Income Tax Appellate Tribunal - Pune
Tieto Software Technologies Ltd. ... vs Cit (A), It/Pt, Pune on 3 March, 2017
आयकर अपील य अ धकरण पण
ु े यायपीठ "बी" पण
ु े म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
सु ी सुषमा चावला, या यक सद य एवं ी अ नल चतुव"द , लेखा सद य के सम%
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपील सं. / ITA No.986/PUN/2013
नधा'रण वष' / Assessment Year : 2007-08
Tieto Software Technologies Ltd.,
(Formerly known as Tieto Software
Technologies Pvt. Ltd.)
8th Floor, 'D' Building,
Weikfield IT Citi Info Park,
Nagar Road, Pune - 411014 .... अपीलाथ /Appellant
PAN: AABCI2507A
Vs.
The Dy. Commissioner of Income Tax,
Circle - 7, Pune .... यथ / Respondent
आयकर अपील सं. / ITA No.965/PUN/2013
नधा'रण वष' / Assessment Year : 2007-08
The Asst. Commissioner of Income Tax,
Circle - 7, Pune .... अपीलाथ /Appellant
Vs.
Tieto Software Technologies Ltd.,
(Formerly known as Tieto Software
Technologies Pvt. Ltd.)
8th Floor, 'D' Building,
Weikfield IT Citi Info Park,
Nagar Road, Pune - 411014 .... यथ / Respondent
PAN: AABCI2507A
Assessee by : Shri Ketan Ved
Revenue by : S/Shri A.K. Modi and Hitendra Ninawe
2
ITA No.965/PUN/2013
ITA No.986/PUN/2013
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 03.01.2017 Date of Pronouncement: 03.03.2017
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
The cross appeals filed by the assessee and the Revenue are against the order of CIT(A)-IT/TP, Pune, dated 27.02.2013 relating to assessment year 2007-08 passed under section 143(3) of the Income-tax Act, 1961 (in short 'the Act').
2. The cross appeals filed by the assessee and the Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The assessee in ITA No.986/PUN/2013 has raised the following grounds of appeal:-
1. The honorable CIT (A) erred in law and on the facts and in circumstances of the case in confirming an upward adjustment to the value of international transactions entered into by the Appellant with its Associated Enterprise ("AE") with respect to rendering of software development services to its AE.
2. The honorable CIT(A) erred in law and on the facts and in circumstances of the case in rejecting the functional adjustments including but not limited to difference in policy for depreciation on computer equipment in case of the Appellant and the comparable companies.
In addition to the above, honorable CIT(A) erred in law and on the facts and in circumstances of the case in ignoring that in subsequent assessment years i.e. AY 2008-09 and AY 2009-10, the said functional adjustment is granted by the Transfer Pricing Officer.
3. The honorable CIT(A) erred in law and on the facts and in circumstances of the case in confirming following as comparable companies which are functionally different:
• Goldstone Technology Limited • Synetairos Technologies Limited • Sterling International Enterprise Limited 3 ITA No.965/PUN/2013 ITA No.986/PUN/2013
4. The honorable CIT(A) erred in law in not allowing variation to the extent of (+/-) 5%, while determining the arm's length price of the international transactions.
5. The honorable CIT(A) erred in law and on the facts and in circumstances of the case in non-granting risk adjustment to the Appellant.
6. The honorable CIT(A) erred in law and on the facts and in circumstances of the case in confirming the rejection of the comparable companies accepted by the Appellant in the transfer pricing study report without providing cogent reasons.
7. Each one of the above grounds of appeal is without prejudice to the other.
4. The assessee has also raised the additional grounds of appeal, which read as under:-
1. The Commissioner of Income-tax (Appeals) while excluding Compucom Software Ltd. from the list of comparable companies has erred in not considering the fact that the related party transactions of the said Company during the year under consideration were more than 25% and also the Company is not functionally comparable to the Appellant's business and hence on this count the said Company ought to be excluded.
2. The Appellant submits that Sterling International Enterprise Ltd. (formerly known as Trasworld Infotech Limited) ought to be excluded from the list of comparable companies for the year under consideration even on account of the fact that the data considered by the Assessing Officer / Transfer Pricing Officer for the comparability analysis is for the period 01 July 2006 to 30 June 2007 whereas the Financial Year of the Appellant (with which the comparison is made) is 01 April 2006 to 31 March 2007.
5. The Revenue in ITA No.965/PUN/2013 has raised the following grounds of appeal:-
1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in directing the A.O to exclude CompuCom Software Limited from the list of comparable companies.
