TaxTMI 
TaxTMI 
2016 (4) TMI 1304
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....ppeals) - IV has erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. Passing the Orders in the manner passed by them. The Orders being bad in law are liable to be quashed. b. passing the order without demonstrating that appellant had motive of tax evasion. c. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law. d. adopting a flawed process for issuing notices u/s. 133(6) and relying on the same without providing complete information or an opportunity to cross examine the companies concerned. GROUNDS ON COMPARABLES AND REJECTION OF TP ANALYSIS OF THE APPELLANT 4. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. computing the arm's length price based on the data for the Financial Year 2007-08 of ....
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.... the Assessing Officer and as confirmed by the CIT(A), to the extent prejudicial to the appellant, being not correct is to be quashed and the figures as determined and returned by the appellant being correct are to be accepted. b. Interest under section 234B and 234D be deleted. The appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeals according to law. The appellant prays accordingly." 3. The grounds raised by the revenue in its appeal are as under:-- "1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. 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., iGate Global Solutions ....
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....hat of the Assessing Officer be restored. 14. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal." 4. At the outset, it was submitted by the ld. AR of assessee that as per Tribunal's order rendered in the case of Kodiak Networks India Pvt. Ltd. v. DCIT in IT(TP)A No. 1540/Bang/2012 dated 05.06.2015 for the same assessment year (copy available at pages 236 to 290 of PB), the Tribunal has decided similar issue under similar facts in favour of the assessee, by following various other Tribunal's orders and it was held by the Tribunal in that case that out of same 20 comparables considered by the TPO/AO in that case as in the present case, 12 comparables noted in para No. 25 of that Tribunal's order are to be excluded. It was further submitted that after these 12 comparables are excluded in the present case, the average arm's length margin on the basis of remaining 8 comparables comes to 14.35% and after adjustment of working capital margin, it goes further down to 13.86% as against margin reported by assessee of 9.60% being operating profit/operating cost of the assesse....
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.... was pointed out by the Bench that as per the Tribunal's order in the case of Kodiak Networks India Pvt. Ltd. v. DCIT (supra), when this comparable i.e., KALS Information Systems Ltd. has to be excluded, then the percentage of margin of that comparable is not relevant and the same is of academic interest only. In reply, the ld. DR of Revenue had nothing to say. 10. Regarding ground Nos. 11 & 12 of the Revenue's appeal, it was submitted by the ld. DR of Revenue that lease line charges of Rs. 6,41,835 and foreign exchange loss of Rs. 45,97,211 attributable to delivery of the product or software outside India should not be excluded from total turnover for the purpose of computing deduction u/s. 10A of the I.T. Act. 11. In the rejoinder, it was submitted by the ld. AR of assessee that as per judgment of Hon'ble High Court of Karnataka rendered in the case of CIT v. Tata Elxsi Ltd., 349 ITR 98 (Karn), total turnover is sum total of export turnover and domestic turnover and therefore, if an item is excluded from export turnover, total turnover also goes down by that amount as a consequence. 12. We have considered the rival submissions. We find that in the present cas....
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.... the assessee is providing purely software development services to its AE. In its Transfer Price study analysis the assessee has bench marked its services by adopting the "Transactional Net Margin Method" (TNMM) as most appropriate method with OP/TC as Profit Level Indicator (PLI) and selected 17 comparables. The assessee has computed arithmetic mean of the comparables at 14.76% in comparison to the assessee's operating margin on cost at 10.73% and accordingly the assessee claimed that margin of the assessee is within 5% range of the Arms'' Length Price (AL)/arithmetic mean of the comparables. The TPO rejected 16 out of 17 companies selected by t he assessee and carried out fresh search by applying the filter as under: * Companies whose data is not available for FY 2007-08 were excluded. * Companies whose software development service income is less than Rs. 1 crore were excluded. * Companies whose Software Development Service revenue is less than 75% of the total operating revenues were excluded. * Companies having more than 25% related party transactions (sales as well as expenditure combined) of the operating revenues were excluded.....
