Income Tax Appellate Tribunal - Hyderabad
D.E Shaw India Software Private ... vs Assessee on 20 May, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 1737/Hyd/2012
Assessment Year: 2008-09
D.E. Shaw India Software Pvt. vs. Asst. Commissioner of
Ltd., Hyderabad Income-tax, Circle - 1(2),
Hyderabad.
PAN - AAACD 7214J
(Appellant) (Respondent)
Assessee by : Shri R. Vijaya Raghavan
Revenue by : Shri R.B. Naik
Date of hearing 03-05-2016
Date of pronouncement 20-05-2016
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal by the assessee is directed against the assessment order passed u/s 143(3) read with section 144C of the Income-tax Act in pursuance to the directions of the Dispute Resolution Panel (DRP in short) Hyderabad pertaining to the assessment year 2008-09.
2. The brief facts are, the assessee is a wholly owned subsidiary of D.E. Shaw and Co., LLP(Desco) (hereinafter referred to as Associated Enterprise, in short AE) a limited liability partnership established and existing under the laws of the State of Delaware, USA having its principal office at New York. The AE is engaged in global financial services in the investment advisory activities, broker dealer activities and computer based quantitative management. The assessee provides software development services to its AE. Therefore, the assessee is purely a captive service provider. The 2 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
assessee has been recognised as 100% EOU registered under the Software Technology Park of India (STPI) Scheme. As per the terms of the contract with its AE, the assessee is remunerated at cost plus 12.01% for the services rendered by it to its AE. For the impugned assessment year, the assessee earned revenue of Rs. 107,28,61,819/- from international transaction with its AE. The assessee for the impugned assessment year filed its return of income on 30-09-2008 declaring total income of Rs. 10,13,83,900/-. Along with return of income, the assessee also submitted a TP study report wherein transaction Net Margin Method (TNMM) was adopted as most appropriate method and operating profit/operating cost as the profit level indicator (PLI). The assessee in the TP study, after conducting a search in the data bases on the basis of functions, assets and risk (FAR) analysis, selected 18 companies as comparables with an average margin of 10.98% as against assessee's margin shown at 12.01%. Hence, the price charged to the AE was considered to be within arm's length.
3. During scrutiny assessment proceedings, the Assessing Officer noticed that the assessee had entered into international transactions with its AE made a reference to the Transfer Pricing Officer (TPO in short) for determining the arm's length price. In course of the proceedings before the TPO, the assessee in response to the query made by the TPO also brought some more companies as comparables. The TPO however did not accept the TP study done by the assessee broadly on the ground that the assessee has used multiple year data of comparable companies , it has used certain non comparable companies as comparables, filters have been selectively used. The TPO, though was of the view that TNMM is the most appropriate method and operating profit/operating cost is the PLI but he nevertheless rejected TP study done by the assessee. After rejecting the TP study submitted by the assessee the TPO himself undertook a search process in the databases by considering only the 3 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
current year data. In this process, the TPO selected 19 comparables with an average margin of 26.20% which also included four comparables selected by the assessee. After allowing working capital adjustment of 2.52%, the adjusted arithmetic PLI was computed at 23.68% resulting in determination of ALP at Rs. 118,93,89,805/- as against the price charged by the assessee at Rs. 107,28,61,819/-. Thus, the shortfall of Rs. 11,65,27,986/- was treated as the adjustment u/s 92CA of the Act. While determining the ALP as above, the TPO also rejected the assessee's claim towards risk adjustment.
4. As a sequel to the order passed by the TPO, the Assessing Officer passed a draft assessment order by incorporating the adjustment of Rs. 11,65,27,986/-. Against the draft assessment order, the assessee filed objections before the DRP. The DRP directed the AO to delete one of the comparable M/s Celestial Biolabs Ltd. as they are not comparables and Assessing Officer passed the final assessment order making transfer pricing adjustment to Rs. 10,80,49,941/-. After the DRP order, the remaining 18 comparables selected by the TPO with an average margin of 21.25% after allowing working capital adjustment of 2.28%, the adjusted arithmetic PLI was computed at 18.97% resulting in adoption of a sum of Rs. 10,80,49,941/- as adjustment u/s 92CA instead of Rs. 11,65,27,986/-. Being aggrieved of the aforesaid order passed by the Assessing Officer, the assessee has preferred this appeal raising various grounds both on transfer pricing issues as well as corporate tax issues, which are as follows:
"1. General 1.1 Based on the facts and circumstances of the case and in contrary to law, D.E. Shaw India Software Private Limited (hereinafter referred to as 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income Tax, Circle 1(2), Hyderabad (hereinafter referred as 'AO') in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred as 'DRP'), Hyderabad 4 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
dated 03 August 2012 under section 253 of the Income-tax Act, 1961 (Act').
2. Transfer Pricing Adjustments 2.1 General Grounds 2.1.1 The assessment order passed by the Learned AO under section 143(3) read with section 144C and read with the order passed by the Learned Transfer Pricing Officer (hereinafter referred as 'TPO'), under section 92CA(3) of the Income Tax Act, 1961 (hereinafter referred as 'the Act') is bad in law and void ab- initio.
2.1.2 The Learned AO/ DRP erred in holding that the Arm's Length Price (hereinafter referred as 'ALP') of international transaction relating to captive software development services is Rs. 1,140,586,220/- as against Rs. 1,076,696,037/- received by the Appellant and in confirming the addition of Rs. 63,890,183/- to transfer price of international transaction with the associated enterprise and not accepting the ALP of the international transaction shown by the Appellant.
2.1.3 The Learned AO/ DRP erred in confirming the TPO's stand in disregarding the economic analysis and search process methodology undertaken by the Appellant without proper justification and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transactions and holding that the Appellant's international transactions are not at ALP Without prejudice to the above, the Appellant would like to submit that the Learned AO I DRP has not properly appreciated the submissions of the Appellant that the TPO has not considered proper comparables and applied the proper adjustments to arrive at the ALP, more specifically mentioned under:
2.2 Recourse to information obtained under section 133(6) of the Act 2.2.1 The Learned AO I DRP erred in confirming that the TPO had not violated the rules of natural justice by not providing I sharing the manner of obtaining and disclosure of information called for under section 133(6) of the Income Tax Act, 1961 and that the TPO was not required to provide the Appellant an opportunity to cross examine the comparable companies which have furnished information U/S 133(6).5 ITA No. 1737 /Hyd/2012
D.E. Shaw India Software Pvt. Ltd.
2.3 Filters 2.3.1 Without prejudice to the above, the Learned AO/DRP ought to have rejected the use of filters adopted by the TPO which have been objected to by the Appellant.
2.3.2 The Learned AO/DRP erred in confirming the TPO's stand of inconsistent application of key filters.
2.3.3 The Learned AO/DRP erred in confirming the TPO's stand of rejection of key filters applied by the Appellant.
2.4 Use of multiple year data 2.4.1 The Learned AO/DRP erred in rejecting the multiple year analysis for computing the operating margins earned by the alleged comparable companies.
2.5 Disregard of Rule 10B(2) and Rule 10B(3) of the Income Tax Rules, 1962 ("the Rules") 2.5.1 The Learned AO/DRP erred in law and facts in disregarding the comparability factors specified under Rule 10B(2) of the Rules and the provisions contained in Rule 10B(3) of the Rules that specify that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions.
2.5.2 The Learned AO/DRP erred in disregarding the differences in risk profile of the Appellant (being a captive service provider) and the alleged comparable companies selected by him, by not allowing the risk adjustment made by the Appellant.
2.5.3 The Learned AO/DRP ought to have appreciated that dissenting DRP member agreed to the contention of the Appellant that risk adjustment should be provided to the Appellant.
2.6 Com parables 2.6.1 Without prejudice to above, the Learned AO/DRP erred in confirming the TPO's stand of rejecting the independent comparable companies selected by the Appellant in its transfer pricing study report without providing any cogent reasons.
2.6.2 The Learned AO/DRP erred in confirming the acceptance of alleged comparable companies selected by the TPO without proper reasoning.
