TaxTMI 
TaxTMI 
2015 (11) TMI 1582
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.... 31, 28,41,221/- to the arm's length price ('ALP') in respect of recomputing 10A deduction, thereby determining the total income of the Appellant at INR 36,62,68,380/- as against the returned income of INR 23,91,580/-by the Appellant. The assessment order passed in the case of your appellant for Assessment Year ('AY') 2009-10 is following DRP's directions and this appeal is directed against the said order. Transfer pricing grounds Ground no.1: Treating foreign exchange as non-operating in nature for the computation of profit level indicator (PLI) 1.1 On the facts and circumstances of the case, and in law, the DRP has erred in excluding the amount of Foreign Exchange Gain amounting to INR 15,99,29,779 from the operating revenue of the Appellant and treating the same as non-operating. 1.2 On the facts and circumstances of the case, and in law, the DRP has erred in enhancing the order ignoring the fact that TPO himself has agreed the treatment of foreign exchange as operating in nature in its order on the principle of consistency. In the earlier assessment years foreign exchange loss was also treated as operating in nature, thereby denied consistent....
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....pplied, are having high turnover and are having higher margins. 3.1. On the facts and circumstances of the case, and in law, the TPO and DRP have erred in selectively including Geneysys International Corporation Ltd., in the final set of comparable companies and falling to follow the order of the DRP in the Appellants own case for AY 2008-09 without appreciating that the said company is functionally different compared to the appellant. 3.2 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in selectively including Infosys Technologies Limited in the final set of comparable companies without appreciating the facts that the said Company is failing the filter applied by the TPO for software development income being greater than 75% of total operating income, is also functionally different in many parameters and the turnover of the said company is far greater than the turnover of the appellant. 3.3 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in including KALS information Systems Ltd. and persistent Systems Ltd. In the final set of comparable companies without appreciating that the said com....
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....hat the benefit of +7-5 per cent range be granted to the appellant as envisaged by the provisions of section 92C(2) of the Act. Ground no.8: Non-applicability of the provisions of Chapter X of the Act to the Appellant. 8.1. The TPO and DRP has erred in not applying the provisions of Chapter X of the Act although the Appellant is availing the relief under section 10A of the Act. 8.2 The Appellant prays that the provisions of Chapter X of the Act be made applicable to the appellant. Corporate-tax grounds Ground no.9: Exclusion of unrealized foreign exchange for determining the deduction under section 10A of the Act. 9.1 On the facts and in the circumstances of the case and in law, the AO and the DRP have erred in concluding that unrealized foreign exchange gain, relating to the activity of export, amounting to INR 3,75,69,434/- is not derived from the activity of export and therefore not entitled for deduction under section 10A of the Act. 9.2. The Appellant prays that the unrealized foreign exchange gain be included in the profits of the undertaking and the relief under section 10A of the Act be recomputed accordingly. G....
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....t the TPO/DRP erred on facts and in law in rejecting Computech International Ltd., satisfying all the filters, in the final set of comparable companies allegedly on the ground that segmental information of the said company is not available. (Original ground of appeal No.2.1) 4. That the TPO/DRP erred on facts and in law in not excluding the pass through cost of Rs. 7,95,55,035 on translation work outsourced to third parties from the total operating cost for determining the operating profit margin for the purpose of undertaking benchmarking analysis applying TNMM. (Original ground of appeal No.4, 4.1 to 4.2) The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal." 4. The following Additional Grounds have also been taken by the assessee: "1. That on the facts and circumstances of the case and in law, the DRP/TPO ought to have allowed appropriate risk adjustment to establish comparability considering that the applicant is a lowrisk-bearing captive service provider as opposed to the com....
