Income Tax Appellate Tribunal - Bangalore
Nxp Semiconductros India Private ... vs Assessee on 5 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH " B "
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND
SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
I.T. (T.P.) A. No.1560/Bang/2012
S.P. No.236/Bang/2014
(Assessment Year : 2008-09)
M/s. NXP Semi Conductors
India Pvt. Ltd.,
I.T. Park, Nagawara Vill., Kasaba Hobli,
Bangalore-560 045
PAN AADCP 9454H
Vs.
The Dy. Commissioner of Income Tax, Circle 12(2), Bangalore.
Appellant
Respondent.
Appellant By : Shri Nageshwar Rao, Advocate.
Respondent By : Shri C.H. Sundar Rao, CIT (D.R)
Date of Hearing : 5.1.2015.
Date of Pronouncement : 5.3.2015.
O R D E R
Per Shri Jason P. Boaz, A.M. :
This appeal by the assessee is directed against the order of assessment passed by the DCIT, Circle 12 (2), Bangalore under Section143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short 'the Act') dt.27.9.2012 in pursuance of the directions issued by the Dispute Resolution Panel ('DRP'), Bangalore under Section 144C(5) r.w.s 144C(8) of the Act vide order dt.17.8.2012. The relevant Assessment Year is 2008-09.
2. The facts of the case, briefly, are as under :-
2.1 The assessee is engaged in the business of development of software and indenting sale of application embedded business and industrial software. The assessee company, formerly known as Phillips Semi-conductors India Pvt. Ltd. was incorporated on 18.7.2006 as a 100% EOU set up under the STPI Scheme; is a private limited company registered in India and is a subsidiary of NXP BV, a Netherlands company. For Assessment Year 2008-09, the assessee filed its return of income declaring income of Rs.32,37,84,304. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny.
2.2 In the period under consideration, the assessee had reported the following international transactions :-
Provision of Software Development Services Rs.253,89,24,193.
Provision of Order Gathering Services.
Rs.13,80,51,438 Purchase of assets.
Rs.37,73,264 Receipt of Services.
Rs.17,75,56,409 Reimbursement of expenses (received) Rs.81,01,426 In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of these international transactions, after obtaining necessary approval from the CIT-III, Bangalore. The TPO vide order under Section 92CA of the Act dt.31.10.2011 proposed a T.P. Adjustment of Rs.20,53,68,934 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment under Section 143(3) r.w.s. 144C of the Act dt.30.12.2011 determining the assessable income of the assessee at Rs.54,10,24,876; which included the T.P. Adjustment of Rs.20,53,68,934 to the ALP of international transactions in respect of the software development services rendered by the assessee as proposed by the TPO in the order under Section 92CA of the Act.
2.2 Aggrieved by the draft assessment order for Assessment Year 2008-09 dt.30.12.2011, the assessee filed its objections thereto before the DRP, Bangalore. The DRP, vide its order under Section 144C(5) rws 144C(8) of the Act dt.17.8.2012 confirmed the additions / disallowances made by the Assessing Officer in the draft order of assessment and thereby rejected the objections raised by the assessee. In pursuance of and conformity with the directions of the DRP, the Assessing Officer passed the impugned order of assessment under Section 143(3) rws 144C(13) of the Act vide order dt.27.9.2012 wherein the income of the assessee was determined at Rs.54,10,24,876; which included the T.P. Adjustment of Rs.20,53,68,934.
3.1 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.27.9.2012, the assessee has preferred this appeal raising the following grounds :-
" General
1. The order of the learned AO and directions of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law.
2. The learned AO erred in assessing the total income at Rs. 54,10,24,876 as against returned income of Rs. 32,37,84,304 computed by the Appellant.
Corporate tax matters 3.1 The learned AO has erred, in law and in facts, by rejecting the claim of the Company that, in its return of income, the Company had inadvertently classified the opening balance of networking equipments amounting to Rs 33,780,539 and addition of '19 Inch Heavy Racks' amounting to Rs 469,373, as 'plant and machinery' instead of 'computers' and claimed lower rate of depreciation at the rate of 15%.
3.2 Further, the learned AO has erred, in law and in facts, by following his predecessor's treatment by considering networking equipments, active components and computer server racks (or 19 inch heavy racks) as 'plant and machinery' instead of 'computers' and consequently applying lower rate of depreciation of 15% on the adjusted opening balance, resulting in a disallowance of Rs 11,337,971.
3.3 Separately, the learned AO has treated the additions to networking equipments, appearing in 'computer' block as 'plant and machinery' and consequently applying lower rate of depreciation of 15% resulting in a disallowance of Rs 533,667.
Transfer pricing matters
4. The learned AO / Transfer Pricing Officer ("TPO") have erred, in law and in facts, in making an addition of Rs. 20,53,68,934 to the total income of the Appellant on account of adjustment in the arm's length price of the software development services transaction entered by the Appellant with its associated enterprise.
5. The learned AO / TPO have erred, in law and in facts, in disregarding the economic analysis undertaken by the Appellant without proper justification and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transactions are not at arm's length.
6. The learned AO / TPO have erred, in law and in facts, in determining the arm's length margin/ price using only financial year 2007-08 data.
