Income Tax Appellate Tribunal - Pune
Ptc Software (India) Private Ltd.,, ... vs Assessee on 31 October, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.336/PN/2014
(Assessment Year: 2009-10)
PTC Software (India) Private Limited
Survey No.15, Marisoft-II
Vadgaonsheri, Kalyaninagar
Pune - 411014
PAN: AABCC1268J .... Appellant
Vs.
The Dy. Commissioner of Income Tax
Circle - 4, Pune .... Respondent
Appellant by : Shri Ashwini Taneja
Respondent by : Shri B.C. Malakar
Date of hearing : 09-10-2014
Date of pronouncement : 31-10-2014
ORDER
PER SUSHMA CHOWLA, JM:
This appeal filed by the assessee is against the order of Dy.CIT, Circle - 4, Pune dated 15.01.2014 relating to assessment year 2009-10 passed under section 143(3) r.w.s. 144C of the Income-tax Act.
2. The assessee has raised the following grounds of appeal:
1. The Ld Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted / contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of Rs.12,91,06,230 to the income of the appellant by holding that the international transaction, pertaining to provision of software services ('IT services') and customer support back office services ("ITES Services') to the associated enterprise ('AE'), are not at arm's length under the Income-tax Act, 1961 ('the Act').
2. On the facts and in the circumstances of the case, the Ld. AO/DRP erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin 2 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying the set of comparables. In doing so, the Ld AO/DRP specifically erred in:
a) conducting selective fresh analysis by applying certain additional quantitative / qualitative filters for identifying the comparables resulting in cherry picking of comparables which contradicts with the principles of conducting search (for comparables) in a scientific manner;
b) rejecting the fresh search (using the data for FY 2008-09 only) for the IT and ITES segment provided by the appellant (on a without prejudice basis) without any cogent reasons, whereas the Ld. TPO had himself conducted a fresh search analysis. This inconsistency indicates a discriminatory mindset whereby only those approaches that generate results prejudicial to the appellant would selectively be acceptable to the Ld TPO;
c) introducing additional companies which were considered as comparables in the prior year's TP Order for AY 07-08 and AY 08-09 resulting in cherry picking of comparables which contradicts with the principles of conducting search (for comparables) in a scientific manner;
d) rejecting companies functionally similar to that of the appellant's business operations from final set of comparables which were accepted in past assessment years (and also identified based on the fresh search conducted by the appellant on a without prejudice basis) without providing any reasons.
3. The Ld. DRP/AO erred in considering the single year data for the comparables i.e. data for FY 2008-09 only and disregarding multiple year data which was considered by the appellant in accordance with the provisions of Rule 10B(4) of the Income-tax Rule, 1962 ("Rules'")
4. The Ld. DRP / AO erred in not allowing an adjustment for the difference between the level of risk borne/assets employed by the comparables and the appellant as provided by the appellant, without providing any cogent reasons, and disregarding the provisions of Rules 10B (3) read with Rule 10C of the Rules. In doing so, the Ld DRP / AO erred by:
i. failing to capture that the appellant is a routine captive service provider as against the comparable companies selected by the Ld TPO which include entrepreneurial companies and hence an adjustment is necessary;
ii. disregarding the provisions of Rules 10B(3) read with Rule 10C of the Rules.
5. The Ld. AO while passing the assessment order has erred in not disposing off the rectification application filed by the appellant for rectifying certain mistakes in the transfer pricing order. 3 ITA No.336/PN/2014
PTC Software (India) Pvt. Ltd.
6. The Ld. AO while passing the assessment order has erred in making certain errors in computing the tax demand/liability. The above grounds are without prejudice to each other Your appellant craves leave to add, amend, alter, withdraw, modify and/or substitute, and to withdraw the above grounds of appeal.
3. The brief facts of the case are that PTC India is engaged in designing and developing software for Parametric Consultancy Corporation (PTC), which in turn utilizes the software to provide Product Lifecycle Management ('PLM') Software Solutions to its clients. In addition, PTC India is also engaged in rendering technical support services (call center services) to PTC's global client base.
4. As per the Transfer Pricing document (TP) furnished for the year under consideration, the assessee was found to have entered into various international transactions with its Associate Enterprise (AE) i.e. PTC USA for the provision of software services and also for the provision of IT enabled services. The assessee had applied a search criteria for picking up the comparables and had selected certain companies in the IT segments and also in the ITES segments which are mentioned at pages 2 and 3 of the order passed under section 92CA(3) of the Act. As the assessee had entered into international transactions, the Assessing Officer made a reference under section 92CA(1) of the Act for computation of Arm's Length Price in respect of the international transactions mentioned in the form No.3CEB. The assessee had applied TNMM method and used Profit Level Indicator of Operating Profit (OP) over operating expenses (TC) as the PLI indicator. The TPO with a view to find comparable companies with more 4 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
appropriateness, conducted a fresh search by using the following search criteria for selecting the comparables in IT and ITES segments.
a. Only current years data (FY 2008-09) has been used b. Companies with income from IT services > 50% of the operating revenue or segmental revenue are selected c. Companies with less than 75% earnings from exports rejected d. Companies with related party transactions less than 25% are selected e. Companies with persistent losses / diminishing revenues are rejected f. Companies with Peculiar Economic Circumstances are rejected g. Companies whose data is not available for the FY 2008-09 has not been considered.
h. Companies with IT and IT enabled service income < 1 Cr and > 200 Cr were excluded and having turnover between Rs 1 Cr to Rs.200 Cr has been retained.
i. Companies whose IT enabled service revenue is less than 50% of the total operating revenue or segmental revenue were excluded j. Companies who have more than 25% related party transactions were excluded k. Companies who have less than 75% of the operating revenue as export sales were excluded.
l. Companies who have diminishing revenues/persistent losses for the period under consideration were excluded m. Companies that are functionally different from you or working in peculiar economic circumstances, after giving valid reasons, were excluded.
5. In view of the search criteria applied by the TPO, certain companies which were selected by the assessee as comparables were found to be not comparables and hence were rejected. The following comparables were selected by the TPO for the purposes of benchmarking the international transactions. The TPO selected the following companies as comparables with the assessee in the IT segments:-
S. No. Name of the Company Remarks / PLI
1 FCS Software Solutions Ltd 53.08
2 Larseh & Tourbo Infotech Ltd 21.33
3 Mindtree Ltd 38.18
4 Persistent Systems Ltd. 37.77
5 KALS Information System Ltd. (seg) 41.91
6 Bodhtree Consulting Ltd 62.29
42.43
5
ITA No.336/PN/2014
PTC Software (India) Pvt. Ltd.
6. The assessee was show caused with regard to the selection of the said companies as comparables for benchmarking the international transactions both in IT and ITES segments. One of the factors applied by the TPO was that the assessee in its TP Study had used the earlier year's data on the premise that the current year's data was not available in all the cases at the time of TP study. The TPO was of the view that only the current year's data to the exclusion of the earlier year's data was to be applied. In view of the provisions of Rule 10B(4) of IT Rules, as per the TP case mandated for the use of the data relating to the financial year in which the international transaction was entered into. The assessee raised objections to the search criteria sought to be applied by the TPO. The first objection raised by the assessee was that the earlier year's data could be applied for doing the benchmarking for selection of the comparable companies. Another objection raised by the assessee was against the selection of companies with income from IT services greater than 50% of the operating revenue or segmental revenue.
7. Another objection was raised against the selection of companies which had turnover between Rs.1 crores to Rs.200 crores. The plea of the assessee in this regard was that the strength of TNMM was that net margins (e.g. return on assets, operating income to sales, and possibly other measures of net profit) were less affected by transactional differences. The difference in the level of turnover, though being an important characteristic at the time of evaluation of comparability, cannot be the sole reason of rejection of comparables having similar functional profile, especially while applying the TNMM. It was further pointed by the assessee that both levels of turnover mentioned above were significantly higher than the turnover of the 6 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
assessee, and on consideration of the turnover filter as the primary reason for rejection, both levels would stand a similar chance for rejection. The assessee further submitted that the turnover filter of sales greater than Rs.1 Crore was applied in the TP study conducted by the assessee.
8. The TPO rejecting the plea of the assessee observed that in the previous year, the TPO had applied higher turnover criteria of Rs.200 crores and the same fact was confirmed by the DRP in its own case. Therefore, in order to maintain consistency, the same criteria was adopted and company such as LT Infotech, Mindtree and Persistent Systems were rejected on this account.
9. The assessee further raised objections on the following criteria applied by the TPO.
a. Foreign exchange loss / gain non-operating in nature b. consideration of other income / miscellaneous income as operating income c. Companies with less than 75% earning from exports- excluded d. companies with less than 25% related to party transactions e. and companies having losses
10. The assessee further carried out a fresh search during the proceedings before TPO on the data basis and capital loan place. The assessee claims to have adopted the same quantitative filters which were adopted in the TP for financial year 2008-09 and following search criteria were adopted.
a. Companies having data for FY 2008-09 (and rejected companies with different financial year end) b. Companies with positive sales and ratio of other operating income of more than 50% of total operating revenue c. Companies with sales turnover of more than 1 crore 7 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
d. Companies with net worth more than zero e. Companies with ratio of research and development expenses to sales less than 3% f. Companies with ratio of the sum of advertising, marketing and distribution expenses to sales less than 3% g. Companies with ratio of net fixed assets to sales less than 200% h. Companies with export sales of more than 75% of operating revenue i. Companies with related party transaction of 25%
11. The TPO applied the ratio laid down by the Bangalore Tribunal in Kodiak Networks India Pvt. Ltd. Vs. ACIT (2012) 51 SOT, 191 (Bang), wherein it was held that under Rule 10D(4), information and documents should be contemporaneous and should exists latest by the specified date in section 92F(4) of the Act i.e. the due date for filing the return of income. As per the TPO, the obligation upon the tax payer was to keep and maintain the documents for that period by providing for specific data in the provisions, however, there was no cut off date up to which the information available in public domain could be taken into consideration by the TPO, while making the transfer pricing adjustment and arriving at the ALP. As per the TPO, the assessee by the new search carried out during the pendency of the proceedings could not do cherry picking and the same was rejected.
