Income Tax Officer, Ward-11(1), Bangalore v. M/s. CDC Software India Pvt. Ltd
[Citation -2016-LL-1014-10]

Citation 2016-LL-1014-10
Appellant Name Income Tax Officer, Ward-11(1), Bangalore
Respondent Name M/s. CDC Software India Pvt. Ltd.
Court ITAT-Bangalore
Relevant Act Income-tax
Date of Order 14/10/2016
Assessment Year 2005-06
Judgment View Judgment
Keyword Tags convertible foreign exchange • telecommunication charges • wholly owned subsidiary • development of software • determination of alp • software development • export business • export turnover • business profit • export profit • excise duty
Bot Summary: One has to give weightage not only to the words total turnover but also to the words export turnover, total export turnover and business profits. The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover, in the numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator. Since export turnover has been defined be Parliament and there is a specific exclusion of freight and insurance, the expression export turnover cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. The submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from export turnover for the purposes of the numerator would be brought in as part of the export turnover when it forms an element of the total turnover as a denominator in the formula. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the IT(TP)A No.1645/Bang/2013 C.O. No.113/Bang/2015 Page 10 of 23 meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible.


IN INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SMT ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT(TP)A No.1645/Bang/2013 Assessment year : 2005-06 Income Tax Officer, M/s. CDC Software India Pvt. Ward-11(1), Bangalore. Ltd., 6th and 7th Floor, Canberra Vs. Block, UB City 24, Vittal Mallya Road, Bangalore-560025. PAN:AACCP7154M APPELLANT RESPONDENT C.O. No.113/B/2015 (In IT(TP)A No.1645/Bang/2013) Assessment year : 2005-06 M/s. CDC Software India Pvt. Income Tax Officer, Ltd., 6th and 7th Floor, Canberra Ward-11(1), Bangalore. Block, UB City 24, Vittal Vs. Mallya Road, Bangalore-560025. PAN:AACCP7154M CROSS OBJECTOR RESPONDENT Revenue by : Smt. Meera Srivastava, Addl. CIT (DR) Assessee by : Shri. Prashanth G. S, CA Date of hearing : 29.09.2016 Date of Pronouncement : 14.10.2016 ORDER Per Inturi Rama Rao, Accountant Member This appeal filed by revenue, and cross objection filed by assessee company directed against order of learned Commissioner IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 2 of 23 of Income Tax (Appeals)-IV, Bangalore dated 17-9-2013 for assessment year 2005-06. 2. revenue raised following grounds of appeal. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 3 of 23 3. brief facts of case are that respondent assessee is company incorporated under provisions of Company s Act of 1956. It is wholly owned subsidiary of Pivotal Corporation, Canada. It is engaged in business of development and export of Customer Relationship Management Software. return of income for assessment year 2005-06 was filed on 28.10.2005 declaring Nil income. Against said return of income, assessment was completed by Income Tax Officer, Ward 11(1), Bangalore, after making transfer pricing adjustment of Rs.1,60,77,477/- u/s 92CA of Act. 4. Being aggrieved by order of assessment, appeal was preferred before CIT(A), who vide impugned order held that companies which are functionally dissimilar to that of assessee company and company s whose turnover exceeded Rs.200 crores are directed to be excluded from list of comparables. learned CIT(A), also held that in respect of internet bandwidth charges incurred in connection with delivery of computer software outside India, should be excluded from both export turnover as well as total turnover following law laid down by jurisdictional High Court in case of CIT Vs. Tata Elxsi 349 ITR 98. Being aggrieved, revenue is appeal before us in present appeal. 5. Ground Nos. 1 and 6 are general in nature and do not require any adjudication. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 4 of 23 6. Ground Nos. 2 and 3 challenges direction of CIT(A) to exclude internet charges incurred in connection with delivery of software outside India both from total turnover as well as from export turnover. issue in these grounds appeal is settled in favour of assessee by jurisdictional High Court in case of CIT Vs. Tata Elxsi wherein it was held as follows: 7. Chapter 3 of Act deals with incomes, which do not form part of total income. Section 10-A is Special provision in respect of newly established Undertakings in free trade zone, etc. said provision is enacted as incentive to exporters to enable their products to be competitive in global market and, consequently, earn precious foreign exchange for country. Therefore, while interpreting these provisions, this aspect has to be borne in mind. Section 10-A(1) provides for deduction of profits and gains as are derived by undertaking from export of articles or things or computer software for period of ten consecutive assessment years and same is excluded from total income of assessee. Sub-section (4) is provision which provides for manner in which said profits and gains have to be arrived at. It reads as under: 8. "For purposes of sub-sections (1) and (1A), profits derived from export of articles or things or computer software shall be amount which bears to profits of business of undertaking, same proportion as export turnover in respect of such articles or things or computer software bears to total turnover of business carried en by undertaking". 