IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 1 IN INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B , BANGALORE BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SMT.BEENA PILLAI, JUDICAL MEMBER Sl. ITA/IT(TP)A No. Assessment. Appellant Respondent No. Year 1 IT(TP)A 2011-12 DCIT, Circle- M/s Emulex No.267(B)/2016 2(1)(2), Bangalore Communications Pvt. Ltd., Bangalore 4 C.O.NO.99(B)/2018 2011-12 M/s Emulex DCIT, Circle- (In IT(TP)A Communications 2(1)(2), Bangalore No.267(B)/2016 Pvt. Ltd., Bangalore Revenue by Miss. Neera Malhotra, CIT Appellant by Miss. Tanmayee Rajkumar, Advocate Date of hearing 18-07-2019 Date of pronouncement 28-09-2019 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals has been filed by revenue and cross objection by assessee against order dated 28/12/15 passed by Ld.AO under section 143 (3) read with 144C (5) read with section 144C (13) of act for assessment year 2011-12 on following grounds of appeal IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 2IT(TP)A No.267/Bang/2016(AY 2011-12) 1.Whether Hon'ble DRP is correct in law and fact in excluding communication travel expenditure from both export turnover and total turnover. 2.Whether Hon'ble DRP is correct in applying "onsite revenue filter" without appreciating fact that function carried out is "Software Development" irrespective of whether onsite or offshore. 3.Whether Hon'ble DRP is correct in excluding M/s RS Software Pvt. Ltd. and M/s. Acropetal Technologies and M/s. L&T Infotech Ltd on ground that they have significant onsite revenue without appreciating fact that onsite development of software entails more cost and thereby results in lower profit margins. 4.Whether Hon'ble DRP is right in seeking exact comparability while searching for comparable companies of assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies. 5.Whether Hon'ble DRP erred in fact in rejecting company as comparable on grounds that it is functionally different when primary source of income of comparable is from provision of software development services. 6.Whether while seeking exact comparability, DRP is right in fact and in law in imposing condition beyond law whereas requirement of law is to acknowledge only those differences that are likely to materially affect margin. 7.Whether Hon'ble DRP is correct in law & fact in disregarding position of law that there could be IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 3 differences between enterprises- compared under TNMM method that are not likely to materially affect price or cost charged or profits accruing to such enterprises. 8.Whether Hon'ble DRP has erred on fact in deleting M/s E-infochips as comparable on ground that it fails filter of service income less than 75% of sales, when said company has service income being 100% of sales. CO No.99/Bang/2018(in IT(TP)A No.267(B)/2016 (AY: 2011012) Respondent submits as under: grounds stated here under are independent of, and without prejudice to one another: 1. That order passed by Deputy Commissioner of Income-tax Circle 2(1)(2) ("Assessing Officer" or "AO") and Dispute Resolution Panel ("DRP") to extent questioned herein are contrary to law, facts and circumstances of case and thus liable to be quashed. 2. That on facts and in circumstances of case, AO/DRP erred in upholding actions of Transfer Pricing Officer ("TPO") in: a. Invoking provisions of Section 92C(3) read with Section 92CA of Income-tax Act, 1961 ("the Act") contending that information or data used in computation of arm's length price is not reliable or correct; b. Disregarding application of multiple year/prior year data and holding that current year (i.e. Financial year 2010-11) data for companies should be used for IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 4 comparability and using data as at time of assessment proceedings; c. Conducting fresh comparability analysis based on application of additional/modified filters which are arbitrary; d. Holding that there is no correlation between mark-up on cost and turnover of company and thus not rejecting companies having large scale of operations. e. Not providing appropriate adjustment towards risk differential between Respondent and companies selected as comparable, while determining arm's length price; f. Rejecting companies which pass test of comparability and are functionally comparable to Respondent; and g. Introducing additional purported companies which fail test of comparability. 3. That on facts and in circumstances of case, AO/DRP erred in suo moto rejecting RS Software Pvt. Ltd., Evoke Technologies Pvt. Ltd.,Mindtree Ltd. from final list of comparable companies, although said companies were comparable to Respondent and Respondent had not objected to same. 4. That on facts and in circumstances of case, AO/DRP erred in upholding inclusion of Persistent Systems Ltd. and Sasken Communications Technologies Ltd., in list of comparable companies although they fail test of comparability. IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 5 5. That on facts and in circumstances of case, AO/DRP erred in upholding action of TPO in rejecting LGS Global Ltd., Spry Resources India P. Ltd., Akshay Software Technologies Ltd., Thinksoft Global Services Ltd. and FCS Software Solutions Ltd. as comparable companies, despite said companies being comparable to Respondent. 6. That further, AO/DRP erred in upholding action of TPO in excluding FCS Software Solutions Ltd. solely for reason that as result of impact of working capital adjustment on its margin, margin of company stood reduced. 7. That AO/TPO erred in not granting appropriate working capital adjustment while computing margins of companies. 8. That AO erred in reducing communication expenses of Rs. 13,12,380/-and travel expenditure incurred in foreign currency of Rs. 35,02,120/- from export turnover in first place whilst computing deduction under Section 10A of Act. Respondent craves leave to add to or alter, by deletion, substitution or otherwise, above grounds, at any time before or during hearing of appeal. IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 6 Relief. Respondent prays that cross-objections raised by Respondent be allowed and appeal filed by Revenue be dismissed. 2. Brief facts of case are as under: Assessee is private limited company incorporated in India and is wholly owned subsidiary of Emulex international Ltd. It has been recorded by Ld. TPO that as per trans-apprising documentation assessee is engaged in software design and development of software for Emulex group. It has been observed by Ld. TPO that assessee renders software development services to Emulex international Ltd and that assessee is contract service provider. Ld. TPO observed that assessee has entered into following international transaction for year under consideration: International Transaction Amount(in Outcome of TP order Rs.) Income from software development 34,41,32,856 TPO made adjustment services of Rs.3,79,25,998. same was deleted post DRP s directions Payment of employee stock 2,54,27,195 Accepted as being at arm s compensation cost length Payment for secondment of employees 1,76,88,297 Accepted as being at arm s (Reimbursement expenses) length IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 7 3. Ld.TPO observed that assessee has computed margin at TNMM as most appropriate method by using OP/OC as PLI thereby determined 11.37%. For carrying out analysis, assessee had used 16 comparables with margin of 13% and therefore concluded transaction to be at arms length price as assessee s margin was within permissible range of +/-5%. Name of company Mark up on Total cost (without adjustment) Akshay Software Technologies Ltd. 4% Bells Softech Ltd 5% FCS Software Solutions Ltd 30% Helios & Matheson Information Technology Ltd. 16% LGS Global Ltd 15% Mindtree Ltd. 21% Omni xis Sotware Ltd. 2% Persistent Systems & Solutions Ltd. 20% Quinnox Consutlancy Services Ltd 14% Reliance Infosolutions Pvt.Ltd 9% Spry Resources India Pvt.Ltd 28% CCE Software Pvt.Ltd 15% Allied Digital Services Ltd. 13% Octant Industries Ltd 1% Techprocess Solutins Ltd. 10% Maxima Systems Ltd. 5% Number of Companies 16 Mean 13% IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 8 3.1 Ld.TPO thereafter applied several filters and rejected/accepted certain comparables and determined set of 13 comparables with average margin of 23.5% Sl.No. Comparables Selected ted by TPO NCP Margins NCP Margins as per TPO as per TPO order (%) (WC- order (%) (WC- Un-adj) Un-adj, as per TP order) 1 Acropetal Technologies Ltd (Seg.) 31.998 28.32 2 e-Zest Solutions Ltd 21.03 18.63 3 E-Infichips Ltd 56.44 55.64 4 Evoke Technologies Ltd., 8.11 7.69 5 ICRA Techno Analytics Ltd. 24.83 22.46 6 Infosys Ltd 43.39 43.02 7 Larsen & Toubro Infotech Ltd. 19.83 19.50 8 Mindtree Ltd 10.66 8.94 9 Persistent Systems & Solutions Ltd 22.12 20.82 10 Persistent Systems Ltd 22.84 21.27 11 R S Software (India) Ltd. 16.37 15.88 12 Sasken Communication Technologies Ltd 24.13 24.14 13 Tata Elxsi Ltd.(Seg.) 20.91 18.59 Arithmetic Mean 24.82 23.05 Learned TPO thus computed proposed adjustment at Rs. 3, 79, 25, 989/-. 4. Aggrieved by proposed adjustment assessee raised objections before DRP. 5. DRP while considering objections raised by assessee directed exclusion of following comparables: Accropatel Technologies Ltd E-Infochips Ltd IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 9 ICRA Techno Analytics Ltd Infosys Ltd Larsen and Toubro Infotech Ltd and Tata Elxsi Ltd Apart from above comparables DRP suo Moto excluded RS software India Ltd, e-book technologies Ltd and mind 3 Ltd from final list of comparables. DRP also applied new filter being, on-site revenue filter for exclusion of RS software India Ltd, Larsen and Toubro Infotech Ltd and Accropatel Technologies Ltd. Ld.AO upon receipt of DRP directions passed final assessment order by making additions in hands of assessee. 