Income Tax Appellate Tribunal - Bangalore
M/S Softek India Pvt. Ltd.,, Bangalore vs Dcit, Bangalore on 31 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH ' A '
BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND
SHRI JASON P BOAZ, ACCOUNTANT MEMBER
I.T. (T.P) A. No.396/Bang/2015
(Assessment Year : 2010-11)
M/s. Softtek India Pvt. Ltd.,
Ozone Manay Tech Park, A Block, 2nd Floor,
Nos.56/18 & 55/9, Hosur Main Road,
Bangalore-560 068. .... Appellant.
Vs.
Dy. Commissioner of Income Tax,
Circle 6(1)(2), Bengaluru-560 001 ..... Respondent.
I.T. (T.P) A. No.435/Bang/2015
(Assessment Year : 2010-11)
(By Revenue)
Assessee By : Shri Tata Krishna, Advocate.
Respondent By : Shri G.R. Reddy, CIT-1 (DR)
Date of Hearing : 03.07.2017.
Date of Pronouncement : 31.08.2017.
O R D E R
Per Shri Vijay Pal Rao, J.M. :
These cross appeals are directed against the assessment order dt.27.01.2015 passed under Section 143(3) r.w.s. 144C(13) of the 2 IT(TP)A Nos.396 & 435/Bang/2015 Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute Resolution Panel (in short 'DRP') dt.4.9.2014 for the Assessment Year 2010-11.
2. The assessee stated to be engaged in the business of software development services providing to its parent company outside India. The assessee has reported the international transactions with its Associated Enterprises (AEs) as under :
International Transactions Amount (Rs.)
Software development services 17,68,09,824
Reimbursement of expenses 8,60,212
Total value of International 17,76,70,036
Transactions
Segment in dispute Software development
services
Methodology adopted to TNMM
determine ALP
Turnover from software 17,68,09,824
development services
Margins :
Appellant's Margin in software 12.00%
segment
ALP Margin in software segment as 22.71%
per TPO
Adjustment under Section 92CA 1,65,04,805
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IT(TP)A Nos.396 & 435/Bang/2015
To bench-mark its international transactions the assessee selected 14 companies in Transfer Pricing Study Analysis however, the TPO rejected 12 companies selected by the assessee and carried out a fresh search. The TPO finally selected a set of 11 companies as under :
Accordingly, the TPO proposed an adjustment under Section 92CA of Rs.1,65,04,805. The assessee challenged the action of the TPO and draft order framed by the Assessing Officer before the DRP and filed its objections. The DRP rejected 8 companies out of set of 11 companies 4 IT(TP)A Nos.396 & 435/Bang/2015 selected by the TPO. The DRP rejected 5 companies on the ground of turnover filter of Rs.1 to Rs.200 Crores and further 2 companies on the ground by applying 0% Related Party Transaction (RPT) consequently the DRP retained only 3 companies. Hence both revenue as well as assessee are aggrieved by the directions of DRP and consequent final order passed by the Assessing Officer and filed the cross appeals by raising the following grounds :
Assessee's Grounds I. The Order of the Learned Assessing Officer in so far as it is prejudicial to the interest of the Appellant is not justified in law and on facts and circumstances of the case.
II. The Directions of the Honourable DRP in so far as the same are prejudicial to the interest of the Appellant are not justified in law and on facts and circumstances of the case.
III. As regards transfer pricing adjustment of Rs.1,16,68,539/-
made under Section 92CA of the IT Act:
1. The Honourable DRP is not justified in upholding the action of the Learned TPO in making adjustment of Rs.1,16,68,539/- under Section 92CA of the IT Act.
2. The Learned TPO is not justified in considering incorrect operating revenue of Rs.17,30,98,447-/ and operating expenses of Rs.15,45,13,286/- as against the correct operating revenue of Rs.17,68,09,824/- and operating expenses of Rs.15,78,27,015/- as accepted by the Honourable DRP although the percentage of margin remains the same.5
IT(TP)A Nos.396 & 435/Bang/2015
3. The Learned TPO is not justified in considering incorrect operating expenses of Rs.15,45,13,286/- [excluding forex loss of Rs. 33,13,729/-] as against the correct operating expenses of Rs.15,78,27,015/- [including forex loss of Rs. 33,13,729/-] as directed by the Honourable DRP.
4. The Honourable DRP is not justified in rejecting the comparable Companies selected by Learned TPO viz. M/s. Persistent Systems & Solutions Ltd. and M/s. Thinksoft Global Services Ltd. having Related Party Transaction (RPT) within 15%, on the basis that there is no necessity to adopt comparable Companies having RPT within 15%, when there are comparable Companies with 0% RPT.
5. The Honourable DRP is not justified in upholding selection of M/s. ICRA Techno Analytics Ltd. (Seg.) as a functionally comparable Company ignoring that the said Company is into business analytics and business process outsourcing.
6. The Honourable DRP is not justified in upholding selection of M/s. Kals Information Systems Ltd. (Seg.) as a comparable Company when the said Company is into development of software products & when there is a material difference/error in the segmental information available in the annual report thereby making the said company incomparable.
7. Without prejudice to the above, the Honourable DRP is not justified in upholding the computation of the margin of M/s. Kals Information Systems Ltd. (Seg.) at segment level and not at enterprise level, when the Honourable DRP held that there is no activity other than the software development and when the training segment is incidental to software development activity of the said Company and the said segment did not exceed 10% limit prescribed under Accounting Standard 17 for disclosing segment report.
8. The Learned TPO while computing the margin in respect of M/s. RS Software (India) Ltd is not justified in not treating miscellaneous expenses written off Rs.14,98,572/- and deposits written off Rs.92,57,112/- as operating in nature, which resulted in arriving at incorrect margin of 10.29% as against the correct margin of 9.12%.
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IT(TP)A Nos.396 & 435/Bang/2015
9. The Learned TPO is not justified in not granting single customer risk adjustment of miniscule 1% without following the directions of the Honourable DRP.
10. The Honourable DRP and the Learned TPO have failed to appreciate that as per the mandate under Second proviso to 92C(2) the Appellant is entitled for the benefit of +/-5% of the international transaction.
IV. The Honourable DRP is not justified in upholding the action of the Learned Assessing Officer and Learned TPO in making adjustment under Section 92CA even though the Appellant is entitled to exemption under Sections 10B of the IT Act. V. Without prejudice to the above, the Learned Assessing Officer is not justified in invoking first proviso to Section 92C(4) to deny the deduction under Section 10B of the IT Act in respect of the adjustment made under Section 92CA.
VI. The Learned Assessing Officer/Learned TPO erred in law and on facts in not furnishing a copy of the order passed under Section 92CA of the IT Act giving effect to the directions issued by the Honourable DRP.
VII. As regards reducing communication expenses of Rs.
19,05,751/- & travelling expenses of Rs.1,58,82,853/- from the export turnover:
1. The Honourable DRP is not justified in upholding the action of the Learned Assessing Officer in reducing communication expenses of Rs. 19,05,751/- & travelling expenses of Rs.1,58,82,853/- from the export turnover.
2. The Honourable DRP has failed to appreciate that the phrase used in clause(iii) of Explanation 2 to Section 10B is "does not include" and not "to be reduced by". The said phrases have different connotations. The phrase "does not include"
deals with items which by trade practice or contractual terms or accounting treatment are considered as components of export turnover but by the aforesaid fiction are not to be so considered. The phrase "to be reduced by" may mean statutory deduction irrespective of the composition of the sale price.7
IT(TP)A Nos.396 & 435/Bang/2015
3. The Honourable DRP has failed to appreciate the fact that the appellant has not charged its customers separately in respect of communication expenses and travelling expenses incurred by it and has neither included the said expenditure in the export turnover nor recovered the same from its customers. Therefore, the Learned Assessing Officer is not justified in excluding the aforesaid expenditure from the export turnover.
