Income Tax Appellate Tribunal - Bangalore
M/S Interwoven Software Services ... vs Department Of Income Tax on 26 August, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'B', BANGALORE
BEFORE SHRI S.K.YADAV, JUDICIAL MEMBER
AND
SHRI A. K. GARODIA, ACCOUNTANT MEMBER
IT (TP) A No.461 (Bang) 2015
(Assessment year 2010-11)
The Income Tax Officer,
Ward-3(1) (4)
Bangalore Appellant
Vs
M/s Interwoven Software Services (India.) Pvt. Ltd,
C/o Autonomy Software Asia (P) Ltd.,
2nd Floor, Hibiscus, Vrindavan Tech Village,
Marathahalli Outer Ring Road, Devarabeesanahalli,
Bangalore -560 037
Pan No.AAACI4421N Respondent
And
IT (TP) A No.535 (B)/2015
(Assessment year 2010-11)
(By Assessee)
Revenue by : Ms. Neera Malhotra, CIT
Assessee by : Shri Sharath Rao, CA, Ms. Vydehi, CA &
Shri Ankur Pai Dhungat, CA
Date of hearing : 25-07-2016
Date of pronouncement: : 26-08-2016
ORDER
PER SHRI A.K.GARODIA, AM
These are cross appeals filed by the revenue and assessee and these are directed against the assessment order dated 30-01-2015 2 IT(TP)A No.461(B)2015 & 535/B/2015 passed by the AO u/s 143(3) r.w.s. 144C of the IT Act, 1961, as per the direction of DRP.
2. The grounds raised by the revenue in its appeal are as under;
1.The directions of the Dispute Resolution Panel are opposed to law and facts of the case.
2.On the facts and in the circumstances of the case, the Dispute Resolution Panel erred by applying new filters i.e. 25% Employee Cost Filter, Onsite Filter & 75% Export Filter in ITES Segment & Software Segment, without appreciating the fact that the direction actually amounts to setting aside of the draft order, which is beyond the mandate given to DRP vide provisions by Section 144C(8).
3.On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPOI AO to exclude the comparables M/s ICRA Techno Analytics Ltd.; M/s KALS Information Systems Ltd.; M/s Infosys Ltd.; M/s Persistent System Ltd.; M/s Sundaram Business Services Ltd.: M/s HCCA Business Services Pvt. Ltd.; M/s Killick Agencies & Marketing Ltd., mainly on basis of other cases for other FYs, without considering the facts discussed by the TPO for selection of the comparables in the case of assessee, without appreciating the fact that these are qualifying the qualitative and quantitative filters applied by the TPO.
4.On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPOI AO to exclude the comparables M/s Tata Elxsi Ltd., without appreciating the fact that the selection of comparables in a case depends on assessee specific FAR analysis and this is functionally comparable 3 IT(TP)A No.461(B)2015 & 535/B/2015 company which qualifies all the qualitative and quantitative filters applied by the TPO.
5. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPO/AO to exclude the comparables M/s Eclerx Ltd., without appreciating the fact that the rejection or selection of comparables in a case on the basis of its appropriateness/inappropriateness in some other case is not possible.
6. On the facts and in the circumstances of the case, as per the directions of the Dispute Resolution Panel, whether working capital adjustment can be made on the basis of advance received from AEs in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit margin.
7. On the facts and in the circumstances of the case the Dispute Resolution Panel is not justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of advances received from AE on the ground that there is time value for money.
8. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it: relates to the above grounds may be reversed.
9. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.
3. The grounds raised by the assessee are as under;
Based on the facts and circumstances of the case, Interwoven Software Services India Private Limited 4 IT(TP)A No.461(B)2015 & 535/B/2015 (hereinafter referred to as "the Appellant", "Interwoven" or "the Company") craves leave to prefer an appeal under section 253(1 )(d) of the Income-tax Act, 1961 ("the Act") on the following grounds:
1. The Final Assessment Order dated January 30, 2015, passed by the learned Income-Tax Officer Ward 3(1 )(4), Bangalore ("learned AO") under section 143(3) read with section 144C(5) of the Income-tax Act, 1961 ("the Act") is not in accordance with the law and is contrary to the facts and circumstances of the present case.
