TaxTMI 
TaxTMI 
2017 (1) TMI 1572
X X X X Extracts X X X X
X X X X Extracts X X X X
.... thereto, the Senior Manager, Taxation of the assessee company appeared and filed the details called for. 2.1 A reference was made to the Transfer Pricing Officer - II, Chennai for determining the arms length price in respect of assessee's transaction with its associate enterprises. The TPO-II, Chennai, vide his order dated 26.10.2010, had proposed an adjustment of Rs..1,10,82,70,000/- to the price charged by the assessee for software maintenance and enabled back office operations rendered to its Associated Enterprises situated outside India. Hence, the total income of the assessee was accordingly adjusted upwardly Rs..110,82,70,000/- in accordance with the provisions of section 92C(4) of the Act. 2.2 The Assessing Officer passed draft assessment order under section 143(3) r.w.s.144C of the Act on 31.12.2010 incorporating the adjustment proposed by the TPO alongwith the following additions: (i) An adjustment to 'arms length price' to the extent of Rs..1,10,82,70,000/- with reference to Transfer Pricing Officer's (TPO) order in respect of international transaction dealt by the assessee with its AE. (ii) Recomputation of deductions under section 10A of the Act. (iii) R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2 are general in nature and no specific adjudication is called for and hence, the same are dismissed. 3.2 Ground No. 32 is regarding charging of interest under section 234B and 234D of the Act. The levy of interest is mandatory and consequential and hence the grounds are dismissed. 3.3 Ground No. 33 is regarding the initiation of penalty proceedings under section 271(1)(c) of the Act. The challenge to initiation of penalty proceedings is premature, hence this ground is also dismissed. 3.4 Ground No. 23 to 26 is with regard to recomputation of deduction under section 10A of the Act. 3.5 Ground No. 27 to 31 is with regard to disallowance of expenditure under section 14A by attributing the same towards earning of dividend income. 3.6 Ground No. 3 to 19 is with regard to transfer pricing issue and other miscellaneous grounds relating to transfer pricing issue are raised in ground No. 20 to 22. 4. As per order under section 92CA of the Act dated 26.10.2010, the TPO having rejected the CUP methodology for transactions with Citibank entities, he adopted an entity wide TNMM for benchmarking the international transactions and arrived at an operating profit margin of the assessee at 11....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arch for suitable comparables is based on the key word "Computer Software". Step Description No of Companies Resulted No of Companies Eliminated 1 No of companies resulted by the key word "Computer Software" 801 2 The companies for which the data is available for the FY 2006-06 477 324 3 The companies which have service income 403 74 4 The companies whose turnover is more than Rs. 1 crore 302 101 5 The companies whose service income is more than 75% of the revenues 292 10 6 The companies whose export revenues are more than 25% of the revenues 168 124 7 The companies whose employee cost is greater than 25% of the revenues 132 36 8 Related Party Transactions> 25% of the revenues 96 68 9 Balance 28 The balance companies have been examined further as follows. In some of the companies, the RPT information, segmental information, onsite revenues information and other information relating to functionality is not available. The same were asked under section 133(6) from the companies by the Bangalore TP Office. Out of these, 28 companies have been proposed as comparables based on the information received from the companies.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 28 comparables is 27.96% as against the operating profit (on operating cost) of 11.47%. Therefore, the assessee was requested to show-cause why the difference between the Arm's Length profit and profit arising out of the international transactions should not be added back. After considering the submissions of the assessee, the TPO finally concluded the transfer pricing analysis with 26 companies (after accepting the contention of the assessee on 2 comparable companies) and arrived at the ALP to be at 25.44% and adjusted the differential percentage of 14.05% (25.44% - 11.39%) to the returned income proposing an adjustment of INR 110.827 crores. The adjustment made by the TPO was affirmed by the DRP vide its order dated 28.09.2011 under section 144C(5) of the Act. 5. The assessee carried the matter in appeal before the Hon'ble Madras High Court with regard to the information/documents that was collected by the TPO for determination of arms' length price using powers under section 133(6) of the Act since the information were not put to the assessee. Accordingly, the Hon'ble Madras High Court in WP Nos. 23564 and 24976 of 2011 and MP Nos. 1 of 2011 dated 15.11.2011 remitted the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....17 Mindtree Ltd 16.90% 18 Persistent Systems Ltd 24.52% 19 Quintegra Solutions Ltd 12.56% 20 R S Software (India) Ltd 13.47% 21 R Systems International Ltd (Seg.) 15.07% 22 Sasken Communication Technologies Ltd (Seg.) 22.16% 23 SIP Technologies & Exports Ltd 13.90% 24 Tata Elxsi Ltd (Seg.) 26.51% 25 Thirdware Solutions Ltd 25.12% 26 Wipro Ltd (Seg.) 33.65% 27 Applabs Technologies Pvt. Ltd. 14.05% 28 Binary Semantics Ltd. 12.33% 29 Chakkilam Infotech Ltd. 6.35% 30 Globsyn Infotech 14.33% 31 Maveric Systems Ltd. 27.34% 32 Neilsoft Ltd. 4.74% 33 Scientific-Atlanta Technology India Pvt. Ltd. 16.29% 34 Vision Comptech Integrators Ltd. 16.12% Weighted Average 22.73% 5.3 Accordingly, the TPO/AO as well as the ld. DRP have made an upwards adjustment to the assessee's international transactions in the nature of provision of software services amount to Rs..57,05,68,292/-. The ld. Counsel for the assessee has strongly contended with regard to software services provided to Citi group entities that the authorities below have went in wrong in rejecting comparable uncontrolled price (CUP) method as the most appropria....