6. Aggrieved by order of Ld.AO, revenue is in appeal and assessee has filed cross objection before us. 7. In revenue s appeal, grounds raised pertains to application of on-site revenue filter selectively to few comparables for rejecting same and for excluding E-Infochips Ltd., on ground of having service income less than 75% of sales which is alleged to be contrary to observations of Ld.TPO. 8. In cross objection filed by assessee it is observed that assessee is challenging exclusion of certain comparables on basis of by Ld.TPO. We first take up appeal filed by revenue in ITA No. 267/Bang/2016 9. Ground no.1 IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 10 This ground has been raised in respect of excluding communication travel expenditure from both export turnover and total turnover. At outset both parties submitted that issue now squarely covered with decision of Hon able Karnataka High Court in case of Tata Elxsi Ltd., vs CIT, reported in ______________________ wherein Hon ble court held that, what is reduced from export turnover should also be reduced from total turnover. It is observed that Ld. CIT (A) granted relief to assessee following aforestated view expressed by Hon ble Karnataka High Court. We do not find any infirmity in view taken by Ld. CIT (A) and same is upheld. Accordingly this ground raised by revenue stands dismissed. 10.Ground No.2-4 Ld.CIT DR submits that, DRP selectively applied on-site revenue filter on following comparables by: RS software Pvt. Ltd., Acropetal Technologies Ltd L&T Infotech Ltd., She submitted that DRP applied on-site revenue filter selectively instead of applying 8 in respect of all comparables. It has been argued by her that application of filter determined is what set of comparables would be displayed on database on which search is carried out. Application of filter to shortlist companies under particular segment is 1st step to conduct transfer pricing analysis. Would she payment clay argued that would once comparables are shortlisted DRP has suo moto applied on-site IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 11 revenue filter and excluded 3 comparables, which is not as per procedures laid down under law. She submitted that on-site revenue filter applied by DRP, neither been applied by assessee in trans-apprising study not been considered by Ld.TPO, while conducting analysis under section 92CA of Act. Placing reliance upon decision of this tribunal in case of ACIT vs Broadcom Communication Technologies Pvt. Ltd., reported in (2017) 88 Taxmann.com 309, she submitted that new filter suo moto cannot be applied by DRP selectively, but should be applied to all comparables. She further submitted that RS Software India Ltd rejected by DRP was acceptable to assessee as well as Ld.TPO. In support of aforestated view she placed reliance upon decisions of Delhi Tribunal in case of DCIT vs Vertex customer services in ITA No.5228/Del/2018 vide order dated 06/11/17 and Aircom International India Pvt. Ltd., in ITA No. 04/04/03/del/2012 wide order dated 19/05/17. It has been contended by her that entire analysis needs to be revisited based upon new filter that has been applied by DRP and therefore needs to be set-aside to Ld.TPO. 11. On contrary Ld.AR submitted that issue of suo moto application of on-site revenue filter by DRP has been addressed by coordinate bench of this Tribunal in case of Autodesk India private limited vs ACIT in ITA(TP)A No.156/Bang/2016 for assessment year 2011-12 vide order dated 21/12/18. He further submitted that IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 12 assessee do not have any objection of RS software India private limited is included as they are functionally similar. 12. We have perused submissions advanced by both sides in light of records placed before us. main grievance of revenue is in respect of on-site revenue filter be applied by DRP suo moto selectively on certain comparables thereby excluding them. On this aspect we agree with contention raised by Ld. CIT DR. However on perusal of observations recorded by DRP to exclude Acropetal Technologies Ltd., L&T Infotech Ltd., on basis of functional dissimilarities brought and that segmental information s are not available in respect of which comparability cannot be analysed. DRP further observed that these comparables are not contract service provider like assessee. Decisions relied upon by Ld. CIT DR of Delhi Tribunal in case of DCIT vs Vertex customer services in ITA No.5228/Del/2018 (supra) and Aircom International India Pvt. Ltd., (supra) does not deal with on-site revenue filter as has been submitted by Ld. CIT DR. Therefore, in our considered opinion, these grounds raised by revenue becomes academic 13. On merits, Ld.CIT DR on issue of functional similarities of these companies with assessee relied upon decision of coordinate bench of this tribunal in case of Mercedes-Benz research and development India private limited vs ACIT reported in (2018) 90 Taxmann.com 300 and submitted that these comparables were sent back to Ld.TPO for re-examination. She thus submitted that, view taken by IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 13 coordinate bench of this Tribunal in Mercedes-Benz research and development India private limited vs ACIT (supra) may be followed. 14. We have perused view of co-ordinate bench of this Tribunal in case of Mercedes-Benz research and development India private limited (supra) in respect of Accropatel Technologies Ltd and L&T Infotech Ltd. It is observed that these comparables were sent back to learn TPO by observing as under: 13. Acropetal Technologies Ltd. ('Acropetal') .. 13.3.1 We have heard rival contentions, perused and carefully considered material on record; including judicial pronouncements cited. We find that DRP has observed that this company, 'Acropetal', operates in three segments and segmental results are available; while on contrary assessee contends that 'Acropetal' operates in four segments. Further, it is seen that even though assessee has raised other issues before DRP, as laid out in para 13.1 of this order, DRP has not rendered any finding thereon. We find that co-ordinate bench of this Tribunal in case of AMD India (P.) Ltd. (supra) relied on by assessee has excluded 'Acropetal' on ground that it fails service income filter of 75%; ground apparently not put forth by assessee before authorities below. 13.3.2 Considering facts and circumstances of case, as discussed above; that DRP has not rendered findings on some of issues raised by assessee before it and there is contradiction in number of segments that this company 'Acropetal' operates in, we are of opinion that it is necessary to remand issue of comparability of this company back to file of DRP for examining and adjudication of issues raised by assessee, after affording assessee adequate opportunity of being heard in matter and to file details /submissions in this regard, which shall be duly considered. We hold and direct accordingly. IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 14 . 16.2 During proceedings before us, learned Authorised Representative for assessee stated that assessee does not wish to press ground related to exclusion of Sasken Communication Technologies Limited; therefore this ground is dismissed as not pressed and consequently Sasken Communication Technologies Ltd. is retained in final list of comparables. 16.3 According to learned Authorised Representative, other two companies were chosen as comparables by assessee in its TP Study itself. learned Authorised Representative however submits that assessee seeks exclusion of L & T Infotech Limited and Persistent Systems Limited, due to more details being now available in public domain which render these two companies as not comparable to assessee and therefore prays that they be excluded from list of comparable companies. 16.4 Per contra, learned Departmental Representative for revenue objected to admission of this additional ground stating that when assessee itself has selected these two companies, authorities below had no occasion to consider objections now raised by assessee before Tribunal. 16.5 After having heard both parties and perused and considered material on record, we find that functional comparability of these two companies i.e. (i) L & T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by ld.AR. By way of this additional ground, assessee is raising objections to inclusion of these companies on issue of functional dissimilarity and other grounds. In our considered view, assessee cannot be precluded from raising objection against inclusion of company even if said company was selected by assessee in its TP Study. This view was taken by Special Bench of ITAT, Chandigarh in case of Dy. CIT v. Quark Systems (P.) Ltd.[2010] 38 SOT 307. As per principles laid down in aforesaid decision of Special Bench (supra), we admit this additional ground raised by assessee seeking exclusion of these two companies (i) L & T Infotech Limited (ii) Sasken Communication IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 15 Technologies Limited without commenting on merits of case and remit matter of their comparability analysis to file of TPO/A.O. for examination of assessee's claim and to adjudicate thereon after providing assessee adequate opportunity of being heard, which shall be duly considered. We hold and direct accordingly. On perusal of aforestated observations by coordinate bench of this tribunal, it is very clear that comparables were remanded for reason that in case of Accropatel, DRP rendered finding that segmental details were available which was contrary to materials that were placed on record. In case of L & T, coordinate bench sent back comparable for reason that financial details which were initially not available on public domain was subsequently available for consideration. In facts of present case there is no such dispute between parties and findings of DRP are concurrent with annual reports placed in paper book filed before us. Thus in our considered opinion these comparables are not functionally similar with that of assessee who is contract service provider working on cost plus business model. It is observed that RS software (India) Ltd, has been excluded by DRP on application of on-site revenue filter . 15. Both parties do not have objection for inclusion of this company. We are therefore of view that this company should be included in list of comparables. IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 16 Accordingly, Ld.TPO is directed to consider this comparable in list. Accordingly Grounds 2-4 raised by revenue stands dismissed. 16. Ground No.8 is in respect of excluding M/s.E-Infochips, by DRP as comparable on ground that it fails service income filter. Ld. CIT DR submitted that TPO while analysing comparables has observed that this company has revenue from software development up to 88% whereas DRP observes that revenue earned by this company is less than 75% and therefore cannot be included. She submitted that basis of determined in revenue by DRP being less than 75% has not been demonstrated and therefore needs to be reconsidered. 17. Ld.AR placed reliance upon decision of coordinate bench of this tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) wherein, E- Infochips Ltd has been excluded for failing in service income filter. 18. We have perused submissions advanced by both sides in light of records placed before us. It is observed that this tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) excluded E- Infochips Ltd., by following view taken by this Tribunal in case of comms Co-opp network (India) private limited vs IT oh in IT (TP) A/Bang/2016 dated 22/02/17 wherein, this company was excluded for reason that there is no segmental information regarding diverse functions performed by this company and that there was major fluctuation in its profits which influenced IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 17 turnover of this company. Further it is observed that in case of DCIT vs M/s CGI Information Systems and management consultations private limited in ITA No. 502/bang/2016 for assessment year 2011-12 wide order dated 06/04/18 has dealt with identical objection raised by Ld. CIT DR before as under: 24. As far as ground No. 4 raised by revenue is concerned, said ground of appeal is weak and any event comparability of companies that were excluded by DRP were on valid grounds contemplated by relevant statutory provisions of act and rules. As far as ground No. 5 in revenue s appeal is concerned, revenue seeks to challenge exclusion of AE Infotech Ltd. On ground that it failed direct software service income filter at 75%. At outset, assessee submits that E Infotech Ltd was excluded by DRP on ground that: (i) no segmental information is regarding its diverse functions is available; (ii) it failed software service income filter and 75%; (iii) there were major fluctuations in profit and turnover every years which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is presence of inventory (page 10 and 11 of DRP s directions). revenue, in its appeal has challenged its exclusion only on 2nd ground. In other words, revenue has not challenged its exclusion on other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and cannot be disturbed by this Hon ble Tribunal. Even otherwise, we are IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 18 of view that DRP rightly arrived at finding that companies software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for year. Thus above action of DRP in rejecting above companies correct. In facts before us revenue is challenging exclusion of this comparable as DRP recorded finding in respect of service income being less than 75%. Other issues considered by DRP in respect of extraordinary event and no segmental information is available has not been challenged before us (page 11 of DRP order). Respectfully following view taken by coordinate bench of this tribunal in DCIT vs M/s CGI Information Systems and management consultations private limited (supra), we direct Ld. TPO to exclude this company. Accordingly this ground raised by revenue stands dismissed. 19.Ground No. 6-7 has been stated to be general in nature and therefore do not require any adjudication. 20. In result appeal filed by revenue stands dismissed. 21. CO No.99/Bang/16 As appeal filed by revenue stands dismissed cross objection filed by assessee does not survive. However, liberty is granted to assessee to challenge inclusion of certain comparables therein in appropriate year. Accordingly cross objections filed by assessee stands dismissed. IT(TP)A No.267(B)/2016 & CO No.99(B)/2018 19 22. In result appeal filed by revenue and cross objection filed by assessee stands dismissed. Order pronounced in open court on 28-08-2019 Sd/- Sd/- (J.SUDHAKAR REDDY) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 28th August, 2019. *am Copy of Order forwarded to 1. Appellant 2. Respondent 3. CIT 4.CIT(A) 5. DR 6. ITO (TDS) 7.Guard File By Order Asst.Registrar DCIT, Circle2(1)(2), Bangalore v. Emulex Communications Pvt. Ltd