TaxTMI 
TaxTMI 
2016 (7) TMI 1481
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....ee are to support internal software related requirements for the Barclays Group and not for sale to third party. During the period relevant to the assessment year 2009-10, the assessee filed its return of income declaring total income of Rs. 4,13,16,515/-. Since, the assessee had entered into international transactions with its Associated Enterprise (AE), the same were referred to Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP) under the provisions of section 92CA of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). During the financial year 2008-09 the assessee had entered into various international transactions which inter alia includes 'Provision for Software Services' having transaction value of Rs. 172,75,06,099/-. The assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method to benchmark international transactions relating to Software Development Services. The TPO accepted the method adopted by the assessee for benchmarking the international transactions. In the TP study the assessee selected 21 companies as comparables. However, the TPO rejected majority of the companies selected by the assessee ....
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.... contentions of the assessee for including following companies in the TP Study: Name of Company Rejected by TPO stating as follows Unadjusted Margins for FY 2009-10 Akshay Software Technologies onsite business model 12.29% Zylog Systems Limited onsite business model 14.29% RS Software Limited onsite business model 9.89% CG VAK Software & Exports Ltd. Incurred loss at segmental level 5.29% Mindtree Limited sufficient segmental information is not available 5.54% Quintegra Solutions Limited Relying on DRP direction for AY 2008-09 0.03% Further, the Commissioner of Income Tax (Appeals) directed the TPO to include Evoke Technologies Private Limited (having operating margin of 20.05%) and Maveric Systems Limited (having operating margin of 14.50%) in the list of comparable companies. The Commissioner of Income Tax (Appeals) further directed the TPO exclude the following companies included in the list of comparables for the reasons that there was vast difference in size and scale of business and nature of activities: i. Infosys Technologies Limited. ii. Larsen & Toubro Limited. 5. The final set of compara....
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....T(A) may be vacated and that of Assessing Officer be restored. 6. The appellant craves to add, alter or amend any or all the grounds of appeal." 8. The assessee in its Cross Objection has raised following grounds : "Rejecting application of onsite filter for the screening of companies 1. errred on the facts and in circumstances of the case, and in law, by objecting the appropriate order passed by CIT(A) by rejecting application of onsite filter (applied by the TPQ) for the screening of companies. Rejecting certain companies considered in the comparable set by the TPO 2. erred on the facts and in circumstances of the case, and in law, by objecting the well-reasoned order passed by CIT(A) for AY 2009-10 for rejecting companies (i.e. Infosys Technologies Limited and Larsen & Toubro Infotech Limited) considered as comparable by the TPQ on account of the vast difference in size and nature of the business activities. Inclusion of companies rejected by the TPO from the comparable set 3. erred on the facts and in circumstances of the case, and in law, by objecting the appropriate order given by CIT(A) to consider certain companies, which were originally a part of th....
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....for risk differences 12. erred on the facts and in circumstances of the case, and in law, in comparing full-fledged risk bearing entities with the Respondent's captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies considered as comparable vis-a-vis the risk profile of the Respondent. The Respondent craves, to consider each of the above grounds of cross objections independent and without prejudice to each other and craves, leave to add, alter, delete or modify all or any of the above grounds of cross objections." 9. Shri Hitendra Ninawe representing the Department vehemently supported the findings of TPO and prayed for setting aside the order passed by the Commissioner of Income Tax (Appeals). 10. On the other hand Shri M.P. Lohia appearing on behalf of the assessee submitted that in the appeal filed by the Department and the Cross Objections filed by the assessee, the primarily dispute is with respect to selection of comparables. The Commissioner of Income Tax (Appeals) has upheld the inclusion of Kals Information Technology Limited and Bodhtree Consulting Limited. However, both the afor....
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....tails of software products and services) Bodhtree Consulting Limited The TPO had considered the company as comparable and this view has been upheld by Hon'ble CIT(A). Our contentions on its functional comparability is given below: a. Functionally different - The company operates as a software solutions company, and is engaged in providing open and end-to-end web solutions, off shoring data management, data warehousing, software consultancy, sign and development of solutions, using the latest technologies. - It has both solutions as well as service offerings and no revenue break up is available. - As per the company website, the company is into product engineering, provision of analytics and cloud computing services. b. Abnormal profit making company - Company operates on a different pricing model vis-a-vis the model adopted by the Appellant and accordingly the operating margins of the companies are widely fluctuating - The operating margin trend of the company over the five years is tabulated below for your Honour's easy reference: Year Unadjusted Operating margin (OP/OC) FY 2007-08 18.51% FY ....
