Income Tax Appellate Tribunal - Hyderabad
Cordys Software India Pvt.Ltd., Hyd, ... vs Dcit, Circle-1(2), Hyd, Hyderabad on 18 May, 2018
ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' A ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S.Rifaur Rahman, Accountant Member
ITA No.486/Hyd/2015
(Assessment Year: 2010-11)
M/s. Open Text Vs Dy. Commissioner of Income
Corporation India Pvt. Ltd Tax, Circle 16(2) 2nd Floor, B
(earlier known as Cordys Block, IT Towers, Masab
Software India Products Tank, Hyderabad
Ltd), Hyderabad
PAN: AABCO6299F
(Appellant) (Respondent)
For Assessee : Shri Ravi Bharadwaj
For Revenue : Dr.K. Srinivas Reddy, DR
Date of Hearing: 26.02.2018
Date of Pronouncement: 18.05.2018
ORDER
Per Smt. P. Madhavi Devi, J.M.
This is assessee's appeal for the A.Y 2010-11 against the assessment order passed u/s 143(3) r.w.s. 144C of the I.T. Act dated 23.2.2015. The assessee has raised the following grounds of appeal:
"Based on the facts and circumstances of the case and in law, the Learned Assessing Officer (" AO") / Learned Transfer Pricing Officer ("TPO") and the Hon'ble Dispute Resolution Panel, Hyderabad ('DRP') erred in the following:
On the facts and in the circumstances of the case and in law, the Learned AO/ DRP has:
TRANSFER PRICING MATTERS - Relating- to determination of Arm's Length Price ("ALP") under Page 1 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
Transactional Net Marg-in Method ("TNMM") in respect of software services provided to Associated Enterprises (" AEs") Rejection of transfer pricing documentation maintained
1. Rejection of the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules') and making an adjustment of Rs.8,03,03,098 to the international transactions relating to provision of software services to its AE by undertaking a fresh economic analysis during the course of assessment proceedings.
Rejection of use of multiple year data
2. Rejecting the use of multiple year data and using data for the FY 2009-10 only. Aggregation of distribution of software products with software services
3. Aggregating the international transactions of the following two business segments for determining the ALP of all the international transactions:
• Software Development services and • Sales and Distribution services Use of additional filters
4. Inter-alia use of the following additional/modified filters in undertaking the comparative analysis and rejecting comparable companies having:
i) Diminishing revenues; ii) Persistent losses; iii) Different financial year - end; and iv) Export sales less than 75% of the sales.
Inclusion of foreign exchange loss as an operating item
5. Not considering the fact that the Appellant suffered a huge and abnormal exchange fluctuation loss and including the same as operating in nature.
Selection of comparables
6. Not undertaking an objective comparative analysis and inter alia selecting the following companies as comparable to the software services of the Appellant:
Page 2 of 22ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
i) Comp-V-Learn Tech India Ltd;
ii) E Infochips Bangalore Ltd;
iii) E Zest Solutions Ltd;
iv) KALS Info Systems Ltd;
v) Persistent Systems Ltd;
vi) Sasken Communication Techn Ltd;
vii) Tata Elxsi Ltd (Seg); and
viii) Thinksoft Global Services Ltd.
Rejection of comparables
7. Not undertaking an objective comparative analysis and inter alia rejecting the following comparable companies:
i) Akshay Software Technologies Ltd;
ii) CG V AK Software and Exports Ltd; and iii) Satyam Computers Services Ltd.
Error in margin computation
8. Computation of net margins of the following companies selected as comparables:
a) Considering Provision for bad debts as Non-
Operating expenses in computing margins for the following companies:
i) E -lnfochips Bangalore Ltd;
ii) E-Zest Solutions Ltd; and
iii) Kuliza Technologies Private Ltd.
b) Computing the net margins of CAT Technologies Ltd by excluding Advertisement expenses written off considering it as inoperative expenses.
c) Not segmenting the unallocable cost in the computation of the net margins for the following:
i) Kals Information Systems Ltd (Seg);
ii) and Tata Elxsi Ltd (Seg).
Adjustment for risk differences
9. Not adjusting the net margins of the comparable companies taking into account the functional and risk differences between the international transaction of the Appellant and the comparable companies in accordance with the provisions of Rule 10B(1)(e).Page 3 of 22
ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
CORPORATE TAX ISSUES
10. Non - grant of TDS credit to the extent of Rs. 3,68,560.
The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal".
2. At the time of hearing, the learned Counsel for the assessee did not advance any arguments in support of Ground of appeal Nos. 1 to 4. Therefore, these grounds are rejected as not pressed.
3. As regards Ground No.5, brief facts are that the assessee company, a wholly owned subsidiary of Cordys B.V. Netherlands, providing software services primarily to its Associate Enterprises and is also an authorized distributor of Cordys Products in India., entered into international transactions of providing software development services, distribution of software products and reimbursement of costs by AE during the relevant financial year. In its TP study, the assessee had segregated the transactions relating to distribution of products and provision of software services and had conducted search for comparables separately in respect of these transactions. The TPO, upon analyzing the nature of the transactions, observed that the transactions are closely linked to the software development services provided by the taxpayer and therefore, the same are to be aggregated as provision of software development services for the purpose of TP study. The TPO observed that functional content of these two businesses is not significantly different to Page 4 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
warrant separate economic analysis. Therefore, the TPO aggregated the transactions and carried out the analysis of software development services as the predominant activity.
4. The TPO applied various filters and observed that the assessee has adopted 20 companies as comparables. The TPO rejected the TP study of the assessee and adopted a total of 19 companies, as comparable to the assessee. While computing the PLI, as operating profit by operating cost, the TPO excluded non- operating revenue such as interests, dividends, provisions no longer written back, gain on sale of assets/investments, income from investments, gain on revaluation of assets, other incomes not pertaining to the operations from operating revenue. He also excluded the non-operating expenses from the operating expenses as claimed by the assessee. He observed that the extra ordinary expenses of income which do not recur every year, like donations, preliminary expenses written off, public issue expenses written off are not to be considered as operating expenses. Provisions of doubtful debts was considered as part of operating expenses only when the same expenses are incurred every year for the last three years upto and including the financial year 2009-10 and these expenses are incurred at almost consistent level in terms of its ratio with the turnover. He adopted the TNMM as the most appropriate method and arrived at the mean margin of the 19 comparables at 26.9% as against the assessee's margin of 15.38% and proposed the adjustment of ALP at 28.37% after granting working capital adjustment. In accordance with the directions of the TPO, a draft assessment order was passed, against which, the assessee preferred its objections before the DRP. The DRP granted Page 5 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
partial relief to the assessee and accordingly final assessment order was passed, against which, the assessee is in appeal before us.
5. Ground of appeal No.5 is seeking exclusion of foreign exchange fluctuation loss from the operating expenses. It is submitted by the assessee that it has suffered huge abnormal fluctuation and exchange loss which is to be considered as non- operating in nature and has to be excluded in calculation of the cost as it is almost 8.5% of the total cost and such impact does not occur regularly every year. In support of this contention, the learned Counsel for the assessee placed reliance upon the decision of the Delhi Tribunal in the case of Honda Trading Corporation India Pvt Ltd vs. ACIT in ITA No.5297/Del/2011 wherein it was observed that foreign exchange fluctuation should not form part of the operating income of the assessee.
6. The learned DR, on the other hand, submitted that the foreign exchange gain or loss is part of the operating income and therefore, should be considered as operating profit or operating cost respectively and therefore, the DRP is justified in not accepting the assessee's objections.
7. Having regard to the rival contentions and the material on record, we find that the foreign exchange fluctuation loss is not abnormal only to the assessee. Such fluctuation would affect the margins of the comparable companies as well as long as the transactions are in the same currency. In a number of cases, we Page 6 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
have already held that the foreign exchange fluctuation profit or loss is also part of the operating revenue. In fact, in the case of Honda Trading Corporation India Pvt. Ltd (Supra), the Coordinate Bench of the Tribunal at Delhi had considered the huge fluctuation in the foreign exchange in favour of Thai Bhat against the INR and it was in these circumstances, that the Tribunal had directed the AO to make necessary adjustments. The distinction of the currency in the international transaction of the assessee and the comparable companies and also the abnormal fluctuation in foreign currency in the case before us has not been brought out by the assessee. Therefore, we are not inclined to accept the assessee's contention and ground of appeal No.5 is rejected.
8. As far as Grounds 6 to 8 are concerned, we find Grounds 6 & 7 that are against the comparables adopted or rejected by the TPO while Ground No.8, is for computing the correct net margin of the comparable companies mentioned in the said ground of appeal. As regards Ground No.6, the assessee has filed a chart showing 19 companies taken by the TPO as comparables and in col. No B, are the companies selected by the TPO which according to the assessee are not comparable to it. As far as these companies are concerned, with regard to CompU Learn Tech India Ltd, the case of the assessee that it is functionally different and that the relevant financial year has been an exceptional year of operation. It is also submitted that the segmental data of the transactions is not available. He has drawn our attention to the financials of the said company which are at pages 1 to 12 of the Paper Book to demonstrate the point.
Page 7 of 22ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
9. The learned DR, however, supported the orders of the authorities below.
10. Having regard to the rival contentions and the material on record, we find that in the Directors' Report of CompU Learn Tech India Ltd, which is at page No.1 of the Paper Book, it is mentioned that during the year under review, the company has grown manifold and has consolidated turnover of Rs.28.46 crores and net profit of Rs.3.68 crores registering growth of 423% in turnover and 281.37% in net profit over the previous year. It is also reported that it was originally into business of software development and education training and that during the past two years, their focus was shifted to e-governance solutions to Govt. Departments of State and Central Govts. It was also stated that the company has expanded its operation in its core activity i.e. software development, e-governanace solutions, IT Services, IT Enabled Services etc., It is also seen that the assessee is into research & development to enhance the quality of its products and the revenue from the sale of software products and courseware materials is recognized when sale has been completed, with the passing of title or licenses or raising invoices as the case may be. As against these activities of CompU Learn Tech, the assessee is into simple software development services. The Coordinate Bench of the Tribunal in the case of M/s. Wissen Infotech Pvt. Ltd in ITA No.99/Hyd/2015 for the A.Y 2010-11 has taken note of these dissimilarities to hold that it is different in line from the activities of the said assessee company and following the decision of the Coordinate Bench in the case of Pegasystems Worldwide Services (P) Ltd, and E-Infochips Bangalore Ltd, has Page 8 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
directed the exclusion of the said company. Facts and circumstances of the case before us being similar, respectfully following the above decisions, we direct the AO to exclude this company from the final list of comparables.
11. As regards E-Infochips Bangalore Ltd is concerned, it is the case of the assessee that this company is also functionally dissimilar and its segmental data is not available, and therefore, it cannot be taken as a comparable. He also pointed out that there is an error in its margin computation as the bad debts should be included for computing the net margin under TNNM. He placed reliance upon the decision in the case of M/s. Kenexa Technologies Pvt Ltd in ITA No.243/Hyd/2014 for the financial year 2008-09 for this proposition and for exclusion of this company, he placed reliance upon the decision of the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd vs. ACIT in ITA No.434/Hyd/2015 for the financial year 2009-10.
12. The learned DR supported the orders of the authorities below.
13. Having regard to the rival contentions and the material on record, we find that E-Infochips Bangalore Ltd is receiving income from software services as well as consultancy charges and it is also reported that the company is engaged in the development and maintenance of computer software and that the production and sales of software cannot be expressed in any Page 9 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
generic units. About the primary business of the said company, it is reported that it is primarily engaged in software development and IT enabled services, which are considered as only one business. Thus, it is seen that the E-Infochips Bangalore Ltd, is not only into software development services but is also into consultancy services and there is no segmental data available and only the aggregate results are reported. As held by the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd (Supra) the said company cannot be held to be comparable to the assessee. The relevant paragraph of the ITAT order is reproduced below:
"1. E Infochips Bangalore Ltd., 1.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is functionally different and segmental information is not available. He submitted the ITAT has rejected this company in the following cases:
1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014, AY 2010-11.
2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11.
3. Allscripts (India) Pvt. Ltd., ITA No. 771/Ahd/2014 AY 2009-10 1.2 Ld. DR relied on the orders of revenue authorities and submitted as under:
i) that the company is engaged in development of software (Annexure to directors report. Hence it is not functionally different.)
ii) As per schedule 7 & 8 of P&L A/c, the income derived is from software services.
iii) In notes to accounts, it was mentioned as revenue from software development.
iv) Hence this company cannot be rejected as comparable.Page 10 of 22
ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
1.3. Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under:
"8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental I.T.A. Nos. 1758 & 1936/Hyd/14 Pegasystems Worldwide India Pvt. Ltd., :- 7 -: information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee's case in this assessment year. We are also aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally different from Assessee's activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard."
1.4 In the case of Allscripts (india) Pvt. Ltd. (supra), the coordinate bench of ITAT, Ahmedabad held as under:
"10.Before us, Revenue has not brought any contrary binding decision in its support. With respect to E-Infochip Bangalore Ltd., we find that in the annual accounts of the company, with respect to the segment information it is stated that the company is primarily engaged in software development and I.T enabled services which is considered the only reportable business segment as per Accounting Standard AS-17 "segment reporting"
prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available. With respect to E-infochip Ltd. Assessee had raided objection against its inclusion to which TPO in the order had directed to verify the Page 11 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
facts and it was held that it cannot be included on the basis of diminishing of Revenues so long it was a not a consistent loss making company. Considering the aforesaid facts, we are of the view that the aforesaid two companies needs to be excluded while working out the comparability analysis and therefore uphold the plea of the Assessee in excluding the margins of the aforesaid 2 companies. We therefore deem it fit to restore the issue back to the file of A.O/TPO, who after excluding the aforesaid 2 companies rework the addition as per facts and law. Needless to state that A.O/TPO shall grant adequate opportunity of hearing to the ITA No 771/AHD/2014 . A.Y. 2009-2010 13 Assessee. The issue of respect to determination of ALP is thus set aside to the file of A.O/TPO and the ground of appeal raised by the Assessee is thus allowed for statistical purposes."
1.5 In view of the above, in line with the decisions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies. With regard to DR submissions, he strongly submitted that in the case of M/s Virtusa India (supra), the matter was remitted back to the AO, in this case also, it should be remitted. We observe that the observations of the coordinate bench also that when the segmental data is not available, we cannot keep the company as comparable. In the present case also, there is no segmental data available on record. Hence, we do not find merits in the submissions of the DR".
14. Respectfully following the same, we direct the AO to exclude this company from the list of comparables.
15. As far as E-Zest Solutions Ltd is concerned, the contention of the assessee is that it is functionally different as it carrying on KPO services. After considering the rival contentions, we find from the financials of the said company (pages 40 to 54 of the Paper Book) that it is rendering the following services which covered the entire project development services:
"E-Zest specializes in following key offerings covering entire product development lifecycle, including:
Product Design & Development Page 12 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
Product Feature Enhancement Product Platform Migration Software Product Testing Product Maintenance and Support Product Release and license Management SAAS/SOA Services Web 2.0 Services"
16. From the profile of the assessee company as referred to by the TPO, it is engaged in providing software services, primarily to its AE. Except saying so, the AO has not brought out any specific or distinctive services rendered by the assessee, except the FAR analysis, wherein it is stated that the assessee provides services to develop modules that incorporates the latest features to AE's product and the product development strategy is formulated by the AE and substantial part of the software coding and programming is done by the assessee. The specific activities or the key functions performed by the assessee in relation to the services of the software development are as under:
Business strategy and development Product conceptualization and planning Architecture design Software programming and documentation Testing and quality control Integration Project Management Training of employees Packaging and branding of software Marketing and sales Post sales services
17. On comparison of these two services, we find that the services rendered by the assessee and also the E-Zest Solutions Ltd appears to be similar and therefore, E-Zest Solutions Ltd Page 13 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
cannot be considered as carrying on KPO services. Therefore, the said company cannot be excluded from the final list of comparables.
18. As far as Kals Information Systems Ltd (Seg.) is concerned, it is the case of the assessee that the company has revenue from software products and software development services and that the company has inventory which is 26% of the total revenue. It is also argued that the Companies Website extracts state that it is into ITES as well. We find that this company has been directed to be excluded from the final list of comparables in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd (Supra) by observing as under:
"2. Kals Information Systems Ltd., 2.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is functionally different and dealing with software products. He submitted that the ITAT has rejected this company in the following cases:
1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014, AY 2010-11.
2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11.
3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10.
2.2 Ld. DR relied on the orders of revenue authorities and submitted as under:
I) As per Pg. 22 of annual report, the company is engaged in the business of computer software. Hence, it is not functionally different.
ii) As per segmental information, Page 23 of annual report, revenue is earned from application software and training.
iii) As per age 21 of annual report, the inventories are in the nature of computer spares and not products.Page 14 of 22
ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
iv) Hence, this company cannot be rejected as a comparable.
2.3 Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under:
"10.1. Assessee's main objection before us is on functionality of the comparable company. As seen from the annual report of 2008-09 and 2009-10 and comparative statement placed by Assessee, the company classified itself as 'the company engaged in development of software and software products since its inception'. The company consisting of STPI unit engaged in development of software and software products and a training centre engaged in training of software professionals on on-line projects. This indicates that company is engaged in development of software and products and its inventory also indicates that Assessee has been using its readymade libraries for sales.
This company was rejected in earlier year on functional analysis by ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 where in it was held that company is engaged in development of software products. Since its annual report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee's objections are accepted and AO is directed to exclude the company."
2.4 In the case of Planet Online Pvt. Ltd. (supra), the coordinate bench held as follows:
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. 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 report, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of Page 15 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
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 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."
2.5 In view of the above, in line with the decisions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies".
Page 16 of 22ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
19. Respectfully following the same, we direct this company to be excluded.
20. As far as Persistent Systems Ltd is concerned, we find that the assessee has itself has taken this company as a comparable in its TP study but has raised its objection against this company for the first time before the Tribunal and has filed an application for treating this ground as an additional ground of appeal.
21. The learned DR has filed the report of the AO dated 26.2.2018 stating that this company was not objected to by the assessee and therefore, cannot be considered to be excluded at this stage. As the assessee is raising its objection to this company for the first time before us, we deem it fit and proper to remand this issue to the file of the AO for de novo consideration in accordance with law.
22. As regards Tata Elxsi is concerned, we find that the learned Counsel for the assessee is arguing that it is functionally different due to the diverse nature of its business and specialization. We find that the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd has directed the exclusion of this company on the ground of functional dissimilarity only. The relevant paragraph is reproduced hereunder:
"3. Tata Elxsi Ltd. (Seg.) 3.1 Objecting to the aforesaid company as comparable, the ld. AR submitted that this company's business Page 17 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
is of complex nature, functionally different and segmental information is not available. He submitted that the ITAT has rejected this company in the following cases:
1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014, AY 2010-11.
2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11.
3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10.
3.2 Ld. DR relied on the orders of revenue authorities and submitted as under:
i)The company has two segments including software development services, which forms 89.52% of total revenues.
ii) In response to notice u/s 133(6) the company has merely stated that it is engaged in SDS.
iii) This company was considered as comparable in the AY 2008- 09, which the DRP has upheld.
iv) Hence, this company cannot be rejected as a comparable.
3.3 Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under:
"12.1. It was the objection of Assessee that above company is predominantly into product design services, Innovation Design Engineering and visual computing labs division which are specialized services. He referred to the order of ITAT in AY. 2009-10 in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this company was rejected on the reason that it is engaged in multiple segments. There is no break- up in the annual report and data on which margin from software services activity only can be computed is also not available. Moreover, the company itself has indicated that it cannot be compared with any other software service company because of its complex nature. Similar view was taken by many of the Co- ordinate Benches in earlier years that Tata Elxsi Ltd., cannot be selected as comparable company. Consistent with the above view, we are of the opinion that a company like Tata Elxsi Ltd., which has complex activities and segmental information of which is not available cannot be selected as comparable company to Assessee. Moreover, as seen from the turnover as reported by TPO itself, it Page 18 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
was many times Assessee's turnover and therefore cannot be exactly considered as a similar company unless the nature of activity, the incomes are analysed in detail. Since no segmental data is available, considering the software development services as a segment by TPO cannot be considered as segmental data, unless the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same."
3.4 In the case of Planet Online Pvt. Ltd. (supra), the coordinate bench held as follows:
"26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables."
3.5 In view of the above, in line with the decision of the various benches of this Tribunal, we direct the AO to exclude this company as comparable".
23 Respectfully following the same, we direct the AO to exclude this company from the final list of comparables.
Page 19 of 22ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
24. As regards the assessee's ground of appeal No.7 seeking inclusion of the companies mentioned therein as comparables, we find that it would serve no purpose because if our directions above are given effect to, the margin of the assessee would be within +or-5% of the average margin of the comparables finally confirmed by us. Therefore, we see no reason to adjudicate the same at this stage and Ground No.7 is accordingly rejected.
25. As regards Ground No.8, it consists of three components; (a) for considering the provision of bad debts as operating expenses in computing the margins of (i) E-Infochips Bangalore Ltd; (ii) E-Zest Solutions Ltd and (iii)Kuliza Technologies (P) Ltd; and (b) computing the net margin of the CAT Technologies Ltd by excluding the advertisement expenses written off, considering it as inoperative expenses; and (c) segmenting unallocable cost in the computation of income of Kals Information Systems Ltd and Tata Elxsi Ltd. In support of these contentions, the learned Counsel for the assessee has placed reliance upon the decision of the Coordinate Bench of the Tribunal in the case of Kenexa Technologies (P) Ltd in ITA No.243/Hyd/2014 for the financial year 2008-09 wherein it has been held that the provision for bad debts should be included in computing the net margins under the TNMM.
26. Having gone through the decision of the Coordinate Bench of the Tribunal, we find that the Tribunal has held that bad debts and provision for bad and doubtful debts are part of the operating expenses and that the margins of the comparable Page 20 of 22 ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
companies should be computed by including bad debts and provisions of bad debts as provisions of expenses for the purpose of computing P&L of comparable companies.
27. The learned DR has not been able to bring any other material, contrary to the above decision, to our knowledge. In fact the Tribunal has followed the decision of the Coordinate Bench of the Tribunal at Delhi in the case of Sony India (P) Ltd vs. DCIT in ITA No.1189/Del/2005 and others. Respectfully following the same, we remand the issue to the file of the AO with a direction to recompute the margins of the companies by including the bad debts/provision for bad and doubtful debts as operating income of those companies as well as the assessee.
28. As regards the assessee's contentions that there is an error in the computation of margin of CAT Technologies Ltd, we remand this issue also to the file of the TPO for de novo consideration in accordance with law.
29. As regards the segmenting of the un-allocable cost in the computation of net margin of Kals Information Systems and Tata Elxsi Ltd also, we deem it fit and proper to remand the issue to the file of the AO for denovo consideration in accordance with law.
30. In the result, grounds of appeal Nos. 6 to 8 are treated as partly allowed for statistical purposes.
Page 21 of 22ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad.
31. As regards Ground No.10 is concerned, this issue is also referred to the TPO for verification and grant of TDS in accordance with law.
32. In the result, assessee's appeal is partly allowed. Order pronounced in the Open Court on 18th May, 2018.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 18th May 2018.
Vinodan/sps
Copy to:
1 Open Text Corporation India Pvt. Ltd, Building No.D, Plot No.17,
Software Units Layout, Madhapur, Hyderabad 500081 2 Dy. Commissioner of Income Tax, Circle 16(2) 2nd Floor, B Block, IT Towers, Masab Tank, Hyderabad 3 DRP, Hyderabad 4 CIT (International Taxation), IT Towers, 10-2-3, AC Guards, Hyderabad 500004 5 CIT-1 Hyderabad 500004 6 The DR, ITAT Hyderabad 7 Guard File By Order Page 22 of 22