Income Tax Appellate Tribunal - Hyderabad
Broadcom India Technologies Private ... vs Assessee on 8 May, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER
AND
SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
ITA No. A.Y. Appellant Respondent
1227/HYD/11 2005-06 The Deputy
Broadcom India Commissioner of
Technologies Private Income Tax,
Limited, Circle-16(1),
(Formerly known as HYDERABAD
LVL7 Systems India
1631/HYD/10 2006-07 Private Limited) The Deputy
2098/HYD/11 2007-08 Madhapur, Commissioner of
HYDERABAD Income Tax,
Circle-1(3),
[PAN: AABCL0010D] HYDERABAD
For Assessee : Shri Sivam Subramanian &
Shri Ashik Shah, ARs
For Revenue : Smt G. Aparna Rao &
Shri Rama Krishna, Bandi, DRs
Date of Hearing : 05-05-2015
Date of Pronouncement : 08-05-2015
ORDER
PER Smt. P. MADHAVI DEVI, J.M. :
All are assessee's appeals for the respective assessment years. ITA No. 1227/Hyd/2011 is an appeal against the order of Commissioner of Income Tax (Appeals)-III, Hyderabad dated 21-03-2011 for the Assessment Year (AY) 2005-06, confirming the inclusion of certain companies as comparables for determination of Arm's Length Price [ALP] of the international transactions between the assessee and its Associated Enterprise [AE].
I.T.A. Nos. 1631/Hyd/10
:- 2 -: 1227 & 2098/Hyd/11
Broadcom India Technologies Pvt. Ltd
(Formerly known as LVL7 Systems India Pvt. Ltd)
2. Brief facts of the case are that the assessee, formerly known as M/s. LVL7 System P Ltd., filed its return of income for the AY 2005-06. During the assessment proceedings u/s. 143(3) of the Income Tax Act (Act), Assessing Officer (AO) noticed that the assessee had entered into international transaction with its AE. Therefore, he made a reference to the Transfer Pricing Officer [TPO] u/s. 92CA(1) of the Act for determination of the ALP. The assessee also furnished the Transfer Pricing study conducted by it for determination of the ALP. During the proceedings u/s. 92CA(1) of the Act, TPO accepted the Transactional Net Margin Method [TNMM] as the most appropriate method. But as far as the comparables are concerned, he rejected certain comparables adopted by the assessee and included certain other comparables and arrived at the ALP and made an adjustment of Rs. 65,50,659/- to the returned income of the assessee. Consequently, AO passed assessment order, against which assessee preferred an appeal before CIT(A), who partly allowed the same and against the relief denied by the CIT(A), assessee is in file before us. Before us, the assessee has filed concise grounds of appeal which are seven in number. Assessee has also filed additional grounds of appeal challenging the consideration of Satyam Communication Services Ltd., and Bodh Tree Consulting Ltd., as comparables to the assessee. At the time of hearing, Ld. Counsel for the assessee submitted that the assessee does not wish to press ground No. 3 & 5 of concise grounds of appeal. Therefore, these two grounds are rejected as not pressed. We find that ground No.1 is general in nature and needs no adjudication.
3. As regards ground Nos. 2 & 4 and the additional grounds raised by the assessee, we find that they are against the comparables adopted by the TPO for determination of ALP, it is the case of the assessee that the TPO has finally adopted 17 comparables as comparables, out of which, I.T.A. Nos. 1631/Hyd/10 :- 3 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) assessee is now challenging nine companies. The comparables which are challenged by assessee are:
i. Bodhtree Consulting Ltd
ii. Exensys Software Solutions Ltd
iii. Sankhya Infotech Ltd
iv. Foursoft Ltd
v. Thirdware Solutions Ltd
vi. Tata Elxsi Ltd
vii. Flexitronics Ltd
viii. Satyam Communication Services Ltd.,
ix. Infosys Technologies Ltd
4. As regards the adoption of Bodhtree Consulting Ltd., is concerned, the Ld. Counsel for the assessee submitted that this company was adopted by the assessee itself in its TP study, but has later challenged it before CIT(A), on the basis of various decisions of this Tribunal. It is stated that Bodhtree Consulting Ltd is not a comparable company as it is a product oriented company and therefore is functionally dissimilar to the assessee company and further that it also fails RPT filter.
5. As regards Satyam Communication Services Ltd., is concerned, it is stated that though the assessee itself had adopted it as one of the comparable companies, the assessee is now challenging it since it has come to light subsequently that the financial statements of Satyam Communication Services Ltd., are not reliable and therefore, the said company is not comparable and the assessee has challenged it before the CIT(A). He placed reliance upon the decision of the Special Bench of the Tribunal at Chandigarh in the case of DCIT Vs. Quark Systems India (P) Ltd., [38 SOT 307] which was affirmed by the Hon'ble High Court of I.T.A. Nos. 1631/Hyd/10 :- 4 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) Punjab & Haryana in the case of CIT Vs. Quark Systems India (P) Ltd., [244 CTR 542], wherein it was held that the tax payer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the tax payer even if the said plea is raised for the first time before the Tribunal. Therefore, the Ld. Counsel for the assessee prayed that the additional grounds of appeal be admitted and the issue be considered on merits.
6. Ld. DR opposed the admission of the additional grounds.
7. Having regard to the rival contentions and the material on record and the decision of the Special Bench of the Tribunal which is confirmed by the Hon'ble High Court of Punjab & Haryana in Quark Systems India (P) Ltd., (cited supra), we admit these two additional grounds of appeal of the assessee.
8. Coming to the merits of the issue, the Ld. Counsel for the assessee has relied upon the decision of the co-ordinate bench of this Tribunal in the case of DE Shaw India Software Pvt. Ltd., for exclusion of these two companies from the list of comparables. Before applying the said decision to the case before us, we have to first examine whether the nature of activities of both the companies is similar and whether they are comparable. We find that the assessee is a 100% captive software service provider as in the case of DE Shaw India Software Pvt. Ltd., and the assessment year in both the cases also in AY.2005-06. Therefore, the decision of the Tribunal in the case of DE Shaw India Software Pvt. Ltd., is very much applicable to the facts of the case before us. The Tribunal in the case of DE Shaw India Software Pvt. Ltd., in ITA No. 1302/Hyd/2010 dt. 21-01-2015 has considered the comparability of all the above companies and has held them as not comparable with the I.T.A. Nos. 1631/Hyd/10 :- 5 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) assessee therein. The relevant portion of the Tribunal's order at paras 7 to 10 are reproduced herein under for ready reference:
"7. The submissions of the learned AR against selection of these comparables, in brief, are as under:
1. Bodhtree Consulting Ltd.
i) The learned counsel submitted that this company should be rejected on the basis of filters applied by TPO himself, which are as under:
• Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover.
• Functionally different filter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services.
ii) He submitted, following rulings have analysed and rejected this company as it has software products:
1. Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010)
2. Invensys Development Centre (India) Pvt. Ltd. (ITA No. 1256/H/2010)
3. Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011)
2. Exensys Software Solutions Ltd.
i) The learned counsel submitted that this company should be rejected for the following reasons:
a) Functionally different: The company is a software product and ITES company. The company owns significant brand intangibles (almost 60% of its net block of assets), unlike the appellant, which is a contract captive services provider.
Further, various disclosures on the site of the company also indicate that it is into product development.
b) Exceptional year of Operations: There was amalgamation of the company with Holool India Ltd. with retrospective effect from April 01, 2004, which had a material/significant impact on the results of the company for financial year ended March I.T.A. Nos. 1631/Hyd/10 :- 6 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) 31, 2005 and confirmed by the company in its response to 133(6) notice.
c) Error in margin computation: The ld TPO has excluded the deferred revenue expenditure while computing the net margin of the company. If the same is included, the net margin of the company would be 32.68%.
ii) It was submitted that the following rulings have analysed and rejected this company as it has software products and held as not comparable to a service provider:
- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
- Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010)
- Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011)
3. Sankhya Infotech Ltd.
i) The learned counsel submitted that this company is functionally different as evident from the following:
• Various disclosures in the annual report and response to 133(6) notice indicates clearly that the company is into software products (services are supplementary to products licensing) • The TPO has in subsequent year rejected this company as comparable relying on the same 133(6) response.
ii) The following rulings have analysed and rejected this company as it has software products :
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
- Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010)
- Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011)
4. Foursoft Ltd.
i) The learned counsel submitted that this company is functionally different as evident from various disclosures in the annual report (Directors report, Management discussion and website information) indicating clearly that the company is into software products. The following rulings have analysed and rejected this company as it has derived income from software license and AMC's:
- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- DCIT Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09) I.T.A. Nos. 1631/Hyd/10 :- 7 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
- Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010)
- Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011)
- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
5. Thirdware Solutions Ltd.:
i) Ld. Counsel submitted that this company is functionally different for the following reasons:
• As per reply to notice issued u/s 133(6), the company informed that it is engaged in implementation and customer services which include training, customized development and help desk services for ERP software and distribution of products of Quad Inc. and Hyperion Solutions Corporation.
• Various news articles available on the internet http://www.hinduonnet.com/2001/07/11/stories/0611000h .htmstated that the company is a distributor of products;
• As per the company's website www.thirdware.net/ourcapabilities.htm. has stated the company has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Pre- sales, sales, training, consulting, implementation and support to application management services.
• He submitted, the following rulings have analysed and rejected this company as it is into trading of software licenses:
- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
- Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010)
- Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011)
6. Tata Elxsi Ltd.
i) The learned counsel submitted that this company shall be rejected as comparable since it is a specialized embedded software development company and this company has in fact clearly stated in its response to 133(6) notice that due to the complex segments in I.T.A. Nos. 1631/Hyd/10 :- 8 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) which they are operating, it is not comparable to any other software services company.
ii) He submitted, the following rulings have analysed this company and relying on the same 133(6) response, rejected it as a comparable to software services provider:
- Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010)
- Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
7. Infosys Technologies Ltd.
i) The learned counsel submitted that this company is engaged in diversified activities including products, consultancy & solutions and this company commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads.
ii) Further, he submitted that the issue of comparability of Infosys to a small captive service provider is no longer res-integra. The following cases have specifically anlaysed in detail the comparability of Infosys on various parameters to a similar size software service provider and rejected it:
- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- Patni Telecom Solutions Pvt. Ltd. Vs. ACIT (ITA No. 1846/Hyd/2012)
- DCIT Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
- Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010)
- Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011)
8. Flexitronics Ltd.
i) Objecting to this company, the learned AR submitted that the said company is not only functionally different but it cannot be treated as a comparable because it is into development of product. It was submitted that the company has also reported very high margin of profit. The learned AR submitted that the TPO himself having classified the assessee as purely software development service I.T.A. Nos. 1631/Hyd/10 :- 9 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) provider, he could not have treated Flextronics Software Systems Limited (seg) as a comparable as it is into product development. In support of such contention, the learned AR relied upon the following rulings:
- Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- DCIT Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09)
8. The learned DR, though, agreed that issue of selection of comparables are covered by the decisions of ITAT referred to by learned AR, but, he nevertheless supported the reasoning of TPO and learned CIT(A).
9. Having considered the submissions of the parties and examined the record, we find merit in the submissions of learned AR with regard to non-comparability of various comparable companies selected by the TPO. On a perusal of the facts on record as well as order of TPO it is clear that assessee is purely a software development service provider, that too to its AE only. Thus, assessee is a captive/contract service provider. As can be seen, comparability of aforesaid comparables were considered in cases of various other purely software development service providers like assessee for the same assessment year. Coordinate benches of this Tribunal in the above referred cases after examining different aspects have held these companies as uncomparable to a purely software development service provider. The finding of the coordinate bench in case of Ness Innovative Business P. Ltd. Vs. DCIT in ITA No. 472, 553 & 1775/Hyd/2011, dated 18/06/2014 with regard to some of the comparables for the same assessment year is extracted hereunder for ready reference:
"9.1 For the sake of record, the decision in the case of Ness Innovative Business Services P. Ltd., vs. DCIT, Circle 16(1), Hyderabad vide ITA.No.472, 553 & 1775/Hyd/2011 dated 18.06.2014 on the above 7 comparables are extracted as under:
"1. Bodhtree Consulting Ltd.
The learned counsel submitted that this company should be rejected under the following TPO's f ilters:
• Related party transactions f ilter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover.
• Functionally different f ilter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing sof tware, website development and other customized sof tware and also state that the e-paper I.T.A. Nos. 1631/Hyd/10 :- 10 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) solutions and data cleansing services would come under the category of IT enabled services.
2. Exensys Sof tware Solutions Ltd., The learned counsel submitted that this company should be rejected under the following TPO's f ilters:
d) Functionally different: The company is a sof tware product and ITES company. The company owns signif icant brand intangibles (almost 60% of its net block of assets), unlike the appellant, which is a contract captive services provider.
Further, various disclosures on the site of the company also indicate that it is into product development.
e) Exceptional year of Operations: There was amalgamation of the company with Holool India Ltd. with retrospective effect from April 01, 2004, which had a material/signif icant impact on the results of the company f or f inancial year ended March 31, 2005 and conf irmed by the company in its response to 133(6) notice.
f) Error in margin computation: The ld TPO has excluded the deferred revenue expenditure while computing the net margin of the company. If the same is included, the net margin of the company would be 32.68%.
