Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income-Tax,, vs Systime Global Solutions Ltd.,, Navi ... on 31 January, 2017
आयकर अपील�य अ�धकरण पुणे �यायपीठ "ऐ" पुणे म�
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
सु�ी सुषमा चावला, �या�यक सद�य एवं �ी अ�नल चतुव�द�, लेखा सद�य के सम�
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपील सं. / ITA No. 336/PUN/2015
�नधा�रण वष� / Assessment Year : 2010-11
The Income Tax Officer 15(2)(1),
Mumbai .... अपीलाथ�/Appellant
Vs.
Systime Global Solutions Ltd.,
(Now KPIT Global Solutions Ltd.)
155, Millenium Business Park,
Mahape Navi - 400710 .... ��यथ� / Respondent
PAN: AABC C2531L
अपीलाथ� क� ओर से / Appellant by : Shri Sandeep Garg, CIT
��यथ� क� ओर से / Respondent by : Shri Kishore Phadke
सुनवाई क� तार�ख / घोषणा क� तार�ख /
Date of Hearing : 12.01.2017 Date of Pronouncement: 31.01.2017
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
This appeal filed by the Revenue is against the order of ITO 15(2)(1), Mumbai, dated 30.01.2015 relating to assessment year 2010-11 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short 'the Act').
2. The Revenue has raised the following grounds of appeal:- 2 ITA No.336/PN/2015
Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.)
1. In the facts and circumstances of the case, the H'ble DRP had erred in directing the AO to include M/s CG-VAK Software and Exports Ltd. as a comparable while benchmarking the software consultancy services transaction ignoring the fact that the company has diversified activities like software development, services and products of which it is primarily into software development activity.
2. In the facts and circumstances of the case, the H'ble DRP had erred in directing the AO to Include M/s Eforce India Pvt. Ltd. as a comparable while benchmarking the software consultancy services transaction ignoring the fact that the company had an operating loss of 55.27% during the AY 2010-11 which depicted an extremely unusual state of affairs of the company, and therefore ought to have been excluded from being considered as a comparable.
3. In the facts and circumstances of the case, the H'ble DRP had erred in directing the AO to not consider Infosys while benchmarking the software consultancy services transaction by ignoring to appreciate the fact that the profitability trend of Infosys Ltd. over the years from the time when it was a small company the margin has almost remained constant over the years even when the turnover has increased substantially.
4. In the facts and circumstances of the case, the H'ble DRP had erred in directing the AO to not consider Infosys & Wipro on turnover grounds while benchmarking the software consultancy services transaction by failing to take cognizance of the decision of the H'ble M um bai ITAT in the case of C apgem ini India Limited vs. ACIT (TS 45 ITAT 2013 (Mumbai TP) AY 2007-08), wherein it was held that concept of economy of scale was relevant to manufacturing concern and not to services oriented companies.
5. In the facts and circumstances of the case, the H'ble DRP had erred in directing the AO to not consider Infosys & Wipro on turnover grounds while benchmarking the software consultancy services transaction by failing to take cognizance of the decision of the H'ble Delhi ITAT in the case of ST Micro Electronics Private Limited [TS 243 ITAT 2011 (Delhi) AY 2003 -04 and 2004-05], wherein ITAT rejected the assessee's argument for hig h turnover.
6. In the facts and circumstances of the case, the H'ble DRP had erred in directing the AO to not consider M/s.Persistent Systems Limited on grounds of functional incomparability while benchmarking the software consultancy services transaction by ignoring the fact that the company was primarily providing software services which is evidence from the fact that out of its total income of Rs.5161 million in AY 2010 -11, the income derived from software services is Rs.5044 million.
7. In the facts and circumstances of the case, the H'ble DRP had erred in directing the AO to exclude Acce ntia while benchmarking the BPO services transaction on grounds of functional incomparability that it operated in KPO sector and ignored the fact that the company was also into ITeS simila r to the service rendered by the assessee and also failed to take cognizance of the decisions of the H'ble Mumbai ITAT in the case of Willis Processing Services (I) Private Limited and that of H'ble Delhi 3 ITA No.336/PN/2015 Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.) ITA T in the case of Agilient Te chnologies, wherein the tribunals have upheld the functional similarity of M/s. Accentia Technologies Limited as ITeS.
8. In the facts and circumstances of the case , the H'ble DRP had erred in directing the AO to exclude Acro petal while benchmarking the BPO services transaction on the ground that the company is engaged in high end software development but failed to appreciate that M/s.Acropetal Technologies Limited ha d an ITeS segment very similar to the services rendered by the assessee which alone was considered by the TPO for benchmarking this transaction.