2. Transfer pricing order passed is erroneous and bad in law and on facts 2.1 The Honorable DRP has erred in law and on facts in upholding the partial adjustment to the arm's length price made by the learned AO / Learned Deputy Commissioner of Income-tax, (Transfer Pricing) - IV ("learned TPO"), based on the order, purportedly under section 92CA of the Act, passed by the learned TPO.
3. Rejection of the transfer pricing documentation of the Appellant 3.1 The Honorable DRP and the learned TPO has erred in law and on facts in rejecting the Transfer Pricing ("TP") documentation which has been prepared by the Appellant in the manner as contemplated under the relevant provisions of the Act and the Income-tax Rules, 1962 ("the Rules").
3.2 The Honorable DRP has erred in law and on facts in upholding the learned TPO's finding that there are defects in the Appellant's determination of arm's length price and in holding that the transfer pricing study undertaken by the Appellant is "unreliable or incorrect", under section 92C(3) of the Act.5 IT(TP)A No.461(B)2015
& 535/B/2015 3.3 Pursuant to the above grounds, the Honorable DRP and the learned TPO have erred in law and on facts in undertaking a new search and arriving at a fresh set of comparable companies for benchmarking the transactions.
4. Use of multiple year data The Honorable DRP and learned TPO have erred in law and on facts in rejecting the use of multiple year data, without considering that the past year data had an influence on the determination of arm's length price and that the Appellant had considered contemporaneous data available at the time when it carried out the benchmarking study having regard to the statutory requirement to maintain the Transfer Pricing documentation by the specified date.
5. Filters and quantitative criteria applied by the Appellant 5.1 Without prejudice to the above, the Honorable DRP and the learned TPO have erred in law in adopting/modifying the additional filters for conducting TP analysis, without appreciating the TP documentation prepared by the Appellant.
5.2. The Honorable DRP, has erred in law and on facts, in upholding the inclusion of additional comparable companies including the following comparable companies selected by the learned TPO without considering the detailed submissions of the Appellant: 6 IT(TP)A No.461(B)2015
& 535/B/2015 IT enabled services Marketing support services Asian Business Exhibition and Accentia Tech Limited Conference Ltd., Informed Technologies Ltd ICC International Agencies Ltd 5.3 The Honorable DRP has erred in law by suo-moto excluding Sundaram Business Services Limited from the set of the comparable companies of the IT enabled services segment selected by the learned TPO, on account of failure of suo-moto modified export filter.
5.4 The Honorable DRP has erred in law by suo-moto excluding Microland Limited as a comparable company selected by the learned TPO on account of failure of one or more filters however the same passes the filters adopted by the learned AO / TPO. Further, the Honorable DRP has erred in law and facts by not considering the segmental results of the comparable companies and has rejected the said comparable companies by applying service income filter at the company level.
5.5 The ld.AO/TPO has erred in not providing any details about the benchmarking analysis including the search matrix, key words for the search or the process adopted for selection of the comparable companies for marketing support service segment. The learned TPO has thus resorted to cherry picking of comparable companies for marketing support service rendered and the Hon'ble DRP has erred in endorsing the same approach.
6. Risk Adjustment and working capital adjustment 7 IT(TP)A No.461(B)2015 & 535/B/2015
6. 1The Honorable DRP and the learned AO/ TPO have erred in not appreciating that the Appellant, being a captive service provider operated at lower risk levels as compared to comparable. companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments to the margins of the com parables.
6.2 The Honorable DRP has erred in law and on facts in upholding the learned TPO's action of incorrect application of the principles of working capital formula prescribed by the Organization for Economic Co- operation and Development ("OECD") and the United Nations Practice Manual for Developing Countries Model Convention to carry out working capital adjustment to the operating profit margins of the comparable companies.
6.3 The Honorable DRP has erred in not directing the learned AOITPO to rectify the errors made in computing the working capital adjustment.
