IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM
ITA No.122/Del/2013
Assessment Year : 2008-09
Global Logic India Pvt. Ltd., Vs. DCIT,
G-52, Vardhman Corporate Plaza, Circle 12(1),
Netaji Subhas Place, New Delhi.
New Delhi.
PAN : AABCI2526F
(Appellant) (Respondent)
Assessee By : Shri Ajay Vohra, Sr. Advocate,
Shri Neeraj Jain, Advocate, Sh.
Abhishek Agarwal CA &
Sh. Ashutosh Gupta, CA
Department By : Shri Gunjan Prasad, CIT, DR &
Sh. Gaurav Dudeja, Senior DR.
Date of Hearing : 03.06.2015
Date of Pronouncement : 04.06.2015
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee is directed against the order passed by
the Assessing Officer (AO) under section 143(3) read with section 144C
ITA No.122/Del/2013
of the Income-tax Act, 1961 (hereinafter also called `the Act') in relation
to the assessment year 2008-09.
2. The only issue in this appeal is a challenge to the addition on
account of transfer pricing adjustment amounting to Rs.12,82,48,777/-.
3. Succinctly, the assessee is an Indian company, a wholly owned
subsidiary of Global Logic, US. It is engaged mainly in the provision of
software development services to its overseas group companies. The
assessee reported two international transactions as per its Audit Report
in Form No.3CEB. The entire controversy in this appeal is restricted to
the international transaction of `Provision of software development
services' with the transacted value of Rs.158,09,04,878/-. The other
international transaction of `Reimbursement of expenses' has been
accepted by the authorities to be at arm's length price (ALP). On a
reference made by the AO to the Transfer Pricing Officer (TPO) for the
determination of the ALP, the latter noticed that the assessee employed
Transactional Net Margin Method (TNMM) to demonstrate that the
international transaction of `Provision of software development services'
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was at ALP. The assessee chose Profit Level Indicator (PLI) of
Operating Profit/Total Cost (OP/TC). The assessee selected 23
companies as comparable. The mean margin of such comparables, on
the basis of current/multiple-years data was computed at 14.84%. As the
assessee's OP/TC stood at 12.47%, it was claimed that the international
transactions were at ALP. The TPO shortlisted 19 companies as
comparable and computed the arithmetical mean of their PLI at 24.82%,
after allowing working capital adjustment of 1.38%. In such calculation,
the TPO used current year data alone. By applying arm's length margin
at 24.82%, the TPO worked out the amount of transfer pricing
adjustment at Rs.18,95,48,030/-. The assessee remained partly
successful before the Dispute Resolution Panel (DRP), which reduced
the amount of addition on account of transfer pricing adjustment to
Rs.12,82,48,777/- as against Rs.18.95 crore proposed by the TPO. The
AO made addition of Rs.12.82 crore and odd in the final assessment
order passed on 19.10.2012. The assessee is aggrieved against this
addition made towards transfer pricing adjustment.
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4. We have heard the rival submissions and perused the relevant
material on record. The assessee has accepted all the aspects of the
transfer pricing analysis carried out by the TPO except the inclusion of
the following companies in the list of comparables:-
i. Avani Cincom Technologies
ii. Infosys Ltd.
iii. Kals Information Systems Ltd. (Seg.)
iv. Persistent Systems Ltd.
v. Tata Elxsi (Seg.)
vi. Wipro Ltd (Seg.)
5. In order to analyse the comparability or otherwise of the above
referred companies, it is necessary to consider the functional profile of
the assessee under this international transaction. The TPO has recorded
on page 2 of his order that the assessee `is engaged in the provision of
software development services to its overseas group company'. Apart
from that, there is no description of the nature of activity carried out by
the assessee in the TPO's order. On adverting to the Transfer pricing
study report, a copy of which is available on pages 40 onwards of the
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paper book, we find some further elaboration of the nature of activity
done under the international transaction of `Provision of software
development services.' Page 21 of the TP study report indicates that the
assessee renders software development services to its associated
enterprises (AEs) and gets remunerated on a cost plus mark-up basis for
these services. There is a narration of `Functions performed' in para
4.02.2 of the TP study report qua the international transaction of
`Provision of software development services'. It can be observed that
the functions performed by the assessee under this segment are
Provisions of Services, Testing & Quality control, Project management,
Administrative Support and, to a limited extent, the Marketing functions.
