Income Tax Appellate Tribunal - Pune
M/S. Barclays Technology Centre India ... vs Assessee on 22 July, 2016
आयकर अपील
य अ धकरण "बी" यायपीठ पण
ु े म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, PUNE
ी आर. के. पांडा, लेखा सद य, एवं ी #वकास अव थी, या%यक सद य के सम& ।
BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No. 1855/PN/2014
%नधा(रण वष( / Assessment Year : 2009-10
Dy. Commissioner of Income Tax,
Circle -1(1), Pune
.......अपीलाथ / Appellant
बनाम / V/s.
Barclays Technology Centre
India Pvt. Ltd.,
3rd Floor, Block - 'C', Panchshil Tech Park,
Opp.: Pune Golf Course, Airport Road,
Pune - 411006
PAN : AADCB1173D
......
यथ / Respondent
*+या&ेप सं. / CO No. 15/PN/2016
%नधा(रण वष( / Assessment Year : 2009-10
Barclays Technology Centre
India Pvt. Ltd.,
3rd Floor, Block - 'C', Panchshil Tech Park,
Opp.: Pune Golf Course, Airport Road,
Pune - 411006
PAN : AADCB1173D
.......अपीलाथ / Appellant
बनाम / V/s.
Dy. Commissioner of Income Tax,
Circle -1(1), Pune
......
यथ / Respondent
Assessee by : Shri M.P. Lohia
Revenue by : Shri Hitendra Ninawe
सन
ु वाई क तार ख / Date of Hearing : 01-06-2016
घोषणा क तार ख / Date of Pronouncement : 22-07-2016
2
ITA No. 1855/PN/2014 & CO No. 15/PN/2016
आदे श / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-IT/TP, Pune dated 23-07-2014 for the assessment year 2009-10. The assessee has filed Cross Objection against the aforesaid order of Commissioner of Income Tax (Appeals).
2. The brief facts of the case as emanating from records are: The assessee is engaged in providing software services to Barclays Group worldwide. The assessee company has been set up as an offshore technology centre in India. The software services provided by the assessee include development, maintenance and enhancement of software for new technologies and platforms and upgradation, modification of existing software applications and systems. The software services rendered by assessee are to support internal software related requirements for the Barclays Group and not for sale to third party. During the period relevant to the assessment year 2009-10, the assessee filed its return of income declaring total income of `4,13,16,515/-. Since, the assessee had entered into international transactions with its Associated Enterprise (AE), the same were referred to Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP) under the provisions of section 92CA of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). During the financial year 2008-09 the assessee had entered into various international transactions which inter alia includes 'Provision for Software Services' having transaction value of `172,75,06,099/-. The assessee adopted Transactional Net 3 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 Margin Method (TNMM) as the most appropriate method to benchmark international transactions relating to Software Development Services. The TPO accepted the method adopted by the assessee for benchmarking the international transactions. In the TP study the assessee selected 21 companies as comparables. However, the TPO rejected majority of the companies selected by the assessee as comparables and retained only 6 companies as comparables from the list provided by assessee. Further, the TPO added 3 new more companies to the list of comparables for determining ALP. The TPO rejected the companies by applying following filters :
i. Companies not having data for the Financial Year 2008-09. ii. Turnover filter - Companies having income from software development services less than `1 Crore.
iii. Related party transactions (RTP) - Companies having RTP more than 25%.
iv. Companies having export sales less than 75% of the operating revenue.
v. Companies having persistent losses.
vi. Companies having different accounting year i.e. accounting year
not ending on March 31, 2009.
vii. Functionally different companies.
3. The final set of comparables adopted by the TPO for
benchmarking the transactions is as under :
Unadjusted Working capital
Sl. Name of the comparable operating Adjusted
No. company margins for FY operating margins
2008-09 (%) for FY 2008-09
1 KALS Information Systems 41.91% 37.64%
2 Goldstone Technologies Limited 4.16% 9.60%
3 Thirdware Solutions Limited 21.90% 18.47%
4 Infosys Technologies Limited 40.39% 39.50%
5 Bodhtree Consulting Limited 62.29% 62.36%
6 Persistent Systems Limited 16.18% 17.53%
7 LGS Global Limited 20.51% 16.13%
8 Sasken Communication 24.22% 26.37%
Technologies
9 Larsen & Toubro Limited 17.54% 20.70%
Arithmetic mean 27.68% 27.59%
4
ITA No. 1855/PN/2014 & CO No. 15/PN/2016
The operating margin of the assessee was determined at 15.34%.
