TaxTMI 
TaxTMI 
2019 (3) TMI 1116
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Act at an income of Rs. 56,87,66,800 as against returned income of Rs. 31,48,35,070. 2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 24,40,13,533 to the arm's length price of the 'international transactions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/ Dispute Resolution Panel ('DRP'). 2.1 That the assessing officer erred on facts and in law in rejecting the use of multiple year data for the purpose of undertaking benchmarking analysis 2.2 That the DRP/ TPO erred on facts and in law in resorting to cherry picking and considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the Appellant: (i) Tata Elxsi Limited (ii) Helios & Matheson Information Technology Ltd (iii) Sasken Communications Technologies Ltd. (iv) Lanco Global Systems Ltd 2.3 That the DRP/ TPO erred on facts and in law in not appreciating that the aforesaid companies do not satisfy the test of comparability as provided in rule 10B(2) of the income t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ftware services. During the impugned year, the assessee calculated mean margin of 13.61% on the basis of three years' data, i.e., F.Y. 2004-05, 2005-06 & 2006-07 (to the extent available) of the following broadly comparable 37 independent companies. The NCP margins earned by the following comparable companies range from 8.85% to 41.29% : Sl. No. Name of the Company NCP 2004-05 % NCP 2005-06 % NCP 2006-07 % Weighted Average (%) 1. A S M Technologies Ltd. 9.54 7.26 6.48 7.46 2. Aztecsoft Ltd. 17.72 17.26 18.74 18.13 3. Blue Star Infotech Ltd. 13.37 6.49 7.7 9.18 4. BT TechNet Ltd. -1.55 NA NA -1.55 5. C M C Ltd. 11.22 19.68 19.59 16.99 6. Computech International Ltd. 8.77 4.59 NA 6.65 7. Exensys Software Solutions Ltd. 31.55 26.18 19.05 23.10 8. F C S Software Solutions Ltd. 14.23 14.74 21.92 17.34 9. Geometric Software Solutions Co. Ltd. 29.9 18.47 13.18 18.01 10. Goldstone Technologies Ltd. 4.67 3.82 21.90 9.78 11. Helios & Matheson Information Technology Ltd. 35.42 35.44 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons Co Ltd. 10.71% 2. LGS Global Ltd. 15.75% 3. Sasken Communication Technologies Ltd. 22.16% 4. Tata Elxsi Ltd. 26.51% 5. Helios & Matheson 36.63% 6. R S Software India Ltd. 13.47% 7. R Systems International Ltd. 15.07% Less: Working Capital Adjustment (0.98%) Average 19.07% Accordingly, after selecting aforesaid seven new comparables by the TPO, as above, he calculated the transfer pricing adjustment on account of provision of software services to the tune of Rs. 24,40,13,533/- as follows : Particulars Amount Operating Cost 2,867,863,907 Arm's Length margin 19.07% Arm's Length Price 341,47,65,554 Operating income of the assessee 317,07,52,021 Transfer Pricing Adjustment 24,40,13,533 The AO/TPO also made disallowance of Rs. 99,18,169/- on account of license fee paid by the assessee by treating the same to be in the nature of capital expenditure. 6. We have heard the submissions of both the sides on the aforesaid additions and have gone through the entire material available on record. 7. The adjustment made by the Transfer Pricing Officer ('TPO') ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., namely Computech International Ltd., the DRP held that software development expenses cannot be regarded as part of employee cost. 8.2. Accordingly, it was the contention of the assessee that the company outsources a significant portion of its business to outside service provider. It would be appreciated that a company which is outsourcing its work to outside vendors cannot be compared to a company which is performing all the function of its business itself. Reliance to support the above contention was placed on the decision of the Hon'ble Delhi High Court in the case of Rampgreen Solutions P. Ltd 377 ITR 533 (Del) wherein the Hon'ble High Court rejected companies engaged in outsourcing of services to outside vendors as comparable to companies performing such services using their own employees and resources. The aforesaid order was followed by the Hon'ble Delhi High Court in the case of Pr. CIT vs New River Software Services Pvt Ltd (ITA No 924/2016). 9. The Ld Departmental Representative relied upon the orders of the lower authorities. He drew our attention to the traveling and conveyance expenditure incurred by the company to the extent of Rs. 2,61,38,162/-. The ld. DR ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... purpose of benchmarking analysis. (iii) Brand development 10.3 It was submitted that the company is actively pursuing development of its brand and has appointed a renowned brand advisor namely JWT. It was further submitted that the company also organized a global brand launch at the United Nations headquarters during the relevant financial year. Further, the company also incurred a sum of Rs. 6.28 crore towards advertisement and marketing which constitutes more than 3% of the sales of this company. 10.4 It was further submitted that the Company is engaged in R&D activities whereas the assessee is a captive service provider and do not undertake any R&D activities. The following extract from the annual report of the company was relied upon by the assessee: "Research and development of new services, designs, frameworks, and methodologies continue to be important to your company" 10.5 Reliance was placed on the decision of the Hon'ble Delhi High Court in the case of Pr. CIT vs Oracle (OFSS) BPO Services Pvt Ltd (ITA No 124/2018) wherein the Hon'ble Court held that companies having significant brand presence cannot be regarded as appropriate comparable for the purpose of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt from the Director's report of this company available at page 202 of the paper book. Following the Mumbai Bench decision in Petro Araldite (P.) Ltd. (supra), we order for the exclusion of this company from the list of comparables. The assessee succeeds." Similarly, in the case of Global Logic India Pvt Ltd (ITA 5809/Delhi/2011) for AY 2007-08 this company was rejected as comparable by the Delhi Bench of the Tribunal holding as under: "(x) Sasken Communications Ltd. 27. Here again, we find that in this year, there were acquisitions and mergers. The Tribunal in the case of Toluna India Pvt. Ltd., has also directed the exclusion of this company on the same basis. Following the same, we direct not to treat this company as comparable." The company has been likewise rejected in the case of Element K India Private Ltd. V.s ITO (ITA No. 431/Del/2012) for AY 2007-08 and Avaya India (P.) Ltd. Vs. ACIT (ITA 5528/Delhi/2011) for AY 2007-08. 12.1 The assessee further submitted that this company owns IPR in the form of numerous patents and has branded products and accordingly, cannot be compared with the appellant, a captive service provider. Reliance was placed on the decis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es, product design services, and visual computing labs. It is submitted that the company is engaged in specialized and niche domain of software products/services and therefore cannot be considered as comparable to the appellant, a contract software development service provider. It is further submitted that that the company has recorded a sum of Rs. 33.78 crore as cost of goods sold which indicates that the company is also engaged in sale of hardware products and therefore cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transaction of provision software services. The Hon'ble Delhi Bench of the Tribunal in the case of appellant's sister concern ST - Ericsson India Pvt Ltd (ITA No 609/Del/2015) for AY 2010-11 rejected TATA Elxsi as comparable on the basis that it is not functionally comparable to a software service provider. The Hon'ble Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT in ITA No. 5645/Del/2011 for AY 2007-08, too, directed the company to be excluded from the final set of comparable companies on account of functional dissimilarity from the assessee, being a contract software development se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nalysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." Also, the Hon'ble Benches of various Tribunal, has directed to exclude Tata Elxsi Ltd. from the final set of comparable companies on account of functional dissimilarity in the following cases: (i) Cisco Systems (India) Pvt. Ltd. vs. DCIT (ITA No. 130/Bang/2014) (ii) Cypress Semiconductor Technology India Pvt. Ltd. vs. DCIT (ITA No. 1167/Bang/2010) (iii) Genesis Integrating Systems (India) Pvt. Ltd. vs. DCIT (ITA No. 25/Bang/2014) (iv) Yahoo Software Development India P. Ltd. vs. DCIT (ITA No. 1129/Bang/2010) (v) Microchip Technology India Pvt. Ltd. vs. DCIT (ITA No. 1429/Bang/2010) In view of the aforesaid, it is respectfully submitted that Tata Elxsi Limited, a company dealing in specialized and niche domain of software products/services, cannot be considered as comparable for the purpose of benchmarking the international transactions of the assessee. (ii) Brand It is submitted that the company being a part of the TATA group enjoys the benefits/returns associated with the TATA brand. The Hon'ble Delhi High Court in the case o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nchmarking analysis. Accordingly, we reject the contention of this assessee and uphold the inclusion of this company as comparable. II. Company whose rejection/exclusion is challenged by the assessee 19. The assessee is disputing the rejection/exclusion of PSI Data Systems Ltd. from the set of comparable companies. The TPO/DRP rejected this company on the basis that it has entered into significant related party transactions equivalent to 27.66% of sales. It was submitted by the assessee that the aforesaid finding of the DRP is factually incorrect. It was submitted that the RPT entered into by this company constitutes 22.41% of sales computed as under: Particulars Amount (Rs) Transactions relating to income 14,65,21,342 Transactions relating to cost 1,54,32,175 Reimbursements 2,95,69,090 Total (A) 19,15,22,607 Total Income (B) 85,44,33,616 RPT/Sales (A/B) 22.41% In view of the aforesaid, it was submitted that since the related party transactions entered into by this company constitutes less than 25% of sales, the said company ought to be included in the final set of comparable companies. The LD Departmental Representative ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and accordingly excluded the same from the operating cost. It is submitted that provision for bad debts and advances is a routine expenditure linked to the operations of a company and cannot be regarded as non operating in nature (ref. Sony India Pvt Ltd 114 ITD 448 (Del) (@ pg 603-604) and Suessen Asia Pvt Ltd (ITA No 1629/PUN/2011) (@pg 545-548). In view of the aforesaid, it is submitted that expenditure on account of provision for bad debts and advances ought to be considered as operating expenditure and after including the same in the operating cost of this company, the operating margin reduces to 7% as against margin of 15.07% considered by the TPO/DRP (pg 61 of appeal folder): Description Amount (Rs) Seg Operating Revenue 1,12,01,72,651 Seg Direct Expenses 1,00,75,62,812 Common Expenses 39334570 Less: proportionate non operating expenses (provision for doubtful debts Rs. 5,08,06,788 and provision for doubtful advance Rs. 3,39,47,774) 73393613 Seg Operating Expenses 1,04,68,97,382 Seg Operating Profit 7,32,75,269 Seg OP/TC 7.00% Accordingly, it is submitted that segmental operating margin of 7% earned by Geometric Softwar....