Deputy Commissioner of Income-tax, V. Exfo Electro Optical Engg. India Pvt. Ltd., Pune

ITA 1347/PUN/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9258 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-07-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 12-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 1347 /P U N/201 5 / ASSESSMENT YEAR : 20 10 - 11 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE . / APPELLANT VS. EXFO ELECTRO OPTICAL ENGG. INDIA PVT. LTD., OFFICE NO.702, 7 TH FLOOR, TOWER S4, CYBER CITI, MAGARPATTA, HADAPSAR, PUNE 411013 . / RESPONDENT PAN: AABCE6929J / APPELLANT BY : SHRI VIVEK AGARWAL / RESPONDENT BY : NONE / DATE OF HEARING : 2 8 .0 6 . 2017 / DATE OF PRONOUNCEMENT: 07 . 0 7 .201 7 / ORDER PER SUSHMA CHOWLA, J M : TH E APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF CIT (A) - 13 , PUNE , DATED 31.07.2015 RELATING TO ASSESSMENT YEAR 20 10 - 11 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE IN COME - TAX ACT , 1961 (IN SHORT THE ACT) . 2 . THE REVENUE HAS RAISED THE FOLLOWING GROUND OF APPEAL : - 1. WHETHER LD. CIT(A) IN THE FACTS AND CIRCUMSTANCES ERRED BY DIRECTING AO TO EXCLUDE FCS SOFTWARE LTD. AS COMPARABLE WHEN THE DELHI ITAT IN CASE OF NAVISI TE INDIA (P) LTD. (TS 193 ITAT 2013) HAS CARRIED OUT FUNCTIONAL ANALYSIS OF SAID COMPANY AND HELD TO ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. ITA NO. 1347 /P U N/20 1 5 EXFO ELECTRO OPTICAL ENGG. INDIA PVT. LTD. 2 2. WHETHER LD. CIT(A) IN THE FACTS AND CIRCUMSTANCES ERRED BY DIRECTING AO TO EXCLUDE INFOSYS TECHNOLOGIE S LTD. AND L & T INFOTECH LTD. AS COMPARABLE ONLY ON THE GROUND HIGH TURNOVER AND WITHOUT ANALYZING THE FAR OF THE COMPARABLE. 3. FOR THESE AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF HEARING, THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APP EALS) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3. DESPITE SERVICE OF NOTICE, NONE APPEARED ON BEHALF OF THE ASSESSEE NOR ANY APPLICATION WAS MOVED FOR ADJOURNMENT. SINCE THE ISSUE IS COVERED BY THE ORDERS OF TRIBUNAL, WE PROCEED TO D ECIDE THE PRESENT APPEAL AFTER HEARING THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE. 4. IN THIS APPEAL OF REVENUE, THE FIRST ISSUE RAISED BY THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE FCS SOFTWARE L TD. AS COMPARABLE CONTRARY TO THE VIEW TAKEN BY THE DELHI BENCH OF TRIBUNAL IN NAVISITE INDIA (P) LTD. (TS 193 ITAT 2013), WHEREIN THE FUNCTIONAL ANALYSIS OF THE SAID COMPANY WAS CARRIED OUT AND IT WAS HELD TO BE ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOP MENT. THE SECOND ISSUE RAISED BY THE REVENUE IS AGAINST EXCLUSION OF INFOSYS TECHNOLOGIES LTD AND L & T INFOTECH LTD. AS COMPARABLE ONLY ON THE GROUND OF HIGH TURNOVER AND WITHOUT ANALYZING FAR OF THE COMPARABLES. 5. BRIEFLY, IN THE FACTS OF THE CASE, TH E ISSUE WHICH HAS BEEN RAISED BY THE REVENUE IN THIS REGARD IS AGAINST THE ORDER OF CIT(A) IN GIVING CERTAIN DIRECTIONS WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. THE LIMITED ISSUE WHICH ARISES BEFORE US IS AGAINST SELEC TION OF CERTAIN COMPANIES AS COMPARABLES. THE ASSESSEE WAS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES AND THE TURNOVER OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS RS.26.96 CRORES . THE TRANSFER PRICING OFFICE R (TPO) WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE HAD SELECTED 11 CONCERNS AS COMPARABLE. THE ITA NO. 1347 /P U N/20 1 5 EXFO ELECTRO OPTICAL ENGG. INDIA PVT. LTD. 3 ASSESSEE WAS AGGRIEVED WITH THE SELECTION MADE BY THE TPO AND APPLIED BY THE ASSESSING OFFICER AND APPEALED AGAINST THE ORDER OF ASSESSING OFFICER / TPO. 6. THE CIT(A) DIRECTED THAT FCS SOFTWARE LTD, INFOSYS TECHNOLOGIES LTD. AND L & T INFOTECH LTD. ARE TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWA RE SERVICES TO ITS ASSOCIATED ENTERPRISES. 7. THE FIRST OBJECTION RAISED BY THE REVENUE IS AGAINST EXCLUSION OF CONCERN FCS SOFTWARE LTD. FROM THE LIST OF COMPARABLE COMPANIES. THE CIT(A) HAD NOTED FROM THE ANNUAL REPORT OF THE COMPANY THAT THE SAID CO NCERN HAD EARNED 42% OF ITS TOTAL REVENUE FROM IT CONSULTING (SOFTWARE SERVICES), 37% OF REVENUE FROM EDUCATION AND 21% OF THE REVENUE FROM INFRASTRUCTURE MANAGEMENT. THE CIT(A) FURTHER OBSERVED THAT ONLY SEGMENT OF SOFTWARE SERVICES WAS COMPARABLE WITH T HE ASSESSEE. HE FURTHER OBSERVED THAT HOWEVER, SEGMENTAL REVENUE BREAK - UP IS NOT PROVIDED IN THE ANNUAL REPORT. FCSS PROFIT AND LOSS ACCOUNT ONLY GIVES NARRATION AS INCOME FROM SOFTWARE DEVELOPMENT AND OTHER SERVICES. THEREFORE, IN THE ABSENCE OF THE SEGMENTAL ACCOUNTS, THIS COMPANY CANNOT BE ACCEPTED AS COMPARABLE WITH THE ASSESSEE. ACCORDINGLY, I DIRECT THE LEARNED AO TO EXCLUDE FCS SOFTWARE LTD. FROM THE LIST OF THE COMPARABLE COMPANIES. 8 . THE REVENUE IS AGGRIEVED SINCE AS PER THE DECISION OF DELHI BENCH OF TRIBUNAL IN THE CASE OF NAVISITE INDIA (P) LTD. (SUPRA) , IT WAS FOUND THAT THE SAID CONCERN WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. THE CIT(A) HAS ALSO ADMITTED TO THE FACT THAT ONE OF THE ACTIVITIES UNDERTAKEN BY THE SAID CONC ERN WAS IN THE FIELD OF SOFTWARE DEVELOPMENT. HOWEVER, THE SEGMENTAL ITA NO. 1347 /P U N/20 1 5 EXFO ELECTRO OPTICAL ENGG. INDIA PVT. LTD. 4 ACCOUNTS WERE NOT AVAILABLE. SECONDLY, THE SAID CONCERN CANNOT BE SELECTED AS COMPARABLE BECAUSE OF THE FILTERS APPLIED BY THE TPO HI MSELF IN SELECTING THE CONCERNS; ONE OF THE FILTERS WAS COMPANIES WITH INCOME FROM IT SERVICES MORE THAN 50% OF THE OPERATING REVENUE OR SEGMENTAL REVENUE WERE TO BE SELECTED . HOWEVER, THE SAID COMPANY HAD EARNED 42% OF ITS TOTAL REVENUE FROM PROVIDING SOFTWARE SERVICES AND APPLYING THE FILTER SELECTED BY THE TPO, THE SAID CONCERN IS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE. 9 . THE NEXT ISSUE RAISED BY THE REVENUE IS AGAINST EXCLUSION OF INFO SYS TECHNOLOGIES LTD. AND L&T INFOTECH BEING NOT COMPARABLE FOR NOT FULFILLING THE FILTER OF TURNOVER AND ALSO THE BRAND. 10 . WE FIND THAT SIMILAR ISSUE OF EXCLUSION OF INFOSYS TECHNOLOGIES LTD. AND L&T INFOTECH LTD. AROSE BEFORE THE TRIBUNAL IN TIBCO S OFTWARE INDIA PVT. LTD. VS. DCIT IN ITA NO.276/PUN/2015 AND DCIT VS. TIBCO SOFTWARE INDIA PVT. LTD. IN ITA NO.334/PUN/2015, RELATING TO ASSESSMENT YEAR 2010 - 11, ORDER DATED 31.01.2017 AND WAS HELD AS UNDER: - 38. THE ISSUE RAISED IN GROUND OF APPEAL NO.2 I S AGAINST EXCLUSION OF INFOSYS LTD., WHEREIN THE TPO HAD APPLIED THE MARGINS OF INFOSYS LTD., AS THE ASSESSEE ITSELF FOR THREE YEARS WAS SELECTING L & T INFOTECH LTD. BUT WAS CHERRY PICKING IN RESPECT OF INFOSYS LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT FIRST OF ALL, INFOSYS LTD. WAS THE PRODUCT COMPANY, HENCE WAS FUNCTIONALLY NOT COMPARABLE AND IN RESPECT OF L&T INFOTECH LTD., SINCE SEGMENTAL DETAILS WERE AVAILABLE, THE SAME WERE APPLIED TO BENCHMARK THE INTERNATIONAL TR ANSACTION. OUR ATTENTION WAS DRAWN TO THE FINAL SET OF COMPARABLES PREPARED BY THE TPO, WHEREIN ALSO UNDER PARA 24 WHILE ENLISTING THE SAID CONCERNS I.E. L&T INFOTECH LTD., IT HAS BEEN CLARIFIED THAT THE SAID COMPARABLES WERE CONSIDERED AT SEGMENTAL LEVEL AND HENCE, NO WORKING CAPITAL ADJUSTMENT IS TO BE PROVIDED. THE DRP IN VIEW THEREOF, DIRECTED THE TPO TO EXCLUDE INFOSYS LTD. BEING PRODUCT COMPANY. WE FIND NO ERROR IN THE ORDER OF ASSESSING OFFICER / DRP THAT A PRODUCT COMPANY IS NOT FUNCTIONALLY COMP ARABLE TO THE SEGMENT OF PROVISION OF SOFTWARE SERVICES BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES. THE PUNE BENCH OF TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2009 - 10 HAD DIRECTED EXCLUSION OF THE COMPANIES WHICH WERE PRODUCT COMPANIES. VIDE PARA 14 OF THE ORDER RELATING TO ASSESSMENT YEAR 2009 - 10, THE TRIBUNAL HAD DIRECTED EXCLUSION OF FCS SOFTWARE LTD. ON THE PREMISE THAT THE SAID CONCERN WAS A PRODUCT COMPANY. ITA NO. 1347 /P U N/20 1 5 EXFO ELECTRO OPTICAL ENGG. INDIA PVT. LTD. 5 1 1 . FOLLOWING THE SAME PARITY OF REASONING, WE UPHOLD THE ORDER OF CIT(A) IN EX CLUDING INFOSYS TECHNOLOGIES LTD. AND L&T INFOTECH LTD. FROM THE FINAL LIST OF COMPARABLES, WHEREIN THE SAID CONCERNS WERE PRODUCT COMPANIES AND FUNCTIONALLY NOT COMPARABLE. FURTHER, THE SAID CONCERNS ARE NOT COMPARABLE BECAUSE OF HIGH TURNOVER , AS AGAINS T THE ASSESSEE HAVING VERY LOW TURNOVER IN THE FIELD OF PROVISION OF SOFTWARE SERVICES. ACCORDINGLY, THE GROUND OF APPEAL NO.2 RAISED BY THE REVENUE IS DISMISSED. THUS, THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE DISMISSED. 1 2 . IN THE RESULT, THE AP PEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 7 TH DAY OF JU LY , 201 7 . SD/ - SD/ - (ANIL CHATURVEDI ) (SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 7 TH JU LY , 201 7 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPEL LANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - 13 , PUNE ; 4. / THE PR. CIT - 1 , PUNE / CIT(IT/TP), PUNE ; 5. , , / DR B , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE