Income Tax Appellate Tribunal - Mumbai
Ucb India P. Ltd, Mumbai vs Assessee on 29 July, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" BENCH, MUMBAI
BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND
SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
ITA no.7691/Mum./2012
(Assessment Year : 2008-09)
UCB India Pvt. Ltd.
504, Peninsula Towers
G.K. Marg, Lower Parel ................ Appellant
Mumbai 400 013
PAN - AAACU1627L
v/s
Addl. Commissioner of Income Tax
Range-7(3), Aayakar Bhawan ................ Respondent
M.K. Marg, Mumbai 400 020
Assessee by : Shri M.P. Lohia a/w
Shri Pranay Gandhi
Revenue by : Shri N.K. Chand
Date of Hearing - 18.07.2016 Date of Order - 29.07.2016
ORDER
PER SAKTIJIT DEY, J.M.
Aforesaid appeal at the instance of the assessee is directed against the assessment order dated 30th October 2012, passed under section 143(3) r/w 144C(13) of the Income Tax Act, 1961 (for short "the Act") in pursuance of the direction of the Dispute Resolution Panel (DRP) for the assessment year 2008-09.
2. Assessee in total has raised 15 grounds, which are reproduced below:-
2
UCB India Pvt. Ltd.
"Based on the facts and circumstances of the case, UCB India Private Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Additional Commissioner of Income Tax, Range 7(3), Mumbai [hereinafter referred to as the 'learned AO] under section 144C(13) read with section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel (hereinafter referred to as the 'Hon'ble DRP').
On the facts and in the circumstances of the case and in law, the learned AO/ Deputy Commissioner of Income-tax - Transfer Pricing 11(10) (hereinafter referred to as the 'learned TPO')l Hon'ble DRP:
General
1. erred in making an addition of Rs 82,0 1,497 to the total income of the Appellant;
Rejection of economic analysis
2. erred in making an addition of Rs 8,45,126 by not accepting the economic analysis undertaken by the Appellant for the international transaction of provision of IT and network support services provided to its AE;
3. erred in rejecting companies considered as comparable by the Appellant without providing sufficient opportunity to be heard;
Undertaking fresh economic analysis and use of contemporaneous data;
4. erred in undertaking fresh comparability analysis post specified date;
5. erred in collating and relying on the information obtained from response to notice issued under section 133(6) of the Act which was not available in public domain;
Use of arbitrary filters
6. erred in applying rejection criteria/ filter in arbitrary, subjective and erroneous manner for purpose of selecting comparable companies like turnover criteria employee cost criteria, onsite revenue criteria and export turnover criteria;
Use of additional comparable companies
7. erred in considering additional companies which are functionally different, as comparable to the Appellant, for benchmarking its international transaction of provision of IT and network support services;3
UCB India Pvt. Ltd.
8. erred in considering additional companies which has insufficient descriptive information, as comparable to the Appellant, for benchmarking its international transaction of provision of IT and network support services;
Incorrect margins
9. erred in computing incorrect margins of comparable companies by considering rent income as operating income and by not allocating the unallocated expenses to the comparable segment;
10. erred in not giving specific findings on incorrect margin computations of comparable companies;
Working Capital Adjustment and Risk Adjustment
11. erred in comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk adjustment for differences between the risk profile of comparable companies vis-à-vis the risk profile of the Appellant;
12. erred in not considering the working capital adjustment which is required to be undertaken in the Appellant's case to account for the difference in the working capital levels between comparable companies (as identified by the learned TPO) and the Appellant;
Disallowance of e-connectivity expenses
13. erred in making an addition of Rs 31,76,461 by considering e- connectivity charges as incurred for acquiring software, which resulted in benefit of enduring nature and thereby classifying the expenses as Capital in nature;
Double addition on account of depreciation
14. erred in adding the depreciation amount of Rs 20,89,955 instead of deducting the same, while computing the assessed income resulting into double addition of the depreciation amount;
Interest under section 234A
15. erred in considering incorrect taxable income for computing interest under section 234A of the Act."
3. Ground no.1 being general in nature, no specific adjudication is required.
4
UCB India Pvt. Ltd.
4. At the instructions of the assessee, learned Authorised Representative did not press grounds no.14 and 15. Hence, these grounds are dismissed as "not pressed".
5. Out of rest of the grounds, grounds no.2 to 12 are arising out of transfer pricing adjustment relating to information technology and network support service (soft development services).
6. Brief facts relating to this issue are, assessee an Indian company is a wholly owned subsidiary of M/s. UCB-SA, Belgium. Assessee is primarily engaged in the business of manufacturing and distribution of pharmaceutical products. It also provides information technology and network support services to its Associate Enterprises (A.E). Since the dispute in the present appeal is confined to the transfer pricing adjustment in relation to provisions of information technology and network support services, we will limit our discussions to that issue alone. As stated herein before, the assessee during the relevant previous year had provided information technology and software support services to the A.E. These services include remote monitoring of information technology system of its overseas group entities, trouble shooting of information technology related problem, back up related task. For providing such services to its A.E., the assessee has received an amount of ` 87,39,095. To bench mark the price charged 5 UCB India Pvt. Ltd.
to the A.E. towards information technology and software support service, the assessee had undertaken transfer pricing study through an independent external agency. Transactional Net Margin Method (TNMM) was selected as most appropriate method to bench mark the transaction with Operating Profit to Operating Cost (OP/OC) as Profit Level Indicator (PLI). Assessee had selected 23 companies as comparables in transfer pricing study by using multiyear data. As the arithmetic mean of the comparable companies was 14.41% as against margin shown by the assessee at 13.97%, the price charged to A.E. was considered to be at arm's length. For the assessment year under consideration, assessee filed its return of income on 24 th December 2008, declaring total income of ` 22,04,20,020. In the course of assessment proceedings, the Assessing Officer noticing that assessee had entered into international transaction with its A.E. made a reference to the Transfer Pricing Officer for determining the arm's length price of the I.T. and network support services by the assessee to its A.E. The Transfer Pricing Officer after examining the transfer pricing study and various other documents called for, noticed that certain comparables selected by the assessee did not represent the I.T. industry in true sense as the assessee has not applied appropriate filters. Though, in the course of proceedings before the Transfer Pricing Officer the assessee also submitted the updated single year 6 UCB India Pvt. Ltd.
margin of the comparable companies selected by it whose arithmetic mean worked out to 14.24% but the Transfer Pricing Officer did not accept the same. He was of the view that the transfer pricing study furnished by the assessee is not acceptable as it is not in accordance with rule 10B(4) as the comparable companies were not selected on the basis of data relating to current financial year. He also observed that most of the comparables do not stand scrutiny of FAR analysis. Accordingly, he proceeded to reject the transfer pricing study of the assessee and proceeded to determine arm's length price independently. Though, the Transfer Pricing Officer accepted TNMM as most appropriate method with OP/OC as PLI, however, by applying some fresh set of filters, he searched data bases to select comparables. The search in data bases conducted by the Transfer Pricing Officer yielded 23 companies as comparables with arithmetic mean of 24.99% as against margin shown by assessee at 13.97%. By applying arithmetic mean of the comparables to the operating cost, the Transfer Pricing Officer determined the arm's length price of the I.T. relating to provisions of international transaction and software support services to A.E. at ` 95,84,221, as against the price charged by the assessee of ` 87,39,095. Resultant shortfall of ` 8,45,126 was treated as I.T. adjustment. In terms with the order passed by the Transfer Pricing Officer, the Assessing Officer framed the draft 7 UCB India Pvt. Ltd.
assessment order by adding the amount of ` 8,45,126. Being aggrieved of such addition assessee filed his objections before the DRP.
7. DRP, as per the reasons recorded in Para-4.3 of its order, upheld the transfer pricing adjustment save and except the observations made in relation to assessee's objection with regard to wrong computation of margin of certain comparables. In pursuance to the directions of the DRP, the Assessing Officer passed the impugned assessment order.
8. Learned Authorised Representative challenging the transfer pricing adjustment more or less confined his arguments to selection of certain comparables by the Transfer Pricing Officer.
9. Learned Authorised Representative submitted, the Transfer Pricing Officer while selecting comparables had applied the turnover filter by rejecting companies whose revenue from software development services were less than ` 1 crore. However, the Transfer Pricing Officer did not fix any upper limit as far as turnover filter is concerned which resulted in selection of comparables whose turnover is more than ` 20 crore. He, therefore, submitted companies with huge turnover should not be treated as comparable to the assessee. Learned Authorised Representative submitted, as a reasonable criteria 8 UCB India Pvt. Ltd.
only companies with turnover from ` 50 lakh to ` 20 crore should be treated as comparables to the assessee. In support of his proposition that high turnover companies cannot be treated as comparable the learned Authorised Representative relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Pentair Water India Pvt. Ltd., Tax Appeal no.18/2015 dated 16th September 2015. He also relied upon the decision of the Hon'ble Delhi High Court in CIT v/s Agnity India Technologies Pvt. Ltd., [2013] 36 Taxmann.com 289 (Del.) as well as number of other decisions of the Tribunal for excluding companies with reasonably high turnover. Without prejudice to the aforesaid argument, as alternative contentions, learned Authorised Representative also objected to selection of certain comparables on functional dissimilarity which are as under:-
Infosys Technologies Limited
10. Learned Authorised Representative referring to the annual report of the company for the year under consideration submitted, the company is engaged in diversified activity and it provides solutions to the entire software life cycle encompassing technical consulting, design, development, re-engineering, maintenance, systems, integration, package evolution and implementation, distinguishing and infrastructure management services. He submitted, this company is 9 UCB India Pvt. Ltd.
also engaged in development of products. In this context, he referred to the Profit & Loss account of the company. Further referring to the Balance Sheet of the company learned Authorised Representative submitted, the company has shown brand value as its intangible asset. The company has significant R&D activity leading to creation of intellectual property right. He, therefore, submitted under no circumstances, it can be treated as a comparable. He submitted, even otherwise also, as the company is having a turnover of ` 15,653 crore it is a giant company, hence, cannot be compared to a captive service provider like the assessee. For such proposition, he relied upon the following decision:-
i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013;
ii) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014;
iii) Adaptec India P. Ltd. v/s ACIT, ITA no.206/Hyd./2014, dated 25.03.2015;
iv) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;
v) Capgemini India P. Ltd. v/s ITO, ITA no.7099/Mum./2012, 10.12.2015;
vi) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;
vii) LGS Global Ltd. v/s ACIT, ITA no.1885/Hyd./2011, dated 27.6.2014;
viii) CIT v/s Quark Systems India P. Ltd., ITA no.594/2010, dated 16.5.2011 (P&H HC);
10
UCB India Pvt. Ltd.
ix) Adaptec India P. Ltd. v/s ACIT, ITA no.1758/Hyd./2012, dated 21.3.214 BODHTREE CONSULTING LIMITED
11. Objecting to selection of this company, learned Authorised Representative submitted, it is engaged in development of software products, hence, cannot be treated as comparable. In this context, he referred to the information submitted in the website of the company. In support of his contention, learned A.R. relied upon the following decisions:-
i) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014; and
ii) Adaptec India P. Ltd. v/s ACIT, ITA no.206/Hyd./2014, dated 25.03.2015;
CELESTIAL BIOLABS LIMITED
12. Learned Authorised Representative submitted, this company not only is providing software development services but also sales products. In this context, he referred to the Profit & Loss account of the company as on 31st March 2008, a copy of which is at page-213 of the paper book. Further referring to the annual report, he submitted the company as per its own admission, has developed a product "CLL- TOX" to read the toxicity of a given molecule and has applied for IPR under the Copyright / Patent Act. Referring to Schedule-VII of the Balance Sheet as at 31st March 2008, learned Authorised 11 UCB India Pvt. Ltd.
