These cross appeals are by Assessee and Revenue against the order of Commissioner of Income Tax (Appeals) giving partial relief to Assessee. Both the parties are aggrieved and raised respective grounds. IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 2 of 21
2. We have heard the Learned Counsel and Ld. DR in detail and perused the Paper Book placed on record and various case law.
3. Assessee is part of McAfee group and renders software development services to McAfee Ireland Holdings Ltd., (AE). It is remunerated on cost+15% basis for the services it provides to its AE. During the FY. 2004-05 relevant to AY. 2005-06, Assessee provided software development services to its AE at a price of Rs. 63,05,75,862/-, for which a TP adjustment of Rs. 5,11,73,398/- was made by the Transfer Pricing Officer (TPOP. Since Assessee was eligible for deduction in respect of profits of business of its undertaking u/s. 10A of the Act, it claimed a deduction of an amount of Rs. 10,01,27,164/-. Of the said deduction claimed, the AO made a disallowance of an amount of Rs. 43,89,266/- by re-computing the deduction in respect of the undertaking.
3.1. An assessment order was passed on 28-11-2008 after incorporating the aforesaid TP adjustment. Aggrieved, Assessee filed an appeal before the CIT(A), which came to be partly allowed vide the impugned order dt. 28-10-2011. Transfer Pricing Issues:
4. The only issue in Transfer Pricing matter is the adjustment made to the provisions of software services. Assessee earned 15% margin (OP/TC) on an operating income of Rs. 63.05 Crores and cost of Rs. 54.83 IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 3 of 21 Crores. Assessee selected nine companies in its TP study under TNMM and justified price received. TPO rejected AssesseesTP study, used various filters and selected 17 comparables with a mean of 26.59%. After providing for working capital adjustment, the Arithmetic Mean was arrived at 23.74%. Considering the reimbursement cost also, the TPO arrived at short fall being adjustment at Rs. 5,11,73,398/-.
5. On appeal by Assessee, Ld.CIT(A) partly allowed the appeal of Assessee. The following were key findings of the Ld.CIT(A). a. Out of the 17 companies chosen by the TPO, the Ld.CIT(A) excluded companies (10) for the reason that these companies are having related party transactions. The CIT(A) has chosen zero per cent RPT filter. b. Exsensys Software Solution was excluded as it was functionally not comparable. c. Satyam Computers Ltd., was excluded for non-reliability of financial data (scam related). d. Infosys Technologies was excluded based on high turnover and functionality. e. Lanco Global Systems was excluded by CIT(A) even though not objected by TPO/Assessee on the reason of low margin of profit. IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 4 of 21
6. Ld.CIT(A) order has resulted in final selection of only three comparable companies and has resulted in adjustment of Rs.3,94,20,026/-. Both Assessee and Revenue are aggrieved on the order of Ld.CIT(A).
7. Both Revenue appeal and Assessees appeal are interrelated. Revenue is mainly aggrieved on the RPT filter adopted by Ld.CIT(A) at 0% where as the Co-ordinate Benches have been accepting upto 15% and in some orders up to 25%. Depending on the facts of each case in each year, the RPT filter is being used / approved. Learned Counsel fairly admitted that Co-ordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06- 2015 ( Sunquest) has followed the other decisions on the issue and held that in various other cases companies having related party transaction upto 15% of total revenues can be considered. Considering the above, it was contended that the Revenues Ground No. 2 may have to be allowed and the companies rejected by Ld.CIT(A) has to be reconsidered. At the same time, Learned Counsel also submitted that the companies which are functionally not similar, having RPT of more than 15% and high turnover cases require reconsideration and made various submissions on the issue. Ld. DR also made submissions on the filters of RPT, turnover etc., and comparability of each of the companies.
8. As a general proposition, various filters are required to be adopted in selecting a company as a comparable. This is part of FAR analysis. IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 5 of 21 However, there cannot be rigid rule or percentage fixed in adopting various filters. Generally, a turnover filter is adopted to avoid selection of high end companies (big companies) with that of minnows in the similar line of business. How to adopt the filter depends on each case. Say for example, in the TP analysis of a company having 20 Crores receipts, a company with 2 Crores to 200 Crores can be stated to be within the range i.e., factor of ten as upper and lower limits. In certain cases, the ITAT also accepted turnover filter of 1 Crore to 200 Crores. But the range cannot be fixed, as the facts may vary from case to case. Simply a comparable can not be excluded on upper turnover limit when infact in number of cases Assessees do not raise any objection on inclusion of companies with very small turnovers. The 200 Crores upper limit also cannot be considered in a case whose turnover is, say 300 Crores. Therefore, instead of a fixed 1cr 200 Crore range, what one has to consider is the turnover/receipts of Assessee and range of upper limit at ten times and lower limit also ten times..i.e., one tenth. Thus, for example the range for a 300 Crores company can be from 30 Crores (1/10 th ) to 3000 Crores (Ten times). Even this has some limitations. For example if range is considered say 2 to 200 Crores, a coparable company cannot be rejected if the turnover is 1.99 Crores or say 201 Crores. There can be margin of variation. These are broad parameters so that no fixed formula can be adopted on uniform basis across all areas of functions. The same principles will also apply to related party transactions. In all the captive service providers, RPT is at 100%. IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 6 of 21 So, some broad parameters, given the fact of the case, can only be considered. Considering these observations, Learned Counsel fairly admitted that they will not context the RPT filter and turnover filter issue and restricted the agreements to only the comparability of the cases on functionality. Accordingly, the issues on RPT, turnover filter and risk adjustment are considered not pressed.
