Income Tax Appellate Tribunal - Bangalore
Sharp Software Development India ... vs Dcit, Bangalore on 25 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER
AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER
IT(TP)A No.1109/Bang/2011
Assessment year : 2005-06
The Deputy Commissioner of Vs. M/s. Sharp Software Development
Income Tax, (India) Pvt. Ltd.,
Circle 12(3), Unit-5, Level-3, Innovator Block,
Bangalore. International Tech Park,
White Field Road,
Bangalore - 560 066.
PAN: AAECS 0269E
APPELLANT RESPONDENT
CO No.13/Bang/2012
[in IT(TP)A No.1109/Bang/2011 ]
Assessment year : 2005-06
M/s. Sharp Software Development Vs. The Deputy Commissioner of
(India) Pvt. Ltd., Income Tax,
Bangalore - 560 066. Circle 12(3),
PAN: AAECS 0269E Bangalore.
CROSS OBJECTOR RESPONDENT
Revenue by : Sheri M.K. Biju, Addl. CIT (ITAT)-3, DR
Assessee by : Shri Chavali Narayan, CA
Date of hearing : 23.11.2016
Date of Pronouncement : 25.01.2017
IT(TP)A No.1109/Bang/2011
& CO 13/Bang/2012
Page 2 of 33
ORDER
Per Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the revenue against the order of CIT(Appeals) inter alia on the following grounds:-
"1. The order of the Learned CIT(A) in so far as it relates to the following grounds is opposed to law and facts of the case.
2. The CIT(A) erred in holding that expenditure traveling and communication expenses of Rs.87,69,553/- are to be excluded from total turnover as well for the purpose of computation of deduction u/s 10A while such exclusion is permitted to arrive at the export turnover only as per the definitions given in Sec.10A of the I.T. Act, 1961 and total turnover has not been defined in the section.
3. The learned CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from the appellant company.
4. In the facts and circumstances of the case, the learned CIT(A) erred in holding that the TPO erred in not excluding comparables having any related party transactions, even if the related party transactions are less than 25% of the revenues.
5. The learned CIT(A) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length Price (ALP) under the proviso to Section 92C(2) of the Income Tax Act.
6. The learned CIT(A) erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys Technologies Ltd. as a comparable.
7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 3 of 33
8. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above."
2. The assessee has filed cross objection assailing the order of CIT(Appeals) inter alia on the following grounds:-
"On the facts and circumstances of the case and in law:
1. The learned CIT(A) has erred, in law and in facts, by not accepting the Respondent's plea in entirety and confirming with the Learned Assessing Officer ("AO)/ Transfer Pricing Officer ("TPO") on not accepting the economic analysis undertaken by the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962 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 Respondent's international transaction is not at arm's length.
2. The learned CIT(A) has erred, in law and in facts, in not accepting the Respondent's plea and confirming with the Learned AO/TPO by determining the arm's length margin/ price using financial year 2004-2005 data which was not available to the Respondent at the time of complying with the transfer pricing documentation requirements.
3. The learned CIT(A) has erred, in law and in facts, by rejecting companies by applying different quantitative and qualitative filters:
a. The learned CIT(A) has erred in law and facts by not accepting the Respondent's plea that 'onsite revenues greater than 75% of the revenues' should not be used as a comparability criterion.
b. The learned CIT(A) has erred in law and facts, by not accepting Respondent's plea that companies having economic performance contrary to the industry behaviour (e.g. companies which showed a diminishing revenue trend and or under-utilisation of assets, etc) should not be rejected.
c. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that certain comparable companies IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 4 of 33 identified in the transfer pricing documentation, where consolidated results had been used for analysis should not be rejected. The Respondent had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide/ segmental revenues.
d. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) should not be rejected.
4. The learned CIT(A) has erred in law by upholding the TPO's approach of exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes.
5. The learned CIT(A) has erred, in law and in facts, by accepting certain comparable companies using unreasonable comparability criteria.
6. The learned CIT(A) has erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Respondent vis-a-vis the comparables.
7. The learned CIT(A) has erred, in law and in facts, by ignoring the fact that since the Respondent is availing tax holiday U/S 10A of the Act, there is no motive or reason to shift profits out of India, curbing which is the basic intention of introducing the transfer pricing provisions.
8. The learned CIT(A) erred in confirming the imposition of interest under section 234B and 234C of the Act;
The Respondent submits that each of the above grounds is independent and without prejudice to one another.
