Income Tax Appellate Tribunal - Bangalore
M/S. Trilogy E-Business Software India ... vs Deputy Commissioner Of Income Tax, ... on 15 February, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : BANGALORE
BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No.1851/Bang/2019
Assessment Year : 2009-10
Triology E-Business, The Dy. Commissioner of
Software India Pvt. Lt., Income-tax,
#1/2, Lalitha Nilaya, Circle-12(4),
4th Cross, RMV 2nd Stage, Vs. Bengaluru.
Bhoopasandra,
Bengaluru-560 094.
PAN - AABCT 2328 Q
APPELLANT RESPONDENT
Assessee by : Shri Narendra Kumar Jain
Revenue by : Shri Priyadarshi Mishra, Add. CIT
(DR)
Date of Hearing : 11-01-2021
Date of Pronouncement : 15-02-2021
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal by the assessee has been filed by assessee as against order dated 24/6/2019 passed by Ld.CIT(A)-10 Bangalore, for assessment year 2009-10.
GENERAL GROUND
1. The Order of the learned Commissioner of Income Tax (Appeals)-10 (hereinafter referred to as CIT (A)) to the extent prejudicial to the Appellant is bad in law.
Page 2 of 19IT(TP)A No.1851/Bang/2019 TRANSFER PRICING GENERAL GROUNDS
2. The learned CIT(A) has erred in confirming the action of the Assessing Officer (hereinafter referred to as AO) and Transfer Pricing Officer (hereinafter referred to as TPO) in:
a.Making a reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so;
b.Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law and c.Passing the order without demonstrating that the Appellant had any motive of tax evasion.
GROUNDS RELATING TO TP ADJUSTMENT
3. The learned CIT(A) has erred in confirming the action of the TPO in:
a. computing the arm's length price based on the data for the Financial Year 2008-09 of the comparables, which was not available when the Appellant undertook transfer pricing documentation and reporting obligations;
b.Rejecting following comparables selected by the Appellant on unjustifiable grounds;
i. CG-VAK Software & Exports Ltd;
ii. Lanco Global Systems Ltd; and iii. Quintegra Solutions Ltd.
c. Ignoring the following additional comparables proposed by the Appellant without giving any cogent reasons and on unjustifiable grounds i. Evoke Technologies Pvt Ltd; and ii.TVS Infotech Ltd d.Rejecting the transfer pricing analysis undertaken by the Appellant on unjustifiable grounds.
4. The learned CIT(A) has erred in confirming the action of the TPO in:
a. Conducting a fresh transfer pricing analysis despite absence of any defects in the transfer pricing analysis submitted by the Appellant;
b. Adopting inappropriate filters in the process of selecting comparables;
c. Adopting companies as comparables even though they are not comparable in respect of functions performed, risks assumed, assets utilized, size, turnover, despite unusual business circumstances or high margins. The lower authorities have erred in adopting following companies as comparables:
i. Kals information Systems Ltd ii. Bodhtree Consulting Ltd iii. Tata Elxsi Ltd iv. Sasken Communication Technologies Lt Page 3 of 19 IT(TP)A No.1851/Bang/2019 v. Persistent Systems Ltd vi. Mindtree Ltd vii. Larsen and Turbo Infotech viii. Infosys Technologies Ltd ix. Zylog Systems Ltd.
5. The learned CIT(A) has erred in confirming the action of the TPO in:
a. Not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies; and b.Not recognizing that the appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account. GROUNDS RELATING TO CORPORATE TAX ADJUSTMENT R&D Expenses
6. The learned CIT(A) has erred in confirming the action of the AO in:
a. Disallowing a sum of Rs. 3,91,21,647/- being research and development expenses under section 37 of the Act stating that the said expenses confer an enduring benefit and is not revenue in nature; and b. In the alternative, the learned CIT(A) has erred confirming the action of AO in not granting depreciation on the amount capitalised by him.
