TaxTMI 
TaxTMI 
2016 (5) TMI 1446
X X X X Extracts X X X X
X X X X Extracts X X X X
....case. 3. The assessee has raised the following grounds:- 1 Assessment and reference to Transfer Pricing Officer are bad in law a) The final order issued by the Income Tax Officer - Ward 11(2) ['ITO' or 'AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to LSI Technologies India Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA(1) of the Act. 2 The fresh comparable search undertaken by the TPO is bad in law a) The TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g less than 25% of revenue from exports. i) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the comparability. j) The AO/TPO erred on facts and in law in considering a set of 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. k) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. l) The AO/TPO also erred on facts incorrectly computing the margins of certain comparable companies. 4 Erroneous data used by the TPO a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies. 5 Non-allowance of appropriate adjustments to the comparable companies, by the TPO The AO/TPO erred in law and on facts in not allowing appropr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... DRP be deleted." 4. Ground Nos.1 to 6 are regarding TP adjustment. During the year under consideration, the assessee has recorded international transaction with its Associated Enterprises (AE) in respect of software development services as under:- Particulars Amount (Rs.) Receipts for software development services 38,83,69,741 Reimbursement of expenses paid 4,31,66,693 Purchase of capital goods 54,89,609 Interest paid on ECB Loan 44,93,979 5. To benchmark its international transactions in respect of software development services provided to the AE, the assessee has adopted TNMM as most appropriate method and selected 44 comparables with arithmetic mean margin of 11% and after the working capital adjustment, net arithmetic mean was computed at 7%. Thus, the assessee claimed its international transaction having net margin of 10% at arm's length in comparison to the mean margin of the comparable at 7% (11%). The TPO rejected 41 comparable companies selected by the assessee out of 44 and accepted only 3 as under:- (1) Aztec Software & Development Services Ltd. (2) Megasoft Ltd. (3) Accel Transamatics Ltd. 6. The TPO carried out a fresh search and added 17 more compani....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ground of Related Party Transaction (RPT) exceeding 15% of its sales. 12. We have heard the ld. AR as well as ld. DR and considered the relevant material on record on the issue of admission of additional ground. 13. The ld. AR has pointed out that assessee raised objections against the inclusion of these 4 companies including 3 companies which are part of TP analysis study. Since these companies are functionally not comparable to that of the assessee, therefore the same should be excluded from the list of comparables. He has relied on the decision of the Special Bench of the Tribunal in the case of DCIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (CHD) (SB) and submitted that even in case the assessee has committed a mistake in including the companies in the comparables list, there is no bar in raising the objections against such companies if these are found functionally dissimilar to that of assessee. 14. On the other hand, the ld. DR has objected to the additional ground of the assessee and submitted that when the assessee itself has selected these companies by considering the comparability, then the assessee cannot raise this issue, after the TPO has accepted those comparab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n and therefore a reasonable tolerance range of the revenue from RPT can be considered for selecting the uncontrolled comparables. There cannot be a single criteria / parameter which can be applied as a general rule in all cases. Therefore, this tolerance range varies from case to case and depending upon the availability of the comparables. If the comparables of international transactions are easily available, then, this tolerance of RPT should be restricted to minimum. There is no specified tolerance range in the Act or Rules under the Transfer Pricing provisions, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, commonly accepted tolerance range of 5% to 25% of the total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case on hand, the availability of the comparables is abundant in number as the assessee selected 44 comparables whereas the TPO selected 20 comparables by applying the filter of 25% of revenue from related parties. Therefore, in this case, good number of comparables are available and there is no difficulty in searching the comparables. Acco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....one by one as under :- 13.1 Kals Infosystems Ltd. 13.1.1 The learned Authorised Representative of the assessee has submitted that this company is into a product business and has earned revenue from sale of software product. Therefore this company is not functionally comparable with the assessee which is purely a software development service provider to its parent company. In support of his contention, he has referred the Annual Report of this company and submitted that it engaged in the software product as stated in the Annual Report and also incurred sales and marketing expenditure. The learned Authorised Representative has pointed out that comparability of this company has been examined by this Tribunal in a series of decisions and it has been held that this company cannot be considered as functionally comparable with the software development service provider company. He has relied upon the following decisions :- CASES PERTAINING TO ASSTT. YEAR : 2006 - 07 CASES PERTAINING TO OTHER ASSTT. YEARS Cypress Semiconductor technology India Private Limited IT (TP) A No. 1167/Bang 2010 Trilogy E -Business Software India Pvt. Ltd vs. DCIT (AY : 2007-08) ITA No. 1054/BANG/2012. Veri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....considered by the co-ordinate bench of this Tribunal regarding the nature of functions and business, revenue earned by this company from the sale of software products. Therefore, by following the decisions of the coordinate bench (supra), we direct the A.O./TPO to exclude this company from the list of comparables. 