TaxTMI 
TaxTMI 
2018 (11) TMI 1120
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....ent services by the assessee to its AE. The consideration received by the assessee for rendering software development services to its AE was a sum of Rs. 47,91,29,509. Since the transaction between the assessee and its AE was an international transaction within the meaning of section 92 of the Income-Tax Act, 1961 ["the Act"], the consideration received by the assessee in the said international transaction has to pass the arm's length test. To justify the price received in the international transaction as at arm's length, the assessee filed a transfer pricing study in which it adopted TNMM as the most appropriate method for determination of ALP. The Profit Level Indicator (PLI) chosen for the purpose of comparison was OP to OC. The OP to OC in the software development segment was as follows:- Description Software Development (Rs.) Operating Revenue (OR) 479579514 Operating Cost (OC)_ 456566084 Operating Profit (OP) 23013430 OP / OC 5% 3. The assessee chose 16 comparable companies whose arithmetic mean of profit margin was 12%. The AO made a reference to the Transfer Pricing Officer (TPO) for determination of ALP in accordance with the provisions of ....
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....transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions." 5. Aggrieved by the aforesaid addition made consequent to the determination of ALP, the assessee filed appeal before the CIT(Appeals). The CIT(Appeals) excluded 9 out of 20 comparable companies, chosen by the TPO, the details of which are as follows:- Sl. No. Name of the company Turnover (Rs.Crore) OP/TC (%) 1 Celestial Biolabs Ltd. 20.21 87.94 2 Flextronics Ltd. 954.42 7.86 3 iGate Global Solutions Ltd. 781.56 13.99 4 Infosys Technologies Ltd. 15,672.00 40.37 5 Mindtree Consulting Ltd. (segment) 572.97 16.41 6 Persistent Systems Ltd. 383.41 20.31 7 Tata Elxsi Ltd. 342.86 18.97 8 Wipro Limited (segment) 1,955.56 28.45 9 Sasken Communication Tech. Ltd. (segment) 335.80 7.58 6. Out of the aforesaid 9 companies, Celestial Biolabs Ltd. was excluded for the reason that it had abnormal profits. The remaining 8 companies were excluded for the reason that they had turnover of about 200 crores and in view of their size, they were not c....
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....appropriate to reject companies having higher sales turnover as well to neutralise the impact of both low and high turnover companies and to provide a more reliable result. 7. With regard to companies which were loss making or making super profits, he held that such companies should also be excluded, as these losses or profits could be due to other factors. 8. The CIT(Appeals) also excluded M/s. Indus Networks Ltd. as a comparable company. This company was chosen as comparable company by the assessee in its TP study, but was rejected by the TPO as a comparable company for the reason that it fails the filter of employee cost being greater than 25% of the revenue of the assessee. The CIT(Appeals) held that when the ALP is determined using TNMM, cost is not a relevant factor and only the net margin of the tested party has to be considered without looking to the new element of cost. The CIT(A) gave the following reasons for not accepting the aforesaid filter, (i) Employee cost may vary from year to year depending on a variety of factors like competition in the labour and services markets, supply of skilled manpower in the industry as a whole and to the appellant's company in ....
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....Ltd. and KALS Information Systems Ltd. cannot be taken as a comparable company by following the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software (I) P. Ltd. v. DCIT in ITA No.1054/Bang/2011 and the reason given in the said order of the Tribunal is that both the aforesaid companies were software services company as well as software products company and the segmental details of software services and software products was not available. 10. The CIT(Appeals) also excluded Bodhtree Consulting Ltd. as a comparable company for the reason that this company was functionally different and was in Information Technology Enable Services (ITeS). He held that this company was engaged in product development, as evidenced by the disclosures available on its website www.bodbtree.com and that the website mentions that the company offers product solutions in the areas of Data Quality, Business Intelligence, and Life sciences to a reputed customer base worldwide and its products include Spend Data Management Solution (SDMS), Multi Industry Data Anomaly Solution (MIDAS), data cleansing and integration software, Patent Asset Management (PAM), and Patent Search and Patent....
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....cost filter applied by the TPO) to select companies which are predominantly into software development services . 7. The learned CIT (A), on the facts and in the circumstances of the case. erred in holding that M/s. Avani Cimcon Technologies and KA LS Information Systems cannot be taken as comparables. 8. The learned CIT (A). on the facts and in the circumstances of the case. erred in holding that M/s. Bodhtree Consulting Ltd being functionally different. cannot be taken as comparables." 12. As far as the assessee's CO is concerned, grounds No. 1 to 8 raised in the CO are general and no arguments were raised by the ld. counsel for the assessee at the time of hearing and therefore these grounds do not require any adjudication. 13. In ground Nos. 9 to 13, the assessee has challenged the action of the CIT(Appeals) in accepting the following companies as comparable companies by the CIT(Appeals). Viz., Lucid Software Ltd., Quintegra Solutions Ltd., Thirdware Solutions Ltd. and e-Zest Solutions Ltd. The assessee has also challenged the non-inclusion of Computech International Ltd. as a comparable company. Ground Nos. 9 to 13 raised by the assessee in its CO reads a....