12. The assessee thereafter before the TPO, has raised the objections against the selection of different companies which has been considered by the TPO elaborately and we shall make a reference to the same while adjudicating the issue raised in the present appeal keeping in mind the submissions made by the learned Authorized Representative for the assessee before us. The assessee also raised an objection to the introduction of the additional companies by the TPO without providing any cogent reasons. However, the TPO rejected the plea of 8 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
the assessee and selected the final set of comparables in IT segments as under:
S.No. Name of the Company PLI PLI After
WC Adj
1 FCS Software Solutions Ltd 15.49 14.41
2 Akshay Software Technology 8.19 10.56
3 KALS Information Systems Ltd. (seg) 41.91 43.20
4 Bodhtree Consulting Ltd 68.35 69.25
5 LGS Global Ltd 18.03 15.03
6 Goldstone Technologies Ltd 4.15 7.07
Average 26.25
13. The PLI of the comparable companies thus worked out at 26.25 as against 17.19 of the assessee.
14. The ALP of the software services rendered by the assessee was worked out as under:
Rs.
Operating revenue of the assessee R 1,276,836,375
Operating Cost (OC) 1,089,510,725
PLI of comparables P 26.25
Arm's Length Price (ALP) of the A 1,375,507,290
international transaction
(ALP=OC*(1+P/100)
Diff +/- 5% = A*95/100 1,306,731,926
Adjustment over operating income A-R 98,670,915
(Shortfall being adjustment u/s 92CA)
15. In view thereof, an adjustment of Rs.98,670,915/- was made to the international transactions relating to software development services of the assessee to arrive at the arm's length value of the international transaction and as a consequence of this adjustment, income of the assessee was proposed to be increased by Rs.98,670,915/-.
16. Further, in ITES segment also, the assessee raised objections to the rejection and acceptance of certain comparables which has been considered by the TPO and also after rejecting the fresh search carried 9 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
out by the assessee has selected following comparables in the ITES segment:-
S.No. Name of the Company OP/OC
1 Accentia Technologies Ltd 52.63 49.35
2 National Securities Depository Ltd 16.98 17.18
3 E4e-health Solutions Ltd. (Formerly 33.31 30.67
known as Nittany Outsourcing
Services Pvt. Ltd
4 Cosmic Global Ltd. 43.11 40.38
5 Eclerx Services Ltd 46.90 46.57
6 Vishal Information Technology 36.99 36.52
7 Microgenetics -0.33 -0.77
Average 31.71
17. The PLI of the comparable companies thus worked out at 31.71 as against 15.04 of the assessee.
18. The ALP of the software services rendered by the assessee was worked out as under:-
Rs.
Operating revenue of the assessee R 101,596,764
Operating Cost (OC) 100,244,536
PLI of comparables P 31.71
Arm's Length Price (ALP) of the A 132,032,078
international transaction
(ALP=OC*(1+P/100)
Adjustment over operating income A-R 30,435,314
(Shortfall being adjustment u/s 92CA)
19. In view of the above, an adjustment of Rs.30,435,314/- was made to the international transaction relating to ITES segment to arrive at the arm's length value of the international transaction and as a consequence of this adjustment, income of the assessee was increased by Rs.30,435,314/-.
20. The report by the TPO was submitted to the Assessing Officer which was show caused to the assessee and the learned Authorized 10 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
Representative for the assessee relied upon the submissions made before the TPO. Consequent to that a draft order was issued to the assessee on 08.03.2013 and in response to the same, the assessee submitted objections before the Dispute Resolution Panel (DRP), Pune against the variations proposed in the draft assessment order. The DRP considered the objections of the assessee and the draft order passed by the Assessing Officer under section 144C(5) of the Act dated 09.12.2013. The DRP, Pune had chosen not to interfere with the proposed variations in the draft assessment order of the Assessing Officer and considering the said directions, the Assessing Officer passed the final assessment order under section 143(3) r.w.s. 144C of the Act and computed the adjustment under section 92CA of the Act at Rs.12,91,06,230/-. The income of the assessee was enhanced and it was also held by the Assessing Officer that no deduction under section 10A or section 10AA or section 10B or under Chapter VIA shall be allowed in respect of the amount of income by which the total income of the assessee was enhanced.
