IN INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B , BANGALORE BEFORE SHRI S.K.YADAV, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER IT (TP) No.1574 (Bang) 2013 (Assessment year 2005-06) M/s July Systems & Technologies Pvt. Ltd., No.17/9C, 4th Floor, Maruthi Chambers, Rupena Agrahara, Hosur Rod, Bangalore -560 068 Pan No.AABCB6543M Appellant Vs Income Tax Officer, Ward-11(2), Bangalore Respondent Assessee by : Shri K.R.Pradeep, CA Revenue by : Shri AR V. Sreenivasan, JCIT Date of hearing : 23-08-2016 Date of pronouncement: : 18-10-2016 ORDER PER SHRI A.K.GARODIA, AM This is assessee s appeal directed against order of ld. CIT(A)-IV, Bangalore dated 16-09-2013 for assessment year 2005-06. 2. grounds raised by assessee in its appeal are as under; 1.That order of Assessing Officer and Transfer Pricing Officer is against law, facts, circumstances, natural justice, equity and all other known principles of law. 2 IT(TP)A No.1574/B/2013 2.That total income computed and total tax computed is hereby disputed. 3.The authorities below erred in bringing to tax sum of Rs.l,39,41,862/- under section 92C r.w.s 92CA of Act as per communication/order of Transfer Pricing Officer. 4.The authorities below erred in holding that ipso facto determination/calculation of arm's length price amounts to earning of income by appellant, thereby taxable in its hands. 5.The order of Transfer pricing officer and that of AO is in clear violation of law on this issue and principles enunciated by various courts more particularly on issue of reference, sanction of approval, recording of reasons and lack of satisfaction. 6.That findings, reasons, conclusions of TPO are bundle of contradictions and clearly unsustainable in law and order u/s 92CA is totally against circular and legislative intent. 7. TPO/ AO erred in ignoring method followed by appellant. TPO/ AO ought to have adduced cogent reasons for rejecting method followed by appellant before substituting and prescribing new method. 8. onus is on department to establish there is any tax avoidance and it is essential that incontrovertible evidences are in possession of AO before reference is made as held by Supreme Court in 131 ITR 597 and further has erred in not relying on circular. 9.The authorities below erred in incorrectly selecting comparable ignoring judicial pronouncements and applicable law in this regard. 10.The authorities below erred in not applying filters particularly filter of exceptional profit and further erred in not making appropriate adjustment as per Rule 10B(3). 11. authorities below failed to make necessary 3 IT(TP)A No.1574/B/2013 adjustment as is required in terms of Rule 10B(2). 12.The TPO erred in ignoring fact that before making adjustment neither comparable transaction entered into has been identified nor enterprise which has entered such transaction has been identified. Unless these two are identified as explained in Rule 10B(2) no further proceedings are possible. In this case, in view of non-identification, entire order requires to be vacated. 13.The authorities below erred in not applying correct method as contemplated in Rule 10C of IT Rules. 14.The assessee denies liability for interest u/s. 234B of Rs.23,48,575/-. Further prays that interest if any should be levied only on returned income. 15.The Assessing Officer ought to have given opportunity of hearing before levy of interest u/s 234B. 16. Without prejudice to appellant's right of seeking waiver before appropriate authority appellant begs for consequential relief in levy of interest u/s 234B. 17. For above and grounds and reasons which may be submitted during course of hearing of this appeal, assessee requests that appeal be allowed as prayed and justice be rendered . 3. At very outset, ld. AR of assessee submitted chart and pointed out that assessee is requesting for exclusion of seven comparables on account of functional dissimilarity and out of same, one company has to be excluded on account of RPT filter also i.e. M/s Bodhtree Consulting Ltd., He placed reliance on Tribunal order rendered in case of ACIT Vs McAfee Software (Ind.) Pvt. Ltd., in IT(TP) No.04(B)/2012 dated 18-03-2016, copy available on pages -1 4 IT(TP)A No.1574/B/2013 to 21 of paper book and he submitted that as per this Tribunal order, issue regarding all seven comparables is covered in favour of assessee. ld. DR of revenue supported order of authorities below. 4. We have considered vial submissions. We find that as per functional profile of M/s McAfee Software (Ind.) Pvt. Ltd., noted by Tribunal in judgment cited by ld. AR of assessee, this company is engaged in providing software development services to its AE. In present case, functional profile of assessee company has been noted by TPO on page-2 & 3 of his order as per which assessee company is also providing software services to its AE and ld. DR of revenue also could not point out any difference in facts in present case and in case of M/s McAfee Software (Ind.)Pvt. Ltd., (Supra). Hence, we examine this claim of ld. AR of assessee that these seven comparables of which exclusion is being sought for by assessee is covered in favour of assessee or not. As per chart submitted by ld. AR of assessee, Para no.10.2 to 10.8 of this Tribunal order are relevant in respect of these seven comparables and hence, we re-produce these paras of Tribunal order from pages-7 to 16 of Tribunal order; Infosys Technologies Ltd., Exensys Software Solutions Ltd 10.2. Ld.CIT(A) has excluded Infosys and Exensys, on basis of functional dissimilarity and having extraordinary event during year. Exensys was 5 IT(TP)A No.1574/B/2013 having extraordinary profits by way of amalgamation of companies during year. Infosys was excluded having different functionality of products, having high turnover and brand name. Following decision of Agnity Technologies Vs. ITO of ITAT as approved by Hon'ble Delhi High Court, Infosys cannot be considered as comparable. same view was held by Co-ordinate Bench in 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 1302/Bang/2011 dt. 11-06-2015 (supra). Since order of Ld.CIT(A) is in agreement with decision on these two comparables by various Coordinate Benches, we uphold same. Bodhtree Consulting Ltd.,: 10.3. This company was retained by Ld.CIT(A) but Assessee objects on basis of functionality. However, as seen from orders of Co-ordinate Benches in 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 comparable. However, in case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (Where one of us, AM is author) has considered in detail and excluded same for following reasons: 1. Bodhtree Consulting Ltd. learned counsel submitted that this company should be rejected under following TPO s filters: Related party transactions filter: As per schedule 4 of balance sheet, company has investments in Perigon, LIC, 6 IT(TP)A No.1574/B/2013 USA and as per response u/s 133(6); company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of total turnover. Functionally different filter: company in its response to notice u/s133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that e-paper solutions and data cleansing services would come under category of IT enabled services . IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 Considering above, we direct that above company has to be excluded on 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 CIT(A) on reason of low profit margin. This is not valid ground. Only continuous loss making companies are being excluded from comparability. If this argument was accepted, high profit making companies are also to be excluded. This is not purpose for which TP analysis is being undertaken. Therefore, keeping principles laid down by Special Bench of ITAT in case of Maersk Global Centers (India) P. Ltd 43 Taxmann.com 100 Mumbai(SB), we, consider same as comparable and retain it in list. Sankhya Infotech Ltd., Thirdware Solution Ltd., & Tata Elxsi Ltd., : 10.5. These three companies are rejected as comparables on functionality in 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 case of 7 IT(TP)A No.1574/B/2013 Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) at Para No.13. analysis by Co-ordinate Benches is as under: Sankhya Infotech Limited ( Sankhya ) 19. 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 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 8 IT(TP)A No.1574/B/2013 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. Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 609I/Del/2011 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. 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 relevant observations:- 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, 9 IT(TP)A No.1574/B/2013 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. For this purpose, he placed reliance upon decision of 10 IT(TP)A No.1574/B/2013 Bangalore Tribunal in case of First Advantage Offshore Services Pvt. Ltd. vs. DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from list of comparables. 23. learned D.R. however, supported Orders of authorities below. 24. Having heard both parties and having gone through material on record, we find that TPO at page 37of 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. 25. 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 11 IT(TP)A No.1574/B/2013 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. 26. 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. 27. learned counsel for Assessee submitted before us that TATA Elxsi Ltd., comparable company out of 10 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) 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. 12 IT(TP)A No.1574/B/2013 28. 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 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 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: "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 13 IT(TP)A No.1574/B/2013 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. 29. Though issue has been set aside to AO in aforesaid decision, ITAT Hyderabad in case of NTT Data India Enterprise Application Services Pvt. Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in subsequent ruling in 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 software development service provider such as Assessee. 30. 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. 13. Similarly, 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 14 IT(TP)A No.1574/B/2013 considered and analysed in various cases relied on about functionality and why same are not comparable to companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suffice to say that Assessee submissions are valid. AO is directed to exclude above comparables and rework out arm s length margin accordingly. ground No.8 and additional ground raised by Assessee are considered as allowed . In view of above, 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, above companies are retained. Four Soft Ltd., 10.7. objection by Assessee is that this company is product company. was analysed and accepted in 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 said company ahs derived income from software license and AMCs. Since functionality was already analysed, respectfully following Co-ordinate Benches also, 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 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. 15 IT(TP)A No.1574/B/2013 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 Co-ordinate Bench at Bangalore in 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 development. We have perused TPO s order. In page 85 and 86 of order, this comparable was analysed. TPO records that there are product sales to extent of 18%. Segmental profits are not available. On assumptions, this company was retained. We are of opinion that being product based company, same is not strictly comparable to service company like Assessee. In absence of segmental profit of service income, we have to exclude same. Following decision in 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 . 5. As per above paras re-produced from Tribunal order rendered in case of M/s McAfee Software (Ind.) Pvt. Ltd. (Supra), we find that Tribunal in that case has upheld exclusion of seven comparables i.e. 1) M/s Bodhtree Consulting Ltd., 2) M/s Exensys Software Solutions Pvt. Ltd., 3) M/s Sankhya Infotech Ltd., 4) M/s Thirdware Solutions Ltd., 16 IT(TP)A No.1574/B/2013 5) M/s Tata Elxsi Ltd., 6) Geometric Software Solutions Co. Ltd., 7) M/s Four Soft Ltd., 6. Respectfully following this Tribunal order, we direct AO/TPO that in present case also, all these seven comparables should be excluded and TP adjustment, if any, should be made, only after excluding these seven comparables. It was agreed by both side that no separate adjudication is called for in respect of any other ground raised by assessee. 7. In result, appeal of assessee stands partly allowed for statistical purposes. Order pronounced in open court on date mentioned on caption page. (SUNIL KUMAR YADAV) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER Place: Bangalore: D t e d : 18.10.2016 am* Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order AR, ITAT, Bangalore 17 IT(TP)A No.1574/B/2013 1. DATE OF DICTATION 2. , , DATE ON WHICH TYPED DRAFT IS PLACED BEFORE DICTATING MEMBER .. 3. . / DATE ON WHICH APPROVED DRAFT COMES TO PS/Sr.PS . 4. DATE ON WHICH ORDER IS PLACED BEFORE DICTATING MEMBER FOR PRONOUNCEMENT 5. . / . . DATE ON WHICH ORDER COMES BACK TO PS/Sr.PS .. 6 DATE OF UPLOADING ORDER ON WEBSITE .. 7. , IF NOT UPLOADED, FURNISH REASON FOR DOING SO . 8. DATE ON WHICH FILE GOES TO BENCH CLERK .. 9. / DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT 10. DATE ON WHICH FILE GOES TO HEAD CLERK 11. DATE ON WHICH FILE GOES TO ASSISTANT REGISTRAR FOR SIGNATURE ON ORDER . 12. DATE ON WHICH FILE GOES TO DESPATCH SECTION FOR DESPATCH OF TRIBUNAL ORDER 13. DATE OF DESPATCH OF ORDER . M/s July Systems & Technologies Pvt. Ltd. v. Income Tax Officer, Ward-11(2), Bangalore