The Respondent craves leave to add, alter, vary, omit, amend or delete one or more of the above grounds of Cross-objections at any time before, or at the time of, hearing of the appeal, so as to enable the Appellate Tribunal to decide this response according to law."
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 5 of 33
3. Since the appeal and the cross objections were heard together, they are being disposed of by this consolidated order for the sake of convenience.
4. Through ground No.2 in revenue's appeal, the revenue has assailed the order of CIT(Appeals) for the exclusion of expenditure on travelling and communication from the total turnover as well as the export turnover for the purpose of computation of deduction u/s. 10A of the Income-tax Act, 1961 ["the Act"].
5. During the course of hearing, our attention was invited that CIT(Appeals) adjudicated the issue in the light of the order of the Tribunal in the case of Tata Elxsi Ltd. v. ACIT, ITA No.315/Bang/2006 and this order of the Tribunal was approved by the jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd., 349 ITR 98 (Karn). Therefore, the finding of the CIT(Appeals) is in consistence with the finding of the jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. (supra). Thus, we do not find any infirmity in the order of the CIT(A). We accordingly confirm the same and reject this ground of the revenue.
6. So far as the remaining grounds in revenue's appeal and the grounds raised in the CO of the assessee are concerned, they all relate to the inclusion/exclusion of the comparables taken by the TPO for computing the ALP with respect to international transactions.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 6 of 33
7. During the course of hearing, the ld. counsel for the assessee has filed a chart detailing the profile, related party transactions (RPT), turnover, etc. of the comparables.
8. The facts in brief borne out from the record are that the assessee is a captive service provider engaged in the business of developing, testing, customizing and maintaining high quality software for its Associated Enterprises (AE). The assessee company filed its return of income on 28.10.2005 declaring a taxable income of Rs.97,52,862 us. 10A of the Act.
During the course of assessment proceedings, having noted the international transactions undertaken by the assessee, the AO made a reference u/s. 92CA of the Act to the TPO for determination of the arm's length price (ALP) of the international transactions of the assessee company. For the purpose of establishing the ALP of its international transactions with its AEs, the assessee had undertaken TP study, carried out by an independent external consultant in accordance with the provisions of the Act read with Income-tax Rules. The detailed analysis was undertaken to determine the functions performed, risks assumed and assets utilized by the assessee company and its AEs in respect of the international transactions between them. The assessee has adopted Transaction Net Margin Method (TNMM) as the most appropriate method to determine the ALP and a search was conducted on Prowess database and Capitaline database updated till 05.08.2005 and 12.08.2005 respectively to select the comparable companies. The searches on the IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 7 of 33 databases yielded a set of 45 comparables for software development services with weighted average operating profit/operating profit cost of 9.97%. As the operating margin of the company of 5.15% was within the +/- 5% range of the arm's length margin, the price charged by the company to its AEs in respect of the said international transactions was found to be at arm's length and according to the Indian TP regulations.
9. The TPO examined the TP study made by the assessee and finally has taken 17 comparables to determine the ALP.
10. Aggrieved, the assessee preferred an appeal before the CIT(Appeals) and the CIT(Appeals) has excluded certain comparables on the ground that percentage of RPT or turnover filter or for super profits of the comparables.
11. Being aggrieved with the computation of ALP made by the CIT(Appeals), the revenue has filed an appeal before the Tribunal and the assessee has filed the CO claiming exclusion of certain more comparables which find place in the TP study of the assessee by raising additional grounds. For the sake of reference, we extract the additional ground raised in the CO as under:-
"Additional grounds of Cross Objection In addition to the grounds of cross objections raised before the Hon'ble Bench, the petitioner hereby wishes to submit the following additional grounds:
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 8 of 33
9. the learned TPO has erred in law and on facts by selecting the following companies as comparable which were functionally different from the Assessee:
a. Visual Soft Tech Limited b. Four Soft Limited The Petitioner submits that the above additional ground is being raised by way of abundant caution. The additional ground raise issue which is fundamental to the appeal and the non-admission and non- adjudication of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise these grounds at an earlier stage is neither wilful nor wanton but due to the reasons stated above. Further the above ground has been raised based on the following rulings:
• DCIT Vs. Textron Global Technology Centre Private Limited (IT(TP)A No. 29/Bang/12) • ITO Vs. Colt Technology Services India Private Limited (IT(TP)A No. 609/Del/2011 ) • ITO Vs Sunquest Information Systems (India) Private Limited (ITA No. 1 032/Bang/ 2011) The Hon'ble ITAT had rejected certain companies as comparables in the aforementioned rulings. No prejudice would be caused to the Appellant by reason of the above additional grounds being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon'ble Tribunal.