Representative submitted, the company has claimed product development expenditure. He, therefore, submitted the company cannot be treated as comparable to the assessee. He further submitted, the turnover of the company being more than ` 20 crore, it should not be treated as comparable. In support of his contention, he relied upon the following decisions:-
i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013;
ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;
iii) LGS Global Ltd. v/s ACIT, ITA no.1885/Hyd./2011, dated 27.6.2014;
E-ZEST SOLUTIONS LIMITED
13. Objecting to the selection of this company, learned Authorised Representative submitted that as the company is engaged in development of product, it cannot be treated as a comparable. In this context, he referred to the information contained in website of the company a copy of which is at page-473 of the paper book. In support of his contention, he relied upon the following decisions:-
i) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014;
ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;12
UCB India Pvt. Ltd.
iii) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;
KALS INFORMATION SYSTEMS LIMITED
14. Objecting to selection of this company, the learned Authorised Representative submitted that this company is into provision of software development services as well as sale of software products. In this context, he referred to note to the financial statement forming part of annual report of the company. He submitted, segmental details are also not available. Learned Authorised Representative referring to the Balance Sheet of the company as at 31st March 2008, submitted the very fact that it has shown inventories signifies development of products. To substantiate such contention, he also referred to the information submitted in the website of the company a screenshot of which is at Page-239 of the paper book. He, therefore, submitted, the company cannot be treated as a comparable. In support of his contention, he relied upon the following decisions:-
i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013;
ii) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014;
iii) Adaptec India P. Ltd. v/s ACIT, ITA no.206/Hyd./2014, dated 25.03.2015;
iv) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;
13
UCB India Pvt. Ltd.
v) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;
TATA ELXSI LIMITED
15. Objecting to this company, learned Authorised Representative submitted, this company operates in two segments i.e., software development and service segment and systems integration and support segment. Learned Authorised Representative submitted, software development and service segment also includes product, design service, which is functionally dissimilar to the assessee. In this context, learned Authorised Representative invited attention of the bench to the annual report of the company, he therefore, submitted, the company cannot be treated as a comparable. For such proposition, he relied upon the following decisions:-
i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013;
ii) Adaptec India P. Ltd. v/s ACIT, ITA no.206/Hyd./2014, dated 25.03.2015;
iii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;
iv) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;
WIPRO LIMITED
16. Arguing for removal of this company, learned Authorised Representative submitted, it cannot be treated as comparable as it is 14 UCB India Pvt. Ltd.
into diversified activities including development of products and no segmental information is available. In this context, he referred to the Profit & Loss account of the company as on 31st March 2008. Besides, the learned Authorised Representative submitted, the turnover of this company being ` 11,276 crore it cannot be a comparable to the assessee. In support of his contention, the learned Authorised Representative relied upon the following decisions:-
i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013;
ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;
iii) Capgemini India P. Ltd. v/s ITO, ITA no.7099/Mum./2012, 10.12.2015;
iv) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;
v) LGS Global Ltd. v/s ACIT, ITA no.1885/Hyd./2011, dated 27.6.2014;
vi) Adaptec India P. Ltd. v/s ACIT, ITA no.1758/Hyd./2012, dated 21.3.214
17. Learned Departmental Representative raising preliminary objection in respect of assessee's objection to Infosys Technologies Ltd., submitted, this company was selected by the assessee in transfer pricing study as well as on the basis of single year updated margin before the Transfer Pricing Officer. He submitted, at no stage, assessee objected the selection of Infosys Technologies Ltd. Therefore, 15 UCB India Pvt. Ltd.