Corporate tax matters 6.4 The Honorable DRP / learned AO has erred, in law and on facts, in granting credit under section 115JAA of the Act amounting to Rs 6,023,724 after computing surcharge and education cess on the tax payable. 6.5 The Honorable DRP / learned AO has erred, in law and on facts in not including surcharge and education cess as part of the credit under section 115JAA of the Act.
6.6 The learned AO has erred on facts, in holding that 8 IT(TP)A No.461(B)2015 & 535/B/2015 the Appellant was granted a refund of Rs 2,356,520, whereas the actual refund granted was Rs 1,663,079. 6.7 The learned AO has erred, in law and on facts, in upholding the levy of interest under section 234B and 234D of the Act.
The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds, at any time before or at the time of hearing of the appeal. Each of the above objections is independent and without prejudice to the other grounds preferred by the appellant.
4. The ld. AR of the assessee submitted a chart in respect of its three segments. In the software development segment out of 11 comparables, these comparables were rejected by the DRP against which the revenue is in appeal. These six comparables are
1) M/s ICRA Techno Analytic Ltd(Seg.)
2) M/s Infosys Ltd.,
3) M/s Kals Information Systems Ltd., (Seg.)
4) M/s Persistent Systems Ltd.,
5) M/s R.S.Software (India) Ltd.,
6) M/s Tata Elxsi Ltd.,
5. He submitted that all these comparables are to be rejected as per the Tribunal order rendered in the case of M/s Electronics for Imaging India (P)Ltd., in IT(TP)A No.212(Bang)/2015. He submitted that para-14 to 33 of this Tribunal order are relevant for deciding the issue regarding these six comparables.
6. In respect of ITES (Seg.), he submitted that out of 10 9 IT(TP)A No.461(B)2015 & 535/B/2015 comparables selected by the TPO, five comparables were rejected by the DRP out of which, for one comparable, appeal is filed by the revenue i.e. M/s Infosys BPO and for one comparable i.e. M/s Sundaram Business Services Ltd., the revenue and the asseseee both are in appeal for its inclusion and the revenue is also in appeal for inclusion of three more comparables i.e. M/s Acropetal Tech. Ltd., (Seg.), 2) M/s E-Clerx Services Ltd., and 3) M/s ICRA Online Ltd., (Seg.) Learned AR submitted that M/s ICRA Online Ltd., (Seg.) (Supra) was excluded by the DRP by applying the export revenue filter of 75% and the assessee has no objection if the order of DRP is reversed regarding this comparable company.
7. Regarding M/s Acropetal Tech. Ltd., (Seg.), he submitted that this comparable has been rejected by DRP on this basis hat this company fails employee cost filter of 25%. He supported the order of DRP regarding this comparable.
8. Regarding M/s E-Clerx Services Ltd., he placed reliance on the judgment of Hon'ble Delhi High Court rendered in the case of M/s Rampgreen Solutions (P)Ltd., as reported in 377 ITR 533(Del.) and it was also pointed out that para-37 of the judgment is relevant.
9. Regarding M/s Sundaram Business Services Ltd., he submitted that this company is having negative margin as per TPO also of 10.65% and therefore, he has no objection if this comparable is reinstated by allowing the appeal of revenue on this issue.
10. Regarding assessee's appeal in respect of M/s Informed Tech. 10 IT(TP)A No.461(B)2015
& 535/B/2015 India Ltd., he submitted that the asseSsee is not pressing for exclusion of this company.
11. Regarding M/s Accentia Tech. Ltd., he submitted that this issue is covered in favour of the assessee by the Tribunal order rendered in the case of M/s Novo Nordisk India Pvt. Ltd., in IT(TP)A No.146(Bang)/2015 and he pointed out that para-30 to 33 of the Tribunal order are relevant.
12. He further submitted that the assessee is requesting for inclusion of one comparable i.e. M/s Microland Ltd. and he submitted that this company had profits in the earlier two years and incurred a loss only in the financial year 2009-10 and therefore, this company is not incurring persistent losses and therefore, this should not be excluded. He has drawn our attention to para-983,989 & 990 of the paper book containing annual report of this company.