The Petitioner states and submits that the issues raised in the additional ground above are legal issues and arise out of the order of the lower authorities. Reliance is based on the decisions of the Hon'ble Supreme Court in the case of Jute Corporation of India vs. C.I.T. (187 ITR 688) and National Thermal Power Corporation vs. C.I.T. (229 ITR 383) as well as the full Bench of the Bombay High Court in the case of Ahmadabad Electricity Co. Ltd. (199 ITR 351) and the decision of Chandigarh Special Bench in the case of DCIT vs. Quark Systems (P.) Ltd. (IT Appeal No.100(CHD.) of 2009).
In the above circumstances the Petitioner prays that this Hon'ble Tribunal be pleased to;
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 9 of 33
(i) admit and adjudicate the above additional ground,
(ii) pass any other order that may be required in the circumstances of the case and render justice."
12. We have heard the arguments advanced by the ld. counsel for the assessee as well as the Addl. CIT(DR). During the course of hearing, the ld. counsel for the assessee has invited our attention to the fact that out of 17 comparables taken by the TPO, the CIT(Appeals) has excluded 13 comparables and has finally taken only 4 comparables for determination of ALP of the international transactions. Out of the finally set of comparables taken by the CIT(A), the assessee further seeks the exclusion of Visual Soft Tech Ltd. on the ground of turnover filter as the turnover of the assessee is Rs.14.41 crores and turnover of this comparable is 185.43 crores. Since it is more than 10 times of the turnover of the assessee company, this comparable has to be excluded. In support of this contention, he placed reliance upon the order of the Tribunal in the case of ITO v. Colt Technology Services India Pvt. Ltd. in ITA No.609/Del/2011 and CO No.81/Del/2011. Besides, he has also supported the exclusion of the comparables made by the CIT(Appeals) on different grounds.
13. During the course of hearing, the ld. counsel for the assessee has contended that all these 17 comparables taken by the TPO were examined by the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos. 04/Bang/2012 & 1338/Bang/2011 and the Tribunal has IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 10 of 33 approved the exclusion of the comparables made by the CIT(Appeals). A copy of the order of the Tribunal is placed on record at pages 566 to 586 of the compilation of the assessee.
14. Out of the final set of comparables taken by the CIT(Appeals), the assessee has also disputed the inclusion of the comparables viz., Bodhtree Consulting Ltd. and Sankhya Infotech Ltd. on the ground that these comparables are functionally different, therefore they should be excluded from the list of comparables. In support of these contentions, he relied upon the order of the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. (supra).
15. The ld. DR, on the other hand, has placed heavy reliance upon the order of TPO with the submission that the TPO has rightly taken 17 comparables for determination of the ALP with respect to international transactions undertaken by the assessee with its AE.
16. It was also contended on behalf of the ld. DR that the profile of McAfee Software (India) Pvt. Ltd. is different from the assessee, therefore reliance cannot be placed upon the order of the Tribunal, while approving exclusion of the comparables made by the CIT(Appeals).
17. Having carefully examined the orders of lower authorities in the light of the order of the Tribunal and the chart filed before us, we find that the TPO has taken the following 17 comparables:-
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 11 of 33
1. Bodhtree Consulting Ltd.
2. Sankhya Infotech Ltd.
3. Visual Soft Technologies Limited (Seg)
4. LGS Global Ltd. (Lanco Global Solutions Ltd.)
5. R S Software (India) Ltd.
6. Sasken Communication Technologies Ltd.
7. Sasken Network Systems Ltd.
8. Geometric Software Solutions Co. Ltd.
9. Four Soft Limited
10. Tata Elxsi Ltd. (Seg.)
11. Infosys Technologies Ltd.
12. Flextronics Software Systems Ltd. (Seg.)
13. Satyam Computer Services
14. L & T Infotech Ltd.
15. iGate Global Solutions Ltd.