Consequent to the determination of ALP on the basis of set of comparables selected by TPO, the TPO made an upward adjustment of `17,46,58,918/- to the value of international transactions in respect of software development services rendered by the assessee to its AEs. On the basis of order of TPO final assessment order was passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(3) of the Act on 05-04-2013.
4. Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). Before the Commissioner of Income Tax (Appeals) the assessee inter alia challenged the action of TPO in including/excluding certain companies in the list of comparables. The Commissioner of Income Tax (Appeals) accepted the contentions of the assessee for including following companies in the TP Study:
Unadjusted Rejected by TPO stating as Margins Name of Company follows for FY 2009-10 Akshay Software onsite business model 12.29% Technologies Zylog Systems Limited onsite business model 14.29% RS Software Limited onsite business model 9.89% CG VAK Software & Exports Incurred loss at segmental level 5.29% Ltd.
Mindtree Limited sufficient segmental information is 5.54% not available Quintegra Solutions Limited Relying on DRP direction for AY 0.03% 2008-09 Further, the Commissioner of Income Tax (Appeals) directed the TPO to include Evoke Technologies Private Limited (having operating margin of 20.05%) and Maveric Systems Limited (having operating margin of 14.50%) in the list of comparable companies. The 5 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 Commissioner of Income Tax (Appeals) further directed the TPO exclude the following companies included in the list of comparables for the reasons that there was vast difference in size and scale of business and nature of activities:
i. Infosys Technologies Limited. ii. Larsen & Toubro Limited. 5. The final set of comparable companies selected by the
Commissioner of Income Tax (Appeals) for determining ALP is as under:
Sr. Operating
No. Name of the company Margin
after WCA
1 KALS Information Technology Systems Limited (Seg) 42.46%
2 Bodhtree Consulting Limited 63.93%
3 Sasken Communication Technologies Limited 13.11%
4 R S Software (India) Limited 8.58%
5 Goldstone Technologies Limited 25.97%
6. CG-VAK Software & Exports Limited (Seg) 7.46%
7 Mindtree Limited 6.34%
8 Akshay Software Technologies Limited 10.60%
9 Lanco Global Systems Limited 12.98%
10 Persistent Systems Private Limited 11.89%
11 Quintegra Solutions Limited -8.02%
12 Thirdware Solutions Limited 18.06%
13 Zylog Systems Limited 10.20%
14 Maveric Systems Limited 12.47%
15 Evoke Technologies Private Limited 18.39%
Arithmetic Mean 16.94%
6. The Commissioner of Income Tax (Appeals) further directed the Assessing Officer to rework margins of the comparable companies, if necessary, by following safe harbour rules issued by the CBDT and to grant working capital adjustment. Against these findings of the Commissioner of Income Tax (Appeals), the Revenue is in appeal and the assessee has filed Cross objections.6 ITA No. 1855/PN/2014 & CO No. 15/PN/2016
7. The grounds raised by the Revenue in appeal are as under :
1. "The learned CIT(A) has erred, in law and on facts, by applying certain inappropriate filters for screening of companies.
2. The learned CIT(A) has erred on the facts and circumstances of the case and in law by rejecting certain companies from the set of comparable identified by the TPO in respect of international transaction pertaining to provision of software services.
3. The learned CIT(A) has erred on the facts and circumstances of the case and in law by including certain additional companies rejected by the learned TPO which are functionally not comparable to the assessee company.
4. Without prejudice to any other grounds/submission, the learned CIT(A) has erred on the facts and circumstances of the case and in law in including certain additional companies which has been rejected by Hon'ble Dispute Resolution Panel. in the assessee's own case for A.Y.2008-09.