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....ed financial statements of Genesys International Corporation Ltd. for the financial year 2006-07-Refer page 975 of Paper Book. 3. DRP order in the case of the appellant for the assessment year 200809-Refer page 1063 of Paper Book. 4. TPO order in the case of the appellant for the assessment year 200809-Refer Page 1077 of Paper Book. 7. Apropos Additional Grounds 2 to 6/Modified Ground No.2 and the additional evidence sought to be filed on behalf of the assessee, it has been contended that undisputedly, these companies were taken as comparables by the assessee itself in its TP study. Therefore, these companies can now be taken and are being sought to be considered. It has been contended that the legal position in this regard is that there is no estoppel in Income-tax proceedings and the assessee can make a claim, notwithstanding that the same was not made in the return of income. Of the five comparables taken in the Modified Ground, the assessee contends that three comparable Companies, i.e., 3D PLM Software Solutions Limited, Bodhtree Consulting Limited and Cosmic Global Ltd., were undoubtedly taken by the assessee itself in its Transfer Pricing documentation f....
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....stems Pvt. Limited" (supra), the Special Bench of the Tribunal, a similar contention, as now raised by the Department, had been raised, that since one of the comparables was the choice of the assessee and no objection to its inclusion was taken before the Authorities below, such request at the second appellate stage was not sustainable. Rejecting this contention, the Special Bench of the Tribunal held that even if the comparable had been taken by the assessee in its Transfer Pricing audit, the assessee was entitled to point out to the Tribunal that the company had been taken wrongly as a comparable. It was held that the Tribunal is a fact finding body and, therefore, it has to take into account all the relevant material and determine the question as per the statutory regulations; that the assessee is not estopped from pointing out a mistake in the assessment, though such mistake may be the result of evidence adduced by the assessee itself; that when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done due to some mistak....
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....jata Grover", 74 TTJ 347 (Del.) 13. "Deutsche Bank A.G. vs. DCIT", 86 ITD 431 14. "Bestobell (India) Ltd", 117 ITR 789 (Cal.) 15. "Khandelwal Brothers Pvt. Ltd. v. CIT", 117 ITR 452 (Cal. 16. "CIT vs. Oil India Ltd." 143 ITR 848 (Cal.) 17. "CIT vs. Martin and Harris P. Ltd." 154 ITR 460 (Cal.) 18. "Oil and Natural Gas Corpn. Ltd. vs. DCIT", (2003) 261 ITR 1 (SB) (Delhi ITAT) 19. "DCIT VS. Sony India Pvt. Ltd.". 114 ITD 446 [ affirmed up to the Hon'ble Supreme Court, as reported at 312 ITR 254 (SC)] 20. "Sumit Diamond India P. Ltd. vs. ACIT", ITA No.7148/Mum/2012). 21. "M/s. Techbooks International Pvt. Ltd. v. ACIT", ITA No.722/Del/2014 22. "Westfalia Separator India Pvt. Ltd vs. ACIT", ITA Nos.4446/Del/2007 & 4447/Del/2007). 23. "CISCO Systems (India) Ltd. vs. DCIT", [IT (TP) A. No.271/Bang/2014] 24. "Four Soft Limited", ( ITA No.1495/Hyd/10) 25. "M/s. Mercendex Benz Research & Development India Pvt. Ltd. vs. DCIT", ( ITA No.1222/Bang/2011) 26. "M/s. Premier Exploration Services Pvt. Ltd. vs. ITO" ( ITA No.5293/Del/2012 27. "S. Narendera vs. ....
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....ternational" (supra), the exchange gain related to sundry debtors will go to increase the operating cost; and that the exchange gain relating to other revenue items need not to be considered, in the absence of the details. It is submitted that the exchange gain relating to other revenue items may be related to business income, but it cannot be treated as operating receipt; it may be on account of reinstatement of interest receivable on account of foreign exchange currency; that interest is not treated as operating income or expense for the purpose of computation of the PLI; that on the other hand, without prejudice, if it is to be so considered, it will go to increase the operating revenue and not cost. It has been urged that here, the denominator in the computation of the PLI (OP/OC) is the operating cost or the total cost; and that, therefore, necessary direction be issued for computation of the assessee's PLI accordingly, since the TPO could not make the necessary adjustment in the working of the PLI, in the absence of details. 15. In this regard, we find the contention of the ld. DR to be correct. It remains undisputed that "Techbook International" (supra), rendered by the D....
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....ame may be decided subject to verification of RPT." 21. As regards the RPT of 3D PLM, it is submitted that there cannot be any situation where related party transaction exceeds one hundred percent The TPO has applied related party transaction filter of 25%. It is submitted that 3D PLM may not be excluded on functional comparability. The same may be decided subject to verification of related party transactions. 22. The contention of the Department is found to be justified. Accordingly, the TPO is directed to verify the related party transactions of 3D PLM and if the contention of the assessee, that the RPT of 3D PLM is more than 25%, is found to be correct, 3D PLM Software Solutions Ltd. will be excluded from the final set of companies comparable to the assessee, in accordance with "Global Logic India Pvt. Ltd." (supra). The TPO shall also keep in mind the assessee's contention that 3D PLM is a software product company, for which reason also it is not comparable to the assessee. 23. Apropos Bodhtree Consulting Ltd., which was also taken as a comparable by the assessee itself in its TP study, the assessee's objection against its inclusion for the final set of comparable compani....
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....ncern the components of "application development" only and "product release" is but one such component. In the absence of any evidence to the contrary, either in the TPR, or elsewhere in the record, this argument of the ld. DR is unsustainable and is rejected. 25. Besides, the TPO's order does not record any finding that the assessee is a product manufacturing company. Rather, the assessee was found to be in the calling of localization and software services, as recorded by the TPO in para 5.1 of his order. This finding of the TPO was confirmed by the ld. DRP. The Department cannot now be allowed to set up a new case, as is sought to be done. Even otherwise, the case sought to be now set up at this stage, i.e., that the assessee manufacturing company is a product company, is factually incorrect. 26. On the basis of the above, it is correct that Bodhtree Consulting Ltd., being a software product manufacturer, is not comparable to the assessee company. Moreover, it has been excluded in "Nethawk Networks Pvt. Ltd.", (supra), "Wills Processing Services (I) Pvt. Ltd." (supra) and "CISCO Systems Pvt. Ltd." (supra). Accordingly, here also, it is ordered to be excluded from the final ....
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....y averages in its TP Study Report; that also, this issue was never before the TPO/DRP; that the some of the comparables have outperformed in terms of percentage of operating profits; that the assessee has applied this criterion selectively to the comparables which are showing higher gain and this criterion has not been applied to the other comparables, based on which, the TPO has determined the ALP, where the PLI or the operating margins are far below that of the industry average, as in the cases of "Gold Stone Technologies", "R.S. Software", "Intertech Communications Ltd." and "Mindtree Limited"; and that there are numerous factors affecting profit and turnover is only one such factor. Reliance has been placed on the decision of the Hon'ble Delhi High Court in the case of "Chryscapital Investment Advisors (I) Pvt. Ltd.", (2015) 56 taxman.com 417 (Del), as per which, wide fluctuations in profits margins of the same entity on an year to year basis would be offset by taking the arithmetic means of all the comparables in the assessment year in question. It has been contended that, therefore, Genesys cannot be excluded as a comparable, particularly when the assessee has itself selected....
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....as above. 34. In view of our discussion of and decision on Ground no.2 of the Modified Grounds of Appeal, Ground nos. 3, 4 & 6 ( of the Original Grounds of Appeal) are also not required to be gone into and we are not doing so. 35. Now, turning to the remaining effective Grounds in the Original Grounds of Appeal, the ld. Counsel for the assessee has chosen not to press Ground Nos. 5, 7 & 8. Ground nos. 5, 7 & 8 are, therefore, rejected as not pressed. 36. Ground no.9 of the Original Grounds pertains to the Cororate-tax issue. It challenges the exclusion of unrealized Forex gain from the profits of the business of the undertaking, for computing deduction u/s 10A of the Act. As per the record, during the year under consideration, the assessee earned net foreign exchange gain of Rs. 15,99,29,779/-, as follows: Nature of loss Amount in (Rs) Exchange gain related to Sundry Debtors Realised Gain 10,41,77,395 Unrealised Gain 4,12,39,516 Total Exchange gain related to Sundry Creditors 14,54,16,911 Exchange gain related to Sundry Creditors ....
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....er in the numerator have to be read in the same manner. For this reliance has been placed on the following case laws: i) "CIT vs. Gem Plus Jewellery India Ltd.", 330 ITR 175 (Bom.) ii) "M/s. Microchiop Technology Designs (India) Pvt. Ltd.", ITA No.1161/Bang/2007 (Bang.) iii) "M/s. Alternative Food Process P. Ltd. vs. ITO", ITA No.52/Bang/2008 (Bang.) iv) "M/s. Goodrich Aerospace Services P. Ltd. vs. DCIT", ITA No.58/Bang/2008 (Bang.) v) "M/s. Hewiett Packard Global Soft Ltd." IT No.333/Bang/208 (Bang) vi) "ACIT vs. Infosys Technologies Ltd.", 172 Taxman 134 (Bang) vii) "ITO vs. Servio Global Solutions Ltd.", 117 TTJ 380( Chennai) viii) "I-Gate Global Solutions Ltd. vs. ACIT", 112 TTJ 1002 (Bang) ix) "Tata Elxsi Ltd.", 115 TTJ 423 (Bang) -affirmed by Karnataka High Court in CIT vs. Tata Elxsi Ltd.: ITA No.70/2009, decided on 30.8.2011. x) "Nous Infosystems (P) Ltd. vs. ITO", ITA No.1042/Bang/07 (Bang.) xi) "Mphasis Ltd. vs. ACIT", ITA No.884/Bang/07 (Bang). xii) "Patni Telecom (P) Ltd. v. ITO", 22 SOT 26 (Hyd.) xiii) "DCIT vs. Softsol India Ltd.", 22 SOT 271 (Hy....
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.... High Court in the case of "Gem Plus Jewellery India Ltd." (supra), which holds the field, the operation whereof has not been shown to have been stayed on appeal. The ld. DRP followed this decision in favour of the assessee. Therefore, the appeal of the Department against the decision of the Hon'ble Jurisdictional Bombay High Court in "Gem Plus Jewellery India Ltd." (supra), notwithstanding, the order of the ld. DRP is confirmed. 51. Accordingly, ITA No.1375/Mum/2012 is dismissed. ITA No.7415/Mumbai/2014 52 This is the assessee's appeal for the assessment year 2010-11 against the order dated 26th Sept., 2014, passed by the ld. DRP. The assessee has taken the following grounds: "Based on the facts and circumstances of the case, the appellant respectfully submits that the learned AO erred in determining the total income of the appellant at Rs. 17,61,98,340 as against the returned income of Rs. 8,98,670 fled by the Appellant. The grounds of the Appellant against the action of the AO are as follows: 1. The assessment order dated November14, 2014, passed by the AO under section 143(3) read with section 144C of the Act is not in accordance with the law and is c....
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....ounsel for the assessee has stated at the bar that the Additional Ground is not pressed. Rejected as not pressed. 55. Ground No.1 is general in nature. 56. Ground No.2 challenges the adjustment of Rs. 12,72,63,996/- to the arm's length price determined by the assessee in respect of international transactions in connection with IT and ITES activity undertaken by the assessee with its Associated Enterprise (AE). 57. The Taxing Authority selected/rejected certain comparables. The TPO computed 12.10% as the assessee's operating profit margin (OP/TC). As against this, the assessee took 18 comparables in its TPR, as follows: Sr. No. Company Name Weighted Average 1. 3D PLM Software Solutions Ltd. 45.28% 2. A S M Techlologies Ltd. 13.68% 3. Bodhtree Consulting Ltd. 41.22% 4. California Software Co. Ltd. 3.98% 5. Cosmic Global Ltd. 31.98% 6. Goldston Technologies Ltd. -1.38% 7. Indus Networks Ltd. 3.00% 8. Intertec Communication Ltd. 7.00% 9. Kaashyap Technologies Ltd. 18.66% 10. Mindtech (India) Ltd. 0.77% 11. R.S. Software ....
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.... Mindtree Ltd. 22.83% 7. Persistent Systems Ltd. 30.56% Arithmetic Mean 25.62% 61. Of the above, seven comparables, Infosys Technololgies Ltd., Kals Information Systems Ltd., and Persistent Systems Ltd. are the companies introduced by the TPO, though not taken as comparables by the assessee. The TPO, thus, arrived at an average profit margin of 25.62%. 62. On the basis of the above, the TPO made addition on account of TP adjustment amounting to Rs. 12.72 crores. The DRP upheld this addition, bringing the assessee now before us. 63. The assessee is aggrieved with the action of the DRP in confirming the TPO's action of selecting the above said three companies, i.e., Persistent, Infosys and Kals, as companies comparable to the assessee. In this regard, the ld. Counsel for the assessee has contended that the services rendered by the assessee include providing low-end software development and related services, i.e., Information Technology (IT) and Information Technology Enabled Services (ITES) and export thereof to its Associated Enterprises. The assessee offers a range of services, such as software development services & applicatio....
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....sfer Pricing Report (TPR), as per which, according to the ld. DR, the assessee is into "application development", which includes, interalia, "product release". Therefore, according to the ld. DR, the assessee is a product manufacturing company. This, however, has been emphatically denied on behalf of the assessee. It has been contended that the TPR is, in fact, being grossly mis-construed and mis-read, in as much as "product release" does not, in any manner, have any equivalence whatsoever with "product manufacture". As a matter of fact, according to the ld. Counsel for the assessee, if the TPR is correctly construed, it refers to "product release" only in the context of "application development", software development being the sole business activity of the assessee. 68. Referring to page 72 of the APB, it was pointed out that as declared by the assessee itself, LB India has two development centres in Mumbai and Chennai employing more than 1200 professionals. The services rendered by LB India include low-end, routine development and maintenance of content application as well as testing to ensure the quality, interoperability, usability and performance of the client's software, h....
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.... rendering a mixture of high-end services and release of products. Therefore, according to the Ld. DR, KALS is definitely comparable to the assessee. Moreover, since it was accepted last year, the assessee cannot cherry-pick for the year under consideration. Besides, there are four companies taken as comparables which are product manufacturing companies, i.e., 3 D PLM Software Solutions, R Systems International Ltd., Goldstone Technologies Ltd., and Zylog Systems (India ) Ltd. So, according to the ld. DR, the assessee selects and then detracts from these comparables for these reasons, which are not permissible in law. 73. In this regard, it is seen that the assessee cannot be faulted with in contending that since the assessee is not into software products manufacture, it cannot be compared with companies which are not into this activity. Like can be compared only with like, as is well settled . We have also held so in the assessee's own case for the AY 2009-10 while dealing with ITA No.668/M/2014 (supra) that Kals is into product manufacturing services ( As per APB-291), whereas the assessee is only providing services. Complete segmental data regarding software is available at A....
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....bility on the basis of segmental results of software development of this company for comparison and determination of mean PLI." So, for the AY 2009-10, segmental data regarding products manufactured and services rendered was available. 75. Thus, for the assessment year 2009-10, as per the DRP, segmental results of software development were available. It was, therefore, that the TPO was directed by the DRP to make a comparison considering segmental results of the software development segment of KALS and to thereby determine the mean PLI of the comparables. 76. Such finding of the DRP for AY 2009-10 stands final. This is due to the fact that comparability only with three companies, i.e. 3D PLM, Bodhtree and Genesys served the assessee's purpose for that year and on our call, the assessee was not required to go into the other comparables. 77. However, the said finality of the DRP order in AY 2009-10 regarding KALS cannot be taken in any manner detrimental to the assessee qua the year under consideration. It is trite that each year is independent and facts are to be viewed and decided for each year separately. 78. So, we have to consider the comparability or otherwise of....
