Income Tax Appellate Tribunal - Hyderabad
Alliance Global Services It India ... vs Assessee on 20 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 58/Hyd/2014
Assessment Year: 2009-10
Alliance Global Services IT vs. Dy. Commissioner of Income-
India Pvt. Ltd., (Earlier known tax, Circle - 1(1),
as Alliance IT Consulting India Hyderabad.
Pvt. Ltd.), Hyderabad
PAN - AAACW2012R
(Appellant) (Respondent)
Assessee by : Shri Utpal Sen/Abhiroop
Bhargav
Revenue by : Smt. G. Aparna Rao
Date of hearing 20-02-2015
Date of pronouncement 20-03-2015
O RDE R
PER SAKTIJIT DEY, J.M.:
This appeal of the assessee is directed against the assessment order passed u/s 143(3) read with section 144C in consequence upon the directions of the Dispute Resolution Panel (DRP). The appeal is pertaining to AY 2009-10.
2. Briefly the facts are, assessee an Indian company is a subsidiary of Alliance Holdings Inc., USA. Basically, assessee is engaged in providing software development and consulting services to its Associated Enterprises (AEs). To be specific, assessee renders custom application development, testing and e-business services to its AEs. For this purpose, assessee has entered into service agreement as per which assessee is remunerated at cost plus mark 2 ITA No. 58 /Hyd/2014 Alliance Global Services IT India Pvt. Ltd.
up of 12%. For the assessment year under consideration, assessee originally filed its return of income on 26/09/2009 declaring total income of Rs. 1,00,45,150. Later, assessee filed revised returns of income on 10/10/2009 & 19/12/2009 declaring total income Rs. 1,01,01,040 and Rs. 33,81,240 respectively after claiming deduction u/s 10B of the IT Act. In course of assessment proceeding, AO noticing that assessee has entered into international transactions with its AEs during the relevant previous year made a reference to the Transfer Pricing Officer (TPO) to determine the arm's length price (ALP). In course of proceeding before him, the TPO noticed that as per 3CEB report assessee has undertaken the following international transactions:
AE Nature of transaction Amount (Rs.)
Alliance Software 34,53,32,211
Consulting Group development and
Associates Inc., consulting services
Alliance Global -do- 9,40,43,658
Services Inc.
43,93,75,869
He further noticed, for establishing the arm's length margin of price charged to its AE assessee has undertaken economic analysis through an external consultant. In the TP study assessee was taken as the tested party. Transaction Net Margin Method (TNMM) was adopted as most appropriate method with operating profit to total cost as the profit level indicator (PLI). A search was undertaken in prowess and capitaline databases in software development segment, which yielded 16 comparable companies with average arithmetic mean of 12.05%. As margin shown by assessee was 13.13%, price charged to AEs for international transaction was found to be within arm's length. Though TPO accepted TNMM as most appropriate method with OP/TC as PLI, however, he rejected assessee's TP study, inter-alia, on the following reasonings:
3 ITA No. 58 /Hyd/2014Alliance Global Services IT India Pvt. Ltd.
i) inappropriate filters have been applied while selecting comparables.
ii) veriticals/horizontals within software industries were not gone into while undertaking comparability study.
iii) instead of confining to current year data, multiple year data have been considered while selecting comparables.
3. After rejecting the TP report, TPO undertook a search himself by applying some of the filters applied by assessee as well as some additional filters which yielded 17 comparables with arithmetic mean PLI of 22.03%. After allowance of 0.32% towards working capital adjustment, the adjusted arithmetic mean PLI was worked out to 21.71% and the ALP of international transaction was determined at Rs. 47,29,94,465 as against price charged by assessee of Rs. 45,01,77,236. The resultant shortfall of Rs. 2,28,17,229 was treated as the adjustment u/s 92CA(3). The comparables selected by TPO are as under:
S.No. Company Name OP/OC
1. Akshay Software Technologies Ltd. 12.41
2. Bodhtree Consulting Ltd. 68.43
3. Comp-U-Learn Tech India Ltd. 28.00
4. Igate Global Solutions Ltd. 21.97
5. Infosys Ltd. 41.34
6. KALS Information Systems (Seg.) 23.11
7. LGS Global 20.51
8. Mindtree Ltd. (seg) 5.56
9. Neilsoft Ltd. 9.05
10. Persistent Sys 18.49
11. RS Software (India) Ltd. 9.99
12. R Systems International Ltd. (Seg.) 17.53
13. Sasken Communication Technologies Ltd. 17.30
14. Tata Elxsi Ltd. (seg.) 22.82
15. Thinksoft Global 20.80
15. Thirdware Solutions 22.28
16. Zylog Systems Ltd. 15.00
374.59
22.03
4
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Alliance Global Services IT India Pvt. Ltd.
4. In pursuance to the order of TPO, AO passed draft assessment order proposing addition of Rs. 2,28,17,229 being TP adjustment. AO also recomputed deduction u/s 10B by reducing lease line/ communication charges from export turnover.