The following functions have been reported to have been done by the
assessee under the above referred sub-heads:-
"Marketing Function
GlobalLogic Inc and GIPL's marketing staff initiates contact directly
with a potential client. Thereafter, GlobalLogic Inc prepares and
submits a proposal to the client, irrespective of whether the client lead
is provided by GIPL or GlobalLogic Inc., giving the scope and the
technical aspects of the project. Bid costs are borne by GlobalLogic
Inc.
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Hence, though primary responsibility for identification of customers
and marketing the GlobalLogic Groups' services lies with
GlobalLogic Inc., GIPL also undertakes marketing function to the
extent of identification of client leads.
Provision of Services
GIPL is responsible for development of software under the projects
sub-contracted to it by GlobalLogic Inc, GIPL employs the resources
required for development of software, both in respect of on-site or off-
shore projects. However GlobalLogic Inc, retains overall project
management responsibility for the entire contract with the end-
customer. This includes all financial responsibility for the work as
well as billing.
Testing & Quality Control
The last step involves testing the software that has been developed.
GIPL has the responsibility of testing the software. GIPL has quality
control departments which adopts the quality control procedures at par
with the industry. This department is inter alia involved in process
improvisations, making of new processes, quality audits, customer
surveys, etc.
Project Management
GIPL is responsible for ensuring timely delivery of the software
developed by it under the contract. However, GlobalLogic Inc is
ultimately responsible to deliver the software to the client.
Administrative Support
With respect to personnel rendering onsite and off shore services,
GIPL is responsible for provisions of administrative support which
includes functions such as arranging work permits/visas, foreign
exchange, payment of allowances, etc."
6. An overview of the above activities carried out by the assessee
divulges that it is mainly responsible for the development of software
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under the projects sub-contracted to it by GlobalLogic Inc. Such
developed software are to be tested by the assessee. The Testing
department of the assessee, apart from testing the software developed by
it, also undertakes process improvisations, making of new processes,
quality audits. After developing and testing a software, the assessee is
required to ensure that such developed software are timely delivered.
Apart from rendering the above software development and maintenance
services, the assessee is also providing `Marketing support' service, for
which it has separate `marketing staff'. Such marketing staff directly
contacts with potential customers along with GlobalLogic Inc. Other
than that, the assessee is also providing `Administrative support'
services to its AEs which include arranging work permits/visas, foreign
exchange, payment of allowances, etc. Thus it is manifest that going by
the TP Study report for the year under consideration, the assessee not
only provided software development and maintenance services but also
Marketing and Administrative support services to its AEs.
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7. When we peruse the Agreement dated 10.11.2006 effective from
1.4.2006 between the assessee and GlobalLogic Inc. under which the
assessee was assigned the task of rendering `Software Development and
other Allied Services', it transpires that Clause 1 of the Agreement
containing - `Scope of Work' stipulates that the assessee shall carry
out Software Development; Maintenance and Repair Work; Technical
Testing and Analysis; QA; IT and IT enabled Services. This is stated to
be the only Agreement under which the services under consideration
were rendered. It can be seen that to some extent, there is an apparent
conflict between the Agreement and the Transfer Pricing Study report
inasmuch as the latter, apart from the aforesaid services set out in the
Agreement, also refers to the rendering of Marketing Function and
Administrative Support services, which do not figure in the Agreement.
As the TPO has treated the entire amount under this international
transaction as consideration for rendering `Software development
services' and benchmarked it accordingly, without separately taking
cognizance of any Marketing and Administrative services, we leave this
issue here only and do not propose to start everything afresh by setting
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up an altogether new case. It is for the TPO to analyze the functions
performed in proper perspective and in the light of the material available
on record and then reach a positive conclusion about the nature of
activity carried out by the assessee in an international transaction.