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....of turnover filter for exclusion of companies that are otherwise found to be functionally comparable. The Grievance of the revenue in this regard is projected in Gr.No.2 of the Grounds of appeal raised by the revenue in its appeal. The basic facts to be noticed with regard application of turnover filter are that the Assessee's turnover for the relevant previous year was Rs. 10.65 crores. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs. 1 Crore. The contention of the Assessee before the CIT(A) was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The CIT(A) agreed with the submission of the As....
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.... size does not matter, what matters is the human capital. According to him application of the filter of turnover might be justified for excluding companies with low turnover of say Rs. 1 crore or less because the margin earned by these companies might widely fluctuate due to narrow capital base and lack of competitive strength, lack of operational efficiencies and also lack of human resources. They also escape the eyes of regulators. He drew our attention to the turnover and profit margins of company Infosys Technologies Ltd. For FY 1997 to 2010 and submitted that in FY 1997 the company had turnover of Rs. 139 Crores and its profit margin was 34.95% whereas in FY 2010 its turnover was Rs. 21140 crores but its profit margin was only 44.91%. According to him therefore the profit margins hover between 35% and 40% over the period of 15 years and therefore high turnover does not necessarily mean high profit margins. He also gave a chart showing turnover and margin of 20 companies in the IT-BPO industry for three years. According to him the chart would show that for the same range of turnover companies earned different profit margins. Therefore according to him there is no relation betwe....
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....2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to un....
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....ial question of law in the case of Chryscapital decided by the Hon'ble Delhi High Court was (i) whether comparables can be rejected on the ground that they have exceptionally high profit margins as compared to the Assessee in Transfer Pricing Analysis.(ii) Whether factors like differential functional and risk profile coupled with high degree of volatility in operating profit margins is sufficient ground to reject comparables for transfer pricing analysis. In answering the above question, the Hon'ble Court however at page 218 of the report (the said decision is reported as 376 ITR 183 (del)) observed that the mere circumstance that a company-otherwise confirming to the stipulations in rule 10B(2) of the Rules in all details, presenting a peculiar feature- such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The Court further observed that the Transfer Pricing officer, first, has to be satisfied that such differences do not "materially affect the price ................ or cost". Secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. According to him therefore the observations of the Hon'b....
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....ided assuming limited risks. 17.6. As far as the decisions of the Tribunal rendered on the application of turnover filter that are contrary to the decision rendered in the case of M/s. Genisys Integrating Systems (supra), the first submission of the learned counsel for the Assessee was that those decisions were rendered at a later point of time and were to be regarded as per incurium since these decisions were also rendered by a bench of equal strength and either the subsequent decisions refused to follow or were rendered in ignorance of an earlier binding precedent. He submitted that if a bench of equal strength differs with a view taken earlier, the proper course for them is to make a reference to larger bench. They cannot refuse to follow a binding decision. If they do so, the decisions so rendered have to be regarded as per incurium. Even if they are rendered in ignorance of the earlier binding precedent, they have to be regarded as per incurium. In this regard the learned counsel for the Assessee placed reliance on the decisions of Hon'ble Supreme Court in the case of Union of India Vs. Raghubir Singh AIR 1989 SC 1933, Union of India Vs. S.K. Kapoor (2011) 4 SCC 589 a....
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....f law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the v....
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.... on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 16. Following the aforesaid decision of the Tribunal, we uphold the order of the CIT(A) excluding companies by application of turnover filter. We also observe that the TPO has himself applied lower turnover filter of excluding companies with turnover of less than Rs. 1 Crore and in such circumstances, there is no reason as to why he should not apply the higher turnover limit. For the reasons given above, we uphold the order of the CIT(A). 17. The next issue to be considered is exclusion of Celestial Biolabs Ltd. The only reason given by the CIT(Appeals) for excluding this company is that the profit margins are very abnormal. This by itself cannot be a ground to exclude a company which is otherwise functionally comparable, unless there are extra-ordinary events that has taken place during the relevant accounting period which has resulted in the abn....
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....ity in the conclusions of CIT(Appeals) and ground No.8 raised by the revenue is dismissed. 22. Ground Nos.9 to 12 raised by the revenue reads as follows:- "9. The CIT (A) erred in directing the AO to recompute the deduction allowable u/s 10A of the 1. T. Act after reducing the telecommunication expenses of Rs. 67,67,964/- and foreign currency expenses amounting to Rs. 2.38.00.502- from the total turnover also. 10. The learned CIT(A) erred in not appreciating the fact that there is no pros Hon in section 10A which requires the concerned expenses: which are required to be reduced from the export turnover as per clause (iv) of the Explanation to section 10A, to be reduced from the total turnover also. 12. The Ld. CIT(A) erred in not appreciating the fact that the jurisdictional High Court decision relied upon by him has not been accepted by the department and a SLP has been filed before Hon'ble Supreme Court." 23. The issue raised in the aforesaid grounds of appeal is with regard to telecommunication expenses and foreign currency expenses reduced from the total turnover without reducing the same from the export turnover. The decision of the Hon'ble....