5. For these and such other grounds as may be urged at the time of hearing, the order of the learned CIT(A) may be vacated and that of Assessing Officer be restored.
6. The appellant craves to add, alter or amend any or all the grounds of appeal."
8. The assessee in its Cross Objection has raised following grounds :
"Rejecting application of onsite filter for the screening of companies
1. errred on the facts and in circumstances of the case, and in law, by objecting the appropriate order passed by CIT(A) by rejecting application of onsite filter (applied by the TPQ) for the screening of companies.
Rejecting certain companies considered in the comparable set by the TPO
2. erred on the facts and in circumstances of the case, and in law, by objecting the well-reasoned order passed by CIT(A) for AY 2009-10 for rejecting companies (ie Infosys Technologies Limited and Larsen & Toubro Infotech Limited) considered as comparable by the TPQ on account of the vast difference in size and nature of the business activities.7 ITA No. 1855/PN/2014 & CO No. 15/PN/2016
Inclusion of companies rejected by the TPO from the comparable set
3. erred on the facts and in circumstances of the case, and in law, by objecting the appropriate order given by CIT(A) to consider certain companies, which were originally a part of the TP Study but rejected by the TPQ from-the comparable set as comparable to the Respondent, Inclusion of companies in the comparable set that were rejected by Dispute Resolution Panel ('Hon'ble DRP') in the AY 2008-09 in Respondent's own case
4. erred on the facts and in circumstances of the case, and in law, by objecting the appropriate order given by CIT(A) to include companies in the comparable set.
Further, based on the facts and circumstances of the case, the Hon'ble CIT(A) and consequently the learned AO and learned TPO has:
Non consideration of contemporaneous data
5. erred on the facts and in circumstances of the case, and in law, in conducting an analysis based on information subsequently available for determining arm's length price which was not available at the time of complying with the transfer pricing regulations.
Non-consideration of multiple year data
6. erred on the facts and in circumstances of the case, and in law, in not considering multiple year data (ie Financial Year 2008-09 and prior two years) for determining the arm's length price. Use of inappropriate filters for screening of companies
7. erred, in law and in facts, by applying certain inappropriate filters for screening of companies.
Rejection of certain comparable companies identified by the Respondent as comparables in the transfer pricing study
8. erred on the fads and in circumstances of the case, and in law, in rejecting certain companies from the set of com parables identified by the Respondent in respect of international transaction pertaining to provision of software services Considering certain additional companies as comparable to the Appellant
9. erred on the facts and in circumstances of the case, and in law, in accepting additional companies as comparable to the Respondent in relation to provision of software services.
8ITA No. 1855/PN/2014 & CO No. 15/PN/2016 Selection of companies having abnormal normal profits
10. erred on the facts and in circumstances of the case, and in law, in accepting companies with abnormal profit as comparable to the Respondent Rejecting companies bearing loss in FY 2008-09
11. erred on the facts and in circumstances of the case, and in law, in rejecting the companies who are not persistent loss makers and have incurred loss only in the current financial year (ie FY 2008-09). Denial of adjustment for risk differences
12. erred on the facts and in circumstances of the case, and in law, in comparing full-fledged risk bearing entities with the Respondent's captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies considered as comparable vis-a-vis the risk profile of the Respondent. The Respondent craves, to consider each of the above grounds of cross objections independent and without prejudice to each other and craves, leave to add, alter, delete or modify all or any of the above grounds of cross objections."
9. Shri Hitendra Ninawe representing the Department vehemently supported the findings of TPO and prayed for setting aside the order passed by the Commissioner of Income Tax (Appeals).
10.On the other hand Shri M.P. Lohia appearing on behalf of the assessee submitted that in the appeal filed by the Department and the Cross Objections filed by the assessee, the primarily dispute is with respect to selection of comparables. The Commissioner of Income Tax (Appeals) has upheld the inclusion of Kals Information Technology Limited and Bodhtree Consulting Limited. However, both the aforesaid companies are functionally different. The Tribunal in assessee's own case for immediately preceding year has directed to exclude the aforesaid companies from the list of comparables. The main grouse of the Department is with respect to removal of Infosys Technologies 9 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 Limited from the list of comparables. The scale of operation of said company is very huge and is thus not comparable. Further, the aforesaid companies are functionally different from the assessee. The ld. AR of the assessee further contended that the Tribunal in assessee's own case for assessment year 2008-09 has excluded Infosys Technologies Limited from the list of comparables. The ld. AR contended that if the above 3 companies are removed from the list of comparables the assessee would fall within ± 5% range allowed under proviso to section 92C(2) of the Act.
11. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. Although, several grounds have been raised by the Department and the assessee in grounds of appeal and Cross Objection, respectively, however, at the time of making submissions the ld. DR could not controvert the reasons give by the Commissioner of Income Tax (Appeals) to include/exclude certain companies from the list of comparables. Similarly, the ld. AR of the assessee confined his submissions against inclusion of Kals Information Technology Systems Limited and Bodhtree Consulting Limited in the list of comparables. The ld. AR has further supported the action of Commissioner of Income Tax (Appeals) in excluding Infosys Technologies Limited from the list of comparables. The written submissions furnished by the ld. AR of the assessee to exclude the aforementioned companies from the list of comparables are as under :
10ITA No. 1855/PN/2014 & CO No. 15/PN/2016
Name of the company Respondent's submission
Kals Information The TPO had considered the company as comparable and this view has
Technology been upheld by Hon'ble CIT(A). Our contentions on its functional
System Limited comparability is given below:
a. Functionally different
• Engaged in development of software products (for e.g. - Shine, -
Docuflo, - Dac4Cast, etc.)
• No segmental data available
- The Company derives its revenues primarily from software
services and software products
- Segmental details not available in Financial Statements (Details
of software products and services)
Bodhtree Consulting The TPO had considered the company as comparable and this view has
Limited been upheld by Hon'ble CIT(A). Our contentions on its functional
comparability is given below:
a. Functionally different
• The company operates as a software solutions company, and is
engaged in providing open and end-to-end web solutions, off shoring data management, data warehousing, software consultancy, design and development of solutions, using the latest technologies.
• It has both solutions as well as service offerings and no revenue break up is available.
• As per the company website, the company is into product engineering, provision of analytics and cloud computing services.
b. Abnormal profit making company
• Company operates on a different pricing model vis-a-vis the model
adopted by the Appellant and accordingly the operating margins of the companies are widely fluctuating • The operating margin trend of the company over the five years is tabulated below for your Honour's easy reference:
Unadjusted Operating Year margin (OP/OC) FY 2007-08 18.51% FY 2008-09 62.29% FY 2009-10 23.13% FY 2010-11 -11.70% FY 2011-12 4.55% • On review of the financial statement of Bodhtree from FY 2007-08 to FY 2011-12, it is clearly evident that the operating margin of Bodhtree for FY 2008-09 is abnormally high.
Infosys Technologies At the outset, it is admitted that this company was considered as Limited comparable by the Respondent in its TP report. However, having regard to the guidelines laid down by various judicial precedents, the Respondent wishes to submit that the above company is functionally not comparable to the Respondent and should be excluded from the comparable set.
Functionally different • The company provides solutions that span the entire software life cycle encompassing technical consulting, design, development, re- engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services.
• The company also offers software products for the banking industry, business consulting and business process management services like Finacle.
• The Company has a substantial investment in R&D (about Rs 440 11 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 crores) • The company has mentioned Brand value as an intangible asset while the Respondent does not own any intangibles. (Refer Annexure - 1 for detailed comparison).