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... order unless there was a strong reason. As per DRP, unless the transactions were so intertwined and associated that it was difficult to disentangle them, transactional net margin method, where profit of the entity was compared with other comparables, could not be used. According to the ld. DR, no such case was made out by the TPO for the assessment year 2008-09 and moreover, the assessee was able to demonstrate that there were comparables available to determine the ALP of these transactions under the CUP method. It was for these reasons that, the ld. DRP opined for the assessment year 2008-09 that the TPO should have adopted CUP for the transactions relating to provision of software development services to the Citigroup entities and accordingly held that the CUP method is most appropriate method. However, for the assessment year under consideration, the assessee has not provided the total volume of transactions with unrelated parties, both on site and off shore. Moreover, as per TP documents, complete financial data for the financial year April 01, 2006 to March 31, 2007 was not available in most of the cases. Over and above multiple year data cannot be adopted by the assessee wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a software product by name "DXchange" and it was also submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT in ITA No.7821/Mum/ 2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cimcon cannot be considered as comparable to the assessee who was rendering software development services only. Moreover, in the case of Novell Software Development (India) P. Ltd. v. DCIT in ITA No. 1287/Bang/2011 dated 31.03.2016 for the assessment year 2007-08, the Bangalore Bench of the Tribunal has also decided to reject Avani Cimcon as comparable by observing as under: "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....03.2016 as well as LSI Research (India) P. Ltd. in ITA No. 1048/Bang/2011 and pleaded that Accel Transmatic should be rejected as comparable as taken by the TPO. We have considered the submissions of both the parties. With regard to this company viz. Accel Transmatic, the objection of the assessee is that this company is not a pure software development service company. It was further submitted that in the decision of the Mumbai Benches of the Tribunal in the case of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP has accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act. Further, the ld. Counsel for assessee has strongly contended that this company is earning super profits and such companies should be rejected while arriving at arm's length price. It was the submission of the ld. Counsel that 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 and not the primary business of this company is software development services as indicated in the annual report for FY 06-07. Per contra, the ld. DR has submitted that the Celestial Bio Labs is into software development relating to bio IT vertical. The TPO has observed that the company is into software services. Celestial Labs has been providing customized enterprise solutions, bio informatics services to health and life science sector, like gene sequence comparison and analysis, prediction modelling, design and development of drug molecules and development of industrial enzymes. Further, the company is having very low profits.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company, the same cannot be considered as a comparable company. Per contra, the ld. DR has submitted that as per the website of the E-Zest Solutions, it has been mentioned as under: "We leverage our domain expertise, business consulting skills and technology competence to provide bespoke/custom solutions to our customers for gaining sustainable edge over competition. The company caters to diverse industry verticals, financial services manufacturing, travel, human resources etc. In their enterprise transformation business process optimization, technology implementation, work flow design and optimization." Therefore, the TPO has observed that the company is predominantly into software development services and hence functionally comparable and this company is catering to financial services sector. We have considered rival submissions. Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It was submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Servic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e year ended March 31, 2007, it is evident that "Establishment expenses" (Rs..2,935,065) grouping contains all the employee related salary and expenses. Accordingly, the assessee has submitted that Ishir Infotech should not be considered as a comparable as it does not satisfy the employee cost filter adopted by the TPO. However, from the website of Ishir Infotech, the TPO has observed that "our software development and outsourcing services offer complete product life cycle solutions as an extension to our clients engineering team. We accelerate the creation of software products, reduce product marketing time and assist in making schedules more predictable". Considering these functions, Ishir Infotech was taken to be a comparable. Before us, the ld. Counsel for the assessee has objected to the inclusion of Ishir Infotech as a comparable, since that company fails employee's cost filter of 25% revenue. According to the learned AR, the Ishir InfoTech employee cost as a percentage of revenue is only 3.96%. The learned DR however objected to the exclusion of this