without raising an additional ground in terms of rule 11 of I.T. (AT) Rule, 1963, it cannot raise the issue at this stage. He submitted, the assessee while selecting comparables in its transfer pricing study has not applied the turnover filter which is evident from the fact that the assessee itself selected Infosys Technologies Ltd. Learned Departmental Representative submitted, only on the basis of turnover companies cannot be excluded if otherwise they are functionally similar to the assessee. He submitted, in case turnover filter was not applied at the initial stage, it cannot be applied to exclude companies as comparable. In this context, he relied upon the decision of the Hon'ble Delhi High Court in CIT v/s Nortel Networks India Pvt. Ltd. As far as the objections of the assessee relating to selection of certain product based companies, learned Departmental Representative submitted the web pages relied upon by the assessee as submitted in the paper book were available before the Transfer Pricing Officer and whether they relate to the impugned assessment year is not known, therefore, they cannot be relied upon. Further, learned Departmental Representative referring to the annual report of the companies objected to by the assessee submitted, mostly the selected companies are engaged in providing software development services, hence, are comparable to the assessee. Learned Departmental Representative submitted, even assuming that some of the companies are into 16 UCB India Pvt. Ltd.
development of products, unless they are effecting mass sales of such product they cannot be considered as product companies. He, therefore, submitted, there is no reason to exclude some of the companies selected by the Transfer Pricing Officer on the basis of argument advanced by the assessee.
18. In the rejoinder, learned Authorised Representative submitted, Infosys Technologies Ltd. is no more assessee's comparable as the Transfer Pricing Officer has rejected the transfer pricing study of the assessee and thereafter has undertaken a search process and proposed certain fresh comparables which also included Infosys Technologies Ltd. In this context, he referred to Para-5.1 of the Transfer Pricing Officer's order. As far as the objection of the learned Departmental Representative that assessee had not specifically raised the issue of comparability of Infosys Technologies Ltd. before the DRP or before the Tribunal, learned Authorised Representative submitted, assessee has raised specific ground not only before the DRP but before the Tribunal with regard to wrong application of turnover filter by the Transfer Pricing Officer. He, therefore, submitted, learned Departmental Representative's submissions are unfounded. As far as allegation of the learned Departmental Representative in relation to the website information submitted in paper book, learned Authorised Representative submitted, not only they are available in public domain 17 UCB India Pvt. Ltd.
and must have been in the records of the Transfer Pricing Officer but the Transfer Pricing Officer also collected information under section 133(6) from these companies which were never confronted to the assessee. He further submitted, the information obtained from the website of the comparables were relied upon by the assessee before the DRP and the data contained therein are contemporaneous. He, therefore, submitted, the objection of the learned Departmental Representative being without any basis is not acceptable.
19. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. The contention of the learned Authorised Representative is twofold. Firstly, he has submitted that companies having turnover of more than ` 20 crore should be excluded as the assessee has turnover of ` 87,39,095 only. The second contention of the learned Authorised Representative is certain companies being involved in development of products, cannot be treated as comparable since they are not functionally similar to the assessee. As far as the first contention of the assessee is concerned, undisputedly the revenue earned from the software development service segment by the assessee during the year is ` 87,39,095 only. Though, it may be a fact that while rejecting / selecting comparables assessee may not have applied turnover filter, but, fact remains the Transfer Pricing Officer after rejecting the 18 UCB India Pvt. Ltd.
transfer pricing study of the assessee has himself applied turnover filter by rejecting companies having revenue earned from software development service of less than one crore. However, he has not fixed any upper limit while applying the turnover filter. When the Transfer Pricing Officer has applied turnover filter by rejecting companies having less than ` 1 crore turnover from software development services, logically, he should have fixed an upper limit for rejecting companies having very high turnover as well. As could be seen, as against the turnover of ` 87,39,095 by the assessee from software development services some of the comparables selected by the assessee have turnover of more than ` 20 crore. In fact, turnover of Infosys Technologies Ltd., Tata Elxsi Ltd. and Wipro Ltd. respectively are ` 15,653 crore, ` 342 crore and ` 11,276 crore.
20. We have noted that the DRP while upholding the turnover filter adopted by the Transfer Pricing Officer has referred to OECD guidelines to observe that company with approximately five times revenue can be taken as comparable. Even applying the same logic of the DRP, companies with extraordinarily high turnover cannot be treated as comparable.
