TaxTMI 
TaxTMI 
2017 (12) TMI 1728
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....t, 1961 (in short 'the Act'). The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In view of the international transactions entered into by the assessee in the year under consideration, as reported in Form 3CEB, the Assessing Officer made a reference to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of the international transactions entered into with its AEs. The TPO passed an order under Section 92CA of the Act dt.28.1.2013 proposing the following TP Adjustments :- i) SWD Segment : Rs. 1,50,87,408. ii) ITES Segment : Rs. 1,23,13,265. Total Transfer Pricing Adjustment u/s.92CA : Rs. 2,74,00,673. The Assessing Officer concluded the assessment under Section 143(3) r.w.s. 92CA of the Act vide order dt.2.4.2013 wherein the assessee's income was determined at Rs. 2,78,40,699, which inter alia, included the aforesaid Transfer Pricing Adjustment of Rs. 2,74,00,673. 2.2 Aggrieved by the order of assessment dt.2.4.2013 for Assessment Year 2009-10, the assessee filed an appeal before the CIT (Appeals). The learned CIT (Appeals) disposed off the appeal....
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.... ii. FCS Software Solutions Ltd Information Technology enabled Services Exclusion i. Infosys BPO Limited ii. Aditya Birla Minacs Worldwide Limited iii. Accentia Technologies Limited iv. Cosmic Global Limited v. EClerxServices Limited 4. The learned CIT(A) erred in law and on facts in ignoring the limited risk profile of Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO and in not allowing appropriate adjustments under Rule 10B of the Rules to account for differences between the Appellant and comparable companies. The Appellant submits that each of the above grounds is independent and without prejudice to one another." 4. Revised Ground Nos. 1 to 3(a) to 3(c) and 4. 4.1 At the outset, the learned Authorised Representative for the assessee submitted that the assessee is not pressing the revised grounds raised at S.Nos.1 to 3(a) to 3(c) and 4 in this appeal, but will be only urging revised Ground 3(d) for exclusion / inclusion of comparables in the software development /information technology services segment and exclusion of comparables in the I....
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.... ii) Bodhtree Consulting Ltd. iii) Tata Elxsi Limited iv) Persistent Systems Ltd. v) Larsen & Toubro Infotech Ltd. vi) Infosys Technologies Ltd. 6.2 In support of the assessee's plea for exclusion of the aforesaid 6 companies form the TPO's final set of comparables, the learned Authorised Representative placed reliance , inter alia, on the following judicial pronouncements of the co-ordinate bench of this Tribunal for the same assessment year 2009-10, and the facts of which; it is submitted would go to show are engaged in similar activities as the assessee in the case on hand :- (i) Cisco Systems India Pvt. Ltd. in IT(TP)A No.271/Bang/2014 for A.Y. 2009-10, and (ii) VMware Software India Pvt. Ltd. in IT(TP)A No.1311/Bang/2014 dt.6.1.2017. 7. KALS Information Systems Ltd. (KALS) 7.1 This company 'KALS' was selected as a comparable by the TPO in spite of the objections of the assessee to its inclusion on grounds of being functionally dissimilar to the assessee as it was engaged in development and sale of software products and has substantial inventory in this regard; whereas the assessee in the case on hand is merely p....
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....other 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 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 i....
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....supported the orders of the authorities below in including this company as a comparable. 8.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. for Assessment Year 2009-10 (supra) has excluded this company 'Bodhtree' from the final set of comparables, holding as under at para 26.1 thereof :- " 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai....
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....to the assessee in the case on hand who is merely providing software development services to its AEs. In support of the assessee's contention, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. also for Assessment Year 2009-10 (supra). 9.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company, 'Tata' in the final set of comparables. 9.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. for Assessment Year 2009-10 (supra) has excluded this company 'Tata' from the final set of comparables, holding as under at para 26.4 and 26.5 thereof :- " 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011,....
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....o exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." ....
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....lar to the assessee in the case on hand on account of its owning significant intangibles, its brand value, R & D activities and scale of operations. In support of the assessee's plea for exclusion of this company, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd. also for Assessment Year 2009-10 (supra). 10.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including 'Infosys' as a comparable to the assessee. 10.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of Cisco Systems (India) Pvt. Ltd., also for Assessment Year 2009-10 (supra) has directed exclusion of this company 'Infosys' from the final list of comparables to a mere provider of software development services, for reasons that it owns significant intangibles and is functionally different as it generates huge revenues from software products. In this regard, at para 26.2 of its order, the c....
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....that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned....