GENERAL GROUND RELATING INTEREST
7. The learned CIT(A) has erred in confirming the action of the AO in levying a sum of Rs. 73,37,407/- as interest under Section 234B, Rs.444/- as interest under Section 234C and Rs. 178965/- as interest under section 234D. On the facts and in the circumstances of the case, interest under Sections 234B, 234C and 234D is not leviable. The Appellant denies its liability to pay interest. Even otherwise the interest charged in excessive.
The Appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law.
The Appellant prays accordingly.
Brief Facts of the case are as under:
2. The assessee is a company. It was incorporated in June, 2000. M/s. Versata International Inc., USA holds the entire share capital of the assessee, except two shares. The assessee provides software research & development services for Versata International Inc. on a contract basis and as requested by Page 4 of 19 IT(TP)A No.1851/Bang/2019 Versata International Inc. For year under consideration, assessee provided software research and development services and call centre services to Versata International and is compensated on cost plus basis, details of which are as under:
Sl no Type of transaction Amount (Rs)
1 Software development & support 32,85,06,958
services
--
2 ITES 25,42,495
3 Travel & other Expenses 1,24,90,328
3. Assessee claims that the price charged by it for services rendered to its AE was at arms' length. The assessee filed a report as required by the provisions of section 92E of the Act, in Form 3CEB together with detailed analysis. The assessee adopted the Transactional Net Margin Method ("TNMM") as the most appropriate method for determining the ALP. The assessee adopted operating profits to cost as the Profit Level Indicator.
Margin computed by the assessee was 17.74%. Assessee used 21 comparables with average margin of 14.13%.
The Ld.TPO, dissatisfied with the comparables selected, and its selection criteria, rejected TP documentation. Ld.TPO applied following filters:
• Companies whose software development service revenue <Rs.1 cr. were excluded • Companies whose Software Development Service revenue is less than 75% of the total operating revenues were excluded • Companies who have more than 25% related party transactions (income as well as expenditure combined) of the operating revenues were excluded;Page 5 of 19
IT(TP)A No.1851/Bang/2019 • Companies who have export sales less than 75% were excluded.
• Companies whose employee cost to operating revenues is less than 25% of the revenues were excluded
4. The Ld.TPO rejected 16 comparables out of 21 comparables given by the assessee in its TP report. The assessee before Ld.TPO had also given some other additional comparables which was also rejected by the Ld.TPO on functional difference. The Ld.TPO on his own, on a search carried on in Prowess Database arrived at a set of 18 comparables over and above the 8 comparables relied upon by the assessee in its TP study, which the Ld.TPO accepted were comparable. Thus, the Ld.TPO arrived at following final set of 11 comparables:
Sl Margin
No. Name of the Comparable
I Kals Information Systems Ltd. 13.89%
2 Akshay Software Technologies Ltd 8.11%
3
Bodhtree Consulting Ltd 62.27%
4
R.S Software (India) Ltd. 9.97%
5 Tata Elxsi Ltd (segmental)
20.28%
6 Sasken Communication Technologies Ltd 27.91% 7 Persistent Systems Ltd .41.40% 8 Zylog Systems Limited 7.81% 9 Mindtree Ltd (seg) 5.52% Page 6 of 19 IT(TP)A No.1851/Bang/2019 10 Larsen and Toubro infotech 24.72% 11 Infosys Ltd 45.61% Average mean 2 4.32%
5. The Ld.TPO finally passed an order u/s. 92CA of the Act and on the basis of the 11 comparables, having arithmetic mean of 24.32%. After factoring the working capital Ld.TPO determined proposed adjustment at Rs.4,28,92,939/- being shortfall.
Against the said adjustment proposed by the Ld.TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP.
6. The DRP rejected objections and confirmed the transfer pricing adjustment suggested by the Ld.TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the Ld.AO in the final order of assessment. Against the said order of the Ld.AO, the assessee has preferred the present appeal before the Tribunal.
7. At the outset, Ld.AR submitted that, on turnover filter, assessee wishes to argue only Ground no.4(c ).
8. The Ld.AR seeks exclusion of following comparables on turnover filter:
Tata Elxsi Sasken Communication Mindtree Ltd Larson&Tubro Infotech Infosys Technologies Ltd Page 7 of 19 IT(TP)A No.1851/Bang/2019 Zylog Systems Ltd.
And Bodhtree Consulting Ltd on functional dissimilarities.
9. The Ld A.R submitted that the Ld.TPO has applied filter of minimum service revenue of Rupees One crore. However, he has failed to fix any upper limit on the turnover/service revenue. She submitted that the turnover of the assessee is Rs. 22.50 crores and hence the assessee falls under the category of companies having turnover between Rs. 1.00 crore to Rs. 200 crores. She submitted that the coordinate bench has held in the assessee's own case related to Autodesk India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang. - Trib.) and also in the case of Tavant Technologies India (P.) Ltd. v. Dy. CIT [IT (TP)No. 1700 (Bang.) of 2017, dated 21-8-2020) has held that the companies having turnover of more than Rs.200 crores could not be taken as comparable companies for an assessee having turnover of less than Rs. 200 crores. The Ld A.R submitted that, on application of above said upper turnover filter, the above said three companies would be excluded. Accordingly he prayed for application of upper turnover filter and exclusion of above said three companies.
10. He submitted that in assessee own case for assessment year 2007-08, reported in (2013) 29 taxmann.com310, coordinate bench of this Tribunal applied turnover filter to exclude comparables. This Tribunal observed and held as under:
"The ld. counsel for the assessee as well as the ld. DR made rival submissions on various aspects of the adjustment made by the TPO. These objections will be dealt with under different heads.Page 8 of 19
IT(TP)A No.1851/Bang/2019 (1) Turnover Filter
11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:-
"Size criteria in terms of Sales, Assets or Number of Employees:
The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability."
12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]:
"Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a Rs 1,000 crore company cannot be compared with the transaction entered into by a Rs 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate."
13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Page 9 of 19 IT(TP)A No.1851/Bang/2019 Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies.
14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715, wherein relying on Dun and Bradstreet's analysis, the turnover of Rs. 1 crore to Rs. 200 crores was held to be proper. The following relevant observations were brought to our notice:-
"9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study."
15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases:
• Kodiak Networks (India) (P.) Ltd. v. Asstt. CIT [2012] 51 SOT 191/18 taxmann.com 32 (Bang.) • Genesis Microchip (I) (P.) Ltd. v. Dy. CIT [2012] 135 ITD 533/20 taxmann.com 237 (Bang.) • Electronic for Imaging India (P.) Ltd. v. Dy. CIT [ITA No. 1171/Bang/2010), dated 31-1-2012] Page 10 of 19 IT(TP)A No.1851/Bang/2019 It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee.
16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Rs. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard.
17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:-
(1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :-
(a) comparable uncontrolled price method;
(b) resale price method;
(c ) cost plus method;
(d) profit split method;
(e ) transactional net margin method;
(f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed:
Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the Page 11 of 19 IT(TP)A No.1851/Bang/2019 price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that-
(a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or
(b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or ( c) the information or data used in computation of the arm's length price is not reliable or correct; or
(d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-
sections (1) and (2), on the basis of such material or information or document available with him:
18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:-
"10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :-
(a) to (d)** ** **
(e) transactional net margin method, by which,-
(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;Page 12 of 19
IT(TP)A No.1851/Bang/2019
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
(3) An uncontrolled transaction shall be comparable to an international transaction if-
none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or reasonably accurate adjustments can be made to eliminate the material effects of such differences.
(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into :
Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared."
19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are Page 13 of 19 IT(TP)A No.1851/Bang/2019 with regard to the comparability of the comparable relied upon by the TPO.
20. In this regard we find that the provisions of law pointed out by the ld.counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra). Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs.
(1) Flextronics Software Systems Ltd. 848.66 crores
(2) iGate Global Solutions Ltd. 747.27 crores
(3) Mindtree Ltd. 590.39 crores
(4) Persistent Systems Ltd. 293.74 crores
(5) Sasken Communication Technologies
343.57 crores
Ltd.
(6) Tata Elxsi Ltd. 262.58 crores
(7) Wipro Ltd. 961.09 crores.
(8) Infosys Technologies Ltd. 13149 crores.
In present facts, assessee contests following comparables for exclusion by using turnover filter;
Tata Elxsi 378.43 crores
Sasken Communication 405.30crores
Mindtree Ltd 793.22crores
Larson&Tubro Infotech 1950.83crores
Infosys Technologies Ltd 20264crores
Zylog Systems Ltd. 734.94crores
Respectfully following the view taken by this Tribunal in assessee's own case for assessment year 2007-08, and decisions relired by the Ld.AR herein above, we direct exclusion of these comparables final list of comparables for failing turnover filter.
Page 14 of 19IT(TP)A No.1851/Bang/2019 Bodhtree Consulting Ltd.
11. The Ld.AR seeks exclusion of Bodhtree Consulting Ltd., on functional dissimilarities.
12. He submitted that this company is functionally different and should be rejected as a comparable. Our attention was invited to the directors report in annual reports of this company for financial year 2008-09 wherein this company has been categorised to have only one segment namely software development. It is also been stated therein that this company is engaged in providing open and end to end web solutions, off shoring Tata management, Tata warehousing, software consultancy, design and development of solutions, using the latest technologies. It has thus been submitted that the activities like that management, Tata warehousing etc are not akin to the captive service provided by assessee to its AE's. Ld. ar submitted that this comparable has been excluded in various decisions by coordinate benches of this tribunal for assessment year 2009-10 for functional dissimilarities with a captive service provider like that of assessee. It is also been submitted that this comparable has fluctuating margin over a period of 6 years and therefore cannot be considered a fit comparable. Placing reliance on coordinate bench of this Tribunal in case of M/s Mindtech (India) Ltd vs DCIT in IT(TP)A No.70/B/2014 for assessment year 2009- 10 by order dated 21/08/2014, has rejected this comparable for the same reason.
13. The Ld. CIT DR placed reliance on the orders passed by authorities below.
Page 15 of 19IT(TP)A No.1851/Bang/2019
14. We have perused the submissions advanced by both sides in light of records placed before us.
15. We note that this Tribunal in case of M/s Mindtech (India) Ltd vs DCIT in IT(TP)A No.70/B/2014 for assessment year 2009- 10 (supra) in respect of this comparable observed as under:
"16. We have considered the rival submissions. The special bench of ITAT in case of mask global centres (supra) had no occasion to deal with the question as to whether high profit margins making companies should be excluded as a comparable. The special bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is normally high. The special bench held that in such cases it would require further investigation to ascertained the reasons for usually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the special bench and in view of the admitted position that the assessee follows fixed-price project model where revenues from software development is recognised based on software developed and built to clients, there is a possibility of expenditure in relation to revenue building boom in the earlier year. The results of both tree from financial year 2003 to 2008 excluding financial year 2007 as given by Ld. counsel for the assessee were also perused. Perusal of same shows that there has been a consistent change in the operating margins. The chart give filed by assessee in this regard is given as Annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason Page 16 of 19 IT(TP)A No.1851/Bang/2019 for the drastic variation in profit margin of this company. In the given circumstances, we are of the view that it would be safe to exclude both tree consulting from final list of comparables chosen by assessee. We hold and direct accordingly."
16. We note that the chart referred to and relied by coordinate bench of this tribunal has been also placed at page 349 of paper book filed before us. In the present facts assessee is a captive service provider and therefore there is a fixed-price project model followed in the present facts. Respectfully following the view taken by coordinate bench of this tribunal in this Tribunal in case of M/s Mindtech (India) Ltd vs DCIT in IT(TP)A No.70/B/2014 for assessment year 2009-10 (supra) we direct Ld.AO/TPO to exclude both tree from the final list of comparables.