16. Thirdware Solutions Ltd.
17. Exensys Software Solutions Ltd.
18. Out of 17 comparables, the CIT(Appeals) had excluded 6 comparables i.e., R.S. Software (India) Ltd., Sasken Communication Technologies Ltd., Sasken Network Systems Ltd., Geometric Software Solutions Co. Ltd., Four Soft Limited and Tata Elxsi Ltd. (Seg.) on the ground that they have Related Party Transactions.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 12 of 33
19. The CIT(Appeals) had also excluded 5 comparables i.e., Infosys Technologies Ltd., Satyam Computer Services and Flextronics Software Systems Ltd. (Seg.) on the ground of having Related Party Transactions and L & T Infotech Ltd. and iGate Global Solutions Ltd. having applied the turnover filter. He also excluded two comparables i.e., Thirdware Solutions Ltd. and Exensys Software Solutions Ltd. on the ground of super profits.
20. The ld. DR disputed exclusion of these comparables from the list of comparables, whereas the ld. counsel for the assessee sought exclusion of Bodhtree Consulting Ltd., Sankhya Infotech Ltd., Visual Soft Technologies Limited (Seg), Geometric Software Solutions Co. Ltd., Four Soft Limited and Tata Elxsi Ltd. (Seg.) on the ground that these comparables are functionally different from the assessee company. Therefore, they cannot be taken as good comparables. He placed heavy reliance upon the order of the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd.
(supra). Besides, he claims exclusion of Infosys Technologies Ltd. on the ground that this company has huge turnover, high risk profile, owns significant intangibles and huge brand name. Exclusion of Flextronics Software Systems Ltd. was sought on the ground that it incurred expenditure for selling products and R&D expenses for product development. The segment includes income from software development and product development. The exclusion of Satyam Computer Services was claimed on the ground that it had unreliable financial data due to financial scam. The exclusion of Thirdware Solutions Ltd., Exensys IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 13 of 33 Software Solutions Ltd. was claimed on the ground that these comparables are functionally different from the assessee company, as Thirdware Solutions Ltd. is engaged in development of software products and has also revenue from sale of software license. Besides it earns extra-ordinary profits due to ownership of significant intangibles. With regard to Exensys Software Solutions Ltd., it was contended that this company is functionally different and deals in software products and extra ordinary events of amalgamation. It owns brand worth 5 crores and engaged in R&D and owns software products.
21. The ld. counsel for the assessee further contended that these comparables were examined by the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. (supra). Copy of the order of the Tribunal is available at pages 566 to 586 of the compilation.
22. From a perusal of the Tribunal orders, we find that the TPO has taken similar 17 comparables and had discussed all these comparables which were sought to be excluded by the assessee. The assessee also claims inclusion of LGS Global Ltd. (Lanco Global Solutions Ltd.), R S Software (India ) Ltd., Sasken Communication Technologies Ltd., Sasken Network Systems Ltd., L&T Infotech Ltd. iGate Global Solutions Ltd. which were excluded by the CIT(Appeals). The CIT(A) has excluded the same by applying the RPT filter at 0%, whereas the Tribunal has repeatedly held that RPT filter has to be applied between the range of 15% to 25%. The inclusion/exclusion of these comparables were examined by the Tribunal in IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 14 of 33 the case of ACIT v. McAfee Software (India) Pvt. Ltd. (supra) for the same assessment year, i.e., AY 2005-06. For the sake of reference, we extract the relevant portion of the order of the Tribunal as under:-
"10. The final list of 17 companies selected by TPO are as under:
Sl Comparables selected by TPO NCP Margins as per NCP Margins as No. TPO Order (%) per TPO Order (WC-Unadj) (%) (WC - Adj)
1. Bodhtree Consulting Ltd., 24.85 22.35
2. Lanco Global Systems Ltd., 13.65 9.51
3. Exensys Software Solutions 70.68 62.85 Ltd.,
4. Sankhya Infotech Ltd., 27.39 21.14
5. Sasken Network Systems Ltd., 16.64 14.02
6. Four Soft Ltd., 22.98 21.35
7. Thirdware Solution Ltd., 66.09 63.97
8. R S Software (India) Ltd., 8.07 6.79
9. Geometric Software Solutions 20.34 17.75 Company Ltd.,
10. Tata Elxsi Ltd., 24.35 22.77
11. Visualsoft Technologies Ltd., 23.52 20.10
12. Sasken Communication 14.42 13.24 Technologies Ltd.,
13. Igate Global Solutions Ltd., 4.32 2.43
14. Flextronics Software Systems 32.19 29.42 Ltd
15. L&T Infotech Ltd., 10.33 8.56
16. Satyam Computer Services Ltd 29.44 26.94
17. Infosys Technologies Ltd., 42.83 4.96 Arithmetical Mean 26.59 23.74 The analysis of each of the comparable company is as under.