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....opting single year data of the comparables relatable to the period under consideration. At the time of hearing, reliance was also placed on the judgement of the Chandigarh Special Bench of the Tribunal in the case of Quark Systems Pvt. Ltd., reported in 2010-TIOL-31-ITAT-Chd.-SB for the proposition that if some inconsistency in the comparable exists, then it should be removed from the final list of comparables notwithstanding the fact that assessee had initially considered it as a comparable concern. In our view, the plea of the assessee for exclusion of Infosys Technologies Ltd. cannot be shut out merely because the said concern was initially adopted by the assessee as a comparable in its Transfer Pricing Study. However, we may wish to point out that the cause and justification for its exclusion is liable to be demonstrated by the assessee. In the present case, it has been pointed out by the assessee that the said concern is functionally different and that it was a giant company in the area of development of software services and it assumed all the risks leading to higher profits, whereas the assessee was a captive unit servicing only its own affiliates and assumed only a limited ....
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....e activity of providing of software development services but also in selling of software products. Symphony Services Pune Pvt. Ltd. was only engaged in providing software services. In the case of Symphony Services Pune Pvt. Ltd. (supra) as well as in the present case also, the TPO did not accept the plea for exclusion of KALS Information System Ltd. primarily on the ground that the financial statements of the said concern did not reflect any sale of software products. Quite clearly the stand of the Revenue in the present case as well in the case of Symphony Services Pune Pvt. Ltd. (supra) is similar. It is also quite clear that the nature of service being rendered by the assessee and Symphony Services Pune Pvt. Ltd. (supra) are similar, namely rendering of software development services to its affiliates. The following discussion in the order of the Tribunal in case of Symphony Services dated 30-04-2014 (supra) brings out the salient features of the controversy : 13. The second point raised by the assessee is with regard to the adoption of Kals Information Systems Limited as a comparable concern while benchmarking the international transactions of the assessee. Before the TPO, as....
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.... development services for its parent company. The action of the TPO of selecting Kals Information Systems Limited as a comparable concern while applying the TNM method was rejected by the Tribunal on the basis that the said concern was engaged in development of software products and sale, which was functionally dissimilar to the software development services undertaken by the Bindview India Pvt. Ltd. (supra). The learned counsel pointed out that the said decision is fully applicable to the facts of the present case inasmuch as similar functions were undertaken by Bindview India Pvt. Ltd. and therefore Kals Information Systems Limited is liable to be excluded from the lists of comparables. 15. A reference has also been made to the decision of the Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. vs. DCIT vide IT(TP)A No.1303/Bang/2012 dated 28.11.2013 wherein also the said concern, namely, Kals Information Systems Limited was not considered as a comparable on account of functional dissimilarities. The learned counsel pointed out that M/s 3DPLM Software Solutions Ltd. (supra) was also a concern engaged in the provision of software development and oth....
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....tems Limited in the current assessment year are different from those noted by the Tribunal in the case of Bindview India Pvt. Ltd. (supra) for assessment year 2006-07. 18. Considering the aforesaid discussion, in our view, the concern i.e. Kals Information Systems Limited is liable to be excluded from the list of comparables for the purposes of benchmarking international transactions of provision of software development services. We hold so. Thus, on this aspect assessee succeeds." 19. Following aforesaid precedent, as the facts and circumstances in the present case are similar, we direct that M/s. Kals Information Systems Ltd., be excluded from the final set of comparables." 14. The Co-ordinate Bench also considered the issue with respect to exclusion of Bodhtree Consulting Ltd. from the final set of comparables. The Tribunal after considering the facts of the case and the decisions on which the ld. AR of the assessee had placed reliance directed to exclude Bodhtree Consulting Ltd. from the list of comparables. The findings of the Tribunal are as under : '22. We have carefully considered the rival submissions with respect to Bodhtree Consulting Limited. The plea of....
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....assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e. software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3 . . . . . . . . . . . . 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 writ....
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....s fluctuating margins. * The company is more of a product company rather than software service company. The Panel has considered the objections of the assessee. Insofar as the contention regarding the rejection of this entity on the basis of fluctuating margin is concerned. In order to appreciate the compatibility or otherwise of this entity, it is important to first note that the Indian Software industry uses two different models for revenue recognition. The first is the Time and Material (T&M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below : 3. Revenue Recognition : Revenue from software development is recognized....
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....n the earlier year. The results of Bodhtree from F.Y.2003 to 2008 excluding F.Y.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 recognitions 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." 24. Though the aforesaid discussion by the Bangalore Bench of the Tribunal is in relation to the assessment year 2009-10, but the inferences drawn with regard to the variations in the profit margins of the said concern for different years is relevant in the present context also. Furthermore, the Tribunal also analysed and found that the said concern was following fixed price project method whereby revenue from software development services was being recognized based on the software developed and billed to the ....