21. The assessee is in appeal against the order passed by Assessing Officer under section 143(3) r.w.s. 144C of the Act. The learned Authorized Representative for the assessee has filed brief synopsis of the arguments which has been taken on record. It was pointed out by the learned Authorized Representative for the assessee that the assessee was a captive service provider and addition in the hands of the assessee was made on account of two segments i.e. IT and IT enabled service segments. It was pointed out by the learned Authorized Representative for the assessee that the assessee has aggrieved by the selection of the certain comparable companies in the TP study. The first objection raised by the learned Authorized 11 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
Representative for the assessee was against the inclusion of the two comparables i.e. M/s. KALS Information Systems Ltd and Bodhtree Consulting Ltd. The learned Authorized Representative for the assessee pointed out that in the preceding year, the Tribunal held that KALS Information Systems Ltd. was not comparable. Our attention was drawn to the Compendium of Relevant case laws and the order of the Tribunal in assessee's own case relating to assessment year 2007-
08. It was also pointed out by the learned Authorized Representative for the assessee that the said comparables picked up by the TPO i.e. KALS Information System Ltd. was primarily engaged in the business of software services and software products, whereas the assessee does not sell any software products and was a capital service provider. The learned Authorized Representative for the assessee made reference to the financial statement of KALS Information System Ltd. placed at pages 479 to 489 of the Paper Book and our attention was drawn to the notes to the financial statement and also the profit & loss account for the year ending 31.03.2009, under which the said company had declared the receipts from sales, services and training at Rs.2.14 crores. The learned Authorized Representative for the assessee further referred to the notes on account at page 481 of the Paper Book and pointed out that it was reported that the company was engaged in the development of computer software and other related services. Further at pages 482 to 489 attached to the list of products dealt in by KALS Information Systems Ltd. In respect of the other comparables selected i.e. Bodhtree Consulting Ltd., it was pointed out that the TPO had selected the said company as a comparable because it was considered as a comparable in assessment year 2008-09 in TPO's order. However, the assessee for the year under consideration was aggrieved by the selection of the said company as a comparable as Bodhtree 12 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
Consulting Ltd. was showing drastic fluctuation in the operating margins with a high of 80.15% and low of (-) 4.46% over period of six years. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Bangalore bench of the Tribunal in M/s. Mindteck (India) Ltd. in I.T(TP).A No.70/Bang/2014, wherein Bodhtree Consulting Ltd. was excluded in assessment year 2009-10 from the final set of comparables for its abnormal profitability trend. Further, reliance was placed on the decision of the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd. UK in ITA Nos.161 & 269/PN/2013 wherein it had followed the Special Bench decision in Maersk Global Centres (India) Pvt. Ltd. in ITA No.7466/Mum/2012 and held that trend of profitability should reflect normal business conditions for a comparable to be accepted.
22. Further, reliance was placed on the ratio laid down by the Mumbai Bench of the Tribunal in NetHawk Networks India Pvt. Ltd. Vs. ITO in ITA No.7633/Mum/2012, dated 06.11.2013, wherein Bodhtree Consulting Ltd. was rejected as comparable, since the same was involved in sale of software products and no segmental data were available. The last contention raised by the assessee was that when loss making company was rejected by the TPO, then super profit making company like Bodhtree Consulting Ltd. and e-Infochips Ltd. also be excluded since the said company was having oscillating profits.
23. The learned Departmental Representative for the Revenue pointed out that the issues raised by the assessee both before TPO and DRP were same. Further, reliance was placed on the order passed by DRP in this regard. Our attention was drawn to the order of the TPO at pages 58 and 59 wherein the said companies i.e. KALS Information 13 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
Systems Ltd. and Bodhtree Consulting Ltd. were selected. It was pointed out by the learned Departmental Representative for the Revenue that Bodhtree Consulting Ltd. was selected by the assessee in TP study relating to assessment year 2008-09 and the same should be selected as a comparable.
24. The learned Authorized Representative for the assessee pointed out that last year the said company Bodhtree Consulting Ltd. was functionally comparable but since comparable was declaring fluctuating profits, the same cannot be used a comparable and was not picked up by the assessee in its TP study. The assessee further was aggrieved by the selection of the FCS Software Solutions Ltd. and it was pointed out by the learned Authorized Representative that the said company was rendering diverse services and no segmental data was available. Even before the TPO, it was pointed out that segmental data was not available. The TPO had selected the said company as the software development was more than 50%. However, the said company does not fit into the said filter as it has software development only to the extent of 40% of the revenue and hence fails the filter. The learned Authorized Representative for the assessee pointed out that certain companies i.e. Mindtree Ltd. (5.52%), e-Infochips Ltd. (- 12.69%) should be taken as comparable. The learned Authorized Representative for the assessee further pointed out that it had carried out a fresh search during the proceedings before the TPO and the TPO rejected the fresh search conducted by the assessee. It was plea of the assessee that fresh search was conducted by applying the quantitative filters adopted in the TP study for the financial year 2008-09 and the additional filters considered by the TPO, on a without prejudice basis. The TPO in assessment year 2008-09 had accepted the fresh search 14 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
conducted by the assessee. However, during the year under consideration, as per the assessee, the TPO had adopted a cherry picking approach for identifying comparables rather than a structured process. The assessee had identified the following companies to be included as per the fresh search:-
a. Thinksoft Global Services Ltd., b. Zylog Systems Ltd., c. Avani Cimcon Technologies Ltd., d. R S Software (India) Ltd.
25. The learned Departmental Representative for the Revenue placed reliance on the order of the TPO and DRP in respect of his submissions.
26. We have heard the rival contentions and perused the record.
The first issue raised by the assessee is in relation to the adjustment of Rs.9,86,70,915/- in IT services segment. The TPO on a fresh search had selected the following comparables:-
S.No. Name of the Company PLI PLI After
WC Adj
1 FCS Software Solutions Ltd 15.49 14.41
4 Akshay Software Technology 8.19 10.56
5 KALS Information Systems Ltd. (seg) 41.91 43.20
6 Bodhtree Consulting Ltd 68.35 69.25
7 LGS Global Ltd 18.03 15.03
8 Goldstone Technologies Ltd 4.15 7.07
Average 26.25
27. The assessee is aggrieved by the inclusion of item at Sr No.5 KALS Information Systems Ltd. (seg). It is the case of the assessee that the said company was included by the TPO in its study relating to assessment year 2007-08 and the Tribunal in assessee's own case in ITA No.1605/PN/2011 relating to assessment year 2007-08 vide order dated 30.04.2013 had held the said company to be not functionally 15 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
comparable with the assessee. The relevant finding of the Tribunal vide para 19 is as under:
"19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern (KALS Information Systems Ltd.) has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services."