Satyam Computers Ltd:
10.1. Out of the above comparables, Satyam Computer Services Ltd., was excluded by CIT(A) on the basis of non-reliability of IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 15 of 33 financial data. Revenue has accepted the same and has not contested.
So, the said company has been rightly excluded.
Infosys Technologies Ltd., Exensys Software Solutions Ltd 10.2. Ld.CIT(A) has excluded Infosys and Exensys, on the basis of functional dissimilarity and having extraordinary event during the year. Exensys was having extraordinary profits by way of amalgamation of companies during the year. Infosys was excluded having different functionality of products, having high turnover and brand name. Following the decision of Agnity Technologies Vs. ITO of ITAT as approved by the Hon'ble Delhi High Court, Infosys cannot be considered as comparable. The same view was held by Co- ordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra). Since the orders of Ld.CIT(A) is in agreement with the decision on these two comparables by various Co-ordinate Benches, we uphold the same.
Bodhtree Consulting Ltd.,:
10.3. This company was retained by Ld.CIT(A) but Assessee objects on the basis of functionality. However, as seen from the orders of Co-ordinate Benches in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as well as DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-
05-2013, Bodhtree Consulting Ltd., was accepted as a comparable. However, in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (Where one of us, AM is the author) has considered in detail and excluded the same for the following reasons:
"1. Bodhtree Consulting Ltd.
The learned counsel submitted that this company should be rejected under the following TPO's filters:
• Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 16 of 33 • Functionally different filter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services".
Considering the above, we direct that the above company has to be excluded on the reason of RPT of more than 25% and functionality.
Lanco Global Systems Ltd., :
10.4. This company even though included by TPO and has not been objected to by Assessee, was rejected by the CIT(A) on the reason of low profit margin. This is not a valid ground. Only continuous loss making companies are being excluded from the comparability. If this argument was accepted, the high profit making companies are also to be excluded. This is not the purpose for which TP analysis is being undertaken. Therefore, keeping the principles laid down by the Special Bench of ITAT in the case of Maersk Global Centers (India) P.Ltd 43 Taxmann.com 100 Mumbai(SB), we, consider the same as comparable and retain it in the list.
Sankhya Infotech Ltd., Thirdware Solution Ltd., & Tata Elxsi Ltd., :
10.5. These three companies are rejected as comparables on functionality in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt.
11-06-2015 (supra) (paras 19-20, 22-26, 27-30 restively) and in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) at Para No. 13. The analysis by the Co-ordinate Benches is as under:
"Sankhya Infotech Limited ('Sankhya')
19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 17 of 33 of the Appellant. The products developed and owned by Sankhya are listed below:
(1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:-
- SILICONTM LMS (Training Management Information
- SILICONTM QT (Online Assessment System)
- SILICONTM LCMS (Learning Content Management System)
- IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations.
- Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below:
"2. Activities The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956."
The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 609I/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the Assessee therein which was also in the business of software development.
20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 18 of 33 The same is directed to be excluded from the list of comparable companies.
22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:-
"15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product developments. Since Assessee is in the product development, having I.P. rights, the same is not comparable.
15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED :
This company is objected to by the Assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns.
15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under :
"23. The other companies which are objected to by the Assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the Assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 19 of 33 comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the Assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables.
23. The learned D.R. however, supported the Orders of the authorities below.
24. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 20 of 33 proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs.
25. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products.
26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the Assessee company to bring them on par with the Assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 21 of 33
27. The learned counsel for the Assessee submitted before us that TATA Elxsi Ltd., a comparable company out of the 10 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability. It was his submission that this company will however, have to be excluded as this company was held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005-2006 order dated 12.2.2014.
28. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows:
"15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments - system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and Assessee's objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to Assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, Assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22:
"22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the Assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 22 of 33 Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another Assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the Assessee."
Keeping the Assessee's objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the Assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to Assessee services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to Assessee."
29. Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services Pvt.Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 23 of 33 is not functionally comparable with that of a software development service provider such as the Assessee.
30. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies.
"13. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suffice to say that Assessee's submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm's length margin accordingly. The ground No.8 and additional ground raised by Assessee are considered as allowed".
In view of the above, the above three companies are to be excluded.
Sasken Network Systems Ltd., R S Software (India) Ltd., Visualsoft Technologies Ltd., and Sasken Communication Technologies Ltd., 10.6 Since there is no objection from Assessee and was selected by TPO, the above companies are retained.
