Income Tax Appellate Tribunal - Hyderabad
Progress Software Development Private ... vs Acit, Circle-16(2), Hyderabad, ... on 15 March, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
(THROUGH VIDEO CONFERENCE)
BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
ITA No. A.Y. Appellant Respondent
M/s. Progress
Dy.Commissioner of Software
347/Hyd/15 Income Tax, Development Private
Circle-16(2), Limited,
Hyderabad Hyderabad
2010-11 [PAN: AADCP4833A]
M/s. Progress Software
Asst. Commissioner
Development Private
391/Hyd/15 of Income Tax,
Limited,
Circle-16(2),
Hyderabad
Hyderabad
[PAN: AADCP4833A]
For Assessee : Shri Mahaveer Jain, AR
For Revenue : Shri Sibendu Moharana, DR
Date of Hearing : 04-02-2021
Date of Pronouncement : 15-03-2021
ORDER
PER BENCH :
These Revenue's and assessee's cross-appeals for AY.2010-11 arise from ACIT, Circle-16(2), Hyderabad's assessment dt.02-02-2014 framed in furtherance to the Dispute Resolution Panel 'DRP', Hyderabad's directions dt.24-12-2014 involving proceedings u/s.143(3) r.w.s.92CA(3) r.w.s.144C(5) of the Income Tax Act, 1961 [in short, 'the Act'].
Heard both the parties. Case files perused.
:- 2 -:
ITA Nos. 347 & 391/Hyd/2015
2. A perusal of the rival pleadings indicates that the Revenue's twin substantive grounds in its appeal ITA No.347/Hyd/2015 seek to reverse the DRP's directions excluding M/s. Mind Tree Ltd., from the array of comparables in assessee's line of software development business involving international transactions with its overseas Associated Enterprise (AE) and also directing the Transfer Pricing Officer (TPO) to ascertain the LIBOR rate for 12 months in the period prevailing in FY.2009-10 and adopt LIBOR+2% for interest payable on loans taken from the said AEs.
3. The assessee's appeal ITA No.391/Hyd/2015 has raised the following multiple substantive grounds:
"1.The learned TPO has erred in selecting E-infochips Bangalore ltd as a comparable company to the appellant.
2.The learned TPO has erred in selecting Kals Information Systems ltd (seg) as a comparable company to the appellant.
3.The learned TPO has erred in selecting Comp-U-Learn Tech India Ltd as a comparable company to the appellant.
4.The learned TPO has erred in selecting Persistent Systems Ltd as a comparable company to the appellant.
5.The learned TPO has erred in selecting Sasken Communication Technologies Ltd as a comparable company to the appellant.
6.The learned TPO has erred by not accepting CG-VAK Software & Exports Ltd (Segmental) as a comparable company to the appellant.
7.The learned TPO has erred by not accepting Quintegra Solutions Limited as a comparable company to the appellant.
8.The learned TPO grossly erred by accepting the comparable companies having abnormal/high profits on one hand and on the other hand removing persistent loss-making companies and the Hon'ble DRP has erred in confirming the same.
9.The learned TPO has erred by considering bad debts as non- operating expenses; thereby erred in the computation of comparable companies' margin.
:- 3 -:
ITA Nos. 347 & 391/Hyd/2015
10.The learned TPO has grossly erred by not making suitable adjustments to account for differences in the risk profile of the appellant vis-à-vis the comparables and in doing so, he has failed to follow the directions given by the Hon'ble DRP.
11.The learned TPO has grossly erred by charging notional interest on delayed receipt from associated enterprise and Hon'ble DRP has erred in upholding the same.
12.The learned TPO has grossly erred by not appreciating that interest paid on loan borrowed from associated enterprise are at arm's length and the Hon'ble DRP has erred in upholding the same".
4. Learned counsel representing the assessee is fair enough in not pressing for its third, fifth to tenth substantive grounds at this stage. The said grounds stand rejected therefore as not pressed therefore.
5. We proceed further and notice that the first and foremost common issue in view of these cross-appeals is that of alleged wrongful alleged exclusion/inclusion of M/s.Mind Tree Ltd., (at Revenue's behest) and inclusion of M/s.E-Infochips Bangalore Ltd., Kals Information Systems Ltd., and Persistent Systems Ltd., (assessee's case); respectively.
6. We deem it appropriate to observe at this stage that there is no dispute between the parties about the assessee being engaged in software development business having carried out the corresponding international transactions with its overseas AE(s) thereby disclosing net cost + margin of 17.18%. It is thus purely an issue of the alleged wrongful exclusion and inclusion of comparable entities only.