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....elow for exclusion of this company from the list of comparables on grounds of being functionally dissimilar to the assessee in the case on hand, as 'Persistent' was also engaged in development and sale of software products, change in business activities - partnered with customers leading to ownership of applications, attending to outsourced business needs, etc. In support of the assessee's plea for exclusion of this company 'Persistent' from the list of comparables, reliance was placed on the decision of the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd. for Assessment Year 2009-10 (supra). 11.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including 'Persistent' in the final set of comparables. 11.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd., also for Assessment Year 2009-10 (supra) at paras 15 and 16 thereof, observing that 'Persistent' is engaged in software product developmen....
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....e- produced above and as per the same, this company i.e. M/s. Persistent Systems Ltd., was in product designing services and into software product development. Since the present assessee company is only providing software development services to the AE, this company cannot be considered as a comparable in the present case. Since the ld. DR of the revenue could not point out any difference in facts, by respectfully following this Tribunal order, we direct the AO/TPO for exclusion of this company from the final list of comparable." 11.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of VMware Software India Pvt. Ltd., also for Assessment Year 2009-10 (supra), we hold that this company, Persistent Systems Ltd., is to be excluded from the list of comparables, it being functionally dissimilar to the assessee in the case on hand, who is merely providing software development services to its AEs. 12. Larsen & Toubro Infotech Ltd. ('L & T') 12.1 This company, 'L & T' was included by the TPO in the final list of comparables, rejecting the assessee's objections to its inclusion on grounds of scale of operations, etc. The TPO held that ....
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....ables. Assessee's Plea for Inclusion of 2 companies in the list of comparables - Software Development Services Segment. 13.1 In the revised grounds raised (supra), the assessee has sought inclusion of the following two companies in the final set of comparables :- (i) Thinksoft Global Services Ltd. and (ii) FCS Software Solutions Ltd. 13.2 On a perusal of the TPO's order under Section 92CA of the Act at para 13.1 (b), we find that the TPO himself in the show cause notices has proposed the aforesaid two companies for inclusion in the final set of comparables, but had thereafter came to the view that the working capital adjustment for both these companies exceeded 4% of profits and therefore these two companies could not be taken as proper comparables. At para 13.1 (b), the TPO has rendered the following reasoning for excluding these two companies as under :- "13.1 (b) Two companies proposed in the show cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin get distorted. It may not be out of context to mention that our search for comparable is primarily focus ....
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.... of working out the correct PLI of the final set of comparables by computing and allowing working capital adjustment on actual basis; holding as under : " 20. Coming to the ground for inclusion of M/s. Thinksoft Global Solutions Ltd and FCS Software Solutions Ltd, we find that TPO herself had suggested these in the show cause notice, but had thereafter come to a conclusion that working capital adjustment required for these two companies exceeded 4% of profits and could not be therefore taken as proper comparables. Reasons given by the TPO for excluding these two companies, appear at paras 3.6.5.1, of her order which reads as under : b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their w....
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....n, insignificantly small. Thus the reasoning given by TPO for rejecting these two companies as proper comparables, was in our opinion, incorrect. We set aside the orders of the lower authorities in this regard and direct these two companies to be included in the list of comparables for working out the average PLI. 24. Now coming to the issue of working capital adjustment, findings of the TPO in this regard as it appears at para 3.7, reads as under : TPO had restricted the cost of capitalto 1.71%. Rationality for such an upper limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of M/s. Rambus Chip Technologies (India) P. Ltd v. DCIT [IT(TP)A.23/Ban/2015, dt.22.07.2015. Coordinate bench had held as under at para 13 and 14 of its order : 13. As regards ground No.3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled ....
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....(i) and (iii) to (v) (supra) from the final set of comparables for the assessee's ITES Segment, reliance, inter alia, ws placed on the decision of the co-ordinate bench of this Tribunal in the case of Novo Nordisk India Pvt. Ltd. in IT(TP)A No.122/Bang/2014 for Assessment Year 2009-10. In respect of the company at S.No.(ii), reliance was placed on Novell Software Development (India) P. Ltd. in IT(TP)A No.1287/Bang/2011 for Assessment Year 2007-08 (supra). 15. (i) Infosys BPO Limited (iii) Accentia Technologies Limited (iv) Cosmic Global Limited (v) Eclerx Services Limited. 15.1 The above 4 companies (supra) were included in the final set of comparables by the TPO, despite the objections of the assessee that, inter alia, they were functionally dissimilar to the assessee in the case on hand. The TPO's action was upheld by the learned CIT (Appeals). Before us, the learned Authorised Representative of the assessee reiterated the objections to their inclusion as comparables raised before the authorities below that they were, inter alia, functionally dissimilar from the assessee in the case on hand. It is contended that the comparability of these companies with an ITES....
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.... 16.2 Per contra, the learned Departmental Representative for revenue supported the orders of the authorities below in including this company, 'Aditya Birla' in the list of comparables. The learned Departmental Representative submitted that in a number of decisions the co-ordinate benches of this Tribunal had consistently taken the view that application of RPT filter at 25% of turnover is reasonable. It was also pointed out that in the case of Novell Software Development (India) P. Ltd. (supra) relied upon by the assessee, the co-ordinate bench of this Tribunal noted that the RPT was generally applied by the Tribunal between 15% and 25%, but the RPT filter at 15% was applied in that case only because there was a large number of comparables, i.e. 26 comparables. 16.3 We have heard the rival contentions, perused and carefully considered the material on record. Before us, the learned Authorised Representative for the assessee could not controvert the submissions of the learned Departmental Representative for Revenue that various coordinate benches of this Tribunal have been consistently following application of RPT filter at 25% of turnover. Respectfully following the decision of t....
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.... Accentia Technologies Ltd. -16.63% 46.40% 6 Informed Technologies India Ltd. 22.61% 7 Cosmic Global Ltd. 40.61% 8 Eclerx Services Ltd. 57.50% AVERAGE PLI 25.04% Document 5 Arm's Length Mean Margin on Cost Less: Working Capital Adjustment (Annex. C) Adjusted margin Operating Cost Arms Length Price (ALP) 124.95% of OC Price Received Shortfall being adjustment u/s 92CA: 25.04% 0.09% 24.95% 10,32,07,710/- 12,89,58,034/- 11,66,44,769/- 1,23,13,265/- Document 6 3.7. Working Capital Adjustment: The working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009. In this case, the average PLR adopted by SBI, the largest scheduled bank, for short term working capital loans for the relevant FY 2008-09 is considered. The average PLR of 12.50% p.a was adopted by the TPO while computing the working capital adjustment. The working capital adjustment is restricted to the average cost of capital computed at 1.71% in the case of the uncontrolled comparables selected by the TPO. Hence, the working capital adjustment in the case of the taxpayer is allowed as p....
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....arables and also perused the relevant material on record including the various decisions of the coordinate benches of the Tribunal cited by the learned counsel for the assessee. Accentia Technologies Limited 12. As regards the selection of Accentia Technologies Limited as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. V/s. Addl./Dy. Commissioner of Income-tax, Circle 1(2), Hyderabad and vice versa (ITA No.124 and 170/Hyd/2014 dated 31.7.2014); Excellence Data Research Pvt. Ltd., Hyderabad V/s. ITO Ward 2(1), Hyderabad (ITA No.159/Hyd/2014 dated 31.7.2014); and Hyundai Motors India Engineering P. Ltd., Hyderabad V/s. DCIT, Circle 2(2), Hyderabad (ITA NHo.255/Hyd/2014 dated 31.7.2014), wherein M/s. Accentia Technologies Limited (Seg) was excluded by the Tribunal from the list of comparables on the ground that it was a case of mergers and acquisition, and the company was also found to be functionally different. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Exce....
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....vices P. Limited (supra), following the decision of the Delhi Bench of the Tribunal in the case of Mercer Consulting (India) Ltd. V/s DCIT (vide order dated 6th June, 2014 in ITA No.966/Del/2014), wherein M/s. Cosmic Global Limited was not accepted as comparable by the Tribunal for the following reasons given in paras 13.2 and 13.3 of its order- "13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs.7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs.9.90 lacs, Translation charges at Rs.6.99 crore and Accounts BPO at Rs.27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable w....
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..... Cosmic Global Limited cannot be considered as comparable with the assessee- company. Accordingly, the Assessing Officer is directed to exclude the same from the list of comparables. We may clarify here for the sake of completeness that the Learned Departmental Representative has pointed out at the time of hearing before us that M/s. Cosmic Global Limited was initially selected by the assessee company itself as a comparable in the TP study report. In our opinion, this aspect on its own is not sufficient to include M/s. Cosmic Global Ltd. in the list of comparables, as the assessee has always a right to object selection of a company taken as comparable earlier, if it is subsequently found to be not comparable, as a result of difference in functions performed etc., and such objection is required to be considered on merits. Document 12 Eclerx Services Ltd. 16. As regards selection of Eclerx Services Ltd. as comparable, it is observed that the said company was excluded by the Tribunal from the list of comparables inter alia in the case of Excellence Data Research P. Ltd. (supra), after having found the same to be functionally dif....