Four Soft Ltd., 10.7. The objection by Assessee is that this company is a product company. was analysed and accepted in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) para 22. It was held that the said company ahs derived income from software license and AMCs. Since functionality was already analysed, respectfully following the Co-ordinate Benches also, the same was to be excluded.
i. Intoto Software India Pvt. Ltd., ITA No. 1196/Hyd/2010; ii. Cordys Software India P. Ltd., ITA No. 1451/Hyd/2010 IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 24 of 33 Geometric Software Solutions Company Ltd.,:
10.8. Even though this company was accepted as comparable in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) and Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) and was not objected to, we find that the Co-ordinate Bench at Banalore in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 has considered that this is in product development. We have perused the TPO's order. In page 85 and 86 of the order, this comparable was analysed.
TPO records that there are product sales to the extent of 18%. Segmental profits are not available. On assumptions, this company was retained. We are of the opinion that being a product based company, the same is not strictly comparable to a service company like Assessee. In the absence of segmental profit of service income, we have to exclude the same. Following the decision in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 (supra), this company is accordingly excluded.
Igate Global Solutions Ltd., & L&T Infotech:
10.9. These two companies are found comparable in many orders of the Co-ordinate Benches, but excluded on the basis of turnover filter of Rs. 200 Crores limit in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra), we have considered the same. Assessee's turnover is about 63 Crores. The turnover of Igate Global Solutions Ltd., (Seg) is about 405 crores and L & T Infotech Ltd is of 562 Crores. This is with the range of ten times the upper limit. Moreover, Assessee Counsel has not pressed on turnover filter of Rs. 200 Crores. Therefore, these two are retained.
Flextronics Software Systems Ltd.,:
10.10. This company was objected to on functional dissimilarity. This was considered in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as under:
"26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 25 of 33 the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the Assessee company to bring them on par with the Assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables".
Respectfully following, we exclude the same.
11. That leaves us with another ground in Revenue's appeal about granting deduction (+) or (-) 5% as a standard deduction. Consequent to the amendment brought out to the proviso to Section 92C(2), the Revenue contends that the deduction is not permissible. It relies on Co-ordinate Bench decision in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (at para 16)]. Learned Counsel contends that the standard deduction was granted correctly as the amendments will apply to the cases pending as on 01-04-2009 and this order was passed by AO on 28-11-2008. Even the explanation brought in later also does not apply to the case. He relied on the principles laid down in SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] and DCIT Vs. Synopsis India P. Ltd., in IT(TP)A No. 1107 & 1093/Bang/2011 dt. 08-10-2015 in support.
11.1. We have considered the rival contentions. The order of Ld.CIT(A) is in accordance with the provisons. The issue was analysed by the Co-ordinate Bench in the case of SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] (supra) at paras 61, 62, 63 & 64 as under:
"61. The Central Board of Direct Taxes in its Circular No. 5 of 2010 dated June 3, 2010 [(2010) 324 ITR (St.) 293] has clarified that these new provisos are effective from April 1, 2009 onwards.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 26 of 33 In fact these provisos have been brought into the Act by the Finance (No.2) Act, 2009. So, it will be applicable to the assessment year 2009-10 and onwards.
62. In the present case, the assessment year is 2003-04. Therefore, the amended proviso as explained above is not applicable to the present case in hand. The proviso applicable to the present case is the one which stood before the substitution brought in by the Finance (No.2) Act, 2009 with effect from October 1, 2009. The earlier proviso is extracted below:
"Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the Assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean".
63. The first limb of the old proviso and the first limb of the present proviso is regarding arriving at the arithmetical mean which is the same. There is no change with regard to that. The change is with reference to the second limb. The old proviso says that at the option of the Assessee, the Assessee may adopt a price different from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean, ie.., the Assessee has an option to claim the tax payer's marginal relief at 5 per cent with reference to the arithmetical mean irrespective of the range of actual deviation between the margin disclosed by the Assessee and the average mean margin. Therefore, in effect, this marginal relief takes the character of a standard deduction of 5 per cent. For e.g., in a case, average mean of the arm's length price determined by the Transfer Pricing Officer/Assessing Officer is 20 per cent and that one disclosed by the Assessee is 10 per cent. The Assessee will get a standard deduction of 5 per cent and the Assessee's arm's length price will be increased to 15 per cent and thereafter the difference of 5 per cent between 20 per cent and 15 per cent alone shall be added as arm's length price adjustment. This is the theme of the old proviso. But under the newly substituted proviso, the marginal relief of 5 per cent will not Act as standard deduction. If the price determined by the average mean price is 20 per cent and that of the Assessee is 10 per cent., then the difference of 10 per cent is more than 5 per cent and therefore, the Assessee will not get the marginal relief and the IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 27 of 33 entire difference of 10 per cent will be added as the arm's length price adjustment. If the arm's length price determined by the Transfer Pricing Officer/Assessing Officer is 15 per cent and that of the Assessee is 11 per cent., the difference of 4 per cent is less than 5 per cent and in that case, the rate disclosed by the Assessee at 11 per cent shall be taken as the arm's length price. This is the position after the amendment.