3. The appeal filed by the Revenue is against the order of Dispute Resolution Panel (in short 'the DRP'), wherein though various grounds of appeal have been raised but the learned Authorized Representative for the assessee pointed out that in case the order of DRP is upheld on exclusion of the concerns having high turnover in Segment-1, then no adjustment would be required to be made since the margins would be within +/- 5%. In respect of BPO Segment i.e. Segment-2, wherein the total turnover is about Rs.1 crore. The learned Authorized Representative for the assessee pointed out that the two concerns i.e. Accentia Technologies Ltd., which was engaged in KP O Segment and Acropetal Technologies Ltd. which was en gaged in design engineering activities, then in case both these concerns are excluded, then the margins of BPO are within +/- 5% and no further adjustment needs to be made.
4. The learned Departmental Representative for the Revenue fairly agreed to the proposition raised by the learned Authorized Representative for the assessee and we proceed to decide the present appeal after hearing both the learned Authorized Representatives.
4ITA No.336/PN/2015
Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.)
5. Briefly, in the facts of the case, the assessee was engaged in the business of providing software consultancy services in the field of Enterprise Resource Planning, Customer Relationship Management, Supply chain management, Business intelligence, Business integration, Human Resource Management, Infrastructure management services and strategic sourcing. During the year under consideration, the assessee had provided software consultancy services to its associate enterprises to the extent of Rs.64.76 crores. The assessee applied TNMM method as most appropriate method and the operating profit to total operating expenses as the appropriate PLI, which worked out at 12.75%. The assessee selected certain concerns and applying three years data worked out weighted average and the arithmetic mean of the said weighted average of the comparables worked out to 13.52% and the assessee claimed that the transaction undertaken by it was at arm's length. During the course of TP proceedings, the assessee was asked to furnish updated margins of comparables and use single year data, wherein the arithmetic mean of the said concern worked out at 5.86%. The Transfer Pricing Officer (in short 'the TPO') proposed certain other companies to be included in the final list of comparables including Infosys Technology Ltd., Persistent Systems Ltd. and Wipro Ltd. The Assessing Officer thereafter, drew final list of companies including the said concerns and the arithmetic mean of the comparables worked out to 22.89% as against the PLI earned by the assessee at 12.75%, therefore, an adjustment of Rs.5,63,60,582/- was made in the hands of assessee.
6. Before the DRP, the assessee filed objections against the draft order proposed by the Assessing Officer and the DRP considered the plea of assessee 5 ITA No.336/PN/2015 Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.) in respect of inclusion and exclusion of certain companies in the software consultancy services division. The DRP vide para 7 considered the plea of assessee in respect of inclusion of additional comparables i.e. M/s. Bodhtree Consulting Ltd., M/s. Infosys Technologies Ltd., M/s. KALS Information Systems Ltd., M/s. Wipro Ltd. and M/s. Persistent Systems Ltd. The DRP held that the said concerns i.e. all the five concerns were not comparable to the assessee. With regard to M/s. Persistent Systems Ltd., it observed that it had more than 3000 new products released in the last five years, which showed that it is developer of software products and also like Infosys, M/s. Wipro Technologies Ltd., it had high turnover which was over 422 times that of the assessee. In respect of Infosys Technology, the assessee pleaded Infosys wa s a giant turnover of Rs.21,140 crores as opposed to the assessee's turnover of Rs.64 crores. In respect of M/s. Wipro Technologies Ltd. , similar plea was raised. The DRP directed exclusion of all the five concerns being not comparable.
7. The Revenue has raised several grounds of appeal but the plea of assessee before us is that in case the order of DRP is upheld on exclusion of three concerns i.e. Infosys Technologies Ltd., M/s. Wipro Technologies Ltd. and Persistent Systems Ltd., which have very high turnover as against total turnover of the assessee at Rs.81 crores, then the margins of assessee are within +/- 5% and no addition is warranted in the hands of assessee.
8. The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer.
6ITA No.336/PN/2015
Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.)
9. We have heard the rival contentions and perused the record. While benchmarking the international transactions, turnover filer is important criteria in choosing comparables. The Pune Bench of Tribunal in ITO Vs. Avalara Technologies (P) Ltd. (2016) 69 taxmann.com 453 (Pune - Trib.), had held that where the turnover of concern is on lower size, then the range of turnover to be selected is between Rs.1 crore to Rs.200 crores. Consequently, all the concerns having turnover of more than Rs.200 crores have to be eliminated from the list of comparables. Following the same parity of reasoning, we hold that where the turnover of assessee in the software segment was only Rs.81 crores, then the concern like Infosys Technologies Ltd. hav ing turnover of more than Rs.20,000 crores and Persistent Systems Ltd. also having similar high turnover are to be excluded from the final set of comparables. In this regard, we uphold the order of DRP.
10. The learned Authorized Representative for the assessee has limited his submissions only vis-à-vis exclusion of three concerns and has pointed out that once the margins of said concerns are excluded from the final list of comparables, then the margins shown by the assessee and the arithmetic mean of margins of comparables are within range of +/- 5% and there is no need to adjudicate any other issue. Accordingly, we hold so and uphold the order of DRP in this regard and no further adjustment is to be made in the hands of assessee in the software segment.
11. Now, coming to the second segment i.e. BPO, wherein the total turnover of assessee is about Rs.1 crore. In this regard, the learned Authorized 7 ITA No.336/PN/2015 Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.) Representative for the assessee pointed out that Accentia Technologies Ltd is to be excluded from the final list of comparables as being not functionally comparable, where the said concern is engaged in KPO services. Further, there is extraordinary event of amalgamation during the year. In this regard, the learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Pune Bench of Tribunal in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT in ITA No.259/PN/2015 and ACIT Vs. M/s. Aptara Technologies Pvt. Ltd. in ITA No.579/PN/2015, relating to assessment year 2010-11, order dated 31.05.2016.
12. The issue arising in the present appeal regarding exclusion of Accentia Technologies Ltd. from the final list of comparables has been adjudicated by the Tribunal in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT (supra) and following the same parity of reasoning, it was held as under:-
"12. The first contention of the assessee was with regard to exclusion of margins of Accentia Technologies Ltd. from the final list of comparables. The learned Authorized Representative for the assessee pointed out that the said concern was picked up as comparable by the TPO in the preceding years in the case of assessee itself and the Tribunal vide its orders dated 02.02.2015 and 29.04.2015 respectively had held that the said concern Accentia Technologies Ltd. was not comparable for those years due to extraordinary events. In respect of extraordinary events taken place during the year under consideration, the learned Authorized Representative for the assessee pointed out that there was acquisition of IQ group of companies in the United Kingdom and in this regard, our attention was drawn to the Directors Report of the said concern, copy of which is placed at page 467 of the Paper Book. Further, there was amalgamation of Asscent Infoserve Pvt. Ltd. with the company as per notings on page 472 of Paper Book. Hence, there was the case of amalgamation and acquisition, which constituted extraordinary events taken place for the year under consideration. The learned Authorized Representative for the assessee pointed out that for the year under consideration i.e. assessment year 2010-11, the Tribunal in various other cases have held that Accentia Technologies Ltd. was not comparable to entities engaged in ITES activities since even during the year under consideration, the said entity had extraordinary events. In this regard, reliance was placed on following decisions:-
a. Techbooks International Pvt. Ltd. Vs. DCIT (ITA No.240/Del/2015) b. Xchanging Technology Services India Pvt. Ltd. Vs. DCIT (ITA No.1222/Del/2015 8 ITA No.336/PN/2015 Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.) c. Amba Research (India) Pvt. Ltd. Vs. DCIT (ITA No.286/Bang.2015 d. Cognizant Technologies Services Pvt. Ltd. Vs. DCIT (ITA No.459/Hyd/2015
13. Under the transfer pricing provisions, while benchmarking the international transaction entered into by the assessee with its associate enterprises, an endeavour is to determine the arm's length price of said transactions and for that purpose, comparison is made to the margins of unrelated parties, which are functionally similar to the assessee. While benchmarking the international transaction, an endeavour is to be made to select such concerns which are functionally similar and the margins of the said concerns are then, to be applied in order to determine the arm's length price of the international transaction undertaken. The assessee before us was engaged in providing ITES services and while benchmarking international transaction of the assessee with its associate enterprises, the TPO had selected Accentia Technologies Ltd. as functionally similar and had included the margins of said concern in order to work out the arithmetic mean of final set of comparables.
14. We find that the Tribunal in assessee's own case in assessment year 2008 - 09 in ITA No.2235/PN/2012, order dated 02.02.2015 had held that the sai d concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No.267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:-
"13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different activities. It was pointed out that the said concern is engaged in providing medical transaction, billing and coding services, application development & customization (segmental data not available). Moreover, it was contended that the sales/turnover of the said concern was more than Rs.50 crores for the year under consideration which did not meet with turnover filter applied by the assessee. On this point, it was pointed out that the assessee had selected sales/turnover filter of 1-50 crores i.e. any concerns having a turnover exceeding Rs.50 crores were excluded. Thirdly, it was pointed out that the activities of the said concern were not comparable to the activities of the assessee.
14. The TPO has noted the aforesaid objections of the assessee in para 18.1 of his order and has rejected the same by merely noticing that 75% of the revenue/income of the said concern is from ITES and therefore it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions put-forth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. vs. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the 9 ITA No.336/PN/2015 Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.) Tribunal in the case of Capital IQ Information Systems (India) Private Limited vs. DCIT, (2013) 32 taxmann.com 21 (Hyd.).
15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable."
15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables.
13. The issue arising in the present appeal is identical to the issue before the Tribunal in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT (supra) and since the concern Accentia Technologies Ltd. was engaged in KPO segment and also because of extraordinary event during the year, is to be excluded from the final list of comparables. Accordingly, we hold so.
14. Vis-à-vis second concern i.e. Acropetal Technologies Ltd. , the learned Authorized Representative for the assessee pointed out that it was engaged in design engineering activities and various Benches of Tribunal including the Pune Bench of Tribunal in Vistcon Engineering Centre (India) (P.) Ltd. Vs. ACIT (2016) 70 taxmann.com 248 (Pune - Trib.), had held that the said concern is not comparable to BPO services provided by the assessee. The Tribunal vide para 26 had held as under:-
"26. So far as Acropetal Technologies Ltd. is concerned it is the submission of the Ld. Counsel for the assessee that the TPO has considered overall entity level 10 ITA No.336/PN/2015 Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.) operating margin in respect of comparable segmental margin. He submitted that Acropetal Technologies Ltd. generates revenue from Engineering Design Services and Information Technology Consultancy. Therefore, only segmental profitability of Engineering Design Services needs to be considered for the comparison. The DRP held that the IT based services segment is also similar to the segment of the Engineering Design Services and accordingly rejected the ground raised by the assessee. He submitted that the operating profit/operating cost of the relevant segment of the said comparable company for the year under consideration is 32.92% before considering the working capital adjustment. He submitted that the Engineering Design Services cannot be equated with IT services, therefore, Acropetal Technologies Ltd. should not be considered as comparable co mpany."
15. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the decision of Delhi Bench of Tribunal in Agilent Technologies (International) Pvt. Ltd. Vs. ACIT in ITA No.6047/Del/2012, relating to assessment year 2008-09, order dated 14.06.2013, wherein Acropetal Ltd. was included.
16. We have heard the rival contentions and perused the record. The limited issue raised is vis-à-vis exclusion of Acropetal Ltd. from the final list of comparables, whereby the said concern was engaged in providing design engineering activities as against the assessee's activities of providing BPO services. The Bangalore Bench of Tribunal in Symphony Marketing Solutions India P. Ltd. Vs. ITO (2013) 27 ITR (Trib) 753 (Bangalore) and Ahmedabad Bench of Tribunal in Lubrizol Advanced Materials India Pvt. Ltd. Vs. ACIT in ITA No.2898/Ahd/2012, relating to assessment year 2008-09, order dated 26.12.2016 have held that the said provision of engineering design services were akin to KPO services and not BPO services. Although the decision of Delhi Bench in Agilent Technologies (International) Pvt. Ltd. Vs. ACIT (supra) is against the assessee but in view of various contrary decisions of the Tribunal and following the ratio laid down in Symphony Marketing Solutions India P. Ltd. Vs. ITO (supra), we hold that 11 ITA No.336/PN/2015 Systime Global Solutions Ltd., (Now KPIT Global Solutions Ltd.) the said concern is to be excluded from the final list of margins while benchmarking the international transactions of BPO segment of the assessee. The learned Authorized Representative for the assessee fairly pointed out that in case these two concerns are excluded from the final list of comparables, then the margins shown by the assessee as compared to the arithmetic mean of comparables would be within range of +/- 5%. Accordingly, we decide this issue and dismiss the grounds of appeal raised by the Revenue.
17. In the result, the appeal of Revenue is dismissed.
Order pronounced on this 31st day of January, 2017.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER
पुणे / Pune; �दनांक Dated : 31st January, 2017
GCVSR
आदे श क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The DIT (TP)-II, Mumbai;
4. The DRP-IV, Mumbai ;
5. The DR 'A', ITAT, Pune;
आदे शानुसार/ BY ORDER, स�या�पत ��त //True Copy // Assistant Registrar