7. The learned AO / TPO have erred, in law and in facts, in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters:
a. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant where consolidated results had been used for analysis.
b. the learned AO / TPO erred in rejecting certain comparables identified by the Appellant using 'onsite revenues greater than 75% of the export revenues' as a comparability criterion.
c. the learned AO / TPO erred in rejecting certain comparables identified by the Appellant using 'employee cost greater than 25% of the total revenues' as a comparability criterion;
d. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant using turnover < Rs. 1 Crore as a comparability criterion;
e. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant as having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend); and f. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant on the ground that the comparables were having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months).
8. The learned TPO erred in obtaining information which was not available in public domain by exercising powers u/s 133(6) of the Act and relying on the information for comparability analysis.
9. The learned AO / TPO have erred, in law and in facts, by accepting/ rejecting certain companies based on unreasonable comparability criteria.
10. The learned AO / TPO have erred, in law and in facts, in wrongly computing the operating margins of some of the comparable companies identified in the TP order.
11. The learned AO / TPO have erred, in law and in facts, in not making suitable adjustments on account of differences in the risk profile of the Appellant vis-à-vis the comparables, while conducting comparability analysis.
12. The learned AO/TPO have erred, in law and in facts, in computing the arm's length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act.
Common grounds of appeal relating to corporate tax and transfer pricing matters.
13. The learned AO erred in levying interest of Rs. 3,76,27,691 and Rs. 428,083 u/s 234B and 234D of the Act respectively.
14. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act."
3.2 The assessee filed additional grounds of appeal vide letter dt.19.12.2013 on the issue of depreciation on goodwill arising out of acquisition of business under slump sale agreement.
3.3 In the course of appellate proceedings, the assessee filed submissions in paper books in support of the grounds of appeal raised and also a compendium of case laws, on which the assessee placed reliance.
4. The grounds raised at S.Nos.1 & 2, are general in nature and not being specifically urged before us, are dismissed as infructuous.
CORPORATE TAX 5.1 The Grounds raised at S.Nos.3.1 to 3.3, relate to the claim of depreciation on net working equipment. In the course of appellate proceedings, the Assessing Officer noticed from Form 3CD that while the assessee had claimed depreciation on net working equipment at 25% therein, the assessee had classified the same as "Computers" and claimed depreciation @ 60% thereon for the purposes of computation of income for tax purposes. The Assessing Officer did not accept the claims and contentions of the assessee, treated the net working equipment as plant and machinery and allowed depreciation thereon @ 15% and disallowed the balance claim.
5.2 Before us, it is the contention of the assessee that the net working equipment included servers, netapp filter, optiplex, monitor, laptop video, etc. which ought to be classified as a "computers" and depreciation @ 60% thereon ought to be allowed. The learned Authorised Representative submitted that the very same issue was before a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 and in its order in IT(TP)A No.1174/Bang/2011 dt.14.11.2014, the matter was remanded back to the file of the Assessing Officer for examination afresh.
5.3.1 We have heard both the learned Authorised Representative and the learned Departmental Representative and perused and considered the material on record; including the judicial decision cited. On an appreciation of the material on record, we find that the same issue was before a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08. In its order in IT(TP)A No.1174/Bang/2011 dt.14.11.2014, at para 11 thereof the co-ordinate bench has held as under :-
" 11. We have considered the rival submissions and are of the view that the issue requires a fresh consideration in the light of the submissions made by the Assessee before the DRP. As far as depreciation on Networking equipment is concerned, the AO has not called upon the Assessee to demonstrate as to how Networking equipment on which depreciation was claimed at 60%, satisfied the requirements being classified as "Computers". This specific objection by the Assessee before the DRP has not been controverted. Therefore there was lack of proper opportunity afforded to the Assessee before the AO. Therefore the issue requires to be examined afresh by the AO after due opportunity to the Assessee of being heard. As far as depreciation on active components and 19 inch heavy racks, the position remains the same, in as much as the AO has not given due opportunity of being heard to the Assessee. Before DRP the Assessee has explained the nature of the components and racks on which depreciation was claimed at 60% and as to how they were in the nature of "Computers". These submissions have not been considered by the DRP. In the circumstances, we are of the view that this issue also requires to be examined afresh by the AO after due opportunity to the Assessee of being heard to the Assessee. We hold and direct accordingly. The relevant ground of appeal is treated as allowed for statistical purpose."
5.3.2 Following the above decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra), we remand the issue back to the file of the Assessing Officer for fresh consideration, after affording the assessee adequate opportunity of being heard and to file details / submissions required. It is ordered accordingly. Consequently, the Grounds at S.Nos.3.1 to 3.3 are treated as allowed for statistical purposes only.
TRANSFER PRICING ISSUES (Ground Nos.4 to12) 6.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO as comparable companies to the assessee. The learned Authorised Representative also submitted that he would only press those grounds on the comparability of individual companies selected by the TPO in the final set of comparables and companies erroneously rejected by the TPO. In support of assessee's contentions, the learned Authorised Representative placed reliance on the decisions of various co-ordinate benches of the ITAT, Bangalore in the following cases :-
Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011 dt.23.11.2012) Curram Software International Pvt. Ltd. (ITA No.1280/Bang/2012 dt.31.7.2013) for A.Y. 2008-09.