6 ITA No. 1737 /Hyd/2012D.E. Shaw India Software Pvt. Ltd.
2.6.3 The Learned AO/DRP erred in rejecting the comparable companies selected by the Appellant by stating that outsourcing cost cannot be considered as employee cost.
2.6.4 The Learned AO/DRP ought to have followed the decision of the jurisdictional ITAT in the case of Oeloitte Consulting Pvt. Ltd. ITA No. 1082 & 1084 of 2010 wherein it was held that outsourced manpower cost included under other heads of expenditure was considered while computing the employee cost to sales ratio.
2.7 Arm's length range of ±5% Without prejudice to the aforesaid grounds, the Learned AO/ DRP has erred in not granting the benefit of the variation/ reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act, while determining the arm's length price for the adjustments made to the international transactions of the Appellant.
3. Disallowance of expenditure The Learned AO/DRP erred in disallowing Rs. 40,000 paid to GPR Charities as final settlement amount on account of rent, which was wrongly narrated in the books as donation.
4. Consequential interest under section 234B and 234D The Learned AO/DRP erred in imposition of interest under section 234B and section 234D.
5. The Appellant craves leave to add, alter, amend, substitute and / or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal."
5. We will first deal with ground Nos. 2.6 to 2.64 relating to selection of certain comparables by the TPO, which were also upheld by the DRP.
6. The learned AR while arguing on the aforesaid grounds specifically objected to 8 companies selected by the TPO as comparables which are as under:-
1) Avani Cimcon Technologies Ltd.
2) E-Zest Solutions Ltd.7 ITA No. 1737 /Hyd/2012
D.E. Shaw India Software Pvt. Ltd.
3) Infosys Technologies Ltd
4) Kals Information Systems Ltd.
5) W ipro Ltd.
6) Tata Elxsi Ltd.
7) Persistent Systems Ltd.
8) Quintegra Solutions Ltd.
7. The learned AR, at the very outset submitted that assessee's case is identical to the case of M/s Intoto Software India (P) Limited which is functionally similar to the assessee. It was submitted that in case M/s Intoto Software India (P) Limited, the TPO has selected the same set of 26 comparable companies for the same assessment year. It was submitted that when the assessee came in appeal before the ITAT against the final assessment order, the ITAT after considering the submissions of the assessee had upheld assessee's objection in respect of the aforementioned 8 companies and directed for excluding the same for determining the ALP. In support of such contention, the learned AR submitted a copy of the order passed by the ITAT, Hyderabad Bench "B" in case of of M/s Intoto Software India (P) Ltd., in ITA No.1810/Hyd/201 relating to the assessment year 2008-09. The learned AR further submitted that the facts of the assessee's case being identical to that of M/s Intoto Software India (P) Ltd.,(supra) the order passed by the co-ordinate Bench squarely covers the issue with regard to the comparables objected to by the assessee.
8. With regard to AVANI CIMCON TECHNOLOGY LIMITED, the learned AR submitted that the website of Avani Cimcon Technology Limited clearly reveals that the said company is engaged in product development, hence is functionally different from the assessee. He submitted that segmental information is not available. The learned AR further submitted that in case of M/s Intoto Software India (P) Ltd., (supra) the Tribunal has directed exclusion of Avani Cimcon from the list of comparable companies. He relied on the following cases:
1. NTT Data India Enterprise Application Services Ltd., ITA No. 1862/Hyd/2012.
2. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1303/Bang/2012.8 ITA No. 1737 /Hyd/2012
D.E. Shaw India Software Pvt. Ltd.
3. Trilogy E-Business Software India Pvt. Ltd., ITA No. 1054/Bang/2011.
9. Objecting to the comparable E-Zest Solutions Ltd., the ld. AR submitted that the said company is engaged in the product development and high end technical services in the category of KPO. The learned AR further submitted that in case of M/s Intoto Software India (P) Ltd., (supra) the Tribunal has directed exclusion of e-Zest Solutions Ltd. from the list of comparable companies. Also the Tribunal in the case of NTT Data India Enterprise Applications Services P.Ltd., (ITA No. 1862/Hyd/2012) excluded the said company from the list of comparables.
10. So far as INFOSYS TECHNOLOGIES LTD. is concerned, the learned AR submitted that this company cannot be considered to be comparable with the assessee not only because of its very high turnover but also due to the fact that it is giant in the field of IT and ITES having diversified activities. It was submitted that this company was also engaged in the development of various niche products. He also submitted that it is functionally different and owns significant intangibles. In support of such contention, the learned AR relied upon decisions of the co-ordinate bench in the case of M/s Intoto Software India (P) Ltd. (supra) as well as in the following decisions:
1. NTT Data India Enterprise Application Services Ltd., ITA No. 1862/Hyd/2012.
2. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1303/Bang/2012.
3. Patni Telecom Solutions Pvt. Ltd., ITA No. 1846/Hyd/12
4. Agnity India Technologies Pvt. Ltd., ITA No. 3856/Del/2010.
11. The next company which was objected to by the learned AR is KALS INFORMATION SYSTEMS LIMITED (seg). The learned AR submitted that this company cannot be treated as comparable to the assessee as it is not only engaged in development of product and functionally different. The learned AR submitted that co-ordinate bench of this Tribunal in case of M/s Intoto Software India (P) Ltd.
9 ITA No. 1737 /Hyd/2012D.E. Shaw India Software Pvt. Ltd.
(supra) and in the case of NTT Data Enterprises Application Services Ltd. excluded the said company from the list of comparables. He also relied on the following cases:
1. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1303/Bang/2012.
2. Triology E-Business Software India Pvt. Ltd., ITA No. 1054/Bang/2011
12. So far as W ipro Ltd. is concerned, the learned AR submitted that this company cannot be considered to be comparable with the assessee as it is engaged in both software development and product development and owns intellectual property in the form of patents. In support of such contention, the learned AR relied upon decisions of the co-ordinate bench in the case of M/s Intoto Software India (P) Ltd. (supra) as well as in the following decisions:
1. NTT Data India Enterprise Application Services Ltd., ITA No. 1862/Hyd/2012.
2. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1 303/Bang/2012.
3. Patni Telecom Solutions Pvt. Ltd., ITA No. 1846/Hyd/12
13. The learned AR objecting to selection of TATA ELXSI LIMITED as a comparable submitted that the said company cannot be considered as a comparable to the assessee as it is engaged in product designing services. The learned AR submitted that the ITAT Hyderabad Bench in case of Intoto Software India (P) Ltd. (supra) has excluded the said company from the list of comparables. He also relied on the following decisions:
1. NTT Data India Enterprise Application Services Ltd., ITA No. 1862/Hyd/2012.
2. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1303/Bang/2012.
14. The ld. AR objecting to the selection of Persistent Systems Ltd., as a comparable submitted that this company is engaged in product development and product design services. He pointed out that the 10 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
segmental details of this company are not available. The learned AR submitted that the ITAT Hyderabad Bench in case of Intoto Software India (P) Ltd. (supra) has excluded the said company from the list of comparables. He also relied on the decision of the 3DPLM Software Solutions Pvt. Ltd., (supra).
15. The ld. AR objecting to the selection of Quintegra Solutions Ltd., as a comparable submitted that this company is engaged in the product engineering and in proprietary software product. It has substantial R&D activity and owns intangibles. It has made acquisitions during the year. The learned AR submitted that the ITAT Hyderabad Bench in case of Intoto Software India (P) Ltd. (supra) has excluded the said company from the list of comparables. He also relied on the decision of the 3DPLM Software Solutions Pvt. Ltd., (supra).