7. Coming to the Revenue's grievance seeking inclusion of M/s.Mind Tree Ltd., we notice that the DRP has accepted the assessee's objections in para 8, page 4 that this entity had :- 4 -:
ITA Nos. 347 & 391/Hyd/2015 seen extraordinary events in the form of strategic acquisition amalgamation and dissolution of subsidiary during the relevant FY.2009-10. And also that this entity is functionally not similar since carrying out intensive research and development providing innovative solutions. This entity had intangible assets as patents as well over a period of years. We thus hold in this factual backdrop that the learned panel has rightly directed exclusion of M/s.Mindtree since lacking not only the reliable functional similarity but also having extraordinary events in the relevant time span in FY.2009-10. We therefore see no reason to accept the Revenue's instant ground. The same stands rejected.
8. We next advert to the assessee's three folded pleadings seeking exclusion of M/s.E-Infochips Bangalore Ltd., Kals Information Systems and Persistent Systems P. Ltd., from the array of comparables. It transpires at the outset that this tribunal's co-ordinate bench's order in M/s.Pegasystems Worldwide India Pvt. Ltd., Vs. ACIT ITA Nos.1758 & 1936/Hyd/2014 has already held in the very assessment year i.e., AY.2010-11 that former twin entities are not functionally similar in software development activity; and therefore, are not to be taken as valid comparables. The very conclusion stands reiterated in M/s.Parexel International (India) Pvt. Ltd. Vs. ACIT in ITA No.1918/Hyd/2014 and Fiserv India Pvt. Ltd., Vs. DCIT in ITA No.6737/Del/2014; both involving the very AY.2010-11. The same appears to be the factual position regarding M/s.Persistent Systems Ltd. wherein this tribunal's yet another co-ordinate bench's decision in 3DPLM Software Solutions Ltd., Vs. DCIT, IT (TP)A No.1303/Bang/2012 holds :- 5 -:
ITA Nos. 347 & 391/Hyd/2015 that it was engaged in outsourced product developmental activities and could not be taken as a valid comparable. We thus decline the Revenue's arguments for all these reasons and hold M/s.Persistent Systems Ltd. as not a valid comparable in assessee's line of business of international transactions in the relevant previous year. The same is directed to excluded therefore.
9. Next comes the Revenue's second and assessee's 10th to 12th substantive grounds raising the common issue of interest of receivables. The DRP's directions in Pgs.4 and 5 take note of the TPO's observations having merely proposed to charge interest @12% p.a. regarding the receivables exceeding the credit period of 30 days. Suffice to say, the DRP has admittedly directed the TPO to ascertain LIBOR rate for 12 months in FY.2009-10 without even indicating the corresponding comparables in the relevant segment involving the receivables in issue. We make it clear that Chapter-X in the Act is a special provision wherein each and every upward and downward adjustment ought to be made after analysing the array of comparables in the very segment than based on mere proposal lacking any uncontrolled transactions information. We thus deem it proper to delete the impugned arm's length price of Rs.18,10,432/- for this precise reason alone. The assessee succeeds in its 10 to 12 substantive grounds and the Revenue's corresponding second substantive ground is declined.
Necessary computation to follow as per law.
:- 6 -:
ITA Nos. 347 & 391/Hyd/2015
10. The Revenue's appeal ITA No.347/Hyd/2015 is dismissed and assessee's cross appeal ITA No.391/Hyd/2015 is partly accepted in above terms. A copy of this common order be placed in the respective case files.
Order pronounced in the open court on 15 th March, 2021 Sd/- Sd/-
(LAXMI PRASAD SAHU) (S.S.GODARA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad,
Dated: 15-03-2021
TNMM
:- 7 -:
ITA Nos. 347 & 391/Hyd/2015
Copy to :
1.M/s.Progress Software Development Pvt. Ltd., 4th Floor, No.18, 1 Labs Centre, #8, Software Unit Layout, Madhapur, Hyderabad.
2.The Deputy Commissioner of Income Tax, Circle-16(2), Hyderabad.
3. The Asst.Commissioner of Income Tax, Circle-16(2), Hyderabad.
4.Dispute Resolution Panel (DRP), Hyderabad.
5.Director of Income Tax (IT & TP), Hyderabad.
6.Addl.Commissioner of Income Tax (Transfer Pricing), Hyderabad.
7.D.R. ITAT, Hyderabad.
8.Guard File.