Yodlee Infotech Pvt. Ltd. (IT(TP)A No.1538/Bang/2012 dt.30.8.2013) 3DPLM Software Solutions Ltd. (IT(TP)A No.1303/Bang/2012 dt.28.11.2013) for A.Y. 2008-09.
6.2 It was submitted, by the learned Authorised Representative, that the set of comparables chosen by the TPO in the cited cases (supra) are the same as those selected in the case on hand and therefore the assessee places reliance on the decisions in the cited cases.
6.3 In the light of the above observations, we now briefly examine the grounds of appeal raised at S.Nos. 4 to 12 raised on T.P. issues.
6.3.1 Ground Nos.4 to 6 are general in nature and since these grounds have not been urged before us, the same are rendered infructuous and accordingly dismissed.
6.3.2 Ground No.7 is raised in respect of the inclusion of certain companies as comparables by the TPO and the exclusion of certain other companies. As we will be examining and considering the comparability or otherwise of the individual companies as raised by the assessee before us, there is no requirement of specific adjudication on specific issues raised.
6.3.3 Ground No.8 relates to use of information collected under Section 133(6) of the Act.
Ground Nos.9 & 10 are general in nature.
Ground No.11 is in respect of the grant of adjustment towards differences in risk profile between the assessee and the comparable companies.
Ground No.12 is regarding the benefit of + / - 5%.
As the learned Authorised Representative has confined the urging of his submissions in appellate proceedings before us only to the issue of comparability of individual companies selected / rejected by the TPO, no adjudication on the above grounds 8 to 12 are necessary.
7.1 As per the T.P. Study carried out by the assessee, for the software development service segment, adopting TNMM as the Most Appropriate Method ('MAM') and taking itself as the tested party, the assessee selected a set of 23 companies as comparables with an average profit margin of 14.84% on cost. The assessee's list of comparables, as per its T.P. Study, are as under :-
Sl.No. Name of the Company Weighted average of operating profits on operating costs (%)
1.
Akshay Software Technologies Limited 6.60
2. Aztecsoft Limited 18.16
3. Goldstone Technologies Ltd.
11.50
4. Helios & Matheson Information Technology Ltd.
38.40
5. Indium Software (India) Ltd.
11.09
6. Infosys Technologies Ltd.
39.96
7. KPIT Cummins Infosystems Ltd.
13.20
8. Lanco Global Systems Ltd.
13.28
9. L & T Infotech Ltd.
11.35
10. Maars Software International Ltd.
15.58
11. Melstar Information Technologies Ltd.
3.46
12. Mindtree Limited 16.98
13. Persistent Systems Pvt. Ltd.
24.34
14. Quintegra Solutions Ltd.
15.18
15. R S Software (India) Ltd.
14.11
16. SIP Technologies and Exports Ltd.
18.37
17. Sasken Communication Technologies Ltd.
17.88
18. Satyam Computers Services Ltd.
29.43
19. TVS Infotech Ltd.
-21.27
20. VJIL Consulting Limited 5.85
21. VMF Softech Limited 4.32
22. Visualsoft Technologies Limited 16.76
23. Zylog Systems Limited 16.87 Arithmetic mean 14.84 Since the average profit margin of the assessee was 12.64% on total cost, the assessee held its international transactions in the software development services segment to be at arm's length.
7.2 The TPO, while accepting TNMM as the MAM, as adopted by the assessee, rejected the assessee's T.P. Study for various reasons and embarked on a fresh search, using the data bases, 'Prowess' and 'Capitaline.' After issuing a show cause notice to the assessee proposing to adopt a fresh set of comparable companies and considering the objections of the assessee, the TPO selected the final list of 20 comparables, which are as under :-
Sl. No. Name of the company OP / TC % 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd.
29.81 5 Flextronics Aricent) 7.86 6 iGAte Global Solution Ltd.
13.99 7 Infosys 40.37 8 Kals Information Systems Ltd (Seg) 41.94 9 LGS Global Ltd.
27.52 10 Mindtree Ltd. (seg) 16.41 11 Persistent Systems Ltd.
20.31 12 Quintegra Solution Ltd.
21.74 13 R Systems International (seg) 15.30 14 R S Software (India) Ltd.
7.41 15 Sasken Communication Technologies Ltd. (seg) 7.58 16 Tata Elxsi (seg) 18.97 17 Thirdware Solution Ltd.
19.35 18 Wipro Ltd. (seg) 28.45 19 Softsol India Ltd.
17.89 20 Lucid Software Ltd.
16.50 Average 23.65 The average mean margin of the 20 comparable companies selected by the TPO was 23.65% whereas the average mean margin of the software development services segment of the assessee was 12.64% on total cost. After granting working capital adjustment of 2.05%, the TPO computed the T.P. Adjustment of Rs.20,53,68,934 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09.
7.3 As mentioned in the pre-paras of this order, in the course of proceedings before us, the learned Authorised Representative submitted that he would make and put forth arguments / contentions only on the issue of comparability or otherwise of individual companies, which in the assessee's opinion are incorrectly included or excluded by the TPO in the final set of comparable companies. In this context, the learned Authorised Representative also submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected or rejected by the TPO as comparable companies to the assessee.