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..... Mindtech (India) Ltd., v. DCIT in IT(TP) No. 70/Ban/2014 (AY-2009-10) dated 21.8.2014 this Tribunal has held that M/s. Bodhtree Ltd. cannot be considered as comparables. Thus, the ld. AR has submitted that after excluding these 13 companies from the list of comparables the mean margin of remaining companies selected by the TPO comes to 13.72% and after adjustment of working capital it comes to 13.50% in comparison the operating martin of the assessee at 11.30% which is within the range of ñ5% and therefore no adjustment is called for. 20. On the other hand, the ld. DR submitted that TPO took segmental data in case of M/s. KALS Information Systems Ltd. (Seg.), M/s. Tata Elxsi Ltd. (Seg.) and M/s. Wipro Ltd. (Seg.), therefore, the objection raised by the assessee that these companies are functionally not comparable with the assessee is not sustainable. As regard M/s. Quintegra Solutions Ltd., the ld. DR submitted that it is assessee's own comparable included in the TP study report and therefore, the assessee cannot ask for rejection of the said company as comparable. He has relied upon the orders of authorities below. In rejoinder, the ld. AR has submitted that ....
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....section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions: i) Trilogy E-Business Software India Pvt. Ltd. V DCIT (ITA No. 1054/Bang/2011) ii) Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No. 7821/Mum/2011) It was also submitted that this company has been held to be functionally not comparable to the assessee by a co-ordinate bench of this Tribunal ....
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....dia Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Triology E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In vi....
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...., 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 company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected IT(TP)A 1380/Bang/2012 Page 7 of 34 on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from th....
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....the assessee in this regard, at this stage, ought to be rejected. 8.4.1 We have heard both parties and perused and carefully considered the material on record. Admittedly, there is no disputing the fact that the assessee had never objected to the inclusion of this company in the set of comparables in earlier proceedings before the TPO and the DRP. It is also seen that even in the grounds of appeal raised before us, the assessee has not raised any grounds challenging the inclusion of this company in the list of comparables. In fact in the assessee's own case for Assessment Year 2007-08, this company was selected as a comparable by the assessee itself. We, therefore, find no merit in the contentions raised by the learned Authorised Representative of the assessee in respect of this company at this stage of proceedings. 8.4.2 It is also seen from the submissions made before us that the assessee has only pointed out fluctuating margins in the results of this company over the years. This, in itself, cannot be reason enough to establish differences in functional profile or any clinching factual reason warranting the exclusion of this company from the list of comparab....
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.... for Assessment Year 2007-08 for software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. in ITA No. 112/Bang/2011, CSR India Pvt. Ltd. in IT (TP) A No. 1119/Bang/2011 and by the ITAT, Delhi Bench in the case of Transwitch India Pvt. Ltd. in ITA No. 6083/Del/2010. (v) The facts pertaining to this company have not changed from Assessment Year 2007-08 to Assessment Year 2008-09 and therefore this company cannot be considered for the purpose of comparability in the instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and therefore there cannot be an assumption that it would continue to be applicable for the period under consideration i.e. Assessment Year 2008-09. 9.4.1 We have heard both the parties and....
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.... 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 service providers for Assessment Year 2007-08 by the co-ordinate bench of this Tribunal in the assessee's own case. This company has been held to be different from a software development company in the decision of the Tribunal in the case of Bind v....
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....ght 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 coordinate 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 coordinate 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 IT(TP)A 1380/Bang/2012 Page 9 of 34 functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the coordinate 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 ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of ....
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....ent; (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 from 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 company in the list of comparable companies. 11.4 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. (sup....
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....ents for comparability purposes and for computing the margins, which is in contradiction to the TPO's own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 ....
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....he Annual Report of this company the description of the segment ' software development services' relates to design services and are not to software services provided by the assessee. (iv) Tata Elxsi Ltd. invests substantial funds in research and development activities which have resulted in the 'Embedded Product Design Services Segment' of the company to create a portfolio of reusable software components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons; Tata Elxsi Ltd. is clearly functionally different/dis-similar from the assessee and therefore ought to be omitted from the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the stand of the TPO in including this company in the list of comparables. 13.4 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development ....
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....ervices', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P.) Ltd. v. Dy. CIT (International Taxation) [2013] 32 taxmann.com 21 (Hyd. - Trib.)....
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....l Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain Communications (P.) Ltd. v. ITO [2009] 118 ITD [2008] 23 SOT 385 (Pune), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given s....