company from the list of comparables. On a careful perusal of the material on record, the TPO has rejected the plea of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., as per the data taken from Capital Line data base, the TPO has noted that 95.69% of the revenue of the company is from software development, he has taken this company as a comparable. Before us, the primary plea raised by the ld. Counsel for the assessee to assail the inclusion of the aforesaid company from the list of comparables is that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the ld. AR is that the aforesaid concern is engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT services segment. As per the discussion in para 13 at page 43 of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern'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 softwa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services and accordingly, we direct to exclude the same for the list of comparables. 8.7 Vis-à-vis Lucid Software Ltd., according to the assessee, this company is not functionally comparable because the company into sale of software products. Further, it was submitted before the TPO that the company had amortized product development expenses amounting to Rs..1866703/- during the year. On perusal of the Capital line data base, the TPO has noticed that predominantly the company is catering into software development and services sector. After considering the fact, the TPO has observed that amortization would....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment 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." Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 200809, we direct the TPO to exclude this company from the list of comparables as it is functionally different; (being engaged in software product development) fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le in the public domain relates to period ended 31st December, 2006. The use of December, 2006 financial statement is against the Indian Income Tax Act. Moreover, the company is engaged in development of software products such as Indus (r) Lending Solutions and ECnet (r) Supply Chain Execution and therefore, he has submitted that this company has to be excluded from the list of comparables as it is functionally different from the assessee. However, with regard to the details of the company, TPO has found the same from the Prowess database. Since this company is functionally different, engaged in development of software products, we direct to exclude from the list of comparables. 8.10 With regard Thirdware Solutions Ltd, no detail is emanating from the order of the TPO. Since this company is functionally different viz., trading in software products and derives revenue from licensing of software products, this company cannot be included as comparable. Turnover filter 9. We further find from the TPO's order that he has selected 28 comparables and applied a lower turnover filter of Rs..1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an imp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....indings of the Tribunal are extracted as under: "20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. Turnover Rs.. 1 Flextronics Software Systems Ltd. 848.66 crores 2 iGate Global Solutions Ltd. 747.27 crores 3 Mindtree Ltd. 590.39 crores 4 Persistent Systems Ltd. 293.74 crores 5 Sasken Communication Technologies Ltd. 343.57 crores 6 Tata Elxsi L....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 2006-07 relevant to the assessment year 2007-08 is required to be considered in view of the provisions of Rule 10B(4) and moreover, multiple year data cannot be adopted by the assessee without giving valid reason. Thus, the ground raised by the assessee is rejected. 14. In ground No. 22, the assessee has contended that the authorities below have erred in not allowing the 5% benefit under the proviso to section 92C(2) of the Act. The TPO/AO is directed to work out the ALP of the assessee in accordance with the directions given above and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment is required to be made to the reported value of the assessee's transaction with its AE. Accordingly, we remit the issue for de novo consideration. 15. Against the draft assessment order under section 143(3) r.w.s. 144C(1) of the Act dated 31.12.2010, the assessee preferred an appeal before the ld. DRP by raising various issues including corporate tax matters. 16. With regard exclusion of expenses incurred in foreign exchange from total turnover, the Assessing Officer has exclu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Assessing Officer has failed to exclude the export proceeds, which have not been realized in time, both from export turnover as well as from total turnover. In determination of total turnover, the Assessing Officer has failed to exclude the export proceeds, which have not been realized in time, both from export turnover as well as total turnover. By relying on various case law, the assessee has pleaded that the export proceeds not realized to the tune of Rs..8,47,41,795/-, which have been reduced from the export turnover, should also be reduced from the total turnover of the assessee company. However, the ld. DRP has held that the objection of the assessee is devoid of merit and finds no need for interference in the action of the Assessing Officer to exclude export proceeds which have not been realized in time from total turnover and confirmed the order of the Assessing Officer. 17.1 Before us, by reiterating the submissions as made before the authorities below, the ld. Counsel for the assessee has submitted that the export proceeds which have not been realized in time should be excluded from both export turnover as well as total turnover. On the other hand, the ld. DR supported ....