Wabco India Limited, CHENNAI V. DCIT, CHENNAI

CO 51/CHNY/2015

• Counselvise Citation: [2016] 112 COUNSELVISE.COM (IT) 4261 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 3 month(s) 17 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 23-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 20-09-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 05-06-2015
• Court: TRIBUNAL
• Department Lawyers: M BALASUBRAMANIYANCA
• Assessee Lawyers: JAIRAM RAIPURA
• Keywords: Transfer pricing; International transaction
• Section: 201

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.883/MDS./2015 & C.O NO.51/MDS./2015 / ASSESSMENT YEAR : 2010-11 DEPUTY COMMISSIONER OF INCOME TAX, CORPORTECIRCLE-3(2), CHENNAI -34. VS. M/S.WABCO TVS LTD ., NO.29,JAYALAKLSHMI ESTATE, HADDOWS ROAD, NUNGAMBAKKAM, CHENNAI 600 034. [PAN AAFCA 6421 P ] ( $% / APPELLANT) ( &'$% /RESPONDENT/ CROSS OBJECTOR ) / APPELLANT BY : MR.JAIRAM RAIPURA, CIT D.R /RESPONDENT BY : MR.M.BALASUBRAMANIYAN,CA / DATE OF HEARING : 20 - 0 9 - 201 6 !' / DATE OF PRONOUNCEMENT : - 0 9 - 2016 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THE APPEAL OF THE REVENUE IS DIRECTED AGAINST TH E DIRECTION OF THE DISPUTE RESOLUTION PANEL, CHENNAI (DRP) PASS ED U/S.144C OF THE ITA NO. 883/MDS./2015 CO NO.51/MDS./15 :- 2 -: ACT DATED 16.12.2014 PERTAINING TO ASSESSMENT YEA R 2010-11 AND THE ASSESSEE FLED A CROSS OBJECTIONS IN SUPPORT OF THE ORDER OF DRP. 2. THE REVENUE IN ITS APPEAL CHALLENGING THE DIRE CTION OF THE DRP EXCLUDING THE FOLLOWING COMPARABLES CONSIDERED BY THE TPO. I) KALS INFORMATION SYSTEMS LTD. II) SPRY RESOURCES INDIA PVT LTD. III) TAKSHEEL SOLUTIONS LTD., 3. THE FACTS OF THE ISSUE ARE THAT IN THE TRANSFER PRICING ADJUSTMENTS, THE TPO HAD ARRIVED AT ARMS LENGTH PR ICE (ALP) OF OPERATING MARGIN OF COMPARABLE COMPANIES AT 23.87% AS AGAINST OPERATION PROFIT ON TOTAL COST OF THE ASSESSEE AT 1 4.51%. ON THIS BASIS, TPO HAS DETERMINED SHORTFALL IN PLI OF THE ASSESSEE AT 9.36% AND AN UPWARD ADJUSTMENT OF ` 81,48,600/- WAS MADE TO THE INTERNATIONAL TRANSACTIONS RELATING TO RENDERING OF SOFTWARE DEVE LOPMENT TO ITS AE. 4. BEFORE THE DRP, THE ASSESSEE OBJECTED THE FOLLOW ING COMPARABLES SELECTED BY THE TPO. (A) FCS SOFTWARE SALES LTD . THE ASSESSEE CONTENDS THAT REVENUE IS GENERATED F ROM IT CONSULTING, EDUCATION AND INFRASTRUCTURE MANAGEMENT WHEREAS THE ASSESSEE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTW ARE SERVICES FOR CAPTIVE CONSUMPTION. ITA NO. 883/MDS./2015 CO NO.51/MDS./15 :- 3 -: TPO HAS STATED THAT THE COMPARABLE AKSHAY IS SI MILAR FUNCTIONAL PROFILE. SINCE BOTH AKSHAY AND FCS SOFTW ARE SOLUTIONS ARE HAVING MULTI-VERTICALS, TPOS ACTION OF INCLUSION O F THIS COMPARABLE IS JUSTIFIED. (B) KALS INFORMATION SYSTEMS LIMITED THE ASSESSEE OBJECTS TO THE INCLUSION OF THIS COMPARABLE STATING THAT THE COMPARABLE SELECTED IS ENGAGED IN PROVIDING SOFTWAR E SECURITY AND SALE OF SOFTWARE PRODUCTS WHEREAS THE COMPANY IS ENGAGED IN DEVELOPMENT OF CAPTIVE SOFTWARE. TPO IN THE ORDER HAS STATED THAT PREDOMINANT REVENUE COMES FROM APPLICATION SOFTWARE. SINCE NO SEGMENTAL DATA OF SOFTWARE DEVELOPMENT AND SOFTWARE SALES ARE AVAILABLE, AO IS DIRECTED TO EXCLUDE THIS COMPARABLE. (C) ICRA TECHIIO ANALYTICS LIMITED ASSESSEE CONTENDS THAT REVENUE IS GENERATED FROM TH E SALE OF PRODUCT AS WELL AS FROM RENDERING FROM SERVICE AND THEREFORE T HIS COMPARABLE IS DISSIMILAR. TPO HAS STATED IN THE ORDER THAT SEGMEN TAL INFORMATION SHOWS THE REVENUES AND RESULTS FROM THE SERVICES AND SALE OF SOFTWARE PRODUCTS SEPARATELY. THE PROFIT FROM SERVICES SEGMENT ALONE WAS CONSIDERED FOR BENCHMARKING AND THEREFORE HAS NOT ACCEPTED THE ASS ESSEES OBJECTIONS. CONSIDERING THE ABOVE FACTS, TPOS ACTION OF INCLUS ION OF THIS COMPARABLE IS JUSTIFIED. (D) SPRY RESOURCES INDIA PVT LTD ITA NO. 883/MDS./2015 CO NO.51/MDS./15 :- 4 -: IN RESPECT OF THIS COMPARABLE, ASSESSEE CONTENDS TH AT REVENUE IS EARNED FROM SOFTWARE CONSULTANCY AND SALE OF SOFTWARE PROD UCTS WHEREAS THE ASSESSEE COMPANY IS ENGAGED IN DEVELOPMENT OF CAPTI VE SOFTWARE. SEGMENTAL INFORMATION IS NOT AVAILABLE. TPO HAS STA TED THE PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31.3.2010 OF THIS COMPAR ABLE SHOWED THAT IT HAS EARNED INCOME IN FOREIGN EXCHANGE FROM SOFTWARE DEV ELOPMENT TO THE TUNE OF RS.2.29 CRORES. SINCE BREAKUP OF SOFTWARE SALES AND SERVICES IS NOT AVAILABLE, AO/TPO IS DIRECTED TO EXCLUDE THIS COMPA RABLE. (E) TAKSHEEL SOLUTIONS LTD THE ASSESSEE CONTENDS THAT IN RESPECT OF THIS COMPA RABLE, EMPLOYEE COST TO THE TOTAL REVENUE IS 2.83%, WHEREAS IN THE CASE OF THE ASSESSEE IT IS 56.4%. SEGMENTAL FINANCIALS ARE NOT AVAILABLE. TPO HAS STA TED THAT THE ACTUAL EMPLOYEE COST IS RS.33.95 CRORES AS AGAINST RS.2.53 IN THE PROWESS DATABASE BY MISTAKE. FROM THE ANNUAL REPORT OF THE COMPARABLE COMPANY, I T IS OBSERVED THAT IT IS MAINLY ENGAGED IN THE AREA OF SOFTWARE SERVICES AND THEREFORE IT IS STATED THAT SEGMENTAL REPORTING IS NOT APPLICABLE. CONSIDE RING THE ABOVE POSITION, AO/TPO IS DIRECTED TO EXCLUDE THIS COMPARABLE. 5. NOW, LD.D.R SUBMITTED THAT THE DEPARTMENT CHALL ENGING THE EXCLUSION OF KALS INFORMATION SYSTEMS LTD., SPRY RE SOURCES INDIA PVT LTD. AND TAKSHEEL SOLUTIONS LTD., FROM THE COMPARAB LES CHOSEN BY THE TPO TO BENCHMARK THE INTERNATIONAL TRANSACTIONS. ITA NO. 883/MDS./2015 CO NO.51/MDS./15 :- 5 -: (I) KALS INFORMATION SYSTEMS LTD. THE DRP RELIED ON THE ASSESSEES OBJECTION THAT THE COMPARABLE IS ENGAGED IN BOTH PROVIDING SOFTWARE SE RVICES AND ALSO SALE OF SOFTWARE PRODUCTS AND IN THE ABSENCE OF SEG MENTAL DATA AVAILABLE FOR THE TWO ACTIVITIES, THE DRP DIRECTED TO EXCLUDE THE COMPARABLE. CONTRARY TO THE OBSERVATION OF THE DRP, PERUSAL OF THE FINANCIAL STATEMENTS OF THE COMPARABLE COMPANY SHOW S THAT IT IS PREDOMINANTLY PROVIDING ONLY SOFTWARE DEVELOPMENT S ERVICE. ACCORDING TO LD.D.R, THE DELHI BENCH OF TRIBUNAL IN M/S.AGLLENT TECH. INFORMATION LTD. (A.Y 2008-09) UP HELD THAT THE COMPANY SHOULD BE CONSIDERED AS A COMPARABLE. THE D EPARTMENTAL REPRESENTATIVE HAS FURTHER SUBMITTED THAT AS FOLLOW S. (II) SPRY RESOURCES INDIA PVT LTD. THE DRPS DIRECTION TO EXCLUDE THE SAID COMPARABL E IS BASED ON THE REASON THAT THE FINANCIALS OF THE COMPARABLE COMPANY DOES NOT SHOW THE BREAKUP OF REVENUE FROM SALE OF SOFTWARE A ND FROM PROVISION OF SOFTWARE SERVICES. ACCORDING TO LD.D.R, THE COMPARABLE IS INTO PROVI DING SOFTWARE DEVELOPMENT SERVICE ONLY AND THE OBSERVATI ON IN THE FINANCIAL ON THE METHOD OF RECOGNITION OF REVENUE WITH RESPEC T TO SOFTWARE DEVELOPMENT AND SALE OF SOFTWARE IS MORE GENERIC IN NATURE AND DOES ITA NO. 883/MDS./2015 CO NO.51/MDS./15 :- 6 -: NOT PROVE THAT THE ENTITY IS GENERATING REVENUE FRO M SALE OF SOFTWARE IN ANY SIGNIFICANT MANNER. THE DRP FOR THAT MATTER HAS APPROVED THE TPOS CH OICE OF M/S.AKSHAY SOFTWARE TECH LTD AS A COMPARABLE, EVEN THOUGH THE FINANCIALS OF THE SAID COMPARABLE ALSO HAS A SIMILA R REMARK ON RECOGNITION OF REVENUE FROM PROVISION OF SOFTWARE A ND SALE OF SOFTWARE. (III) TAKSHEET SOLUTIONS LTD., THE DRPS DIRECTION TO EXCLUDE THE SAID COMPARABL E IS BASED ON THE REASON THAT THE SAID COMPARABLE IS NOT ENGAG ED IN THE PROVISION OF SOFTWARE DEVELOPMENT AS THE EMPLOYEE COST AS A P ERCENTAGE OF REVENUE WAS ONLY 2.83%. THE OBSERVATION OF THE DRP IS INCORRECT. IT IS FA CTUALLY FOUND CORRECT THAT THE EMPLOYEE COST AS A PERCENTAGE OF R EVENUE WAS 68.57%. THIS IS CONCLUSIVE PROOF OF THE FACT THAT T HE COMPARABLE IS INTO PROVISION OF SOFTWARE SERVICE ONLY. HENCE, THE EXCL USION OF THIS COMPARABLE IS NOT JUSTIFIED. 6. LD.A.R SUBMITTED THAT KALS INFORMATION SYSTEMS LTD. IS ENGAGED IN DIFFERENT LINE OF BUSINESS , NAMELY IN P ROVIDING SOFTWARE SERVICES. AS AGAINST THIS, THE ASSESSEE IS ENGAGED IN PRODUCTION OF CAPTIVE SOFTWARE DEVELOPMENT, NO SEGMENT DATA OF SO FTWARE AND ITA NO. 883/MDS./2015 CO NO.51/MDS./15 :- 7 -: SOFTWARE SOLUTIONS ARE AVAILABLE. AS SUCH THE DRP I S DIRECTED TO EXCLUDE THE SAME FROM COMPARABLE. 6.1 REGARDING SPRY RESOURCES INDIA PVT LTD., LD.A. R SUBMITTED THAT IT IS ENGAGED IN IMPARTING CORPORATE TRAINING. FURTHER, NO BREAK UP IS AVAILABLE FOR INCOME FROM SALE OF PRODUCTS AND R ENDERING OF SERVICES. MORE SO, ASSESSEE CANNOT BE COMPARED WITH THE ACTIV ITIES OF SPRY RESOURCES INDIA PVT LTD., AS THEIR FUNCTIONAL DIFFE RENT. 6.2 REGARDING TAKSHEEL SOLUTIONS LTD., LD.A.R SUBM ITTED THAT IT IS AN EMPLOYEE COST TO TURNOVER RATIO IS 2.83% AS AGAI NST 56.4% OF THE ASSESSEE. HENCE, IT CANNOT BE COMPARED. FURTHER, HE SUBMITTED THAT THE TURNOVER OF SPRY RESOURCES INDIA PVT LTD., TAKS HEEL SOLUTIONS LTD., IS VERY MEAGER AS AGAINST THE TURNOVER OF ` 1,000/- CRORES OF ASSESSEES COMPANY. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, IN OUR OPINION AS RIGHTLY OBS ERVED BY THE DRP, NO SEGMENTED DATA OF KALS INFORMATION SYSTEMS LTD. IS AVAILABLE ON PUBLIC DOMINION. EVEN BEFORE US, THE LD.D.R IS NOT ABLE TO SHOW THAT SEGMENTED DATA OF KALS INFORMATION SYSTEMS LTD. COU LD BE MADE AVAILABLE TO TPO. HENCE, RIGHTLY POINTED OUT BY THE LD.A.R KALS INFORMATION SYSTEMS LTD. DERIVES ITS REVENUE PRIMAR ILY FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS. IT IS ALSO GETTING INCOME FROM TRAINING, UNLESS AND UNTIL THE SEGMENT DATA IS AVAILABLE REGA RDING PROVIDING ITA NO. 883/MDS./2015 CO NO.51/MDS./15 :- 8 -: SOFTWARE SERVICES, IT IS NOT POSSIBLE TO COMPARE KA LS INFORMATION SYSTEMS LTD. WITH THE ASSESSEE. BEING SO EXCLUSION BY THE DRP FROM THE COMPARABLE IS JUSTIFIED. THIS GROUND OF THE REV ENUE IS DISMISSED. 8. THE NEXT GROUND IS WITH REGARD TO SPRY RESOURCE S INDIA PVT LTD., NO BREAK UP IS AVAILABLE FOR INCOME FROM SALE OF SOFTWARE PRODUCTS AND RENDERING SERVICES AND IT CANNOT BE CO MPARED WITH THE ASSESSEE THAT IS LESS THAN 10% OF THE TURNOVER OF THE ASSESSEES TURNOVER. BEING SO, AS HELD BY THE BANAGALORE BENCH OF THE TRIBUNAL IN THE CASE OF FIBRE AND FAHNA INTERNATIONAL LTD. VS. DCIT REPORTED IN 160 ITD 102(BANG.), COMPANIES HAVING TURNOVER OF LE SS THAN 10% OF THE ASSESSEE COULD NOT BE SELECTED AS COMPARABLES SO AS TO DETERMINE THE ALP. IN OUR OPINION, THE DRP IS JUSTIFIED IN E XCLUDING THE SPRY RESOURCES INDIA PVT LTD. FROM THE COMPARABLES. ACCO RDINGLY, THIS GROUND OF REVENUE IS REJECTED. 9. REGARDING TAKSHEEL SOLUTIONS LTD., THE EMPLOYE E COST TO TURNOVER RATIO OF IT IS ONLY 2.83% A AGAINST THE A SSESSEES EMPLOYEE COST TO TURNOVER IS 56.4%. SINCE THERE IS A WIDE G AP IN EMPLOYEES COST WHEN COMPARED TO THESE TWO COMPANIES, IT IS NOT APP ROPRIATE TO CONSIDER THE TAKSHEEL SOLUTIONS LTD., AS COMPARABLE TO THE ASSESSEE. ACCORDINGLY, WE ARE OF THE OPINION THAT THE DRP HAS TAKEN A CORRECT OF ITA NO. 883/MDS./2015 CO NO.51/MDS./15 :- 9 -: THE FACTS OF THE CASE IN REJECTING THE TAKSHEEL SOL UTIONS LTD., AS COMPARABLE. ACCORDINGLY, THIS GROUND OF THE REVENUE IS ALSO REJECTED 10. SINCE WE HAVE DISMISSED THE APPEAL OF REVENUE, THE CROSS OBJECTIONS FILED BY THE ASSESSEE IS ALSO DISMISSED AS INFRUCTUOUS. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND CROSS OBJECTIONS FILED BY THE ASSESSEE IS DISMI SSED. ORDER PRONOUNCED ON 23 RD SEPTEMBER, 2016, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 23 RD SEPTEMBER, 2016 K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF