Income Tax Appellate Tribunal - Pune
Affinity Express India Pvt. Ltd.,, Pune vs Department Of Income Tax on 29 April, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
Before Shri R.K. Panda, Accountant Member
and Shri Vikas Awasthy, Judicial Member
ITA. No.595/PN/2013
(Assessment Year : 2007-08)
DCIT, Circle-1(1), Pune .. Appellant
Vs.
Affinity Express India Pvt. Ltd.,
Survey No.247/2, Hinjewadi,
Pune - 411057
PAN No.AABCC1224C .. Respondent
Assessee by : Shri Ketan Ved &
Shri Vishal Solanki
Department by : Shri B.C. Malakar
Date of Hearing : 09-04-2015
Date of Pronouncement : 29-04-2015
ORDER
PER R.K. PANDA, AM :
This appeal filed by the Revenue is directed against the order dated 21-12-2012 of the CIT(A)-IT/TP, Pune relating to Assessment Year 2007-08.
2. Facts of the case, in brief, are that the assessee is a company engaged in the business of embroidery software designing and document creation. It filed its return of income on 31-10-2007 disclosing NIL income. During the course of assessment proceedings, the AO noted that the assessee has entered into international transactions with the related parties/Associated Enterprises, the details of which are as under:
Sr.No. Description of transaction Amount (Rs.) Method used 1 Provisions of Digitizing 11,48,73,761 TNMM Services 2 Provision for Data 19,05,53,874 TNMM Conversion/Creation Service 3 Import of Capital goods 0 2 4 Import of consumables 1,18,265 TNMM 5 Receipt of loan 1,10,88,000 TNMM 6 Repayment of loan 6,30,709 TNMM Total 31,72,64,609 He therefore made a reference u/s.92CA(1) to the TPO. The TPO thereafter issued notice u/s.92CA(2) of the I.T. Act to the assessee along with a detailed questionnaire to make its submissions/produce documents to support the ALP computed by it in Form No.3CEB. From the various details furnished by the assessee, the TPO noted that the assessee company was incorporated on 10-05-1993 and started its commercial production on 01-01-1994. The assessee Affinity Express (India) Pvt. Ltd., (in short 'AEIPL') is a 100% export oriented unit and is a subsidiary of CVJV. Further, during the F.Y. 2005-06 CVJV has been taken over by Affinity Express Inc, USA (AEXP, USA) and as a result holds 100% in CVJV. AEIPL basically provides 2 types of services to its AE, i.e. Digitizing services and data conversion/creation services. Both the services fall under the ambit of IT enable service. Under the Digitization service, the company is engaged in the business of developing and exporting of computerized embroidery design, emblem, art works, drawings, badges and other allied products. The company provides services for drawing and designs. Under the data conversion services, the company develops documents such as invitation cards, resumes, business cards, letter heads, labels and brochures etc. on order basis. The total turnover of AEIPL for the impugned assessment year was Rs.30.55 crores and the profit before tax was Rs.2.11 crores.
3. The TPO noted that the assessee has used TNM method as the most appropriate method. For the purpose of analysis, the International Transactions have been aggregated and entity level adjusted operating profit over sales has been taken as profit level indicator (PLI). A set of 5 3 external comparables have been taken and weighted average operating margin has been taken as PLI for the set of comparables, the details of which are as under :
Sr.No. Company Operating
Margin Ratio
1 Ace Software Exports Ltd., 0.63%
2 C.S. Software Enterprise Limited 17.37%
3 Genesys International Corporation Ltd., 5.83%
4 K L G Systel Ltd. 15.48%
5 Vama Industries Limited 8.88%
Grand Average 9.64%
AEIPL 14.00%
The assessee accordingly submitted that the international transaction of providing of services is at arm's length. However, the TPO in the order worked out profit level indicator of the assessee company at 7.41% as against the PLI of comparable companies at 14.78%, the details of which are as under :
Sr.No. Company Operating
Margin OP/OC)
1 Ace Software Exports Ltd., (-) 6.79%
2 C.S. Software Enterprise Limited 22.13%
3 Genesys International Corporation Ltd., 13.35%
4 Vama Industries Limited 9.18%
5 K L G Systel Ltd. 21.24%
6 Bodhtree Consulting Limited 29.58%
Mean 14.78%
4. The TPO accepted the comparable companies of the assessee and included one new company, i.e. M/s. Bodhree Consulting Ltd. and accordingly made an adjustment of Rs.2,09,60,280/- on the value of international transaction of providing services to AE of Rs.28,44,00,000/-.
5. Before CIT(A) the assessee vehemently challenged the inclusion of M/s. Bodhtree Consulting Ltd., as a comparable. It was argued that the company is into the business of software development services and hence not functionally similar to that of the assessee. It was argued that as per the business description in its annual report for the year ended 31- 4 03-2007 not only its line of business is completely different but also its FAR is different than that of the assessee and consequently it is not a comparable company for benchmarking international transaction of the assessee. It was argued that M/s. Bodhtree Consulting Ltd. had hived of its e-paper business to its subsidiary company viz., Pressmart Media Ltd. for the year ended March 2007. Since the business of PML is in the field of e-paper which is in the industry of Information Technology Enabled Services (ITES), it would be appropriate to consider the subsidiary company as comparable in the assessee's case which is also in ITES industry. However, the argument of the assessee that M/s. Bodhtree Consulting Ltd. is not functionally comparable was not accepted by the TPO and was retained as a comparable.
6. The assessee brought to the notice of the Ld.CIT(A) the following paragraph in the Director's report in the annual report of the company:
"Bodhtree has only one segment, namely software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies."
7. The assessee also drew the attention of the Ld.CIT(A) to the different parts of the annual report and information provided on the website of the company to contend that M/s. Bodhtree Consulting Ltd. is clearly into software development whereas the assessee company provides ITES, therefore, M/s. Bodhtree Consulting Ltd. cannot be considered as a comparable to the assessee.
8. Based on the arguments advanced by the assessee the Ld.CIT(A) directed the AO to exclude M/s. Bodhtree Consulting Ltd. from the list of comparables. While doing so, he observed that the various parts of the directors report as well as other references in the annual report make 5 it clear that M/s. Bodhtree Consulting Ltd. is into software development and therefore this company cannot be treated as comparable with the assessee company which renders ITES.
9. Aggrieved with such order of the CIT(A) the revenue is in appeal before us with the following grounds :
"1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case.
2. The learned Commissioner of Income-tax (Appeals) grossly erred in allowing the assessee's appeal instead of confirming the Assessing Officer's order.
3. The learned Commissioner of Income-tax (Appeals) grossly erred in directing to exclude M/s. Bodhtree Consulting Limited from the set of six comparables selected by the Transfer Pricing Officer by holding that the said company is engaged in software development.
4. The learned Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that out of the six comparables, four comparables including M/s. Bodhtree Consulting Ltd. are engaged in similar type of services i.e. Software Development and IT related services and also that the assessee itself has not objected to the comparability of the other three comparables viz. M/s. Ace Software Exports Ltd., M/s. C.S. Software Enterprises Limited(now known as CSS Technology Ltd.) & M/s.Varna Industries Ltd.
5. For these and such other grounds as may be urged at the time of hearing, the order of the learned CIT (Appeals) may be vacated and that of the Assessing Officer be restored.
6. The appellant craves leave to add, alter or amend any or all the grounds of appeal."
10. The Ld. Departmental Representative strongly challenged the order of the CIT(A). He submitted that the 6 comparables taken by the TPO in the comparables including M/s. Bodhtree Consulting Ltd. are engaged in similar type of services, i.e. software development and IT related services. Further, the assessee itself has not objected to the comparability of the other 3 comparables viz., M/s. Ace Software Exports Ltd., M/s. C.S. Software Enterprises Ltd. and M/s. Vama Industries Ltd. He submitted that the TPO had rightly included M/s. Bodhtree Consulting Ltd. as comparable. The Ld. CIT(A) without any 6 justifiable grounds has directed the AO to exclude the same from the list of comparables which is not proper. He accordingly submitted that the order of the CIT(A) be reversed on this issue.
11. The Ld. Counsel for the assessee on the other hand strongly supported the order of the CIT(A). He submitted that from A.Y. 2006-07 till date M/s. Bodhtree Consulting Ltd. was never included as a comparable except for the impugned assessment year. Therefore, following the rule of consistency itself, M/s. Bodhtree Consulting Ltd. should be excluded from the list of comparables and the order of the Ld.CIT(A) be upheld. For the above proposition, the Ld. Counsel for the assessee relied on the decision of the Pune Bench of the Tribunal in the case of Brintons Carpets Asia Pvt. Ltd. Vs. DCIT vide ITA No.1296/PN/2010 order dated 15-06-2011 for A.Y. 2006-07.
12. The Ld. Counsel for the assessee drew the attention of the Bench to the following chart which gives year on year comparison of financial results from F.Y. 2003-04 to 2013-14 :
Bodhtree Technologies Ltd Year-on-year comparison of financial results Sr.No. Particulars 2003-04 2004-05 2005-06 2006-07 2007-08 A Operating Revenue (OR) 42,647,090 38,685,845 53,189,165 103,528,905 103,665,824 B Year-on-year variation in the OR -9.29% 37.49% 94.64% 0.13% C Operating Cost(OC) 35,399,302 30,985,406 46,709,532 57,294,338 85,803,159 D Year-on-year variation in the OC -12.47% 50.75% 22.66% 49.76% E Operating Profit (OP) 7,247,788 7,700,439 6,479,633 46,234,567 17,862,665 F Year-on-year variation in the OP 6.25% -15.85% 613.54% -61.37% G OP/OC 20.47% 24.85% 13.87% 80.70% 20.82% H Year-on-year variation in the OP/OC 21.38% -44.18% 481.71% -74.20% 7 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 160,575,212 225,676,988 212,115,207 434,321,855 428,680,863 467,004,623 54.90% 40.54% -6.01% 104.76% -1.30% 8.94% 98,110,636 168,073,152 221,222,104 420,747,674 481,337,388 435,856,106 14.34% 71.31% 31.62% 90.19% 14.40% -9.45% 62,464,576 57,603,836 (9,106,897) 13,574,181 (52,656,525) 31,148,517 249.69% -7.78% -115.81% -249.05% -487.92% -159.15% 63.67% 34.27% -4.12% 3.23% -10.94% 7.15% 205.83% -46.17% -112.01% -178.37% -439.09% -165.33% Referring to the above, he submitted that there is wide variation in the operating revenue and operating cost in different years.
13. Referring to the decision of the Pune Bench of the Tribunal in the case of Barclays Technology Centre Vs. ACIT vide ITA No.2279/PN/2012 the Ld. Counsel for the assessee drew the attention of the Bench to para Nos. 20 to 24 of the order of the Tribunal and submitted that the Tribunal in the said decision has held that the revenue recognition model of M/s. Bodhtree Consulting Ltd. is quite different from the model being pursued by the assessee. Relying on various decisions the Tribunal accepted the contention of the assessee that M/s. Bodhtree Consulting Ltd. should be excluded from the list of comparables. He accordingly submitted that the order of the Ld.CIT(A) be upheld.
14. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute in the grounds raised by the revenue is regarding the exclusion of M/s. Bodhtree Consulting Ltd. as a comparable which has been included by the TPO as a comparable. We find the Ld.CIT(A) directed the AO to exclude the same from the list of comparables on the ground that M/s. Bodhtree Consulting Ltd. is 8 engaged into software development whereas the assessee company renders IT enabled services. The submission of the Ld. Counsel for the assessee that from A.Y. 2006-07 till date M/s. Bodhtree Consulting Ltd. was never considered as comparable except for the impugned assessment year could not be controverted by the Ld. Departmental Representative. Therefore, we find merit in the submission of the Ld. Counsel for the assessee that following the rule of consistency itself M/s. Bodhtree Consulting Ltd. should be excluded from the list of comparables. Although it is the settled proposition of law that the principle of resjudicata is inapplicable to IT matters, however, the same is true as long as the facts are different in different assessment years. However, when the facts are similar, the rule of consistency is relevant to IT matters and the revenue authorities cannot ignore the same. There should be uniformity in treatment and consistency in approach when the facts and circumstances are identical.
15. So far as the function of M/s. Bodhtree Consulting Ltd. is concerned, we find the Pune Bench of the Tribunal in the case of Barclays Technology Centre (Supra) for A.Y. 2008-09 following the decision of the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. vide IT(TP) A. No.70/Bang/2014 order dated 21-08-2014 and the decision of the Mumbai Bench of the Tribunal in the case of Neth Hawk Networks India Pvt. Ltd., vide ITA No.7663/M/2012 order dated 06-11-2013 for A.Y. 2008-09 has directed to exclude M/s. Bodhtree Consulting Ltd. from the list of comparables. The Tribunal at Para No.24 of the order has observed as under :
"24. Though the aforesaid discussion by the Bangalore Bench of the Tribunal is in relation to the assessment year 2009-10, but the inferences drawn with regard to the variations in the profit margins 9 of the said concern for different years is relevant in the present context also. Furthermore, the Tribunal also analysed and found that the said concern was following fixed price project method whereby revenue from software development services was being recognized based on the software developed and billed to the clients. In such a business model, the possibility of the expenditure not being booked on the basis of the matching principle cannot be ruled out, which would impart fluctuation in the margins over the years. In contrast, in the present case, the revenue is being recognized based on the cost plus markup basis. Clearly, the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the model being pursued by assessee and such distinction prevailed with the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. (supra) to exclude Bodhtree Consulting Ltd. from the list of comparables. Considering such difference, in our view, assessee is justified in asserting that the said concern be excluded from the list of comparables. We hold so."
16. Further, from the chart filed by the Ld. Counsel for the assessee showing the year on year comparison of financial results, we find there is large variation in the operation revenue, operating cost and operating profit of M/s. Bodhtree Consulting Ltd. between different financial years which has already been reproduced at Para No.12 of the impugned order. In view of the above discussion, we are of the considered opinion that M/s. Bodhtree Consulting Ltd. was rightly excluded by the CIT(A) from the list of comparables. Therefore, we do not any infirmity in his order and accordingly uphold the same. The grounds raised by the revenue are accordingly dismissed.
17. In the result, the appeal filed by the Revenue is dismissed.
Pronounced in the open court on 29-04-2015.
Sd/- Sd/-
(VIKAS AWASTHY) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
satish
Pune Dated: 29th April, 2015
10
Copy of the order forwarded to :
1. Assessee
2. Department
3. CIT(A)-IT/TP, Pune
4. CIT-IT/TP, Pune
5. The D.R, "B" Pune Bench
6. Guard File
By order
// True Copy //
Assistant Registrar
ITAT, Pune Benches, Pune