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....ncomparrable with the assessee, we reject this company as a comparable. We hold that the DRP has erred in confirming the TPO's action including KALS as a comparable. 83. Apropos Persistent Systems Ltd., it is an offshore software product development company, as available at APB 305. In this regard, the assessee has contended that the company derives its revenues primarily from sale of software services and software products. It was further submitted that this company is a global company specializing in software product and technology innovation. The company utilizes its product engineering processes to develop best-in-class solutions for its customers who are players in the technology, telecommunication, life science, healthcare, banking and consumer products sectors. 84. On the other hand, the ld. DR, again, like in the case of KALS, states the assessee to be a product manufacturing company. 85. However, while dealing with KALS, we have rejected this company as a comparable. Like-wise, we hold that Persistent Systems Ltd., has also not been correctly chosen as acomparable. This comparable is also rejected. 86. Coming to Infosys Technologies Ltd.. the assessee's content....
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....and conduct business. * Ranked as the most admired company in India according to the Wall Street Journal Survey. * Ranked among the 50 most respected companies in the world by Reputation Institute's Global Reputation Pulse 2009. * Ranked among the top 25 companies in Business Week's Infotech 100. * Ranked among the top 25 companies in the world for developing leaders by Fortune/Hewitt. * Ranked as the best company to work for in India for Business Today's ninth survey of 'Best Companies to Work For'. Industry analysis rates as highly in reports on our key services and markets. The services for which we were rated highly include, Service Oriented Architecture, Oracle Service providers. Comprehensive Finance and Accounting Business Process Outsourcing, and also for the Finacle product suite. We had over a million visits to our blogs on business and technology related topics on our website wwwinfosys.com during the year. Our employees contributed and published several thought leadership articles across various industry for a and publications. We leveraged social media platforms and engaged with our stakeholders an....
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....en pointed out that as per the company's overview (APB 478 para -1), Infosys provides end to end business solutions that leverage cutting-edge technology, thereby enabling its clients to enhance business performance. The company provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. In addition, the company offers software products for the banking industry. 89. It has also been pointed out as per APB 454, para 20, Infosys has a strength of 92,688 employees. It has further been pointed out that per contra, the assessee company has a team of approximately 4600 employees only, out of whom, 1600 are professionals. It has been contended that in the case of "Agnity India Technologies P. Ltd.", ITA/1204/11 (HC Delhi), Infosys has been rejected as a comparable. 90. On the other hand, the ld. DR has adopted the same argument as in the case of KALS. 91. In this regard, it is seen that the DRP, for the AY 2009-10, observed, with regard to Infosys, as follows: "4.3.3. Infosys Techno....
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....so found to be correct. Infosys has not been shown to be at parity with the assessee, on the basis of functionality. Its functionality is entirely different from that of the assessee, as seen in the preceding paragraphs. Therefore, we reject Infosys as a comparable. 94. Therefore, Ground No.2 is accepted, as indicated. 95. In view of the above, the final set of companies comparable to the assessee would be as follow: Sr. No. Name of the company NCP(%) 1. Cosmic Global Ltd 16.59% 2. I-Gate Global Solutions Ltd. 19.19% 3. Mindtree Ltd. 22.83% 4. R.S. Software (India) Ltd. 10.27% Arithmetic mean 17.22% Appellants' margin (computed by TPO) 12.10% 96. Apropos Corporate Tax related Grounds, as per Ground no.3, the AO erred in disallowing the foreign exchange loss of Rs. 4,80,35,675/- on account of the same being neither accrued nor an actual loss. 97. As per the assessee, this issue has been decided in favour of the assessee in assessee's own case by the Mumbai Bench of the Tribunal for the assessment year 2009-10. 98. This contention of the assessee is found to b....