2. While directing so, the learned CIT(A) has erred in not considering the fact that the Transfer Pricing Officer (TPO) had included this company as a comparable after considering its segmental results.
6. Briefly in the facts of the case the assessee for the year under consideration had filed return of income declaring total income at Nil. The assessee was engaged in the business of software development wherein the assessee had received the approval from STPI. The assessee claims that it was a 100% export oriented unit which was engaged in designing, developing quality 4 ITA No.965/PUN/2013 ITA No.986/PUN/2013 assured documentation at its unit located in Pune. Reference under section 92CA was made to the Transfer Pricing Officer to determine the Arm's Length Price of the international transaction undertaken by the assessee. The Transfer Pricing Officer noted various international transactions undertaken by the assessee which are as under :
Sr.No. Description of transaction with AE Amount (Rs.) Method 1 Development and sale of Software 19,07,17,500 CPM 2 Reimbursement of expenses 2,23,92,362 CUP 3 Payment of management and technical 37,41,253 CUP fees 4 Payment of interest on ECB loan 1,27,923 CUP TOTAL 21,69,79,038
7. The Transfer Pricing Officer observed that assessee was a 100% subsidiary of Tieto Enator Oyj which belong to the TE group headquartered in Finland. The assessee was a dedicated in-house software developer for the TE group handling and the entire export billing was made on TE group and not on any outside parties. The assessee had selected CPM as the most appropriate method to benchmark the international transaction relating to rendering of Software Development Services. However, the TPO rejected the same and during the course of hearing itself TNMM was considered as most appropriate method. During the course of hearing the assessee selected some of the listed companies as functionally comparable and the average margin of the said 4 companies, i.e. (a) KPIT Cummins, (b) Satyam Computers Ltd., (c) Tata Consultancy Services Ltd. and (d) Patni Computer Systems Ltd. worked out to 14.17%. The assessee pointed out that the Arm's Length Price of its international transaction with 14.03% markup was considered to be most reasonable. However, the Transfer Pricing Officer did not accept the contention of the assessee and a show cause notice was issued to the assessee. After considering the filters applied by the assessee, the Transfer Pricing Officer from 5 ITA No.965/PUN/2013 ITA No.986/PUN/2013 the accept reject matrix filed by the assessee considered the following companies to be comparable to the assessee :
Sr.No. Name of the Company NCP 2006-07(%)
1 Goldstone Technologies Ltd. 21.90
2 Synetairos Technologies Ltd. 19.75
3 Sterling International Enterprise Ltd. 32.90
4 Compucom Software Ltd. 35.63
Arithmetic Mean 27.54
8. The assessee was show caused in this regard. In reply, the assessee objected to the selection of the said companies and the submissions of the assessee are reproduced at pages 8 to 11 of the Transfer Pricing Officer's order. The Transfer Pricing Officer noted that no fresh search was carried out and the concerns were taken up from the accept reject matrix of the assessee and the data for the year under consideration was applied to benchmark the international transaction undertaken by the assessee. The plea of the assessee thus was rejected and the said companies were adopted as final set of comparables. The Arithmetic Mean of the comparables worked out to 27.54% as against operating profit on total cost of the assessee at 14.03%. Accordingly, an adjustment of Rs.1,90,33,220/- was worked out by the Transfer Pricing Officer. The said addition was in respect of the international transaction relating to development of software services. In respect of the balance international transactions no adjustment was proposed by the Transfer Pricing Officer. The assessee also asked for adjustment on account of certain expenses while computing the margins of the comparables, however, the same were denied by the Transfer Pricing Officer. The risk adjustment asked for by the assessee was also denied to the assessee.
9. The Assessing Officer passed the order under section 143(3) read with section 144C(3) of the Act. The assessee filed an appeal before the CIT(A) who in turn held that TNMM is to be applied to benchmark the international 6 ITA No.965/PUN/2013 ITA No.986/PUN/2013 transaction undertaken by the assessee. The next objection of the assessee was against selection of 4 new companies which as per the assessee were not functionally comparable. The CIT(A) took note of the segmental reporting of Goldstone Technologies Ltd., also the notes to accounts in the annual report which show that the company was engaged in the business of software development. In view thereof the objection of the assessee was dismissed. In respect of the other 3 concerns the CIT(A) confirmed the order of the Transfer Pricing Officer in selecting Synetairos Technologies Ltd. and Sterling International Enterprise Ltd. being functionally comparable as the said concerns were engaged in software development. In respect of Compucom Software Ltd. the CIT(A) noted that the company fails Related party Transaction filter of minimum 75% of export earnings and hence the Assessing Officer was directed to exclude the said concern from the list of comparable companies. The next objection of the assessee that there were no reasons for rejecting the comparables selected by it was also rejected by the CIT(A) as the CPM method was not applied and the companies which were used for applying the said method merits to be rejected.
