1. Art and Diseño

IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH “B”, HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 464/Hyd/2014
Assessment Year: 2009-10
Planet
Online
Pvt.
Secunderabad.
PAN – AAECS1624F
Ltd.,
(Appellant)
Asst. Commissioner of Incometax, Circle – 16(3), Hyderabad.
(Respondent)
ITA No. 608/Hyd/2014
Assessment Year: 2009-10
Dy. Commissioner of Incometax, Circle – 16(3), Hyderabad.
(Appellant)
Planet
Online
Pvt.
Secunderabad.
PAN – AAECS1624F
Ltd.,
(Respondent)
Assessee by
Revenue by
Date of hearing
Date of pronouncement
Shri P. Murali Mohan Rao
Shri D. Sudhakar Rao
01-12-2014
-01-2015
O RDE R
PER SAKTIJIT DEY, J.M.:
These cross appeals are against the directions of the Dispute
Resolution Panel (DRP) u/s 144C(5) and the assessment order
passed u/s 143(3) read with section 144C(13) in consequence
thereto. The appeals are pertaining to AY 2009-10.
2.
Briefly the facts are, assessee an Indian company is a wholly
owned subsidiary of Planet Soft Inc., USA. Assessee is engaged in
2
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
providing software development services to its Associated Enterprises
(AE). It provides a range of software development services for
upgrading/enhancing
software
solutions
including
preparation
of
functional specification documents, preparation of technical designs,
coding, testing etc. to its AE, which deals in providing solutions
relating to insurance and finance industry. Assessee is registered as
a 100% Export Oriented Unit (EOU) under the software technology
park of India scheme. For the AY under consideration, assessee filed
its return of
income on 29/09/2009 declaring total income of
Rs.9,31,968 after claiming exemption u/s 10A of the Act. Assessee
also declared book profit under the MAT provisions. As the tax
payable under MAT provisions was higher than the tax payable under
normal provisions, assessee also paid tax as per MAT provisions.
During the scrutiny assessment proceeding, AO having noticed that
assessee has entered into international transactions with its AE
resulting in earning of revenue to the tune of Rs. 34,20,01,237, made
a reference u/s 92CA to the Transfer Pricing Officer (TPO) for
determining the arm’s length price (ALP). In course of proceeding
before TPO, assessee submitted its TP report along with other related
documents and books of account. In the TP report, assessee adopted
Transaction Net Margin Method (TNMM) as the most appropriate
method and operating profit to operating cost as profit level indicator
(PLI). Assessee searched the prowess and capital line data bases
which yielded 15 comparable companies with average OP/OC of
9.34%. As the OP to OC ratio of assessee was 9.50%, the price
charged to AE was found to be within arm’s length. The TPO, though,
accepted
TNMM
as
the
most
appropriate
method,
but,
he
nevertheless rejected the TP report of assessee by pointing out
various defects and deficiencies in them. TPO was of the view that
not only assessee has selected comparables by using multiple year
data instead of data relating to the year under consideration, but,
assessee has not gone in to the
verticals of the software industry
and has applied inappropriate filters which has resulted in selection of
3
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
un-comparables as comparables. Accordingly, TPO rejecting the TP
report of assessee, independently undertook a search of data bases,
which yielded the following17 comparables with average arithmetic
mean PLI of 22.02%.:
1. Akshay Software Technologies Ltd.
2. Bodhtree Consulting Ltd.
3. Comp-U-Learn Tech India Ltd.
4. Igate Global Solutions Ltd.
5. Infosys Ltd.
6. KALS Inf. System (Seg.)
7. LGS Global
8. Mindtree Ltd. (Seg.)
9. Neilsoft Ltd.
10. Persistent Sys
11. RS Software (India) Ld.
12. R Systems International Ltd. (Seg.)
13. Sasken Communication Technologies Ltd.
14. Tata Elxsi Ltd. (seg.)
15. Thninksoft Global
16. Thirdware Solutions
17. Zylog Systems
3.
After negative working capital adjustment of -3.64%, arithmetic
mean PLI of comparables was enhanced to 25.67%. By applying the
aforesaid arithmetic mean PLI to operating cost, TPO determined the
ALP of the international transaction with AE at Rs. 44,35,02,901,
which resulted in an TP adjustment of Rs. 6,88,46,979. In pursuance
to the order passed by TPO, AO framed a draft assessment order on
25/02/2013 by adding the TP adjustment of Rs. 6,88,47,971. AO also
made adjustment to the deduction claimed u/s 10A by reducing the
communication charges from export turnover, as a result of which
deduction claimed u/s 10A was reduced by an amount of Rs.
10,67,970. As a result. the taxable income was determined at Rs.
7,08,46,971. Assessee objected to the draft assessment order before
DRP by raising various grounds both on transfer pricing issues as
well as on the computation of deduction u/s 10A.
4
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
4.