28. In the year under consideration also, the said company KALS Information Systems Ltd. is engaged in the sale of software products, which is apparent from the financial statements and notes to accounts filed by the assessee at pages 479 to 489 of the Paper Book. The said company being not functionally comparable in view of the factual aspects referred to by the assessee and in view of finding of the Tribunal in assessee's own case for assessment year 2007-08, we hold that the application of software segment of the said concern was not comparable to the assessee's segment of IT services.
29. The assessee further has assailed the inclusion of Bodhtree Consulting Ltd. appearing at item No.6 in the list of comparables selected by the TPO. The said company was selected as a comparable by the TPO because in assessment year 2008-09, Bodhtree Consulting Ltd. was selected by the assessee itself. On the other hand, the objection raised by the assessee was that the current year's profits of 16 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
the said company were on higher side and the same thus, was not functionally comparable. The trend of OP / TC of Bodhtree Consulting Ltd. was as under:
Particulars FY 05- FY 06- FY 07- FY 08- FY FY 10- FY FY 12-13 06 07 08 09 09-10 11 11-12 OP / TC 13.87% 80.15% 19.89% 62.27% 33.42 -4.46% 3.29% -11.53%
30. The plea of the assessee before us was that admittedly it had selected the said company in the preceding year as a comparable because it was functionally comparable in the said year. However, because of the fluctuating profits shown by the assessee which varied in the range of 80.15% to -4.46%, the said company was not to be picked up as a comparable.
31. The Bangalore Bench of the Tribunal in M/s. Mindteck (India) Ltd. (supra) had considered the oscillating profits declared by the said concern i.e. Bodhtree Consulting Ltd. and held as under:-
"16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it 17 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly."
32. Further, the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK, Vs. Dy.DIT, had on similar issue of exclusion of abnormal profit making concern held as under:-
"8. We have carefully considered the rival stands on this aspect. In the context of the controversy relating to the exclusion of abnormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Private Ltd. vs. ACIT vide ITA No.7466/Mum/2012 dated 07.03.2014. The relevant observations of the Bench are as under :-
"In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin."
In terms of the aforesaid discussion of the Special Bench, it is quite clear that the concerns earning abnormal high profit margins cannot be excluded from the list of comparables unless appropriate investigations are made. It would be necessary to ascertain as to whether the high profit margins reflect a normal business phenomena or whether it is the result of certain abnormal conditions prevailing in a particular year. In order to determine so, profit margins earned by such concern in the proximate preceding and succeeding years would be required to be considered in order to establish whether the high profit margins reflect a normal business trend or otherwise. In this 18 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
background of the matter, the appellant has furnished before us the operating margin trends of the said concern over the five financial years i.e. for the three preceding years and one succeeding financial year. Notably, for the financial year under consideration, the margin of the said concern is 34.71% whereas for the preceding three financial years of 2003-04, 2004-05 and 2005-06 it is -6.47%, -69.07% and -44.21% respectively and for the subsequent financial year of 2007-08, the margin is 3.67%. The aforesaid clearly suggests a wide fluctuation in the margins earned by the said concern over a period of time. In-fact, a further analysis of the financial data for the aforesaid years suggest that there is a wide fluctuation in the revenue generation of the said concern during the financial year under consideration as compared to the past three financial years. For the subsequent financial year, the revenue generation has taken a downward trend which again reflects a wide fluctuation. At the time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no material to say that the high profit margin of 34.71% declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of either the three preceding financial years or of the succeeding financial year do not justify that the margin of 34.71% for the year under consideration is a normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final set of comparables would not lend credibility to the comparability analysis and therefore it deserves to be excluded. We hold so.
9. The plea setup by the CIT(A), and which has been reiterated before us is that the point setup by the assessee would involve consideration of multiple year data of the comparable whereas the transfer pricing analysis is required to be done based on the singular financial year data i.e. financial year data of the comparables relevant to the year in which the international transactions have been entered into. In our considered opinion, the aforesaid plea of the Revenue is untenable having regard to the issue in question. No doubt, sub-rule (4) of rule 10B of the Income Tax Rules, 1962 (in short "the Rules") prescribe that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. So however, the aforesaid rule is not absolute inasmuch as proviso thereof permits use of the data relating to other years, subject to the condition that it reveals "facts which could have an influence" on the determination of transfer prices in relation to the tested transaction. We are only pointing out the aforesaid to say that the proposition being canvassed by the Revenue that data of the financial year in which the international transaction has been entered into, alone and alone, is to be used is not an absolute proposition. Needless to say, the objective of carrying out the comparability analysis is to determine the arm's length price of an international transaction by means of examining similarly placed uncontrolled transactions. Therefore, if on facts, it can be established that adoption of a 19 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
certain comparable would lead to skewed results or that the financial data of a particular comparable is otherwise devoid of credibility, such comparables would deserve to be excluded from the list of comparables even if such an exercise involved examination of data of the comparables for more than one financial year. In the present case, as our discussion in the earlier paras reveal, the profit margin of 34.71% for the year under consideration is an abnormal business trend, and, accordingly the said concern is liable to be excluded. Therefore, we do not find any force in the plea of the Revenue to retain the said concern in the final list of comparables.