13.2 Tata Elxsi Ltd. (Seg.) 13.2.1 The learned Authorised Representative of the assessee has submitted that this company is functionally not comparable with the assessee as it fails the test of R&D expenditure to sale which is more than 3% filter. He has further contended that the company is engaged in the R&D activity resulting in creation of Intellectual Property Rights (IPRs). This company is not only into software products as explained in the Annual Report of this company but also is engaged in the embedded product development based on current and emerging technologies such as Multimedia, Wimax, Imaging, Imaging Process etc. The company actively engaged in developing house expertise in current and emerging markets through house development products and training. Further the software development business segment of this company also comprising of diversified activit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provider like the assessee, considered the comparability of Lucid Software Ltd. with similar software services provider and the Tribunal held as follows :- " 7.2 Lucid Software Limited. It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-à-vis the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e has raised its objections. These companies are as under:- 1. Infosys Ltd. 2. KALS Infosytems Ltd. 3. Tata Elxsi Ltd. (Seg.) 4. Lucid Software Ltd. 5. Accel Transmatics Ltd. (Seg.) 6. Flextronics Software Ltd. 22. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. 23. The ld. AR of the assessee has submitted that out of these 6 comparable companies, the Tribunal in the case of Textron India Pvt. Ltd. (supra) has considered and decided the comparability of 5 companies in paras 13 to 17.4 as under:- " 13.1 Kals Infosystems Ltd. 13.1.1 The learned Authorised Representative of the assessee has submitted that this company is into a product business and has earned revenue from sale of software product. Therefore this company is not functionally comparable with the assessee which is purely a software development service provider to its parent company. In support of his contention, he has referred the Annual Report of this company and submitted that it engaged in the software product as stated in the Annual Report and also incurred sales and marketing expenditure. The learned Authorised Representative has pointed out that comparabilit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y different, from the assessee who is purely into provision of software development services, ought to be excluded from the list of comparable companies. In support of this contention for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra)." 13.1.4 The learned Departmental Representative has not disputed the facts considered by the co-ordinate bench of this Tribunal regarding the nature of functions and business, revenue earned by this company from the sale of software products. Therefore, by following the decisions of the coordinate bench (supra), we direct the A.O./TPO to exclude this company from the list of comparables. 13.2 Tata Elxsi Ltd. (Seg.) 13.2.1 The learned Authorised Representative of the assessee has submitted that this company is functionally not comparable with the assessee as it fails the test of R&D expenditure to sale which is more than 3% filter. He has further contended that the company is engaged in the R&D activity resulting in creation of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uding the judicial pronouncements relied on by the assessee. We find that the coordinate bench in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra) has excluded these two companies from the set of comparables holding as under at paras 14 & 15 thereof :- " 14. As far as Lucid Software Ltd. and Tata Elxsi Ltd. chosen by the TPO as comparables, we find that the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Pvt. Ltd. (supra) while dealing with the case of software services provider like the assessee, considered the comparability of Lucid Software Ltd. with similar software services provider and the Tribunal held as follows :- " 7.2 Lucid Software Limited. It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtain more companies from the list of comparables in the additional grounds raised before this Tribunal. The companies sought to be excluded are discussed as under : 14.2 As regards M/s. Aztec Software & Technology Services Ltd. & Megasoft Ltd, since these two companies have not satisfied with the filter of RPT at 15%, therefore, in view of the consistent view taken by the Tribunal and our finding in the foregoing paragraphs, these two companies stand excluded from the list of comparables. 14.3 In the additional grounds, the assessee is also seeking exclusion of some more companies on the ground of turnover filter. The turnover filter was neither applied by the assessee nor by the TPO for selecting comparable companies. Further, the assessee did not raise any such objection either before the TPO or before the DRP. Thus, this plea raised by the assessee does not pertain to any finding of the authorities below and therefore this issue does not emanate from the orders of the authorities below. Moreover, the assessee company sought exclusion of selected companies from the list of comparables of the TPO on the ground of turnover filter. If such a criteria has to be applied in selectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has been examined in a number of cases by this Tribunal and therefore in view of the findings of the Tribunal on the issue of comparability of these companies, we incline to admit the additional grounds of the assessee raising objection on the ground of functional dis-similarity of these companies mentioned (supra) for deciding the issue on merits. 15. Accel Transmatics Ltd. (Seg.) 15.1 Though this company was part of the T.P. analysis of the assessee and also part of the 44 comparables selected by the assessee itself for bench marking its international transactions, however, the assessee objected the inclusion of this company in the list of comparables selected by the TPO on the ground that this company is functionally not comparable. The TPO as well as DRP rejected the contentions of the assessee. 15.2 Before us, the learned Authorised Representative of the assessee has submitted that the assessee is seeking exclusion of this company as this company provides software design and development product services. Since this is a software product company and therefore is functionally dis- similar to the assessee. Therefore, this company is not a good comparable for the purpose of d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n examined by the Tribunal in paragraphs 7.2 to 7.4.2 which is reproduced below :- " 7.2 (5) Accel Transmatics Ltd. This company was selected as a comparable by the TPO and was retained as a comparable even though the assessee objected to its inclusion before the DRP. It is the contention of the assessee that the above company is functionally different from the companies engaged in business of providing software development services to its AEs. It is submitted that apart from software development services, this company is engaged in provision of Accel Animation Studies Services in the form of ACCEL IT and ACCEL Animation Services for 2D and 3D Animation. It was also engaged in various business activities, some of which are Ushus Technologies - for off shore development centre for embedded software network system, imaging technologies; Accel IT Academy for training services in hardware and networking, VLSI designs, CAD/CAM/BPO, etc., the learned Authorised Representative for the assessee contends that in view of the above services rendered, it is evident that this company is functionally different from the assessee in the case on hand and therefore ought to be excluded from the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assesses engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 13. In view of the aforesaid decision of the Tribunal, Kals Info Systems Ltd., and Accel Transmatics Ltd. are to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal. It is ordered accordingly." 7.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Hu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rks Technologies (India)Private Limited- IT(TP)A No.1326/Bang/2010 - Turnover Witness Systems Software India Pvt Ltd (AY : 2007-08) ITA No. 1366/Bang/2011. FOR CASES INVOLVING JOINT OPERATION, LARGE INTANGIBLES, HIGH BRAND VALUE, RISK BEARING & HIGH PROFIT MARGIN CASES Agnity India Technologies Pvt Ltd ITA No. 3856(Del)/2010], ITAT Delhi" This ruling has been upheld by the High Court (ITA No. 1204/2011, dated July 2013). Scale of operation, brand value etc. NTT Data India Enterprise Application Services Pvt. Ltd. [ITA No. 1612/Hyd/2010.] Motorola India Electronics Private Limited vs. ACIT ITA No. 1274 & 1413/Bang/2008. Logica Pvt. Ltd. Vs ACIT (ITA No. 1129/Bang/2011 16.2 On the other hand, the learned Departmental Representative has submitted that the TPO has taken the segmental data of this company which are functionally similar to that of the assessee. She has relied upon the orders of the authorities below. 16.3 We have considered the rival submissions as well as the relevant material on record. There is no dispute that Infosys Technologies Ltd. has big brand value and intangibles and also engaged in diversified operations at larg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than Rs. 13145 crores and expenditure on advertisement/sales promotion and expenditure on R&D is at Rs. 69 crores and Rs. 167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of 'FAR' ie. function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced in para 6(iv) above, mostly shows that the profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of lnfosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of 'Agnity India Technologies Private Limited' (ITA No.3856/Delhi/2010), wherein it was held that lnfosys is a giant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is company in R&D and also acquiring IPRs has not been dealt with by the authorities below. Accordingly, in the facts and circumstances of the case, we direct the A.O/TPO to re-adjudicate this issue after considering the objections of the assessee on functional dis-similarity." 24. Since the functional comparability of 5 companies which are in dispute before us have been discussed by the coordinate Bench of this Tribunal in case cited supra for the assessment year under consideration, therefore in view of the finding of the coordinate Bench of this Tribunal, we direct the AO/TPO to exclude 4 companies from the list of comparables for determination of ALP and re-examine the comparability of Flextronics Software Ltd. in light of the directions given by the coordinate Bench. 25. Another company which is sought to be excluded by the assessee is Lucid Software Ltd. The ld. AR of the assessee has submitted that functional comparability of this company has been examined by the coordinate Bench of this Tribunal in the case of Cypress Semiconductor Technology India (P) Ltd. v. DCIT, order dated 27.3.2015, 57 taxmann.com 69 (Bang. Trib.). Thus, the ld. AR has submitted that this company be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on (4) the proportion between the export turnover in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried over by the under-taking is applied to the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried or by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follows: The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by subsection (4). Export turnover also forms a constituent element of the denominator inasmuch as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is a constituent e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353/ 30 SOT 55 (Chennai) also had an occasion to consider the meaning of the word 'total turnover'. After referring to the various judgments of the High Court as well as the Supreme Court held as under: "53. For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of Section 10-B, the freight telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula." The formula for computation of the deduction under Section 10-A would be as under: Profits of the business X export turnover Total turnover From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to prom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mputing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under Section 10-A, would be as under: Profits of the business of the undertaking X Export turn over (Export turnover + domestic turn over) Total Turn Over 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of Section 80HHC in interpreting Section 10-A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered....