparable should also have been excluded on further grounds that it was functionally dissimilar being a product company which was not verifiable merely on the basis of 133(6) information supplied by Avani Cimcon TechnologiesLtd. to the transfer pricing officer.(corresponding to original cross objection 9) 10) The Commissioner of Income Tax (Appeals) has rightly excluded Celestial Biolabs Ltd. on the groundsof functional dissimilarity and abnormally high margins and the same should be upheld.(corresponding to original cross objection 9) 11) The Commissioner of Income Tax (Appeals) erred in law and on facts by excluding Infosys Technologies Ltd. only on the ground of application of turnover filter, whereas this comparable should also have been exclu....
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....development services, sale of user licenses for software applications and also from sale of investments. (corresponding to original cross objection 9) 17) The Commissioner of Income Tax (Appeals) erred in law and on facts by excluding Wipro Ltd. only on the ground of application of turnover filter, whereas this comparable should also have been excluded on further grounds that it was functionally dissimilar being a product development company and also on the ground that on the basis of relative turnover this was not a comparable.(corresponding to original cross objection 9) 18) The Commissioner of Income Tax (Appeals) erred in law and on facts by upholding the inclusion of Lucid Software Ltd. on the grounds that it was a software development company and fails appellant's filter of advertising, marketing and distribution expenses to sales less than 3%, whereas this comparable should have been excluded on the grounds that it was functionally dissimilar being a product company focusing on Advanced non - destructive Testing ('NDT') Technologies. (corresponding to original cross objection 9) 19) The Commissioner of Income Tax (Appeals) erred in upholding the ad....
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....cordingly, we are of the opinion that the decision of the coordinate bench in the case of 3DPLM Software Solutions Ltd (supra), can be applied vis-a-vis assessee's arguments for exclusion of some of the companies. 24. At para 7.3 of the order in the case of 3DPLM Software Solutions Ltd (supra) it was held by this Tribunal as under with regard to comparability of Avani Cincom Technologies Ltd : 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. Nonfurnishing 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 substantial merit in the contention of the learned Authorised Representative that this comp....
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....sed in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bioinformatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company 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 Triology EBusiness 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. ....
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....fective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this 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 co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology 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 Triology E-Business Software India Pvt. Lt....
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....ase on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellelctual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does 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 ....
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.... para 10.1 to 10.4 of the order which is reproduced hereunder : 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 respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 10.2 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 for the following reasons :- (i) This company is functionally different from the software activity of the assessee as it is into software products. (ii) This company has been held to be functionally not comparable to software se....
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....om 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 out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ....
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....ccount for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the 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 com....
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....l property. Accordingly, some of the products developed by the company ............... have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks." (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the....
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....reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee 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 s....
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....e 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. 31. Coming to Thirdware Solutions Ltd (seg), findings of the Tribunal in the above mentioned case of 3DPLM Software Solutions Ltd(supra),appear at para nos.15.1 to 15.3 which is reproduced hereunder : 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of Rs. 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that:- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not....
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....ntended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons:- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (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 informat....
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...., and this is reproduced hereunder : 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. Ltd. [ IT(TP)A No.1119/Bang/2011 ] and by the Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (ITA ....
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....Year 2008- 09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 34. As for Bodhtree Consulting Ltd, comparability of the said company was an issue which came up before the Mumbai Bench of the Tribunal in the case of Nethawk Networks India P. Ltd (supra). The decision was also for the very same assessment year and the segment considered was again software development services. Comparability of Bodhtree Consulting Ltd, was dealt with at paras 21 to 23 of the said order, which is reproduced herebelow : Bodhtree Consulting Limited 21.On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too. 22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no....
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....d Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application........." 23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO. 14 Accordingly, we dismiss the argument of the Ld DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean. 35. In view of the above decisions, we are of the opinion that assessee has to succeed in its pleading for exclusion of the following companies : 1. Avani cincom Technologies Ltd, 2. Bodhtree Consulting Ltd, 3. Celestial Biolabs, 4. E-Zest Solutions Ltd, 5. Infosys 6. Kals Information Systems Ltd (seg), 7. Persistent Systems Ltd, 8. Quintegra Solution Ltd, 9. Tata Elxsi (seg), 10. Thirdware Solution Ltd, 11. Wipro Ltd (seg) and 12. Lucid Software Ltd. ....