8. With the above understanding of the nature of software development
and maintenance functions carried out by the assessee, we will examine
whether or not the above six companies are comparable. Before that, it is
pertinent to mention that for the immediately preceding assessment year,
namely, 2007-08, the TPO chose certain companies as comparable for
the similar international transaction of `Provision of software
development services'. The appeal filed by the assessee for such year in
ITA No.580/Del/2011 has since been disposed of by the tribunal vide its
order dated 22.1.2015, a copy of which is available on record. It can be
noticed from such Tribunal order that the TPO treated similar
international transaction, as has also been transacted for the instant year,
as `Provision of software development services'. Such services have
been provided to the AEs, both in the preceding year as well as the
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current year, in terms of the common Agreement effective from
1.4.2006. The crux of the matter is that the nature of services rendered
by the assessee in the current year under the extant international
transaction are similar to those rendered in the preceding year.
Avani Cincom Technologies
9. The TPO included this company in the list of comparables by
noticing that as per the information available in the public domain, it is a
software development and consulting company. After seeking certain
information from the company u/s 133(6) of the Act, the TPO prima
facie formed the view about the comparability of this company. On
being called upon to show cause as to why this company be not
considered as comparable, the assessee submitted that data of this
company for the year in question was not available in the public domain
and, also it was functionally different. Rejecting the assessee's
contention, the TPO treated this company as comparable. The assessee
remained unsuccessful before the DRP as well.
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10. We have heard the rival submissions and perused the relevant
material on record. It is observed that this company was considered as
comparable by the TPO in the preceding year as well. The Tribunal in
its order has held it to be not comparable. The relevant discussion has
been made in paras 9 and 10 of the order. It has been noticed in the
order that though this company is a pure software development service
provider, it is also utilizing its own software in rendering such services.
Relying on the order passed by the Tribunal in the case of Motorola
Solutions India Pvt. Ltd. VS. ACIT (2015) 152 ITD 0158 (Delhi), the
Tribunal ordered for the exclusion of this company from the list of
comparables. In reaching this conclusion, the Tribunal also observed
that apart from rendering software development services, this company
was also engaged in the sale of software products and the accounts
maintained by it were at entity level without there being any segregation
of revenue from software development segment. Adverting to the facts
of the instant year, it is observed that the assessee specifically argued
before the TPO that the data for the instant year was not available which
objection was also repeated before the DRP, but, without any success.
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Be that as it may, the fact that this company is also engaged into
software products, apart from rendering software development services,
has not been controverted by the ld. DR with any cogent material.
Respectfully following the view taken by the Tribunal in the assessee's
own case for the immediately preceding year, we order for the exclusion
of this company from the list of comparables.
Infosys Technologies Ltd.
11. The TPO noticed that this company was finding place in the
accept/reject matrix but was rejected in the TP documentation by
claiming that it failed functional area comparability. The TPO found
this company to be into software development services qualifying all the
filters applied by him. The assessee raised certain objections against the
inclusion of this company, but without any success. The TPO computed
operating profit margin of this company at 40.41% and included it in the
final list of comparables. The assessee is aggrieved against the inclusion
of this company in the ultimate set of comparables.
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12. We have considered the rival submissions and perused the relevant
material on record. It can be seen that the TPO has included this
company in the list of comparables by rejecting the assessee's
contention about the brand of this company helping in earning huge
profits and also the brand-related products swelling the ultimate profit
rate of this company. We find that the assessee is a captive unit
rendering services to its AE alone without acquiring any intellectual
property rights in the work done by it in the development of software.
The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P)
Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys
Ltd., in terms of risk profile, nature of services, number of employees,
ownership of branded products and brand related profits, etc. in
comparison with such factors prevailing in the case of Agnity India
Technologies Pvt. Ltd., being, a captive unit providing software
development services without having any IP rights in the work done by
it. After making comparison of various factors as enumerated above, the
Hon'ble Delhi High Court held Infosys Ltd. to be incomparable with
Agnity India Technologies Pvt. Ltd. The facts of the instant case are
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more or less similar inasmuch as the extant assessee is also a captive
service provider with a limited number of employees at its disposal and
also not owning any branded products with no expenditure on R&D etc.
When we consider all the above factors in a holistic manner, there
remains absolutely no doubt in our mind that Infosys Technologies Ltd.
is incomparable with the assessee company. Respectfully following the
judgment of the Hon'ble jurisdictional High Court in Agnity India
(supra), we hold that Infosys Technologies Ltd., cannot be treated as
comparable with the assessee company. This company is, therefore,
directed to be excluded from the list of comparables.
KALS Information Systems Ltd. (seg.)
13. The assessee rejected this company in its TP documents by
considering it as `functionally different.' The TPO, on the basis of
certain information collected u/s 133(6) from the company, observed
that its business activity was into two segments, namely, (i) Software
development services; and (ii) Training. By considering the data
available before him, the TPO included the `Software development
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services' segment into the list of comparables. The assessee is aggrieved
the inclusion of this company on segmental level.
14. We have heard the rival submissions and perused the relevant
material on record. We have also gone through the Annual report of this
company which is available on pages 349 onwards of the paper book. It
can be observed from page 358 of the paper book that the segmental
information pertains to `Application software' and `Training'. Under
the `Application software' segment, the company has also included its
income from software products. Note 1 to the Financial statements on
page 357 of the paper book evidently provides that : `The company is
engaged in development of Software and Software products since its
inception.' Note 2(b) on page 357 of the paper book also states that :
`The company derives its revenues primarily from software services and
software products.' Since this company is into the business of software
products and also software development and has merged the revenue
from both the streams under the overall segment of `Application
software', which has been taken by the TPO for inclusion in the final set
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of comparables, this company loses the tag of comparability vis-a-vis the
assessee company which is exclusively engaged in providing software
development services on a contract basis to its AEs as a captive unit. It
is manifest that under the circumstances prevailing in the case of this
company, the impact of the profit from the sale/licence of software
products on the overall profitability of the `Application software'
segment cannot be segregated. To what extent the overall profits of this
company have been influenced by the revenues from software products,
cannot be precisely ascertained. In view of the aforegoing
distinguishing facts, this company ceases to be comparable. We order
for the exclusion of this company from the list of comparables.
Persistent Systems Ltd.
15. This company was originally selected by the assessee in its TP
study. However, it was contended before the TPO that it is a product
company and because of lack of segmental data, the same cannot be
considered as comparable. The TPO, after seeking information u/s
133(6) of the Act from this company, observed that 96% of its total
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operating revenues from `Software development services' are from
software development services. He ignored the figure of revenue from
product licences at Rs.28.29 crore and proceeded to consider this
company as comparable at entity level. The assessee is aggrieved before
us.
16. We have heard the rival submissions and perused the relevant
material on record. It is noticed that this company has been excluded
from the list of comparables by the Tribunal in its order for the
immediately preceding year in the assessee's own case by relying on
extraordinary events, such as, merger or acquisition, etc. There are no
such extraordinary events in the current year. However, we find from
the Annual report of this company, that it is a software product company
which is apparent from page 383 of the Paper book. It has been
mentioned that it : `is different from most of the outsourcing firms
because we are focused exclusively on the software product
development.' The same thing has been mentioned on page 388 of the
paper book that Persistent Systems Ltd. : `is predominantly engaged in
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outsourced Software Product Development services for independent
Software Vendors.' When we peruse page 389 of the paper book, it
becomes manifest that apart from earning revenue from licensing of
products, it has also earned revenue from Royalty which is recognized
on sale of products in accordance with the terms of the relevant
agreement. The ld. AR contended that revenue from Royalty was
considered by this company as part of revenue from `Software
development services' segment, which has not been controverted by the
ld. DR with any cogent material. The Bangalore Bench of the Tribunal
in 3DPLM Software Solutions Ltd. Vs. DCIT (ITA No.1303/Bang./2012
vide its order dated 28.11.2013, for the identical assessment year, i.e.,
2008-09, has held Persistent Systems Ltd., to be a company engaged in
product development and product design services and hence functionally
different from a software development services provider. Similar view
has been taken in FCG Software Services (India) (P) Ltd. Vs. ITO (ITA
No.1242/Bang./2012) vide its order, a copy of which is available on
record. Again, in LG Soft India (P) Ltd. Vs. DCIT (2014) 48
taxmann.com 237 (Bangalore-Trib.) this company has been held to be
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functionally different from a software development service provider
company. In view of the above discussion and relying on so many
precedents favouring the elimination of this company, we are of the
considered opinion that Persistent Systems Ltd., cannot be considered as
comparable with the assessee company. The same is, therefore, directed
to be excluded.
Tata Elxsi (Seg.)
17. This company was rejected by the assessee in its TP documents by
claiming it to be `functionally different'. The TPO observed from the
Annual report of this company that it has two segments, namely,
`Software development and services segment' and `Systems integration
and support segment.' Noticing the segmental details, the TPO
considered `Software development and service segment' as comparable.
The assessee's objections against the incomparability were set aside.
The assessee remained unsuccessful before the DRP as well.
18. After considering the rival submissions and perusing the relevant
material on record, we find that the TPO has adopted `Software
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development and services' segment which, in turn, consists of three
sub-segments, namely, Embedded product design services (design and
development of hardware and software), Industrial design and
engineering (mechanical design with a focus on industrial design) and
Animation and Visual Effects. Since this company offers integrated
hardware and packaged software solutions, the same cannot be
considered as comparable with the assessee company, which is simply
providing software related services. The Tribunal in Toluna India Pvt.
Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions
India Pvt. Ltd. (supra), both of which were rendering software
development services, has treated this company as functionally not
comparable. Similar view has been taken by the Tribunal in the
assessee's own case for the immediately preceding assessment year.
We, therefore, order for the exclusion of this company from the list of
comparables.
Wipro Ltd. (Seg.)
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19. The TPO included this company in the list of comparables by
overruling the assessee's objections about the super normal profits
earned by this company; very high turnover; owning significant IPRS in
the form of patents; and engaged in R& D activity. The assessee failed
to persuade the DRP to fall in line with its reasoning for the exclusion of
this company from the final set of comparables. That is how, the
assessee is before us.
20. We have heard the rival submissions and perused the relevant
material on record. It is noticed that the TPO has taken `Software
development' segment of this company on standalone basis. We agree
with the TPO that super normal profits or very high turnover cannot be
criterion for treating an otherwise functionally comparable company as
incomparable. However, the fact remains that this company own
significant IPRS in the form of patents which are obviously used in the
rendering of software development services. Apart from that fact, this
company is engaged in R&D activity. Per contra, the assessee in
question is only a captive software development service provider not
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owning any IPRS. Owning or not owning IPRS in the form of patents in
software developed by a company has an important bearing on the profit
earned by it from the `Software development services' segment. A
company which does not own any IPRS and carries on the activity of
rendering software development services at its own cannot be compared
with a company which provides software development services by using
its own IPRS in the form of patents of software. Under such
circumstances, we hold that this company cannot be considered as
comparable at segment level. The same is ex consequenti directed to
expelled from the set of comparables.
21. The ld. AR submitted that if the above six companies are removed
from the final list of comparables, then, there will remain no scope for
any addition on account of TP adjustment and there will be no need to
assail other points. We find that all the above companies have been
excluded by the Tribunal in the assessee's own case for the immediately
preceding year, in Toluna India Pvt. Ltd. (supra) and/or Motorola
Solutions India Pvt. Ltd.(supra). Under such circumstances, we set
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aside the impugned order and send the matter back to the AO/TPO for a
fresh computation of ALP of the international transaction undertaken by
the assessee in conformity with our above decision. Needless to say, the
assessee will be afforded a reasonable opportunity of being heard in such
fresh adjudication.
22. No other issue was argued by the ld. AR.
23. In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 04.06.2015.
Sd/- Sd/-
[C.M. GARG] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 4th June, 2015
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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