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....e Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e., Lucid software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT (TP) A No. 845/Bang/2011), LG Soft India (P.) Ltd. (supra), CSR India (P.) Ltd. (supra); the ITAT, Mumbai Bench in the case of Telcordia Technologies India (P.) Ltd. (supra) and the Delhi ITAT in t....
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....ftware Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telcordia Technologies India (P.) Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account 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 ....
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....and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under: "Quintegra has taken various measures to preserve its intellectual 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 Solution Ltd. being functionally different and possessing its own intangibles/IPRs, it canno....
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....n the ground that as per the company's reply to the notice under section 133(6) of the Act, the company has categorized itself as a pure software developer and therefore included this company as a comparable as the assessee was also a provider of software development services. Before us, in addition to the plea that the company was functionally different, the assessee submitted that this company was excluded from the list of comparables by the order of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (ITA No. 845/Bang./2011) on the ground that the 'Related Party Transactions ('RPT') is in excess of 15%. The learned Authorised Representative submitted that for the current period under consideration, the RPT is 18.3% and therefore this company requires to be omitted from the list of comparables. 19.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables as this company was a pure software development service provider like the assessee. 19.3 We have heard both parties and perused and carefully considered the material on r....
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....ibunal that 12 companies are required to be excluded from the list of comparables for determining the ALP. No difference in facts could be pointed out by the ld. DR of Revenue in the present case and in that case i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra). In that case also, the issue in dispute was regarding TP adjustment in respect of software development activity of the assessee as in the present case. The 20 comparables selected by the TPO in the present case and in that case are the same. The reasoning given by the tribunal in that case for exclusion of 12 comparables is this that these companies are functionally dis-similar and different. In the present case, the function of the assessee company is claimed to be similar to that company i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra) and the learned DR of the revenue could not point out any difference in the function of the present assessee company and that company i.e. Kodiak Networks India Pvt. Ltd. v. DCIT (supra). Therefore, by respectfully following that tribunal order, we hold that in the present case also, the same 12 comparables are to be excluded for working out the ALP, as was held by the Tribunal in t....
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....n the case of Kodiak Networks India Pvt. Ltd. v. DCIT (supra). 19. Regarding ground No. 3 of Revenue's appeal, we find that even without including this comparable i.e., VGL Softech Ltd., no TP adjustment is justified as per our decision above by following the coordinate Bench's decision of the Tribunal and even if this comparable is included, this comparable has operating margin on cost of 12.39% and therefore, it will further reduce the arm's length margin computed at 13.86% on the basis of 8 comparables. Since inclusion or non-inclusion of this comparable i.e., M/s. VGL Softech Ltd. is not making any impact on the final decision because in both the situations, the arm's length margin remains within +/- 5% margin of the assessee's reported margin, we hold that this ground No. 3 of Revenue's appeal is of academic interest and therefore, we do not give any finding on this ground. 20. Regarding other 3 comparables as per grounds Nos. 4, 5 & 6 of the Revenue's appeal i.e., M/s. Avani Cincom Technologies Ltd., M/s. Celestial Biolabs Ltd., and KALS Information Systems Ltd.; we find that these 3 comparables are to be excluded as per decision of the coord....
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....86 6 iGate Global Solution Ltd. 13.99 7 Infosys 40.37 8 Kals Information Systems Ltd (Seg) 41.94 9 LGS Global Ltd. 27.52 10 Mindtree Ltd (seg) 16.41 11 Persistent Systems Ltd. 20.31 12 Quintegra Solution Ltd. 21.74 13 R Systems International (Seg) 15.30 14 RS Software (India) Ltd. 7.41 15 Sasken CommunicationTEchnologies Ltd. (Seg) 7.58 16 Tata Elxsi (Seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd. 16.50 AVERAGE 23.65 Document 2 S.No Particulars Rs. 1 Rendering of software development and related services 26,72,70,160 2 Rendering of customer support services 3 Rendering of sales and marketing support services 45 4 Import of capital goods 2,93,14,632 3,88,437 35,91,861 5 Reimbursement of expenses received 91,99,469 Document 3 23456 Flextronics Software Systems Ltd S.No. Name of the Company 1 Avani Cimcon Technologies Ltd Bodhtree Ltd Celestial Biolabs Ltd E-Zest Solutions Ltd iGate Global Solutions Lt....