Affinity Express India Pvt. Ltd.,, Pune vs Department Of Income Tax

DCIT, Circle-1(1), Pune .. Appellant

Vs.

Affinity Express India Pvt. Ltd., Survey No.247/2, Hinjewadi, Pune - 411057 PAN No.AABCC1224C .. Respondent

Assessee by : Shri Ketan Ved & Shri Vishal Solanki Department by : Shri B.C. Malakar Date of Hearing : 09-04-2015 Date of Pronouncement : 29-04-2015

ORDER

PER R.K. PANDA, AM :

This appeal filed by the Revenue is directed against the order

dated 21-12-2012 of the CIT(A)-IT/TP, Pune relating to Assessment Year

2007-08.

2. Facts of the case, in brief, are that the assessee is a company

engaged in the business of embroidery software designing and

document creation. It filed its return of income on 31-10-2007 disclosing

NIL income. During the course of assessment proceedings, the AO noted

that the assessee has entered into international transactions with the

related parties/Associated Enterprises, the details of which are as under:

Sr.No. Description of transaction Amount (Rs.) Method used 1 Provisions of Digitizing 11,48,73,761 TNMM Services 2 Provision for Data 19,05,53,874 TNMM Conversion/Creation Service 3 Import of Capital goods 0 2

4 Import of consumables 1,18,265 TNMM 5 Receipt of loan 1,10,88,000 TNMM 6 Repayment of loan 6,30,709 TNMM Total 31,72,64,609

He therefore made a reference u/s.92CA(1) to the TPO. The TPO

thereafter issued notice u/s.92CA(2) of the I.T. Act to the assessee along

with a detailed questionnaire to make its submissions/produce

documents to support the ALP computed by it in Form No.3CEB. From

the various details furnished by the assessee, the TPO noted that the

assessee company was incorporated on 10-05-1993 and started its

commercial production on 01-01-1994. The assessee Affinity Express

(India) Pvt. Ltd., (in short 'AEIPL') is a 100% export oriented unit and is

a subsidiary of CVJV. Further, during the F.Y. 2005-06 CVJV has been

taken over by Affinity Express Inc, USA (AEXP, USA) and as a result

holds 100% in CVJV. AEIPL basically provides 2 types of services to its

AE, i.e. Digitizing services and data conversion/creation services. Both

the services fall under the ambit of IT enable service. Under the

Digitization service, the company is engaged in the business of

developing and exporting of computerized embroidery design, emblem,

art works, drawings, badges and other allied products. The company

provides services for drawing and designs. Under the data conversion

services, the company develops documents such as invitation cards,

resumes, business cards, letter heads, labels and brochures etc. on order

basis. The total turnover of AEIPL for the impugned assessment year

was Rs.30.55 crores and the profit before tax was Rs.2.11 crores.

3. The TPO noted that the assessee has used TNM method as the

most appropriate method. For the purpose of analysis, the International

Transactions have been aggregated and entity level adjusted operating

profit over sales has been taken as profit level indicator (PLI). A set of 5 3

external comparables have been taken and weighted average operating

margin has been taken as PLI for the set of comparables, the details of

which are as under :

Sr.No. Company Operating Margin Ratio 1 Ace Software Exports Ltd., 0.63% 2 C.S. Software Enterprise Limited 17.37% 3 Genesys International Corporation Ltd., 5.83% 4 K L G Systel Ltd. 15.48% 5 Vama Industries Limited 8.88% Grand Average 9.64% AEIPL 14.00%

The assessee accordingly submitted that the international transaction of

providing of services is at arm's length. However, the TPO in the order

worked out profit level indicator of the assessee company at 7.41% as

against the PLI of comparable companies at 14.78%, the details of which

are as under :

Sr.No. Company Operating Margin OP/OC) 1 Ace Software Exports Ltd., (-) 6.79% 2 C.S. Software Enterprise Limited 22.13% 3 Genesys International Corporation Ltd., 13.35% 4 Vama Industries Limited 9.18% 5 K L G Systel Ltd. 21.24% 6 Bodhtree Consulting Limited 29.58% Mean 14.78%

4. The TPO accepted the comparable companies of the assessee and

included one new company, i.e. M/s. Bodhree Consulting Ltd. and

accordingly made an adjustment of Rs.2,09,60,280/- on the value of

international transaction of providing services to AE of Rs.28,44,00,000/-.

5. Before CIT(A) the assessee vehemently challenged the inclusion of

M/s. Bodhtree Consulting Ltd., as a comparable. It was argued that the

company is into the business of software development services and

hence not functionally similar to that of the assessee. It was argued that

as per the business description in its annual report for the year ended 31- 4

03-2007 not only its line of business is completely different but also its

FAR is different than that of the assessee and consequently it is not a

comparable company for benchmarking international transaction of the

assessee. It was argued that M/s. Bodhtree Consulting Ltd. had hived of

its e-paper business to its subsidiary company viz., Pressmart Media Ltd.

for the year ended March 2007. Since the business of PML is in the field

of e-paper which is in the industry of Information Technology Enabled

Services (ITES), it would be appropriate to consider the subsidiary

company as comparable in the assessee's case which is also in ITES

industry. However, the argument of the assessee that M/s. Bodhtree

Consulting Ltd. is not functionally comparable was not accepted by the

TPO and was retained as a comparable.

6. The assessee brought to the notice of the Ld.CIT(A) the following

paragraph in the Director's report in the annual report of the company:

"Bodhtree has only one segment, namely software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies."

7. The assessee also drew the attention of the Ld.CIT(A) to the

different parts of the annual report and information provided on the

website of the company to contend that M/s. Bodhtree Consulting Ltd. is

clearly into software development whereas the assessee company

provides ITES, therefore, M/s. Bodhtree Consulting Ltd. cannot be

considered as a comparable to the assessee.

8. Based on the arguments advanced by the assessee the Ld.CIT(A)

directed the AO to exclude M/s. Bodhtree Consulting Ltd. from the list

of comparables. While doing so, he observed that the various parts of

the directors report as well as other references in the annual report make 5

it clear that M/s. Bodhtree Consulting Ltd. is into software development

and therefore this company cannot be treated as comparable with the

assessee company which renders ITES.

9. Aggrieved with such order of the CIT(A) the revenue is in appeal

before us with the following grounds :

"1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case.

2. The learned Commissioner of Income-tax (Appeals) grossly erred in allowing the assessee's appeal instead of confirming the Assessing Officer's order.

3. The learned Commissioner of Income-tax (Appeals) grossly erred in directing to exclude M/s. Bodhtree Consulting Limited from the set of six comparables selected by the Transfer Pricing Officer by holding that the said company is engaged in software development.

4. The learned Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that out of the six comparables, four comparables including M/s. Bodhtree Consulting Ltd. are engaged in similar type of services i.e. Software Development and IT related services and also that the assessee itself has not objected to the comparability of the other three comparables viz. M/s. Ace Software Exports Ltd., M/s. C.S. Software Enterprises Limited(now known as CSS Technology Ltd.) & M/s.Varna Industries Ltd.

5. For these and such other grounds as may be urged at the time of hearing, the order of the learned CIT (Appeals) may be vacated and that of the Assessing Officer be restored.

6. The appellant craves leave to add, alter or amend any or all the grounds of appeal."

10. The Ld. Departmental Representative strongly challenged the

order of the CIT(A). He submitted that the 6 comparables taken by the

TPO in the comparables including M/s. Bodhtree Consulting Ltd. are

engaged in similar type of services, i.e. software development and IT

related services. Further, the assessee itself has not objected to the

comparability of the other 3 comparables viz., M/s. Ace Software

Exports Ltd., M/s. C.S. Software Enterprises Ltd. and M/s. Vama

Industries Ltd. He submitted that the TPO had rightly included M/s.

Bodhtree Consulting Ltd. as comparable. The Ld. CIT(A) without any 6

justifiable grounds has directed the AO to exclude the same from the list

of comparables which is not proper. He accordingly submitted that the

order of the CIT(A) be reversed on this issue.

11. The Ld. Counsel for the assessee on the other hand strongly

supported the order of the CIT(A). He submitted that from A.Y. 2006-07

till date M/s. Bodhtree Consulting Ltd. was never included as a

comparable except for the impugned assessment year. Therefore,

following the rule of consistency itself, M/s. Bodhtree Consulting Ltd.

should be excluded from the list of comparables and the order of the

Ld.CIT(A) be upheld. For the above proposition, the Ld. Counsel for the

assessee relied on the decision of the Pune Bench of the Tribunal in the

case of Brintons Carpets Asia Pvt. Ltd. Vs. DCIT vide ITA

No.1296/PN/2010 order dated 15-06-2011 for A.Y. 2006-07.

12. The Ld. Counsel for the assessee drew the attention of the Bench

to the following chart which gives year on year comparison of financial

results from F.Y. 2003-04 to 2013-14 :

Bodhtree Technologies Ltd Year-on-year comparison of financial results

Sr.No. Particulars 2003-04 2004-05 2005-06 2006-07 2007-08

A Operating Revenue (OR) 42,647,090 38,685,845 53,189,165 103,528,905 103,665,824 B Year-on-year variation in the OR -9.29% 37.49% 94.64% 0.13% C Operating Cost(OC) 35,399,302 30,985,406 46,709,532 57,294,338 85,803,159 D Year-on-year variation in the OC -12.47% 50.75% 22.66% 49.76% E Operating Profit (OP) 7,247,788 7,700,439 6,479,633 46,234,567 17,862,665 F Year-on-year variation in the OP 6.25% -15.85% 613.54% -61.37% G OP/OC 20.47% 24.85% 13.87% 80.70% 20.82% H Year-on-year variation in the OP/OC 21.38% -44.18% 481.71% -74.20% 7

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 160,575,212 225,676,988 212,115,207 434,321,855 428,680,863 467,004,623 54.90% 40.54% -6.01% 104.76% -1.30% 8.94% 98,110,636 168,073,152 221,222,104 420,747,674 481,337,388 435,856,106 14.34% 71.31% 31.62% 90.19% 14.40% -9.45% 62,464,576 57,603,836 (9,106,897) 13,574,181 (52,656,525) 31,148,517 249.69% -7.78% -115.81% -249.05% -487.92% -159.15% 63.67% 34.27% -4.12% 3.23% -10.94% 7.15% 205.83% -46.17% -112.01% -178.37% -439.09% -165.33%

Referring to the above, he submitted that there is wide variation in the

operating revenue and operating cost in different years.

13. Referring to the decision of the Pune Bench of the Tribunal in the

case of Barclays Technology Centre Vs. ACIT vide ITA

No.2279/PN/2012 the Ld. Counsel for the assessee drew the attention of

the Bench to para Nos. 20 to 24 of the order of the Tribunal and

submitted that the Tribunal in the said decision has held that the revenue

recognition model of M/s. Bodhtree Consulting Ltd. is quite different

from the model being pursued by the assessee. Relying on various

decisions the Tribunal accepted the contention of the assessee that M/s.

Bodhtree Consulting Ltd. should be excluded from the list of

comparables. He accordingly submitted that the order of the Ld.CIT(A)

be upheld.

14. We have considered the rival arguments made by both the sides,

perused the orders of the Assessing Officer and the CIT(A) and the Paper

Book filed on behalf of the assessee. We have also considered the various

decisions cited before us. The only dispute in the grounds raised by the

revenue is regarding the exclusion of M/s. Bodhtree Consulting Ltd. as

a comparable which has been included by the TPO as a comparable. We

find the Ld.CIT(A) directed the AO to exclude the same from the list of

comparables on the ground that M/s. Bodhtree Consulting Ltd. is 8

engaged into software development whereas the assessee company

renders IT enabled services. The submission of the Ld. Counsel for the

assessee that from A.Y. 2006-07 till date M/s. Bodhtree Consulting Ltd.

was never considered as comparable except for the impugned

assessment year could not be controverted by the Ld. Departmental

Representative. Therefore, we find merit in the submission of the Ld.

Counsel for the assessee that following the rule of consistency itself M/s.

Bodhtree Consulting Ltd. should be excluded from the list of

comparables. Although it is the settled proposition of law that the

principle of resjudicata is inapplicable to IT matters, however, the same is

true as long as the facts are different in different assessment years.

However, when the facts are similar, the rule of consistency is relevant to

IT matters and the revenue authorities cannot ignore the same. There

should be uniformity in treatment and consistency in approach when the

facts and circumstances are identical.

15. So far as the function of M/s. Bodhtree Consulting Ltd. is

concerned, we find the Pune Bench of the Tribunal in the case of Barclays

Technology Centre (Supra) for A.Y. 2008-09 following the decision of the

Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. vide

IT(TP) A. No.70/Bang/2014 order dated 21-08-2014 and the decision of

the Mumbai Bench of the Tribunal in the case of Neth Hawk Networks

India Pvt. Ltd., vide ITA No.7663/M/2012 order dated 06-11-2013 for

A.Y. 2008-09 has directed to exclude M/s. Bodhtree Consulting Ltd. from

the list of comparables. The Tribunal at Para No.24 of the order has

observed as under :

"24. Though the aforesaid discussion by the Bangalore Bench of the Tribunal is in relation to the assessment year 2009-10, but the inferences drawn with regard to the variations in the profit margins 9

of the said concern for different years is relevant in the present context also. Furthermore, the Tribunal also analysed and found that the said concern was following fixed price project method whereby revenue from software development services was being recognized based on the software developed and billed to the clients. In such a business model, the possibility of the expenditure not being booked on the basis of the matching principle cannot be ruled out, which would impart fluctuation in the margins over the years. In contrast, in the present case, the revenue is being recognized based on the cost plus markup basis. Clearly, the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the model being pursued by assessee and such distinction prevailed with the Bangalore Bench of the Tribunal in the case of Mindteck India Ltd. (supra) to exclude Bodhtree Consulting Ltd. from the list of comparables. Considering such difference, in our view, assessee is justified in asserting that the said concern be excluded from the list of comparables. We hold so."

16. Further, from the chart filed by the Ld. Counsel for the assessee

showing the year on year comparison of financial results, we find there is

large variation in the operation revenue, operating cost and operating

profit of M/s. Bodhtree Consulting Ltd. between different financial years

which has already been reproduced at Para No.12 of the impugned

order. In view of the above discussion, we are of the considered opinion

that M/s. Bodhtree Consulting Ltd. was rightly excluded by the CIT(A)

from the list of comparables. Therefore, we do not any infirmity in his

order and accordingly uphold the same. The grounds raised by the

revenue are accordingly dismissed.

17. In the result, the appeal filed by the Revenue is dismissed.

Pronounced in the open court on 29-04-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 29th April, 2015 10

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A)-IT/TP, Pune 4. CIT-IT/TP, Pune 5. The D.R, "B" Pune Bench 6. Guard File

By order

// True Copy // Assistant Registrar ITAT, Pune Benches, Pune