10. The next objection of the assessee before CIT(A) was the requisite comparability adjustments wherein adjustment was sought on account of depreciation on fixed assets. The assessee claimed that under the Straightline method, the depreciation claimed was higher than the rate prescribed under Schedule XIV of the Companies Act. The assessee pointed out that it was claiming higher charge on account of depreciation on PCs and Laptops which cost assumption may not be there in the other I.T. companies. The assessee submitted that it would be appropriate to adjust the profits by adding 100% depreciation on PCs and Laptops as the same were debited to the profit and loss account as a result of software consideration for cost, adopted by it w.e.f. 01-04- 2006. The CIT(A) noted that the assessee had not sought this adjustment before 7 ITA No.965/PUN/2013 ITA No.986/PUN/2013 the Transfer Pricing Officer. However, since it was in nature of legal argument the same was admitted. On principle it was held as under :
"2.5.1.1.3 I have considered the facts and arguments of the Appellant. I find that this adjustment was not sought by the Appellant before the learned TPO. However, prayer for granting of such adjustment is in the nature of legal argument. Therefore, I admit the same. On principle, adjustment on account of differences in accounting policies can be allowed under the Rule 10B(1)(e)(ii). Accordingly, the Appellant would be well within the Law to adjust the profit margin if it had claimed depreciation at the rates higher than what is provided in the Companies Act. However, what I find in this case is that the Appellant is not clear about the accounting policy on laptops and PCs adopted by the comparable companies. The Appellant's lack of clarity on this issue is expressed by it as 'this is special cost assumption, which may not be there in other IT companies' in its written submission.
2.5.1.1.4 Rule 10B(1)(3)(ii) requires that the adjustment made should be reliable and reasonably accurate. However, if the Appellant is not clear about the depreciation rate at which comparable companies have claimed depreciation on PCs & Laptops, no adjustment can be made as both comparable company and the tested party cannot attain the same level of comparability. Therefore, in the facts of the case, I decline to grant an adjustment for depreciation to the Appellant."
11. The next adjustment sought by the assessee was working capital adjustment which was allowed to the assessee and necessary directions were issued to the Assessing Officer. Third adjustment sought was risk adjustment wherein the CIT(A) held that the assessee was not a risk free entity, as it was contended that the assessee was a captive service provider. Relying on series of decisions the CIT(A) declined to grant risk adjustment to the assessee.
12. Both the assessee and the revenue are in appeal against the order of CIT(A).
13. The Revenue is in appeal only against the exclusion of the concern Compucom Software Limited.
14. The Ld. Departmental Representative for the revenue pointed out that the CIT(A) had directed the Assessing Officer to exclude Compucom Software Limited from the final list of comparables since it failed to fulfil Related Party Transaction filter of 75%. The Ld. Departmental Representative drew our 8 ITA No.965/PUN/2013 ITA No.986/PUN/2013 attention to page 66 of the paper book No.2 wherein under the head "Software Development Services" the income from overseas projects was declared at Rs.10,96,57,237/- and from the domestic projects at Rs.37,76,407/-. Our attention was further drawn to page 73 of paper book No.2 wherein the transaction with the Related Parties for the under consideration the revenue from Software Services were declared at Rs.1134.34 lakhs, i.e. cumulative total of Overseas Services of Rs.1096.57 lakhs and domestic receipts of Rs.37.76 lakhs. He stressed that the directions issued by the CIT(A) in this regard are to be reversed.
15. The Ld. Authorised Representative for the assessee relied on the order of the CIT(A). The Ld. Authorised Representative for the assessee also referred to the additional ground of appeal and pointed out that both the grounds of appeal do not involve any investigation into facts and the same may be admitted for adjudication. He further referred to the additional ground of appeal No.1 which was against inclusion of Compucom Software Limited since it fails Related Party Transaction filter. In this regard, the Ld. Authorised Representative for the assessee relied on the ratio laid down by the Pune Bench of the Tribunal in the case of PTC Software (India) Pvt. Ltd. Vs. ACIT in ITA No.1605/PUN/2011 relating to Assessment Year 2007-08, vide order dated 30-04-2013 had held that Compucom Software Limited could not be considered as comparable since the Related Party Transaction exceeded to 25% filter. Similar view was taken in the case of M/s. SunGard Solutions (India) Pvt. Ltd. Vs. Dy. Director of Income Tax (International Taxation) in ITA No.122/PUN/2011 order dated 30-09-2014 relating to Assessment Year 2007 and in the case of John Deere Pvt. Ltd. Vs. ACIT in ITA No.1319/Pun/2011 order dated 10-10-2014 relating to Assessment Year 2007-08.
9ITA No.965/PUN/2013 ITA No.986/PUN/2013
16. We have heard the rival contentions and perused the record. The first issue which arises for adjudication is against exclusion of concern Compucom Software Limited from the final list of comparables. As pointed out in the paras hereinabove, the assessee was engaged in providing Software Development Services to its Associate Enterprises. The unit of the assessee was 100% export oriented unit wherein the assessee had received the recognition under the STPI scheme. The assessee while benchmarking its international transaction had initially applied CPM as the most appropriate method; however, the Transfer Pricing Officer applied TNMM as most appropriate. The Ld. Authorised Representative for the assessee during the course of hearing pointed out that there was no dispute on the application of method and also on the application of filter, however, the issues were against various adjustments not allowed to the assessee.
17. The appeal of the revenue is against exclusion of Compucom Software Limited on the ground that it does not fail the export filter and its export sales at Rs. 10.96 crores far exceeded the domestic sales of Rs.37.76 lakhs. We have perused the financial statements of the said concern. We find as per the annual report, the assessee for the year under consideration, had declared its income under the head "Software Development and Services" wherein for the year under consideration the income from Overseas operation was declared at Rs.10.96 crores and the domestic sales services were to the tune of Rs.37.76 lakhs. We find error in the order of the CIT(A); though the income reported by the said company in its annual report is reproduced in Para 2.3.3.5.1 at page 10 of the appellate order, however, the CIT(A) directed its exclusion failing to satisfy the filter of minimum 75% of export earnings. We reverse the order of CIT(A) in this regard since the said concern fulfils the filter of minimum 75% of the export earnings. Hence, Ground of appeal No1 raised by the revenue is allowed. 10 ITA No.965/PUN/2013 ITA No.986/PUN/2013
18. Now coming to the alternate plea raised by the assessee by way of additional Ground of appeal No.1 for the exclusion of the said concern Compucom Software Limited failing to satisfy the Related Party Transaction filter, we find this issue of the said concern being not comparable on failing to fulfil Related Party Transaction filter arose before the Pune Bench of the Tribunal for the instant assessment year itself, i.e. 2007-08 in the case of PTC Software (India) Pvt. Ltd. vide para 14 the Tribunal held that the Related Party Transaction was in excess of 25% filter adopted by the TPO and Compucom Software Limited was to be excluded from the list of comparables for the purpose of comparability analysis. Similar view has been taken in M/s. SunGard Solutions (India) Pvt. Ltd. Vs. Dy. Director of Income Tax (International Taxation) and in John Deere Pvt. Ltd. Vs. ACIT (Supra).
19. Following the said ratio, we hold that Compucom Software Limited does not fulfil the Related Party Transaction filter and hence the said concern is to be excluded from the final set of comparables on account of failure to fulfil Related Party Transaction filter. The additional Ground of appeal No.1 raised by the assessee is thus allowed.
20. Now coming to the appeal filed by the assessee wherein the Ground of appeal No.1 is general in nature and hence the same is dismissed.
21. Ground of appeal No.2 raised by the assessee is against the order of authorities below in not allowing adjustment on account of depreciation.
22. The assessee before us is a captive service provider to its Associated Enterprise is 100% export oriented unit wherein services are provided to the Associated Enterprise. The assessee has sought depreciation adjustment on the ground that it is providing higher depreciation on certain assets on a different basis while the other comparables are providing depreciation as per the Companies Act. The issue of claim of depreciation while working out the 11 ITA No.965/PUN/2013 ITA No.986/PUN/2013 operating margins arose before the Hon'ble Bombay High Court in CIT Vs. M/s. Welspun Zucchi Textiles Ltd. in Income Tax Appeal No.1286 of 2014, judgment dated 06.01.2017, where the question raised before the Hon'ble High Court was as under:-
"(ii) Whether on the facts and in the circumstances of the case and despite the prescription of parameters of comparability by Rule 10B(2) of the Income Tax Rules, 1962, the Tribunal was correct in law, in directing the inclusion of DEPB in turnover and depreciation in net profit for the purpose of profit margin of comparables and assessee?"
23. The Hon'ble High Court held that the depreciation is to be included as operating expenses to determine the operating cost of the assessee and the comparables. The question before the Hon'ble High Court was the comparability between profit margins of assessee and the comparables in view of the parameters of comparability under Rule 10B(2) of IT Rules. The Hon'ble High Court has held as under:-
"4.....
(a)....
(b)....
(d) We find that so far as exclusion of DEPB benefit in arriving at the operating profit of the respondent assessee is concerned, the order of the Tribunal for the Assessment Years2005-06 and 2007-08 were appealed by the Revenue to this Court. Mr. Suresh Kumar, learned Counsel appearing for the Revenue very fairly states that this very issue was raised by the Revenue in its appeal before this Court for the earlier assessment years being Income Tax Appeal No.1827 of 2013 relating to A.Y. 2005-06 and Income Tax Appeal No.171 of 2014 relating to A.Y. 2007-08. However, this Court by orders dated 22nd September, 2015 for A.Y. 2005-06 and 1st July, 2016 for A.Y. 2007-08, dismissed the Revenue's appeal. In the above view, the issue with regard to the exclusion of the DEPB benefit stands concluded by virtue of order of this Court against the Revenue and in favour of the respondent assessee.
(e) So far as depreciation is concerned, we find that the analysis done by the Tribunal to include DEPB benefit to hold it to be an operating revenue to determine operating profit, would be equally applicable in case of depreciation for the purposes of holding it to be an operating expenses to determine operating costs. It must be borne in mind that the depreciation which is incurred by the comparables are not being excluded before arriving at the total cost while applying the TNMM method for the purposes of determining the ALP price of the respondent assessee's export to its Associate Enterprise. The comparison to determine the ALP has to the extent possible has to be done between like to like and similar to similar. One sided exclusion would lead to distortion in comparison."12 ITA No.965/PUN/2013 ITA No.986/PUN/2013
24. In view thereof we hold that while determining the operating margins of the assessee, depreciation is to be considered as part of cost and there is no merit in the claim of the assessee in this regard. It may further be clarified that as per Rule 10B(1)(e)(iii) of the Rules, adjustment if any has to be made in the hands of the comparables and not in the hands of the tested party. So we dismiss the plea of the assessee in this regard. However, in case the assessee is able to establish that there is material difference in the claim of depreciation by the assessee vis-à-vis comparables, then suitable adjustment may be allowed in the hands of comparables after due verification by the Assessing Officer / Transfer Pricing Officer.
25. The assessee has raised other grounds of appeal against exclusion or inclusion of the concerns as comparables but the Ld. Authorised Representative for the assessee has not made any submission in this regard and the said grounds of appeal are dismissed. Even in the written submissions filed the assessee in its appeal has agitated Grounds of appeal No.2 which is against the adjustment claimed on account of depreciation which we have already adjudicated in the paras herein above. However, the additional Ground of appeal No.2 raised by the assessee is against the inclusion of Sterling International Enterprise Ltd. on the ground that the financial years are different.
26. The Ld. Authorised Representative for the assessee pointed out that the Pune Bench of the Tribunal in PTC Software (India) Pvt. Ltd. Vs. ACIT (Supra) for the very same assessment year, i.e. 2007-08 had held that the said company could not be considered as comparable as the accounting period adopted does not relate to the financial year in which the international transaction had been undertaken by the assessee.
13ITA No.965/PUN/2013 ITA No.986/PUN/2013
27. We find merit in the claim of the assessee in this regard and applying ratio laid down in PTC Software (India) Pvt. Ltd. Vs. ACIT (Supra) we hold that Sterling International Enterprise Ltd. now known as Transworld Infotech Ltd. is to be excluded from the final set of comparables in order to benchmark the Arm's Length Price of the international transaction undertaken by the assessee, as it has different year ending. The Assessing Officer/Transfer Pricing Officer is directed to recompute the Arm's Length Price in relation to our directions in the paras hereinabove. The additional Grounds of appeal No.2 raised by the assessee is this allowed.
28. In the result, the appeal of the assessee is partly allowed and appeal of the revenue is allowed.
Order pronounced on this 03rd day of March, 2017.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
पण
ु े / Pune; दनांक Dated : 03 March, 2017.
rd
Satish
आदे श क) * त+ल,प अ-े,षत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The CIT(A)-IT/TP / CIT-IV, Pune;
4. The DIT (TP/IT), Pune;
5. The DR 'B', ITAT, Pune;
6. Guard file.
ु ार/ BY ORDER, आदे शानस स या&पत 'त //True Copy// सहायक पंजीकार / Assistant Registrar, आयकर अपील य अ+धकरण, पुणे / ITAT, Pune