It was submitted that the following rulings have analysed and rejected this company as it has sof tware products and held as not comparable to a service provider:
- Intoto Sof tware India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- ITO Vs. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011)
- Integrated Decisions & Systems India (P) Ltd. Vs. DCIT (ITA No. 27/JP/2011)
- ACIT Vs. Sonata Software (ITA No. 3514/Mum/2010)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
3. Sankhya Infotech Ltd.
The learned counsel submitted that this company is functionally different as evident from the following:
• Various disclosures in the annual report and response to 133(6) notice indicates clearly that the company is into I.T.A. Nos. 1631/Hyd/10 :- 11 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) sof tware products (services are supplementary to products licensing) • The TP off ice has in subsequent year rejected this company as comparable relying on the same 133(6) response.
The following rulings have analysed and rejected this company as it has sof tware products :
- ITO Vs. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011)
- Integrated Decisions & Systems India (P) Ltd. Vs. DCIT (ITA No. 27/JP/2011)
- ACIT Vs. Sonata Software (ITA No. 3514/Mum/2010)
- DCIT Vs. M/s Hellosof t India Pvt. Ltd. (ITA No. 645/Hyd/09)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
4. Foursof t Ltd.
The learned counsel submitted that this company is functionally different as evident from various disclosures in the annual report (Directors report, Management discussion and website information) indicates clearly that the company is into sof tware products. The following rulings have analysed and rejected this company as it has derived income from software license and AMC's:
- Intoto Sof tware India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- DCIT Vs. M/s Hellosof t India Pvt. Ltd. (ITA No. 645/Hyd/09)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
5. Thirdware Solutions Ltd.:
Ld. Counsel submitted that this company is functionally different for the following reasons:
• As per reply to notice issued u/s 133(6), the company informed that it is engaged in implementation and customer services which include training, customized development and help desk services for ERP sof tware and distribution of products of Quad Inc. and Hyperion Solutions Corporation.
• Various news articles available on the internet http://www.hinduonnet.com/2001/07/11/stories/0611000h. htmstated that the company is a distributor of products;
I.T.A. Nos. 1631/Hyd/10
:- 12 -: 1227 & 2098/Hyd/11
Broadcom India Technologies Pvt. Ltd
(Formerly known as LVL7 Systems India Pvt. Ltd) • As per the company's website www.thirdware.net/ourcapabilities.htm. has stated the company has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Pre- sales, sales, training, consulting, implementation and support to application management services.
• The following rulings have analysed and rejected this company as it is into trading of sof tware licenses:
- Intoto Sof tware India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- ITO Vs. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011)
- ACIT Vs. Sonata Software (ITA No. 3514/Mum/2010)
- E-Gain Communications (P) Ltd. Vs. ITO, 23 SOT 385.
6. Tata Elxsi Ltd.
The learned counsel submitted that this company shall be rejected as comparable since it is a specialized embedded sof tware development company and this company has in f act clearly stated in its response to 133(6) notice that due to the complex segments in which they are operating, it is not comparable to any other sof tware services company.
The following rulings have analysed this company and relying on the same 133(6) response, rejected it as a comparable to sof tware services provider:
- Conexant Systems India Pvt. Ltd. (ITA No. 1429/Hyd/2010 and 1978/Hyd/2011)
- Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011)
- Logica Pvt. Ltd. (IT(TP)A No. 1129/Bang/2011)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
7. Infosys Technologies Ltd.
The learned counsel submitted that this company is engaged in diversif ied activities including products, consultancy & solutions and this company commands a premium in the pricing of its products and services due to its goodwill, I.T.A. Nos. 1631/Hyd/10 :- 13 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) reputation and brand value. Further due to scale of operations, Inf osys enjoys economies of scale, which results in lower cost of infrastructural f acilities and overheads.
Further, he submitted that the issue of comparability of Inf osys to a small captive service provider is no longer res- integra. The following cases have specifically anlaysed in detail the comparability of Infosys on various parameters to a similar size sof tware service provider and rejected it:
- Intoto Sof tware India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
- Virtusa India Pvt. Ltd. Vs. DCIT (ITA No. 1962/H/2010)
- Patni Telecom Solutions Pvt. Ltd. Vs. ACIT (ITA No. 1846/Hyd/2012)
- Adaptec (India) Pvt. Ltd. Vs. DCIT (ITA No. 1801/Hyd/2009)
- DCIT Vs. M/s Hellosof t India Pvt. Ltd. (ITA No. 645/Hyd/09)
- Trilogy E Business Services Sof tware Ltd. Vs. DCIT (ITA No. 1054/Bang/2011 - Para 20)
- Telcordia Technologies India P Ltd. (ITA No. 7821/Mum/2011
- Para 7.4)
- Cordys Sof tware India Pvt. Ltd. Vs. ACIT (ITA No. 1972/H/2011)
- Agnity India Technologies Vs. ITO (ITA No. 3856/Del/2010)
- Agnity India Technologies Pvt. Ltd. Vs. ITO (High Court decision - ITA 1204/2011)
- Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014
6. We have considered the issue and examined the record including paper books placed on record. There is a merit in assessee's contentions about non-comparability of various comparable companies selected by the TPO.
7. As regards the Exensys Sof tware Solutions Ltd., as seen from the paper book placed on record, there is a merger of Holool India Ltd. and in the director's report (PB-951), there is a clear mention that the company's income of Rs. 737.79 lakhs is possible with the amalgamation of Holool India Ltd. It was further mentioned that Assessee company has got benefit by advanced latest technical expertise on various technology I.T.A. Nos. 1631/Hyd/10 :- 14 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) domains of the transferor company. Further, that company has charged deferred expenditure and the amount claimed in this year is Rs. 1.22 crores as against Rs. 30.21 lakhs in earlier year. This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies. Vide page 957 of paper book, it was seen that out of gross assets of Rs. 7.95 crores, Brands alone consist of Rs. 5 crores, therefore, intangible assets comprising of substantial par t of this company's assets. Not only in the correspondence with the TPO that Assessee expressed its inability to furnish separate accounts for two amalgamated companies but also further it has clearly mentioned vide letter dated 26-04-2007 to the TPO that there is a gap in the expenditure expected to incur and actual expenditure incurred which made the company record high operating margin on cost. These f actors indeed support assessee's contention that this exceptional prof it with the fact of amalgamation affected operating prof it of the company and this cannot be taken as comparable. Other issues were also analysed and accepted in various cases as relied upon by the learned counsel. In the case of Intoto Sof tware India Pvt. Ltd.,(supra) this comparable case was analysed and held as under:
"17. Having heard both parties and having considered the material available on record, we f ind that there is no dispute that Assessee has accepted the Exensys Sof tware Solutions Limited as one of the comparable companies when proposed by the TPO. However, the f act that there is an amalgamation of two companies i.e., Exensys Sof tware Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Higher Forums that to compare a company with another company, both the companies have to be brought on par with each other af ter making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by Assessee are made for the f irst time before the Tribunal. The Tribunal being the f inal f act f inding authority is bound to take note of the objections of Assessee. As the material relied upon by the learned Counsel for Assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, we deem it f it and proper to remand this issue to the f ile of the Assessing Off icer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Sof tware Limited and Holool India Limited and formed as one entity viz.,Exensys Sof tware Solutions Limited. during the relevant previous year and the f inancial result is the combined result of these two companies, then, we direct the Assessing I.T.A. Nos. 1631/Hyd/10 :- 15 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) Off icer/TPO to exclude this company from the list of comparables."