12. We find that the issue relating to inclusion of Infosys Technologies Limited in the list of comparables for determining ALP was considered by the Co-ordinate Bench in assessee's own case for immediately preceding assessment year in ITA No. 2279/PN/2012 decided on 28-01-2015. The Tribunal directed to exclude Infosys Technologies Limited from the list of comparables by observing as under :
"14. We have carefully considered the rival submissions. In so far as the objection of the Revenue to the effect that the said concern was initially included by the assessee in its Transfer Pricing Study as a comparable is concerned, the Ld. Representative has pointed out that in the Transfer Pricing Study, assessee carried out the comparability analysis by adopting multiple year's data of the comparables. However, the TPO has disagreed with the assessee on this aspect and instead he has carried out the comparability analysis after adopting single year data of the comparables relatable to the period under consideration. At the time of hearing, reliance was also placed on the judgement of the Chandigarh Special Bench of the Tribunal in the case of Quark Systems Pvt. Ltd., reported in 2010-TIOL-31-ITAT-Chd.-SB for the proposition that if some inconsistency in the comparable exists, then it should be removed from the final list of comparables notwithstanding the fact that assessee had initially considered it as a comparable concern. In our view, the plea of the assessee for exclusion of Infosys Technologies Ltd. cannot be shut out merely because the said concern was initially adopted by the assessee as a comparable in its Transfer Pricing Study. However, we may wish to point out that the cause and justification for its exclusion is liable to be demonstrated by the assessee. In the present case, it has been pointed out by the assessee that the said concern is functionally different and that it was a giant company in the area of development of software services and it assumed all the risks leading to higher profits, whereas the assessee was a captive unit servicing only its own affiliates and assumed only a limited risk. Quite clearly, the turnover of Infosys 12 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 Technologies Ltd. stands at Rs.15,051 crores (approx) whereas assessee's turnover from software development services is to the tune of Rs.73 crores (approx). It is also clear from the Tabulation above, that the said concern is undertaking diversified activities whereas assessee is providing software services, at minimal risk as 100% activities are to its associated enterprise. In-fact, assessee has rightly relied upon the judgement of the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) wherein in a somewhat similar situation the action of the Tribunal in excluding Infosys Technologies Ltd., from the list of final comparables was affirmed. In the case of Agnity India Technologies Pvt. Ltd. (supra), assessee was a wholly owned subsidiary of a USA company, and was engaged in providing software development services for its associated enterprises as a captive service provider. The Tribunal had found on the basis of the differences in risk profile, nature of services, revenue earned, ownership of branded/proprietary products, expenditure on research and development etc., that the concern M/s. Infosys Technologies Ltd. was not comparable with Agnity India Technologies Pvt. Ltd. The Hon'ble High Court of Delhi affirmed the aforesaid finding of the Tribunal. In the present case too, the differences between assessee and Infosys Technologies Ltd. as tabulated above, have not been controverted by the Revenue and therefore in our view assessee has justifiably demonstrated that M/s. Infosys Technologies Ltd. was liable to be excluded from the final set of comparables. We hold accordingly."
13. The Co-ordinate Bench in the same order has also considered the issue relating to exclusion of Kals Information Systems Ltd. from the final set of comparables. The Tribunal held :
"18. Thirdly, assessee has contended that the concern M/s. Kals Information Systems Ltd. be excluded from the final set of comparables. On this aspect also, the case set up by the assessee is that the decision of the Pune Bench of the Tribunal in the case of Symphony Services Pune Pvt. Ltd. (supra) fully covers the controversy. In the case of Symphony Services (supra), M/s. Kals Information Systems Ltd. was excluded from the list of comparables on the ground that the said concern was involved not only in the activity of providing of software development services but also in selling of software products. Symphony Services Pune Pvt. Ltd. was only engaged in providing software services. In the case of 13 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 Symphony Services Pune Pvt. Ltd. (supra) as well as in the present case also, the TPO did not accept the plea for exclusion of KALS Information System Ltd. primarily on the ground that the financial statements of the said concern did not reflect any sale of software products. Quite clearly the stand of the Revenue in the present case as well in the case of Symphony Services Pune Pvt. Ltd. (supra) is similar. It is also quite clear that the nature of service being rendered by the assessee and Symphony Services Pune Pvt. Ltd. (supra) are similar, namely rendering of software development services to its affiliates. The following discussion in the order of the Tribunal in case of Symphony Services dated 30-04-2014 (supra) brings out the salient features of the controversy :
"13. The second point raised by the assessee is with regard to the adoption of Kals Information Systems Limited as a comparable concern while benchmarking the international transactions of the assessee. Before the TPO, assessee submitted that the said concern be excluded from the list of comparables on account of functional dissimilarities. The relevant discussion in this regard is contained in para 6.1 of the order of the TPO. The plea of the assessee was that the said concern was engaged in selling of software products, namely, Virtual Insure, La. Vision, CMSS, e-DMS and ERP "SHINE", etc., which are all specialised software products developed for the respective sectors. For the instance, Virtual Insure was said to be a web based solution that was useful in the insurance sector; La Vision was an e-commerce based application in the field of intra-organizational communications, etc.; and, CMSS was a software for consultants/agents to manage their customers pre and post sales. On this basis, it was sought to be made out that the assessee was functionally different inasmuch it was engaged in the provision of software development and other related services to its associated enterprises as well as to the non-associated enterprises and, was not involved in development and sale of software products. The TPO did not accept the plea of the assessee for the reason that the Annual Report of the said concern did not reflect about sale of software products after development and therefore, according to him, it was not functionally different.
14. Before us, the learned counsel for the assessee has vehemently pointed out that the plea of the assessee has been rejected by the income-tax authorities without any justifiable reasons, as even on the basis of the information available in the public domain it is quite evident that Kals Information System Limited was a concern which was developing and selling software products, which was an activity quite distinct from the activity of software development undertaken by the assessee. In the course of hearing, the learned counsel has furnished the 14 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 prints out from the Annual Report of Kals Information Systems Ltd. wherein various software products sold by the said concern have been detailed, which according to him, supports the plea of the assessee that the said concern was functionally different. Apart therefrom, the learned counsel has referred to the decision of the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. vs. DCIT vide ITA No.1386/PN/2010 dated 30.11.2011, which was also a concern engaged in rendering software development services for its parent company. The action of the TPO of selecting Kals Information Systems Limited as a comparable concern while applying the TNM method was rejected by the Tribunal on the basis that the said concern was engaged in development of software products and sale, which was functionally dissimilar to the software development services undertaken by the Bindview India Pvt. Ltd. (supra). The learned counsel pointed out that the said decision is fully applicable to the facts of the present case inasmuch as similar functions were undertaken by Bindview India Pvt. Ltd. and therefore Kals Information Systems Limited is liable to be excluded from the lists of comparables.
15. A reference has also been made to the decision of the Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd.
vs. DCIT vide IT(TP)A No.1303/Bang/2012 dated 28.11.2013 wherein also the said concern, namely, Kals Information Systems Limited was not considered as a comparable on account of functional dissimilarities. The learned counsel pointed out that M/s 3DPLM Software Solutions Ltd. (supra) was also a concern engaged in the provision of software development and other related services, which is similar to the functions undertaken by the assessee. It was pointed out that the functions of Kals Information Systems Limited considered by the Bangalore Bench of the Tribunal is for the same assessment year as is in the present case and therefore the said decision also squarely applies to the facts of the present case.
16. The learned CIT-DR has defended the position of the TPO by relying on the discussion in the order of the TPO, which we have already adverted to in the earlier part of this order, and is not being repeated for the sake of brevity.
17. We have carefully considered the rival submissions. We find that the precedents by way of the decision of the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) and the decision of the Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) relied upon by the assessee squarely cover the controversy relating to Kals Information Systems Limited. In the aforesaid two precedents, the said concern has been sought to be excluded from the list of comparables on account of functional 15 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 dissimilarities. The Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) has considered the functions undertaken by the said concern during the previous year relevant to the assessment year under consideration before us, and it has been found that the said concern was engaged in the business of developing and selling software products and was not purely or mainly a software service provider. There is no dispute to the fact position that the appellant before us has undertaken mainly software development services for its associated enterprises and the non-associated enterprises and that such activity is quite distinct from the developing and selling of software products. The Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) has also found the said concern to be functionally dissimilar from a concern which was engaged in the business of software development services, which is the case before us. Though, the decision of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) relates to the assessment year 2006-07 whereas the present case of the assessee is for assessment year 2008-09 yet there is no material on record to suggest that the activities carried out by Kals Information Systems Limited in the current assessment year are different from those noted by the Tribunal in the case of Bindview India Pvt. Ltd. (supra) for assessment year 2006-07.