13. Regarding the third segment i.e. marketing support services segment, he submitted that out of additional five comparables, the DRP has directed for exclusion of two comparables for which the revenue is in appeal and the issue regarding both these comparables is covered in favour of assessee by the Tribunal order rendered in the case of M/s Electronics for Imaging India (P)Ltd. (Supra). He further submitted that the assessee is seeking exclusion of two comparables i.e. M/s Asian Business Exhibition & Conference Ltd. and 2) M/s ICC International Agencies Ltd. For the first company i.e. M/s Asian Business Exhibition & Conference Ltd., he submitted that this company is also covered by 11 IT(TP)A No.461(B)2015 & 535/B/2015 the same Tribunal order rendered in the case of M/s Electronics for Imaging India (P)Ltd. (Supra).
14. Regarding the second company i.e. M/s ICC International Agencies Ltd., he has drawn our attention to page-1105 to 1104 of the paper book containing the annual report of the company.
15. The ld. DR of the revenue supported the order of the TPO.
16. We have considered the rival submissions. We decide the issue in dispute segment wise. First segment is software development segment. The turnover of the assessee for this segment is Rs. 20.56 Crores and OP/OC percentage of this segment is 15% as noted by the TPO on page-2 of his order. The TPO has selected 11 comparables for this segment and out of it, six comparables are rejected by the DRP for which the revenue is in appeal before us. Out of these six comparables rejected by the DRP, the issue in respect of five comparables is covered by the Tribunal order rendered in the case of M/s Electronics for Imaging India (P)Ltd. (Supra). These five comparables are
1) M/s ICRA Techno Analytic Ltd(Seg.)
2) M/s Infosys Ltd.,
3) M/s Kals Information Systems Ltd., (Seg.)
4) M/s Persistent Systems Ltd.,
5) M/s Tata Elxsi Ltd.,
17. The ld DR of the revenue could not point out any difference in facts in the present case and in the case of M/s Electronics for Imaging India (P)Ltd. (Supra). Therefore, respectfully following this Tribunal order, we hold that these five companies were rightly excluded by the 12 IT(TP)A No.461(B)2015 & 535/B/2015 DRP from the list of final comparables.
18. Regarding sixth company i.e. M/s R.S.Software (India) Ltd., it was submitted by the ld. AR of the assessee in the chart furnished before us that the in the argument before DRP on page-239 of the paper book was to re-consider the margin of this company at 9.58% but the DRP suo-moto excluded this company. We find that on page-14 of its order, it is noted by the DRP that as per the note H to Schedule-15 in regard to revenue recognition that the company in addition to software services also earns income from licensing of products, royalty on sale of products, income from maintenance contract etc., It is also noted by the DRP that there is no segment information available for sale of software services and product. In the light of these facts, it was held by DRP that this company should be excluded from the list of final comparables. Under these facts, we find no infirmity in the order of the DRP for directing exclusion of this comparable. Accordingly, appeal of the revenue in respect of this segment i.e. software development segment is dismissed.
19. Now we take up the second segment i.e. ITES segment. In this segment, the TPO has adopted10 comparables out of which DRP has rejected 4 comparables for which the revenue is in appeal before us and the assessee is in appeal for exclusion of one comparable i.e. M/s Acentia Technologies Ltd., and inclusion of one comparable i.e. M/s Microland Ltd., and the assessee has not pressed its ground regarding exclusion of M/s Informed Technologies Ltd., 13 IT(TP)A No.461(B)2015 & 535/B/2015
20. Regarding revenue's appeal for this segment, we find that one comparable M/s Acentia Technologies Ltd.(Seg.) has been rejected by the DRP on this basis that this company fails employees cost filter of 25%. AS per page-21 of its order, the DRP has noted that it is noticed from the P&L account of this company that out of the total expenses of Rs.87.26 Crores, the expenses of 58.85 Crores was incurred on onsite development of software which works out to 64% of the total expenses which makes it clear that the company is predominantly engaged in providing services onsite and therefore, not comparable with the assessee. The DRP has also stated that this company is also failing the employees cost filter of 25% but the predominant reason for exclusion of this company was this that this company is predominantly engaged in providing service onsite. For this reasoning of the DRP that this company is predominantly engaged in providing services onsite, we decline to interfere with the order of DRP regarding exclusion of this company.
21. Regarding the revenue's appeal for exclusion of second company i.e. M/s Eclerx Services Ltd., we find that the issue for exclusion of this company is covered in favour of the assessee by the judgment of the Hon'ble Delhi High Court rendered in the case of M/s Rampgreen Solutions (P) Ltd., (Supra) and since the ld., DR of the revenue could not point out any difference in facts, we decline to interfere with the order of the DRP regarding exclusion of this company by respectfully following this judgment of the Hon'ble Delhi High Court. 14 IT(TP)A No.461(B)2015
& 535/B/2015
22. The third company for which exclusion was directed by the DRP and the revenue is in appeal is for M/s ICRA Online Ltd (Seg.). Exclusion of this company was directed by DRP by applying export revenue filter of 75% and it was submitted by the ld. AR of the assessee before us that he has no objection if this filter of 75% export is not applied. Accordingly, we reverse the order of the DRP regarding exclusion of this company and direct the AO/TPO to include this company i.e. M/s ICRA Online Ltd (Seg.)as a good comparable.
23. The next company for which exclusion was directed by the DRP and the revenue is in appeal..is M/s Sundaram Business Services Ltd. Regarding this comparable, we find that this is noted by the DRP on page-24 of its order that only 36.91% of the turnover is from exports and therefore, this company is failing 75% export earning filter since both sides agreed that this filter i.e. 75% export earning filter should not be applied, we reverse the order of DRP on this comparable and hold that this comparable company i.e. M/s Sundaram Business Services Ltd., should be reinstated as a comparable. Accordingly, the appeal of the revenue regarding this segment is partly allowed.
24. Regarding this segment i.e. ITES, the assessee is seeking exclusion of one comparable i.e. M/s Acentia Technologies Ltd., and it has been stated that this issue regarding this company is covered in favour of the assessee by the Tribunal order rendered in the case of M/s Novo Nordisk India Pvt. Ltd., (Supra). Since the ld. DR of the revenue could not point out any difference in facts, by respectfully following this 15 IT(TP)A No.461(B)2015 & 535/B/2015 Tribunal order, we hold that this company should be excluded from the list of final comparables.
25. Regarding this segment, the assessee has also raised a ground for exclusion of M/s Informed Technologies Ltd. but in course of hearing before us, it was submitted by the ld. AR of the assessee that this ground is not pressed and accordingly, this ground of the assessee is rejected as not pressed.
26. For this segment, the assessee is seeking exclusion of one comparable i.e. M/s Microland Ltd. and it has been stated before us that the TPO has initially included this company in show cause notice but later, he did not include the same in the list of final comparable and the claim of the assessee was rejected by DRP also but this company should be included in the list of final comparables. We find that it is noted by the DRP on page-125 of its order that from the perusal of the annual report of this company i.e. M/s Microland Ltd., it is seen that out of total revenue of Rs.135.00 Crores, the revenue from ITES is only Rs.31.73 Crores which is around 23% of revenue and hence this company is not predominantly engaged in ITES and therefore, cannot be considered as a good comparable. Nothing is stated by the ld. AR of the assessee regarding this objection of the DRP in respect of this comparable. Hence, we find no merit in the claim of the assessee. Accordingly, the appeal of the assessee regarding ITES is also partly allowed.
