Income Tax Appellate Tribunal - Hyderabad
Lgs Global Ltd, Hyderabad vs Assessee on 27 June, 2014
1
ITA NO. 1885/H/2011
LGS Global Ltd.
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 1885/Hyd/2011
Assessment Year : 2007-08
LGS Global Ltd., Hyderabad. vs. Asst. Commissioner of Income-
PAN - AAACL5827B. tax, Circle - 16(1), Hyderabad.
(Appellant) (Respondent)
Assessee by : Shri P. Murali Mohan Rao
Revenue by : Shri P. Soma Sekhar Reddy
Date of hearing 15-05-2014
Date of pronouncement 27-06-2014
O RDE R
PER SAKTIJIT DEY, J.M.:
This appeal of the assessee is directed against the assessment order passed u/s 143(3) read with section 144C of the Act in pursuance to the directions of the Dispute Resolution Panel (DRP), Hyderabad, pertaining to the AY 2007-08.
2. Briefly the facts are, the assessee company earlier known as Lanco Global Systems Ltd., was incorporated under the Companies Act, 1956. The assessee is registered with Software Technology Park of India (STPI) as 100% EOU. Assessee provides software development services to its clients in various countries including its associated enterprises (AE) overseas. For the AY under dispute assessee filed its return of income on 27/10/2007 declaring total income of Rs. 41,08,995/- after claiming deduction u/s 10A of the Act. The financial results of the assessee for the FY 2006-07 as per the annual report is as under:
2ITA NO. 1885/H/2011 LGS Global Ltd.
Discretion Amount
Operating Revenue Rs. 45,38,93,898
Operating Cost Rs. 39,19,54,735
Operating profit (PBIT) Rs. 6,19,39,163
Operating Profit to Cost Ratio 15.80%
To benchmark the price charged by the assessee for the international transaction entered with its AE which amounted to Rs. 18,29,92,020/-, Assessee undertook a TP study through an external consultant. Transaction Net Margin Method (TNMM) was selected as the most appropriate method for determining the ALP. Assessee by undertaking a search in the data bases selected 11 companies as comparables having average PLI of 11%. As assessee's net profit margin on sales was 14% and on cost was 17% the price charged was found to be at arm's length. During the scrutiny assessment proceedings, the Assessing Officer noticing that the assessee has entered into international transactions with its AE made a reference u/s 92CA of the Act to the TPO for determining the ALP. In course of the proceeding before him, though the TPO accepted TNMM as the most appropriate method, however, ultimately he rejected the TP study of the assessee by pointing out various defects and deficiencies. The TPO by applying some filters adopted by the assessee as well as certain additional filters selected by him searched the data bases which yielded 25 companies as comparables having average PLI of 25.51%. With a negative working capital adjustment of (-) 0.05% , the adjusted arithmetic mean PLI was worked out to 25.57%. By applying this adjusted arithmetic mean PLI to the total operating cost of Rs.
39,19,54,735/-, the TPO worked out the adjustment u/s 92CA as under:
Sl.No. Item Code Remarks
1 Total Operating costs A 39,19,54,735
2 Arms Length meaning margin B 125.57%
(OP)/Cost
3 Arms length total sales C 49,21,77,561
(AXB/100)
4 Total operating revenues D 45,38,93,898
5 Sales with related parties E 18,29,92,020
6 Sales with unrelated parties F 27,09,01,878
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ITA NO. 1885/H/2011
LGS Global Ltd.
(D-E)
7 Arms length price of sales G 22,12,75,683
Made to AES (C-F)
8 Adjustment (G-E) H 3,82,83,663
2.1 After receiving the order of the TPO, the Assessing Officer framed the draft assessment order by adding the amount of Rs. 3,82,83,663/- being TP adjustment u/s 92CA of the Act. The Assessing Officer also modified the deduction claimed u/s 10A of the Act by reducing the communication and freight expenses amounting to Rs. 1,47,17,752/- from the export turnover. Being aggrieved of the draft assessment order, the assessee raised objections before the DRP.
3. The DRP, however, vide order dated 25/08/2011 rejected all the objections raised by the assessee and directed the Assessing Officer to finalize the assessment accordingly. In accordance with the direction of the DRP, the Assessing Officer passed the impugned assessment order, which is under challenge in the present appeal before us.