18. Considering the aforesaid discussion, in our view, the concern i.e. Kals Information Systems Limited is liable to be excluded from the list of comparables for the purposes of benchmarking international transactions of provision of software development services. We hold so. Thus, on this aspect assessee succeeds."
19. Following aforesaid precedent, as the facts and circumstances in the present case are similar, we direct that M/s. Kals Information Systems Ltd., be excluded from the final set of comparables."
14. The Co-ordinate Bench also considered the issue with respect to exclusion of Bodhtree Consulting Ltd. from the final set of comparables. The Tribunal after considering the facts of the cse and the decisions on which the ld. AR of the assessee had placed reliance directed to exclude Bodhtree Consulting Ltd. from the list of comparables. The findings of the Tribunal are as under :
"22. We have carefully considered the rival submissions with respect to Bodhtree Consulting Limited. The plea of the assessee is that the said 16 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 concern is engaged in the sale of software products, apart from considering software services, and that no segmental data is available in this context; thus, it is functionally not comparable with the assessee's activities. In this regard, we have perused the discussion made by our Coordinate Bench in the case of NetHawk Networks India Pvt. Ltd. (supra) wherein the said concern has been found to be not exclusively engaged in rendering software development services. The relevant discussion in the case of NetHawk Networks India Pvt. Ltd. (supra) is as under :
"C. Bodhtree Consulting Limited
21. On this comparable, case of the assessee is that the company is not a good comparable in view of the Software Products produced by the company. As such, no segmental data is adequately available too.
Accordingly, we dismiss the argument of the Ld. DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean.
22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of the Tribunal in the case of M/s. Wills Processing Services (I) P Ltd (supra) wherein it was mentioned that the TPO described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under:
"29.1 The Id Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the 17 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables.
29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3.........
30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application........."
23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO."
23. There is no material placed before us which would require us to deviate from the conclusion drawn by the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. (supra) in the context of the exclusion of Bodhtree Consulting Ltd. from the final set of comparables. Moreover, the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. (supra) also considered the efficacy of inclusion of Bodhtree Consulting Ltd. on the basis of comparability analysis in the case of an assessee which was engaged in similar activities as the appellant before us. The following discussion in the case of Mindteck India Ltd. (supra) is worthy of notice :
"I. Bodhtree Consulting Ltd. :
As far as this company is concerned, the submission of the learned counsel for the assessee was that this company made extra ordinary profits during the previous year. Our attention was drawn to the fact that the operating profit/operating cost of this company jumped from 17% for F.Y. 2007-08 to 56% in F.Y. 2008-09. It dipped in F.Y.2009-10 to 40% and in F.Y.2010-11 it became (-) 2% and 5% in F.Y.2011-12 and finally touched (-) 9% in F.Y.2012-13. Our attention was drawn to the fact that the Special Bench of the Tribunal, Mumbai, in the case of Maersk Global Centres (India) P. Ltd., in ITA No.7466/M/2012, dt.07-03- 18 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 2014 for A.Y. 2008-09 had an occasion to consider the question as to whether companies having abnormal profits should be excluded as a comparable. The Special Bench took the view that it has to be shown that the high profit margin does not reflect the normal business conditions and only in such circumstances, high profit margin companies can be excluded. Our attention was drawn to the DRP's observation in its order on the issue which is as follows :
"Bodhtree :
The assessee has objected to selection of this entity on the basis of the following objections :
• The entity has fluctuating margins.
• The company is more of a product company rather than software service company.
The Panel has considered the objections of the assessee. Insofar as the contention regarding the rejection of this entity on the basis of fluctuating margin is concerned. In order to appreciate the compatibility or otherwise of this entity, it is important to first note that the Indian Software industry uses two different models for revenue recognition. The first is the Time and Material (T&M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below :
3. Revenue Recognition :
Revenue from software development is recognized based on software developed and billed to clients.
From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Product mode. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year for which the revenue may have been recognized in the earlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the profitability margin of such entity. Merely because of such fluctuation, an entity engaged in the development of software, being functionally comparable to the assessee, cannot be rejected only on this ground".