8.1 The learned Authorised Representative submitted that the following three companies are liable to be rejected as comparables as they are functionally different from the assessee; based on the rulings in the decisions of co-ordinate benches of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra); Curram Software International Pvt. Ltd. (supra) and Yodlee Infotech Pvt. Ltd. (supra). These companies are :-
(i) Avani Cincom Technologies.
(ii) Celestial Biolabs Ltd.
(iii) KALS Information Systems Ltd.
8.2 The learned Authorised Representative further submitted that the following three companies are liable to be excluded from the final list of comparables as they are functionally different from the assessee and based on the rulings of co-ordinate benches of ITAT, Bangalore in the cases of Curram Software International Pvt. Ltd. (supra) and Yodlee Infotech Pvt. Ltd. (supra) :
(i) Infosys Technologies Ltd.
(ii) Tata Elxsi Ltd. (seg.)
(iii) Wipro Ltd. (seg.) 8.3 It was also submitted by the learned Authorised Representative that the following 7 companies are liable to be rejected as comparables as they are functionally different from the assessee, based on the decision of a co-ordinate bench of the ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra);-
i) Bodhtree Consulting Ltd;
ii) e-Zest Solutions Ltd.
iii) Persistent Systems Ltd.
iv) Quintegra Solutions Ltd.
v) Thirdware Solutions Ltd.
vi) Softsol India Ltd.
vii) Lucid Software Ltd.
We now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart.
9. Avani Cincom Technologies Ltd.
9.1 This company was selected by the TPO as a comparable. The assessee objects to its inclusion as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the assessee's objections for the reason that this comparable company has categorized itself as a pure software development service provider just like the assessee and therefore selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to information called for under Section 133(6) of the Act.
9.2 Before us, the learned Authorised Representative reiterated the assessee's objections to the inclusion of this company on the ground that it is not functionally comparable to the assessee as it is into software products whereas the assessee offers purely software development services to its AEs. In support of its contention for exclusion of this company from the list of comparables the learned Authorised Representative placed reliance on the following judicial decisions :-
Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011 dt.23.11.2012) Curram Software International Pvt. Ltd. (ITA No.1280/Bang/2012 dt.31.7.2013) for A.Y. 2008-09.
9.3 The learned Departmental Representative supported the orders of the authorities below for inclusion of this company in the list of comparables.
9.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited by the assessee. We find that a co-ordinate bench of this Tribunal in the case of M/s. Curam Software International Pvt. Ltd. in ITA No.1280/Bang/2012 dt.31.7.2013 for Assessment Year 2008-09, has remanded the matter of examination of the comparability of this company to the file of the Assessing Officer / TPO afresh; holding as under at para 9.5.1 to 9.5.2 of its order :-
" 9.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable.
9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :-
(i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Triology case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable.
(ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09.
9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Triology E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly."
9.4.2 Following the above cited decision of the co-ordinate bench of ITAT, Bangalore in the case of Curram Software International Pvt. Ltd. (supra), we direct the Assessing Officer / TPO to examine the comparability of this company afresh by considering the observations made by the Tribunal in paras 9.5.1 to 9.5.3 of the cited order (reproduced supra). The Assessing Officer / TPO is directed to make available to the assessee information obtained under Section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and make submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly.
10. Celestial Biolabs Ltd.
10.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables for the reason that it is functionally different from the assessee and that it fails the employee cost filter. The TPO, however, did not accept the assessee's objections and included this company in the final list of comparables.
10.2 The learned Authorised Representative contended before us that this company is not functionally comparable, as it is into bio-informatics, software product / services and the segmental break up is not provided. In support of its claim, the learned Authorised Representative placed reliance on the decision of a co-ordinate bench of this Tribunal in the case of Triology E-Busienss Software India Pvt. Ltd. (supra) wherein at para 43 thereof it was observed of this company that -
" 43..... As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with that of the assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference is fractional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the assessee in this regard."
The learned Authorised Representative prayed that in view of the above and the decision of another co-ordinate bench of this Tribunal in 3DPLM Software Solutions Ltd., in its order in IT(TP)A No.1303/Bang/2012 dt.28.11.2013, which followed the decision taken in the case of Triology E-Business Software India Pvt. Ltd. (supra), this company ought to be excluded from the final list of comparables.
10.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final list of comparables.
10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM software Solutions Ltd. (supra), for Assessment Year 2008-09 has held that this company be excluded from the list of comparables; holding as under at paras 9.4.1 and 9.4.2 of its order :-
" 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity.
9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted from the list of comparables. The A.O./TPO are accordingly directed."
10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a provider of software development services.
11. KALS Information Systems Ltd.
11.1 This is a company selected by the TPO. The assessee had objected to the inclusion of this company in the TPO's set of comparables for the reason that it is functionally different from the assessee and also because segmental details had not been provided in the Annual Report of the company with regard to software service revenue and software product revenue. The TPO, however, rejected the objections put forth by the assessee and included this company in his final set of comparables.
11.2 In the appeal before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee and ought to be rejected / excluded from the list of comparables as it is into software products, unlike the assessee who is only a software service provider to its AEs. It was also submitted that this company was rejected as a comparable to a software service provider by the decision of a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra). The learned Authorised Representative prayed that in view of the above cited decision (supra), this company be excluded from the list of comparables.
11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final list of comparables.
11.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 has excluded this company as a comparable, observing that it was developing software products and was not purely a software service provider and at para 10.4 thereof it was held as under :-
" 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly."
11.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider.
12. Infosys Technologies Limited.
12.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the final set of comparables on the grounds of turnover and its brand value attributable to profit margin. The TPO, however, rejected the assessee's objections as he was of the view that turnover and brand value aspects were not materially relevant in the software development services segment.
12.2 In appellate proceedings before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand as its activities are diversified. It commands substantial brand value, owns IPRs and is a market leader in software development activities, whereas the assessee is merely a software service provider which does not possess any brand value, owns any IPRs or intangibles. In support of the assessee's arguments, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench in the case of Curram Software International Pvt. Ltd. (supra) and M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the final list of comparables, as it is functionally different from the assessee.
12.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final set of comparables.
12.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 11.4 of the order has held as under :-
" 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has 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 breakup 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."
12.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider.
13. Wipro Limited.
13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several grounds like functional dis-similarity, brand value, size, etc. The TPO however, brushed aside the assessee's objections and included this company in the set of comparables.
13.2 Before us, the learned Authorised Representative contended that this company, i.e. Wipro Ltd., is not functionally comparable to the assessee as it owns significant intangibles in the nature of customer related intangibles and technology related intangibles. The learned Authorised Representative submitted that the co-ordinate benches of this Tribunal in the cases of Curram Software International Pvt. Ltd. (supra) and M/s. 3DPLM Software Solutions Pvt. Ltd. (supra) for Assessment Year 2008-09 have held that this company cannot be held as a comparable to a software service provider and therefore it ought to be excluded from the list of comparables. The learned Authorised Representative prayed that in view of the above, the company should be excluded from the list of comparables in the case on hand.
13.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the final list of comparables.
13.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company ought to be excluded from the list of comparables holding as under at paras 12.4.1 and 12.4.2 of its order, which is extracted hereunder :-
" 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison.
12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (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 such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration."
13.4.2 Following the above decision of the co-ordinate bench of this Tribunal (supra), we direct the TPO to exclude this company from the list of comparables as it is engaged both in software development and product development, owns IPR's, intangibles, etc. and cannot be held as comparable to a pure software service provider, as is the assessee in the case on hand. It is ordered accordingly.
14. Tata Elxsi Ltd.
14.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several counts, like functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO however rejected the assessee's objections and included this company in the set of comparables.
14.2 In appellate proceedings before us, the learned Authorised Representative submitted that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment; namely product design, innovation design engineering and visual computing labs, as is reflected in the Annual Report of the company and is not a pure software development service provider like the assessee. The learned Authorised Representative also submitted that the co-ordinate benches of this Tribunal in the cases of Curram Software International Pvt. Ltd. (supra) and M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 have held that this company is to be excluded from the list of comparables for a software service provider. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables.
14.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable.
14.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that since this company being predominantly engaged in product design services, it cannot be considered comparable to a pure software service provider and excluded it from the list of comparables holding as under at paras 13.4.1 and 13.4.2 of its order, which is extracted hereunder :-
" 13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee.
13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :-
" .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion."
As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly."
14.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is predominantly engaged in a variety of functions like product designing services and not purely software development services like the assessee in the case on hand. It is ordered accordingly.
15. Bodhtree Consulting Ltd.
15.1 This company has been selected as a comparable by the TPO. The assessee has objected to the inclusion of this company as a comparable, both before the DRP and this Bench, on the grounds that this company is functionally different as it has software products and a hybrid service business model. In the proceedings before us, the learned Authorised Representative placed reliance on the decision of the co-ordinate benches of this Tribunal in the cases of Mindtech (India) Ltd. (supra) and CISCO Systems (India) Pvt. Ltd., in IT(TP)A No.271/Bang/2014 dt.14.8.2014, both for Assessment Year 2009-10, wherein this company was excluded from the list of comparables. It was submitted by the learned Authorised Representative that though these cited decisions were rendered for Assessment Year 2009-10, the facts and circumstances of the case are similar for Assessment Year 2008-09 as well and applies to the year under consideration. The learned Authorised Representative prays that in view of the above, this company be excluded from the list of comparables.
15.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparable companies.
15.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited by the ld. A.R. We find that this company has been excluded from the set of comparables for software development service companies in both the aforesaid decisions cited by the assessee. In Mindtech (India) Ltd., the relevant portion of the order at para 16 thereof it has been held as under :-
" 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin 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 abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually 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 recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly."
The relevant portion of the order in the case of CISCO Systems (India) Pvt. Ltd. (supra) at para 26.1 is extracted hereunder :-
" 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."
15.3.2 It is also seen that the decision relied on by the co-ordinate bench of this Tribunal in the above mentioned case; CISCO Systems (India) Pvt. Ltd. (supra), has been in relation to Assessment Year 2008-09 and therefore we find merit in the contention of the assessee that the finding rendered in the above cited decision applies to the facts and circumstances of the case on hand, which is for Assessment Year 2008-09. In this view of the matter, following the above decision of the co-ordinate bench of the Tribunal, we direct the TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly.
16. E-Zest Solutions Ltd.
16.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO rejected the assessee's objections on the ground that as per the information received in response to notice under Section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters.
16.2 In proceedings before us, the learned Authorised Representative reiterated its contention that this company be excluded from the list of comparables as it was functionally different from the assessee as it is engaged in 'e-Business Consulting Services' which are high end ITES, categorized as knowledge process outsourcing ('KPO') services which are not comparable to the pure software development services rendered by the assessee. The learned Authorised Representative submitted that this company was excluded from the list of comparables by the order of a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) holding that this company is to be excluded from the list of comparables since it provides KPO services which are not comparable to pure software development services providers. The learned Authorised Representative prayed that in view of this, this company ought to be excluded from the list of comparables.
16.4.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had excluded this company from the list of comparables holding that this company is into rendering of product development services and high end technical services in the category of KPO Services and therefore cannot be considered as comparable to an assessee rendering purely software development services. The relevant portion of the order of the co-ordinate bench at para 14.4 thereof is as under :-
" 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed."
16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the A.O. / TPO to exclude this company from the list of comparables as it is functionally different from the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly.
17. Thirdware Solutions Ltd.
17.1 This company was included in the list of comparables by the TPO in spite of the assessee's objections on the ground that its turnover was in excess of Rs.500 Crores. Before us, the assessee objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and licenses for the use of software. In this regard, the learned Authorised Representative submitted that -
(i) this company is engaged in product development and earns revenue from sale of licenses and subscription. It has been pointed out form the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services;
(ii) the co-ordinate bench of this Tribunal in its order in M/s. 3DPLM Software Solutions Ltd. (supra) has held that this company, which is into product development and sale of licenses, be omitted as a comparable in respect of those companies rendering purely software development services. The learned Authorised Representative contends that in view of the above, this company ought to be excluded from the list of comparables to the assessee in the case on hand who is into purely software development services.
17.2 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO.
17.3.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparables to a pure software development service provider since this company is functionally different as it is engaged in product development and earns revenue from sale of licenses and subscription. The relevant portion of the above order at para 15.3 thereof is extracted hereunder :-
" 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the 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."
17.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different from the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly.
18. Lucid Software Ltd.
18.1 This company has been selected as a comparable by the TPO. In proceedings before us, the assessee objected to the inclusion of this company as a comparable on the ground that it is into software product development and is therefore functionally different from the assessee. The learned Authorised Representative submitted that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) in IT(TP)A No.1303/Bang/2012 dt.28.12.2013 for Assessment Year 2008-09 has held that this company is to be excluded from the list of comparables for software development service providers and therefore prayed that this company be excluded from the list of comparables in the case on hand also.
18.2 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO.
18.3.1 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16.3 thereof is extracted hereunder :-
" 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand."
18.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different; (being engaged in software product development) from the assessee in the case on hand who is rendering only software development services. It is ordered accordingly.
19. Persistent Systems Ltd.
19.1 This company was selected by the TPO as a comparable in spite of the assessee's objections that this company being engaged in software product designing and analysis service is functionally different from the assessee who is rendering purely software development services. It was also contended that segmental results were not available. The TPO rejected the assessee's objections on the ground that it is mainly a software development services company; as per details filed in respect to information called for under Section 133(6) of the Act, 96% of its revenue was from software development. The TPO therefore included this company in the list of comparables as it qualified the functionality criterion.
19.2 In proceedings before us, the assessee objected to the inclusion of this company as a comparable on the ground that it being engaged in software development services and analytic services, it is not a purely a software development service provider as is the assessee in the case on hand. The learned Authorised Representative submitted that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the list of comparables to a purely software development service provider on the grounds of functional difference and therefore prayed that in the case on hand also, this company ought to be excluded from the list of comparables since the assessee is only rendering software development services.
19.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO.
19.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company being engaged in product development and product design and analysis service is functionally different from a pure software service provider and therefore excluded it from the list of comparables for software development services; holding as under at para 17.3 of its order :-
" 17.3 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 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."
19.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different (viz. being engaged in product development and product design services) from the assessee in the case on hand which is rendering software development services. It is ordered accordingly.
20. Quintegra Solutions Ltd.
20.1 This case was selected as a comparable by the TPO in spite of the objections of the assessee that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections, holding that this company qualifies all the filters applied and included this company in the list of comparables.
20.2 In proceedings before us, the assessee objected to the inclusion of this company on the ground that it is functionally different as it is engaged in product engineering services and not purely into software development services like the assessee. It was further submitted that this company was also engaged in R&D activities which resulted in the creation of IPRs. It was submitted by the learned Authorised Representative that, it is in view of the above diverse functions performed by this company that it has been excluded as being comparable to software development service provider companies, by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09. The learned Authorised Representative prayed that in view of the above, this company ought to be excluded from the list of comparables.
20.4.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company be excluded from the list of comparables for software development service providers, holding as under at paras 18.3.1 to 18.3.3 thereof :-
" 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand.
18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables.
18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider."
20.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different being engaged in product engineering services and in R&D activities which has resulted in the creation of its own IPRs, etc. whereas the assessee in the case on hand is a software development service provider. It is ordered accordingly.
21. Softsol India Ltd.
21.1 This company was selected as a comparable by the TPO in spite of the assessee objecting to its inclusion in the list of comparables on the ground that it is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that as per the company's reply to notice calling for information under Section 133(6) of the Act the company had categorized itself as a pure software development service provider and therefore included this company as a comparable as the assessee in the case on hand is also a provider of software development services.
21.2 In the appellate proceedings before us, the learned Authorised Representative submitted that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, has held that this company is to be excluded from the list of comparables as it has RPT of 18.3%. In view of the above, the learned Authorised Representative prayed that this company be excluded from the list of comparables.
21.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparables.
21.4.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra), has excluded this company from the list of comparables holding as under at para 19.3 thereof :-
" 19.3 We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 has excluded this company from the set of comparables for the reason that RPT is in excess of 15% following the decision of another bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2011. As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the co-ordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand."
21.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, and 24/7 Customer.com Pvt. Ltd. in ITA No.227/Bang/2011, we direct the A.O / TPO to exclude this company from the list of comparables as it has RPT of 18.30% which is in excess of 15%. It is ordered accordingly.
22. Assessee's plea for companies to be included in the list of comparables.
22.1 In the course of appellate proceedings, the learned Authorised Representative submitted that the following companies selected by the assessee for inclusion in the list of comparables were wrongly rejected by the TPO :-
i) Indium Software (India) Ltd.
ii) VMF Softech Ltd.
iii) KPIT Cummins Infosystems Ltd.
22.2 It is the contention of the assessee that the TPO rejected the first two companies on the ground that they fail the export revenue filter of 25% adopted by the TPO and the third company on the ground that its RPT was in excess of 25%. The learned Authorised Representative contends that the filters have been wrongly applied in the case of these three companies and they deserve to be included in the list of comparables even as per the filters adopted by the TPO, if properly applied.
22.3 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter. From the material on record, we find that the TPO in his order under Section 92CA of the Act has not explained how these companies fail the filters adopted by him. In view of this being the position, the co-ordinate bench of this Tribunal in assessee's own case for Assessment Year 2007-08 in IT(TP)A No.1174/Bang/2011 dt.14.11.2014 has remanded the issue to the file of the TPO for fresh examination in the cases of (i) Indium Software (India) Ltd. and (ii) VMF Software Ltd. The same reasoning applies for this year under consideration i.e. for Assessment Year 2008-09 also for these two companies (supra) and also for KPIT Cummins Infosystems Ltd. In this view of the matter, we deem it fit to restore the issue of the comparability of the above three companies back to the file of the TPO to examine the computation given by the assessee in this regard and to decide the issue afresh after affording the assessee adequate opportunity of being heard and to make submissions in the matter, which shall be duly considered before a decision is taken. It is ordered accordingly.
23. Ground No.11 : Risk Adjustment.
23.1 In the Ground at S.No.11, the assessee submits that it has a limited risk profile vis-à-vis the comparable companies selected by the TPO and contends that the TPO ought to have allowed appropriate adjustments for differences between the risk profile of the assessee and the companies selected as comparables. It was submitted that it is essential for appropriate risk adjustments to be made to bridge the disparities in the risk profile between a risk free entity like the assessee and risk bearing entities among the comparables selected by the TPO. The learned Authorised Representative submitted that in similar factual positions, co-ordinate benches of this Tribunal have held that the single customer risk borne by a captive service provider is only an 'anticipated risk' vis-à-vis the 'existing market risk' borne by independent comparables and that the TPO ought to have given risk adjustment to the margins of the comparables to bring them on par with the assessee. It was submitted that this matter was remanded back to the file of the TPO with the direction to consider all the contentions of the assessee and the material on record before coming to a decision in the matter.
23.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and perused and carefully considered the material on record. While the submission of the assessee may be based on principles, we find that it has merely put forth its claim but has not filed any basis of the quantification of the risk adjustment either before the authorities below or before us. In this view of the matter, the assessee's claim for risk adjustment is rejected. Consequently, Ground No.11 raised by the assessee is dismissed.
24. In Ground No.13, the assessee has denied itself liable in respect of the interest it has been charged under Sections 234B and 234D of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala 252 ITR 1. In this view of the matter, we uphold the action of the Assessing Officer in charging the assessee the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under Sections 234B and 234D of the Act, if any, while giving effect to this order.
25. In Ground No.14, the assessee challenges the action of the Assessing Officer in initiating penalty proceedings under Section 271(1)(c) of the Act in its case for Assessment Year 2008-09. This ground is not maintainable in this appeal as no penalty has been levied on the assessee under Section 271(1)(c) of the Act for any cause of grievance to arise in the assessee's case and for us to adjudicate upon in the impugned order. This ground being not maintainable is dismissed accordingly.