21. Thus, in our view, companies which are having more than 20 times the turnover of the assessee from software development services segment, in our view, cannot be treated as comparables. This 19 UCB India Pvt. Ltd.
view of ours is supported by various decisions of the Tribunal as well as the Hon'ble Jurisdictional High Court in Pentair Water India Pvt. Ltd. (supra). In the aforesaid view of the matter, we direct the Transfer Pricing Officer to exclude companies having turnover of more than ` 20 crore from software development services segment from the list of comparables. As far as the objection of the learned Departmental Representative with regard to assessee's objection against Infosys Technologies Ltd., we may observe, no doubt, the assessee in the transfer pricing study and even in the course of proceedings before the Transfer Pricing Officer has selected Infosys Technologies Ltd. as a comparable. However, fact remains the transfer pricing study report as well as the updated margin submitted by the assessee in the course of proceedings before the Transfer Pricing Officer were rejected. It is further evident, after rejecting the transfer pricing study report, the Transfer Pricing Officer undertook a search process himself by applying certain filters which yielded certain comparables including Infosys Technologies Ltd. Therefore, it cannot be said that Infosys Technologies Ltd. is a comparable selected by the assessee. The observations made by the Transfer Pricing Officer in Para-5.3 of his order clearly prove that Infosys Technologies Ltd., was proposed as comparable by the Transfer Pricing Officer after search in data base. Moreover, we have noted that not only before the Tribunal but before 20 UCB India Pvt. Ltd.
the DRP also the assessee had objected to wrong application of turnover filter by the Transfer Pricing Officer. This is evident from Para-4.2 of DRP's order. Therefore, as borne out from the record, for the first time assessee has not raised the issue of rejection of certain comparables on the basis of turnover. That being the case we are unable to accept the contention of the learned Departmental Representative. In view of the aforesaid, we direct Assessing Officer / Transfer Pricing Officer to determine arm's length price afresh after removing the companies having turnover of more than ` 20 crore. However, at this stage, we make it clear our decision to exclude companies having turnover of more than ` 20 crore is purely in the context of the the peculiar facts of the present appeal, hence, should not be considered as a precedent.
22. In view of our aforesaid finding, the alternate contention of assessee to remove some companies being functionally different is of academic interest. However, as both the parties were heard at length on this issue also, we consider it appropriate to record our finding in respect of each of the comparable contested by assessee as under:-
Bodhtree Consulting Limited
23. On a perusal of the information contained in the website of the company, screenshot of which is submitted in the paper book it is 21 UCB India Pvt. Ltd.
noticed that this company is engaged in development of products also. In case of Barkley Technology Centre India P. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 28th January 2015, the Tribunal, Pune Bench, held that this company is into product development hence, cannot be treated as comparable. As the aforesaid decision of the co-ordinate bench is for the very same assessment year 2008-09, respectfully following the same, we hold that this company cannot be treated as comparable.
Celestial Biolabs Limited
24. On a perusal of the Profit & Loss account of this company, a copy of which is at Page-213 of the paper book, we have noted that the company is engaged in sale of products. Further, the annual report of the company as well as Schedule-VII of the Balance Sheet indicates that this company is into product development. Thus, on the basis of information contained in the annual report of the company for the financial year 2007-08 it emerges that the company is involved in sale of products and segmental details are not available. We have also noted that the Tribunal, Bangalore Bench, in IBM India Pvt. Ltd. (supra), following another decision of the same bench in Logica Pvt. Ltd. in ITA no.1129/B./2011, had rejected this company as a comparable as it is engaged in the clinical research and manufacture of bio products and other products. The same view was again 22 UCB India Pvt. Ltd.
reiterated by the Tribunal, Bangalore Bench, in DPLM Software Solutions Ltd. (supra). As these decisions pertain to the very same assessment year respectfully following the same, we hold that Celestial Biolabs Ltd. cannot be treated as a comparable.
Kals Information Systems Limited
25. On a perusal of the annual report of this company for the assessment year under consideration, it is noticed that the company itself has admitted that it derives revenue from software services and software products. However, it has not maintained segment-wise details. The inventories shown in the Balance Sheet signifies development of products. The information contained in the website of the company also reveals that the company is developing product. Considering the aforesaid aspect, the Tribunal, Pune Bench, in Barkley Technology Centre India P. Ltd. (supra) excluded this company from being treated as a comparable. The other Benches of the Tribunal also expressed similar view in the following cases:-
i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013;
ii) Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;
iii) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;23
UCB India Pvt. Ltd.
26. As these decisions are for the very same assessment year i.e., for assessment year 2008-09, respectfully following the decisions of the co-ordinate bench, we exclude Kals Information Systems Ltd. as comparable.
Tata Elxsi Limited
27. The reason on which the assessee has sought exclusion of this company as a comparable as it is engaged in product design service which includes design and development of hardware and software. On a perusal of the annual report of the company for the financial year 2007-08, a copy of which is at Page-245 of the paper book, it is noticed that this company has two main segments, which are software development and services segment and systems integration and support segment. Under the software development and service segment, the company has undertaken product design services which comprises of design and development of hardware / software. Thus, as could be seen, this company is not a purely software development service provider. Considering the aforesaid factual aspect, Tribunal, Hyderabad Bench, in Net Cracker Technologies Solutions India Pvt. Ltd. (supra) excluded this company as comparable. The same view was expressed by the Tribunal in IBM India Pvt. Ltd. (supra) and 3DPLM Software Solutions Pvt. Ltd. (supra) for assessment year 2008-
09. Moreover, this company gets excluded due to its very high 24 UCB India Pvt. Ltd.
turnover of ` 342 crore during the relevant financial year as against the turnover of ` 87,39,095 of the assessee. Therefore, respectfully following the decisions of the co-ordinate bench of the Tribunal referred to above which are for the very same assessment year, we exclude this company as comparable.
Wipro Limited
28. On a perusal of the annual report of the company which has been placed in the paper book, it is noticed that it has diversified activities, however, segmental details have not been provided in the audited financial account. That besides the turnover of this company during the relevant financial year was ` 11,276 crore, as against paltry turnover of ` 87,39,095 of the assessee. For the aforesaid reasons, different benches of the Tribunal have consistently held that Wipro Ltd., cannot be comparable to a purely captive software development services provider. In this context, we refer to the following decisions:-
i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013;
ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;
iii) Capgemini India P. Ltd. v/s ITO, ITA no.7099/Mum./2012, 10.12.2015;
iv) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;
v) Adaptec India P. Ltd. v/s ACIT, ITA no.1758/Hyd./2012, dated 21.3.214 25 UCB India Pvt. Ltd.
29. Therefore, following the decision of the Co-ordinate Bench of the Tribunal which are relating to the same assessment year, we direct exclusion of Wipro Ltd.
Infosys Technologies Limited
30. After perusing information contained in annual report of this company as well as other documents placed before us we are convinced that this company under no circumstances can be treated as comparable to the assessee as not only it has diversified activities and involved in development of software as well as products which is evident from the intangible owned but economies of sales, brand value R&D activities of the company makes it totally uncomparable to the assessee as the business model of this company is completely different. Moreover, the turnover of Infosys Technologies Ltd. for the year under consideration is ` 15,653 crore compared to assessee's turnover of ` 87,39,095. Therefore, giants like Infosys Technologies Ltd. and Wipro Ltd., cannot be treated as comparable to Pigmy captive service providers like assessee. Moreover, comparability of big companies like Infosys Technologies Ltd., Wipro Ltd., etc., is no more res integra in view of the decision of the Hon'ble Jurisdictional High Court in Pentair Water India Pvt. Ltd. (supra) and number of decisions of the Tribunal holding that these companies being giants in the field 26 UCB India Pvt. Ltd.
of software cannot be treated as comparable. For this reason, we exclude Infosys Technologies Ltd., from the list of comparable.
E-Zest Solutions Limited
31. The assessee has sought exclusion of this company on the reasoning that it is involved in development of product. On a perusal of the information contained in the website of the company, the screenshot copy of which is submitted in the paper book, it appears that the company is engaged in development of product. Considering the aforesaid aspect, the Tribunal, Bangalore Bench in 3DPLM (supra), having found that this company is rendering product development service and high end technical services which comes under the category of KPO services excluded this company as a comparable. The Pune Bench of the Tribunal in Barkley Technology Centre India P. Ltd. (supra) also took a similar view. The same view was again reiterated by the Tribunal, Hyderabad Bench, in Net Cracker Technologies Solutions India Pvt. Ltd. (supra). As these decisions pertained to the very same assessment year 2008-09, respectfully following the ratio laid down in these decisions, we exclude E-Zest Solutions Ltd. (supra) from the list of comparables. Accordingly, we direct the Assessing Officer / Transfer Pricing Officer to compute the arm's length price in terms with our directions contained in this order. 27
UCB India Pvt. Ltd.
32. In ground no.13, assessee has challenged the addition made of ` 31,76,461 on account of disallowance of e-connectivity charges.
33. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of ` 79,41,152 to the Profit & Loss account towards e-connectivity charges. When called upon to justify the deduction claimed and why it should not be treated as capital expenditure as it resulted in providing enduring benefit, it was submitted by the assessee that the expenditure incurred was not capital in nature as it was not for acquiring software. It was submitted by the assessee that the expenditure incurred was for facilitating assessee's trading operations and for enabling the management and control of the business to be carried on more efficiently and profitably leaving fixed capital untouched. Hence, the expenditure incurred is revenue in nature. The Assessing Officer, however, did not find merit in the submissions of the assessee. He was of the view that acquisition of e-connectivity amounts to acquiring an asset which is capital in nature as it is likely to provide benefit of enduring nature. Accordingly, he capitalised the entire expenditure on e-connectivity charges amounting to ` 79,41,152 and allowed depreciation @ 60% thereon. Thus, balance amount of ` 31,76,461 was disallowed.
28
UCB India Pvt. Ltd.
34. Though, the assessee objected to such disallowance, DRP having noted that similar disallowance was made in assessment year 2004-05 and 2005-06, upheld the disallowance made in the impugned assessment year also. The learned Authorised Representative at the outset submitted the issue is covered in assessee's favour by the decisions of the Tribunal in assessee's own case for assessment years 2004-05, 2005-06, 2006-07 and 2009-10. Copies of the orders passed by the Tribunal were also placed before us.
35. Learned Departmental Representative relied upon the order of the Assessing Officer and the DRP.
36. We have considered the submissions of the parties and perused the material available on record. As could be seen, the only dispute is with regard to the nature of expenditure, whether capital or revenue. We have also noted that it is a recurring dispute between the parties. In fact, the DRP in its order has referred to similar disallowance made by the Assessing Officer in assessment year 2004-05 and 2005-06. Incidentally, the disallowance of e-connectivity charges was agitated before the Tribunal in assessment year 2004-05 and 2005-06, in ITA no.6681/Mum./2013 and others. The co-ordinate Bench of the Tribunal vide order dated 18th May 2016, after examining the facts in detail held that the expenditure incurred by the assessee is not for 29 UCB India Pvt. Ltd.
acquiring any software, hence, the expenditure is revenue in nature. The same view was again reiterated in assessee's own case in assessment year 2006-07 in ITA no.8819/Mum./2010 dated 3rd June 2016 and ITA no.1218/Mum./2014 and 1422/Mum./2014 dated 18 th May 2016, for assessment year 2009-10. Respectfully following the consistent view of the Tribunal in assessee's own case, we allow assessee's claim for deduction, thereby, deleting the addition of ` 31,76,461. Ground no.13, is allowed.
37. In the result, assessee's appeal stands allowed.
Order pronounced in the open Court on 29.07.2016 Sd/- Sd/-
RAMIT KOCHAR SAKTIJIT DEY
ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 29.07.2016
Copy of the order forwarded to:
(1) The Assessee;
(2) The Revenue;
(3) The CIT(A);
(4) The CIT, Mumbai City concerned;
(5) The DR, ITAT, Mumbai;
(6) Guard file.
True Copy
By Order
Pradeep J. Chowdhury
Sr. Private Secretary
(Dy./Asstt. Registrar)
ITAT, Mumbai