4. Without prejudice to the above, the Honourable DRP is not justified in failing to appreciate that the question of deduction of telecommunication charges of Rs. 19,05,751/- would arise only if the same has been incurred in foreign-exchange and as the telecommunication charges have been incurred in Indian rupee, the question of deduction thereof does not arise.
5. The Honourable DRP is not justified in upholding the action of the Learned Assessing Officer in reducing the telecommunication charges of Rs. 19,05,751/- from the export turnover when such expenditure is incurred in respect of a standard facility and the same cannot be wholly attributable to delivery of computer software outside India.
VIII. As regards exclusion of expenditure incurred in foreign currency {i.e. travelling expenses} from export turnover when the Appellant is engaged in software development:
1. The Honourable DRP is not justified in upholding the exclusion of sum of Rs. 1,58,82,853/- from export turnover for the purpose of computation of deduction under section 10B of the Act, merely on the basis that the same was incurred in foreign currency by rejecting the contention of the Appellant that it is not engaged in providing technical services but is engaged in development and export of computer software.
2. The Honourable DRP has failed to appreciate that the Appellant company is engaged in the business of development of software and export of software outside India and more so qualifying within the meaning of the term 'Computer Software' as per Explanation 2 (i) to section 10B and the aforesaid expenditure ought not to have been reduced from the export turnover.8
IT(TP)A Nos.396 & 435/Bang/2015
3. The Honourable DRP has failed to consider that as the Appellant is not providing any technical services outside India, there is no question of incurring any expenditure in foreign exchange in providing the technical services outside India and therefore the aforesaid reduction from the export turnover is not called for.
4. The Honourable DRP has failed to consider the jurisdictional Honourable Bengaluru Tribunal decision in the Appellant's own case for the AY 2009-2010 in IT [TP] No. 222/Bang/2014 dated 31.10.2014, wherein the Honourable Tribunal has held that travelling expenses are part of the export turnover and hence cannot be reduced or excluded from the export turnover for computation of deduction under Section 10B of the IT Act.
IX. The Honourable DRP is not justified in upholding the levy of interest under sections 234B & 234C of IT Act when the conditions for levying such interest did not exist in the present case.
Revenue's Grounds 9 IT(TP)A Nos.396 & 435/Bang/2015 10 IT(TP)A Nos.396 & 435/Bang/2015
3. The revenue has raised an issue of turnover filter applied by the DRP for exclusion of comparables apart from the computation of deduction under Section 10A of the Income Tax Act, 1961 (in short 'the Act') by exclusion of the expenses on telecommunication, travel and other foreign currency expenses from export turnover as well as total turnover.
4. On the other hand, the assessee has raised the issue of functional dissimilarity of the companies selected by the TPO including the companies which were rejected by the DRP by applying the turnover and 0% RPT filter apart from the corporate issues.
5. First we will deal with the TP issue including the turnover filter and 0% RPT filter applied by the DRP.
6. As regards the turnover filter applied by the DRP and challenged by the revenue, the learned Authorised Representative of the assessee has submitted that the assessee has no objection if the directions of the DRP to the extent of applying the turnover filter are set aside. However the companies which were excluded by the DRP on this ground may be excluded on functional dissimilarity. In view of the statement of learned 11 IT(TP)A Nos.396 & 435/Bang/2015 Authorised Representative that the assessee has no objection if the directions of the DRP to the extent of applying the turnover filter are set aside. We set aside the directions of the DRP to the extent of applying turnover filter in respect of the comparables selected by the TPO. The functional comparability of those companies will be examined separately.
7. The second objection of the revenue is regarding 0% RPT filter by DRP.
8. We have considered the rival submissions as well as the relevant material on record. At the outset we note that in strict sense, the ALP has to be determined by considering uncontrolled comparable prices which means unrelated comparable prices has to be taken into account to bench mark the international transactions which are the control and RPTs. However, 0% RPTs of the comparable price is an impossible situation and therefore a reasonable tolerance range of the revenue from RPT can be considered for selecting the uncontrolled comparables.
There cannot be a single criteria / parameter which can be applied as a general rule in all cases. There is no specified tolerance range in the Act 12 IT(TP)A Nos.396 & 435/Bang/2015 or Rules under the Transfer Pricing provisions, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, commonly accepted tolerance range of 5% to 25% of the total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case on hand, the availability of the comparables is abundant in number as the TPO selected 17 comparables by applying the filter of 25% of revenue from related parties. Therefore, in this case, good number of comparables are available and there is no difficulty in searching the comparables.
Accordingly, in order to determine the ALP by considering the comparable uncontrolled transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the RPT in the case of DCIT Vs. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012 & C.O. No.40/Bang/2012 Dt.20.3.2015 for the Assessment Year 2005-06 the Tribunal has held in para 17 as under :-
" 17. In view of the conclusion above that exclusion of comparable companies with RPT of less than zero percent is not valid, and that companies where RPT is less than 15% alone can be considered, then the comparable rejected by the CIT (Appeals) on the basis of the said filter will have to be included along with the four comparable retained by the CIT (Appeals). Although 12 comparable which were rejected on the basis 13 IT(TP)A Nos.396 & 435/Bang/2015 of RPT being more than zero percent, one comparable viz., Four Soft Ltd, will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd. and Infosys Technologies Ltd. will get excluded for the reason that the financial results are not reliable in the case of Sathyam Computers Ltd. and for the reason that the high turnover, brand value, high risks etc. The remaining 9 comparable companies which were excluded by the CIT (Appeals) by applying the RPT filter of 0% related party transaction will not have to be included. Their comparability with the assessee in terms of other filters will be discussed in the following paragraphs."
In view of the facts and circumstances of the case when there is good number of comparables available then, we concur with the view of the co-ordinate bench that the RPT filter of 15% is proper in the case of the assessee. Accordingly we direct the Assessing Officer/TPO to exclude the comparable companies having the revenue of more than 15% from related parties. Since we have determined the RPT filter at 15% and the assessee has agreed not to apply any turnover filter, the only issue remained to be decided is functional comparability of various companies selected by the TPO and objected by the assessee.
9. The assessee is seeking exclusion of 8 companies from the set of comparables selected by the TPO/A.O. on functional dissimilarity as well as on the ground of exceeding 15% RPT. We will deal with the functional comparability of these 8 companies one by one as under : 14
IT(TP)A Nos.396 & 435/Bang/2015 ICRA TECHNO ANALYTICS LIMITED (SEG.)
10. The learned Authorised Representative of the assessee has submitted that this company is engaged in the diversified business activities including the business analytics and business process outsourcing. The service segment of this company comprises of software development, software consultancy, engineering services, web development, web hoisting etc. for which no segmental information is available. He has also pointed out that the RPT to total sale of this company is 15.37% and therefore it breaches the tolerance range of 15%. In support of his contention, he has relied upon the decision of co- ordinate bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. 70 Taxman 299 as well as other various decisions.
INFOSYS LIMITED
11. The learned Authorised Representative of the assessee has submitted that this company is having diversified business activities and also own product sales. The segmental information is not available. This company earns revenue ofRs.925 Crores during the year under 15 IT(TP)A Nos.396 & 435/Bang/2015 consideration which is more than 51 times of the assessee's revenue at Rs.17.7 Crores. This company owns significant brand value in the market and owned considerable intangible asset as recognized by the management therefore, this company cannot be considered as a comparable to the assessee with the captive service provider. The risk profile, nature of services, number of employees, ownership and brand product and brand royalty makes this company functionally different from the assessee. In support of his contention he has relied upon the co-ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra).
KALS INFORMATION SYSTEMS LIMTIED (SEG.)
12. The learned Authorised Representative of the assessee has submitted that this company is engaged in the development of software products and cannot be compared with the assessee who has engaged in the software development services. The segment results of the said company as disclosed in the Annual Report does not show the correct profit from operation. Therefore this company is not functionally comparable to the assessee. In support of his contention he has relied 16 IT(TP)A Nos.396 & 435/Bang/2015 upon the co-ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra).
L & T Infotech Limited
13. The learned Authorised Representative of the assessee has submitted that this company also commands significant brand value in the market. This company earns 49% of its revenue from on site software services. Therefore this company is functionally not comparable. Further the RPT of this company is 18.66% breaching the tolerance range of 15%. Thus the learned Authorised Representative has submitted that this company has to be excluded from the set of comparables. In support of his contention he has relied upon the co- ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra).
Persistent Systems Limited
14. The learned Authorised Representative of the assessee has submitted that this company has derived income from sale of software services and products. There is no segmental information in respect of software services and products therefore this company cannot be 17 IT(TP)A Nos.396 & 435/Bang/2015 considered as a good comparable to the assessee. He has also contended that the RPT of this company is 15.47% which is more than the tolerance range of 15% therefore this company be excluded from the set of comparables. In support of his contention he has relied upon the co-ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra).
Sasken Communication Technology Ltd.
15. The learned Authorised Representative of the assessee has submitted that this company has earned revenue from three segments i.e. software services and software products and other services. He has contended that there is no segmental information available and this company also has a significant brand value in the market. In support of his contention he has relied upon the co-ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra).
Tata Elxsi Limited
16. The learned Authorised Representative of the assessee has submitted that this company operates in the segment of software development and services segment which comprises of embedded 18 IT(TP)A Nos.396 & 435/Bang/2015 products, design services, industrial design and engineering services apart from visual computing laboratory and system integration services segment. Thus the learned Authorised Representative of the assessee has submitted that this company cannot be regarded as a purely into development of software and accordingly functionally dissimilar to the assessee. Further this company commands brand value in the market. In support of his contention he has relied upon the co-ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra).
17. On the other hand, the learned Departmental Representative has submitted that the TP provisions of the Act and Rules under Section 92C and Rule 10B(2) mandate that the comparability of an international transaction with an uncontrolled transactions shall be judged with reference to specific character of property transferred or services provided in the service transaction/functions performed. The dispute of determination of Arm's Length Price (ALP) is necessarily fact based and requires consideration of business model of the assessee and the contractual terms entered into with AE along with the details of FAR 19 IT(TP)A Nos.396 & 435/Bang/2015 Analysis so as to characterize the transaction and business model. After characterization of the tax payer on the basis of FAR Analysis the selection of comparable companies has to be made whether functionally similarity qua the transaction on the basis of FAR Analysis of the comparable companies is required to be done. The learned Departmental Representative has vehemently contended that the functional comparability has to be examined separately in each case and the decision of the Tribunal in other case cannot be considered as a precedent. In support of his contention, he has relied upon the decision of the Delhi Bench of the Tribunal in the case of Viraje Logic International India Vs. JDIT (IT) 72 Taxmann.com 11 (Del) as well as the decision of Mumbai Benches of the Tribunal in the case of ECI Telecom India Pvt. Ltd. Vs. ACIT 74 Taxmann.com 107. He has also relied upon the decision of Delhi Benches of the Tribunal in the case of Sony Mobile Communications India Pvt. Ltd. Vs. ACIT 147 ITD 399.
18. We have considered the rival submissions as well as the relevant material on record. At the outset, we find that the functional comparability of the above 7 companies has been considered by the co- 20
IT(TP)A Nos.396 & 435/Bang/2015 ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra). However the learned Departmental Representative has raised an objection against the applicability of the precedent in the case of TP matters as held by this Tribunal in Sony Mobile Communications India Pvt. Ltd. Vs. ACIT (supra). In the case on hand, the functional profile of the assessee being a software development services provider to the AE has not been disputed by the department therefore the functional profile of the assessee can be safely accepted as software development captive service provider. The co- ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra) has considered all these aspects of the functional profile of the tested party in the said case as well as various aspects and facts relevant for the functional comparability of the comparable companies and thereafter reach to the conclusion on the functional comparability of the said comparable companies selected by the TPO. Thus once the facts as pointed outby the assessee before us for functional dissimilarity of the comparable companies are not in dispute and by considering those facts, the co-ordinate bench of this Tribunal has 21 IT(TP)A Nos.396 & 435/Bang/2015 given finding then in the absence of any contrary fact brought before us we have no reason to take a different view than taken by the co-ordinate bench in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra) in paras 13 to 32 and paras 62 to 66 as under :
" 13. We shall deal with each comparable which has been disputed by the Revenue one by one as under:-
(1) ICRA Techno Analytics Ltd. (seg)
14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:--
"Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables."
