TaxTMI 
TaxTMI 
2017 (2) TMI 1438
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The facts, in brief, relevant to this appeal are that for the a y 2009-2010, the assessee filed its return on 30 September 2009, declaring a taxable income of Rs. 391, 81, 690 under the normal provisions. On a reference to the TPO, the, TPO passed an order dated 8th January 2013 determining an adjustment of Rs. 5, 46, 76, 721 & Rs. 1, 15, 99, 315 in respect of the software development services & the CSS transactions, respectively. Thereafter, the AO has considered the ALP determined by the TPO and passed an order which resulted in an addition of Rs. 6, 62, 76, 036 to the total income of the assessee. The assessee challenged this order before the CIT (A), inter alia, on functional dissimilarity of comparables and on working capital adjustment on both segments but could not succeed. Aggrieved against the CIT (A) order, it filled this appeal with the following grounds : 04. Additional grounds : Subsequently, the assessee filed additional grouds as under : 04. The AR of the assessee submitted that there are two segments viz Software Services and ITEs or Customer Support Services having a turnover of Rs. 49.34 & 9.89 Crores, respectively, and the corresponding operativ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Tech Ltd., and M/s Larsen & Toubro infotech Ltd. 12. Regarding the first aspect i.e. exclusion of some comparables on the basis of functional dissimilarity we deal this issue company wise as under; 1) M/s Kals Information Systems Ltd., For exclusion of this company, reliance has been placed on the Tribunal order rendered in the case of M/s Onward technologies Ltd., Vs DCIT as reported in 26 ITR (Trib) 734(ITAT, Mum.). It was pointed out that copy of the judgment is available on pages 1 to 19 of the Case Law Compendium and our attention was drawn to para no.23 of this Tribunal order. Ld. DR of the revenue supported the order of the authorities below. 13. We have considered rival submissions. We find that in para-23 of this Tribunal order, cited by the ld.AR of the assessee i.e. in the case M/s Onward technologies Ltd., Vs DCIT (Supra), it is noted by the Tribunal that this company i.e. M/s Kals information Systems Ltd., functions in the field of consultancy, information provider and general insurance sector. In the present case, the assessee company is providing software development services to its AE who is engaged in business of software products as well as of o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21.We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal order is reproduced 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. 5. M/s Infosys Technologies Ltd., For exclusion of this company, reliance has been placed on the judgment of the Hon'ble Delhi High Court rendered in the case of M/s Aginity India Technologies Pvt.Ltd., in ITA No.1204/2011 dated 10-07-2013 and in particular, our attention was drawn to para-6 of the judgment as available inpage- 386 of the case law compendium and the same is reproduced hereunder:- "6. Learned counsel for the revenue has submitted that the Tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the Tribunal has stated hat Infosys Technologies....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssimilarity. 06. The next issue is seeking correction in the margin computation of two comparables viz Sasken Communications Services Ltd & Larson and Toubro Infotech Ltd. In this regard, the gist of the AR's submissions is extracted as under : Sasken Communication Technologies Ltd : The TPO held that it is functionally comparable, satisfies all the filters and retained it as a comparable. However, the assessee submitted that this company has to be rejected for the reason that the margins are erroneously computed, took us through pages 282, 327& 328 of the paper book and furnished a working which shown the revised margin at 16.00%. Larsen & Toubro Infotech Ltd : The TPO held that this company is engaged in software development services, satisfies all the filters and retained it as a comparable. The sssessee submitted that this company has purchased Mutual fund units approx 170% of its revenue from operations and sold approx 169% of its revenue as found in page 1968 of paper book. It itself has categorised the closing balance under the current investments, showing intention to sell the said outstanding balance of securities as well as in page 1970. Though the ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....han 75%. The assessee submitted that its export earnings is 95%, functionally similar and qualified all the filters applied by the TPO and hence it should be held as a comparable. Placed reliance on the decision in Cisco systems India P Ltd in IT(TP)A.27/Bang/2014 dt 14.8.2014. The relevant portion of the order is extracted as under : " 27.8 CG-Vak Software & Exports Ltd. (D) (i) As far as this company is concerned, the TPO rejected the same by applying the 25% employee cost filter. According to the TPO, usually software development services are high-end services performed by skilled and professional employees and hence the cost of rendering such high-end services is also high as they comprise of high salaries and better welfare facilities, compared to low-end services. Therefore, the filter of employee cost of more than 25% of turnover was considered by the TPO while choosing the comparable. (ii) The submission of the ld. counsel for the assessee was that in the case of assessee, this test is satisfied. In this regard, our attention was drawn to page 818 to 824 of the assessee's paperbook wherein annual report of this company has been provided. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndent comparable companies to take into account the differences in functions and risks. The OECD Transfer Pricing guidelines also recognize adjustments to be made to account for differences between controlled and uncontrolled situations that would significantly affect the price charged or return required by independent enterprises. Accordingly, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in terms of risks assumed is made. 17.3 In the submissions made to the leaned TPO, the Appellant has computed the adjustment for the risk difference of the Appellant vis-à-vis of the comparable companies by placing reliance on the methodology of risk adjustment as stated in the decision of the Hon'ble Bangalore Tribunal in case of Philips Software Centre Private Limited vs. Asst. Commissioner of Income Tax (119 TTJ 721) (2008 26S0T226) as below. Average prime lending rate during FY 2008-09 (A)¹ - 12.75 percent² Average bank rate during FY 2008-09 (B) - 6.00 percent³ Difference between the prime lending rate and bank rate C = (A - B) -6.75 percent Risk Adjustment (C) - 6.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad. In other words, if one customer goes out of business still there are others which will sustain the business of the tested party. But in case of the taxpayer there being only one client, the entire risk is concentrated on one client, and therefore. if the client is out of business the taxpayer will also be out of business. Earlier the argument given about the country risk was that EU & US are having better credit rating as compared to India. This argument is no longer valid as their credit rating is also on a downward trend. and moreover in case of uncontrolled comparables we are taking the filter of export sales >75%. Most of the exports of software services from India are primarily to EU & US and therefore in case of uncontrolled comparables also the risk level will he equated. So far as the methods suggested by taxpayers in this regard are concerned, they are statistical methods available in standard books of statistics and financial management. A careful study of these methods would show that in all of them a number of assumptions are made to draw the conclusions. Transfer pricing regulations in India is against any assumption in respect to any adjustment. In support, refere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AR's submissions are as under: Microland Ltd : The TPO held that this company is functionally comparable, satisfies all the filters and hence retained it as a comparable. The assessee submitted that it is engaged in IT Infrastructure Management services and ITeS services. The TPO has considered KPO services such IT Infrastructure management as well, while computing the margins. However, only ITeS operations has to be considered. Further, it submitted that the margins are erroneously computed and furnished a working. Relied on Lam Research (India) P Ltd v DCIT in IT(TP)A.1437/Bang/2014 dt 30.4.2015 Aditya Birla Minacs Worldwide Ltd : TPO held that it is functionally comparable, satisfies all the filters hence retained it as a comparable. Further, the assessee did not raise any objection when it is included. The assessee submitted that the margins are erroneously computed and furnished a working. Relied on Lam Research (India) P Ltd v DCIT in IT(TP)A.1437/Bang/2014 dt 30.4.2015. 08. The assessee also placed reliance on its own case for a y 2007-08 in ITA No.1214/Bang/2011 dt 29.8.2016. For the above two issues, it placed reliance on Lam Research (India) P Ltd v D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bulated hereunder- Sl. Company Name Operating Revenue PBIT/ Cost% 1. Accentia Technologies Limited 78.73 49.40 2. Acropetal Technologies Ltd. (Seg.) 33.13 25.01 3. Aditya Birla Minacs Worldwide Ltd 231.57 0.53 4. Cosmic Global Ltd. 7.76 48.20 5. Crossdomain 33.76 29.38 6. Eclerx Services Ltd. 187.98 53.44 7. Infosys BPO Ltd. 101.62 16.90 8. Jeevan Softech Technology Ltd. 1.79 16.56 9. Microland Limited 144.05 2.35 10. Microgenetic Systems Ltd. 1.27 10.11 11. R.Systems International Ltd.(Seg.) 26.55 5.77 12. Genesys International Ltd. 83.18 71.50 The TPO has here considered the profit margin of M/s. Aditya Birla Minacs Worldwide Ltd., at 23.86%, against 0.53% given in the table above. There is an obvious contradiction which has to be resolved. We are therefore of the opinion that profit margin needs to be correctly worked out and the matter requires a fresh look by the AO / TPO. Though Aditya Birla Minacs Worldwide Ltd., is a good comparable, the profit margin needs to be correctly worked out after considering the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ta, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected. 33. Capital IQ Information Systems (India) P. Ltd., was also into ITES and the decision given was also for the very same assessment year. Therefore, we are of the opinion that Accentia Technologies has to be excluded from the list of comparables. Ordered accordingly. 34. With respect to Cosmic Global Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 19 of its order, had held as under : Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27.76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. Accordingly, we direct that Cosmic Global Ltd., also be excluded from the list of comparables. 35. With respect to Eclerx Services Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 18 of its order, had held as under : Eclerx Services Ltd. 18. The objection of assessee t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....PO held that this company is functionally comparable, satisfies all the filters hence retained it as a comparable. The assessee submitted that it has to be rejected for the following reasons : 1. Market Leader - Infosys is a giant company with different risk profile and nature of services, has brand value and owns IPs. 2. Global company - provides global delivery through 11 delivery locations (5 in India and 6 internationally) which sufficiently hints that the company fails onsite services filter, although the actual onsite revenue information is not available. 3. Brand building activity and the company incurs significant Marketing Expenses - 5.88% of sales. 4. Extraordinary events during the year - Amalgamation & re-organisation of various companies. 5 Rewards and recognition obtained by Infosys. 6 Significant brand value leading to the increase in revenue and brand profits. In the assessee's case in a y 2007-08, this Tribunal rejected it as a comparable in ITA No.1214/Bang/2011 and the assessee relied on the case laws of : Logica P. Ltd IT(TP)A No 1621/Bang/ 2014 dt 18.03.2016 for ay 2009-10[TS -187 - ITAT -2016 (Bang)TP)] and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....brought to the TPO's notice that is not required to report RPT filters as it qualifies to be 'Level I enterprise' as per Accounting Standards. In spite of powers available u/s 133(6), the TPO did not exercise it to get the RPT details. Hence this company should not be rejected. Cepha Imaging : This TPO and the CIT (A) rejected this company without giving any reason. The assessee stated that it is engaged in provision of EPublishing including Typesetting, composition, Artwork, proof editing management, XML conversion services servicing to publishers of books and journals. As the above services are in the nature of ITeS, accordingly the company should be accepted as comparable. We heard the rival submissions and gone through relevant material. We deem it fit to remit these issues to the TPO/AO for a fresh re-adjudication. While doing so, the assessee shall have to be given due opportunity to present its case. 12. The next issue is that the assessee is seeking risk adjustments. In this regard, our attention was drawn to the decision of ; this Tribunal in case of Philips Software Centre Private Limited vs. Asst. Commissioner of Income Tax (119 TTJ 721) (200....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... facts, by not accepting the Appellant's plea that for determining the arm's length margin/price, only using the margins earned by the comparable companies during the financial year 2004-2005 and considering additional comparables at the time of assessment proceedings, the data pertaining to which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements, is not appropriate. the learned CIT(A) erred in law and facts, by accepting the approach of the learned AO/ learned TPO in accepting/rejecting companies by applying different quantitative and qualitative filters, a) the learned CIT(A) has erred in law and facts, by accepting the learned AO/learned TPO approach of modifying the nil "foreign exchange earnings" filter adopted by the Appellant to accept only those companies whose export revenues contributed at least 25% of its total revenues. b) the learned CIT(A) has erred in law and facts, by not accepting Appellant's plea that comparable companies identified by the Appellant should not be rejected where consolidated results had been used for analysis. The Appellant had considered the co....