10. In conclusion, we set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to exclude Informed Technologies India Ltd. from the final list of comparables."
33. The Mumbai Bench of the Tribunal in NetHawk Networks India Pvt. Ltd. Vs. ITO in ITA No.7633/Mum/2012, dated 06.11.2013 had also excluded the company Bodhtree Consulting Ltd. as it was engaged in the production of software products and also because no segmental data was adequately available. The said company was rejected as it was not engaged in the software development services and there was no segmental data comparable were available.
34. With regard to the inclusion of Bodhtree Consulting Ltd., the objection raised by the assessee was on two accounts that first it was engaged in the sale of software products and no segmental data was available. However, on the other hand, the said company was picked up by the assessee as a comparable in the financial year 2008-09. We find that the profits declared by the said concern ought to be considered while selecting the said comparables. The perusal of the results shown by the said company reflected high margins in certain years and very low in other years, which do not reflect normal business conditions. Consequently, the margins of the said companies cannot be applied as comparables while benchmarking international transactions of the assessee in IT segments. 20 ITA No.336/PN/2014
PTC Software (India) Pvt. Ltd.
35. The learned Authorized Representative for the assessee during the course of arguments had stated that if the assessee was to succeed on its plea of exclusion of KALS Information System Ltd. and Bodhtree Consulting Ltd. from the final set of comparable, then the stated variation between arm's length price worked out by the TPO / DRP and the value stated value of the income would fall within +/- 5% margin and therefore, in terms of section 94C(2) of the Act, no further adjustment in the international transactions would be required to be made, though the assessee during the course of hearing had raised various arguments in respect of exclusion of other companies and inclusion of certain companies selected by way of fresh search, but the same are rendered an academic and are not being adjudicated for the present as we have upheld the plea of the assessee vis-à-vis exclusion of KALS Information System Ltd. and Bodhtree Consulting Ltd. from the final set of comparables. We accordingly, direct the Assessing Officer to re-compute the arm's length price of the transactions of assessee company with its AEs applying the average profit margin of remaining comparables and if the difference between the arm's price length so recomputed and the price actually charged is within the limit of +/- 5%, then no Transfer Pricing adjustment is to be made. The grounds of appeal raised by assessee are thus, allowed for statistical purposes.
36. The other issue remaining for adjudication is the adjustment made in IT enables serviced segment at Rs.3,04,35,314/-.
37. The assessee was also aggrieved by the selection of certain comparables by the TPO in the ITES segments. The first objection 21 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
raised by the assessee is against the inclusion of M/s. Coral Hubs Ltd (formerly known as Vishal Information Technologies Ltd.). The plea of the assessee was that the said company, besides providing IT enabled services, also provides diversified activities like data capture and digitalization, data conversion, e-publishing, digital library solutions, fund accounting services, online books stores. Based on the analysis of the relevant financial data, it also outsourced the services to third party vendors and acted as an intermediary between the final customer and the vendor. Accordingly, the company was not functionally comparable to the assessee's ITES segment. Further, the said company had made significant payments towards vendor.
38. The learned Authorized Representative for the assessee pointed out that the Tribunal in assessee's own case in assessment years 2007-08 and 2006-07, had rejected M/s. Vishal Information Technologies Ltd. on account of being functionally non-comparable to the assessee's ITES segment since the said company provided high end services. Further, reliance was placed on the ratio laid down in Cummins Turbo Technologies Ltd., UK in ITA No.161 & 269/PN/2013 relating to assessment year 2007-08 and 2008-09, order dated 29.09.2014, wherein the Tribunal had held the said company to have significantly outsourced its business. Our attention was drawn to the annual reports of the said company placed at pages 503 and 504 of the Paper Book.
39. The next objection raised by the learned Authorized Representative for the assessee was against the inclusion of Accentia Technologies Ltd. The learned Authorized Representative for the assessee pointed out that the said company renders medical 22 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
transcription services, medical coding, medical billing, receivables management with respect to the Healthcare Receivables Cycle Management Sector. Further, the said company develops its own software products and owns intangibles in the form of Goodwill. Such software products were primarily the platforms required for rendering medical transcription services.
40. It was pointed out by the learned Authorized Representative for assessee that the assessee does not have any such software products or intangibles. The learned Authorized Representative for the assessee further pointed out that the said company had made certain acquisitions during the year, which in turn had affected its margins for the year under consideration. The learned Authorized Representative for the assessee further pointed out that Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Pvt. Ltd. in ITA No.1961/Hyd/2011, had rejected Accentia Technologies Ltd. for having extra-ordinary circumstances (amalgamation). Thus, the Tribunal held that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. The learned Authorized Representative for the assessee further drew our attention to the list of services provided by the said company and the nature of the activities and the list of products as per the financial statements of the said company placed at pages 505 to 507 of the Paper Book.
41. The learned Authorized Representative for the assessee is also aggrieved by the inclusion of Eclerx Services Ltd. as a comparable. The grievance of the assessee was that the TPO had observed that both BPO and KPO services were similar in nature and hence the said 23 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
companies were functionally comparable to the assessee. The learned Authorized Representative for the assessee pointed out that the said company was rejected by the TPO in its study relating to assessment year 2008-09 on account of having super profits and the same was also not part of the final set of companies accepted by DRP in assessment year 2008-09. The learned Authorized Representative for the assessee further pointed out that the said company was a Knowledge Process Outsourcing (KPO) company engaged in providing data analytics and data process solutions to the customers based on the annual report for financial year 2008-09. Eclerx supports core and complex activities for its clients using proprietary processes and a scalable offshore delivery model. The plea of the assessee was that the said company was to be rejected on account of having super profits and also because it was engaged in providing KPO services. Reliance was placed on the ratio laid down by the Special Bench of the Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd. in ITA NO.7466/MUM/2012 (SB).
42. The next comparable picked up by the TPO was Cosmic Global Ltd. The learned Authorized Representative for the assessee pointed out that either before the TPO of DRP, the assessee had not contested the rejection of the said company, but however, it had come across certain decisions, wherein the said company had been rejected on account of having different business model. It was further pointed out by the learned Authorized Representative for the assessee that even though the assessee had not challenged the inclusion of said comparables in the TP study report, but the same could be challenged before the Tribunal as has been laid down by the Special Bench of the 24 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
Tribunal in the case of DCIT Vs. M/s. Quark Systems Pvt. Ltd. in ITA No.115/Chd/2009 (SB), order dated 22.10.2009.
43. Another objection raised by the learned Authorized Representative for the assessee was that certain companies were identified by the assessee as being functionally comparable as per the fresh search conducted and the same should have been considered by the TPO in the TP study. It was the plea of the learned Authorized Representative for the assessee that the said comparables have arbitrarily been rejected by the TPO. However, the learned Authorized Representative for the assessee fairly admitted that the issue may be sent back to the TPO for considering the said comparables selected by the assessee in its fresh study.
44. The learned Departmental Representative for the Revenue had placed reliance on the orders of TPO and DRP.
45. We have heard the rival contentions and perused the record. In the TP study carried out by the TPO in the ITES segments, fresh search criteria were applied by the TPO and list of comparables which were not selected by the assessee were picked up in the TP study and the margins of the said comparables were applied to determine the arm's length price of the transactions of the assessee in ITES segments. The assessee was aggrieved by the selection of the said comparables and the plea of the assessee was that in case said comparables were not included in the TP study, the margins shown by the assessee would be at arm's length. The first comparable referred to by the learned Authorized Representative for the assessee was M/s. Vishal Information Technologies Ltd. The said company was providing 25 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
IT enabled services and was also engaged in other diversified activities. Further, it has outsourced its services to third party vendor and acted as intermediary between the final customer and the vendor. The assessee on the other hand was engaged in the running of a call centre and was providing technical support to its AEs. We find that the Tribunal in assessee's own case relating to assessment year 2006-07 in ITA No.1346/PN/2010 and in assessment year 2007-08 in ITA No.1605/PN/2011 had excluded the said comparables observing as under:
"30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said concern is functionally comparable to the IT- Enabled services segment of the assessee and for that reason, the said concern has been included as a comparable for the purposes of comparability analysis. In this connection, the plea set up by the assessee is that the said concern is engaged in not only IT- Enabled services, but also in providing quality products and in the creation of animated films and books. It has also been ascertained by referring to the Annual Report of the said concern that it is engaged in providing agency services by way of outsourcing the services to third party vendors and acting as an intermediary between the final customer and the vendor. The assessee furnished detailed submissions in this regard before the lower authorities, copies of which have been placed in the Paper Book at pages 420.8 to 420.31. By referring to the written submissions, it is also sought to be pointed out that the intermediary functions performed by the said concern can be compared to that of a distributor which takes title to service/product for resale to the customers. The aforesaid assertion is sought to be substantiated by the details of payments made by the said concern for data entry and vendor payments, personnel costs and sales. It is, therefore, contended that the said concern is functionally dissimilar to that of the IT-Enabled services segment of the assessee. It has also been argued that the said concern has earned supernormal profits as high as 59.19% and therefore, the same is not includible in the list of comparables so as to avoid skewing of the comparability analysis. On the other hand, the stand of the Revenue as brought out by the TPO in para 6.9.6. of the order is to the effect that the said concern being categorized as an IT-Enabled services concern, the same is liable to be included.
31. We have carefully considered the rival submissions on this aspect. At the outset, we may refer to page 810 of the Paper book, wherein the Notes to Accounts for the year ended 31.3.2007 of the said concern have been placed. As per the available 26 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
information, the said concern has related party transactions as reported by the concern at para 7 of the said Notes at 86.92%, which breaches the RPT filter. Furthermore, the functional profile of the said concern brought out by the assessee also reveals differentiation in the activity profile. The TPO, in our view, has not appreciated the qualitative difference in the functions performed by the said concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds."
46. The Tribunal in the assessee's own case had held that the said concern was found to be operating in different functional environment and the same was excluded for the purpose of comparability analysis. Following the ratio laid down by the Tribunal in assessee's own case in assessment years 2006-07 and 2007-08 (supra), we uphold the plea of the assessee in excluding the margins of the said concern M/s. Vishal Technologies Ltd.
