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2014 (11) TMI 551
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....e us. 2. The grounds taken by the assessee in the appeal read as under :- "That on the facts and circumstances of the case, and in law; 1. The assessment order passed by the Learned Assessing Officer ('Ld. AO') pursuant to the directions of Learned Dispute Resolution Panel ('Ld. DRP') is bad in law and void ab-initio. 2. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition of Rs. 11,859,033 to the income of the appellant proposed by the Transfer Pricing Officer ('Ld. TPO') by holding that the international related party transactions pertaining to provision of content development support services do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act') and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of: 2.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2.2. ignoring the fact that the appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore wo....
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....ased on application of the following additional/ revised filters in determining the ALP for the international transactions: 2.7.1. exclusion of companies having different financial year ending (i.e. not March 31,2007); 2.7.2. exclusion of companies with export sales that are less than 25% of their total revenue; 2.7.3. exclusion of companies with diminishing revenues/ persistent losses for last three years upto and including FY 2006-07; 2.7.4. retaining companies with related party transactions upto 25% of their sales; 2.7.5. adopting employee cost/ revenues filter greater than 25% of their total revenues as a search criteria for short listing and evaluating comparables; 2.7.6. exclusion of companies with onsite revenues greater than 75% of their export revenues for selecting comparables; and rejecting, in particular, the following filters applied by the appellant in its TP documentation/ fresh search: 2.7.7. companies having other operating income (i.e. income other than manufacturing and trading income) to sales greater than 50% were accepted; 2.7.8. companies with net worth less than zero were rejected; 2.7.9. companies having research & development co....
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....en filed by the Department against the said order of the Hon'ble High Court. 4.2 The Ld. AO and Ld. DRP erred in not adjudicating on merits and disregarding the detailed arguments/ submissions put forth by the appellant during the course of the DRP/ assessment proceedings. 5. The Ld. AO and Ld. DRP erred in disallowing Rs. 809,447 under section 40(a)(ia) of the Act on which TDS has been deducted and deposited under Chapter XVII- B of the Act. 6. The Ld. AO and Ld. DRP erred in disallowing and considering Rs. 114,030 on account of 'Computer Consumables & Small Accessories' and Rs. 24,469 on account of 'Repair & Maintenance - others' as an expense of capital in nature. 7. The Ld. AO and Ld. DRP erred in disallowing an amount of Rs. 925,768 on account of advances written off by the appellant. 8. Without prejudice to the grounds 4 to 7 above, on the facts and in the circumstances of the case and in law, the Ld. AO erred in not allowing deduction under section 10A of the Act on the increased amount of business income/profits on account of additions/disallowances made by the Ld. AO. 9. The Ld. DRP erred in disregarding the detailed arguments/ submiss....
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....indtree Ltd 590.35 16.90% 18 Persistent Systems Ltd 293.75 24.18% 19 Quintegra Solutions Ltd 62.72 12.56% 20 R S Software (India) Ltd 101.04 13.47% 21 R Systems International Ltd (Seg) 112.01 15.07% 22 Sasken Communication Technologies Ltd (Seg.) 343.57 22.16% 23 SIP Technologies & exports Ltd 3.80 13.90% 24 Tata Elxsi Ltd (Seg) 262.58 26.51% 25 Thirdware Solutions Ltd 36.08 25.12 26 Wipro Ltd (Seg) 9616.09 33.48% 25% Ld. AR's pleadings were based on the decision of the Tribunal in the case of M/s Toluna India Pvt. Ltd. in ITA No. 5645/Del/2011 dated 26.08.2014. According to Ld. AR, the case of Toluna India Pvt. Ltd. was of AY 2007-08 and there were 26 comparable companies in the same serial order which were treated as comparable companies by the TPO. As per Ld. AR, Tribunal in the case of Toluna India Pvt. Ltd., supra, has discussed each and every comparable in detail and found only some companies as comparable. Ld. AR pleaded that the decision of Toluna, supra, should be followed in the assessee's case also as facts are same. 7. On the other hand, Ld. CIT DR opposed the submission and relied upon the orders of the authorities ....
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....n the list of comparables. The assessee's objections before the DRP also met with failure before the DRP. 16.2. After considering the rival submissions and perusing the relevant material on record, we find that the assessee itself considered this company as functionally comparable by including it in the accept/reject matrix, but, rejected it on the ground that advertisement expenses were more than 3%. It is important to mention that the TPO has taken the figures of this company's Software services segment alone, which is admittedly akin to that of the assessee and that the Advertisement, marketing and distribution spend in this segment is less than 3%, being the filter applied by the assessee. 16.3. In so far as the other objection of the percentage of related party transactions is concerned, the Id. AR relied on two tribunal orders in which filter of 15% RPT has been accepted. On the contrary, we find the predominant view of the Tribunal across the country in several cases including Actis Advisors Pvt. Ltd. Vs. DCIT [(2012) 20 ITR (Trib.) 138 (Del)], Stream International Pvt. Ltd. Vs. ADIT (IT) [(2013) 141 ITD 492 (Mum) [authored by the AM of this order] and Agilent ....
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.... using the patent. This company developed a tool, "CELSUITE" to drug discovery in finding the lead molecules for drug discovery. As this company is engaged in developing software tools after enough research and development activity and the tools so produced by it are its intellectual property, it cannot be considered as comparable to the assessee which is, also albeit in software development, but is doing it on contract basis without having any I.P. rights in the software developed by it. It is further relevant to note that this company has been held to be not comparable by the Dispute Resolution Panel (DRP) in its Directions for a subsequent year, a copy of which is available on record. Thus this company can't be considered as functionally similar to that of the assessee. We, therefore, direct to exclude this company from the list of comparables. The assessee succeeds. Datamatics Limited: 19. The assessee has no objection to the inclusion of this company in the list of comparables. E-Zest Solutions Limited: 20.1. The annual report of this company was available, but, the functionality was not clear. Notice u/s 133(6) was issued by the TPO. On receipt of reply from the ....
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....e. The assessee's objection that this company had incurred huge R & D expenses and, hence, should be ignored, did not find favour with the TPO. The DRP approved the view taken by the authorities below on the comparability of this case. 21.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be not comparable to that of the assessee. The reason for our this decision is that the TPO has taken segmental data of Rs. Product and service segment of this company which has Product revenue of 92.1 crore. In contrast to it, the instant assessee is not selling any software products, but, is doing the job assigned to it on cost plus basis. The contention of the Id. DR that since the majority of the revenue from Rs. Product and services segment' was from the services segment and, hence, this company should be considered as comparable, is bereft of any force. When figures of Products and services are combined, it cannot be ascertained as to how much contribution was made by the product division or the service division to the overall revenue of the Product and services segment. As the assessee is admittedly not engaged in sell....
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....arable and is, hence, directed to be excluded from the list of comparables. The assessee succeeds. IGate Global Solutions Limited: 24. The assessee has no objection to the inclusion of this company in the list of comparables. Infosys Technologies Limited: 25. From the nature of services rendered by the assessee to its AE on a cost plus basis without having any intangible assets or retaining any intellectual property in the work done by it, we find that Infosys Technologies Ltd., which is a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, onsite and offshore services, etc., cannot be compared with the assessee. Our view is fortified by the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. [(2013) 219 Taxman 26 (Del)] in which Infosys Ltd. has been held to be not comparable to a company that was engaged in the business of development of software for parent company. We, therefore, direct the exclusion of this case from the list of comparables. The assessee succeeds. Ishir Infotech Limited: 26.1. Th e AO included this company in the list ....
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....ssessee. As such, we approve the view taken by the TPO in including this case in the list of comparables. The assessee fails. KALS Information Systems Limited (Segmental): 27.1. The TPO observed that this company was engaged in Software development and training. As the software products constituted only 3% of its revenue and training revenue constituted 8.56%, the TPO held that this segment of KALS Information Systems Limited was rightly includible. 27.2. After considering the rival submissions and perusing the relevant material on record, it is an admitted position that the TPO adopted Software development segment of this company by noticing that this segment also included revenues from software products and training. In view of the fact that the assessee is not engaged in imparting any training on commercial basis or selling its software products, we hold that the financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability. As such, this case is directed to be excluded. ....
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....n the list of comparables. 31.2. Having heard the rival submissions and perused the relevant material on record, we find from the Director's report of this company, a copy of which is available on page 193 of the paper book, that the financial results for the year include the business performance of Visual Soft Technologies Ltd. w.e.f. 1st October, 2006 consequent to the amalgamation. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. vs. DCIT [(2013) 154 TTJ (Mum) 176] has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. Since the financial results of Megasoft Ltd. have the impact of the merger of Visual Software Technologies Ltd., w.e.f. 1st October, 2006, obviously, this company cannot be considered as comparable. Accordingly, this company is directed to be excluded. The assessee succeeds. Mindtree Limited: 32. The assessee has no objection to the inclusion of this company in the list of comparables. Persistent Systems Limited: 33. After considering the rival submissions and perusing the relevant material on record, we hold that this company also cannot be considered as compa....
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.... that this company acquired Botnia Hitec Oyoy, Finland and its two wholly owned subsidiary companies during the year, which fact is apparent from the Director's report of this company available at page 202 of the paper book. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we order for the exclusion of this company from the list of comparables. The assessee succeeds. SIP Technologies & Exports Limited: 38. The assessee has no objection to the inclusion of this company in the list of comparables. Tata Elxsi Ltd. (Software development and services segment): 39.1. The TPO included this company in the list of comparables by noticing that its 'Software development and services segment' matched with the assessee. On being called upon to explain as to why this company be not included in the list of comparables, the assessee stated that the nature of activity done by this company was different inasmuch as it was engaged in R&D activities also which resulted in creation of intellectual property. Not convinced with the assessee's submissions, the TPO included this segment of the company in the list of comparables. 39.2. After considering the....
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....e matter of comparable companies and work out the transfer pricing adjustment, if any, based on that. Accordingly, this ground is allowed subject to above observations. 9. Ground No.4 is regarding deduction u/s 10A amounting to Rs. 2,98,09,829/- which was disallowed by Assessing Officer by following the assessment order for Assessment Year 2006-07, holding that the deduction u/s 10A was not allowable as there was reconstruction of old business. This was objected by the assessee before DRP contending that this issue has been decided in favour of the assessee in Assessment Year 2005-06 by the Tribunal and High Court. In Assessment Year 2006-07, CIT (A) has granted relief to the assessee. The DRP declined to interfere with the finding of Assessing Officer on the ground that it is not known whether the department has filed an SLP in Assessment Year 2005-06 or not. 10. Ld. AR for the assessee submitted that this issue has been decided in favour of the assessee in Assessment Year 2005-06 by Hon'ble Bombay High Court. Therefore, the issue is settled in favour of the assessee. Hence, this ground should be allowed. 11. We have heard both the sides and perused the records. This issu....