Saktijit Dey, Judicial Member - This appeal of the assessee is directed against the assessment order dated 26.12.2011 passed under section 143(3) read with section 144C of the Income Tax Act, 1961 on the directions of the Disputes Resolution Panel (in short "DRP") pertaining to the assessment year 2008-2009.
2. The assessee, a company registered under the Indian Companies Act is engaged in the business of providing testing services. The assessee-company has two wholly owned subsidiary companies viz., AppLabs Inc. USA located in USA and AppLabs Technologies (UK) Pvt. Limited, UK which are the Associated Enterprise (AE) of the assessee. The main job of the AEs is to identify customers, develop business relations, execute the contracts with the customers, understand the customer requirements, coordinate between AppLabs India and customers for the service delivery. The AEs are also responsible for collection of sale proceeds. Thus, in essence the AEs outsource the contracts to the assessee, which is responsible to deliver the services. The assessee is a 100% export oriented unit being registered under the software technology park of India scheme of the Government. For the assessment year under dispute, the assessee filed its return of income declaring an income of Rs.70,19,691/-under the normal provisions after claiming deduction under section 10A and book profit of Rs.6,94,02,058/- under section 115JB of the I.T. Act, 1961. Initially, the return was processed under section 143(1) of the Act. Subsequently, assessee's case was selected for scrutiny assessment. In course of scrutiny assessment proceedings, the Assessing Officer noticing that the assessee has entered into International Transactions with its A.E. made a reference to the Transfer Pricing Officer (in short "TPO") for determining the arms length price (in short "ALP"). In its T.P. Study Report the assessee had shown the revenue earned from international transaction with its AE at Rs.90,66,86,494/- for providing software development services. The assessee adopted Transactional Net Margin Method (in short "TNMM") as the most appropriate method and after making a search of the database selected 12 companies as comparables. Since the average arithmetic mean of the comparable companies were found to be within the arms length, no adjustment was made to the price charged for international transaction with its AE.
3. The TPO, however, rejected the T.P. study of the assessee though he accepted TNMM as the most appropriate method. The TPO rejected the 12 comparables selected by the assessee and himself undertook a search process from the data bases by applying certain additional filters and finally selected 15 companies as comparables. The TPO after considering the financial result of the aforesaid companies arrived at the un-adjusted operating margin of the comparable companies at 26.20%. Since the assessee's operating margin shown at 12.00% was not within the acceptable range, the TPO proposed an adjustment of Rs.14,29,00,905/- in the order passed by him under section 92CA(3) of the Act. In consequence of the Order passed by the TPO, the Assessing Officer passed a draft assessment order by incorporating the adjustment proposed by the TPO. Further, the Assessing Officer also made certain adjustments/disallowances while computing deduction under section 10A of the Act.
4. The assessee filed objection against the draft assessment order before the Disputes Resolution Panel (in short "DRP"). Before the DRP, the assessee challenged the findings of the TPO with regard to various issues relating to selection of comparables as well as the TPO not restricting the adjustment to the global profits of the group from the international transactions. The DRP after hearing the submissions of the assessee, so far as the comparables selected by the TPO are concerned, rejected the contention of the assessee excepting in case of 2 of the comparables i.e., Celestial Bio-Labs Limited and Softsol India Limited. While in the case of Celestial Bio-Labs Limited, the DRP held that this company cannot be considered as comparable. So far as Softsol India Limited is concerned, the DRP directed to consider the PLI of the aforesaid company at 25.58%. So far as assessee's contention that if any adjustments is required to be made should be restricted to surplus available to the Aplabs USA and not to the profit of the entire group, the DRP took into view the decision of the Income-tax Appellate Tribunal Delhi bench in the case of Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1 (Delhi) wherein the Income-tax Appellate Tribunal held that the total adjustment made together with the ALP already reported cannot exceed the total revenue earned by the assessee and its AE from third party independent clients. Following the aforesaid view of the Tribunal, the DRP held that adjustments if any, cannot exceed the global profits earned by the group from those transactions. Otherwise, it will amount to imposing an impossible burden on the assessee which cannot be the intendment of the statute. The DRP observed that the essential purpose of TP legislation is only to protect the legitimate tax base of India from being shifted out but it cannot mandate an assessee to earn more than what it has actually earned from independent third parties. With the aforesaid finding the DRP disposed of the assessee's objection. In pursuance to the order passed by the DRP, the TPO passed a consequential order on the basis of which the final assessment order was passed by the Assessing Officer by adding the short fall of Rs.10,12,67,762/- as the transfer pricing adjustment under section 92CA of the Act as recommended by the TPO.
5. At the outset the learned A.R. submitted that the assessee has preferred additional grounds which are as under :
"1. |
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Without prejudice to the other grounds of appeal, the appellant wishes to submit that the learned A.O. in his order (Para No. 4 and page No.6) while giving effect to Hon'ble DRP's directions (Para No.7 and page No.9) has erroneously considered INR 24,25,98,273/- instead of INR 5,39,20,551/- as global profits attributable to impugned international transactions. |
2. |
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Further, the learned A.O. erroneously made transfer pricing adjustment to the international transactions ignoring the fact that the profit retained by AppLabs, Inc USA is nominal and reasonable for the activities carried out." |
6. It was submitted by the learned A.R. that though the issue was raised before the DRP but inadvertently, there was an omission on the part of the assessee to raise the ground which has now been raised by way of additional ground. Considering the submissions of the assessee and also keeping in view the fact that the additional ground raised materially affects the ultimate adjustment that is required to be made, we admit the additional ground and proceed to decide the same as under.
7. It was contended by the learned A.R. that though the DRP while disposing of assessee's objection had accepted the assessee's contention that the adjustment if any, cannot exceed the global profits earned by the group from 'those' transactions but such direction of the DRP has not at all been implemented by the TPO in the consequential order passed by him in pursuance to the order of the DRP. In this context, the learned A.R. also submitted a sworn affidavit of Sri Ashish Khera, Director of the assessee-company. In the said affidavit it has been averred that the DRP in its order had directed that the adjustment cannot exceed the global profit of Rs.5,39,20,551/- earned by the group from the impugned international transaction. Whereas the A.O. has erroneously considered Rs.24,25,98,273/- which is the global profits earned by AppLabs group on account of various business activities at various locations inclusive of impugned international transactions. He, therefore, requested that the issue may be remitted to the Assessing Officer / TPO to pass an order in conformity with the direction of the DRP.
8. The learned D.R. also has no objection on remitting the issue to the file of Assessing Officer for deciding afresh in conformity with the direction of the DRP.
9. We have heard the submissions of the parties and perused the order of the DRP as well as other materials on record in this context. As can be seen, the DRP while considering this issue held as under :
"10. In Ground 7, the applicant requests for considering the consolidated operating results of the AppLabs Group which had lower operating margins during A.Y. 2008-09. Accordingly, it is claimed by the applicant that adjustments if any, should be restricted to surplus available to AppLabs, USA for the year under consideration. The group operating profit margins are given by the applicant as under:
|
Sl. No. |
Particulars |
Applabs India (INR) |
Applabs USA (USD) |
Applabs Group (INR) |
|
1. |
Opening Income (A) |
97,87,75,973 |
36,907,001 |
313,06,73,842 |
|
2. |
Operating Cost (B) |
87,07,75,843 |
35,566,694 |
288,80,75,569 |
|
3. |
Operating Profit (C) (A-B) |
10,80,00,130 |
1,340,307 |
24,25,98,273 |
|
4. |
OP/OC(C/B) |
12.40% |
3.77% |
8.40% |
It is the claim of the Tax payer that it has earned a margin of 12.40% as against 3.77% earned by the AE. At this juncture, reference may be had to the TP study prepared by the applicant to understand the relative functions performed and risks assumed by the applicant in relation to its AE. In para 1 of the Executive Summary to the TP study, the applicant states that Applabs Inc. USA is a 100% subsidiary of Applabs India. The AE in USA is basically a distributor of services to its customers by outsourcing the entire work to Applabs India. The AE in USA undertakes business development and clients services and hence, entitled to earn an appropriate profit for the services performed.
Applabs India owns virtually all the valuable intellectual property rights (know-how, copy rights etc.) and other commercial or marketing intangibles (brand names, trademarks etc.) and is involved in complex operations of developing proprietary technologies. It is assisted by Applabs Group for business development. Applabs India bears all the significant business and entrepreneurial risks of product acceptability and performance in the market. On the other hand, Applabs group has limited risk in these intangibles and is a mere distribution services.
In view of the above, it is claimed by the applicant that the adjustment if any, should have been restricted to the global operating profits and by the Applabs group as a whole. In its support, the applicant has strongly relied on teh decision of Hon'ble ITAT, Delhi in the case of Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1. In this decision, the Hon'ble ITAT held that the total adjustments made together with the ALP already reported cannot exceed the total revenue earned by the appellant and its AEs from third party independent clients. We concur with the assessee on this issue that the adjustments if any, cannot exceed the global profits earned by the group from those transactions. Or else, it amounts to imposing an impossible burden on the assessee which the law does not contemplate. The essential purpose of TP litigation is only to protect the legitimate tax base of India from being shifted out. It cannot mandate an assessee to earn more than what is has actually earned from independent third parties. Hence, the objection of the assessee succeeds and is allowed."
10. On a plain reading of the aforesaid extracted portion, it is very much clear that the DRP has held that adjustments if any, cannot exceed the global profits earned by the group from 'those transactions'. It is further evident from para 11 of the order of the DRP that while summarising its finding the DRP has categorically held that it has allowed the assessee's ground with regard to restricting TP adjustment to the global profits of the group from the international transactions. Therefore, considering the submissions of the parties, in the light of the directions given by the DRP, we remit the issue back to the file of the Assessing Officer for deciding it afresh in confirmity with the direction given by the DRP in para 10 of its order extracted hereinabove.
11. The next issue as referred to in the summary of the argument submitted by the learned A.R. relates to selection of certain companies as comparables by the TPO and which were upheld by the DRP. We shall now consider the submissions of the parties in respect of each of the companies objected to by the assessee hereinbelow.
12. Avani Cincom Technologies : The learned A.R. objecting to the aforesaid company being treated as comparable submitted that the website of the said company indicates that it is engaged in sale of products and services. Therefore, in absence of appropriate segmental break-up with regard to earning of revenue and other details with regard to each of the segment the company cannot be taken as a comparable. He further submitted that the said company has been considered as a comparable by the TPO after obtaining information under section 133(6) of the Act which is not available in the public domain. Hence, the TPO cannot use such information for selecting the company. The learned A.R. submitted that different benches of the Tribunal considering all these aspects have held that the aforesaid company cannot be considered as a comparable. In support of such contention, the learned A.R. relied upon the following decisions :
| (i) |
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Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1/22 taxmann.com 96 (Mum.) |
(ii) |
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Trilogy e-Business Software India (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540/29 taxmann.com 370 (Bang.) |
13. The learned D.R. on the other hand strongly refuting the contentions of the learned A.R. submitted that the assessee having not objected to the aforesaid company being treated as comparable in the proceeding before DRP, it cannot re-agitate the issue again before the Tribunal. The learned A.R. in a rejoinder to such contention of the Departmental Representative, submitted that even if the assessee has not objected to certain comparables, it is not estopped from pointing out a mistake in the assessment order. In support of such contention, the learned A.R. relied upon the decision of the Income-tax Appellate Tribunal, Delhi Bench in the case of Dy. CIT v. MCI Com India (P.) Ltd. [2012] 53 SOT 290/25 taxmann.com 520.
14. We have heard submissions of the parties and perused the material available on record as well as the orders of the revenue authorities. Undisputedly, the assessee has not raised any objection with regard to selection of aforesaid company as a comparable before the DRP. It is for the first time that the assessee has objected to the aforesaid company being treated as comparable before us. Once the assessee has accepted the aforesaid company as a comparable by not raising any objection before the DRP, the issue attained finality so far as the selection of the aforesaid comparable is concerned. The assessee cannot be permitted to raise objection with regard to the said company before the Tribunal once the selection of the said comparable has attained finality. So far as the decision relied upon by the assessee in the case of MCI Com India (P.) Ltd. (supra) the same is not applicable to the facts of the present case as the assessee has not made out a case before us that because of a mistake on the part of the assessee it failed to object to the selection of the aforesaid company as a comparable. In fact, the assessee has not shown any reasonable cause as to why it did not object to the said company before the DRP. In this view of the matter, we are not inclined to accept the assessee's contention which is accordingly rejected.
15. INFOSYS LIMITED & WIPRO LIMITED (SEGMENT): Objecting to the aforesaid companies being treated as comparable, the learned A.R. submitted that Infosys cannot be treated as a comparable because of its brand value and huge turnover. It was submitted that not only Infosys Limited is a giant in the field of I.T. and I.T.E.S. Sector, but, it has its own brand value, economies of scale and cannot be compared with a software service provider like the assessee. It was submitted that Infosys assumes all risks and hence, its profit margin is also more. It also owns substantial intangibles which makes it non-comparable with the assessee. For the same reason the learned A.R. also wanted removal of Wipro Ltd. From the list of comparables. In support of such contention, the learned A.R. relied upon the following decisions :
| (i) |
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Actis Advisors (P.) Ltd. v. Dy. CIT [IT Appeal No. 5277 (Delhi) of 2011, dated 12-10-2012] |
(ii) |
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Agnity India Technologies (P.) Ltd. v. ITO [IT Appeal No. 3856 (Delhi) of 2010, dated 4-11-2010] |
(iii) |
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Deloitte Consulting India (P.) Ltd. [IT Appeal No.1082 (Hyd.) of 2010] |
(iv) |
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Capital IQ Information Systems (India) (P.) Ltd. v. Dy. CIT (International Taxation) [2013] 32 taxmann.com 21 (Hyd.) |
(v) |
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Triniti Advanced Software Labs (P.) Ltd. v. Asstt. CIT [2011] 47 SOT 197(URO)/14 taxmann.com 24 (Hyd.) |
(vi) |
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Adaptec (India) (P.) Ltd. v. Dy. CIT [IT Appeal No. 1801 (Hyd.) of 2009] |
16. The learned D.R. on the other hand, supporting the order of the DRP and TPO submitted that there is no reason to exclude the aforesaid companies from the list of comparables.
17. We have heard the submissions of the parties and perused the materials on record. It is not disputed that Infosys turnover during the impugned assessment year was Rs.15677 crores compared to the assessee's turnover of about Rs.91 crores during the year. Similarly, the turnover of Wipro Limited (Segment) for the relevant financial year was reported at Rs.11258 crores. The Coordinate Bench of this Tribunal in the case of Capital IQ Information Systems India (P.) Ltd. (supra), as well as in many other decisions while considering the issue of selection of aforesaid companies as comparables, had categorically held that not only these companies have high turnover but various other factors like brand value, economies of scale, assumption of risks, owning of intangible make them non-comparable to software development service companies like assessee.
18. Moreover, the Hon'ble Delhi High Court in a recent judgment dated 10.7.2013 in the case of CIT v. Agnity India Technologies (P.) Ltd. [ITA No.1024/2011] affirmed the order of the Income-tax Appellate Tribunal Delhi Bench holding that the companies like Infosys Technologies Ltd. cannot be treated as comparable. In view of the ratio laid down by the Hon'ble Delhi High Court as well as the decision of the coordinate bench, we direct the exclusion of the aforesaid two companies from the list of comparables for determining the Arms Length Price.
19. KALS INFORMATION SYSTEMS LIMITED : Learned A.R. objecting to the aforesaid company being treated as a comparable, submitted that on a review of the annual report of the said company for the year ended 31st March, 2008,it could be observed that the company is into provision of software development services as well as software products. It was submitted that as per page 16 of the annual report of the said company, inventories under the schedules to the financial statements discloses software development as inventory and work-in-progress which proves that it is not a purely software service provider but into development of software products also. He further submitted 'background' under schedule-16 to the financial statements clearly states that the company is engaged in development of software and software products since its inception. It was further submitted that as per the website of the said company, it had developed two products namely virtual insure and la-vision. He, therefore, submitted that the said company being engaged in development of software products cannot be compared to the assessee. He, therefore, submitted that unless adequate revenue/segmental break-up of software development services and software products are available the said company cannot be selected as a comparable. In support of such contention, the learned A.R. relied upon the following decisions :
| (i) |
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Bind View India (P.) Ltd. v. Dy. CIT [2013] 34 taxmann.com 164 (Pune) |
(ii) |
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Trilogy E-Business Software India (P.) Ltd. (supra) |
20. The learned D.R. on the other hand, relied on the order of the DRP and TPO.
21. We have heard the submissions of the parties and perused the materials on record. The main contention of the assessee for removing the aforesaid company from the list of comparables is because of the fact that the said company is engaged in product development also. In this context the learned A.R. has heavily relied upon the annual report of the Kals Information Systems Limited. We find that in case of Bindview India (P.) Ltd. (supra) the Income-tax Appellate Tribunal, Pune Bench has excluded the aforesaid company from being treated as comparable on the ground that it is engaged in development of software products. The same view has also been taken by the Income-tax Appellate Tribunal, Bangalore Bench in the case of Trilogy E-Business Software India (P.) Ltd. (supra) by holding that the company cannot be treated as comparable with a software service provider as it is engaged in development of software products. Therefore, following the view adopted by the Income-tax Appellate Tribunal, Pune Bench and Income-tax Appellate Tribunal, Bangalore Bench as referred to hereinabove, we also direct the Assessing Officer/TPO to remove the aforesaid company from the list of comparable for determining the arms length price.
22. PERSISTENT SYSTEMS LTD. & TATA ELXSI LTD. : The learned A.R. at the outset fairly submitted that the assessee has not objected to the aforesaid two companies being treated as comparable by raising any objection before the DRP. However, the learned A.R. submitted that the said companies cannot be treated as comparable to the assessee on various grounds.
23. The learned D.R. on the other hand, submitted that since the assessee has not objected to the aforesaid company being treated as comparable, he cannot be permitted to raise objection at this stage before the Tribunal.
24. We have heard the submissions of the parties and perused the orders of the lower authorities as well as materials on record. It is not disputed that the aforesaid two companies were not objected to by the assessee being selected as a comparable before the DRP. Hence, in view of our finding in case of another company viz., Avani Cincom Technologies hereinabove, in para 14 of the order, we are not inclined to entertain assessee's objection with regard to the aforesaid companies in view of the fact that the selection of the aforesaid company has attained finality on account of assessee not raising any dispute before the DRP.
25. The next issue raised by the assessee is with regard to rejection of certain companies selected by the assessee as comparables. The companies are as under :
| (i) |
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ICRA Techno Analytics Limited |
(ii) |
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Aditya Birla Minacs IT Services Ltd. |
(iii) |
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Aditya Birla Minacs Technologies Ltd. (Birla Technologies) |
(iv) |
|
CG - VAK Software and Exports Limited |
(v) |
|
Indium Software (India) Limited |
(vi) |
|
Thinksoft Global Services Limited |
26. The learned A.R. of the assessee fairly conceded that the assessee has not raised this issue before the DRP. However, the learned A.R. submitted that these companies are wrongly rejected by the Assessing Officer even though they are comparable to the assessee.
27. The learned D.R. on the other hand, strongly objecting to the assessee's contention submitted that the assessee cannot be permitted to raise an issue which has already attained finality.
28. We have heard the submissions of the parties and gone through the order of the revenue authorities as well as other materials on record. Undisputedly, the assessee has not objected to the Assessing Officer's decision to exclude the aforesaid companies being treated as comparables before the DRP. In aforesaid view of the matter, following our finding in para No.14 hereinabove, we dismiss the ground raised by the assessee.
29. The next issue raised by the assessee is with regard to wrong application of differential ALP adjustment. It was contended by the learned A.R. that the Assessing Officer/TPO has computed the TP adjustment without considering the fact that transaction with AE was only 93% hence any adjustment must be restricted to the extent of transactions with AE. The learned A.R. however, fairly submitted that this issue was not raised before the DRP.
30. Considering the fact that the assessee has not raised this issue before DRP, we are not inclined to entertain this issue raised for the first time before us without there being a valid reason by the assessee to show the reason for not raising this issue before DRP. We, therefore, dismiss this ground of the assessee.
31. In view of our aforesaid observations, we direct the Assessing Officer/TPO to compute the arms length price in accordance with the observations made by us hereinabove.
32. In ground No. 3.1 along with its sub-grounds, the assessee has raised various issues with regard to claim of deduction under section 10A of the Act. However, on perusal of the order of the DRP and other materials on record, it is seen that the assessee has not raised any of the issues relating to the aforesaid grounds before the DRP. The assessee has also not shown any reasonable cause before us why such new grounds would be entertained for the first time before this Forum/Tribunal. In aforesaid view of the matter, we are not inclined to entertain the aforesaid ground of the assessee. Accordingly, ground No.3.1 along with it sub-grounds is dismissed.
33. In ground No. 3.2 the assessee has raised the issue of computation of interest under section 234B of the Act. Levy of interest under section 234B is mandatory and consequential in nature. Since, we have directed the Assessing Officer/TPO to compute the ALP afresh, the issue of charging of interest under section 234B is not required to be adjudicated as this issue is consequential in nature.
34. In the result, appeal of the assessee is partly allowed for statistical purposes.