8. In view of the above, we are of the opinion that there is an extra-ordinary event which resulted in high operating margin of that company and we, therefore, direct the AO to exclude this company from the list of comparables. In the above referred case of Intoto Sof tware India Pvt. Ltd., complete details were not placed on record, therefore, the matter was sent to AO for verif ication whereas in this case assessee has objected even before the AO/ CIT(A), therefore, there is no need to set aside the issue to the f ile of the AO for examination as was done in the case of Intoto Sof tware(supra). We are, therefore, of the opinion that on the basis of f acts placed on record, the case of Exensys Sof tware Solutions Ltd. cannot be taken as comparable.
9. Similarly, the other cases, Bodhtree consulting Ltd, Four Sof t Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about f unctionality and why the same are not comparable to the companies like assessee. Bodhtree consulting Ltd also f ails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suff ice to say that assessee's submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm's length margin accordingly."
Similar view has also been expressed in other decisions referred to hereinabove. Therefore, respectfully following the consistent view of the ITAT, we exclude, Bodhtree Consulting Ltd., Exensys Software Solutions Ltd., Sankhya Infotech Ltd., Four Soft Ltd., Thirdware Solutions Ltd., Tata Elxsi Ltd and Infosys Technologies Ltd. from the list of comparables.
10. As far as Flextronics Software Limited is concerned, we find that in case of Intoto Software India Pvt. Ltd., (supra) the co-ordinate Bench of this Tribunal having found it to be functionally different as it is into product development has directed excluding it for comparability analysis. Respectfully following the decision of the coordinate bench of this Tribunal in case of M/s Intoto Software India Pvt.Ltd. (supra) we also direct the Assessing Officer/ TPO to exclude this company".
9. We find that the contentions of the assessee in the case before us are similar to the contentions raised by the assessee in the case of DE Shaw India Software Pvt. Ltd., and since facts and circumstances are I.T.A. Nos. 1631/Hyd/10 :- 16 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) similar, respectfully following the decision of the co-ordinate bench, we hold that the companies challenged by the assessee before us are not to be considered as comparables. As regards Satyam Communications Services Ltd., is concerned, we find that the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Ltd., reported in 262 CTR 291 has upheld its exclusion from the list of comparables for the same reasons as canvassed by the assessee before us. Therefore, we hold that this company also has to be excluded. Thus, grounds 3, 5 and additional grounds are allowed.
10. The assessee has given the working of the average margins of the comparable companies after exclusion of these nine companies which works out to 10.43% as against the margin computed by the TPO at 22.02%. The ALP determined by assessee was 9.97% which is within (+)/(-) 5% of the ALP of the comparable companies after exclusion of the above nine companies. Therefore, we are of the opinion that the assessee's margin is at ALP and therefore no ALP adjustment is required. Ground No.6 is accordingly allowed. Ground No. 7 is against the levy of interest u/s. 234B & 234D of the Act and is consequential in nature. The AO is directed to give consequential relief to the assessee.
11. Assessee's appeal is accordingly, partly allowed.
I.T.A. No. 1631/HYD/2010 (AY. 2006-07)
12. In this appeal also assessee has raised as many as eight concise grounds of appeal, out of which, ground No.1 is general in nature and needs no adjudication and ground Nos. 3 & 5 are not pressed and therefore they are rejected as not pressed. As regards ground Nos. 2 & 4 are concerned, we find that they are against the comparables selected by I.T.A. Nos. 1631/Hyd/10 :- 17 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) the TPO for determination of the ALP adjustment. The assessee is challenging the following companies as comparables:
x. Infosys Technologies Ltd.
xi. KALS Information Systems Ltd.
xii. Persistent Systems Ltd.
xiii. Tata Elxsi Limited.
xiv. Accel Transmatic Limited.
xv. Megasoft Limited.
13. The Ld. Counsel for assessee has placed reliance upon the decisions of this Tribunal in the case of 1) United Online Software Development (India) Pvt. Ltd., in ITA No. 1500/Hyd/2010 dt. 20-06-
2014; 2) M/s NTT DATA India Enterprise Application Services P. Ltd., in ITA No. 1613/Hyd/2010 dt. 02-01-2015 and 3) CES Pvt. Ltd., in ITA No.1445/Hyd/2010 dt. 29-11-2013 in support of his contention that all these companies have to be excluded from the list of comparables. The copies of such orders are filed before us in the form of Paper Book.
14. The Ld. DR, on the other hand, supported the orders of the authorities below.
15. Having regard to the rival contentions and material on record, we find that the facts of the case before us are similar to the facts in the cases relied upon by the assessee and cited supra. The co-ordinate bench of this Tribunal, in the case of United Online Software Development (India) Pvt. Ltd., (cited supra) has held that Infosys Technologies Ltd., having a huge turnover and not being a captive service provider, cannot be considered as a comparable to the assessee therein and therefore, it has to be excluded from the list of comparables.
I.T.A. Nos. 1631/Hyd/10
:- 18 -: 1227 & 2098/Hyd/11
Broadcom India Technologies Pvt. Ltd
(Formerly known as LVL7 Systems India Pvt. Ltd) For similar reasons, KALS Information Systems Ltd., has also been directed to be excluded, by following the decision of the co-ordinate bench of the Tribunal of Bangalore in the case of Huawei Technologies India Pvt. Ltd., Vs. ITO in ITA No. 1338/Bang/2010 dt. 30-04-2013. Similarly, in the case of M/s NTT DATA India Enterprise Application Services P. Ltd., (supra), the comparability of all these companies except Persistent Systems Ltd. has considered by the Tribunal and have been directed to be excluded. The relevant portion of the order of the Tribunal at paras 8 & 9 is reproduced here under for ready reference:
"8. Out of the comparables, assessee has objected to Sl. No. 15 to 20 comparables referred above. Among the six companies, five companies are already considered by Coordinate Bench decision of the Hyderabad Tribunal in the case of United Online Software Development (India) P. Ltd., Hyderabad vs. ITO, Ward 3 (2), Hyderabad ITA.No.1500/ Hyd/ 2010 dated 20.06.2014 and the findings are as under :
I. Accel Transmatic Ltd.
II. KALS Info. Systems Ltd
i. Objecting to selection of this company, the learned AR submitted
that this company is functionally different. It was submitted that during the year the company had sold IP rights in the software developed by it, which has impacted its profitability of the year. Hence, the company not only does not satisfy the 75% service revenue filter applied by the TPO, but, has an exceptional year of operations. It was submitted that the performance of the software segments clearly indicate that the company has income from sale of products. The learned AR further submitted that the company has a negative operating margin of 18.73% for FY 2004-05. Further, the learned AR submitted that as per the annual report submitted by the company in response to 133(6) related party transaction (RPT) also fails threshold limit applied by the TPO himself. In this regard, the learned AR submitted the following computation:
Particulars AE
Rendering of services 56,274,970
Receiving of services 10,011,622
Interest paid 1,513,025
Lease payments 1,830,084
Total RPT 69,629,701
RPT/Sales 60.60%
I.T.A. Nos. 1631/Hyd/10
:- 19 -: 1227 & 2098/Hyd/11
Broadcom India Technologies Pvt. Ltd
(Formerly known as LVL7 Systems India Pvt. Ltd) ii. It was therefore submitted that this company under no circumstances can be considered as a comparable to the assessee, which is a purely software development service provider. The learned AR submitted that ITAT, Bangalore Bench in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010 dated 30/04/2013 has held the aforesaid company not to be a comparable in respect of a purely software development service provider. For the same reason Ld. AR sought exclusion of KALS Infosystems Ltd. He also relied upon the following other decisions:
1. Trilogy E Business Services Software Ld. Vs. DCIT (ITA No. 1054/Bang/2001.
2. CSR India Pvt. Ltd. (TS-68-ITAT-2013(Bang.-TP)
3. Intoto Software India Pvt. Ltd., (ITA No. 1196/Hyd/2010)
4. Transwhich India Pvt. Ltd. Vs. DCIT (ITA No. 948/Bang/2011) iii. The learned DR, on the other hand, supporting reasoning of the TPO and DRP submitted that there is no need to exclude the above said company.
iv. We have considered the submissions of the parties and perused the materials on record. As can be seen, the TPO at page 53 of his order has categorized the assessee as a pure software development service provider. The comments of the TPO in this regard are extracted hereunder for the sake of convenience:
"Software Product Company A company who develops a software product by following all the steps involved in creating software as explained above from Domain Analysis to Testing. In this case, intellectual property belongs to the company. The products are sold generally on license basis wherein the right to use the software is transferred without giving the source code. These types of companies are not similar to the taxpayer, who is a pure service provider.
Pure Software Development Service Provider A pure software development service provider does a portion of the described software development life cycle. It does not generate any intellectual property for its own. The intellectual property generated belongs to the customer and not to the service provider. The taxpayer falls in this category. Thus comparables are also to be chosen from companies whose significant activities (> 75% of the operating revenues) are in the nature of or relate to software development services."
I.T.A. Nos. 1631/Hyd/10 :- 20 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) As can be seen from the above extracted portion, the TPO has himself mentioned that a pure software development service provider does not generate any intellectual property for its own. He has further stated that, the companies which sell their products generally on license basis wherein the right to use the software is transferred without giving source code cannot be comparable to pure software development service provider like assessee. It is the specific contention of the learned AR that Accel Transmatic Ltd., has sold IP rights for the software developed by it. Further, it is also the contention of the assessee that this company fails the RPT filter of more than 25% applied by the TPO himself. In case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), the ITAT Bangalore Bench while examining the issue of comparability of the aforesaid company to a purely software development service provider has held as under:
"In so far Kals Info Systems Ltd., and Accel Transmatics Ltd., chosen by the TPO as comparables, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are functionally different. The following are the relevant observations of the Tribunal in this regard:-
46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs.45, 93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the. Pune Bench Tribunal's decision of the ITA T in the case of Bind view India Private Limited Vs. DC/, ITA No. ITA No 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:
"16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, ete. All these aspects have not been factually rebutted and, in our view the said concern is liable to be excluded I.T.A. Nos. 1631/Hyd/10 :- 21 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) from the final set of comparables, and thus on this aspect, assessee succeeds. "
Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.
47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.06.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.
(e) Accel Transmatic Ltd.
48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. c/T 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows:
"In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under.
(i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system
(ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development
(iii) Accel lT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/8PO I.T.A. Nos. 1631/Hyd/10 :- 22 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd)
(iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as It was engaged in the services in the form of ACCEL IT and ACC EL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final/ist of comparables for the purpose of determining TNMM margin. "
49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken tor comparability purposes. The submission of the Id. counsel for the assessee was that If the above company should not be considered as comparable. The Id. DR, on the other hand relied on the order of the TPO.
50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the Id. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the Id. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. "
13. In view of the aforesaid decision of the Tribunal, Kals Info Systems Ltd., and Accel Transmatics Ltd. are to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal. It is ordered accordingly."
Facts being materially same and since it pertains to the same assessment year, following the view adopted by the ITAT, Bangalore Bench in the aforesaid case, we are also of the view that this company cannot be comparable to the assessee.
For the very same reasons, II. KALS Info. Systems Ltd. also cannot be a comparable to the assessee. We, therefore, direct the AO/TPO to exclude the aforesaid companies from the list of comparability analysis.