64. In view of the above discussion, we find that the second limb of the proviso to section 92C(2) given an option to the Assessee to claim a marginal variance of 5 per cent as standard deduction. This ground of the Assessee is accepted and we hold that this benefit of deduction of 5 per cent has to be given to the Assessee, if the circumstances, so warrant".
11.2. Not only that, the explanation brought in by Finance Act, 2014 w.e.f. 01-04-2015 also specifies that the provisions of second proviso shall also be applicable to all assessments or reassessments proceedings pending before the AO as on the first day of October, 2009. The present proceedings were concluded before that day. So, the second proviso to Section 92C(2) does not apply to the impugned order. The pre-amended proviso, as interpreted by various authorities does permit standard deduction of (+) or (-) 5% to Assessee. The order of Ld.CIT(A) is confirmed. The Revenue's ground is rejected accordingly."
23. Our attention was also invited to the order of the Tribunal in the case of ITO v. Colt Technology Services India Pvt. Ltd. in ITA No.609/Bang/2011 in which these comparables were also examined by the Tribunal and Visual Soft Technologies Ltd. was excluded from the list of comparables. The relevant portion of the Tribunal's order is extracted hereunder for the sake of reference:-
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 28 of 33 "14. We find the submissions of the assessee differentiating its case with the claimed comparables (i) Exensys Software Solutions Ltd. 2) Sankhya Infotech Ltd. 3) Third Ware Solution Ltd. And 4) Visual Soft Technologies Ltd. (SEG) searched by TPO, which have been accepted by the Ld. CIT(A), have not been successfully rebutted by the department before us. Regarding Exensys Software Solutions Ltd.
the submission of the assessee remained that the said company owns brands worth Rs. 5 crores as against its turnover of Rs. 7.37 crores during the financial year 2004-05, hence the company is a brand owner of the products developed by it. The said company is also engaged in section R & D and owns several software products such as X migrate, integration workbench, and report designer etc. Regarding Sankhya Infotech Ltd., it was submitted that they own the intellectual property rights in the form of software products developed by it and bears substantial risk associated with the success / failure of these products in the market. These submissions were made on the basis of its annual report for the relevant financial year. It was also submitted that as a part of its business operations the said company is engaged in and focuses on development of niche products for the transportation and aviation industry and accordingly spends heavily on development of software products. It was also submitted that the said company owns software products. This information was based on a review of the schedule 4 of its books of accounts on fixed assets. Regarding Thirdware Solutions Ltd. it was submitted that the said company has a diversified functional professional profile and is also engaged in sale of software licenses. They invest in R&D and also provides / sells software licenses and there are no segmental results available in its audited financials to segregate profitability from provision of software development services and from sale of software licences. These informations were supported by the annual report for Financial year 2004-05 of the said company. In its annual report a generic disclosure was made that the company is involved in trading of software and provision of IT services. Schedule 14 of the Financial statement of the said company provide information on details of purchases as per which the total purchase cost incurred by the company was about Rs. 56871743/- as against the total cost of Rs. 175527264/- which is about 32% of the total cost. Besides the said company earned abnormally high OP / TC margin of 66.11% during Financial Year 2004-05 indicating risk dissimilarity vis a vis the assessee which claimed to be a cost plus low risk captive which cannot be expected to earn such high profitability. Regarding Visual Soft TechLtd. (seg) it was submitted that company is engaged in IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 29 of 33 undertaking substantial R & D activities and hence should be excluded from the final set of comparables since its return includes a return on account of the R & D function. It was demonstrated by the fact that during Financial Year 2004-05, the said company was having a high R & D / sales spend of 4.5% (fails the R /& D filter of 3%as applied by the assessee). The Ld. CIT(A) on the basis of Indian TP regulations, OECD Guidelines and judicial decisions came to the conclusion that in much as these companies owning software products and undertaking R & D command a premium return compared to any routine contract software development service provider, they should not be taken as comparable for a contract software development service provider such as the assessee. After exclusion of the above companies from the comparables the Ld. CIT(A) has worked out the following result :-
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 30 of 33
15. In conclusion the Ld. CIT(A) in para 47 of the first appellate order has held that with the mean OP / TC margin of 14.04%, after availing the benefit of the (+/-) 5 percent range, the assessee's international transactions are proved to be at arm's length.