26. Additional Ground of appeal.
26.1 The assessee has filed a petition under Rule 11 of the ITAT Rules, 1963 for admission of the following ground :-
" 1. The learned Assessing Officer has erred in law, and in fact, in not allowing depreciation on goodwill as per Section 32(1)(ii) of the Income-tax Act, amounting to Rs 255,799,740 i.e. 25% of the total goodwill amounting to Rs 1,023,198,958, which arose on account of acquisition of the semiconductor business of Philips Electronics India Limited under a slump sale arrangement by executing a Business Transfer Agreement."
26.2 In appellate proceedings before us, it was submitted that the same issue was before the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 and the Tribunal had remanded the matter back to the file of the Assessing Officer for adjudication afresh.
26.3 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and have perused and carefully considered the submissions on record on this issue. We find that the same issue was before the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08. In its order in IT(TP)A No.1174/Bang/2011 dt.14.11.2014, the co-ordinate bench of this Tribunal had admitted this additional ground of appeal for adjudication and remanded the matter to the file of the Assessing Officer for examination and consideration of the issue raised holding as under at paras 49 & 50 thereof :-
" 49. We have given a very careful consideration to the rival submissions. It is clear from the material on record of the AO that the facts with regard to the business transfer by PEIL to the Assessee and its valuation were filed before the AO in the course of assessment proceedings. The fact that there was a sum of Rs.140 crores shown as goodwill consequent to the business transfer agreement has also been acknowledged by the AO in the order of assessment. As to how the goodwill was valued and whether it was used for the purpose of business are all extraneous considerations at this stage of admission of additional ground of appeal. The argument of the learned DR that if depreciation is allowed on Goodwill than it would result in refunding taxes voluntarily paid by the Assessee. In our view such objections are not germane to deciding the question whether additional ground sought to be raised should be admitted for adjudication. In any event tax has to be levied and collected in accordance with law. Tax which is not due in law which was paid under a mistake cannot be said to be tax levied and collected in accordance with law. As we have already seen the law on the question of allowing depreciation on Goodwill was in a fluid state. With the decision of the Hon'ble Supreme Court in the case of Smifs Securities (supra) which decision was available only after the directions of the DRP were given, the law on the issue became clear. The learned DR's attempt to distinguish the facts of the Assessee's case and that of Smifs Securities Ltd. (supra) on the basis that in the case of the Assessee it was a slump sale whereas in the case of Smifs Securities Ltd.(supra) it was a case of amalgamation, in our view, cannot be accepted. The question is regarding the existence of goodwill and not the manner in which the Goodwill in question came to be created. The exclusion clause in the business transfer agreement on which the learned DR placed reliance, in our view is again not relevant. In our view the facts of the Assessee's case is identical to the facts of the case decided by the Hon'ble Supreme Court in the case of Smifs Securities Ltd.(supra). We are also of the view that the Assessee was also in the business of Semiconductors and the claim of the Assessee of having acquired goodwill on purchase of the said business with all existing contracts will result in creation of Goodwill to the Assessee. We are therefore of the view that the additional ground sought to be raised by the Assessee should be admitted for adjudication. We hold accordingly.
50. On the merits of the additional ground, we are of the view that the issue should be remanded to the AO for consideration. We do so keeping in mind the objection raised by the DR regarding valuation of the goodwill, its use etc. The AO shall examined the question of allowing depreciation on goodwill in the light of the material already available on record and such other material that the AO may require and such other material as the Assessee may rely upon to substantiate its claim for depreciation on goodwill. The AO will afford opportunity of being heard to the Assessee. For statistical purpose, the additional ground is treated as allowed."
26.4 Following the above decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra), we admit the additional ground raised by the assessee for adjudication and remand the matter to the file of the Assessing Officer for his examination and consideration of the issue in the light of the directions issued by the Tribunal at paras 49 and 50 of its order for Assessment Year 2007-08 in the assessee's own case (supra).
27. In view of the assessee's appeal for Assessment Year 2008-09 being disposed off as above, the Stay Petition No.236/Bang/2014 is rendered infructuous and is accordingly dismissed.
28. In the result, the assessee's appeal is partly allowed and Stay Petition is dismissed.
Order pronounced in the open court on 5th March, 2015.
Sd/- (N.V.VASUDEVAN) Judicial Member
Sd/- (JASON P BOAZ) Accountant Member
*Reddy gp
Copy to :
Appellant
Respondent
C.I.T.
CIT(A)
DR, - B Bench.
Guard File.
(True copy) By Order
Asst. Registrar, ITAT, Bangalore
1.
Date of Dictation .................................................................
2. Date on which the typed draft is placed before the dictating Member ........................................
3. Date on which the approved draft comes To Sr. P. S. ..........................................................................
4. Date on which the fair order is placed before the dictating Member ....................
5. Date on which the fair order comes back to the Sr. P.S. ....................................................................
6. Date on which the file goes to the Bench Clerk ......................................................................................
7. Date on which the file goes to the Head Clerk ........................................................................................
8. Date on which the file goes to the Assistant Registrar / Sr. P.S. ...................................
9. Date of dispatch of the order .....................................
PAGE \* MERGEFORMAT 45 IT(T.P)A No.1560/Bang/2012 & S.P. No.236/Bang/2014