9. word 'export turnover' used in sub-Section (4) is defined in Explanation 2(iv ) at end of Section 10-A, it reads as under: 10. "export turnover" means, consideration in respect of export by undertaking of articles or things or computer software received in or brought into, India by assessee in convertible foreign exchange in, accordance with sub-Section (3), but does not include freight, telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses if any, incurred in foreign exchange in providing technical services outside India." 11. Therefore, while computing consideration received from such export turnover, expenses incurred towards freight, telecommunication charges, or insurance attributable to delivery of articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing technical services outside India should not be included. However, word 'total turnover' is not defined for purpose of this Section. It is because of this omission to define 'total turnover', word 'total turnover' falls for interpretation by this Court. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 5 of 23 12. expression 'total turnover' has been subject matter of various decisions as defined under Act under Section 80HHC. However, in aforesaid provision, total turnover is defined. definitions of 'export turnover' and 'total turnover' as defined in Explanation to Section 80HHC read as under: 13. (b) "export turnover" means sale proceeds received in, or brought into, India by assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this Section applies and which are exported out of India, but does not include freight or insurance attributable to transport of goods or merchandise beyond customs station as defined in Customs Act, 1962." 14. (ba) "total turnover" shall not include freight or insurance attributable to transport of goods or merchandise beyond customs station as defined in Customs Act, 1962." 15. In aforesaid definitions, what is to be excluded from both is expressly mentioned. In Section 10-A, not only word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at total turnover. However, while interpreting aforesaid provisions of Section 80HHC, Courts have laid down various principles, which are independent of statutory provisions. question is, whether those independent principles can be adopted while defining 'total turnover' in absence of definition in Section 10-A. Apex Court, in case ofLakshmi Machine Works (supra) held at para. 15 as under: 16. "15. It is important to note that tax under Act is upon income, profits and gains. It is not tax on gross receipts. Under Section 2(24) of Act word "income" includes profits and gains. charge is not on gross receipts but on profits and gains. charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits. According to "The Law and Practice of Income Tax" by Kanga and Palkhivala, word "profits" in section 28 should be understood in normal and proper sense. However, subject to special requirements of income-tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, income-tax has laid down certain rules to be applied in deciding how tax should be assessed and even if result is to tax as profits what cannot be construed as profits, still requirements of income-tax must be complied with. Where deduction is necessary in order to ascertain profits and gains, such deductions should be allowed. Profits should be computed after deducting expenses incurred for business though such expenses may not be admissible expressly under Act, unless such expenses are expressly disallowed by Act [see page 455 of "The Law and Practice of Income- tax by Kanga and Palkhivalal. Therefore, schematic interpretation for making formula in section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 6 of 23 indicate that Legislature intended to exclude items like commission and interest from deduction on ground that, then did not possess any element of "turnover" even though commission and interest emanated from exports. We have to read words "total turnover" in section 80HHC as part of formula which sought to segregate "export profits" from "business profits". Therefore, we have to read formula in entirety. In that formula entire business profits is not given deduction. It is business profit which is proportionately reduced by above fraction/ratio of export turnover/total turnover which constitute section 80HHC concession (deduction). Income in nature of "business profits" was, therefore, apportioned. above formula fixed ratio in which "business profits" under section 28 of Act had to be apportioned. Therefore, one has to give weightage not only to words "total turnover" but also to words "export turnover", "total export turnover" and "business profits". That is reason why we have quoted hereinabove extensively illustration from Direct Taxes (Income tax) Ready Reckoner of relevant word. In circumstances, we cannot interpret words "total turnover" in. above formula with reference to definition of word "turnover" in other laws like Central Sales tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated, above, even commission and interest formed part of profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without clarification introduced by Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of income-tax, profits and gains were required to be computed with reference to books of account of assessee. However, as can be seen from Income-tax Rules and from above Form No. 10CCAC in case of deduction under section 80HHC report of auditor certifying deduction based on export turnover was sufficient. This is because very basis for computing section 80HHC deduction was "business profits" as computed under section 28, portion of which had to be apportioned in terms of above ratio of export turnover to total turnover. Section 80HHC(3) was beneficial section. It was intended to provide incentives to promote exports. incentive was to exempt profits relatable to exports. In case of combined business of assessee having export business and domestic business Legislature intended to have formula to ascertain export profits by apportioning total business profits on basis of turnovers. Apportionment of profits on basis of turnover was accepted as method of arriving at export profits. This method earlier existed under Excess Profits-tax Act. it existed in Business Profits-tax Act. Therefore, just as commission received by assessee is relatable to exports and yet it cannot form part of "turnover", excise duty and sales tax also cannot form part of "turnover". Similarly, "interest" emanates from exports and yet "interest" does not involve element of turnover. object of Legislature in enacting section 80HHC of Act was to confer benefit on profits accruing with reference to export turnover. Therefore, "turnover" was requirement. Commission, rent, interest etc. did not involve any turnover. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 7 of 23 Therefore, 90 per cent of such commission, interest etc. was excluded from profits derived from export. Therefore, even without clarification such items did not form part of formula in section 80HHC(3) for simple reason that it did not emanate from "export, turnover", much less any turnover. Even if assessee was exclusive dealer in exports, said commission was not includible as it did not spring from "turnover". Just as interest, commission etc. did not emanate from "turnover", so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of character of turnover and, therefore, they were not includible in "total turnover". above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of turnover also. In fact, in Civil Appeal No. 4409 of 2005, above proposition has been accepted by Assessing Officer See: page No. 24 of paper book, if so, then excise duty and sales tax also cannot form part of "total turnover" under section 80HHC(3), otherwise formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is position even in case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by assessee on behalf of Government Therefore, if they are made relatable to exports, formula under section 80HHC would become unworkable. view which we have taken is in light of amendments made to section 80HHC from time-to-time." 17. said judgment has been re-affirmed by Apex Court, in ease of CIT v. Catapharma (India) (P.) Ltd. [2007] 292 ITR 641/ 162 Taxman 455. 18. Bombay High Court had occasion to consider meaning of word 'total turnover' in context of Section 10-A, in case of CIT v.Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: 19. "Under sub-section (4) proportion between export turnover in respect of articles or things, or, as case may be, computer software exported, to total turnover of business carried over by under- taking is applied to profits of business of undertaking in computing profits of business of undertaking in computing profits derived from export. In other words, profits of business of undertaking are multiplied by export turnover in respect of articles, things or, as case may be, computer software and divided by total turnover of business carried or by undertaking. formula which is prescribed by sub-section (4) of section 10A is as follows: Profits of Export turnover in respect Profits derived from export of articles or business of of articles or things or undertaking computer software things or Computer = software Total turnover of business carried on by undertaking IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 8 of 23 20. total turnover of business carried on by undertaking would consist of turnover from export and turnover from local sales. export turnover constitutes numerator in formula prescribed by sub-section (4). Export turnover also forms constituent element of denominator inasmuch as export turnover is part of total turnover. 21. export turnover, in numerator must have same meaning as export turnover which is constituent element of total turnover in denominator. legislature has provided definition of expression "export turnover" in Explanation 2 to section 10A by which expression is defined to mean consideration in respect of export by undertaking of articles, things or computer software received in, or brought into India by assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to delivery of articles things or software outside India. Therefore in computing export turnover Legislature has made specific exclusion of freight and insurance charges. 22. submission which has been urged on behalf of Revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, similar exclusion has not been provided in regard to total turnover. submission of Revenue, however, misses point that expression "total turnover" has not been definded at all by Parliament for purposes of section 10A. However expression "export turnover" has been defined. definition of "export turnover" excludes freight and insurance. Since export turnover has been defined be Parliament and there is specific exclusion of freight and insurance, expression "export turnover" cannot have different meaning when it forms constituent part of total turnover for purposes of application of formula. Undoubtedly, it was open to Parliament to make provision to contrary. However, no such provision having been made, principle which has been enunciated earlier must prevail as matter of correct statutory interpretation. Any other interpretation would lead to absurdity. If contention of Revenue were to be accepted, same expression viz. "export turnover" would have different connotation in application of same formula. submission of Revenue would lead to situation where freight and insurance, though it has been specifically excluded from "export turnover" for purposes of numerator would be brought in as part of "export turnover" when it forms element of total turnover as denominator in formula. construction of statutory provision which would lead to absurdity must be avoided." 23. special bench of Tribunal, in case of ITO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353/ 30 SOT 55 (Chennai) also had occasion to consider meaning of word 'total turnover'. After referring to various judgments of High Court as well as Supreme Court held as under: IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 9 of 23 24. "53. For above reasons, we hold that for purpose of applying formula under sub-section (4) of Section 10-B, freight telecom charges or insurance attributable to delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India are to be excluded both from export turnover and from total turnover, which are numerator and denominator respectively in formula .." 25. formula for computation of deduction under Section 10-A would be as under: Profits of business export turnover Total turnover 26. From aforesaid judgments, what emerges is that, there should be uniformity in ingredients of both numerator and denominator of formula, since otherwise it would produce anomalies or absurd results. Section 10-A is beneficial section. It is intended to provide incentives to promote exports. incentive is to exempt profits relatable to exports. In case of combined business of assessee, having export business and domestic business, legislature intended to have formula to ascertain profits from export business by apportioning total profits of business on basis of turnovers. Apportionment of profits on basis of turnover was accepted as method of arriving at export profits. In ease of Section 80HHC, export profit is to be derived from total business income of assessee, whereas in Section 10-A, export profit is to be derived from total business of undertaking. Even in case of business of undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. export turnover would be component or part of denominator, other component being domestic turnover. In other words, to extent of export turnover, there would be commonality between numerator and denominator of formula. In view of commonality, understanding should also be same. In other words, if export turnover in numerator is to be arrived at after excluding certain expenses, same should also be excluded in computing export turnover as component of total turnover in denominator. reason being total turnover includes export turnover. components of export turnover in numerator and denominator cannot be different. Therefore, though there is no definition of term 'total turnover' in Section 10-A, there is nothing in said Section to mandate that, what is excluded from numerator that is export turnover would nevertheless form part of denominator. Though when particular word is not defined by legislature and ordinary meaning is to be attributed to same, said ordinary meaning to be attributed to such word is to be in conformity with context in which it is used. When statute prescribes formula and in said formula, 'export turnover' is defined, and when 'total turnover' includes export turnover, very same meaning given to export turnover by legislature is to be adopted while understanding IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 10 of 23 meaning of total turnover, when total turnover includes export turnover. If what is excluded in computing export turnover is included while arriving at total turnover, when export turnover is component of total turnover, such interpretation would run counter to legislative intent and impermissible. If that were intention of legislature, they would have expressly stated so. If they have not chosen to expressly define what total turnover means, then, when total turnover includes export turnover, meaning assigned by legislature to export turnover is to be respected and given effect to, while interpreting total turnover which is inclusive of export turnover. Therefore, formula for computation of deduction under Section 10-A, would be as under: Export turn over Profits of business of (Export turnover + undertaking domestic turn over) Total Turn Over 27. In that view of matter, we do not see any error committed by Tribunal in following judgments rendered in context of Section 80HHC in interpreting Section 10-A when principle underlying both these provisions is one and same. Therefore, we do not see any merit in these appeals. substantial question of law framed is answered in favour of assessee and against revenue. 7. We find that order of CIT(A) on this issue is in consonance with law laid down by Hon ble jurisdictional High Court in above case. Hence we dismiss these grounds of appeal. 8. Ground No. 4 challenge direction of learned CIT(A) remanding matter AO/TPO to exclude functionally dissimilar companies following guidelines laid down in division of ITAT, Delhi in case of Actis Advertisers P. Ltd., Vs. Dy. Commissioner of Income-tax (20 ITR (Trib) 138). learned DR contended that CIT(A) ought not have restored matter to file of TPO as entire information is available on record and should have rendered finding on merits. It was further contended that CIT(A) has no power of remand. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 11 of 23 9. On other hand learned AR has submitted that following comparables are held to be functionally dissimilar to that of software company by coordinate bench, Bangalore in case of ACIT Vs. Symbol Technologies India Pvt. Ltd., 56 taxmann.com 410: 1. Bodhtree Consulting Ltd., 2. Exensys Software Solutions Ltd., 3. Sankhya Infotech Ltd., 4. Foursoft Ltd., 5. Thirdware solutions Ltd., 6. Tata Elxsi Ltd., (Seg.) 10. Thus, it was submitted that if above companies are excluded from list of comparables, and he has no serious objections for inclusion of companies item Nos. (1) Lanco Global Systems Ltd., (2) Sasken Network Systems Ltd., (3) R. S. Software (India) Ltd., (4) Geometric Software Solutions Co. Ltd., (5) Visuals Soft Technologies Ltd., (Seg), (6) Sasken Communication Technologies Ltd., (Seg). Thus he submitted that there was no need of remanding matter, these companies can be excluded on ground of functional dissimilarity following decision of Coordinate Bench in case of Symbol Technology P. Ltd. 11. We have heard rival submissions and perused material on record. In case of Symbol Technologies Ltd., which is also software development service company, it was held by that Bodhtree Consulting Ltd., Foursoft Ltd, Thirdware Solutions Ltd., are held to be incomparable on grounds of functionally dissimilarity vide Para 22 which reads as under: IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 12 of 23 We have considered his submission and find that ITAT Hyderabad Bench on identical facts, held that aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. following were : "15.4. FOURSOFT LIMITED : This comparable is objected on 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 Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in product development, having I.P. rights, same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by assessee on reason that said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not service provider. Referring to annual report, it was submitted that this comparable was rejected by ITAT, Pune in 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 Coordinate Bench of Tribunal in case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : "23. other companies which are objected to by assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, learned Counsel appearing on behalf of assessee submitted that they are into both software as well as product development. He submitted that TPO has taken note of fact these companies are also into product development but has selected these companies as comparables by applying filter of more than 70% of its revenue being from software development services. learned Counsel submitted that functions of these companies are different from assessee who was into sole activity of software development for its associated enterprise. He submitted that TPO has allocated expenditure in proportion of revenue of these companies from software services and software products and has adopted figure as segmental margin of company and has taken these companies as comparables. He submitted that by taking proportionate expenditure, correct financial results would not emerge. He submitted that nothing prevented Assessing Officer/TPO from obtaining segmental details from respective comparable companies before adopting them as comparable companies and before taking operating margin for arriving at arms length price. He submitted that wherever segmental details are not available, then said companies should not be taken as comparables. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 13 of 23 For this purpose, he placed reliance upon decision of Bangalore Tribunal in case of First Advantage Offshore Services Pvt. Ltd. v. DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from list of comparables. 24. learned D.R. however, supported Orders of authorities below. 25. Having heard both parties and having gone through material on record, we find that TPO at page 37 of his order has brought out differences between product company and software development services provider. Thus, it is clear that he is aware of functional dissimilarity between product company and software development service provider. Having taken note of difference between two functions, Assessing Officer ought not to have taken companies which are into both product development as well as software development service provider as comparables unless segmental details are available. Even if he has adopted filter of more than 75% of revenue from software services for selecting comparable company, he ought to have taken segmental results of software services only. percentage of expenditure towards development of software products may differ from company to company and also it may not be proportionate to sales from sale of software products. Under section 133(6) of I.T. Act, TPO has power to call for necessary details from comparable companies. It is seen that Assessing Officer/TPO as exercised this power to call for details with regard to various companies. As seen from annual report of Foursoft Limited which is reproduced at page 7 of TPO's Order, said company has derived income from software licence also and AMCs. 26. As far as Thirdware Software Solution Limited is concerned, we find from information furnished by said company that though said company is also into product development, there are no software products that company invoiced during relevant financial year and financial results are in respect of services only. Thus, it is clear that there is no sale of software products during year but said company might have incurred expenditure towards development of software products. 27. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, TPO has also observed that said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of products. above facts clearly demonstrate that there is functional dissimilarity between assessee and these companies and without making adjustment for dissimilarities brought out by TPO himself, these companies cannot be taken as comparable companies. method adopted by TPO to allocate expenditure proportionately to software development services and software product activity cannot be said to be correct and reasonable. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 14 of 23 Wherever, Assessing Officer/TPO cannot make suitable adjustment to financial results of comparable companies with assessee company to bring them on par with assessee, these companies are to be excluded from list of comparables. Therefore, we direct Assessing Officer/TPO to exclude these three companies from list of comparables". Respectfully, following same, we accept assessee's objections and direct TPO to exclude above three companies from list of comparables.' 23. In view of aforesaid decision rendered on identical facts and circumstances, we are of view that Foursoft Ltd., and Thirdware Solutions Ltd., should be excluded from list of comparable companies. 24. learned counsel for Assessee submitted before us that TATA Elxsi Ltd., comparable company out of 12 excluded by CIT(A) by applying RPT filter and which gets included in comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for 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 Assessee such as Assessee in present case providing software development services by ITAT Hyderabad Bench in case of CNO IT Services (India) (P.) Ltd. (supra). 12. In respect of Sankya Infotech Ltd., coordinate bench in case of Symbol Technologies vide para 18 held as follows: 18. It was submitted by learned counsel for Assessee that Sankhya is engaged in business of development of software products & services and training. company focuses on development of niche products for transport and aviation industry. However, segmental information in relation to 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 comparable of Appellant. products developed and owned by Sankhya are listed below: (1) SILICONTM Training Suite of Products: products are comprehensive enterprise wide training platform that covers entire spectrum of training in 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 integrated resource planning, management IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 15 of 23 tracking system exclusively developed for Airline operations. It is end-to-end solution for all Flight Operations. - Sakai CLE : This is widely used and popular open source LMS used in many leading educational institutions and corporate. relevant extract from Annual report substantiating that company also engages in different activities is reproduced below: "2. Activities company as engaged in business of development of Software Products & Services and training. production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of Companies Act, 1956." 19. Delhi Tribunal in ITO v. Colt Technology Services India (P.) Ltd. [2014] 146 ITD 468/[2013] 34 taxmann.com 182 for assessment year 2005-06 has held that said company is not comparable to assessee therein which was also in business of software development. 20. submissions made by learned counsel for Assessee are considered. activities set out above and decision of Delhi ITAT rendered in context of software development company such as Assessee makes it amply clear that this company Sankhya cannot be regarded as comparable. same is directed to be excluded from list of comparable companies. 21. learned counsel for Assessee submitted before us that two of comparable companies out of 12 excluded by CIT(A) by applying RPT filter and which gets included in comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for purpose of comparability, viz., Four Soft Ltd., and Thirdware Solutions Ltd., will have to be excluded as these companies are not functionally comparable. These companies according to him, will however, have to be excluded as these two companies were held to be not comparable with Assessee such as Assessee in present case providing software development services by ITAT Hyderabad Bench in case of CNO IT Services (India) (P.) Ltd. v. Dy. CIT [2014] 43 taxmann.com 231. 22. We have considered his submission and find that ITAT Hyderabad Bench on identical facts, held that aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. following were : IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 16 of 23 "15.4. FOURSOFT LIMITED : This comparable is objected on 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 Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in product development, having I.P. rights, same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by assessee on reason that said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not service provider. Referring to annual report, it was submitted that this comparable was rejected by ITAT, Pune in 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 Coordinate Bench of Tribunal in case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : "23. other companies which are objected to by assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, learned Counsel appearing on behalf of assessee submitted that they are into both software as well as product development. He submitted that TPO has taken note of fact these companies are also into product development but has selected these companies as comparables by applying filter of more than 70% of its revenue being from software development services. learned Counsel submitted that functions of these companies are different from assessee who was into sole activity of software development for its associated enterprise. He submitted that TPO has allocated expenditure in proportion of revenue of these companies from software services and software products and has adopted figure as segmental margin of company and has taken these companies as comparables. He submitted that by taking proportionate expenditure, correct financial results would not emerge. He submitted that nothing prevented Assessing Officer/TPO from obtaining segmental details from respective comparable companies before adopting them IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 17 of 23 as comparable companies and before taking operating margin for arriving at arms length price. He submitted that wherever segmental details are not available, then said companies should not be taken as comparables. For this purpose, he placed reliance upon decision of Bangalore Tribunal in case of First Advantage Offshore Services Pvt. Ltd. v. DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from list of comparables. 24. learned D.R. however, supported Orders of authorities below. 25. Having heard both parties and having gone through material on record, we find that TPO at page 37 of his order has brought out differences between product company and software development services provider. Thus, it is clear that he is aware of functional dissimilarity between product company and software development service provider. Having taken note of difference between two functions, Assessing Officer ought not to have taken companies which are into both product development as well as software development service provider as comparables unless segmental details are available. Even if he has adopted filter of more than 75% of revenue from software services for selecting comparable company, he ought to have taken segmental results of software services only. percentage of expenditure towards development of software products may differ from company to company and also it may not be proportionate to sales from sale of software products. Under section 133(6) of I.T. Act, TPO has power to call for necessary details from comparable companies. It is seen that Assessing Officer/TPO as exercised this power to call for details with regard to various companies. As seen from annual report of Foursoft Limited which is reproduced at page 7 of TPO's Order, said company has derived income from software licence also and AMCs. 26. As far as Thirdware Software Solution Limited is concerned, we find from information furnished by said company that though said company is also into product development, there are no software products that company invoiced during relevant financial year and financial results are in respect of services only. Thus, it is clear that there is no sale of software products during year but said company might have incurred expenditure towards development of software products. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 18 of 23 27. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, TPO has also observed that said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of products. above facts clearly demonstrate that there is functional dissimilarity between assessee and these companies and without making adjustment for dissimilarities brought out by TPO himself, these companies cannot be taken as comparable companies. method adopted by TPO to allocate expenditure proportionately to software development services and software product activity cannot be said to be correct and reasonable. Wherever, Assessing Officer/TPO cannot make suitable adjustment to financial results of comparable companies with assessee company to bring them on par with assessee, these companies are to be excluded from list of comparables. Therefore, we direct Assessing Officer/TPO to exclude these three companies from list of comparables". Respectfully, following same, we accept assessee's objections and direct TPO to exclude above three companies from list of comparables.' 13. Similarly in respect of Tata Elxsi Ltd., coordinate bench vide paras 25-27 held as follows: 25. We have considered his submission and find that ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: '15.7. TATA ELXSI LIMITED : objection of assessee is that TATA Elxsi operating two segments -system communication services and software development services. TPO accepted software development services segment in his T.P. analysis and assessee's objection is that software development services segment itself comprises of three sub-services 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 TPO as comparable but not entire software development service. Since company's operations are functionally different as such, same is not comparable. Further, assessee is also objecting on basis of intangible scale of operations. coordinate bench in case of Intoto (supra) considered issue as under in para 22. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 19 of 23 "22 Tata Elxsi Limited : As regards this company, learned Counsel appearing on behalf of assessee, filed before us reply of Tata Elxsi Limited to Addl. CIT (Transfer Pricing), Hyderabad, wherein concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of specialisation and also because of diverse nature of its business, it is very difficult to scale-up 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. communication dated 25th August, 2009 to TPO is placed before us. As this communication was not before TPO at time of transfer pricing adjustment we deem it fit and proper to remand this issue also to file of TPO to reconsider adopting this company as comparable in light of observations of this company to TPO in case of another assessee. In result, Assessing Officer/TPO is directed to reconsider issue in accordance with law, after affording reasonable opportunity of being heard to assessee." Keeping assessee's objections and decisions of Coordinate Bench, prima facie, we are of view that TATA Elxsi Limited is functionally different and has incomparable size to that of assessee. Further, we are unable to verify whether segmental profits adopted by TPO pertain to entire software development services or pertain to limited service akin to assessee services. Since, these aspects are not clear from data furnished before us, we direct TPO to examine and in case, segmental profits of particular service is not available, then, to exclude TATA Elxsi Limited from list of comparables. Accordingly, this issue is restored to file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to assessee.' 26. Though issue has been set aside to AO in aforesaid decision, ITAT Hyderabad in case of NTT Data India Enterprise Application Services (P.) Ltd. v. Asstt. CIT [2013] 40 taxmann.com 173 and in subsequent ruling in case of Invensys Development Centre (India) (P.) Ltd. v. Addl CIT [2014] 151 ITD 245/43 taxmann.com 419 (Hyd. - Trib) held that TATA Elxsi is not functionally comparable with that of software development service provider such as Assessee. 27. In view of aforesaid decision rendered on identical facts and circumstances, we are of view that TATA Elxsi Ltd., should be excluded from list of comparable companies. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 20 of 23 14. We do not find any reason to differ from decision of coordinate bench in above case. Therefore we direct AO/TPO to exclude companies (1) Bodhtree Consulting Ltd., (2) Exensys Software Solutions Ltd., (3) Sankhya Infotech Ltd., (4) Foursoft Ltd., (5) Thirdware solutions Ltd., (6) Tata Elxsi Ltd., (Seg.) from list of comparables. Thus ground No. 4 is disposed off. 15. Ground No. 5: ground appeal is filed by revenue and contending that once particular filter/criteria adopted by TPO or assessee in TP study, is accepted or rejected by appellate authority matter should go back to TPO/AO for application of filters approved by appellate authorities on uniform basis to all comparables finally selected. 16. In our considered opinion issue raised vide above grounds is only of academic importance as none of comparables selected by TPO are either approved or rejected applying any filter. Therefore this ground of appeal does not survive. 17. In result, appeal filed by revenue is dismissed. C.O. No. 113/B/15 18. These cross-objections are filed by assessee company. grounds of cross objection are as under: IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 21 of 23 1. orders of Transfer Pricing Officer (TPO) 1 Commissioner of Income Tax- Appeals (CIT-A) 1 Assessing Officer (AO) in so far as they are against cross objector l respondent, are opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of cross objector l respondent's case. 2. a) order of assessment is bad in law as mandatory conditions to invoke jurisdiction under section 92CA of Act did not exist, or having not been complied with and consequently order of assessing officer is bad in law for want of requisite jurisdiction. b) assessing officer erred in not providing copy of approval granted by Commissioner which is in violation of settled principles of natural justice and thus order of assessment needs to be set aside. 3. TPO, CIT-(A) and AO failed to understand spirit and intent of Rule 10B(1)(e)(ii) as per which even if one of comparables selected by cross objector satisfies computation mechanism for determination of ALP, determination of ALP by using arithmetic mean of different comparables is not warranted. 4. TPO, CIT-(A) and AO failed to appreciate that cross objector/respondent runs single customer risk and failed to provide risk adjustment while computing comparable margin. 5. cross objector / respondent craves leave to add, alter, delete, and modify any of grounds which are urged above. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 22 of 23 6. For above and such other grounds as may be urged at time of hearing, cross objector / respondent prays your Honour to consider facts and circumstances of case and justice be rendered. 19. On perusal of orders of CIT (A), it is crystal clear that issues raised vide cross-objections 1 to 3 do no form part of order of learned CIT(A). cross-objection is maintainable only when CIT(A) renders some finding on issues raised on cross-objection. Therefore, cross-objection 1 to 3 are dismissed as such. In respect of cross-objection No. 4 challenges denial of risk adjustment by learned CIT(A). CIT(A) has denied risk adjustment on ground that working capital adjustment was granted by TPO and therefore no risk adjustment can be granted. 20. learned AO contended that assessee company is catering to needs of single customer and therefore exposed to single customer risk and these adjustments should be granted in light of decision of coordinate bench in case Intellinet Technologies India (P.) Ltd., Vs. Income-tax Officer, Ward-11(2) Bangalore. 21. We heard rival submissions and perused material on record. We find from record that assessee company had not quantified adjustment on account of risk. Further assessee company had not demonstrated before us as to how risk differences resulted in deflation of financial results of comparables. It cannot be granted as general rule of standard adjustment. Therefore this cross-objection is dismissed. IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 23 of 23 Pronounced in open court on this 14th day of October, 2016. Sd/- Sd/- (ASHA VIJAYARAGHAVAN) (INTURI RAMA RAO) Judicial Member Accountant Member Bangalore. Dated:14th October, 2016. /NS/ Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order Assistant Registrar, ITAT, Bangalore. Income Tax Officer, Ward-11(1), Bangalore v. M/s. CDC Software India Pvt. Ltd
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