AI Drafter 
TaxTMI 
TaxTMI 
2016 (5) TMI 1446
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....P)A No.1380/Bang/2010 is taken as the lead 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 Appel....
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....r, without considering the specific segmental results h) The AO/TPO erred on facts in arbitrarily rejecting companies earning 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 ....
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....tion or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. c) The Appellant further prays that the adjustment in relation toTransfer pricing matters made by the Ld. A.O/TPO and upheld by the Hon'ble 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 a....
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.... Accel Transmatic Ltd., KALS Info Systems Ltd. and Lucid Software Ltd. ought to stand rejected in view of them being functionally dissimilar to the appellant. 3(n) That Megasoft Ltd. ought to stand rejected in view of tis related party transactions exceeding 15% of its sales." 11. Thus, by way of additional ground, assessee is seeking exclusion of Accel Transmatics Ltd., KALS Infosystems Ltd. and Lucid Software Ltd. on functional dissimilarity as well as Megasoft Ltd. on the 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 asses....
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....e Bench of this Tribunal in the case of Textron India Pvt. Ltd. (supra) in paras 12 & 13 as under:- " 12. We have considered the rival submissions as well as the relevant material on record. In strict sense, the ALP has to be determined by considering uncontrol comparable prices which means uncontrolled, unrelated comparable prices has to be taken into account to bench mark the international transactions which are the control and RPTs. However, 0% RPTs of the comparable price is an impossible situation 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....
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....presentative of the assessee has referred Annexure A to TPO order which mentions the percentage of RPTs. Thus as per the Annexure A of the TPO's order, the following companies having more than 15% of RPT are directed to be excluded. Sl. No. Comparable Company Name % of RPT Over sales 1. Aztec Software Limited 17.78 2. Geometric Software Limited 19.34 3. Megasoft Limited 17.08 13. The assessee has also raised objections against the other comparables selected by the TPO which we will deal with 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 comparab....
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....and therefore being functionally 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&....
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....rused and carefully considered the material on record, including 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 ....
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....n view of the consistent opinion of this Tribunal on this issue, we concur with the view of the coordinate Bench that when a sufficient number of comparable companies are available for determination of arm's length price (ALP), then the tolerance limit of RPT at 15% is proper in the case of assessee. Accordingly, we direct the AO/TPO to exclude the following three companies from the list of comparables having more than 15% RPT. 1. Aztec Software Ltd. 2. Geometric Software Ltd. (Seg.) 3. Megasoft Ltd. 21. Now we will deal with the issue of comparability of 6 other companies against which the assessee 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 K....
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....ibunal has dealt with this issue in paragraphs 46 & 47. We further note that in the case of Misys Software Solutions (India) Pvt. Ltd. in IT(TP)A No.1425/Bang/2010 Dt.23.9.2015, the Tribunal has again considered functional comparability of this company in paragraphs 7.1 to 7.4.2 as under :- " 7.1 (4) KALS Infosystems 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 this company is into software products, and training apart from provision of software development services and therefore being functionally 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 ....
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.... diversified product development activity which includes Multi-media, Wimax, Imaging and Imaging Process. Further, this company is also involved in the activities such as hardware design, industrial design, engineering design and visual computing. Therefore, the diversified activities as mentioned above are not comparable with the software development services provider like the assessee. The identical issue has been considered by the co-ordinate bench of this Tribunal in the case of Misys Software Solutions (India) Pvt. Ltd. (supra) in paragraphs 8.3.1 to 8.3.2 as under : " 8.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including 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 t....
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.... ALP of the international transaction impugned in this appeal." 8.3.2 As far as the company Tata Elxsi Ltd., is concerned, following the decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that this company be excluded from the list of comparables for the software development services of the assessee. It is ordered accordingly." In view of the above discussion, as well as the decision of the co-ordinate bench, we direct the A.O./TPO to exclude this company from the set of comparables for determining the ALP. 14. Additional Grounds. 14.1 The assessee has also sought the exclusion of certain 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 comparabl....
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....at the assessee has raised its plea for the first time at this stage because if a particular company is found functionally not comparable with the assessee ought to have been excluded from the set of comparables to avoid incorrect results. Even otherwise, in case if the assessee commits some mistakes in the assessment proceedings that results incorrect assessment of the tax liability then the assessee cannot be barred from raising such a plea at the appellate stage in order to assess correctly the tax liability of the assessee. We find that the functional comparability of these companies namely Accel Transmatics Ltd., Geometric Software Ltd., Flextronic Software System Ltd. and Infosys Technologies Ltd. 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 c....
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....upon the orders of the authorities below. 15.4 We have considered the rival submissions as well as the relevant material on record. Though this company was part of the T.P. analysis of the assessee and also included in the comparables selected by the assessee however, the functional comparability of the company has been examined by this Tribunal in a series of decisions and it has been consistently held that this company cannot be considered as functional comparable to a pure software development services provider. The Tribunal in a number of decisions as relied upon by the assessee mentioned (supra) has given this consistent finding. In the case of Misys Software Solutions Pvt. Ltd. (supra), the functional comparability has been 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 i....
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....hat this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006- 07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The 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 establ....
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....mation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and 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 Tri....
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....G TO OTHER ASSTT. YEARS Cypress Semiconductor technology India Private Limited IT (TP) A No 1167/Bang 2010 Triology E -Business Software India Pvt. Ltd vs. DCIT ITA No. 1054/BANG/2012 (AY : 2007-08) Agnity India Technologies Pvt Ltd ITA No. 3856(Del ITAT)/2010 (AY 2006-07) 24/7customer.com vs DCIT (AY : 2004- 05) ITA No.227/Bang/2010 Agnity India Technologies P. Ltd. (ITA No. 1204/2011)(Del HC) Adaptec India Private Limited (AY : 2007-08) ITA No. 1801/Hyd/09. Misys Software Solutions India Private Limited - IT(TP) A No.1425/Bang/2010 - Turnover Mercedes Benz R & D India Pvt. Ltd. (AY : 2007-08) ITA No. 1222/Bang/2011. Verisign Services India Private Limited IT(TP)A No 1404 bang 2010 - Turnover CSR India Pvt. Ltd. (AY : 2007-08) ITA No. 1119/Bang/2011, [2013] Thoughtworks 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 bee....
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....f the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. in ITA No.7821/MUM/2011, wherein it was held as under:- "7.2 Lucid Software Limited ......... ......... 7.4 Infosys Technologies Ltd.: The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sale revenue, stage of business cycle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at Rs. 69,522 crores, which comprises of brand value itself at Rs. 22,915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India's No.2 software service exporter and Third in the World as an 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....
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....that this comparable has a software development services segment and therefore is functionally similar to the business activity of the assessee in providing software development services. The DRP has concurred the view of the TPO. 17.2 Before us, the learned Authorised Representative of the assessee has submitted that apart from the turnover dis-similarity, this company is also not functionally comparable with the assessee. 17.3 On the other hand, the learned Departmental Representative has submitted that the TPO has used the segmental data of this company and given a finding that this company is functionally comparable with the assessee. He has relied upon the orders of the TPO and DRP. 17.4 Having considered the rival submissions and relevant material on record, we note that the objection raised by the assessee regarding the activity of this 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 wh....
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....ia Private Ltd. in ITA No.7821/MUM/2011, which was followed by the ITAT Bangalore Bench in the case of Logica Private Ltd. ITA No.1129/Bang/2011 for AY 07-08, wherein it was held as under:- "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 expendi....
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....on u/s. 10A. 33. We have heard the ld. DR and the ld. AR as well as considered the material on record. At the outset, we note that this issue is covered by the Hon'ble jurisdictional High Court in the case of ACIT v. Tata Elxsi Ltd., 349 ITR 98 [Karn], wherein the Hon'ble High Court has held as under:- "10. The Bombay High Court had an occasion to consider the meaning of the word 'total turnover' in the context of Section 10-A, in the case of CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: Profits derived from export of articles or things or Computer software = Profits of the business of the undertaking X Export turnover in respect of the articles or things or computer software Total turnover of the business carried on by the undertaking "Under sub-section (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....
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....the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. "export turnover" would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from "export turnover" for the purposes of the numerator would be brought in as part of the "export turnover" when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided." The special bench of the Tribunal, in the case of ITO 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: ....
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....ents of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing 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 ....