5. Assessee raised objections against draft assessment order before the DRP on transfer pricing adjustment as well as corporate issues. However, none of the objections raised by assessee found favour with the DRP. As a result, in terms with the directions of DRP, AO passed the impugned assessment order on 03/12/2013.
6. Being aggrieved, assessee is before us raising, in total 12 grounds. Ground Nos. 1 to 9 are on transfer pricing issues, whereas, ground Nos. 10 to 12 are on corporate tax issues. As far as transfer pricing issues are concerned, ld. AR confined his argument to selection of certain companies as comparables as raised in ground Nos. 4 and 6 and issue of non-consideration of bad debt as part of the operating cost as raised in ground No. 9. In view of the above, rest of the grounds raised on TP issues are dismissed as not pressed. At the outset, we will take up the issues relating to selection of comparables as raised in ground No. 4 & 6. Out of the seventeen comparables selected by TPO, assessee has objections in respect of four comparables as under:
i) Infosys BPO Ltd.
ii) Bodhtree Consulting Ltd.
iii) KALS Inf. Systems Ltd. (Seg.)
iv) Tata Elxsi Ltd. (seg.)
7. Brief submissions of the ld. AR against the selection of the aforesaid comparables are as under:
S.No. Name of the Reasons for rejections
comparable
1. Infosys Ltd. i)Incomparable scale of operations:
Revenue of Infosys is 453 times
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Alliance Global Services IT India Pvt. Ltd.
more than the revenue of assessee and operations of the assessee.
ii) Significant brand presence in the market and incurs substantial advertisement and marketing and distribution expenses.
iii) Established player and market leader with assets valuing INR 3779 cr and has employed 27639 employees.
iv) Engaged in the development of products-develops 'Finacle'.
2. Bodhtree Consulting Functionally different: Engaged in e Ltd. sale of products.
3. KALS Inf. Systems Functionally different: This Ltd. (seg). company is a full-fledged software product development company as it is engaged in developing products like Shine ERP Software, Docuflo, Dac4Cast etc.
4. Tata Elxsi Ltd. Functionally different: Product (seg.) design services, Mechanical design with a focus on industrial design and deals in high end engineering services.
Ld. AR submitted, the coordinate benches of this Tribunal have held the aforesaid companies not to be comparable with pure software development providers in various cases including the following cases:
1. Kenexa Technologies Pvt. Ltd. Vs. DCIT in ITA No. 243/Hyd/14.
2. CISCO Systems (India) Pvt. Ltd. Vs. DCIT, Bangalore in IT(TP) No. 130/Bang/14 dated 14/08/14.
3. CIT Vs. Agnity India Technologies Ltd., 219 Taxman 26 (Del.)
8. The ld. DR, however, supported the order of the DRP/TPO.6 ITA No. 58 /Hyd/2014
Alliance Global Services IT India Pvt. Ltd.
9. We have considered the submissions of the parties and perused the orders of the departmental authorities as well as other materials on record. There is no dispute to the fact that TPO has classified assessee as a software development service provider. As can be seen from the materials on record, comparability of Infosys Ltd., Kals Information Systems Ltd. and Bodhtree Consulting Ltd. with a software development service provider came up for consideration before the coordinate benches of this Tribunal in a number of cases. The Tribunal after examining the functionality of these companies on the basis of materials on record, held the aforesaid companies not to be comparable with a captive software development service provider. The coordinate bench in case of M/s CISCO Systems (India) Pvt. Ltd. Vs. DCIT (supra) after examining in detail, excluded Infosys Ltd., Bodhtree Consulting Ltd., and Kals Information Systems. The relevant observations of the ITAT Bangalore Bench in respect to each of the aforesaid companies are reproduced hereunder for the sake of clarity:
"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 7 ITA No. 58 /Hyd/2014 Alliance Global Services IT India Pvt. Ltd.
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. 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:-
"11.0 Infosys Technologies Ltd.
11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment.
11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to ubmit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :-
(i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in 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 intangible and hence does not have an additional advantage in the market. It is submitted that 8 ITA No. 58 /Hyd/2014 Alliance Global Services IT India Pvt. Ltd.
this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee;
(ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ;
(iii) the company has generated several inventions and filed for many patents in India and USA ;
(iv) the company has substantial revenues from software products and the break up of such revenues is not available ;
(v) the company has incurred huge expenditure for research and development;
(vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems.
In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies.
11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee as 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 9 ITA No. 58 /Hyd/2014 Alliance Global Services IT India Pvt. Ltd.
functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up 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."
The decision rendered as aforesaid pertains 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. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies.
26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:-
"(d) KALS Information Systems Ltd.
46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:
"16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in 10 ITA No. 58 /Hyd/2014 Alliance Global Services IT India Pvt. Ltd.
development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds."
Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.
47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable."
Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable.
10. ITAT, Hyderabad Bench following the aforesaid decision of the ITAT, Bangalore Bench also excluded these three companies in case of M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT in ITA No. 243/Hyd/2014 dt. 14/11/2014. Respectfully following aforesaid decisions of coordinate benches, we direct AO/TPO to exclude Infosys Ltd., Bodhtree Consulting Ltd., and Kals Information Systems Ltd.