27. The third segment is market support services segment. In this 16 IT(TP)A No.461(B)2015 & 535/B/2015 segment, there is appeal of revenue against exclusion of two comparables i.e. a) HCCA Business Service Pvt. Ltd., and b) M/s Killick Agencies and Marketing Ltd. and as per the chart of the assessee, the issues regarding both these comparables is covered in favour of the assessee by the Tribunal order rendered in the case of M/s Electronics for Imaging India (P)Ltd.,(Supra) and since the ld. DR of the revenue could not point out any difference in facts, we decline to interfere with the order of the DRP in respect of exclusion of both these companies by respectfully following this Tribunal order.
28. For this segment, the assessee is seeking exclusion of two comparables i.e. M/s Acentia Technologies Ltd., and M/s ICC International Agencies Ltd., The claim of assessee regarding exclusion of M/s Acentia Technologies Ltd. is also covered in favour of the assessee by the same Tribunal order rendered in the case of M/s Electronics for Imaging India (P)Ltd.,(Supra) and respectfully following the same Tribunal order, we direct the AO/TPO to exclude this company from the list of final comparable because the ld. DR of the revenue could not point out any difference in facts.
29. Regarding exclusion of second company, it was submitted by the learned AR of the assessee that i.e. M/s ICC International Agencies Ltd., (Supra) this is the claim of the assessee that annual report of this company available on page-1100 & 1104 of the paper book. As per the same, we find that this company is deriving income from trading activity and also maintaining inventories. Both these arguments are supported 17 IT(TP)A No.461(B)2015 & 535/B/2015 by annual report of this company available on page-1100 & 1104 of the paper book. Since the assessee is not engaged in trading activity, in our considered opinion, this company cannot be considered as good comparable in the present case and hence, we direct the AO/TPO to exclude his company from the list of final comparable.
30. In the combined result, the appeal of the assessee and revenue are partly allowed.
Order pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (A.K. GARODIA)
JUDICAL MEMBER ACCOUNTANT MEMBER
Place: Bangalore:
D a t e d : 26.08.2016
am*
Copy to :
1 Appellant
2 Respondent
3 CIT(A)-II Bangalore
4 CIT
5 DR, ITAT, Bangalore.
6 Guard file
By order
AR, ITAT, Bangalore
18 IT(TP)A No.461(B)2015
& 535/B/2015
1. ौुतलेख क तार ख................................................................................. DATE OF DICTATION.................................................................................
2.तार ख, जस पर टाइप कया हुआ मसौदे , संबंिधत सदःय के सामने रखा गया ह DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER.....................................................................................................
3. तार ख जस पर अनुमो दत मसौदे व.िनजी सिचव/िनजी सिचव के पास वापस आए DATE ON WHICH THE APPROVED DRAFT COMES TO THE PS/Sr.PS...................
4. घोषणा के िलए आदे श संबंिधत सदःय के सामने रखने क ितिथ DATE ON WHICH THE ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT..........................................................................................
5. आदे श िन.सिचव/व.िन.सिचव के पास वापस आने क ितिथ DATE ON WHICH THE ORDER COMES BACK TO THE PS/Sr.PS.......................... 6 आदे श अपलोड करने क ितिथ DATE OF UPLOADING THE ORDER ON WEBSITE..................................................
7. अगर अपलोड नह ं कया तो, उसका कारण IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO...............................
8. ब.च िल/पक के पास फाइल जाने क ितिथ DATE ON WHICH THE FILE GOES TO THE BENCH CLERK......................................
9. आदे श ज़ेरो2स/पृ4ांकन के िलए भेजने क ितिथ DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT...........................
10. फाइल मु6य िल/पक के पास जाने क ितिथ DATE ON WHICH THE FILE GOES TO THE HEAD CLERK.......................................
11. आदे श पर हःता7र के िलए फाइल सहायक र जःशार के पास जाने क ितिथ THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER.....................................................................................
12. अिधकरण आदे श के ूेषण के िलए फाइल ूेषण /वभाग म. जाने क ितिथ THE DATE ON WHICH THE FILE GOES TO DESPATCH SECTION FOR DESPATCH OF THE TRIBUNAL ORDER.......................................................................................
13. आदे श क ूेषण क ितिथ DATE OF DESPATCH OF ORDER...............................................................................