Accordingly Ground no.4(c ) stands allowed.
17. The next ground pressed by Ld. counsel is ground No. 6 is in respect of disallowance of Rs.3,91,21,647/-being research and development expenses under section 37 of the act stating that the said expenses confer an enduring benefit and is not revenue in nature.
18. Both sides submitted that this issue stands squarely covered by the order of this tribunal in assessee's own case for assessment year 2007-08 (supra). It has been submitted that the issue has been remanded to the Ld.AO for considering it afresh by observing as under:
85. Before us, the assessee submitted that these expenses were incurred by it in developing two websites by name www.billbuddy.com and www.carbuy.com. In case of www.billbuddy.com, a customer could upload his telephone bill and the website would analyze the call charges and give output. In case Page 17 of 19 IT(TP)A No.1851/Bang/2019 of www.carbuy.com, the website would give comparison of various cars etc, to make informed decision to buyers. The assessee during the year incurred expenses like salaries and related benefits paid to employees, outsourcing charges, rent, electricity, insurance, travelling & conveyance, trainings etc for development of the above website. The Assessee submitted that these expenses should be considered as revenue expenditure. It was submitted that in the following decisions it has been held that website development expenses are revenue in nature.
CIT v. Indian Visit.com (P) Ltd [2009] 176 Taxman 164 (Delhi) Lyons Technologies Ltd. v. ACIT [I.T.A. No.3060/ AHD/2004] Kisan Ratilal Choksey Shares & Securities (P.) Ltd. v. Addl. CIT [ITA No.4821 /Mum/2009] The learned DR relied on the order of the AO.
86. We have considered the rival contentions. The submissions made before us that the above expenses were incurred for website development is contrary to the stand of the Assessee before DRP/AO that these expenses were for exploring the possibility of domestic market through pilot projects. Unless the nature of the expenses is examined it is not possible to decide as to whether the same were revenue in nature and that it relates to existing business of an Assessee. The alternative contention of the Assessee that the claim should be examined u/s.35 of the Act also cannot be decided unless the correct description of the expense is considered. We therefore set aside the order of the AO on this issue and remand the issue for consideration afresh by the AO after affording opportunity of being heard to the Assessee."
19. It has been submitted that there is no factual change on the issue in respect of present year under consideration with 2007-
08. Based on this, respectfully following the aforestated view taken by coordinate bench of this tribunal in assessee's own case for assessment year 2007-08, we remand this issue to learnt AO for considering it afresh after affording opportunity of being heard to assessee.
Page 18 of 19IT(TP)A No.1851/Bang/2019
20. Accordingly this ground raised by assessee stands allowed for statistical purposes.
21. The Ld.AR before us has argued ground 4 (c) and Ground 6, which we have adjudicated hereinabove. All other grounds having not been argued are left open to be considered in an appropriate situation.
In the result appeal filed by assessee stands partly allowed.
Order pronounced in the open court on 15th February, 2021 Sd/- Sd/-
(B. R. BASKARAN) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 15th February, 2021.
/Vms/
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore
6. Guard file By order
Assistant Registrar, ITAT, Bangalore
Page 19 of 19
IT(TP)A No.1851/Bang/2019
Date Initial
1. Draft dictated on On Sr.PS
Dragon
2. Draft placed before -2- Sr.PS
author 2021
3. Draft proposed & placed -2- JM/AM
before the second 2021
member
4. Draft discussed/approved -2- JM/AM
by Second Member. 2021
5. Approved Draft comes to -2- Sr.PS/PS
the Sr.PS/PS 2021
6. Kept for pronouncement -2- Sr.PS
on 2021
7. Date of uploading the -2- Sr.PS
order on Website 2021
8. If not uploaded, furnish -- Sr.PS
the reason
9. File sent to the Bench -2- Sr.PS
Clerk 2021
10. Date on which file goes to
the AR
11. Date on which file goes to
the Head Clerk.
12. Date of dispatch of Order.
13. Draft dictation sheets are No Sr.PS
attached