TaxTMI 
TaxTMI 
2015 (10) TMI 2495
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.... incorrect margin computation. Ground Nos. 10, 11 & 12 are with reference to initiation of penalties and imposing interest u/s. 234B. 2. We have heard Ld. Counsel for Assessee and Ld. DR in detail and also perused the Paper Books placed on record running to Pages 881. Arguments of the Counsels and evidence placed on record are considered as and when required. 3. Briefly stated, Pegasystems Worldwide India Pvt. Ltd., is wholly owned subsidiary of Pegasystems, USA, an Associated Enterprise (AE). Assessee is a software solution provider to business process management software solutions and business rules platform. Assessee filed return of income admitting NIL income on 15-10-2010 for the impugned assessment year. AO has referred the case u/s. 92CA(1) of the Act for determination of ALP in respect of the international transactions reported for the financial year relevant to the AY. 2010-11. Assessee has reported the following international transactions in its 3CEB report/TP document: A.E. Nature of transaction Amount (Rs) Pegasystems Worldwide Inc. Provision of Software development services 29,20,96,158 Pegasystems Worldwide Inc. Reimbursement of expenses ....
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....ed as 121 TTJ Chennai (SB): 313 ITR (AT) 353 and CIT Vs. Gem Plus Jewellery India Ltd. [233 CTR 248] of Hon'ble Bombay High Court. Revenue is aggrieved on the relief granted by DRP, whereas Assessee is aggrieved on the TP adjustments made. T.P. Adjustments: 6. As briefly stated above, TPO has selected 18 comparables and arrived at the PLI which was reduced to 21.35% after excluding (Infosys Technologies Ltd.,) by DRP. Final selection of comparable companies after DRP's order is as under: OP/OC % 1. Avani Cimcon Technologies Ltd., - 3.39 2. CAT Technologies Ltd., - 13.04 3. Evoke Technologies Pvt Ltd., - 18.61 4. E Zest Solutions Ltd., - 22.10 5. Kulilza Technologies Pvt Ltd., - 25.92 6. Mindtree Ltd (Seg) - 20.47 7. Persistent Systems and Solutions Ltd., - 11.37 8. RS Software India Ltd., - 9.88 9. Thinksoft Global Services Ltd., - 11.22 10. Zylog Systems Ltd., - 18.62 11. E infochips Bangalore Ltd., - 72.32 12. Comp-U-Learn Tech India Ltd., - 19.96 13. Kals Information Systems Ltd (Seg) ....
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.... this year, there was arbnormally very high margin, the reasons of which could not be analysed in the absence of annual report. It was further contended that segmental information was not available. On the argument that the said company is providing both software development and IT enabled services Ld. Counsel placed the disclosures in annual report of FY. 2008-09 and annual report of FY. 2009-10 to submit that the company is primarily engaged in software development and IT enabled services and has reported both of them as one segment. Therefore, company is not comparable with Assessees on functional analysis. It was further submitted that company has merged in 2012 with another company and it will be difficult to obtain further information/segmental information about the company now. In view of its fluctuating profits over the years, this company was not selected as a comparable earlier or in later years by Revenue. Since the disclosure in annual report is common, Assessee relied on the decision of Ahmadabad Bench of ITAT in the case of All Scrips (India) Private Ltd., in ITA No. 771/AHD/2014 for AY. 2009-10, wherein this comparable was rejected on the basis of lack of segmental i....
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....ion, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard. Comp-U-Learn Tech India Ltd., : 9. This company was selected by TPO as one of the comparable companies. Assessee objected stating that this company is engaged in two segments ie. IT enabled services and software products solutions as per the annual report and it has exceptionally abnormal growth of profits of 160% as against industrial norm of 13 to 15%. It was also objected stating that the growth is more than 10 times the industrial growth and company in its standard financial performance has mentioned that it has spent sizeable amount towards R&D in pharmaceutical sector for the purpose of coming out with unique products and solutions for facilitating operational efficiency, effective inventory management and complete financial control for the sector. TPO however, considered the exceptional growth was only 1.6 times compared to last year and not an exceptional increase. Further, he extracted schedule 12, to come to a conclusion that as per annual report income from software development was about Rs. 14.11 Crores as against total income of ....
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....shed to enhance the quality of its products. Further, referring to revenue recognition in schedule 14 (page 219 of the Paper Book), it was submitted that 'revenue in respect of brand license fee is accounted on execution of agreement. Revenue for software development is recognized on the basis of chargeable time or achievement of prescribed milestone as relevant to each contract. Revenue from sale of software products and courseware materials is recognized when the same has been completed with the passing of title or licenses or raising invoices as the case may be'. Referring to the above, it was submitted that, that company is in diversified activities and not exclusively as software development service provider in which Assessee is functioning. Therefore, the company is functionally different. 9.2. After considering the rival contentions, we are of the opinion that on the basis of information available, Comp-U-Learn Tech India Ltd., cannot be selected as a functionally comparable company as it has diversified activities. Only if there are segmental reports pertaining to software development services, then only the company can be taken as comparable company. In the absence o....
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.... and software products since its inception'. The company consisting of STPI unit engaged in development of software and software products and a training centre engaged in training of software professionals on on-line projects. This indicates that company is engaged in development of software and products and its inventory also indicates that Assessee has been using its readymade libraries for sales. This company was rejected in earlier year on functional analysis by ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 where in it was held that company is engaged in development of software products. Since its annual report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee's objections are accepted and AO is directed to exclude the company. Persistent Systems and Solutions Ltd. : 11. This comparable was not objected to earlier by Assessee, therefore, there is no discussion on Assessee's objections either in TPO's order or in DRP's order. It was the submission by Assessee that above said earned revenue ....