25. We have heard the submissions of the parties and perused the material on record as well as the orders of the lower authorities. We have also applied our mind to the decisions of the co-ordinate bench placed before us. It is the contention of the learned AR before us that the case of the assessee is identical to the case of M/s Intoto Software India Pvt. Ltd. Hence, the decision of the co-ordinate bench in case of M/s Intoto Software India Pvt. Ltd., (supra) with regard to the comparables selected by the TPO will also cover the case of the assessee. Though, the learned Departmental Representative has submitted before us that Intoto's (supra) case is different from that of the assessee but, on a perusal of the order passed by the TPO in case of M/s Intoto for the impugned assessment year, a copy of which has been placed before us by the learned AR, we find that the order passed by the TPO in case of the present assessee is nothing but a replica of the order passed by the TPO in case of M/s Intoto Software India Pvt. Ltd. Like M/s Intoto, in case of the present assessee also, as has been observed by the TPO in his order, neither the assessee 11 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
nor the TPO has gone into verticals /functional or service lines of the comparable companies. Like in case of M/s Intoto the TPO has classified the assessee as a purely software development service provider. In fact the TPO has selected the same set of 26 comparable companies in case of the assessee which were also selected in case of M/s Intoto. Therefore, in our view, the decision of the co-ordinate bench in case of M/s Intoto Software India Pvt. Ltd.(supra),will also apply to the facts of the present case in so far as selection of comparables are concerned. The coordinate bench in case of Intoto Software India Pvt. Ltd., held as follows:
7. Having considered the rival contentions and the material on record, we find that the Coordinate Bench of this Tribunal in the case of NTT Data India Enterprise Application (cited supra), has recorded the following reasons for exclusion of the following companies from the final list of comparables.
"2. SELECTION OF COMPARABLES.
9. The next issue for consideration is with reference to selection of comparables. As briefly stated above, TPO selected 19 companies as comparable companies out of which, one company viz., Celestial Bio Labs was deleted by DRP. Out of the balance 18 comparables, assessee is objecting to selection of 8 comparable companies which are as under :
1. Avani Cincom Technologies Ltd., 21.65%
2. Bodhtree Consulting Ltd., 19.14%
3. E-Zest Solutions Ltd., 28.95%
4. Infosys Technologies Ltd., 40.41%
5. Kals Information Systems Ltd., 30.92%
6. Tata Elxsi Ltd., (Seg.) 18.97%
7. Thirdware Solutions Ltd., 18.01%
8. Wipro Ltd., (Seg.) 28.38% 9.1. It was the submission that these companies are functionally different and the objections are summarily stated in the chart submitted. It was the submission by Ld. Counsel that these comparables were analysed by various Coordinate Benches particularly in the case of M/s. 3DPLM Software Solutions Ltd. vs. DCIT ITA.No.1303/Bang/2012, Agnity India Technologies P. Ltd., vs. DCIT ITA.No.6485/Del/2012, Nethawk Networks India P. Ltd., vs. ITO ITA.No.7633/M/2012 and IBM India P. Ltd., vs. JCIT ITA.No.1543/Bang/2012.
10. Ld. D.R. however, objected to the above and filed written submissions stating that the functional difference highlighted by assessee are less effected as the analysis done in the TNMM and assessee itself is not following the high end and low end distinction while selecting the comparables. Since neither the tax-payer nor the TPO has gone into the verticals within the software industry in its comparable study, the objections of assessee cannot be considered. Likewise, the Ld. D.R. objected 12 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
for excluding the abnormal high margin companies, high turnover companies and relied on various case law in favour of Revenue.
11. After considering the rival contentions, we are of the opinion that the above companies (except Bodhtree Consulting Ltd.,) are to be excluded as these are analysed by Coordinate Bench of the Bangalore Tribunal in I.T.(T.P.)A.No.1303/Bang/2012 dated 28.11.2013 in the case of M/s. 3DPLM Software Solutions Ltd., Bangalore vs. DCIT, Circle(1), Bangalore which was relied upon by Ld. Counsel. Bothtree Consulting Ltd was discussed in the case of Net Hawk Net works India P Ltd in ITA no 7633/Mum/2012 dt 06.11.2013 by ITAT Mumbai Bench 'K' and this is also to be excluded. For the sake of record, the findings of various companies decided by the Coordinate Benches of Tribunal (supra) are as under :
1. "Avani Cincom Technologies Ltd., 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non- furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable.