16. The decisions relied upon by the Ld. DR having distinguishable facts are not helpful to the revenue. In the case of ST Microelctronics PVt. Ltd. (supra) the assessee tried to establish that the role of the assessee in producing semiconductor (IC) was limited qua the role performed by ST group which was not accepted by the Tribunal with this observation that the assessee had employed more than 1600 persons and it was having one of the largest design centres out of the Europe and thus the operations carried out by the assesee within India were to be compared with other assesses and not with ST group. Thus the assessee failed to establish that this case was not comparable with the ST group. The Tribunal observed further that the assessee could have produced the report of an expert indicating the work performed by it was negligible in comparison to other software development companies. Similarly in the case of Symantec Software Solutions Pvt. Ltd. (supra) relied upon by the Ld. DR the Tribunal did not find any merit and substance in the submission of the assessee for adjustment in respect of risk and functional differences. The Tribunal held that what is relevant is the margin/profit the assessee earned from international transaction and comparison of the same with the uncontrolled transactions. The Tribunal held that if net revenue of the AE is negative then the assessee would get no remuneration, which is IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 31 of 33 however irrelevant for the purpose of ALP determination. Actually this decision of Mumbai Bench relied upon by the Ld. DR is helpful to oppose the contention of the Ld. AR that the loans are normally part of business and the loss making companies should have also been considered as comparables by the TPO.
17. We thus in absence of a successful rebuttal by the department that aforesaid four comparables searched by the TPO were not comparable with the assessee, are not inclined to interfere with the above finding of the Ld. CIT(A) on the issue. The same is upheld.
The ground is thus rejected."
24. Having carefully examined the aforesaid orders of the Tribunal in the light of assessee's contentions, we find that exclusion of Geometric Software Solutions Co. Ltd., Four Soft Limited, Tata Elxsi Ltd. (Seg.), Infosys Technologies Ltd., Flextronics Software Systems Ltd., Satyam Computer Services, Thirdware Solutions Ltd., and Exensys Software Solutions Ltd. made by the CIT(Appeals) is correct as these companies are either functionally different or having huge turnover or incurred expenditure for selling products or having unreliable financial datas due to financial scam. Exclusion of these companies are also approved by the Tribunal in the aforesaid cases.
25. Bodhtree Consulting Ltd., Sankhya Infotech Ltd. and Visual Soft Technologies Ltd., though taken as comparables by the CIT(Appeals), but these companies are also functionally different with the assessee company and this aspect was examined by the Tribunal in the aforesaid orders.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 32 of 33 Therefore, we are of the view that these companies should be excluded from the list of comparables.
26. So far as the other companies i.e., LGS Global Ltd., R S Software (India) Ltd., Sasken Communication Technologies Ltd., Sasken Network Systems Ltd., L & T Infotech Ltd., and iGate Global Solutions Ltd. are concerned, though assessee has claimed the inclusion of all these companies, but 3 companies i.e., Sasken Communication Technologies Ltd., L&T Infotech Ltd. and iGate Global Solutions Ltd. can also be excluded by applying the turnover filter as the turnover of the assessee company is Rs.14.4 crores and turnover of these companies is in the range of Rs.189.05 crores to Rs.562.45 crores. Since the turnover of these companies are more than 10 times the turnover of the assessee company, these companies shall also be excluded from the list of comparables and we order accordingly.
27. So now the companies which should be considered as good comparables are only 3 companies viz., LGS Global Ltd., R S Software (India) Ltd. and Sasken Network Systems Ltd. We accordingly direct the TPO/AO to determine the ALP after taking into account these comparables.
Accordingly the appeal of the revenue and CO of the assessee are disposed of.
IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 Page 33 of 33
28. In the result, the appeal of the revenue and CO of the assessee are partly allowed for statistical purposes.
Pronounced in the open court on this 25th day of January, 2017.
Sd/- Sd/-
( A.K. GARODIA ) (SUNIL KUMAR YADAV )
Accountant Member Judicial Member
Bangalore,
Dated, the 25th January, 2017.
/D S/
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore.