Case Law Details
M/s. Blue Yonder India Private Limited, (Formerly JDA Software India Private Limited) Vs DCIT (ITAT Bangalore)
E-INFOCHIPS LIMITED- The Annual Report of e-Zest Solutions Limited for assessment year 2010-2011 (placed at page 527 to 534 of the paper book) clearly demonstrates that it is engaged in end to end product development, including product design and development. Thus, it is clearly incomparable to the assessee. Further it has significant inventory (nearly 15% of the income from its operations) which substantiates the assessee’s contention that it is a product development company, and thus incomparable to the assessee which is engaged in rendering routine IT services. In addition, the services rendered by e-Zest Solutions Limited are diverse such as product development, software services, web development, and support services. The company is also engaged in rendering business intelligence and analytical services, which are akin to IT enabled services / Knowledge Process Outsourcing (KPO) services. Since there are no segmental details available in its Annual Report for the above diverse activities, it is apparent that the company is not comparable and the same needs to be excluded from the final list of comparables. In this context, we rely on the order of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. v. DCT [(2014) 42 taxmann.com 333 (BangaloreTrib.)] wherein it has been held that e-Zest Solutions Limited is rendering product development and end to end technical services which comes under the category of KPO services and this cannot be compared to software development providers. The Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. was dealing with the assessment year 2009-2009. However, identical situation remains for this assessment year also viz., 2011-2012. On perusal of activities mentioned in financial of e-Zest Solutions Limited, it is clear that the company continued to come under the KPO services. Therefore, the said company is directed to be excluded from the final list of comparables.
ICRA TECHNO ANALYTICS LIMITED- A perusal of the Annual Report of ICRA Techno Analytics Limited (page 538 to 544 of the paper book), it is clear that the company has significant growth in the business intelligence and analytics space which shows that the activities carried out by ICRA Techno Analytics Limited are different from that the assessee. The revenue recognition policy of the company also shows that the company is engaged in rendering diverse services. The services rendered by the company as per its website also include services akin to IT enabled services / KPO services. The Bangalore Bench of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT (supra) had excluded the company from the final list of comparables.
PERSISTENT SYSTEMS & SOLUTIONS LIMITED- The TPO in the order passed u/s 92CA of the I.T.Act had admitted that the said company is engaged in development products. However, he brushed aside by stating that the product development is nothing but software development services. The Bangalore Benches of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT (supra) had directed the exclusion of the above company from the final list of comparables.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal at the instance of the assessee is directed against assessment order dated 31.12.2015 passed u/s 143(3) r.w.s. 144C(1) of the I.T.Act, pursuant to the Dispute Resolution Panel (DRP)’s direction dated 24.11.2015. The relevant assessment year is 2011-2012.
2. The issues involved in this appeal are as follow:-
(i) Transfer Pricing Adjustment of Rs. 10,51,12,366 towards provision for software development services (reduced to Rs. 10,08,70,033 on giving effect to DRP’s direction).
(ii) Non-receipt of refund for assessment year 2011- 2012.
(iii) Interest u/s 234D of the I.T.Act.
We shall adjudicate the case issue-wise as under:-
A. T.P. Adjustment
3. The solitary ground pressed by the learned AR, viz., ground No.3(d) (revised ground) reads as follow:-
“The AO/TPO/Hon’ble DRP erred on facts and in law in considering Acropetal Technologies Limited, EInfochips Limited, e-Zest Solutions Limited, ICRA Techno Analytics Limited and Persistent Systems & Solutions Limited as comparable to the captive software development services function rendered by the Appellant.”
3.1 Brief facts of the case are as follow:
The assessee is a wholly owned subsidiary of JDA Software Inc. [Associated Enterprises (AE)]. The assessee is primarily engaged in the business of development of software and other allied services to its AE. During the relevant assessment year, the assessee had entered into three international transactions with its AE. One of the international transactions was provision of software development services amounting to Rs. 110,75,19,991. The operating margin of the assessee was declared at 14.87%. The profit level indicator was OP/OC. The details of the same are as follow:-
| Operating Income | Rs.1,10,75,19,991 |
| Operating Cost (Less forex loss) | Rs.96,41,66,619 |
| Operating Profit (Op. income – Op. Cost) | Rs.14,33,53,373 |
| Operating / Net Margin (OP/OC) | 14.87% |
3.2 The assessee in its TP study had adopted methodology of TNMM. The assessee had taken 12 comparable companies. The arithmetical mean of 12 comparables selected by the assessee was 12.16%. Since the assessee’s net margin (OP/OC) was 14.87% compared to arithmetical mean of 12.16% of the comparables, the assessee sought to justify the Arm’s Length Price (ALP) of its international transaction with its AE.
3.3 During the course of assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO). The TPO rejected the assessee’s TP study. Out of the 12 comparables selected by the assessee, the TPO accepted 4 comparables, viz., (i) Evoke Technologies Private Limited, (ii) R.S.Software (India) Limited, (iii) Sasken Communication Technologies Limited, and (iv) Tata Elxsi Limited. The TPO rejected the remaining eight comparables selected by the assessee. The TPO selected fresh comparables. In total, 13 comparables were selected (including the 4 comparables selected by the assessee). The adjusted mean of the comparables selected by the TPO was arrived at 25.58% (after adjustment of Working Capital). The TPO, thereafter calculated the ALP of the international transactions at Rs.121,26,32,357 and since the price received was only Rs.110,75,19,991, the TPO proposed ALP adjustment of Rs.10,51,12,366 u/s 92CA of the I.T.Act. The details of the comparables selected by the TPO, the average margin of the comparables, the computation of ALP and adjustment made are as follow:-
| Comparables selected by TPO and their arithmetic mean: | |||
| Sl. No. | Name of the Company | Mark-up on Total costs (WC – unadj) (in %) | Mark-up on Total costs (WC – adj) (in %) |
| 1. | Acropetal Technologies Ltd. (seg.) | 31.98 | 30.46 |
| 2. | e-Zest Solutions Limited | 21.03 | 20.72 |
| 3. | E-Infochips Limited | 56.44 | 57.92 |
| 4. | Evoke Technologies Private Limited | 8.11 | 9.74 |
| 5. | ICRA Techno Analytics Limited | 24.83 | 24.59 |
| 6. | Infosys Limited | 43.39 | 45.23 |
| 7. | Larsen & Toubro Infotech Limited | 19.83 | 21.64 |
| 8. | Mindtree Limited (seg.) | 10.66 | 10.99 |
| 9. | Persistent Systems & Solutions Limited | 22.12 | 22.94 |
| 10. | Persistent Systems Limited | 22.84 | 23.38 |
| 11. | R.S.Software (India) Limited | 16.37 | 17.97 |
| 12. | Sasken Communication Technologies Limited. | 24.13 | 26.29 |
| 13 | Tata Elxsi Limited (seg.) | 20.91 | 20.71 |
| AVERAGE MARGIN | 24.82 | 25.58 | |
–
| Computation of arm’s length price by the TPO and the adjustment made | |
| Arm’s length mean margin on cost | 24.82% |
| Less : Working capital adjustment | -0.9 5% |
| Adjusted mean margin | 25.77% |
| Opearting cost | Rs.96,41,66,6519 |
| Arm’s Length Price – 125.33% of operating cost | Rs. 12 1,26,32,357 |
| Price Received | Rs.1,10,75,19,991 |
| Shortfall being adjusted u/s 92CA | Rs.10,51,12,366 |
3.4 Aggrieved by the TPO’s order proposing ALP adjustment of Rs.10,51,12,366, the assessee preferred objections before the DRP. The DRP vide its order dated 24.11.2015, directed the following comparables to be excluded by applying the turnover filter:-
(i) Infosys Limited
(ii) Larsen & Toubro Infotech Limited
(iii) Mindtree Limited
(iv) Persistent Systems Limited
(v) Sasken Communications Technologies Limited
(vi) Tata Elxsi Limited.
3.5 Pursuant to the direction of the DRP, the TP adjustment was reworked out at Rs. 10,08,70,033 and the final list of comparables subsequent to the DRP’s order are as follow:-
(i) Acropetal Technologies Limited (seg.)
(ii) e-Zest Solutions Limited
(iii) E-Infochips Limited
(iv) Evoke Technologies Private Limited
(v) ICRA Techno Analytics Limited
(vi) Persistent Systems & Solutions Limited
(vii) R S Software (India) Limited.
3.6 Aggrieved by the adoption of direction of DRP in the final assessment order dated 31.12.2015, the assessee is in appeal before the Tribunal. As mentioned earlier, the assessee is only pressing ground No.3(d) mentioned above, which is seeking to exclude from the list of comparables, the following companies:-
(i) Acropetal Technologies Limited
(ii) e-Zest Solutions Limited
(iii) E-Infochips Limited
(iv) ICRA Techno Analytics Limited
(v) Persistent Systems & Solutions Limited.
3.7 We shall examine each of the comparables which the assessee is seeking to exclude from the list of comparable companies, as under:-
I. ACROPETAL TECHNOLOGIES LIMITED
4. The assessee is seeking to exclude the above company on account of functional dissimilarity. According to the assessee, the above company is engaged in the development of software products, services and solutions. It was further contended that the above company fails the employee costs filter of 25% on sales which the TPO himself has adopted. Lastly it was contended that the above company does not satisfy the TPO’s filter of having 75% of the total operating cost from the software development revenue. The learned Counsel had relied on the following orders of the Bangalore Bench of the Tribunal in the case of (i) Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A Nos. 17 & 39/Bang/2016 – order dated 21.09.2016], (ii) Electronics for Imaging India P. Ltd. v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib.)], and (iii) Commscope Networks (I) Pvt. Ltd. v. ITO [IT(TP)A Nos. 166 & 181/Bang/2016 – order dated 22.02.2017].
4.1 The learned Departmental Representative relied on the TPO’s and DRP’s orders.
4.2 We have heard the rival submissions and perused the material on record. As per the Annual Report for Acropetal Technologies Limited, for the financial year 2011-2011, we noticed that the income from software development services is less than 75% of the total revenue and the company is not comparable towards software development service provider. In this context, the Bangalore Bench of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT (supra) in the case of a similarly placed assessee and for the same assessment year, had held as follows:-
“1 6.4 We have considered the rival submissions as well as the relevant material on record. As per the segmental reporting at page 53 of the Annual Report the income from information Technology Services is Rs.81.40 crores out of the total income of Rs. 141 crores. Therefore the revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy the filter of information technology revenue applied by the TPO itself. Accordingly, we do not find any reason to interfere with the order of the DRP for this issue.”
4.3 In view of the above order of the Tribunal, which had considered a case of a similarly placed assessee and for the same assessment year, we direct exclusion of Acropetal Technologies Limited from the list of comparables. It is ordered accordingly.
II. e-ZEST SOLUTIONS LIMITED
5. The assessee is seeking to exclude the above company from the list of comparables. According to the assessee, the above company is functionally different from the assessee because e-Zest Solutions Limited is engaged in product engineering and software development. It is primarily a product company having presence of inventories and no segmental data is available.
5.1 According to the TPO, the company is engaged predominantly in providing software development services and has only one reportable segment. The DRP affirmed the inclusion of the above company by stating that the TPO has done a detailed analysis before selecting a comparable. The learned Departmental Representative relied on the findings of the TPO and DRP.
5.2 We have heard the rival submissions and perused the material on record. The Annual Report of e-Zest Solutions Limited for assessment year 2010-2011 (placed at page 527 to 534of the paper book) clearly demonstrates that it is engaged in end to end product development, including product design and development. Thus, it is clearly incomparable to the assessee. Further it has significant inventory (nearly 15% of the income from its operations) which substantiates the assessee’s contention that it is a product development company, and thus incomparable to the assessee which is engaged in rendering routine IT services. In addition, the services rendered by e-Zest Solutions Limited are diverse such as product development, software services, web development, and support services. The company is also engaged in rendering business intelligence and analytical services, which are akin to IT enabled services / Knowledge Process Outsourcing (KPO) services. Since there are no segmental details available in its Annual Report for the above diverse activities, it is apparent that the company is not comparable and the same needs to be excluded from the final list of comparables. In this context, we rely on the order of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. v. DCT [(2014) 42 taxmann.com 333 (BangaloreTrib.)] wherein it has been held that e-Zest Solutions Limited is rendering product development and end to end technical services which comes under the category of KPO services and this cannot be compared to software development providers. The Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. was dealing with the assessment year 2009-2009. However, identical situation remains for this assessment year also viz., 2011-2012. On perusal of activities mentioned in financial of e-Zest Solutions Limited, it is clear that the company continued to come under the KPO services. Therefore, the said company is directed to be excluded from the final list of comparables.
III. E-INFOCHIPS LIMITED
6. The learned AR submitted that E-Infochips Limited is to be excluded on the ground that it is functionally dissimilar as it is engaged in rendering software development service, IT enabled services and products. It was submitted that there is no segmental information regarding its diverse functions. It was further submitted that it is an IP driven company and it undertakes R & D activities. Further, it was submitted that it fails the software service income filter at 75%.
6.1 The TPO held that 88% of the company’s revenue is from software development services, hence, qualifies as a comparable. The DRP confirmed the view by holding that TPO has done a detailed analysis before selecting a comparable. The learned Departmental Representative supported the order of the TPO and DRP.
6.2 We have heard the rival submissions and perused the material on record. The above company is engaged in diverse activities such as product development and provisions for IT enabled services for which no separate segmental information is available in its Annual Report. On the contrary, the diverse activities of software development and IT enabled services are considered and reported together in one segment. Thus, in the absence of such segmental details, the company is functionally not comparable to assessee which is a captive software development provider. Further, E-Infochips Limited has also presence of inventory and therefore, incomparable to assessee. Moreover, the company’s software development service revenue for the relevant year was less than 75% of its total operating revenue. The Bangalore Benches of the Tribunal in the case of Electronics for Imaging India (P.) Ltd. v. DCIT reported in 85 taxmann.com 124 (Bangalore-Trib.), in a similarly placed assessee, had directed the exclusion of the above said company from the list of comparables. The relevant finding of the Bangalore Benches of the Tribunal in the case of Electronics for Imaging India (P.) Ltd. (supra) reads as follow:-
“10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs.3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit fro0m software development services, we order to exclude this company from the list of comparables.”
6.3 In the light of the above order of the Tribunal and the aforesaid reasons, we direct E-Infochips Limited to be excluded from the list of comparables.
IV. ICRA TECHNO ANALYTICS LIMITED
7. The assessee seeks exclusion of ICRA Techno Analytics Limited on the ground that it is functionally incomparable to the assessee. According to the assessee ICRA Techno Analytics Limited is engaged in diversified activities such as software development, consultancy services, engineering services, web development and hosting services. It was further submitted that ICRA Techno Analytics Limited concentrates in niche areas of business intelligence and analytics space.
7.1 According to the TPO, just because the company analysis statistical data of the client before providing software solution services does not make the company functionally dissimilar (page 9 of the TPO’s order). The view taken by the TPO was affirmed by the DRP. The learned Departmental Representative supported the order of the TPO and DRP.
7.2 We have heard the rival submissions and perused the material on record. A perusal of the Annual Report of ICRA Techno Analytics Limited (page 538 to 544 of the paper book), it is clear that the company has significant growth in the business intelligence and analytics space which shows that the activities carried out by ICRA Techno Analytics Limited are different from that the assessee. The revenue recognition policy of the company also shows that the company is engaged in rendering diverse services. The services rendered by the company as per its website also include services akin to IT enabled services / KPO services. The Bangalore Bench of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT (supra) had excluded the company from the final list of comparables. The relevant finding of the Bangalore Benches of the Tribunal reads as follow:-
“17.2 We further note that the Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in paras 14 to 16 as under : ” (1) ICRA Techno Analytics Ltd. (seg)
14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:-
“Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables.”
15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE.
16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider.”
Nothing has been brought before us to show that the facts recorded by the DRP as well as by the co-ordinate bench of this Tribunal are not correct. Accordingly, in view of the decision of the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in the order of the DRP on this issue.”
7.3 In view of the above said reasoning and the Bangalore Benches of the Tribunal in the case of Applied Materials India Pvt. Ltd. (supra), we hold that the above company is to be excluded from the final list of comparables.
V. PERSISTENT SYSTEMS & SOLUTIONS LIMITED
8. The learned AR is seeking to exclude the above company on account that it is not functionally comparable to the assessee. It was stated that the company is engaged in software development, consultancy and systems integration. It owns products and R & D activities. It was stated that the segmental results are not available. The learned AR relied on the order of the Bangalore Benches of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT (supra), Electronics for Imaging India P. Ltd. v. DCIT (supra) and Commscope Networks (I) Pvt. Ltd. ITO (supra).
8.1 According to the TPO, product development is nothing but software development services, and therefore, the company is comparable to the assessee. The view taken by the TPO was confirmed by the DRP. The learned Departmental Representative supported the order of the TPO and the DRP.
8.2 We have heard the rival submissions and perused the material on record. The TPO in the order passed u/s 92CA of the I.T.Act had admitted that the said company is engaged in development products. However, he brushed aside by stating that the product development is nothing but software development services. The Bangalore Benches of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT (supra) had directed the exclusion of the above company from the final list of comparables. The relevant finding of Bangalore Benches of the Tribunal in the case of Applied Materials India Pvt. Ltd. (supra) in excluding Persistent Systems & Solutions Limited reads as follow:-
“9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) in para 60 and 61 & paras 24 to 26 as under:
“Persistent Systems & Solutions Ltd.
60. The assessee has the grievance against rejection of this company by the DRP. The Id. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables.
61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs. 6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. This ground of CO is dismissed.
………………………”
We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we direct the AO / TPO to exclude these two companies from the set of comparables.”
8.3 In the light of the above reasoning and the order of the Tribunal in the case of Applied Materials India Pvt. Ltd. (supra), we direct that Persistent Systems & Solutions Limited to be excluded from the list of comparables.
8.4 Since we have directed the exclusion of five comparables, the final list of comparable is only Evoke Technologies Private Limited and R S Software (India) Limited. The assessee’s margin being 14.87% for provision for software development services would be more than the arithmetical means of the working capital adjusted margin of the above two comparables. Therefore, the international transaction of provision of software development services by the assessee to its AE for the relevant assessment year is to be concluded as being at Arm’s length. It is ordered accordingly.
8.5 In the result, ground No.3(d) is allowed.
B. Non-receipt of refund for the assessment year 2011- 2012
9. In the draft assessment order, the Assessing Officer had stated that refund of Rs. 1,08,37,220 has been already issued to the assessee u/s 143(1) of the I.T.Act for the assessment year 2011-2012. However, the learned AR submits before the Tribunal that the assessee is not in receipt of any refund pertaining to the said assessment year.
9.1 We have heard the rival submissions and perused the material on record. The DRP in the impugned order dated 24.11.2015, had directed the A.O. to verify the objections of the assessee and take necessary action in the matter. However, we find that in the final assessment order dated 31.12.2015, no such examination / verification has been done by the A.O. Therefore, we direct the A.O. to examine the objections of the assessee whether it was not in receipt of refund of Rs. 1,08,37,220 for the relevant assessment year.
9.2 In the result, ground No.7 is allowed for statistical
C. Interest u/s 234D of the I.T.Act
10. Calculation of interest u/s 234D of the I.T.Act is only consequential to the issue raised in ground No.7. Since the issue raised in ground No.7 has been remitted to the A.O. for his verification / examination, this ground is rendered infructuous and it is accordingly dismissed.
11. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this day of 19th October, 2020.
