TaxTMI 
TaxTMI 
2015 (7) TMI 1275
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....9;AE'). For Assessment Year 2008-09, the assessee filed its return of income declaring total income of Rs. 1,00,10,120. The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In the year under consideration, the assessee had reported the following international transactions:- (i) Provision of software services : Rs.37,61,50,003. (ii) Reimbursement of expenses (Received) : Rs. 2,26,20,160 (iii) Reimbursement of expenses (Paid) : Rs. 36,39,030. 2.2 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer (TPO') for determining the Arm's Length Price ('ALP') of these international transactions, after obtaining the approval of the CIT- III, Bangalore. The TPO vide order passed under Section 92CA of the Act dt.31.10.2011 proposed a T.P. Adjustment of Rs. 2,35,10,275 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment for Assessment Year 2008-09 under Sec....
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....T.P. Study for various reasons set out in the show cause notice issued to the assessee and embarked on a fresh search using the data bases 'Prowess' and 'Capitaline'. After considering the objections of the assessee, the TPO selected the final set of 20 comparable companies, which are as under :- Sl. No. Name of the company OP/TC % 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd. 29.81 5 Flextronics (Aricent) 7.86 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) 15.3 14 R S 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. 16.5 AVERAGE 23.65 ....
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....er risk without evaluating the business arrangement of the appellant. 5. The ld. TPO and the ld. A.O. erred in not allowing the benefit of range of +/- 5% as provided in proviso to section 92C(2) of the Act to the appellant, while determining the arm's length price. 6. On the facts and circumstances of the case, the ld. A.O. and ld. TPO erred in rejecting the T.P. documentation without appreciating the contentions, arguments, and evidentiary data put forward by the appellant during the course of the proceedings before them, and in doing so have grossly erred : 6.1 in rejecting the comparability analysis carried in the TP documentation and conducting a fresh comparability analysis for determining the arm's length price by the ld. TPO. 6.2 In adopting the arm's length mark up to be 23.65%, in respect of the international transaction pertaining to the rendering of software development services by the appellant; 6.3 in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Income- tax Act, 1961 ('the Act'), which in many instances are ....
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....cations Technologies Limited, Wipro Limited and R Systems International Limited without taking into consideration the peculiar economic circumstances surrounding their operations during the year under review; 6.12 in accepting companies having Related Party Transactions exceeding 10% such as Softsol India Limited and Infosys limited. In doing so the learned AO has disregarded the Delhi IT AT ruling in case of Sony India Pvt. Ltd. (reference ITA No.1189/Del/2005); 6.13 in upholding the actions of the learned TPO in applying the export filter for selection of software comparables. In doing so, the learned TPO erred in rejecting Aarman Software Private Limited and VMF Soft Tech Limited. 6.14 in applying the onsite filter for selection of software comparables with the use of the data obtained under section 133(6) of the Act, is not economically valid. In doing so, the learned TPO erred in rejecting companies such as Akshay Software Technologies Limited, Prithvi Information Solutions Limited, Silverline Technologies Limited, Zylog Systems Limited and VJIL Consulting Limited. 6.15 in not maintaining consistency in applying the filters of rejecting comp....
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....ed AO has further erred in ignoring the settled principle, enunciated by the jurisdictional High Court in the case of Tata Elxsi Ltd. (ITA No. 70 of 2009), dated 30th August, 2011, that for the purpose of calculation of deduction under section IOA of the Act, any expenditure reduced from export turnover, should also be reduced from total turnover. 3. Denial of IOA deduction on the VAT refund of Rs. 9,502 3.1 The learned AO has erred in treating VAT refund amounting to Rs. 9,502 as income from other sources. 3.2 The learned AO has erred in holding that VAT refund does not comprise income from business and profession and in denying IOA deduction on the same. 3.3 The learned AO has failed to give an opportunity to the assessee of being heard on the aforesaid issue. III. Erroneous double taxation of the VAT refund 1. The learned AO has erred in including the VAT refund twice in the computation of total income. This has resulted in double taxation of the VAT refund. 2. The appellant has also filed a rectification application with the AO on 8th October 2012 against the above under section 154 of the Act. IV. Interest....
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....certain companies from the TPO's list of comparables, the assessee has placed reliance on the decision of the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) and NXP Semi Conductors India (P.) Ltd. (supra). As pointed out by the learned Authorised Representative in the aforesaid decisions relied on (supra); both cases are also in respect of Assessment Year 2008-09, which is the year under consideration in the case on hand and in both the cited cases also, the TPO has characterised the assessees in both the cited cases as captive service providers; providing software development services to their AEs. We also find that the 20 comparables chosen by the TPO are the same in both the cited cases as also in the case on hand. It is also seen that various parameters of comparability are also similar; in that the TPO has adopted TNMM as the MAM in these cases, the PLI has been adopted at Operating Profit to Total Cost (OP/TC). In these circumstances as laid out above, we agree with the contentions of the learned Authorised Representative that the decisions rendered in the cited cases (supra) are applicable for considering the comparability of the companies in the ....
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....is a captive provider of software development services to its AEs. 6.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in selecting this company as a comparable to the assessee in the case on hand. 6.4.1 We have heard the rival contentions and have perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that the co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company is functionally dis-similar and different from the assessee who is a provider of software development services to its AEs and directed that this company be omitted from the list of comparables. 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 ....
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....nd services and the segmental break up is not provided. The learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in its order in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, has held that this company be omitted from the list of comparables. 7.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparables to the assessee. 7.4.1 We have heard the rival submissions and perused and carefully considered the material on record, including the judicial decisions cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had held that this company, being into bio-informatics and software products and services, is to be omitted from the list of comparables as it was functionally dis-similar and different from a captive software service provider. At paras 9.4.1 and 9.4.2 of the above order, the co-ordinate bench held as under :- "9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is tru....
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.... rejecting the assessee's objections that it was functionally different from the assessee. The TPO selected this company on the ground that as per the information furnished by this company under Section 133(6) of the Act, it is engaged in software development services and satisfies all the filters. 8.2 Before us, the learned Authorised Representative of the assessee reiterated the assessee's contention that this company be excluded from the list of comparables as it was functionally different from the assessee. It was submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', which are high end ITES normally categorised as Knowledge Process Outsourcing ('KPO') services. It is also submitted that this company has not provided segmental data in its Annual Report. It was further submitted that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to providers of software development services and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be excluded from t....
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....le by the TPO inspite of the objections of the assessee to its inclusion on grounds of size, turnover and brand attributable profit margin. The TPO was of the view that turnover and brand aspects were not materially relevant in the software development segment. 9.2 Before us, the learned Authorised Representative contended that this company is functionally different from the assessee in the case on hand as it commands substantial brand value, owns IPRs and intangibles of its own and is a market leader in software development activities, whereas the assessee is merely a captive software service provider catering to its AEs, does not possess its own IPRs or intangibles and has no brand value of its own. The learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company being functionally dis-similar and different cannot be comparable to a captive software service provider, and therefore omitted it from the list of comparables. 9.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the l....
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....oftware service provider to its AEs. The learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company being into software products is functionally dis-similar and different from captive software service providers and directed that it be excluded from the list of comparables. 10.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables to the assessee. 10.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company i.e. KALS Information Systems Ltd. being into software products is functionally different from a captive software service provider, as is the assessee in the case on hand. At para 10.4 of its order, the co-ordinate bench has held as under :- "10.4 We have heard both parties and perused and carefully considered ....
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....ftware development constitutes 96% of its revenues. 11.2 Before us, the assessee objected to the inclusion of this company in the list of comparables for the reason that it is functionally different from a captive software service provider like the assessee in the case on hand, as it is engaged in software designing services, product designing services and analytic services. It was also pointed out by the learned Authorised Representative that page 60 of its Annual Report for F.Y. 2007-08 indicates that this company is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. The learned Authorised Representative prays that in view of the above it is clearly establish that this company i.e. Persistent Systems Ltd. is functionally dis-similar and different from a captive software service provider like the assessee and therefore requires to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 wher....
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....;s objections observing that the assessee had not adduced any evidence to show that this event had any influence on the pricing or the margin earned. 12.2 Before us, the assessee objected to the inclusion of this company in the list of comparables on the ground that it was functionally different and also that there were other factors for which this company cannot be considered as a comparable to the assessee in the case on hand who was a captive software service provider to its AEs. It is submitted that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and its Annual Report states that it is engaged in proprietary software products and in research and development activities which has resulted in creation of its own IPRs. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 where this company was excluded from the list of comparables on the ground of functional differences from a captive software service provider. 12.3 Per....
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....ibunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider." 12.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the Assessing Officer/TPO to omit this company from the list of comparables. 13. Tata Elxsi Ltd. (Seg.) 13.1 This company was selected as a comparable by the TPO overruling the objections of the assessee to the inclusion of this company on several counts like functional dis-similarity, having significant R&D activity, brand value, size, etc. 13.2 Before us, the learned Authorised Representative contended that this company i.e. Tata Elxsi Ltd., is not functionally comparable to the assessee as it performs a variety of functions under software development services segment, namely product design, innovation design engineering, visual computing labs etc. as per the details reflected in its Annual Report; whereas the assessee in the case on hand is ....
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....ils for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have 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.' 13.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the Assessing Officer/TPO to exclude this company from the list of comparables to the assessee. 14. Thirdware Solutions Ltd. 14.1 This company was selected as a comparable by the TPO inspite of the assessee's objections to its inclusion on the ground that its turnover was in excess of Rs. 500 Crores. Before us, the assessee has objected to the inclusi....
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....and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand." 14.3.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 15. Wipro Limited (Seg.) 15.1 This company was selected as a comparable by the TPO inspite of the objections by the assessee to its inclusion in the list of comparables on several grounds like functional dis- similarity, brand value, size, turnover etc. 15.2 Before us, the learned Authorised Representative of the assessee contended that this company namely, Wipro Ltd., is not functionally comparable to the assessee as it owns significant intangibles in the nature of customer related intangibles and technology related intangibles; has huge brand value, is a market leader in size and turnover which render it not functionally comparable to a captive provider of software development services. In support of its plea for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee....
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....g the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration." 15.4.2 Following the above decision of the co-ordinate bench (supra), we direct the Assessing Officer/TPO to omit this company from the list of comparables. 16. Softsol India Ltd. 16.1 This company was selected as a comparable by the TPO inspite of the objections of the assessee to its being taken as comparable on the grounds that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that in the company's reply to information called for under Section 133(6) of the Act it had categorised itself as a pure software developer and included this company as a comparable as the assessee was also a provider of software development services. Before us, the learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Sof....
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....y and justice, admit the additional grounds for consideration and the same are disposed off as hereunder. 18. Lucid Software Ltd. 18.1 This company was selected as a comparable by the TPO and its inclusion was not objected to by the assessee. Before us, the assessee has sought the exclusion of this company from the list of comparables on the ground that this company, i.e. Lucid Software Ltd., is into software product development and therefore is functionally different from the assessee who is a captive software development service provider to its AEs. The learned Authorised Representative submitted that for exclusion of this company from the list of comparables reliance is placed on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the list of comparables on the ground that it is engaged in software product development and therefore was held to functionally different and dis-similar from providers of software development services. 18.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the ....
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....as selected as a comparable by the TPO and the assessee did not object to the same before the TPO. Before us, the contention of the assessee is that this company is engaged in product development, ITES and other value added services, apart from provision of software development services and that the revenue generated by the company is not only from software development services. Also, no segmental data has been provided by the company in the Annual Report. It was further submitted that there is an abnormal fluctuation in the operating revenue vis-à-vis operating cost on a year to year basis and also wide fluctuation in the year-on-year percentage change in operating revenue vis-à-vis employee cost, which indicates that this company is facing higher risk, which is an contrast to the assessee which is a captive software service provider. It was also submitted that the co-ordinate bench of this Tribunal in the case of NXP Semi Conductors (P.) Ltd. (supra) for Assessment Year 2008-09 has held that this company is not comparable to companies engaged in software development services and prayed that in view of the above, this company be excluded from the list of comparables ....
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....03 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 is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, ....
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....20. Ground Nos. 1 to 3 : Computation of Deduction under Section 10A of the Act. 20.1 Ground No.1 is on the issue of reducing of expenses incurred in foreign currency from export turnover while computing the deduction under Section 10A of the Act. Ground No.2 is on the issue of reducing expenses incurred in foreign currency from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act. In proceedings before us, the learned Authorised Representative submitted that the assessee would be pressing only Ground No.2 (supra) and Ground No.1 is not pressed. 20.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98/204 Taxman 321/17 taxmann.com 100 (Kar.), we are of the view that it would be just and appropriate to direct the Assessing Officer that travel, interest charges - MPLS, etc incurred in foreign currency are to be excluded from both export turnover as well as total turnover while computing the deduction under Section....