7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co- ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA.No.845/Bang/2011 dt.22.2.2013, and in the case of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables.
3. E-Zest Solutions Ltd.
14.4. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparabales only on the basis of 13 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I- Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed.
4. Infosys Technologies Ltd.
11.4. We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.
5. KALS Information Systems Ltd., :
10.4. We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co- ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dissimilar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of 14 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly.
6. Tata Elexsi Ltd.
13.4.1. We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee.
13.4.2. The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :-
" .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative 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 portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007- 08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the 14 ITA.No.1810/Hyd/2012 Intoto Software India P. Ltd., Hyderabad. set of comparables in the case on hand. It is ordered accordingly.
8. Wipro Ltd., 12.4.1. We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the 15 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/ 2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co- ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration.
12. Respectfully following the decisions of Coordinate Benches of the Tribunal referred above, and other cases relied on, we hold that the aforesaid 8 companies have to be excluded from the list of comparables chosen by TPO".
7.2. Further, the Ld. Counsel for the assessee is seeking exclusion of the following companies also for the following reasons :
a) Persistent Systems Ltd., is engaged in product development and design services and No separate segmental details available.
b) Quintegra Solutions Ltd., is engaged in product engineering services and in proprietary software products and has undertook substantial R & D activities during the relevant financial year. It was submitted that during the relevant financial year, there were peculiar economic circumstances such as acquisitions. It was also submitted that Quintegra Solutions Ltd., holds intangibles such as Trademark, registrations for products.
c) Softsol Ltd., is both functionally different as well as fails RPT filter as held by the Tribunal in the case of 3DPLM.
7.3. We find that the facts and circumstances before us are similar and are for the very same A.Y. both in the case of the assessee company as well as NTT Data India Enterprise Application Services P. Ltd., (cited supra) and the Ld. Counsel for the assessee has also relied upon the decision of this Tribunal in the case of 3DPLM Software Solutions P. Ltd., (cited supra), wherein these companies were held to be not comparable in the following paragraphs:
"17. Persistent Systems Ltd.
17.1.1. This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the 16 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion.
17.1.2. Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that
(i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand.
(ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises.
(iii) Website extracts indicate that this company is in the business of product design services.
(iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables.
17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables.
17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.
17 ITA No. 1737 /Hyd/2012D.E. Shaw India Software Pvt. Ltd.
18. Quintegra Solutions Ltd.
18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned.
18.1.2. Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that,
(i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand.
(ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies."
(iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under :
" Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company ............... have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks."
(iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it 18 ITA No. 1737 /Hyd/2012 D.E. Shaw India Software Pvt. Ltd.
cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration.
18.2. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration.
18.3.1. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand.
18.3.2. We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables.
18.3.3. Respectfully following the decision of the coordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider.
7.4. Therefore, respectfully following the decisions of the Coordinate Bench of the Tribunal (supra), we direct that these companies be excluded from the list of final comparables."
26. Respectfully following the decision of the coordinate bench, we direct the Assessing Officer /TPO to exclude the aforesaid companies as comparable from the list of comparables and determine the ALP keeping in view our directions given hereinabove and if on such determination the price charged by the assessee for its international transaction is found to be within the arms length then no adjustment is required to be made.
19 ITA No. 1737 /Hyd/2012D.E. Shaw India Software Pvt. Ltd.
27. Accordingly, the grounds pressed by the assessee i.e. 2.5.1 and 2.6.1 are allowed and the other grounds are not pressed by the assessee, therefore, the same are dismissed as not pressed.
28. In the result, assessee's appeal is allowed.
Pronounced in the open court on 20 th May, 2016.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 20 th May, 2016
kv
Copy to:-
1) D.E. Shaw India Software Pvt. Ltd., Plot No. 573 B and C, Road No. 1, Jubilee Hills, Hyderabad - 500 096.
2) ACIT, Circle - 1(2), Hyd.
3) DRP, Hyderabad
4. DIT, International Taxation, Hyd.
5) The Departmental Representative, I.T.A.T., Hyderabad.