TaxTMI 
TaxTMI 
2018 (9) TMI 1973
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Assessing Officer ('A.O') made a reference to the Transfer Pricing Officer (TPO) under Section 92CA of the Act for determination of the Arm's Length Price (ALP) of the international transactions entered into by the assessee with its AEs in the year under consideration. 2.2 The TPO passed an order under Section 92CA of the Act dt.4.8.2008 proposing a Transfer Pricing Adjustment of Rs. 1,47,92,474 to the ALP of international transactions entered into by the assessee in respect of its software development services. After receipt of the TPO's order, the Assessing Officer proceeded to complete the assessment under Section 143(3) of the Act vide dt.10.12.2008, whrein the assessee's income was determined at Rs. 1,65,96,800 including, inter alia, the Transfer Pricing Adjustment of Rs. 1,47,92,474 proposed by the TPO. 2.3 Aggrieved by the order of assessment dt.10.12.2008 for Assessment Year 2005-06, the assessee carried the matter in appeal to the CIT (Appeals) - IV, Bangalore. The learned CIT (Appeals) disposed off the appeal vide the impugned order dt.19.2.2013 granting the assessee partial relief. 3. Revenue, being aggrieved by the order of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tive filters applied by the TPO. 9. The hon'ble CIT(A), on the facts and in the circumstances of the case, erred in holding that M/s. Bodhtree Consulting Ltd and Geometric Software Solutions Co. Ltd. can not be taken as comparables, without appreciating the fact that the companies qualifies all the qualitative and quantitative filters applied by the TPO in selection of these companies as comparables. 10. The learned CIT (A) has erred in directing inclusion of the M/s. VJIL Consulting Ltd. as a comparable, rejecting the TPO's conclusion that the company does not satisfy the qualitative filters applied for the purpose of comparability analysis without appreciating the fact that it is an inappropriate comparable for the purpose of determining the arm's length price. 11. The learned C1T(A) erred in directing inclusion of M/s Akshay Software Technologies Ltd., without recording any finding as to how the same qualifies through the filters ( qualitative and quantitative) applied for the purposes of comparability analysis without appreciating the fact that the profile of the company shows that it is a predominantly onsite company and thus not a suitab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ported, inter alia, international transactions of "Export of software development services" aggregating to Rs. 24,73,14,000. The assessee, in its TP Study has adopted TNMM as the Most Appropriate Method (MAM) and arrived a set of 45 comparables (listed at page 19 of the TPO's order under Section 92CA of the Act) with average Mean Margin of 9.97%. The assessee's profit margin being higher at 16.17%, the assessee concluded that its transactions in the software development services segment are at Arm's Length. 5.2 The TPO rejected the assessee's TP Study for various reasons mentioned in his TP Study and conducted his own comparability analysis, applying various filters, and selected the following set of 17 comparable companies; as listed at para 15 on page 151 of his order :- Sl. No. Company Name 1 Bodhtree consulting Ltd.* 2 Lanco Global Systems Ltd.* 3 Exensys Software Solutions Ltd. 4 Sankhya Infotech Ltd. 5 Sanken Network Systems Ltd.* 6 Four Soft Ltd.** 7 Thirdware Solution Limited 8 R.S. Software (India) Ltd.* 9 Geometric Software Solutions Co. Ltd. 10 Tata Elxsi Limited (seg.) 11 Visual s....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., from a perusal of the figures mentioned n the Table at para 103 of the CIT (A)'s order, it would appear that 2 companies, namely, (i) Exensys Software Solutions Limited and (ii) Thirdware Solutions have been excluded under the 'abnormal profit filter' as these two companies would not qualify to be excluded under the turnover filter adopted by the learned CIT (Appeals). 5.5 Different Accounting Year Filter. 5.5.1 The learned CIT (Appeals) has disapproved the application of this filter by holding that in the absence of evidence to show that there has been a significant impact on margins due to different reporting OR accounting periods the said filter cannot be applied. In that view of the matter, the learned CIT (Appeals) directed the inclusion of Quintegra Solutions Ltd., as a comparable in the final set of comparables and also directed that the operating margin be adopted at 8.77%; being the average of margins of 6.85% and 10.68% for the Financial Years ended 30.9.2004 and 30.9.2005 respectively. 5.6 Apart from the above, the learned CIT (Appeals) has discussed the functional comparability and other criteria of certain companies and has dire....
X X X X Extracts X X X X
X X X X Extracts X X X X
....following 10 companies from the list of comparable companies, for the reasons cited hereunder :- S. No. Name of the Company Reasons for Exclusion 1 Bodhtree Consulting Ltd. Functionally different. 2 Exensys Software Solutions Ltd. Functionally different and other reasons. 3 Thirdwre Solutions Ltd. Functionally different fails export revenue filter and super profits. 4 Geometric Software Solutions Ltd. Functionally different and segmental details are not available. 5 Tata Elxsi Ltd. Functionally different and segmental details are not available. 6 i-Gate Global Solutions Ltd. HighTurnover. 7 Flextronics Software Systems Ltd. High Turnover and functionally different. 8 L & T Infotech Ltd. High Turnover. 9 Satyam Computer Services Ltd. High Turnover and unreliable data. 10 Infosys Technologies Ltd. High Turnover and functionally different. The assessee also prayed for upholding the inclusion of the following companies in the final set of comparables, for the reasons given hereunder :- Sl. No. Name of the company Reasons for Inclusion 1 Quintegra Solutions Ltd. Functi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), wherein it was held that when there is a limit for the lower end for identifying the comparable companies, there is no reason why there should not be an upper turnover limit also; as size matters in business. 6.3.1 The learned Departmental Representative for Revenue submitted that turnover is not a relevant criteria to regard a company as not comparable, so long a the two companies are functionally comparable. If the functions of two companies are identical then they have to be regarded as comparable. According to the learned Departmental Representative, therefore, the learned CIT (Appeals) was not justified in excluding the above 5 companies from the list of comparables on the ground that their turnover was above Rs. 200 Crores and cannot be compared with the assessee whose turnover is approximately Rs. 24.73 Crores. 6.3.2 The learned Departmental Representative also filed before us, written submissions to contend that in the Software Industry size has no influence on the margins earned by an entity. According to the learned Departmental Representative, economie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see submitted that the co-ordinate bench of this Tribunal in the case of Dell International Services India (P.) Ltd. v. Dy. CIT [2018] 89 taxmann.com 44 dt.13.10.2017 also for Assessment Year 2005-06 has considered the various aspects of the application of the turnover filter for excluding companies and has observed that the first decision rendered on the application of this filter was in the case of Genisys Integrating Systems (India) (P.) Ltd. (2012) 53 SOT 159 (Bang - Trib.) on 5.8.2011. Further, in that case i.e. Dell International Services India Pvt. Ltd. (supra), the co-ordinate bench of this Tribunal had discussed the apparent divergent view of two non-jurisdictional High Courts and also the decision of this Tribunal in the case of Sysarris Software (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 243 (Bang. - Trib.), wherein the Tribunal; after noticing the decision of the Hon'ble High Court of Delhi in the case of Chryscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT (2015) 376 ITR 183 (Del) and the decision to the contrary of the Hon'ble Bombay High Court in the case of CIT v. Pentair Water India (P.) Ltd. ITA No.18 of 2015 dt.16.9.2015; held that since there we....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble companies, as they were medium sized companies and assessee was a small sized company and therefore it cannot be compared. By this process, 5 companies were excluded from the list of comparable companies. These 5 companies, as we have already mentioned, also got excluded by application of RPT filter. These companies are:- (1) iGate Solutions Ltd. (2) Infosys Technologies Ltd. (3) Satyam Computer Services Ltd. (4) L&T Infotech Ltd. and (5) Flextronics Software Systems Ltd." 6.5.2 Respectfully following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Dell International Services India (P.) Ltd. (supra), we uphold the decision of the learned CIT (Appeals) in applying the upper turnover filter and excluding the five companies listed above (at para 6.1 of this order) from the list of comparable companies. 7. Ground No.3 - Abnormal Profits. 7.1 In Ground No.3 (supra), revenue assails the decision of the learned CIT (Appeals) in the impugned order in excluding companies with abnormal profit margins from the final set of comparable companies. Revenue contends that the learned CIT (Appeals) has sought t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has not been discussed at all. Further, the assessee has also raised issues/arguments of non-comparability due to other reasons also, which require to be examined. In view of the above factual matrix of the case, we deem it appropriate to remand the issue of comparability of the two companies, (i) M/s. Exensys Software Solutions Ltd. and (ii) M/s. Thirdware Solutions Ltd. to the file of the learned CIT (Appeals) for proper examination, discussion and adjudication on the points raised by the assessee on the comparability of these two companies. Needless to add the assessee shall be afforded adequate opportunity of being heard and file details/submissions, which shall be duly considered before deciding the issue. We hold and direct accordingly. Consequently, Ground No.3 of Revenue's appeal is allowed for statistical purposes. 8. Ground No.4 8.1 In this Ground (supra), Revenue has assailed the decision of the learned CIT (Appeals) in rejecting the diminishing revenue filter used by the TPO to exclude companies not reflecting the industry trend. 8.2 On a perusal of the impugned order, we find that none of the comparable companies have been either excluded OR included by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....known as to whether the quarterly results of the company are available on record. It is also not known whether such results, even if available, are reliable OR not. It is also not known whether from such details, the results can be extrapolated or not. No evidence has been brought on record to substantiate the above. In the absence of any details, we are unable to agree/concur with the assessee's contention. 9.3.3 As regards the computation of margin, it is settled principle that only the current financial year's data has to be considered; which has not been followed by the learned CIT (Appeals). No reasons have been adduced by the learned CIT (Appeals) for his direction that the average of two years margin has to be taken as the margin in this case. In this view of the matter, we do not agree with the decisions of the learned CIT (Appeals) on both disapproving of the different accounting year filter and in adopting the average of two years margin, and consequently set aside the orders of the learned CIT (Appeals) on this issue and restore that of the TPO. The ground Nos.5 to7 of Revenue are allowed. 10. Ground No.8 - Exclusion of Tata Elxsi Ltd. 10.1 In this groun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 & 13 of its order, has held as under: "12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): ** ** ** 17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica Pvt. Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- "14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the co-ordinate bench has given a finding that there is no change in the business activity of this company and hence the finding is applicable to the case on hand also. In the above factual and legal matrix of the case, we uphold the decision of the learned CIT (Appeals) in excluding this company from the set of comparables. Consequently, Ground No.8 of Revenue's appeal is dismissed. 11. Ground No.9 - Exclusion of (1) Bodhtree Consulting Ltd. And (2) Geometric Software Solutions Company Ltd. 11.1 In this ground (supra), Revenue assails the decision of the learned CIT (Appeals) in excluding the above two companies from the set of comparables. Revenue contends that these companies satisfy all the qualitative and quantitative filters applied by the TPO and hence the learned CIT (Appeals) erred in directing their exclusion from the set of comparables. 11.2 Per contra, the learned Authorised Representative of the assessee contended that these two companies are functionally different from the assessee in the case on hand. It was submitted that Bodhtree Consulting Ltd., is engaged in product development and ITES and has a different revenue recognition policy on account of whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ycle management services which are not similar to the functions of the assessee. The learned CIT (Appeals) has also observed that the revenue break up between products and services is not available and therefore directed exclusion of this company from the set of comparables. This finding of the learned CIT (Appeals) that this company is functionally dissimilar to the assessee, has not been controverted by the learned Departmental Representative. In this view of the matter, we find no reason to interfere with the decision of the learned CIT (Appeals) in directing exclusion of this company, M/s. Geometric Software Solutions Company Ltd., from the set of comparables. 11.4.2 Consequently, we dismiss ground No.9 of Revenue's appeal. 12. Ground No.10 - Inclusion of VJIL Consulting Ltd. 12.1 In this ground, Revenue assails the decision of the learned CIT (Appeals) in including this company in the set of comparables. According to Revenue, the learned CIT (Appeals) erred in doing so since this company failed to satisfy the qualitative filters applied by the TPO and therefore was not an appropriate comparable to the assessee in the case on hand. 12.2 Per contra, the learned A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f comparables on the ground of on-site filter on the basis of details obtained under Section 133(6) of the Act. The learned CIT (Appeals) has rendered a finding that the rejection of this company by the TPO is based on expenditure incurred on foreign branch and not on the basis of on-site revenues. The learned CIT (Appeals) was of the view that the TPO's decision is based on surmises and misplaced understanding of foreign branch expenses as on-site revenue and not by any corroborative evidence in this regard. This finding of the learned CIT (Appeals) has not controverted by Revenue before us. We find that in the cited decision, Qualcomm India (P.) Ltd.'s case (supra), the Delhi Bench of the Tribunal has rendered a finding that this company is engaged in provision of software development services, which is functionally similar to that of the assessee. Though this decision (supra) is for assessment year, it does support the finding of the learned CIT (Appeals) and also revenue has not brought on record any contrary decision or evidence to controvert the same. In this view of the matter, we find no reason to interfere with or deviate from the decision of the learned CIT (Appea....