The DRP in its
directions dated 29/11/2013 rejected all
contentions of assessee with regard to TP issues. However, as far
as issue relating to claim of deduction u/s 10A, the DRP allowed
assessee’s claim by directing AO to reduce the communication
charges both from export turnover and total turnover while computing
the deduction u/s 10A. In terms with the direction of the DRP, AO
finalized the assessment u/s 143(3) read with section 92CA(3) and
section 144C vide order dated 26/12/2013.
5.
Being aggrieved with the directions of the DRP, both the
assessee as well as revenue are before us.
ITA No. 464/Hyd/14 – by assessee
6.
Though assessee in the memorandum of appeal has raised 14
grounds but at the time of hearing, assessee has submitted modified
grounds (termed as additional grounds) raising various issues on
transfer pricing adjustment.
In ground nos. 20 to 28, assessee has
objected to selection of certain comparables by TPO and confirmed
by DRP, which we propose to take up first.
objected to by assessee are as under:
S.No.
1
2
3
4
5
6
7
8
9
10
11
12
Name of the comparable
Persistent Systems Pvt. Ltd.
R. Systems International Ltd. (seg.)
Sasken Communication Technologies
Ltd. (seg.)
Thinksoft Global Services Ltd.
Thirdware Solutions Ltd.
Zylog Systems Ltd.
Bodhtree Consulting Ltd.
Comp-U-Learn Global Tech India Ltd.
Igate Global Solutions Ltd.
Infosys Ltd.
Kals Information Systems Ltd.
Tata Elxsi Ltd. (seg.)
The comparables
5
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
7.
The submissions of the learned AR in brief in respect of each
the aforesaid comparables as submitted in a tabular form are as
under:
S.No.
1
2
Name of the
comparable
Bodhtree
Consulting
Ltd.
Comp-U-Learn Global
Tech India Ltd.
3
4
Infosys Ltd.
Kals
Information
Sysytems (Seg.)
5
Tata Elxsi Ltd. (seg.)
6.
Persistent
Pvt. Ltd.
7.
R Systems
International
(seg.)
Thinksoft
Services Ltd.
8
9
10
Thirdware
Ltd.
Systems
Ltd.
Global
Solutions
Igate Global Solutions
Ltd.
Reasons for rejections
It is engaged in the business of
software products.
It is functionally different as
engaged
in
software
product
development.
It is functionally different company
Functionally dissimilar compared to
assessee as core area of business
includes
the
development,
manufacture and sales & marketing
of
printers,
computers,
LCD
projectors and color TVs and high
profit making company.
The comparable is functionally
different and no segment revenue.
Company is engaged predominantly
in outsource software product
development
and
product
designing. No segmental data is
available.
Financial
year
ends
on
31 s t
st
December and not on 31 March
Difference in functionality compare
to assessee company, product
based company. Providing testing
services and this is only one phase
of SDLC, which are not comparable
with
software
development
services.
Functionally dissimilar was into
product
development
and
purchase/sale of licences also.
Segmental details for sales is
available
but
no
expenditure
bifurcation is available. Therefore,
operating
margin
for
software
services cannot be determined.
Company having huge turnover
which is more than 200 crores
about 20 times the turnover of the
appellant company. Company is
giant company having presence in
various countries and charges
6
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
8.
11
Zylog Systems Ltd.
12
Sasken
Communication
Technologies
(seg.)
Ltd.
premium
pricing.
Further,
the
company
is
having
various
intangibles in its name. Further,
company is having closing stock of
raw materials.
Company has made acquisitions
during the financial year under
consideration which has increased
its revenue.
Functionally dissimilar compared to
the assessee as having product
sales
and is
a
provider
of
telecommunication
software
services and products to network
equipment manufacturers, mobile
terminal
vendors
and
semiconductor companies around
the world. Offers combination of
R&D consultancy, wireless software
products and software services.
Works
with
network
OEMs,
Semiconductor vendors, terminal
device OEMs and operators across
the world. No segment data
available.
The learned AR submitted that different benches of ITAT
including the Hyderabad Benches from time to time and for different
assessment years including the asst. year under consideration have
considered comparability of the aforesaid companies with a software
development service provider and held these companies not to be
comparable. In support of such contention, the ld. AR relied upon the
following decisions:
1. M/s 3DPLM Software Solutions Ltd. Vs. DCIT, IT(TP) NO.
1303/Bang/2012.
2. ACIT Vs. Hapag Lyoyd Global Services (TS 47 ITAT 2013
(Mum) TP)
3. Triology E Business V. DCIT, (TS 748 ITAT 2012 (Bang) TP)
4. Intoto Software Pvt. Ltd. Vs. DCIT (TS 141 ITAT 2013 (Hyd)
TP)
5. NTT Data India Enterprises Applications Services Pvt. Ltd.
Vs. ACIT (TS 293 ITAT 2013 (Hyd) TP)
7
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
6. Agnity India Technologies Pvt. Ltd. Vs. DCIT (TS 265 ITAT
2013 (Del) TP)
7. Nethawk Networks India P. Ltd. ITAT, Mumbai, ITA No.
7633/M/2012.
8. Kenexa Technologies
243/Hyd/2014.
P.
Ltd.,
ITAT,
Hyd
in
ITA
No.
9. DCIT Vs. Hellsoft India P. Ltd. (TS 59 ITAT 2013 (Hyd) TP)
10. CIT Vs. Agnity India Technologies Pvt. Ld. Delhi High Court,
ITA No. 1204/2011.
11. CES Pvt. Ltd. Vs. DCIT, Hyderabad ITAT, ITA No.
1445/Hyd/2010.
12. M/s Triology E Business Software India Pvt. Ltd. Vs.
DCIT, ITA No. 1054/Bang/2011
13. Agnity India Technologies Pvt. Ltd. Vs. DCIT, ITA No.
6485/Del/2012.
14.
9.
Virtusa India Pvt. Ltd. vide ITA No. 1962/Hyd/2011.
The learned DR, on the other hand, justified the selection of the
comparables objected to by assessee.
10.
We have considered the submissions of the parties and perused
the orders of departmental authorities as well as other materials on
record. We have also applied our mind to the case laws cited by the
parties.
10.1
As far as comparables at Sl. Nos. 1 to 5 are concerned, the
issues are more or less covered by decisions of the coordinate
benches for the self-same AY i.e. 2009-10.
In case of M/s CISCO
Systems (India) Pvt. Ltd. Vs. DCIT, IT(TP) No. 130/Bang/14 dated
14/08/14, the coordinate bench after examining in detail, excluded
Bodhtree consulting Ltd., Infosys Ltd., Kals Information Systems and
Tata Elxsi Ltd. (Seg.) The relevant observations of the ITAT,
8
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
Bangalore Bench in respect to each of the aforesaid companies are
reproduced hereunder for the sake of clarity:
“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 Bench
of the Tribunal in the case of Wills Processing Services (I) P.
Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the
Tribunal has taken the view that Bodhtree Consulting Ltd. is in
the business of software products and was engaged in providing
open & end to end web solutions software consultancy and
design & development of software using latest technology. The
decision rendered by the Mumbai Bench of the Tribunal in the
case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y.
2008-09. It was affirmed by the learned counsel for the
Assessee that the facts and circumstances in the present year
also remains identical to the facts and circumstances as it
prevailed in AY 08-09 as far as this comparable company is
concerned. Following the aforesaid decision of the Mumbai
Bench of the Tribunal, we hold that Bodhtree Consulting Ltd.
cannot be regarded as a comparable. In this regards, the fact
that the assessee had itself proposed this company as
comparable, in our opinion, should not be the basis on which
the said company should be retained as a comparable, when
factually it is shown that the said company is a software product
company and not a software development services company.
26.2 Infosys Ltd.:- As far as this company is concerned, it is not
in dispute before us that this company has been considered to
be functionally different from a company providing simple
software development services, as this company owns
significant intangibles and has huge revenues from software
products. In this regard, we find that the Bangalore Bench of
the Tribunal in the case of M/s. TDPLM Software Solutions Ltd.
v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013
with regard to this comparable has held as follows:“11.0 Infosys Technologies Ltd.
9
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
11.1 This was a comparable selected by the TPO. Before
the TPO, the assessee objected to the inclusion of the
company in the set of comparables, on the grounds of
turnover and brand attributable profit margin. The TPO,
however, rejected these objections raised by the
assessee on the grounds that turnover and brand aspects
were not materially relevant in the software development
segment.
11.2 Before us, the learned Authorised Representative
contended that this company is not functionally
comparable to the assessee in the case on hand. The
learned Authorised Representative drew our attention to
various parts of the Annual Report of this company to
ubmit that this company commands substantial brand
value, owns intellectual property rights and is a market
leader in software development activities, whereas the
assessee is merely a software service provider operating
its business in India and does not possess either any
brand value or own any intangible or intellectual property
rights (IPRs). It was also submitted by the learned
Authorised Representative that :(i) the co-ordinate bench of this Tribunal in the case of
24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010
has held that a company owning intangibles cannot be
compared to a low risk captive service provider who does
not own any intangible and hence does not have an
additional advantage in the market. It is submitted that
this decision is applicable to the assessee's case, as the
assessee does not own any intangibles and hence Infosys
Technologies Ltd. cannot be comparable to the assessee;
(ii) the observation of the ITAT, Delhi Bench in the case
of Agnity India Technologies Pvt. Ltd. in ITA No.3856
(Del)/2010 at para 5.2 thereof, 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 ;
10
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
(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 Departmental
Representative supported the decision of the TPO to
include this company in the list of comparable companies.
11.4 We have heard the rival submissions and perused
and carefully considered the material on record. We find
that the assessee as brought on record sufficient
evidence to establish that this company is functionally
dis-similar and different from the assessee and hence is
not comparable and the finding rendered in the case of
Trilogy E-Business Software India Pvt. Ltd. (supra) for
Assessment Year 2007-08 is applicable to this year also.
We are inclined to concur with the argument put forth by
the assessee that Infosys Technologies Ltd is not
functionally comparable since it owns significant
intangible and has huge revenues from software products.
It is also seen that the break up of revenue from software
services and software products is not available. In this
view of the matter, we hold that this company ought to be
omitted from the set of comparable companies. It is
ordered accordingly.”
The decision rendered as aforesaid pertains to A.Y. 2008-09. It
was affirmed by the learned counsel for the Assessee that the
facts and circumstances in the present year also remains
identical to the facts and circumstances as it prevailed in AY
08-09 as far as this comparable company is concerned.
Respectfully following the decision of the Tribunal referred to
above, we hold that Infosys Ltd. be excluded from the list of
comparable companies.
11
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
26.3 KALS Information Systems Ltd.:- As far as this company is
concerned, it is not in dispute before us that this company has
been considered as not comparable to a pure software
development services company by the Bangalore Bench of the
Tribunal in the case of M/s. Trilogy e-business Software India
Pvt. Ltd. (supra). The following were the relevant observations
of the Tribunal:“(d) KALS Information Systems Ltd.
46. As far as this company is concerned, the contention of
the assessee is that the aforesaid company has revenues
from both software development and software products.
Besides the above, it was also pointed out that this
company is engaged in providing training. It was also
submitted that as per the annual repot, the salary cost
debited under the software development expenditure was
Rs. 45,93,351. The same was less than 25% of the
software services revenue and therefore the salary cost
filter test fails in this case. Reference was made to the
Pune Bench Tribunal’s decision of the ITAT in the case of
Bindview India Private Limited Vs. DCI, ITA No. ITA No
1386/PN/1O wherein KALS as comparable was rejected
for AY 2006-07 on account of it being functionally
different from software companies. The relevant extract
are as follows:
“16. Another 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.
12
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
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
information obtained by issue of notice u/s.133(6) of the
Act. This information which was not available in public
domain could not have been used by the TPO, when the
same is contrary to the annual report of this company as
highlighted by the Assessee in its letter dated 21.6.2010
to the TPO. We also find that in the decision referred to
by the learned counsel for the Assessee, the Mumbai
Bench of ITAT has held that this company was developing
software products and not purely or mainly software
development service provider. We therefore accept the
plea of the Assessee that this company is not
comparable.”
Following the aforesaid decision of the Tribunal, we hold that
KALS Information Systems Ltd. should not be regarded as a
comparable.
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, order dated 29.3.2013. Following were the
relevant observations of the Tribunal:II. UNREASONABLE COMPARABILITY CRITERIA :
19. 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, Tata Elxsi Ltd., is
to be excluded from the list of comparables.
13
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
(ii) Flextronics Software Systems Ltd. : The learned TPO
has considered this company as a comparable based on
133(6) reply wherein this company reflected its software
development services revenues to be more than 75% of
the "software products and services" segment revenues.
Flextronics has a hybrid revenue model and hence should
be rejected as functionally different. Based on the
information provided under "Revenue recognition" in its
annual report, it can be inferred that the software services
revenues are earned on a hybrid revenue model, and the
same is not similar to the regular models adopted by
other
software
service
providers.
The
learned
representative pleaded that a regular software services
provider could not be compared to a company having
such a unique revenue model, wherein the revenues of
the company from software/product development services
depends on the success of the products sold by its clients
in the marketplace. Hence, it would be inappropriate to
compare the business operations of the assessee with
that of a company following hybrid business model
comprising of royalty income as well as regular software
services income, for which revenue break-up is not
available. He finally submitted that this was a good
reason to 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
segment
segment
consider
enabled
contribution of the embedded services
is to the tune of Rs.230 crores in the total
revenue of Rs.263 crores. Even if we
the other two sub-segments pertain to IT
services, the 87.45% (›75%) of the
14
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
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 Elxsi and Flextronics are
functionally different from that of the assessee and hence
they deserve to be deleted from the list of six
comparables and hence there remains only four
companies as comparables, as listed below:”
26.5. Following the aforesaid decision of the Tribunal, we hold
that M/S.Tata Elxsi Ltd. should not be regarded as a
comparable.”
10.2 ITAT, Hyderabad Bench following the aforesaid decision of the
ITAT, Bangalore Bench also excluded these four companies in case
of
M/s
Kenexa
Technologies
Pvt.
Ltd.
Vs.
DCIT
in
ITA
No.
243/Hyd/2014 dt. 14/11/2014. Respectfully following the decisions of
the ITAT, we direct AO/TPO to exclude these four companies. As far
as Comp-U Learn Global Tech India Ltd. is concerned, ITAT,
Hyderabad Bench in case of M/s Kenexa Technologies Pvt. Ltd. Vs.
DCIT (supra) observed as under:
15
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
“39. The assessee submitted before the DRP that Comp-ULearn Tech India Ltd. was engaged in the development of new
software (product development) (page 7 of the Annual Report)
in ITES call centre and BPO services (page 11 of Annual
Report). It was further submitted that schedule XIII of the
Annual Report shows software development expenditure at only
25% of the total expenditure. The TPO extracted the 133(6)
notice and held that the company has nil onsite revenue and
satisfied all the filters applied by the TPO. We are of the
opinion that some more analysis has to be done and we direct
the TPO to look into the financial statement of the company and
also provide an opportunity to the assessee to submit relevant
details to substantiate its claim that Comp-U-Learn Tech India
Ltd. is not a comparable company.”
Consistent with the view expressed by the coordinate bench, we also
remit the issue of comparability of this company to AO/TPO with
similar directions.
10.3 As far as Persistent Systems Pvt. Ltd. is concerned, it is the
contention of the learned AR that this company cannot be a
comparable as it is engaged in development of software product and
product designing. On a perusal of the extracts of annual report of
this company for the FY 2008-09 submitted by ld. AR, it is noticed
that the company has claimed that
it was formed mainly to provide
software development services. However, the P&L account for the
year ended 31/03/2009, a copy of which has been submitted before
us, indicates that it has shown income from sale of software services
as
well
as
products.
Therefore,
unless
segmental
details
are
available, the company cannot be treated as comparable. Moreover,
in case of M/s 3DPLM Software Solutions Ltd. Vs. DCIT, IT(TP) No.
1303/Bang/2012, the ITAT Bangalore Bench held as under:
“We have heard the rival submissions and perused and carefully
considered the material on record. It is seen from the details on
record that this company i.e. Persistent Systems Ltd., is
engaged in product development and product design services
while the assessee is a software development services
provider. We find that, as submitted by the assessee, the
segmental details are not given separately. Therefore, following
the principle enunciated in the decision of the Mumbai Tribunal
16
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
in the case of Telecordia Technologies India Pvt. Ltd. (supra)
that in the absence of segmental details / information a
company cannot be taken into account for comparability
analysis, we hold that this company i.e. Persistent Systems Ltd.
ought to be omitted from the set of comparables for the year
under consideration. It is ordered accordingly.”
Though, the aforesaid finding of the coordinate bench relates to the
AY 2008-09, but, in our view, it will also equally apply to AY under
consideration as facts are identical. Therefore, respectfully following
the view expressed by the coordinate bench, we exclude this
company as comparable.
10.4 With regard to R Systems International ltd., it is the contention
of
the
assessee
that
the
company
cannot
be
selected
as
a
comparable as it has a different financial year ending than assessee.
As can be seen from the P&L account statement of R Systems
International Ltd. for the AY 2008-09, a copy of which has been
placed before us by ld. AR, the company follows 31 st December as its
year ending whereas assessee is having its year ending on 31 st
March. The ITAT Mumbai Bench in case of ACIT vs. Hapag Lloyd
Global Services Pvt. Ltd. ITA No. 8499/Mum/10 having found that this
company has a different financial year ending than assessee,
observed as under:
“7.2 The learned Departmental Representative contended that
Unless the financial year-end of a comparable case matches
with that of the assessee, it cannot be considered as
comparable because the figures of different financial year
endings are distorted. He relied on an order passed by the
Mumbai Bench of the Tribunal in case of Sandstone Advisors
(P) Ltd. Vs. ACIT, [2013] 32 taxmann.com 216, the Tribunal
after considering the prescription of Rule 10B(4) and an another
case of Pune Bench of the Tribunal in Honeywell Automation
India Ltd. Vs. DCIT (IT Appeal No. 4(PN) of 2008, dated
11/02/2009) has held that it is mandatory for the purposes of
comparing the data of an uncontrolled transaction with an
international transaction that the same must relate to the
financial year ending similar to that of the assessee. The ld. DR
contended that since the case of CMC Ltd has a different
financial year ending vis-à-vis that of the assessee, the same
17
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
ought to have been excluded. No contrary precedent was
brought to our notice by the learned AR. In fact, the argument
advanced by the ld. DR in this regard was not seriously
challenged by the ld. AR. Respectfully following the precedent,
we hold that this case should be excluded from the list of
comparables.”
As facts are identical respectfully following the aforesaid observation
of the coordinate bench, we exclude this company from comparability
analysis.
10.5 As far as Think Soft Global Services Ltd. is concerned,
assessee has objected to inclusion of the aforesaid company on the
reasoning that it is functionally different as it is a product based
company and provides testing services. On a perusal of the annual
report of this company, extract of which was submitted before us, it is
seen that the company is predominantly into software testing. In case
of Triology E Business Vs. DCIT, ITA No. 1054/Bang/11, dtd.
23/11/12 it has been held by coordinate bench that software testing
services cannot be equated with software development services.
Therefore, we find merit in the contention of ld. AR. Accordingly, we
hold that this company cannot be treated as comparable to assessee.
10.6 As far as
Thirdware Solutions is concerned, assessee has
sought exclusion of the aforesaid company because it is into product
development and purchase and sale of licences.
It is further
contention of assessee that though segmental details for sales is
available but no expenditure bifurcation is available, which makes it
impossible to correctly determine the operating margin of software
services. On a perusal of the break-up of sales of this company as on
31 st March, 2009, the contention of assessee appears to be correct.
Further, ITAT Bangalore Bench in case of 3DPLM Software Solutions
Ltd. Vs. DCIT (supra), has held as under:
“15.3 We have heard the rival submissions and perused and
carefully considered the material on record. It is seen from the
18
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
material on record that the company is engaged in product
development and earns revenue from sale of licenses and
subscription. However, the segmental profit and loss accounts
for software development services and product development are
not given separately. Further, as pointed out by the learned
Authorised Representative, the Pune Bench of the Tribunal in
the case of E-Gain Communications Pvt. Ltd. (supra) has
directed that since the income of this company includes income
from sale of licenses, it ought to be rejected as a comparable
for software development services. In the case on hand, the
assessee is rendering software development services. In this
factual view of the matter and following the afore cited decision
of the Pune Tribunal (supra), we direct that this company be
omitted from the list of comparables for the period under
consideration in the case on hand.”
10.7 The ld. DR has not brought any material to our notice to
demonstrate that the
aforesaid finding of the coordinate bench will
not be applicable to AY under consideration. Therefore, following the
view expressed by the ITAT Bangalore Bench, we exclude this
company from the list of comparables.
10.8 As far as I-Gate Global Solutions Ltd. is concerned, it is the
contention of ld. AR that the company is having huge turnover of more
than Rs. 900 crores, and is a relatively big company having presence
in various countries and enjoys premium pricing. He has further
submitted that the company owns various intangibles in its name and
is having closing stock of raw materials which signify that it is into
development of product. We have considered the submissions of the
parties. On a perusal of the P&L account of this company for the year
ended March 2009, a copy of which is submitted by ld. AR, it is seen
that the company has claimed ‘expenses’ towards raw materials,
stores and spares. Therefore, it needs to be examined in detail
whether
assessee’s
claim
that
the
company
is
into
product
development is correct. As relevant informations required for coming
to a definite conclusion are not before us, we are inclined to remit the
issue of comparability of this company to AO/TPO for considering
afresh. Further, we may observe that in case of Triology E Business
19
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
(supra)
this company has been excluded on the basis of high
turnover. Therefore, this aspect is also required to be examined by
AO/TPO while deciding comparability of this company.
10.9 As far as Zylog Systems Ltd. is concerned, it is the contention
of the ld. AR that during the year company has made acquisitions
which could be having an impact over the financials of the company
as the revenue has substantially increased compared to the preceding
year. On a perusal of the extract of annual report for the FY 2008-09
of this company, which were placed before us by learned AR, it is
seen that during the FY 2008-09, the company has acquired Fair Fax
Consulting Inc. and Ducont FZ LLC through its wholly owned
subsidiary ZylogBV Ltd.. The company itself has admitted in the
annual report that benefits from such acquisition include access to
new clients, new geographical areas and new service offerings as
well as an increase in per capita revenue. From the extracts of the
annual report, it is seen that there is substantial increase in revenue
in the impugned AY compared to the preceding AY.
Therefore,
considering the fact that the acquisitions made by the company during
the relevant FY could have impacted the revenue earning and
profitability of the company, it will not be safe to treat the aforesaid
company as a comparable. Accordingly, we direct the AO/TPO to
exclude this company from the list of comparables.
10.10 As
far
as
Sasken
Communication
Technologies
Ltd
is
concerned, the main thrust of the learned AR’s contention is the
company is also developing products and segmental details are not
available relating to costs. On a perusal of the extracts of annual
report of the aforesaid company submitted before us by ld. AR it is
seen that the company is involved in providing software development
services as well as development of software products also. From the
breakup of revenue earned during the relevant FY, it is seen that as
against
revenue
of
Rs.
40531.20
lakhs
earned
from
software
20
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
development
services,
Rs.
6146.43
lakhs
were
from
software
products. Though, it appears that substantial revenue is earned from
software development services, however, the cost relating to earning
of such revenue has to be taken into account. It is the contention of
the assessee that segmental details of cost is not available from the
annual report. Since the entire annual report has not been placed
before us, we are not in a position to give a conclusive finding in this
regard. We, therefore, remit the issue relating to comparability of this
company for fresh adjudication by the AO/TPO. However, we make it
clear that unless segmental details of cost are available, it will be
better to ignore this company.
11.
The AO/TPO is directed to re-compute the ALP in terms with the
direction hereinabove.
12.
Ground No. 14 reads as under:
“Ld. TPO/DRP/AO erred in treating the deferred revenue
expenditure as operating cost without appreciating the fact that
the said expenditure is not incurred in connection with the
export earnings.”
13.
In course of proceeding before TPO, assessee submitted that
the operating costs also include amortization of deferred revenue
expenses to the tune of Rs. 1,19,01,104, which needs to be excluded
as it
cannot be considered to be
operational expenditure.
TPO
however rejected assessee’s claim with the observation that as the
annual report does not contain any entry to support assessee’s claim,
the expenditure cannot be treated as non-operational. Though,
assessee objected to such finding of TPO before DRP, but, the DRP
did not find any merit in the contentions of assessee. The DRP
observed that the P&L account clearly indicates that assessee
debited amount of Rs. 1,19,01,104 towards amortization of intangible
assets by considering the same to be non-operational. The DRP
observed,
intangible assets are developed as a result of normal
21
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
business operations and, therefore, they need to be treated as
operational. Accordingly, they rejected the claim of assessee.
14.
Before us, the ld. AR more or less reiterating the submissions
made before the departmental authorities, submitted that every
expenditure debited to the P&L account cannot be considered as
operational. The ld. AR submitted that during FY 2002-03, assessee
had undertaken development of certain software which was spread
over more than one FY. As development was spread over several
years the company decided to capitalize all the cost that were
incurred on the software development. Following the generally
accepted accounting principle and relevant accounting standard 1/5 th
of the capitalized expenditure cost was amortized every year. It was
submitted that amortization commenced from the year in which the
development of software was completed and sold. Thus, it was
submitted by ld. AR that the deferred revenue expenditure should not
have been considered as part of operating cost as it is not incurred in
connection with export earnings.
15.
The learned DR, on the other hand, relied on the orders of the
TPO and DRP.
16.
We have considered the submissions of the parties and perused
the orders of the revenue authorities as well as other materials on
record. We agree with the submissions of the ld. AR that every
expenditure debited to the P&L account cannot be considered as
operational in nature. From the observations made by TPO, it
appears, he has rejected assessee’s claim only for the reason that no
such entries were found in the annual report. The TPO has not
properly examined the nature of expenditure. However, at the same
time, assessee has to demonstrate that such expenditure was not
claimed in any preceding assessment years. Therefore, considering
the facts of the case, we are inclined to remit this issue back to the
22
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
file
of
AO/TPO
for
deciding
the
issue
afresh
reasonable opportunity of hearing to assessee.
after
providing
This ground is
allowed for statistical purposes.
17.
In ground No. 15, assessee has raised the non-exclusion of a
reasonable amount of employee cost from the operating cost while
calculating the operating margin.
18.
It was contended by assessee before DRP that it maintains
excess capacity staff of about 10%. The excess capacity does not
generate any revenue on a regular basis but is useful only when
additional work flows in or in case of unforeseen staff attrition.
Assessee stated that it has to maintain excess staff capacity as it
cannot quickly hire people with required skills, knowledge and
experience. In this regard assessee also relied upon a decision of the
ITAT Delhi Bench in case of DCIT Vs. Vertex Customer Service India
P. Ltd., 126 TTJ 184. The DRP rejected assessee’s contention by
observing that it is a common practice to maintain excess staff
capacity in this field. The DRP observed that unless the assessee
keeps excess staff it has to engage persons on contract basis by
paying higher wages. It was observed that the expenditure on excess
staff capability is not an extraordinary and not of non-recurring
nature, hence, it cannot be excluded keeping in view the OECD
guidelines. Further, the DRP observed that assessee has also not
produced any documentary evidence to support its claim. Accordingly,
they rejected the claim of assessee.
19.
Before us, ld. AR submitted that the increase in employee cost
is much more in terms with increase of revenue. Ld. AR submitted
that while increase in revenue is to the tune of only 23.52%, salary
paid during the year increased from 9 crores to 23.3 crores, hence,
suitable adjustment from operating cost has to be given on account of
salaries.
23
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
20.
Having heard the parties and perused the materials on record,
we are of the view that the matter requires re-examination by AO/TPO
after verifying the cause for quantum jump of salary in the impugned
AY. If it is found that part of the employee cost is non-operational,
then, suitable adjustment may be given from the operating cost. This
ground is allowed for statistical purposes.
21.
Ground No. 16
and 17 are on risk adjustment and negative
working capital adjustment.
22.
While
computing the
ALP,
TPO
did
not
allow any
risk
adjustment. Before the DRP, assessee raising the issue of risk
adjustment, submitted that though the TPO examined the risk
assumed by assessee and its AE, but, he ignored to make necessary
adjustment towards risk. However, the DRP observed that though,
TPO vide his show cause notice dated 09/10/2012 has called upon
assessee to submit the calculation of risk, but, assessee in its reply
dated 06/11/12, did not furnish any such calculation. Further, the DRP
observed that assessee though explained the risk assumed by it and
the AE, but, it did not quantify how each type of risk or the difference
in each risk affect the profitability
of
each of the comparable
companies based on the data for FY 2008-09. Ultimately, the DRP
rejected assessee’s claim for risk adjustment.
23.
As far as working capital adjustment is concerned, TPO while
computing the ALP made negative working capital adjustment of
(-)3.64% which enhanced the arm’s length margin of the comparable
companies to 25.67%. Before the DRP while objecting to negative
working capital adjustment made by TPO, it was submitted by
assessee that the TPO considered the closing balances of trade
receivables and trade payables instead of average balances current
assets and liabilities. Assessee submitted, the TPO ought to have
24
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
considered entire current assets and liabilities without restricting
himself to trade receivables and payables. The DRP however did not
find merit in the objections of assessee. The DRP observed that there
is no uniformity when definition of items receivables and payables is
concerned, as debtors inventories and creditors are categorized
differently in different companies. The DRP also observed that neither
before the panel nor before TPO assessee has explained the
possibility of exact result in view of the ambiguity pointed out by TPO.
It was observed by DRP, the benefit can be given only in situations
where there is a greater chance of increasing the comparability levels
of assessee. However, since assessee did not explain the chance of
increasing the comparability level, its contention cannot be accepted.
Accordingly, DRP rejected the claim of assessee.
24.
The ld. AR submitted before us, assessee functions under a
limited risk environment with almost all the risk being assumed by its
AE.
It
was
submitted,
assessee
bears
limited
business
risks
compared to independent comparable companies due to the nature of
its revenue model as it is guaranteed profits in provision of software
development services. However, independent companies have to bear
the vagaries of the economic and business factors that are prevailing
in the industry, hence, could either incur losses or earn profits based
on the market conditions. It was submitted, as per Rule 10B(1)(e)(iii)
an adjustment should be made to the profit margin of independent
comparable companies to take into account the differences in
functions
and
risks.
He
submitted,
the
OECD
transfer
pricing
guidelines also recognize adjustments to be made to account for
differences between controlled and uncontrolled situation that would
significantly
affect
the
price
charged
or
return
required
by
independent enterprises. Accordingly, controlled and uncontrolled
transactions are comparable only if adjustment with respect to
significant differences between them in terms of risks assumed is
made. Ld. AR relied upon a decision of the ITAT Bangalore Bench
25
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
wherein risk adjustment of 6.75% was allowed. He submitted, benefit
of at least 3% may be given to assessee as risk adjustment. As far as
negative working capital is concerned, ld. AR reiterated submissions
made before DRP.
25.
The ld. DR, on the other hand, supported the order of TPO and
DRP on this issue.
26.
We have considered the submissions of the parties and perused
the orders of the revenue authorities as well as other materials on
record. It is evident from the orders of TPO and DRP as well as
materials on record that neither in its TP study nor before the TPO
and DRP, assessee has submitted any computation made on a
scientific basis towards risk adjustment. Though
benefit of risk
adjustment can be given in an appropriate case, but, it has to be on
the basis of
facts and evidence and cannot be granted in a routine
manner. Though, it may be true, in case of a captive service provider
AE takes all major risks. But, at the same time assessee also bears
single customer risk, as in the event of any loss or damage to the
business of AE assessee is also likely to suffer. Moreover, assessee
has to demonstrate risk assumed by each of the comparable
companies vis-à-vis the assessee. The basis for adjustment towards
risk must come from assessee’s side. As assessee has not properly
established its case either before the TPO or DRP by bringing facts
and materials on record, we are inclined to remit this issue back to
the file of AO/TPO for deciding afresh after affording an opportunity of
being heard to assessee. While doing so, AO/TPO must also examine
assessee’s claim in respect of working capital adjustment. Ground
No. 16 & 17 are allowed for statistical purposes.
27.
In course of hearing, ld. AR submitted before us that the TPO
has not excluded the domestic sales while computing the ALP. We
make it clear that for determining the ALP, AO has to consider the
26
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
controlled transactions i.e. the international transaction entered into
by assessee with its AE alone. In view of the above, we direct the
AO/TPO to determine the ALP afresh keeping in view our directions
hereinabove and after extending reasonable opportunity of being
heard to assessee.
28.
We
have
confined
our
findings
to
the
grounds/issues
specifically argued before us by ld. AR. As ld. AR has not argued the
other grounds raised by assessee in the Memorandum of Appeal as
well as in additional grounds, they are treated as not pressed, hence,
dismissed.
29.
In the result, assessee’s appeal is partly allowed for statistical
purposes.
ITA No. 608/Hyd/14 by the Department
30.
The only issue in the department’s appeal is in respect of
direction of the DRP to exclude communication charges, insurance,
etc. from the export turnover as well as total turnover while computing
deduction u/s 10A.
31.
Having heard the parties, we are of the view that the directions
of ld. DRP cannot be disturbed. As can be seen from the decisions
referred to by ld. DRP in para 9.2 of its order, the issue is squarely
covered in favour of assessee. In view of the aforesaid, we uphold the
order of ld. DRP on this issue and dismiss the grounds raised by the
department.
32.
In the result, department’s appeal is dismissed.
27
ITA No. 464 & 608/Hyd/20 14
Planet Onlin e Pvt. Ltd.
33.
To sum up, assessee’s appeal is partly allowed for statistical
purposes and appeal of the department is dismissed.
Pronounced in the open court on 30/01/2015.
Sd/(B. RAMAKOTAIAH)
ACCOUNTANT MEMBER
Sd/(SAKTIJIT DEY)
JUDICIAL MEMBER
Hyderabad, Dated: 30 th January, 2015
Kv
Copy to:1) Plant Online Pvt. Ltd., 1-8-271, 272 & 273, 6 th Floor,
Ashoka Bhoopal Chambers, Sardar Patel Road,
Secunderabad – 500 003.
2) ACIT, Circle – 16(3), Hyderabad – 500 004.
3) DRP, Hyderabad
4) TPO-II, 6 th Floor, IT Towers, 10-2-3, AC Guards, Hyd-004.
5)The Departmental Representative, I.T.A.T., Hyderabad.