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2015 (11) TMI 431
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....ct profits derived from development and export of computer software. While computing the export turnover for the purpose of allowing deduction u/s. 10A of the Act, the AO excluded telecommunication expenses and travelling expenses incurred in foreign currency. 4. The Assessee submitted that Explanation 2 to section 10A defines 'export turnover' to mean consideration in respect of export of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India. The Assessee submitted that none of the items of aforesaid items fell within the definition of Export Turnover. Alternatively, it was submitted that if the aforesaid amounts are excluded from the Export Turnover, the same should also be excluded from the Total Turnover. The AO did not accept the claim of the Assessee and excluded the aforesaid items from the Export turnover while computing ....
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....ofits or losses of the Sec.10A unit will not enter the computation of total income of the Assessee at all. 8. Aggrieved by the order of the CIT(A), the revenue has raised ground No.3 before the Tribunal. The learned DR relied on the order of the AO and relied on the decision of the Hon'ble Karnataka High Court in the case of CIT V. Himatsingike Seide Ltd., 286 ITR 265 (Karn.) wherein it was held that losses of non STPI units should be set off against profits eligible for deduction u/s.10A of the Act. 9. The ld. counsel for the assessee submitted that exemption u/s. 10A is in the nature of exemption and not a deduction and therefore profits of 10A unit will be outside the computation of total income and therefore there is no question of setting off of losses of non-STPI unit. In other words, it was the submission that exemption u/s. 10A of the Act is not in the nature of a deduction under Chapter VI of the Act and therefore set off as done by the revenue authorities should not be made. On the reliance placed by the ld. DRP on the decision of Hon'ble High Court of Karnataka in the case of Himatsingike Seide Ltd.(supra), the ld. counsel placed reliance on the decision of the ITA....
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....ourt in Himatsingike Seide Ltd.'s case (supra) are different. Similar is the factual situation insofar as the order of the Tribunal in Intellinet Technologies India (P.) Ltd. case (supra)." 10. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. This issue has already been settled by the Hon'ble Karnataka High Court in the case of Yokogawa India Ltd. (supra). The Hon'ble Karnataka High Court in the case of Yokogawa (supra) had to deal with two substantial question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eligible unit on which deduction u/s.10B was to be allowed. The Hon'ble Court in para 10 to 20 of its judgment dealt with the issue. The Hon'ble Court noticed that Sec.10- A(1) of the Act (which is in pari ....
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....ess loss) of same (s. 10A/10B) unit brought forward from earlier years have to be set off against the profits before computing exempt profits. The assessee in that case set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred "exemption" for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a "commercial" basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the order of the CIT. On appeal by the department, the High Court in CIT Vs. Himatasingike Seide Ltd. 286 ITR 255 (Kar) reversed the order of the Tribunal and held that the brought forward depreciation had to be a....
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....e international transactions, in the IT and ITES segments with associated enterprises (AEs) reported in Form 3CEB relevant to this appeal were as follows:- 1. Software Developments services (IT segment) Rs. 85,14,82,906 2. BPO Services (ITES segment) Rs.129,56,97,209 21. The details of segmental financials are as follows:- Description Software services Rs. ITES Rs. Operating Revenue 85,16,22,269 129,55,58,033 Operating Cost 77,29,72,192 114,37,06,621 Operating Profit 7,86,50,077 15,18,51,412 OP/TC 10.18% 13.28% 22. The issue raised by the Assessee in Grounds No.2 to 7 relates to the determination of Arm's Length Price (ALP) in respect of receipts by the Assessee from it's AE in respect of transaction of rendering software development services (IT) and ITES. Software Development Services (IT Segment) 23. In support of the claim of the Assessee that the price paid as above was at Arm's Length, the Assessee filed a Transfer Pricing analysis. The Assessee adopted TNMM as the most appropriate method. The Profit Level Indicator (PLI) chosen was Operating profit to operating cost. Th....
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....see against the order of the AO/TPO. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. 26. The next aspect that requires consideration is with regard to the comparability analysis carried out by the TPO. As we have already seen, the assessee had chosen a list of 11 comparable companies, which are given in the earlier part of this order. One of the comparable companies so chosen by the TPO was Persistent Systems Ltd., which was also a comparable proposed by the Assessee in its TP study. The Assessee however objected to this company being chosen as a comparable company before the TPO (at page 13 of the TPO's order) that this company is functionally different, but did not raise a specific objection before the DRP An additional ground was filed before the Tribunal raising a specific ground that Persistent Systems Ltd., should be excluded from the list of comparable companies on the ground that the said company is functionally different and in this regard has also placed reliance on decisions of tribunals rendered on the issue of this company being functionally comparable with a software development service provider such as the Assessee. The decisio....
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....tems (supra) has after considering the OECD Commentaries observed as follows:- "35. In para 4.16 of latest report, the OECD provides the following guidelines : "In practice, neither countries nor taxpayers should misuse the burden of proof in the manner described above. Because of the difficulties with transfer pricing analysis, it would be appropriate for both taxpayers and tax administrations to take special care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm's length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm's length principle regardless of where the burden of proof lies." 36. The aforesaid decisions an....
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.... admission and the determination of tax liability has to be in accordance with law. In the light of the aforesaid judicial pronouncement, we are of the view that the additional ground of appeal deserves to be admitted for adjudication. Accordingly, the additional ground is admitted for adjudication. 30. Before us, the ld. counsel for the assessee has filed a chart in which he has questioned the action of the TPO in including/retaining some of the comparable chosen by the TPO in the final list of comparables chosen by him. The assessee has also submitted that some of the comparable chosen by the Assessee ought not to have been rejected by the TPO. We will deal with each of such comparable companies in the following paras. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 31. Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of comp....
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....sessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the ....
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....f comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 33. KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- "(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was....
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....aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable. 34. Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software s....
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....services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comp....
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....ads as under : 3.7 Working Capital Adjustment: The working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009. In this case, average PLR adopted by SBI, the largest scheduled bank, for short term working capital loans for the relevant FY 2008-09 is considered. The average PLR of 12.50% p.a was adopted by the TPO while computing the working capital adjustment. The working capital adjustment is restricted to the average cost of capital computed at 1.71% in the case of the uncontrolled comparables selected by the TPO. Hence, the working capital adjustment in the case of the taxpayer is allowed as per the calculation in annexure-C or the average cost of capital to the comparables whichever is the least. The detailed discussion on this is given in the Annexure-D to the order. The computation of the working capital adustment is annexed to this order as Annexure C. 40. The TPO had restricted the cost of capital to 1.71%. Rationality for such an upper limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of M/s. Rambus Chip Technologies (India) P. Ltd v. DCIT [IT(TP)A.23/Ban/20....
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....% 2 Aditya Birla Minacs Worldwide Ltd 23.86% Microland Ltd (both segments) 1.53% 4 Allsec Technologies Ltd -16.63% 5 Accentia Technologies Ltd 46.40% 6 Informed Technologies India Ltd 22.61% 7 Cosmic Global Ltd 40.61% 8 Eclerx Services Ltd 57.46% AVERAGE PLI 25.03% 44. After allowing adjustment on account of working capital, the TPO computed the ALP as follows : "4.8.3Computation of Arms Length Price : The arithmetic mean of the Profit Level Indicators is taken as the arms length margin. Please see Annexure B1 for details of computation of PLI of the comparables. Based on this, the arms length price of the ITES services rendered by the taxpayer to its AE (s) is computed as under : Arm's Length Mean Margin on cost 25.04% Less : Working capital adjustment (Annex.C) 0.91% Adjusted margin 24.12% Operating Cost 3114,37,06,621 Arms Length Price (ALP) @ 124.12% of Operating Cost 141,95,68,658 Price received 129,55,58,033 Shortfall being adjustment u/s.92CA 12,40,10,625 45. The aforesaid addition made by the TPO was confirmed by....
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....identical, we direct that Infosys BPO be excluded as a comparable. Accentia Technologies Ltd. : 49. The comparability of this company was again considered by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions (supra) and it was held by this Tribunal as follows : "(1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing IT....
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....ontention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded." 50. The learned DR however put forth an argument that the case decided by the Tribunal was in relation to A.Y 2008-09 and there was an amalgamation during the previous year relevant to AY 2008-09 and therefore the aforesaid decision of the Tribunal cannot be applied blindly. In this regard, the learned counsel for the assessee brought to our notice that even during the previous year relevant to AY 2009-10 there was an amalgamation of Acentia Technologies Ltd with another company by name Asscent Infoserve Private Limited. The following Notes to accounts appear in the Annual Report :- "(B) NOTES TO ACCOUNTS 1. Amalgamation of Asscent Infoserve Private Limited with the Company. Pursuant to the scheme of amalgamation of the erstwhile Asscent Infoserve Private Limited (subsidiary of the company) with the company as approved by the shareholder in the court c....