III. Megasoft Ltd.
i. Objecting to the aforesaid company being treated as comparable, the learned AR submitted that as per the information obtained from the said company u/s 133(6) of the Act, the annual report of the company I.T.A. Nos. 1631/Hyd/10 :- 23 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) clearly indicates that it is also engaged in selling of products, namely, XIUS suit of packaged products. It was submitted that since segmental financial results in respect of product and services are available in respect of this company, if at all this company is to be treated as comparable, the TPO may be directed to consider the profit margin of software development services segment alone which is 16.97%, In respect of such contention, the learned AR relied upon the following decisions:
1. Trilogy E Business Software India Pvt. Ltd. (ITA No. 1054/Bang/2011)
2. LG Soft India P. Ltd. (TS-64-ITAT-2013(Bang.-TP)
3. Bearing Point Business Consulting Pvt. Ltd. (ITA No. 1124/Bang/2011)
4. Intoto Software India Pvt. Ltd. (ITA No.1196/Hyd/2010)
5. Transwhich India Pvt. Ltd. VS. DCIT (ITA No.948/Bang/2011)
6. Mercedez Benz research & development India Pvt. Ltd., (ITA. No. 1222/Bang/2011).
7. Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010) ii. The learned DR, on the other hand, submitted that the TPO having correctly considered the profit margin of the company by examining the annual report there is no need to modify the order of the TPO in this regard.
iii. We have heard the parties and perused the materials on record. On a consideration of the contentions raised by the assessee vis-à-vis materials on record as well as decisions of different benches of the Tribunal placed before us, it is quite evident that this company has two separate segments i.e. product and services. Therefore, if at all, the AO/TPO considers the aforesaid company to be a comparable, then, he is directed to consider software development services segment alone for comparability analysis.
IV, Infosys Technologies Ltd.
i. Objecting to this company, the learned AR submitted that under no circumstances, This company can be considered as comparable, to a small captive service provider like assessee. It was submitted that Infosys is engaged in diversified activities including products, consultancy & solutions. It commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further, due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. Finally, the learned I.T.A. Nos. 1631/Hyd/10 :- 24 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) AR submitted that the issue of comparability of Infosys to a captive service provider is no longer RES INTEGRA, due to following decisions of the different benches of the Tribunal:
1. Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011-Para 7.4)
2. Adaptee (India) Pvt. Ltd. Vs. DCIT (ITA No. 1801/Hyd/2009)
3. Patni Telecom Solutions Pvt. Ltd., Vs. ACIT (ITA No. 1846/Hyd/2012)
4. Trilogy E Business Services Software Ltd. Vs. DCIT (ITA No. 1054/Bang/2011 - Para 20)
5. Agnity India Technologies Vs. ITO (ITA No.3856/Del/2010)
6. Agnity India Technologies Pvt. Ltd. Vs. ITO (High Court decision) ITA No. 1204/2011
7. Huawei Technologies India Pvt. Ltd. Vs. IT) (ITA No. 1338/Bang/2010) (AY 2006-07
8. Cincom Systems India P. Ltd., Vs. ACIT (ITA No. 761/Del/2012 (AY 2006-07)
9. Adobe Systems India Pvt. Ltd. (TS-320-ITAT-2011 (Del.)
10. Virtusa India Pvt. Ltd., Vs. DCIT (ITA No.1962/H/2011)
11. Intoto Software India Pvt. Ltd. (ITA No. 1196/H/2010) ii. The learned DR, on the other hand, supported the orders of the DRP & TPO.
iii. We have heard the parties and perused the materials on record as accepted the fact that the assessee is purely a software development service provider to its AE whereas Infosys is not a captive service provider like assessee. It is a fact that Infosys is engaged in diversified activities and also engaged in development of products consultancy and solution. That apart, the size, reputation and brand value of Infosys, in no way makes it comparable to a small captive service provider like assessee. Therefore, following consistent view of different benches of Tribunal, we exclude this company from the list of comparables.
V. Tata Elxsi Ltd. (Seg.) i. Objecting to the aforesaid company being treated as comparable, the learned AR submitted that the said company shall be rejected as comparable since it is a specialized embedded software development company. Further, he submitted that as per the information obtained from the said company u/s 133(6) of the Act, it was stated that due to the complex segments in which they are operating, it is not comparable to any other software services company. The AR relied on the following precedents in support of his submissions:
1. Conexant Systems India Pt. Ltd., (ITA No. 1429/Hyd/2010 and 1978/Hyd/2011) I.T.A. Nos. 1631/Hyd/10 :- 25 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) 2 Telcordia Technologies India P. Ld., (ITA No.7821/Mum/2011)
3. Logica Pvt. Ltd. (IT(TP)A No. 1129/Bang/2011)
4. Huawei Technologies India Pvt. Ltd. Vs. IT) (ITA No. 1338/Bang/2010) AY 2006-07 ii. The learned DR, on the other hand, supported the orders of the DRP & TPO.
iii. We have heard the parties and perused the materials on record as well as decisions relied upon by the learned AR. We find that in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), ITAT Bangalore Bench excluded this company relying upon the decision of ITAT, Mumbai Bench in case of Telcordia Technologies India Pvt. Ltd. (supra) pertaining to the same assessment year i.e. 2006-07.
iv. Following the view expressed by Bangalore and Mumbai Benches, of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Tata Elxsi Ltd. is also to be excluded from the list of comparables while determining the, ALP of the international transaction 8.1. Respectfully following the analysis made by various coordinate benches, we direct the AO/TPO to exclude the above five companies as they are not comparable to the functions of assessee.
8.2. With reference to VI. Flextronics Software Systems Ltd., (seg), it was submitted that this was not considered in the decision of United Online and it was excluded in A.Y. 2007-08 in the case of Intoto Software India P. ltd., in ITA.No.1196/H/2010, 1197/Hyd/2010 (A.Y. 2005-06) & 2102/Hyd/2011 dated 24.05.2013 (A.Y. 2007-08) on the reason of incurring expenditure on selling products and R & D and not a computer software development Company. The finding of the Coordinate Bench in A.Y. 2005-06 in Flextronics Software Systems Ltd., (supra) is as under :
"27. As far as Flextronics Software Limited is concerned, we find that at page 20 of his order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the A.O./TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the A.O./TPO to exclude these three companies from the list of comparables."
I.T.A. Nos. 1631/Hyd/10 :- 26 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd)
9. Likewise, in A.Y. 2007-08 also the Coordinate Bench has considered this comparable company and stated that Flextronics Software is functionally different and A.O. could not have taken this company as comparable company without making suitable adjustments for the differences. Therefore, this comparable has to be excluded. However, since, this aspect was not examined by any Coordinate Bench in A.Y. 2006-07 and no order of Coordinate Bench was brought to our notice relevant to this year. We, in the interest of justice, restore this to the file of TPO to examine the functions of the above company and determine whether that is comparable or not, keeping in mind the decision of Coordinate Bench of earlier A.Y. and later A.Y. about the functional differences. The issue is restored to the file of TPO".
16. Respectfully following the decision of the co-ordinate bench in similar set of circumstances, all these companies are directed to be excluded from the list of comparables except Persistent Systems and Megasoft. As regards Persistent Systems Ltd., is concerned, we find that the Tribunal in the case of CES Pvt. Ltd., had considered the extraordinary event of the acquisition of another company by name Norwest Capital Partner's by the said company on 22-11-2005 for directing it to be excluded. Since the event has taken place during the previous year relevant to the assessment year before us, we also direct that this company should be excluded from the list of comparables. Further, as regards Megasoft, we confirm its inclusion in the list of comparables but we direct the AO to consider its segmental data for determining the average margin of the comparables. In the result, all the comparables except Megasoft challenged by the assessee are directed to be excluded from the list of comparables.
17. As regards Ground No. 6, we find that the ALP determined by the assessee is 12.06% while the average margin of the comparables after exclusion of the above companies is 11.05% and therefore the margin of the assessee is which is within (+)/(-) 5% of the average margin of the comparables subject to the segmental margin of Megasoft being within the range. Therefore we direct the AO/TPO to re-determine the ALP. Ground No. 6 is accordingly allowed for statistical purposes.
I.T.A. Nos. 1631/Hyd/10
:- 27 -: 1227 & 2098/Hyd/11
Broadcom India Technologies Pvt. Ltd
(Formerly known as LVL7 Systems India Pvt. Ltd)
18. As regards ground Nos. 7 & 8 are concerned, we find that these grounds are against the exclusion of telecommunication expenses, lease line charges and certain other expenses incurred by the assessee in foreign currency from the export turnover for the purpose of computation of relief u/s.10A of the Income Tax Act.
19. The Ld. Counsel for assessee submitted that if these expenses are excluded from the export turnover, then the same should also be excluded from the total turnover for computation of deduction u/s.10A. He placed reliance upon the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Limited, wherein it was held that, if any expenditure is excluded from the export turnover, the same should also be excluded from the total turnover for the purpose of computation of deduction u/s.10A. Respectfully following the decision of the Hon'ble High Court, we direct the AO to exclude the expenditure both from the export turnover as well as from total turnover while computing the deduction u/s.10A. These grounds are accordingly allowed for statistical purposes.
20. In the result, assessee's appeal is partly allowed for statistical purposes.
I.T.A. No. 2098/HYD/2011 (AY. 2007-08)
21. In this appeal also, the assessee has filed concise grounds of appeal. We find that ground No.1 is general in nature and needs no adjudication. Ground Nos. 3 & 5 are not pressed at the time of hearing and therefore, they are rejected as not pressed. As regards ground Nos. 2 & 4 are concerned, they are against the comparables selected and adopted by Transfer Pricing Officer [TPO] and the Arm's Length Price I.T.A. Nos. 1631/Hyd/10 :- 28 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) [ALP] adjustment made by the TPO. In this appeal, the assessee is challenging the following comparables:
i. Accel Transmatic Ltd.
ii. Avani Cimeon Technologies Ltd.
iii. Celestial Labs Ltd.
iv. Flextronics Software Systems Ltd.
v. Geometric Software Ltd.
vi. Infosys Technologies Ltd.
vii. Ishir Infotech Ltd.
viii. KALS Info Systems Ltd.
ix. Lucid Software Ltd.
x. Megasoft Ltd.
xi. Thirdware Solutions Ltd.
xii. Wipro Ltd.
22. At the time of hearing, the Ld. Counsel for assessee submitted that Dispute Resolution Panel [DRP] has rejected Celestial Labs Ltd., and Geometric Software Ltd., as comparables and that the assessee has included them in their chart inadvertently. Therefore, there is no need to adjudicate about these two companies. As regards other companies, the Ld. Counsel for assessee submitted that in similar set of facts all these companies were directed to be excluded by this Tribunal on the ground of functional dissimilarity or failing of employee cost filter in the case of 1) LGS Global Ltd., in ITA No. 1885/Hyd/2011, 2) M/s. Tecumseh Products India P. Ltd., in ITA No. 2228/Hyd/2011 dt. 28-05- 2014 and 3) M/s. Axsys Healthtech Ltd., in ITA No. 2076/Hyd/2011 dt. 28-05-2014. We find that the Tribunal in the case of M/s. Axsys Healthtech Ltd., (cited supra) has considered the comparability of all the above companies except Megasoft and Thirdware Solutions Ltd. at paras I.T.A. Nos. 1631/Hyd/10 :- 29 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) 14 to 16 of its order. . The said paras are reproduced here under for ready reference:
"14. After hearing rival contentions, we agree that the following comparables were excluded by the Coordinate Benches considering the similar facts and arguments raised before us:
1. functionally dissimilar.
1.Accel Transmatic Ltd.-
On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin."
2. Avani Cincom Technologies Ltd.
Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis."
3. KALS INFORMATION SYSTEMS LTD:
". We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable".
4. LUCID SOFTWARE LIMITED:
The objections raised by the assessee for inclusion of Lucid Software Ltd. as a comparable is placed at pages 244 to 248 of the paper book filed by the assessee. We find identical objection has been raised against the inclusion of Lucid Software in case of Telcordia Technologies. Since the I.T.A. Nos. 1631/Hyd/10 :- 30 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) facts and the assessment year are identical, following the order of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra), we direct the Assessing Officer/TPO not to include Lucid Software Limited as a comparable."
2.employee cost filter:
5. ISHIR INFOTECH LTD:
So f ar as this company is concerned, the assessee has sought exclusion of the aforesaid company on the ground that this company f ails employee cost f ilter as its employee cost was only 3.96%. In this context, the learned AR has relied upon the decision of co-ordinate Bench of this Tribunal in case of M/s Virtusa (India) Pvt. Ltd. (supra). On a perusal of the order passed in case of M/s Virtusa (India) Pvt. Ltd.((supra)), we f ind that the co-ordinate bench has held that Ishir Infotech Limited cannot be treated as comparable as it does not qualif y the employee cost f ilter as well as RPT f ilter. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as stated below :
a) M/s. Foursof t Limited (ITA.No.1903/H/2011)
b) Intoto Sof tware India P. Ltd. ITA.2102/H/2010
c) LG Sof t India P. Ltd. ITA.1121/Bang/2011
d) Transwitch India P. Ltd. ITA.948/Bang/2011
f) Mercedes Benz Research & Development ITA.No.1222/Bang/2011
g) CSR India P. Ltd. ITA.No.1119/Bang/2011
h) First Advantage ITA.No.1086/Bang/2012
i) HCL EAI Services Ltd. ITA.No.1348/Bang/2011.
3. High Turnover- functionally dissimilar:
6. FLEXITRONICS SOFTWARE LIMITED :
" As far as Flexitronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee- company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude from the list of comparables."
I.T.A. Nos. 1631/Hyd/10 :- 31 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd)
7. INFOSYS TECHNOLOGIES Ltd.:
" We have heard both the parties. We find that Infosys Technologies Ltd., though, is into the similar business of the assessee as software development, cannot be considered as a comparable to any other companies which are also involved in similar activities. It is not only a giant company but is also engaged in development of various niche products. It cannot be compared to the assessee in any manner. Similar directions have been given by the Tribunal at Delhi and Hyderabad Benches in the cases cited (supra)".
8. TATA ELXSI LIMITED :
" As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also becauseof diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee".
9. WIPRO LIMITED :
" . As far as (Infosys Technologies Limited and) Wipro Limited are concerned, we find that both are giant companies and are into diversified activities and for the detailed reasons given by us in assessee's own case for the A.Y. 2005-06 even dated, we direct that these two companies are to be excluded from the list of comparables."
14.1. In the case of Triology E-Business Software India Private Limited vs. DCIT reported in 140 ITD 540, Coordinate Bench decided companies as not comparable on High turnover, with respect to
10. iGate Global Solutions Ltd. (747.27 crores),
11. Mindtree Ltd. (590.39 crores),
12. Persistent Systems Ltd. (293.74 crores),
13. Sasken Communication Technologies Ltd. 343.57 crores).
The Bangalore Bench of the Tribunal held as under :
I.T.A. Nos. 1631/Hyd/10 :- 32 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) "20. In this regard we find that the provisions of law pointed out by the ld.
counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Q 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO.
14. HELIOS & MATHESON information Technology ltd This comparable is objected on the reason of low employee cost of 1.36%. Thus it fails the employee cost filter. Therefore, not comparable. Assessee relied on the judgment of Mentor Graphics P. Ltd. vs. DCIT 109 ITD 101 (Del.) with reference to this comparable.
15. After considering the contentions, we are of the opinion that these 14 comparables are required to be excluded by the TPO. Respectfully following the decisions of the Coordinate Benches of the Tribunal, we direct that these companies should be excluded from the list of comparables as assessee turnover is only 2.18 crores and employee cost is more. Many of the companies are also found to be not functionally similar. The various filters and reasons accepted in other cases do apply to the assessee as TPO selected same 26 comparables in all the cases relied on and decided earlier in various cases.
16. Respectfully following the Coordinate Bench decisions in the above companies, we direct that these 14 companies should be excluded from the computation of PLI. It was submitted that the mean PLI of the rest of the comparables selected by the TPO would come to 18.66% and this is within the margin as arrived at by the assessee. after excluding the R&D cost contested above. However, these aspects require examination by the TPO as the issue of 'operating cost' has a bearing on working the ALP. The AO/TPO is directed to determine the operating cost as directed above and then workout the arithmetic mean of the comparables accepted above after rejecting the comparables as discussed in the above paras. Thereafter, A.O/TPO is directed to examine whether any adjustment is required under the provisions of the Act toward working capital. Eventhough, assessee has not raised specific objections about negative working capital adjustment before us, though a ground was raised, in the charts it taken the negative working capital as such. However, in the revised T.P. computation if required A.O. can also examine this aspect of negative working capital adjustment which was duly objected before the DRP. With these observations, grounds are considered as allowed for statistical purposes".
I.T.A. Nos. 1631/Hyd/10
:- 33 -: 1227 & 2098/Hyd/11
Broadcom India Technologies Pvt. Ltd
(Formerly known as LVL7 Systems India Pvt. Ltd) Since the facts and circumstances before us are similar, we directed that these companies to be excluded from the list of comparables before us also.
23. As regards Megasoft Ltd., is concerned, we find that the Tribunal in the case of LGS Global Ltd. has held that the same is comparable to the assessee company but has directed that the segmental margin be applied. Respectfully following the decision of the co-ordinate bench on similar set of facts, we direct the AO to consider the Megasoft as comparable provided, the segmental details of the said company are available.
24. As regards Thirdware Solutions Ltd., we find that the Tribunal, in the case of Intoto Software India Private Ltd., has held the said company to be not comparable on the ground of functional dissimilarity and the said order has been upheld by the jurisdictional High Court vide order dt. 27-03-2014. Respectfully following the same, we direct the AO to exclude the said company also from the list of comparables. Thus grounds 2 & 4 are allowed.
25. Coming to ground No. 6, we find that the ALP as determined by assessee was 14.53% whereas the average margin after exclusion of the above comparables is 16.68% subject to the segmental margin of Megasoft being within the range. We therefore direct the AO to re-determine the after considering the segmental margin of Megasoft. In the result, Ground No. 6 is treated as allowed for statistical purposes.
26. As regards concise grounds of appeal No. 7 & 8 are concerned, we find that the issue is covered in favour of the assessee by the decision of Hon'ble Karnataka High Court in the case of Tata Elxsi Limited reported I.T.A. Nos. 1631/Hyd/10 :- 34 -: 1227 & 2098/Hyd/11 Broadcom India Technologies Pvt. Ltd (Formerly known as LVL7 Systems India Pvt. Ltd) as [349 ITR 98 (Karn)]. Respectfully following the above decision, we direct the AO to exclude the expenditure both from the export turnover as well as from the total turnover while computing deduction u/s.10A. In the result, Ground Nos. 7 & 8 are allowed for statistical purposes.
27. Ground No.9 is consequential in nature. AO is directed to give consequential relief, if any, to the assessee.
28. In the result, assessee's appeal is treated as partly allowed for statistical purposes.
29. In the result, appeals in ITA No. 1227/Hyd/2011 (AY.2005-06) is partly allowed, ITA No. 1631/Hyd/2010 (AY.2006-07) and ITA No. 2098/Hyd/2011 (AY.2007-08) are partly allowed for statistical purposes.
Order pronounced in open Court on 8th May, 2015 Sd/- Sd/-
(P.M. JAGTAP) (P. MADHAVI DEVI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated 8th May, 2015
TNMM
I.T.A. Nos. 1631/Hyd/10
:- 35 -: 1227 & 2098/Hyd/11
Broadcom India Technologies Pvt. Ltd
(Formerly known as LVL7 Systems India Pvt. Ltd) Copy to :
1. Broadcom India Technologies Private Limited, Office No. 3 & 4, 9th Floor, Building No.9, Raheja Mind Space, Hi-Tech City, Madhapur, Hyderabad.
2. The Deputy Commissioner of Income Tax, Circle-1(3), Hyderabad.
3. The Deputy Commissioner of Income Tax, Circle-16(1), 4th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad
3. Dispute Resolution Panel (DRP), Hyderabad.
4. Director of Income Tax (IT & TP), Hyderabad.
5. Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad.
6. D.R. ITAT, Hyderabad.