15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE.
16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider.
(2) Infosys Ltd.
17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs. 21,140 crores, which is 442 times higher than the assessee.
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IT(TP)A Nos.396 & 435/Bang/2015
18. The DRP accepted the objections of the assessee and by following the decision of the Delhi Benches of the Tribunal in the case of Agnity India Technologies (P.) Ltd. v. ITO [2015] 58 taxmann.com 167/154 ITD 293 (Delhi - Trib.), directed the TPO to exclude this company from the list of comparables.
19. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Technologies (P.) Ltd. (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re- engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry.
20. In view of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE.
(3) KALS Information Systems Ltd.
21. The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists of STPI unit and also having a training centre engaged in training of software professionals on online products. Thus, when this company is having revenue from software services as well as software product, the same cannot be considered as comparable with software development service providing company.
22. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy E- Business Software India (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540/29 taxmann.com 310 (Bang. - Trib.), this company was found to be not comparable with that of the assessee.
23. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India (P.) Ltd. (supra). We further note that in the balance sheet 23 IT(TP)A Nos.396 & 435/Bang/2015 of this company as on 31.3.2010, there are inventories of Rs. 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persistent Systems Ltd.
24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration.
25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us.
26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables.
(5) Sasken Communication Technologies Ltd.
27. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables.
28. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:-
Amount in Rs. lakhs 24 IT(TP)A Nos.396 & 435/Bang/2015 Year ended Year ended March March 31, 31,2010 2019 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other Services 372.77 1,297.05 Total Revenues 40,150.89 47,974.68
29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP.
(6) Tata Elxsi Ltd.
30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1/22 taxmann.com 96.
31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra).
32. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies India (P.) Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:--
"7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and 25 IT(TP)A Nos.396 & 435/Bang/2015 development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties."
33.....
34....
" 62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related party transaction (RPT) of this company is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable.
63. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the ld. AR submitted this company is also in the software products and therefore cannot be considered as good comparable. He has further contended that in a series of decisions, the Tribunal has applied 15% RPT filter and since this company is having more than 15% RPT, the same cannot be considered as a good comparable.
64. On the other hand, the ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable.
65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables.
66. As regards the functional comparability of this company is concerned, the assessee has referred to the income under the head software development services and products.26
IT(TP)A Nos.396 & 435/Bang/2015 However, it is not clear from the details whether any revenue is earned from products or entire revenue is from the software development services. Therefore, in the facts and circumstances of the case, we direct the AO/TPO to verify the details of the revenue earned by this company and if the revenue earned of this company during the year consists of software development services as well as product, then in the absence of segmental data, this company cannot be considered as functionally comparable to the software development services segment of the assessee."
Accordingly following the decision of coordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India (P.) Ltd. ;(supra) that these companies are not functionally comparable to the assessee and therefore the TPO / A.O is directed to exclude these companies from the set of comparables.
MINDTREE LIMTIED
19. The learned Authorised Representative of the assessee has submitted that this company has gone into restructuring and thereby profit of this company has been influenced. Further in the absence of a reasonable accurate adjustment on account of the impact on the profit due to restructuring, this company cannot be considered as a good comparable. He has further contended that this company enjoys a significant brand value in the market. In support of his contention, he has relied upon various decisions of this Tribunal including the decision in the case of HSBC Electornic Data Processing (I) Pvt. Ltd. Vs. ACIT 52 27 IT(TP)A Nos.396 & 435/Bang/2015 Taxmann.com 126/152 ITD 128. Hence the learned Authorised Representative has submitted that this company shall be excluded from the set of comparables.
