TaxTMI 
TaxTMI 
2017 (8) TMI 1683
X X X X Extracts X X X X
X X X X Extracts X X X X
....1/-. The assessee-company also reported the following international transactions: Ø Rendering of consultancy services ... Rs.83,21,05,022/- Ø Reimbursement of expenses (paid) ... Rs. 82,91,029/- 3. The assessee-company had also submitted transfer pricing study report adopting the operating profit to total cost (OP/TC) as a profit level indicator for the transfer pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee-company's profit margin was computed at 14.19% and the assessee-company claimed that the same was comparable with other companies rendering software development services. For the purpose of transfer pricing study, the assessee-company had chosen 8 comparable entities and arithmetic average of operating profit margins of said comparables was computed at 8%. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm's length. The assessee-company has select....
X X X X Extracts X X X X
X X X X Extracts X X X X
....list of companies: The CIT(A) also directed exclusion of the comparable Tata Elxsi on account of functional differences and also directed exclusion of Bodhtree Consulting Ltd. as this company was held to be engaged in ITeS and absence of segmental information. The CIT(A) also directed exclusion of Geometric Software Solutions Ltd., on the ground that it is functionally different from that of assessee-company and no segmental information was available. The CIT(A) upheld the action of the TPO in inclusion or exclusion of the other comparable entities. As regards deduction u/s. 10A, the CIT(A) held following the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Tata Elxsi 349 ITR 98) that expenditure incurred in foreign currency in the form of insurance, freight and telecommunication charges attributable to delivery of computer software, the same should be reduced from export turnover as well as total turnover. 9. Being aggrieved, the revenue is in appeal before us raising the following grounds of appeal: 1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stances of the case, the learned CIT(Appeals) erred in upholding the approach of the learned Joint Director of Income-tax (Transfer Pricing Officer - II), Bangalore ("learned Transfer Pricing Officer" or "learned TPO") in rejecting the Transfer Pricing ("TP") documentation maintained by the Respondent on invoking provisions of sub-section 3 of 92C of the Act contending that the information or data used in the computation of the arm's length price is not reliable or correct and in doing so grossly erred in: 2.1. Upholding the learned TPO's approach using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining arm's length price, ignoring the fact that this data was not available to the Respondent at the time of complying with the TP documentation requirements. 2.2. Upholding the rejection of comparability analysis in the Transfer Pricing documentation undertaken by the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962, ("the Rules") and in conducting a fresh comparability analysis and application of cert....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... TP documentation for comparable companies while determining arm's length price, ignoring the fact that this data was not available to the Respondent at the time of complying with the TP documentation requirements. [corresponding to cross objection 2.1] 4. That the learned CIT (A) erred upholding the rejection of comparability analysis in the Transfer Pricing documentation undertaken by the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962, ("the Rules") and in conducting a fresh comparability analysis and application of certain arbitrary filters (i.e., related party transactions to sales > 25%) in determining the arm's length price in connection with the international transactions of the Respondent [corresponding to cross objection 2.2] 5. That the learned CIT (A) erred in upholding the approach of the learned TPO in not applying multiple year/prior year data for comparable companies while determining arm's length price [corresponding to cross objection 2.3] 6. That the learned CIT(A) erred in upholding the approach of the learned TPO in collecting selective information of the companies by exercising....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rnover, has failed to appreciate that the company should also have been excluded on the ground that the financial information of this company is unreliable [corresponding to cross objection 5] 13. That, without prejudice, the learned CIT(A) while excluding Infosys Technologies Ltd. only on the ground of turnover, has failed to appreciate that the company should also have been excluded on the grounds that this company is functionally dissimilar as it is engaged in diversified operations, owns significant intangible assets and brand value [corresponding to cross objection 5] 14. That the learned CIT(A) has erred in upholding the approach of the learned TPO in ignoring the limited risk nature of the services provided by the Respondent and in not providing an appropriate adjustment towards the risk differential, even when full-fledged entrepreneurial companies are selected as comparable companies, [corresponding to cross objection 6] That the Respondent craves leave to add to and/or alter, amend, rescind or modify the objections taken hereinabove before or at the time of hearing of this appeal. 11. Now, we shall take up the revenue's appeal. Ground ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re as under: "34. As can be seen from the above analysis, this company has erratic margins and growth over the years. The margins of Bodhtree are consistently changing. This reflects that the revenue recognition policy followed by Bodhtree is not proper and is resulting in consistent change in margins. Further, the growth rate over the years is also fluctuating to extremes. Further, growth in revenues is not supported by growth in expenses. In some cases, expense growth is higher than the revenue growth. Also salary cost ratio is widely fluctuating. These circumstances are peculiar in nature and require further analysis, without which this company should be rejected as a comparable. 35. We are of the view that the basis on which the assessee seeks to exclude Bodhtree Consulting Ltd. in this year is acceptable and accordingly Bodhtree Consulting Ltd. is directed to be excluded from the list of comparable companies. We hold accordingly." 9.2 From a perusal of the order of the co-ordinate bench in the case of Kodiak Networks India Pvt. Ltd. (supra) it is clear that the Tribunal has followed its earlier decision in Mindtech India Ltd. vs. DCIT in ITA No. 70/B....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onal dissimilarities in this connection he relied on the decision of the co-ordinate bench in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra). We heard the rival submissions and perused material on record. On perusal of the order in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra), we find that this company was not considered in the said decision. Therefore, the reliance placed by the learned AR of the assessee-company on this decision is misplaced. Therefore, we do not find any reason to exclude this company from the list of comparables. Therefore, respectfully following the decision of the co-ordinate bench in the case cited supra, we uphold the action of the TPO/AO to include in the list of comparables the comparables Bodhtree Consulting Ltd. and Geometric Software Solutions: 15. In the result, the appeal filed by the revenue is partly allowed. 16. The assessee filed revised cross objections seeking inclusion of the entities Spanko Telesystems & Solutions Ltd, and exclusion of entities Exensys Software Solutions Ltd., Thirdware Solutions, Flextronics Software Systems Ltd., on the ground that there are functional ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d had related party transactions. This contention was rebutted by the TPO by drawing attention to the annual report of the company, wherein it was specifically stated that the company is not engaged in any software product sales. The TPO by exercising the power u/s. 133(6) of the IT Act called for information from the said company wherein the said company had stated vide its letter dated 14/11/2007 that it had no related party transactions. 10.1 The ld.AR of the assessee-company had relied on the order of the coordinate bench of Tribunal in the case of ITO vs. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No. 1302/Bang/2011 dated 11/6/2015 wherein this Tribunal, vide para. 14 of its order, had directed the exclusion of this company from the list of comparables on the ground that the company is dealing in the software products and earned abnormal profits on account of amalgamation etc. 10.2 We perused the annual report of this company paced at pages 1097 to 1129 of the paper book. From perusal of page 1104 of the paper book it is clear that the nature of business of the company is software development services. Therefore, the submission of the assessee-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e product sales also and therefore, it is functionally dissimilar. But from the order of the TPO as well as the financial results of the company, it is clear that 85% of the revenue of the company is derived from software services. Therefore, it can be safely classified as a software development services. Therefore, this company cannot be excluded from the list of comparables. ................................ Sankhya Infotech: 13. This comparable was selected by the TPO. The assessee-company objected to the inclusion of this company as a comparable on the ground that personnel cost (salary) is less than 15% of the sales, which is less than the industry average of 47%. This objection was overruled by the TPO by citing that salary includes consultancy charges and overseas manpower cost and the two items are included in the personnel cost it comes to 26%. 13.1 Learned AR of the assessee-company again relied on the decision of the co-ordinate bench of the Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra). 13.2 We heard the rival submissions and perused material on record. Perusal of the decision of the co-o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company. In its annual report a generic disclosure was made that the company is involved in trading of software and provision of IT services. Schedule 14 of the Financial statement of the said company provide information on details of purchases as per which the total purchase cost incurred by the company was about Rs. 56871743/- as against the total cost of Rs. 175527264/- which is about 32% of the total cost. Besides the said company earned abnormally high OP/TC margin of 66.11% during Financial Year 2004-05 indicating risk dissimilarity vis a vis the assessee which claimed to be a cost plus low risk captive which cannot be expected to earn such high profitability. " Similarly co-ordinate bench of Tribunal in the case of Textron Global Technology Centre Pvt. Ltd(cited supra) recorded the finding as under: "26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nies from the list of comparables on the ground that the turnover of the above companies is more than Rs. 200 crores relying on the decision in the case of Genesis Integrating Systems (India) Pvt. Ltd. vs. DCIT (20 taxmann.com 715 (Bang.): i. Infosys ii. L & T Infotech iii. Satyam Computer Systems These companies were selected by the TPO as comparables and the assessee-company objected to their inclusion in the list of comparables on the ground of turnover of the above companies is more than Rs. 200 crores and the companies had related party transactions. The TPO rejected the submission by holding that the turnover had no co-relation with the profit margin earned by the company and also rebutted that the companies had related party transactions by drawing the attention of the assessee-company to the annual reports of those companies. 24. We now deal with each of these companies. Before adverting to the comparables, it is worth mentioning here that there are divergent decisions of the Tribunal whether high turnover is a relevant for accepting/rejecting a comparable in the case of a service company. For example, the Mumbai bench of the Tribunal ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he cross objections filed by the assessee are dismissed. Order pronounced in the open court on 09th August, 2017. ============= Document 1 SI. No Company Amex Information Technologies Ltd Bristlecone India Ltd Hexaware Technologies Ltd 1. 2. 3. 4. Intertec Communications Ltd 5. Sasken Communication Technologies Ltd 6. Spanco Telesystems & Solutions Ltd. Weighted Average of operating profit on total cost 27% 2% 8% -8% 6% 12% 7. Tata Infotech Ltd 8. Tata Technologies Ltd Arithmetic Mean 6% 10% 8% Document 2 No Name of Comparable Company Operating Profit by Total Cost WC adjusted OP/TC ("OP/TC") 1 Bodhtree Consulting Ltd. 24.85% 26.30% 2 Lanco Global Systems Ltd 13.65% 13.36% 3 Exensys Software Solutions Ltd 70.68% 67.03% 4 Sankhya Infotech Ltd 27.39% 25.10% 5 Sasken Network Systems Ltd 16.64% 17.90% 6 RS Software (India) Ltd. 8.07% 10.62% 7 Foursoft Ltd 22.98% 25.30% 8 Thirdware Solutions Ltd 66.09% 68.18% 9 Geometric Software Solutions Co Ltd 20.34% 21.64% 1....