11. As far as Tata Elxsi Ltd. (segment) is concerned, the reason on which assessee has sought exclusion is, it is a functionally different 11 ITA No. 58 /Hyd/2014 Alliance Global Services IT India Pvt. Ltd.
company as it provides high end services. However, on going through the segmental details of services provided by Tata Elxsi Ltd. as contained in annual report, a copy of which is at page 707 of the assessee's paper book vis-à-vis, the functions of the assessee as enumerated in TP study, a copy of which forms part of assessee's paper book, we are of the view that unless proper analysis is made with regard to the functions of both the companies it cannot be said that services performed/provided by Tata Elxsi Ltd. is high end services whereas services provided by assessee are low end services. As the issue requires thorough examination in so far as it relates to exact nature of services rendered by both the companies, we remit the comparability of the aforesaid company to the file of AO/TPO for considering afresh after affording due opportunity of being heard to assessee. It is worth mentioning, ld. AR while seeking removal of the aforesaid company has relied upon a decision of ITAT Bangalore bench in case of CISCO Systems (India) Pvt. Ltd. Vs. DCIT, Bangalore in IT(TP) No. 130/Bang/14 dated 14/08/14. However, on perusal of the said decision, it is noticed that Tata Elxsi Ltd. was excluded as a comparable basically for the reason that in the immediately preceding AY in assessee's own case, Tata Elxsi Ltd. was considered as un comparable. However, that is not the case with assessee before us.
15. In Ground No. 9, assessee has raised the issue of non- consideration of provision for bad and doubtful debts as part of operating cost while computing margins of comparables.
16. The ld. AR submitted before us that TPO has not considered certain expenses while computing the mark-up of the comparable companies on the premise that these are not the routine operating costs and specifically TPO has excluded provision for doubtful debts in computing the mark up on total cost of the companies selected as comparables. Ld. AR submitted, as per TPO, provision for doubtful debts can be considered as operating only when the same expenses 12 ITA No. 58 /Hyd/2014 Alliance Global Services IT India Pvt. Ltd.
are incurred every year for the last three years up to and including FY 2008-09 and if these expenses are incurred at almost consistent level in terms of its ratio with the turnover. Otherwise, according to TPO, it has to be treated as extraordinary expenses which shall be excluded from the calculation of the total operating expenses. He submitted, as provisions for doubtful debts are closely interlinked with the business operations for each relevant year and constitute operating expense, the same must not be treated as extraordinary and should be taken into consideration for the calculation of the PLI irrespective of the trend in prior years. In support of his contention, ld. AR relied on the decision of ITAT, Hyderabad Bench in case of Kenexa Technologies Pvt. Ltd. Vs. DCIT in ITA No. 243/Hyd/2014 dated 14/11/2014.
17. The ld. DR, on the other hand, relied upon the reasoning of TPO/DRP.
18. We have considered the submissions of the parties and perused the materials on record. In principle we agree with the contention of ld. AR that provision for bad and doubtful debts and bad debts should form part of the operating expenditure. In this connection, we rely on the observations of the coordinate bench in case of M/s Kenexa Technology Pvt. Ltd. Vs. DCIT (supra), which are as under:
"41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: "106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating 13 ITA No. 58 /Hyd/2014 Alliance Global Services IT India Pvt. Ltd.
profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly."
42. We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expenses and we direct the TPO to re-compute the margins of 24 comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies." Respectfully following the decision of the coordinate bench, we remit this issue to the file of AO/TPO for considering afresh in the light of the said decision of the coordinate bench.
19. In view of the aforesaid, AO/TPO is directed to compute ALP afresh in terms with our directions herein before.
20. In Ground No. 10 & 11, the assessee has challenged the action of the AO in excluding communication expenses from the export turnover while computing deduction u/s 10B of the Act. This issue is squarely covered by the decision of the Hon'ble Bombay High Court in case of CIT Vs. Gemplus Jewellery, 330 ITR 175 and ITO Vs Saksoft Ltd (313 ITR AT 353 (Chennai) SB). Following the ratio laid down in the aforesaid decisions, we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10B of the Act.
21. Ground No. 12 is challenging levy of interest u/s 234B and 234D of the Act. As the issue raised in the aforesaid ground is consequential, it is not required to be adjudicated at this stage.
14 ITA No. 58 /Hyd/2014Alliance Global Services IT India Pvt. Ltd.
22. In the result, appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open court on 20 th March, 2015.
Sd/- Sd/-
(P.M. JAGTAP) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: March, 2015
kv
Copy to:-
1) Alliance Global Services IT India Pvt. Ltd., 3 rd & 4 th Floor, North Wing, Plot No. 5, Software Units Layout, Madhapur, Hyderabad - 500 033
2)DCIT,Circle - 1(1), Hyderabad
3)DRP, Hyderabad
4) TPO, Hyderabad
4) DIT (International Taxation & TP), Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.