4. Ground Nos. 1 to 15 relate to various transfer pricing issues. However, at the time of hearing the learned AR confined his argument only to the issue of selection of certain comparables by the TPO and sustained by the DRP. Out of the 25 comparables selected by the TPO, the assessee has objections in respect of 5 comparables. Hereinafter we will deal with each of the comparable objected to by the assessee.
1. Avani Cimcon Technologies Ltd.
i) The learned AR objecting to this company submitted that it has product sales along with software development services and segment wise data is not available. Further, it was contended that the company has disclosed super normal profit during this year as against the average 4 ITA NO. 1885/H/2011 LGS Global Ltd.
profit margin of other comparables. The learned AR submitted that for these reasons this company cannot be treated as a comparable. In support of such contention, the learned AR relied upon the following decisions:
1. M/s Sumtotal systems India Ltd. , Hyderabad V/s. ITO, ITA No. 1710/Hyd/2011, dt. 09/05/14.
2. Logica Pvt. Ltd., 1129/Bang/11
3. Triology E Business Software India Ltd., 1054/Bang/11
4. Bearing Point Business Consulting Pvt. Ltd., 1124/Bag/11
5. Software India P. Ltd., 1196/H/10
6. Virtusa (India) P. Ltd., 1962/H/11
ii) The learned Departmental Representative on the other hand supported the order of the TPO/DRP.
iii) We have heard the parties and perused the materials on record. Assessee's contention that aforesaid company is having revenue from both product and services and segment wise data is not available could not be controverted by the department. Further it is seen that the coordinate bench of this Tribunal in case of M/s Sumtotal Systems India P. Ltd. (supra) following another decision of the coordinate bench in case of Virtusa India Pvt. Ltd. as well as some other rulings of the different benches of the Tribunal excluded this company from the list of comparables by holding as under:
"It is very much evident from the TP order that the assessee has been categorised as a software development service provider. Coordinate Bench of this Tribunal in the case of Virtusa (India) Pvt. Ltd. (ITA No. 1962/Hyd/2011 dated 30/08/2013) after following some other decisions of the Tribunal has held this company cannot be treated as comparable as this company is also into product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with the assessee. As the aforesaid decision of the Coordinate Bench pertained to the same 5 ITA NO. 1885/H/2011 LGS Global Ltd.
assessment year i.e. A.Y. 2007-08, following the same, we hold that this company cannot be treated as comparable to the assessee."
iv) In the case before us also assessee is engaged in providing software development services, therefore, following the aforesaid decisions of the coordinate bench which pertain to the same assessment year, we direct the Assessing Officer/TPO not to consider this company as comparable.
2. Celestial Labs Ltd.
i) Objecting to selection of this company, the learned AR submitted that the company is involved in research and development activity, hence, it is functionally different from the assessee. It was submitted that though the panel accepting assessee's contention found this company is not to be a comparable, but, ultimately they have retained the same.
ii) The learned Departmental Representative supported the order of the TPO/DRP.
iii) We have considered the submissions of the parties and perused the materials on record as well as the orders of the TPO and DRP. From the materials on record, it is quite evident that the aforesaid company is not comparable to the assessee as the functions are not similar. Further, on a perusal of the order of the DRP, it is to be seen that two of the members of the panel on considering the fact that in many other cases Celestial Labs Ltd., was not treated as comparable on the ground that it is not involved in development of software services have differed from the final order passed by the panel. In the aforesaid facts and circumstances, we are of the view that Celestial Labs cannot be treated as comparable to the assessee.
6ITA NO. 1885/H/2011 LGS Global Ltd.
3. Infosys Technologies Ltd. and Wipro Ltd.
i) Objecting to the aforesaid companies, learned AR submitted that both these companies cannot be considered to be comparable to the assessee as they are industrial giants not only on account of quantum of revenue earned by them but due to various other factors like reputation, brand value, goodwill etc. It was submitted that due to the aforesaid factors not only these companies command premium in the pricing of their products and services, but, due to scale of operation also they enjoy economies of scale in the lower cost of infrastructure facilities and employees and as well as in earning profit. Apart from this, it was submitted that these companies have diversified activities including products, consultancy and solution. They not only own intangibles but also assume considerable risk which results in earning higher profits. In support of such contention, learned AR relied on the following decisions:
1. M/s Sumtotal Systems India P. Ltd., ITA No. 1710/Hyd/2011, order dated 09/05/2014.
2. Virtusa (India) P. Ltd., 1962/H/11
3. CES Pvt. Ltd., 1445/H/10
4. Capital IQ Information Systems India Ltd.
ii) The learned Departmental Representative on the other hand supported the orders of the TPO and DRP.
iii) Having considered the submissions of the parties in the light of the orders of the coordinate bench cited before us by the learned AR, we are of the view that both these companies cannot be considered as comparables to the assessee for the reasons stated by the coordinate bench in the cited rulings. Respectfully following the view expressed by the coordinate bench as aforesaid, we direct 7 ITA NO. 1885/H/2011 LGS Global Ltd.
the Assessing Officer/TPO to exclude the aforesaid companies from the list of comparables.
4. Mega Soft Ltd.
i) Objecting to the aforesaid company, the learned AR submitted that this company cannot be considered as comparable to the assessee, as it is predominantly a product development company and the margin from software development services is only 23.11%. Further, the learned AR submitted that during the year there is amalgamation in the company which has impacted its profits. The learned AR submitted that if at all this company has to be selected as comparable then only segmental profit can be considered for comparability analysis. In support of such contention, he relied upon the following decisions:
1. Intoto Software India P. Ltd., 1196/H/10.
2. M/s Sumtotal Systems India P. Ltd., ITA No. 1710/Hyd/2011, order dated 09/05/2014.
ii) The learned Departmental Representative, however, supported the orders of the TPO/DRP.
iii) We have considered the submissions of the parties and perused the materials on record. As can be seen from the order passed in case of M/s Sumtotal Systems India Pvt. Ltd. (supra) the coordinate bench of this Tribunal following another decision of the same bench in case of M/s Virtusa India Pvt. Ltd. directed the TPO to take only the segmental margin of this company for computing ALP. Facts being materially same, following the view expressed by the coordinate bench as aforesaid, we direct Assessing Officer/TPO to consider only segmental margin of this company for the relevant AY for computing ALP.
8ITA NO. 1885/H/2011 LGS Global Ltd.
6. In view of the aforesaid, we direct the Assessing Officer/TPO to compute the ALP afresh keeping in view our directions given hereinabove and after affording reasonable opportunity of being heard to the assessee.
7. In view of the above, all other grounds raised by the assessee relating to TP issues are considered to be dismissed as not pressed.
8. The only other surviving issue in this appeal relates to the action of the Assessing Officer in reducing communication and freight expenses amounting to Rs. 1,47,17,752/- from the export turnover only while computing deduction u/s 10A of the Act.
9. We have considered the submissions of the parties and perused the materials on record. This issue is squarely covered by the decision of the Hon'ble Bombay High Court in case of CIT Vs. Gemplus Jewellery, 330 ITR 175 and ITO Vs Saksoft Ltd (313 ITR AT 353 (Chennai) (SB). Following the ratio laid down in the aforesaid judgments, we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10A of the Act.
10. In the result, appeal of the assessee is partly allowed.
Order pronounced in the court on 27/06/2014.
Sd/- Sd/-
(B. RAMAKOTAIAH) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 27 th June, 2014
kv
9
ITA NO. 1885/H/2011
LGS Global Ltd.
Copy to:-
1) LGS Global Ltd., C/o P. Murali & Co., CAs., 6-3-655/2/3, Somajiguda, Hyderabad - 500 082
2) ACIT, Circle - 16(1), Hyderabad.
3)DRP, Hyderabad.
4) The Addl. CIT(TP), Hyderabad
5)The Departmental Representative, I.T.A.T., Hyderabad.
Description Date Intls 1. Draft dictated on Sr.P.S. 2. Draft placed before author Sr.P.S Draft proposed & placed before AM 3 the second Member 4 Draft discussed/approved by VP second Member 5 Approved Draft comes to the Sr.P.S. Sr.P.S./PS 6. Kept for pronouncement on Sr.P S. 7. File sent to the Bench Clerk Sr.P.S. 8 Date on which file goes to the Head Clerk 9 Date of Dispatch of order