9. In the Revenue appeal, the ground that companies ought to have not excluded on RPT filter has to be allowed. Consequently, ten companies excluded by him are to be included. At the same time, Assessee objects many of the comparables on functional dissimilarity. Consequently, each of the comparables selected by TPO is analysed for the sake of convenience, keeping in mind the grounds raised by Assessee and Revenue on these.
10. The final list of 17 companies selected by TPO are as under: Sl No. Comparables selected by TPO NCP Margins as per TPO Order (%) (WC-Unadj) NCP Margins as per TPO Order (%) (WC Adj)
1. Bodhtree Consulting Ltd., 24.85 22.35
2. Lanco Global Systems Ltd., 13.65 9.51
3. Exensys Software Solutions Ltd., 70.68 62.85
4. Sankhya Infotech Ltd., 27.39 21.14
5. Sasken Network Systems Ltd., 16.64 14.02
6. Four Soft Ltd., 22.98 21.35
7. Thirdware Solution Ltd., 66.09 63.97
8. R S Software (India) Ltd., 8.07 6.79
9. Geometric Software Solutions Company Ltd.,
20.34 17.75
10. Tata Elxsi Ltd., 24.35 22.77 IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 7 of 21
11. Visualsoft Technologies Ltd., 23.52 20.10
12. Sasken Communication Technologies Ltd.,
14.42 13.24
13. Igate Global Solutions Ltd., 4.32 2.43
14. Flextronics Software Systems Ltd 32.19 29.42
15. L&T Infotech Ltd., 10.33 8.56
16. Satyam Computer Services Ltd 29.44 26.94
17. Infosys Technologies Ltd., 42.83 4.96 Arithmetical Mean 26.59 23.74 The analysis of each of the comparable company is as under. Satyam Computers Ltd:
10.1. Out of the above comparables, Satyam Computer Services Ltd., was excluded by CIT(A) on the basis of non-reliability of financial data. Revenue has accepted the same and has not contested. So, the said company has been rightly excluded. Infosys Technologies Ltd., Exensys Software Solutions Ltd
10.2. Ld.CIT(A) has excluded Infosys and Exensys, on the basis of functional dissimilarity and having extraordinary event during the year. Exensys was having extraordinary profits by way of amalgamation of companies during the year. Infosys was excluded having different functionality of products, having high turnover and brand name. Following the decision of Agnity Technologies Vs. ITO of ITAT as approved by the Honble Delhi High Court, Infosys cannot be considered as comparable. The same view was held by Co-ordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 8 of 21 1302/Bang/2011 dt. 11-06-2015 (supra). Since the orders of Ld.CIT(A) is in agreement with the decision on these two comparables by various Co- ordinate Benches, we uphold the same. Bodhtree Consulting Ltd.,:
10.3. This company was retained by Ld.CIT(A) but Assessee objects on the basis of functionality. However, as seen from the orders of Co-ordinate Benches in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as well as DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013, Bodhtree Consulting Ltd., was accepted as a comparable. However, in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (Where one of us, AM is the author) has considered in detail and excluded the same for the following reasons:
1. Bodhtree Consulting Ltd. The learned counsel submitted that this company should be rejected under the following TPOs filters: 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. IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 9 of 21 Considering the above, we direct that the above company has to be excluded on the reason of RPT of more than 25% and functionality. Lanco Global Systems Ltd., :
10.4. This company even though included by TPO and has not been objected to by Assessee, was rejected by the CIT(A) on the reason of low profit margin. This is not a valid ground. Only continuous loss making companies are being excluded from the comparability. If this argument was accepted, the high profit making companies are also to be excluded. This is not the purpose for which TP analysis is being undertaken. Therefore, keeping the principles laid down by the Special Bench of ITAT in the case of Maersk Global Centers (India) P.Ltd 43 Taxmann.com 100 Mumbai(SB), we, consider the same as comparable and retain it in the list. Sankhya Infotech Ltd., Thirdware Solution Ltd., & Tata Elxsi Ltd., :
10.5. These three companies are rejected as comparables on functionality in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (paras 19- 20, 22-26, 27-30 restively) and in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) at Para No. 13. The analysis by the Co-ordinate Benches is as under: IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 10 of 21 Sankhya Infotech Limited (Sankhya)
19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information - SILICONTM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below:
2. Activities The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956.The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 609I/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the Assessee therein which was also in the business of software development. IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 11 of 21
20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies.
22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- 15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product developments. Since Assessee is in the product development, having I.P. rights, the same is not comparable.
15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the Assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns.
15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : "23. The other companies which are objected to by the Assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the Assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the Assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 12 of 21 companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables.
23. The learned D.R. however, supported the Orders of the authorities below.
24. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPOs Order, the said company has derived income from software licence also and AMCs.
25. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 13 of 21
26. As far as Flextronics 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 these three companies from the list of comparables.
27. The learned counsel for the Assessee submitted before us that TATA Elxsi Ltd., a comparable company out of the 10 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability. It was his submission that this company will however, have to be excluded as this company was held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005- 2006 order dated 12.2.2014.
28. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows:
15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and Assessees objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to Assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since companys operations are functionally different as such, the same is not comparable. Further, Assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22: "22 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 IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 14 of 21 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 because of 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.Keeping the Assessees objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the Assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to Assessee services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to Assessee.
29. Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services Pvt.Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee.
30. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies.
13. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft 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 functionality and why the same are not comparable to the companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 15 of 21 discussing above comparables in detail, but, suffice to say that Assessees submissions are valid. The AO is directed to exclude the above comparables and re- work out the arms length margin accordingly. The ground No.8 and additional ground raised by Assessee are considered as allowed. In view of the above, the above three companies are to be excluded. Sasken Network Systems Ltd., R S Software (India) Ltd., Visualsoft Technologies Ltd., and Sasken Communication Technologies Ltd.,
10.6 Since there is no objection from Assessee and was selected by TPO, the above companies are retained. Four Soft Ltd.,
10.7. The objection by Assessee is that this company is a product company. was analysed and accepted in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) para 22. It was held that the said company ahs derived income from software license and AMCs. Since functionality was already analysed, respectfully following the Co-ordinate Benches also, the same was to be excluded. i. Intoto Software India Pvt. Ltd., ITA No. 1196/Hyd/2010; ii. Cordys Software India P. Ltd., ITA No. 1451/Hyd/2010 IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 16 of 21 Geometric Software Solutions Company Ltd.,:
10.8. Even though this company was accepted as comparable in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) and Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) and was not objected to, we find that the Co-ordinate Bench at Banalore in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 has considered that this is in product devolopement. We have perused the TPOs order. In page 85 and 86 of the order, this comparable was analysed. TPO records that there are product sales to the extent of 18%. Segmental profits are not available. On assumptions, this company was retained. We are of the opinion that being a product based company, the same is not strictly comparable to a service company like Assessee. In the absence of segmental profit of service income, we have to exclude the same. Following the decision in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 (supra), this company is accordingly excluded. Igate Global Solutions Ltd., & L&T Infotech:
10.9. These two companies are found comparable in many orders of the Co-ordinate Benches, but excluded on the basis of turnover filter of Rs. 200 Crores limit in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra), we have IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 17 of 21 considered the same. Assessees turnover is about 63 Crores. The turnover of Igate Global Solutions Ltd., (Seg) is about 405 crores and L & T Infotech Ltd is of 562 Crores. This is with the range of ten times the upper limit. Moreover, Assessee Counsel has not pressed on turnover filter of Rs. 200 Crores. Therefore, these two are retained. Flextronics Software Systems Ltd.,:
10.10. This company was objected to on functional dissimilarity. This was considered in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as under:
26. As far as Flextronics 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 these three companies from the list of comparables. Respectfully following, we exclude the same.
11. That leaves us with another ground in Revenues appeal about granting deduction (+) or (-) 5% as a standard deduction. Consequent to the amendment brought out to the proviso to Section 92C(2), the Revenue IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 18 of 21 contends that the deduction is not permissible. It relies on Co-ordinate Bench decision in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (at para 16)]. Learned Counsel contends that the standard deduction was granted correctly as the amendments will apply to the cases pending as on 01-04-2009 and this order was passed by AO on 28-11-2008. Even the explanation brought in later also does not apply to the case. He relied on the principles laid down in SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] and DCIT Vs. Synopsis India P. Ltd., in IT(TP)A No. 1107 & 1093/Bang/2011 dt. 08-10-2015 in support.
11.1. We have considered the rival contentions. The order of Ld.CIT(A) is in accordance with the provisons. The issue was analysed by the Co- ordinate Bench in the case of SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] (supra) at paras 61, 62, 63 & 64 as under: 61. The Central Board of Direct Taxes in its Circular No. 5 of 2010 dated June 3, 2010 [(2010) 324 ITR (St.) 293] has clarified that these new provisos are effective from April 1, 2009 onwards. In fact these provisos have been brought into the Act by the Finance (No.2) Act, 2009. So, it will be applicable to the assessment year 2009-10 and onwards.
62. In the present case, the assessment year is 2003-04. Therefore, the amended proviso as explained above is not applicable to the present case in hand. The proviso applicable to the present case is the one which stood before the substitution brought in by the Finance (No.2) Act, 2009 with effect from October 1, 2009. The earlier proviso is extracted below:
Provided that where more than one price is determined by the most appropriate method, the arms length price shall be taken to be the arithmetical mean of such prices, or, at the option of the Assessee, a price which may vary from the IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 19 of 21 arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.
63. The first limb of the old proviso and the first limb of the present proviso is regarding arriving at the arithmetical mean which is the same. There is no change with regard to that. The change is with reference to the second limb. The old proviso says that at the option of the Assessee, the Assessee may adopt a price different from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean, ie.., the Assessee has an option to claim the tax payers marginal relief at 5 per cent with reference to the arithmetical mean irrespective of the range of actual deviation between the margin disclosed by the Assessee and the average mean margin. Therefore, in effect, this marginal relief takes the character of a standard deduction of 5 per cent. For e.g., in a case, average mean of the arms length price determined by the Transfer Pricing Officer/Assessing Officer is 20 per cent and that one disclosed by the Assessee is 10 per cent. The Assessee will get a standard deduction of 5 per cent and the Assessees arms length price will be increased to 15 per cent and thereafter the difference of 5 per cent between 20 per cent and 15 per cent alone shall be added as arms length price adjustment. This is the theme of the old proviso. But under the newly substituted proviso, the marginal relief of 5 per cent will not Act as standard deduction. If the price determined by the average mean price is 20 per cent and that of the Assessee is 10 per cent., then the difference of 10 per cent is more than 5 per cent and therefore, the Assessee will not get the marginal relief and the entire difference of 10 per cent will be added as the arms length price adjustment. If the arms length price determined by the Transfer Pricing Officer/Assessing Officer is 15 per cent and that of the Assessee is 11 per cent., the difference of 4 per cent is less than 5 per cent and in that case, the rate disclosed by the Assessee at 11 per cent shall be taken as the arms length price. This is the position after the amendment.
64. In view of the above discussion, we find that the second limb of the proviso to section 92C(2) given an option to the Assessee to claim a marginal variance of 5 per cent as standard deduction. This ground of the Assessee is accepted and we hold that this benefit of deduction of 5 per cent has to be given to the Assessee, if the circumstances, so warrant.
11.2. Not only that, the explanation brought in by Finance Act, 2014 w.e.f. 01-04-2015 also specifies that the provisions of second proviso shall also be applicable to all assessments or reassessments proceedings pending before the AO as on the first day of October, 2009. The present proceedings were concluded before that day. So, the second proviso to IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 20 of 21 Section 92C(2) does not apply to the impugned order. The pre-amended proviso, as interpreted by various authorities does permit standard deduction of (+) or (-) 5% to Assessee. The order of Ld.CIT(A) is confirmed. The Revenues ground is rejected accordingly.
12. The last ground in Revenues appeal is with reference to exclusion of certain expenditure from total turnover which are excluded from export turnover by AO. Expenditures were excluded from export turnover stating to be for telecommunication and for rendering services. Assessee while contending that the said expenditure should not be excluded, made alternative contention that the same are to be excluded from total turnover. Following the Co-ordinate Bench decision in Tata Elxsi case, the Ld.CIT(A) directed the same to be excluded from total turnover as well. This order is in line with the principles laid down by the jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd., [349 ITR 98] (Kar). Therefore, we uphold the same and reject Revenues grounds.
13. The AO/TPO is directed to modify the order accordingly. In the result, both Assessees appeal and Revenues appeal are partly allowed. Pronounced in the open court on this 18 th day of March, 2016 Sd/- Sd/- (NARENDRA KUMAR CHOUDHURY) (B. RAMAKOTAIAH) Judicial Member Accountant Member Bangalore, Dated, the 18 th March, 2016. TNMM IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Page 21 of 21 Copy to:
1. Appellant
2. Respondents
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file By order Assistant Registrar, ITAT, Bangalore.