20. On the other hand, the learned Departmental Representative has submitted that this company was otherwise found to be functionally comparable and the assessee has not disputed the business profile of this company is comparable with the assessee. He has relied upon the orders of the authorities below.
21. We have considered the rival submissions as well as the relevant material on record. Though the learned Authorised Representative has submitted that there is a restructuring in this company which has influenced the profits however, the decision relied upon by the learned Authorised Representative in the case of HSBC Electornic Data Processing (I) Pvt. Ltd. Vs. ACIT (supra) is not directly on the comparability of this company but it was in respect of some other company which was under restructuring of event like merger, demerger, etc. In the facts and circumstances of the case and in the interest of justice, we set aside the issue of functional comparability of this 28 IT(TP)A Nos.396 & 435/Bang/2015 company to the record of the TPO/A.O. for considering the objections raised by the assessee and fresh adjudication.
22. The next issue raised by the assessee in Ground Nos.VII & VIII is regarding exclusion of telecommunication expenses from the export turnover while computing the deduction under Section 10B of the Act. The learned Authorised Representative of the as has submitted that the assessee has not received the telecommunication expenses from its AE and the same is not part of the export turnover. Therefore, there is no need of further exclusion of the said amount from the export turnover. The learned Authorised Representative has further contended that the assessee has not charged the AE, the telecommunication expenses incurred by the assessee. In support of his contention, he has relied upon the decision of the co-ordinate Bench of this Tribunal in the case of M/s. Subex Limited Vs. DCIT dt.6.3.2017 in ITA No.1430/Bang/2010.
23. On the other hand, the learned Departmental Representative has submitted that an identical issue was considered and decided by the Tribunal in assessee's own case for the Assessment Year 2009-10 vide order dt.31.10.2014 in IT(TP)A No.222/Bang/2014.
29
IT(TP)A Nos.396 & 435/Bang/2015
24. Having considered the rival submissions as well as the relevant material on record, at the outset we note that an identical issue was raised by the assessee for the Assessment Year 2009-10 where the co- ordinate bench of this Tribunal in assessee's own case has decided this issue in para 5.1 as under :
" 5.1 Having regard to the rival contentions and the material on record, we find that the travelling expenses incurred by the assessee are towards the travel of its employees to the offices of the AE outside India in order to discharge its functions of software development. It is not in dispute that the assessee is eligible for exemption u/s 10A of the Act and the only dispute herein is with regard to the travelling expenses forming part of the export turnover. The assessee is eligible for exemption u/s 10A of the Act provided if it is in the manufacture and export of computer software. The traveling of the employees of the assessee is an integral part of the software development. In such circumstances, it cannot be said that the travelling expenses are not part of the export turnover. Therefore, respectfully following the decision of the jurisdictional High Court in the cases cited supra, we hold that these expenses cannot be reduced or excluded from the export turnover for computation of deduction u/s 10A of the Act."
25. Though the said issue was regarding travelling expenses whereas for the year under consideration the issue is regarding telecommunication as well as travelling expenses. So far as the travelling expenses are concerned, the said issue is covered by the decision of the co-ordinate Bench of this Tribunal and the DRP has already given the direction for exclusion of the same from the total turnover as well and the revenue has challenged the said direction of the DRP which we will 30 IT(TP)A Nos.396 & 435/Bang/2015 deal with subsequently. The assessee has specifically contended that when these expenses were not received from the AE and not part of the export turnover then the same are not required to be reduced further from the export turnover. The assessee relied upon the decision of the co-ordinate Bench of this Tribunal in the case of Subex Limited Vs. DCIT (supra) wherein the Tribunal has considered this issue in para 6 as under :
" 6. We heard rival submission and perusal of material on record. The Assessing Officer shall verify whether the expenditure such as courier charges, insurance charges and internet charges were actually recovered and included in the export turnover, by the assessee while computing deduction under Section 10A of the Act. If the above said expenses were not recovered and was not included in the export turnover, the Assessing Officer shall not reduce the same from the export turnover while computing the deduction under Section 10A of the IT Act. Accordingly, the issue is restored to the Assessing Officer. The Assessing Officer is directed to verify this aspect and shall take a decision in accordance with the law. It is ordered accordingly."
