TaxTMI 
TaxTMI 
2016 (10) TMI 1190
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2. The Honourable DRP and the learned AO/TPO have erred in law and on facts in rejecting, without appropriate reasons, the detailed benchmarking analysis conducted by the Appellant and embarking on a fresh search for comparables. 3. The Honorable DRP and the learned AO/TPO erred in fact and in law in determining the Arm's Length Price ("ALP") by adopting the financial data for a single year (i.e. the financial year 2007-08) of the comparables as against multiple year data considered by the Appellant. 4. The Honorable DRP and the learned AO/TPO erred in fact and in law in using selective information, which was not available in public domain, obtained under section 133(6) of the Income tax Act, 1961 ("the Act") and identifying additional comparables based on the same. 5. The Honourable DRP/Leanred AO has erred in law and on facts in upholding the ALP of 21.48 percent as proposed by the TPO, for the software development services rendered by the Appellant. 6. The Honorable DRP and the learned AO/TPO has erred in determining the ALP based on companies, which are not comparable to the Appellant due to various facto....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng interest under section 234B of the Act.' 3. Ground Nos.1 to 9 are regarding Transfer Pricing Adjustment and selection of comparables by the Transfer Pricing Officer ('TPO'). 4. The profile of the assessee, financial results as well as international transactions are recorded by the TPO in paras 2.1 & 2.2 as under : 2.1 Profile of the taxpayer M/s. Tektronix Engineering Development (India) Pvt. Ltd., is a subsidiary of M/s. Tektronix Inc., USA. The taxpayer provides Tektronix group affiliates with engineering and software development services with a mark-up. 2.2 Financial Results of the Company The financials of the taxpayer for the F.Y. 2007-08 as per P & L a/c are as under: Operating Revenues* Rs. 280068145 Operating Expenses** Rs. 244939626 Operating Profit Rs. 35128519 Op Profit on sales % Rs. 12.54% Op Profit on cost % 14.34% *Excluding other income, interest income **Excluding bad debts written off and finance cost/interest 2.3 International transactions As per the Transfer Pricing (TP) document furnished for the A.Y.2008-09, the taxpayer company has entere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rability of all these 13 companies have been examined by the co-ordinate bench of this Tribunal vide order dt.26.6.2015 in the case of Broadcom Communications Technologies (P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 1587 (Bang.) of 2012] and therefore these 13 companies are functionally not comparable with the assessee. 8. On the other hand, the ld. DR has submitted that out of these comparable companies challenged by the assessee, 2 comparables namely Bodhtree Consulting Ltd. & Lucid Software Ltd. were also part of the set of comparables for the Assessment Year 2006-07. The ld. DR has submitted that in assessee's own case for the Assessment Year 2006-07, the Tribunal vide its order dt.20.2.2015 in Tektronix Engg. Devt. India (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 223/69 SOT 1 (URO) (Bang. - Trib.) has not disturbed these two companies as the comparability of these companies was not challenged by the assessee therefore these two companies were accepted as comparable to the assessee. The ld. DR has thus contended that when these companies were accepted as functionally comparable for the Assessment Year 2006-07 and there is no material change in the business profile and activ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company as a comparable. 5.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that a co-ordinate bench of this Tribunal on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for A.Y. 2008-09 had held that this company be omitted from the set of comparables as it was functionally dis-similar from a company which only provides software development services to its AEs, like the assessee in the case on hand. At paras 7.6.1 and 7.6.2 of its order, the co-ordinate bench held as under :- "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. Non-furnishing t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tribunal in the case of NXP Semi-Conductors India P. Ltd. (supra) for A.Y.2008-09 and the decision of the Mumbai Bench of the ITAT in the case of Nethawk Networks India Pvt. Ltd. (supra) for A.Y. 2008-09 wherein Bodhtree Consulting Ltd., was excluded from the list of comparable companies on account of being functionally different from a provider software development services to its AE as it has software products and a hybrid service business model. 6.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparable companies. 6.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements relied upon by the assessee. We find that this company; i.e. Bodhtree Consulting Ltd. has been excluded from the list of comparables for providers software development services in the judicial decisions cited by the assessee (supra at para 6.1.2 of this order). The relevant portion at para 15 of the order in the case of NXP Semi-conductors India (P.) Ltd. (supra) is extracted hereunder :- "15. Bodhtree Consulting Ltd. 15.1 T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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 FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly." The relevant portion of the order in the case of CISCO Systems (India) Pvt. Ltd. (supra) at para 26.1 is extracted hereunder :- "26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly." 6.3.2 In view of the above mentioned decision of the co-ordinate bench of this Tribunal in the case of NXP Semi-Conductors India P. Ltd. (supra) for A.Y.2008-09. We direct the Assessing Officer/TPO to omit this company from the set of comparables to be applied to the assessee. 7. Celestial Biolabs Ltd. (S. No. 3 in the chart) 7.1 The comparable was selected by the TPO as a comparable inspite of the assessee's objection to its inclusion in the list of comparables for the reason that it is functionally different form the assessee and as it fails the employee cost filter. 7.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable as this company is into bio-informatics, software product/services and in this context placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for A.Y. 2008-09. 7.3 Per contra, the learned Departmental Representative supported the order of the TPO in including this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng 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. Ltd. in ITA No. 1054/Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed." 7.4.2 Following the above decision of the co-ordinate bench of this Tribunal on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for A.Y. 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand. 8. e-Zest Solutions Ltd. (S. No. 4 in the chart) 8.1 This company was selected by the TPO as a comparable inspite of the assessee's objections to its inclusion as a comparable on the ground that it was functionally different from the assessee. The TPO rejected the assessee's objections on the ground that as per the information received under Section 133(6) of the Act this company is engaged in software development services and qualifies all the filters applied. 8.2 Before us, the learned Authorised Repr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed." 8.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand. 9. Infosys Technologies Ltd. (S. No. 7 in the chart). 9.1 This company was selected as a comparable by the TPO in spite of the assessee's objections to its inclusion as a comparable on the grounds of its scale of operations and brand attributable profit margins. The TPO, however, brushed aside the assessee's objections on the ground that turnover and brand aspects were not materially relevant in the software development services segment. 9.2 Before us, the learned Authorised Representative contended that this company ought to be omitted from the list of comparables as it is not functionally comparable to the assessee since it commands substantial brand value, owns IPR's and is a market leader in softw....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able selected by the TPO inspite of the assessee's objections to its inclusion in the list of comparables on the grounds that it is functionally different and that the segment details were inconsistent with respect to software services revenue and software products revenue. The TPO, however, rejected the assessee's objections and included this company in the list of comparables by relying on the information received in reply to notice under Section 133(6) of the Act. 10.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables as it is functionally different, being into software products, whereas the assessee in the case on hand is merely into provision of software development services. It was submitted that the rejection of this company as a comparable to providers of software development services has been upheld by a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra). 10.3 Per contra, the learned Departmental Representative supported the TPO's action in including this company in the final list of comparables. 10.4.1 We have heard ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s selected as a comparable by the TPO. Before the DRP, the assessee objected to the inclusion of this company in the list of comparables but the DRP retained this company as a comparable on the ground that it is a pure software development services provider and does not have any revenue's by way of sale of products/licenses. 11.2 Before us also, the assessee objected to the inclusion of this company as a comparable on the grounds that it is into software product development and is therefore functionally different from the assessee in the case on hand. In this context, the learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has omitted this company form the list of comparables on the ground that it is into development of software products and therefore is functionally different from provider of software development services. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable. 11.4.1 We have heard the rival contentions and perused and carefu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on hand. 12. Persistent Systems Ltd. (S. No. 12 in chart). 12.1 This company was selected as a comparable by the TPO over-ruling the objections of the assessee that this company, being into development of software products engaged in product design and analytic services is functionally different from the assessee who is only a provider of software development services. The TPO rejected the assessee's objections on the ground that this company is mainly, a software development service company, and as per the details filed/obtained under Section 133(6) of the Act 96% of its revenues are from software development services. 12.2 Before us, the assessee objected to the inclusion of this company in the list of comparables on the ground that it is functionally different, being engaged in software designing and analytic services and is therefore not comparable to a provider of software development service provider, as is the assessee in the case on hand. The learned Authorised Representative submitted that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company, bei....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee's objections holding that this company qualifies all the filters applied. 13.2 Before us, the assessee objected to the inclusion of this company as a comparable on the ground that it is functionally different as it is engaged in product engineering services and not in software development services. It was also submitted that this company was engaged in developing proprietary software products and has IPR's and is functionally different from a provider of software development services, as is the assessee in the case on hand. In support of its contentions, the assessee relied on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 where it was held that this company was to be omitted from the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the orders of the authorities in including this company in the list of comparables. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied on by the assessee. We find that the co-ordinate ben....