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.... of the total cost, the company spent Rs. 11,41,177 or 6% on product development, which is not abnormally high. It is clear from the Schedule that the expenditure amortised at Rs. 24,47,822 was out of the cumulative expenditure of Rs. 58,55,960 not pertaining to this year alone, leaving an unamortised expenditure of Rs. 34,08,138. These figures cannot lead one to the conclusion that the company is functionally different from the appellant. 135. Secondly, the TPO has not accepted the selling, marketing, and distribution expenses filter adopted by the appellant and I find no explanation or rationale for either the filter or the 3% threshold the appellant has adopted. Moreover, a 5.95% expenditure on sales, marketing, and distribution, does not mean that the company is incomparable to the appellant and it is not the TPO's case that it was a captive service provider like the appellant. In these facts and circumstances, I uphold the selection of this company by the TPO as a comparable." (ii) M/s. Quintegra Solution Ltd. The Plea of the Assessee for exclusion of this company was that this company undertook research and development activity, as reflected in ....
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.... Software Operation P. Ltd. (supra). The relevant portion is extracted hereunder: 11. Lucid Software Ltd. 11.1 This company was selected as a comparable by the TPO. Before the DRP, the assessee objected to the inclusion of this company in the list of comparables but the DRP retained this company as a comparable on the ground that it is a pure software development services provider and does not have any revenue's by way of sale of products/licenses. 11.2 Before us also, the assessee objected to the inclusion of this company as a comparable on the grounds that it is into software product development and is therefore functionally different from the assessee in the case on hand. In this context, the learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for assessment year 2008-0-9 has omitted this company from the list of comparables on the ground that it is into development of software products and therefore is functionally different from provider of software development services. 11.3 Per contra, the learned Departmental Representative supported the orders o....
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....upra) for Assessment year 2008-09, we direct the Assessing Officer/TPO to exclude this company from the list of comparables in the case on hand. Respectfully following the ratio of the decision of the co-ordinate bench in the case of M/s. Hewlett-Packard (India) Software Operation P. Ltd. (supra) we direct the AO/TPO to exclude Lucid Software Ltd from the list of comparables. Quintegra Solutions Ltd. 43. This company was selected by the TPO, but contested by the assessee-company before the TPO on the ground that the company is having peculiar economic circumstances and as an extraordinary event of acquisition of another company. 43.1 On appeal, the ld.CIT(A) deleted this company from the list of comparables by applying turnover filter of range of Rs. 200 crores to Rs. 2000 crores. Being aggrieved by this revenue was in appeal before us in IT(TP)A No.1070/Bang/2013 wherein we held that turnover is not an appropriate filter. 43.2 Hence, the assessee-company is challenging the inclusion of this company on the ground that this company on the ground that the company provides a full range of custom high end IT solutions such as development, te....
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....nt services, as is the assessee in the case on hand. In support of its contentions, the assessee relied on the decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 where it was held that this company was to be omitted from the list of comparables. 13.3 Per contra, the learned Departmental Representative supported the orders of the authorities in including this company in the list of comparables. 13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision relied on by the assessee. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 has held that this company, being engaged in product engineering services, having substantial R&D activity resulting in the creation of proprietary software products and IPR's, is functionally different from a mere provider of software development services is to be omitted from the set of comparables; observing as under at paras 18.3.1 to 18.3.3 of the order:- '18.3.1 We have heard the rival....
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....d that it its turnover is more than Rs.,500 crores. 45.1 On appeal, the Id.CIT(A) deleted this company from the list of comparables by applying turnover filter of range of Rs. 200 crores to Rs. 2000 crores. Being aggrieved by this revenue was in appeal before us in IT(TP)A No.1070/Bang/2013 wherein we held that turnover is not an appropriate filter. 45.2 Hence, the assessee-company is challenging the inclusion of this company on the ground that this company on the ground that the company is engaged in implementation and consulting services of software based on ERP and Business Intelligence. M/s.Thirdware also earns revenues from sale of user licenses and subscription. Software development services rendered by the company comprise of implementation and consulting services of developed and traded software. There are no segmentals for software development services and product development services and the financials indicate that the production and sale of developed and traded software cannot be expressed in any generic unit and therefore, segmental data is not available. Reliance in this regard was placed on the decision of the co-ordinate bench of Tribunal in the ca....
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.... licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter 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." 16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09, we direct the Assessing Officer/TPO to omit this company from the list of comparables in the case on hand." Respectfully following the ratio of the decision of the co-ordinate bench in the case of M/s.Hewlett-Packard (India) Software....
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.... 8.1 This company was selected by the TPO as a comparable inspite of the assessee's objections to its inclusion as a comparable on the ground that it was functionally different from the assessee. The TPO rejected the assessee's objections on the ground that as per the information received under Section 133(6) of the Act this company is engaged in software development services and qualifies all the filters applied. 8.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It was submitted that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for A.Y. 2008¬09, has held that this company is to be excluded from the list of comparables to a provider of software development services as it is rendering product development services and high and technical services which come under the category of KPO services. 8.3 Per contra, the learned Departmental Representative supported the order of the TPO including this company in the list of comparables. 8.4.1 We have heard th....