26. Having considered the rival submissions as well as the decisions of the co-ordinate Bench of this Tribunal, we are of the view that it is purely the factual aspect of the issue and in case the expenses incurred by the assessee are not part of the export turnover being adjusted by the AE 31 IT(TP)A Nos.396 & 435/Bang/2015 then it would amount to reduction of export turnover and therefore no further reduction of the said amount is required from the export turnover. Therefore this issue requires a proper verification and examination and accordingly we set aside this issue to the record of the Assessing Officer for proper verification and examination and then adjudication of the same.
27. The learned Authorised Representative has raised an alternate plea that the expenses incurred in respect of onsite service cannot be treated as the expenses incurred for rendering the technical services outside India. He has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Motor Industries Co. Ltd. 55 Taxman.com 377.
28. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below as well as the decision of this Tribunal in assessee's own case for the Assessment Year 2009-10.
29. We have considered the rival submissions as well as the relevant material on record. As per the definition of export turnover provided in Expln. 2 below Section 10B(9A), the export turnover does not include 32 IT(TP)A Nos.396 & 435/Bang/2015 freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India or expenses if any incurred in foreign exchange in providing the technical services outside India. Thus from the plain language of the definition of the export turnover, it is clear that the expenses which are not in the nature of freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India but expenses incurred in foreign exchange are to be excluded only when the same are incurred for providing technical services outside India. In the case of the assessee, the assessee has claimed that the traveling expenses incurred by the assessee are not for providing the technical services outside India and therefore the same are not required to be excluded from the export turnover. On principle, we do agree with the contention of the learned Authorised Representative that if the expenditure other than the freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India incurred in foreign exchange not for providing the technical services outside India then the same are not required to be 33 IT(TP)A Nos.396 & 435/Bang/2015 excluded from the export turnover. The Hon'ble jurisdictional High Court in the case of CIT Vs. Motor Industries Co. Ltd. (supra) while dealing with the issue of definition of export turnover has held in paras 17 to 19 as under :
" 17. For the purpose of this Section export turnover has been defined in Explanation
(c) to the section and it reads as under:
(c) "export turnover" means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (2), but does not include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;
18. From the aforesaid provision it is clear that the consideration in respect of computer software received in or brought into India by the assessee in convertible foreign exchange is deducted from the profits of the said business. In other words the assessee is not liable to pay any income tax on such consideration received from export of computer software. However the said export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of computer software outside India or expenses if any incurred in foreign exchange in providing technical service outside India. In other words out of the said export turnover the following amounts have to be deducted;
a. Freight b. telecommunication charges c. insurance attributable to the delivery of computer software outside India; d. expenses, if any, incurred in foreign exchange in providing technical services outside India;
19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer 34 IT(TP)A Nos.396 & 435/Bang/2015 software outside India. If the technical services rendered by the assessee's Engineers is in connection with the export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of subsection (1) of Section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover. In the instant case as is clear from the order of the Assessing Authority, he proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of said software. Therefore the expenditure incurred in foreign exchange in providing such technical services outside India of Rs.62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction under Section 80HHE of the Act. The assessee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of sub-section (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (i) of sub- section (1) of Section 80HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Ordered accordingly."
30. Similar view has been taken by the Hon'ble jurisdictional High Court in the case of CIT Vs. Kshema Technologies Ltd. 381 ITR 435 as well as in the case of CIT Vs. HP Global Soft Ltd. 381 ITR 99. Accordingly, the Assessing Officer is directed to verify the factual aspect and decide this issue in the light of above observations.