X X X X Extracts X X X X
X X X X Extracts X X X X
....008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand. 14. Softsol India Ltd. (S. No. 17 in chart) 14.1 This company was selected as a comparable by the TPO inspite of the assessee's objections that it was functionally different and dis-similar from the assessee. The TPO rejected the assessee's objections on the ground that as per the company's reply to the information called for under Section 133(6) of the Act, the company has categorised itself as a pure software developer and therefore included this company as a comparable to the assessee in the case on hand who was also a provider of software development services. 14.2 Before us, the learned Authorised Representative submitted that this company ought to be excluded from the list of comparables as a co-ordinate bench of this Tribunal in its order in 3DPLM Software Solutions Ltd. (supra) has held that this company is to be excluded as a comparable as it has related party transactions (RPT) of 18.3%; thereby failing the RPT filter of 15%. 14 3 Per contra, the learned Departmental Representative supported the order of the TPO....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngineering and visual computing labs, as is reflected in the Annual Report of the company and therefore it is not purely a provider of software development services like the assessee. The learned Authorised Representative also submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) has held that this company is to be omitted from the list of comparables for providers of software development services, like the assessee in the case on hand. 15.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparable companies. 15.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables to a provider of software development holding as under at paras 13.4.1 and 13.4.2 of its order extracted hereunder :- "13.4.1 We have heard b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ound that its turnover was in excess of Rs. 500 Crores. 16.2 Before us, the assessee 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, trading in software, giving licenses for use of software and that segmental details are not available. It was also submitted that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) in its order for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables for providers of software development services. 16.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables. 16.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied upon. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 had held that since this company is engaged in product development and earns revenue from sale of licenses it is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany in the final list of comparables. 17.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncements cited and relied upon. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company is to be omitted from the list of comparables for providers of software development services for the following reasons as laid out at paras 12.4.1 and 12.4.2 of its order which is extracted hereunder :- "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 fl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....details. On verification of the record, the Assessing Officer found that the assessee has not furnished the details of the loss whether this income is capital or revenue in nature. Finally the Assessing Officer made disallowance of Rs. 2,20,50,750 on account of foreign exchange loss by treating the same as capital loss. The details of the loss has been reproduced by the Assessing Officer in para 8.2 as under : "8.2 The Assessee Company has not been able to establish that the following : a. Advance to Holding Company Rs. 1,50,46,655. b. Advance from Holding Company Rs. 18,65,755 c. Export Earners Foreign Currency Account. Rs. 51,38,309 Rs. 2,20,50,715" 13. Before us, the ld. AR has submitted that this is a revenue loss arising from foreign exchange fluctuation of receivables. He has referred to the details of the loss at pages 217 & 253 of the paper book and submitted that the advance to the holding company is pertaining to the payment made to the employees under Employees Stock Option Scheme which was receivable by the assessee from the holding company. Therefore it is a revenue expenditure and foreign exchange loss on this account is an a....