47. The next objection of the learned Authorized Representative for the assessee was with regard to the inclusion of M/s. Accentia Technologies Ltd. which admittedly was engaged in developing its own software products and was rendering medical transcription services. Further, the said company during the year under consideration had made certain acquisitions which in turn affected the margins of the year of the acquisition. We find that Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Pvt. Ltd. (supra) had rejected Accentia Technologies Ltd. for having extra-ordinary circumstances i.e. amalgamation. Following the parity of reasoning as adopted by the Hyderabad Bench of the Tribunal, we hold that the said company had different functional profile as compared to the assessee, which in turn explained the abnormally high profit margins earned by the said company as compared to the assessee. 27 ITA No.336/PN/2014
PTC Software (India) Pvt. Ltd.
Accordingly, we accept the plea of the assessee and hold that the said company is not to be used as comparable in ITES segments of the assessee.
48. The next objection of the assessee was that with regard to inclusion of Eclerx Services Ltd. which admittedly was engaged in providing KPO services i.e. Knowledge Process Outsourcing, whereas the assessee was engaged in BPO services. The Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. (supra) vide order dated 21.08.2014 had excluded the said company as a comparable while determining the margins under ITES segments. The Special Bench of the Tribunal vide paras 82 and 83 at pages 73 and 74 of the order, had observed as under:-
"keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns."
49. Following the same parity of reasoning, we direct the TPO to exclude M/s. Eclerx Services Ltd. as comparable.
50. The next company as per the assessee which should not be taken as comparable is Cosmic Global Ltd. Admittedly, the assessee had not objected to its inclusion either before the TPO or DRP. However, the assessee challenged the exclusion of the said company as comparable before the Tribunal.
51. We find that the Special Bench of Chandigarh Tribunal in the case of Quark Systems Pvt. Ltd. (supra) had held that even if the 28 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
assessee had not challenged the inclusion of the comparable before the authorities below, the same could be challenged before the Tribunal for the first time. Accordingly, we hold that the assessee at this point can raise the said issue. Now, the second part of the objection was that the company had outsourced its vendor and was making high vendor payments as compared to the sales and hence was not comparable. While adjudicating the exclusion of M/s. Vishal Information Technologies Ltd., we have in paras hereinabove already considered this aspect of the companies outsourcing to vendors and held M/s. Vishal Information Technologies Ltd. to be not functionally comparable. Following the same parity of reasoning, we hold that M/s. Cosmic Global Ltd. is not functionally comparable.
52. An ominous objection was raised by the assessee with regard to non-consideration of the following comparables by the TPO:-
Sr. Company Adjusted OP/TC OP/TC of
No. of comparables comparables
considered by Ld. considered by the
TPO Assessee
8 Informed Technologies Ltd - 26.22%
9 Omega Healthcare Management - 17.64%
Services Pvt. Ltd
10 Cameo Corporate Services Ltd. - 21.51%
11 Gebbs Infotech Ltd - 19.58%
12 Techprocess Solutions Ltd - 24.57%
(Processing segment)
13 In House Production Ltd. - 5.44%
(Healthcare segment)
14 AOK In House BPO Services Ltd - 14.57%
15 Aegis BPO Services (Gurgaon) - 7.44%
Ltd (BPO Segment)
16 Delta Services (I) Pvt. Ltd. - 8.33%
17 Professional Management 18.01%
Consultants Pvt. Ltd.
53. In this context, it was explained that since the adoption of multiple years data of the comparables by the assessee in its Transfer 29 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
Pricing study was not accepted by the TPO, assessee was required to re-work the comparability analysis on the basis of the financial data of the comparables pertaining to the period under consideration. Moreover, in the course of the Transfer Pricing assessment, the TPO modified certain filters and even for this reason, assessee was required to conduct a fresh search. The aforesaid comparables were found functionally comparable by the assessee and before the TPO, it was submitted that the same be considered. The TPO has rejected the same merely for the reason that such comparables were not a part of the original Transfer Pricing study carried out by the assessee.
54. Having regard to the aforesaid discussion, we find that the TPO wrongly rejected the aforesaid comparables without even examining as to whether they are functionally comparable or not. If at all the TPO was to reject the same, it was imperative for him to examine all the comparables in the light of the FAR analysis and only thereafter reject the same after passing a speaking order. In the absence of such an approach by the TPO, in our view, the comparability analysis carried out by him is vitiated. The learned Authorized Representative for the assessee submitted in the course of hearing that assessee would be satisfied at the stage if the matter is sent back to the AO / TPO to examine the functional comparability of the aforesaid comparables and decide the issue on merits. In the entirety of the facts and circumstances, we deem it fit to restore this aspect of the issue back to the file of the AO / TPO, who shall consider the aforesaid companies picked up by way of fresh search carried out in ITES segments. Reasonable opportunity of being heard to the assessee should be given in this regard. The said issue with respect to determination of arm's length price in ITES segment is thus, set aside to the file of AO / TPO 30 ITA No.336/PN/2014 PTC Software (India) Pvt. Ltd.
and the ground of appeal raised by the assessee in this regard is thus, allowed for statistical purposes.
55. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on this 31st day of October, 2014.
Sd/- Sd/-
(G.S. PANNU) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, Dated: 31 st October, 2014.
GCVSR
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The DRP, Pune;
4) The DR "A" Bench, I.T.A.T., Pune;
5) Guard File.
By Order
//True Copy//
Assistant Registrar
I.T.A.T., Pune