14. The learned counsel for the assessee drew our attention to the fact that Bodhtree Consulting admittedly follows a fixed price project model whereby revenues from software development is recognized based on software and 19 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 billed to clients. In such business model expenditure for developing software would be billed in an earlier year but the revenue would be recognized in a subsequent year. It was his submission that this fact is recognized by the DRP in its order. According to him this circumstance would be sufficient to show that the margin reflected of this company does not reflect the normal business condition.
15. The Learned DR placed reliance on the reason given by the DRP in its order.
16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (Supra) had an occasion to deal with the question as to whether higher profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special Bench held that in such cases it would require further investigation to ascertain the reason for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year.
The results of Bodhtree from F.Y.2003 to 2008 excluding F.Y.2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognitions method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly."
24. Though the aforesaid discussion by the Bangalore Bench of the Tribunal is in relation to the assessment year 2009-10, but the inferences drawn with regard to the variations in the profit margins of the said concern for different years is relevant in the present context also. Furthermore, the Tribunal also analysed and found that the said concern was following fixed price project method whereby revenue from software development services was being recognized based on the software developed and billed to the clients. In such a business model, the possibility of the expenditure not being booked on the basis of the matching principle cannot be ruled out, which would impart fluctuation in the margins over the years. In contrast, in the present case, the revenue 20 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 is being recognized based on the cost plus markup basis. Clearly, the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the model being pursued by assessee and such distinction prevailed with the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. (supra) to exclude Bodhtree Consulting Ltd. from the list of comparables. Considering such difference, in our view, assessee is justified in asserting that the said concern be excluded from the list of comparables. We hold so."
15. The ld. DR has not been able to controvert the findings of the Tribunal in excluding the three companies i.e. Infosys Technologies Limited, Kals Information Systems and Bodhtree Consulting Ltd. from the final set of comparables. No material has been brought before us to show that there is any change in the facts and circumstances in the assessment year under appeal. Respectfully following the decision of the Co-ordinate Bench under identical facts and circumstances we direct to exclude Kals Information Systems and Bodhtree Consulting Ltd. from the final list of comparables and uphold the directions of Commissioner of Income Tax (Appeals) to exclude Infosys Technologies Limited from the list of comparables.
16. The ld. AR of the assessee at the time of making submissions had stated that if the three companies i.e. (i) Infosys Technologies Limited,
(ii) Kals Information Systems and (iii) Bodhtree Consulting Ltd. are excluded from the list of comparables, then the ALP margin of comparables and the assessee's operating margin of the international transaction with respect to Software Services to its AEs would fall within ± 5% range and hence no adjustment would be required. Since, the assessee has succeeded in its prayer for excluding the aforesaid three companies, the other grounds in Cross Objections have become 21 ITA No. 1855/PN/2014 & CO No. 15/PN/2016 academic. Moreover, no arguments were advanced by the ld. AR to substantiate the other grounds raised in Cross Objections, accordingly, the same are dismissed as such.
17. In the result, the appeal of the Revenue is dismissed and the Cross Objections filed by the assessee are partly allowed.
Order pronounced on Friday, the 22nd day of July, 2016.
Sd/- Sd/-
(आर. के. पांडा / R.K. Panda) (!वकास अव"थी / Vikas Awasthy)
लेखा सद"य / ACCOUNTANT MEMBER $या%यक सद"य / JUDICIAL MEMBER
पुणे / Pune; &दनांक / Dated : 22nd July, 2016
RK
आदे श क- *%त/ल#प अ0े#षत / Copy of the Order forwarded to :
1. अपीलाथ / The Appellant.
2. यथ / The Respondent.
3. आयकर आयु'त (अपील) / The CIT(A)-IT/TP, Pune
4. The DIT (TP/IT), Pune
5. !वभागीय %त%न,ध, आयकर अपील य अ,धकरण, "बी" ब/च, पुणे / DR, ITAT, "B" Bench, Pune.
6. गाड1 फ़ाइल / Guard File.
//स या!पत %त // True Copy// आदे शानस ु ार / BY ORDER, %नजी स,चव / Private Secretary, आयकर अपील य अ,धकरण, पुणे / ITAT, Pune