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....ed is also not available. Moreover, the company itself has indicated that it cannot be compared with any other software service company because of its complex nature. Similar view was taken by many of the Co-ordinate Benches in earlier years that Tata Elxsi Ltd., cannot be selected as comparable company. Consistent with the above view, we are of the opinion that a company like Tata Elxsi Ltd., which has complex activities and segmental information of which is not available cannot be selected as comparable company to Assessee. Moreover, as seen from the turnover as reported by TPO itself, it was many times Assessee's turnover and therefore cannot be exactly considered as a similar company unless the nature of activity, the incomes are analysed in detail. Since no segmental data is available, considering the software development services as a segment by TPO cannot be considered as segmental data, unless the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same. Sasken Communication Technologies Ltd: 13. This comparable....
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....he most appropriate method adopted by TPO after rejecting the TP documentation of the Assessee, the filters used by TPO and also verified the financials of the comparables with reference to the notes on accounts & website notes. We noticed that certain notes on accounts made in certain cases do not match with that of the financials reported. We also noticed that meaning of the words used in the notes on accounts are not defined. Based on certain ITAT decision, the earlier directions of this panel and other panels, the huge turnovers involved, huge brand value, their predominant presence in the market, in view of incomplete details etc., this panel is of the view that the following comparables selected by TPO should be excluded from the list of final comparables chosen by TPO in the ALP computation. i) Infosys Technologies Ltd., ii) L&T Infotech Ltd., We direct TPO to exclude the above referred comparables from the list of final comparables chosen by TPO in the ALP computation and re-compute the ALP accordingly". 14.2. It was the submission that once DRP has accepted the objections of Assessee whereas in Assessee's case DRP did not exclude L&T Infotech while ....
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....any. TPO however, relied on the annual report disclosures particularly results of operations noted that '90% of the revenues are from Dubai and due to steep pricing pressure and huge discounts requested by the clients, its business severely got affected'. He was of the opinion that this is an exceptional year of operation and this fails the filter adopted by TPO. 15.2. After considering the rival contentions, we are of the opinion that TPO has correctly rejected the above company as comparable. Even though Assessee submits that the company satisfies the filters but seen from the annual report placed on record at page 251, the financial results indicate that income from software services and products to an extent of Rs. 1086.58 Lakhs. How much is from services and how much is from products is not available. Since above company also is having the products division, for the same objections raised by Assessee with reference to other comparables already selected by TPO discussed above, we are of the opinion that this company cannot be selected as a comparable for the same reasons accepted above while rejecting some companies. Since, there is no segmental data of software services and....
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....ced that Assessee has receivables of Rs. 21,07,53,864/- at the end of the year. Assessee was asked to submit the details of raising the invoice and subsequent receipts. TPO proposed to charge interest at 12% on the outstanding receivables. While replying that assessee is a fully funded entity of the AE and the amounts outstanding are on services but not loan or advances given. It also does not have any working capital risk and there is no interest payment also. It relied on the order of the ITAT in the case M/s. Evonik Degussa India Private Limited in ITA No. 7653/Mum/2011, wherein it was held that TP adjustment cannot be done on hypothetical issues. Assessee also further relied on the decision of Logix Micro Systems Ltd v. ACIT [42 SOT 525] (Bang) wherein ITAT held that a reasonable period should be provided as interest free period and no interest should be calculated for such period. However, while calculating the interest of 12%, TPO neither considered the above decisions nor gave any interest free period. Not only that even though Assessee realized the amounts in later year, i.e., after 31-03-2010, interest was charged for whole of the period. As can be seen from the table i....
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.... being made while analyzing the operational performance of the companies, therefore, outstanding amount gets adjusted in working capital adjustments and another separate addition is not required under the TP provisions. Thus, it was contended that the outstanding amounts are not to be considered for adjustment. 17.3. We have considered the issue and examined the rival contentions. In the case of Evonik Degussa India P. Ltd., in ITA No. 7653/Mum/2011, it was already held the TP adjustment cannot be made on hypothetical and notional basis, until and unless there is some material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case. Even though DRP tried to distinguish the above decision on facts, as seen from the facts in both the cases, we are of the opinion that the above decision will equally apply to Assessee's case. Assessee has outstanding service charges receivables and as seen from the order of TPO, the outstanding is only fr....
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....nciples of law and the orders of ITAT/High Court on this issue before levying any interest u/s. 234B. Ground Nos. 11 & 12 pertain to initiation of penalty proceedings which are little premature to be adjudicated at this point of time. Accordingly, grounds are rejected as academic in nature. 20. In the result, appeal of the assessee is partly allowed for statistical purposes. Revenue's Appeal in ITA No. 1936/Hyd/2014: 21. Revenue has raised three grounds which as are under: "2. DRP ought to have retained the Infosys Technologies Ltd from the list of comparables as the Transfer pricing rules or OECD guidelines do not prescribe any specific range of turnover for comparability corresponding to size and scale of operation. 3. DRP ought to have retained the rate of depreciation charged by AO/TPO. 4. DRP erred in deleting the addition towards communication expenses in view of the explanation 2 to section 10A of the IT Act". 21.1. Ground No.3 does not arise out of the order of AO/TPO, therefore, the same was withdrawn in the course of proceedings. 22. Ground No.2 pertains to rejection of Infosys Technologies Ltd., from the list of comparables by DRP. We have a....