TaxTMI 
TaxTMI 
2014 (10) TMI 936
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....re capital and therefore, the same was to be disallowed." 3.1 Facts of the case, in brief, are that during the course of assessment proceedings the Assessing Officer observed that assessee has increased its issued, subscribed and paid up share capital by making direct expenses of Rs. 33,17,360/- on account of stamp duty and registration charges. He observed that in the computation of income the assessee company claimed deduction of Rs. 6,63,472/- u/s.35D of the I.T. Act. by amortizing the said expenses over a period of 5 years. According to the Assessing Officer the assessee must have incurred further indirect expenses for increasing the share capital. Therefore, the Assessing Officer made adhoc disallowance of Rs. 33,174/- treating the said expenses as capital expenditure. The assessee approached the DRP but without any success. The Assessing Officer accordingly made disallowance of Rs. 33,174/-. 3.2 Aggrieved with such order of the Assessing Officer the assessee is in appeal before us. 4. The Ld. Counsel for the assessee strongly challenged the order of the Assessing Officer. He submitted that the assessee has incurred expenditure of Rs. 33,17,360/- on stamp duty and reg....
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....isallowance u/s.14A. The assessee approached the DRP but without any success. The Assessing Officer accordingly made addition of Rs. 33,17,360/- to the total income of the assessee. 7.2 Aggrieved with such order of the Assessing Officer the assessee is in appeal before us. 8. The Ld. Counsel for the assessee submitted that the addition made by the Assessing Officer is devoid of any merit. According to him, the share capital was increased by the assessee company which is available for various purposes and it is not a case that the capital is increased only for making the investment in the subsidiary company. He submitted that the utilisation of funds raised on account of increase in the share capital is not to be considered for making the disallowance u/s.14A. Referring to page 98 of the paper book he submitted that the assessee has already disallowed itself an amount of Rs. 39,92,272/- and has not claimed any expenditure. Referring to page 29 of the paper book he submitted that the auditors in clause 15 of the Tax Audit Report have mentioned that the deduction is allowable u/s.35D at Rs. 39,99,272/- and the assessee has debited an amount of Rs. 33,17,360/-. He submitted that ....
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....me is compared with respect to the exempted unit. On verification of the various details furnished by the assessee, the Assessing Officer noted that both the units, i.e. STPI and non STPI (exempt and taxable) are rendering their total IT and IT enabled services to their parent/holding company. He noted that no separate books of accounts are maintained for the said two units. Therefore, in absence of the same, he was of the opinion that the book results shown by the assessee are not fully verifiable. He noted that the auditors while certifying the eligibility of deduction of Rs. 9,22,90,403/- u/s.10A have given the following note : "4. The indirect costs have been allocated to the eligible STPI unit based on the assumptions made and determined appropriate by the management and we have relied upon the same. 5. In determining the profit of the undertaking, operating and other overhead costs have been allocated based on the assumptions made as determined appropriate by the management of the company and the auditors have not ascertained their propriety". 11.2 He, therefore, was of the opinion that the correctness/reasonableness of the expenses allocated by the asses....
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....owing Rs. 2,89,14,439/- as above. 11.4 Aggrieved with such order of the Assessing Officer the assessee is in appeal before us. 12. The Ld. Counsel for the assessee referring to page 98 of the paper book submitted that the assessee has given complete details and has made addition to the total income u/s.40(a)(ia) and 43B. He submitted that because of the disallowances the business income of the assessee has gone up and the assessee has claimed higher deduction u/s.10A. Referring to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Pvt. Ltd. reported in 330 ITR 175 he submitted that the Hon'ble High Court in the said decision has held that increased income owing to disallowance has to be taken into account for the purpose of calculation of deduction u/s.10A. He submitted that the Assessing Officer has completely ignored the decision of the Hon'ble Bombay High Court cited (Supra). He submitted that the assessee has maintained separate books of account. The assessee has apportioned the common expenses on the basis of number of employees whereas the Assessing Officer has allocated the expenses on the basis of turnover. In any case, in vi....
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.... Bombay High Court while deciding an identical issue for computation of deduction u/s.10A where disallowance was made u/s.43B has observed as under : "For the purposes of the appeal it is necessary to refer to the admitted position which is that the assessee had deposited both the employer's and the employees' contribution towards PF and ESIC, though beyond the due date including the grace period. The AO added these payments to the total income of the assessee and made an addition in the amount of Rs. 71.59 lacs. However, for the deduction under s. 10A, the addition made on account of the employees' contribution was ignored in calculating the profits eligible for deduction on the ground that these receipts were not generated out of the manufacturing activity of the assessee company. By reason of the judgment of the Supreme Court in CIT vs. Alom Extrusions Ltd. (2009) 227 CTR (SC) 417 : (2009) 32 (SC) DTR 49 : (2009) 319 ITR 306 (SC) the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that th....
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....e said income was derived from the business of industrial undertaking and hence, the deduction ought to have been allowed". 15.1 At the time of hearing, the Ld. Counsel for the assessee did not press this ground for which the Ld. Departmental Representative has no objection. Accordingly, ground of appeal No.4.2 is dismissed as 'not pressed'. 16. Grounds of appeal No. 5 to 5.6 by the assessee reads as under: "5. The Ld. DRP erred in confirming the addition of Rs. 10,29,90,870/- made u/s.92CA of the Act". 5.1] The learned DRP erred in making an adjustment of Rs. 5,03,92,400/- u/s 92CA in respect of provision of software development services by the appellant company to its AE. 5.2] The learned DRP erred in making an adjustment of Rs. 4,63,25,506/- u/s 92CA in respect of provision of design engineering & testing services by the appellant company to its AE. 5.3] The learned DRP erred in making an adjustment of Rs. 62,72,964/- u/s 92CA in respect of provision of regional supply management Services by the appellant company to its AE. 5.4] Without prejudice to the above grounds, the learned DRP erred in not appreciating that the adjustment....
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.... 5,03,92,400 2 Design Engineering, Testing and Authoring Services 4,63,25,506 3 Regional Management Supply Services/Business Support Services 62,72,964 Total 10,29,90,870 SOFTWARE DEVELOPMENT SERVICES SEGMENT : 17. In this year, the assessee has provided software development services to Deere & Co. The software development services are mainly in the nature of computer programming, code development, integration, etc. The total turnover of software development services in this year was Rs. 39,29,09,065/-. In the TP Study Report, the assessee had initially selected 28 companies as comparable entities for determining ALP of software services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 27 comparable entities on the basis of single year data. The list of comparable entities selected by the assessee is as under : Sr. No. Companies selected as comparable by the TPO OM (%) 1 Akshay Software Technologies Ltd 6.20 2 Aztech Software & Technology Services 18.93 3 Four Soft Ltd 18.94 4 Gebbs Infotech Ltd NA 5 Ge....
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....e (India) Ltd. 13.09 8 SIP Technologies and Exports Ltd. 10.12 9 Sasken Communication Technologies Ltd. 21.92 10 Transworld Infotech Ltd. 32.88 11 Kals Information Systems Ltd. 30.55 12 Compucom Software Ltd. 35.63 13 Goldstone Technologies Ltd. 20.31 Avg. Operating Margin 23.38 17.3 Accordingly, the TPO computed the Avg. Operating Margin of comparable entities at 23.38% as against the Operating Margin of 9.37% earned by the assessee and hence, the A.O./TPO has made an adjustment of Rs. 5,03,92,400/- u/s 92CA in respect of the software development services rendered by the assessee. The assessee approached the DRP but without any success. Accordingly, the TPO made adjustment of Rs. 5,03,92,400/- u/s.92CA of the I.T. Act. 18. The Ld. Counsel for the assessee strongly challenged the order of the TPO. He submitted that the addition made by the TPO is not justified. The Ld. Counsel for the assessee gave reasons for not excluding the following companies as comparable, the details of which are as under: MAARS SOFTWARE INTERNATIONAL LTD. [MAARS] : 19. The Ld. Counsel for the assessee submitted that the TPO....
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....s. Referring to the submissions given before the DRP, copies of which are placed at page 561 of the paper book, the Ld. Counsel for the assessee submitted that profits and losses are part and parcel of business activity and hence, merely because VJIL has incurred loss in this year, the TPO is not justified in rejecting the said company from the list of final comparables. Referring to page No.402 of Paper book-II he submitted that VJIL has been consistently earning profits for the preceding five years i.e. from A.Y.2002-03 to A.Y.2006-07 and thus, it is not a persistent loss making company. He accordingly submitted that merely because VJIL has incurred loss in this year, there is no reason to reject the said company from the list of final comparable entities. For the above proposition, he relied on the decision of the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd. v. DCIT [ITA No. 118/PN/2011] wherein it has been held that a company should not be rejected merely because it has incurred losses, unless it is shown that the said company is a persistent loss making company. Referring to the decision of the Delhi Bench of the Tribunal in the case of Qualcomm In....
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....ese companies are not comparable. INFOSYS TECHNOLOGIES LTD. (INFOSYS) : 22. The Ld. Counsel for the assessee submitted that Infosys is the market giant in the field of software development and it assumes all risks leading to higher profits whereas the assessee company is a captive unit of its holding company, Deere & Co., USA and it assumes only limited risks. There is vast difference in the size of operations, assets and risks borne by Infosys and that of the assessee company. For instance, the turnover of Infosys for this year is Rs. 13,149 Crs. [page 423 of P.B- II] as against the turnover of the assessee company of Rs. 39.34 Crs. from software developmentactivity [page 37 of TPO's order]. He submitted that Infosys owns a large number of brands/proprietary products which is not the case of the assessee company. Further, in the TPO's order for A.Y.2006 - 07 in the assessee's own case, the TPO has held that Infosys is not comparable with the assessee company on the ground that its turnover is far more than that of the assessee and hence, it is not comparable. He also relied on the following decisions wherein it has been held that considering the huge 'differe....
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....d in view of the above reasoning. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. (HELIOS) : 24. The Ld. Counsel for the assessee submitted that Helios is functionally different from the assessee company. Referring to the decision of Pune Bench of the Tribunal in the case of PTC Software (India) Pvt. Ltd. [ITA No. 1605/PN/l 1] for A.Y.2007 - 08 (Copy of which is placed in the paper book at page 17) he submitted that the assessee company was engaged in providing software development services. The TPO considered Helios as a comparable entity for A.Y. 2007 - 08. The assessee contended that Helios was also engaged in functions other than rendering software development services and hence, it was not comparable with the assessee. The Tribunal held that Helios was not comparable with companies rendering software development services and thus, the said company was excluded. He submitted that like PTC Software (India) Pvt. Ltd., the assessee is also engaged in rendering software development services and hence, the facts and the year under consideration being similar as in that case, therefore, Helios has to be held as functionally not comparable with the assessee company in view of the ....
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....ssee submitted that the TPO is not justified in newly introducing the following two companies as comparable entities with the assessee company. KALS INFORMATION SYSTEMS LTD. (KALS) : 25. The Ld. Counsel for the assessee submitted that Kals is engaged in provision of software development services as well as sale of software products and the separate segmental data is not available for software development services business. Accordingly, he submitted that Kals is not comparable with the assessee company. 25.1 Referring to para 5.15 on page 563-564 of paper book-III he submitted that the assessee has clarified this issue in its submission to DRP The relevant extracts of the Annual Report of Kals are on pages 424 - 427 of P.B.- II. Referring to the decision of the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. [ITA No. 1386/PN/10] and PTC Software (India) Pvt. Ltd. [ITA No. 1605/PN/l 1] he submitted that the Tribunal in the aforesaid cases has held that Kals is engaged in software products business and therefore, it cannot be considered as a comparable entity in respect of a software development service provider. He accordingly submitted that Kals cannot be....
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....f Compucom is 18.58% i.e. more than 15% and therefore, Compucom should be excluded from the final list of comparable entities. ADDITION OF Rs. 4,63,25,506/- IN RESPECT OF DESIGN ENGINEERING, TESTING AND AUTHORING SERVICES SEGMENT : 27. The Ld. Counsel for the assessee submitted that the assessee company has provided design, engineering and other related services to its AE. These services include modification/improvement in the designs of existing components, 3D modeling of the same and analysis of the designs. The total turnover of these activities for this year was Rs. 43,48,75,003/-. In the TP Study Report, the assessee has selected 4 companies as comparable entities for determining ALP of design engineering, testing and authoring services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 2 comparable entities on the basis of single year data, the details of which are as under : Sr. No. Companies selected as comparable by the TPO OM 1 Ace Software Exports Ltd. (%)-7.04 2 Genesys International Corporation Ltd. 12.52 Avg. Operating Margin 2.74 ....
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....prejudice, he submitted that KLG Systel is functionally different. For this purpose, he referred to the detailed submissions made before the DRP. [para 6.9 - 6.10 on pages 569 - 571 of P.B. - III]. He accordingly submitted that KLG Systel may be excluded from the list of final comparable entities. ADDITION OF Rs. 62,72,964/- IN RESPECT OF BUSINESS SUPPORT SERVICES SEGMENT : 28. The Ld. Counsel for the assessee submitted that the assessee company has provided business support services to its AE which include regional supply management services, global jobevaluation services, evaluation of vendors, quality audit, etc. etc. The total turnover of this activity in the current year was Rs. 3,59,99,094/-. In the TP Study Report, the assessee has selected 13 companies as comparable entities for determining ALP of business support services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 11 comparable entities on the basis of single year data. The list of companies selected by the assessee is as under - Sr. No. Companies selected as comparable by the TPO OM (%) 1 Capital Trust Ltd ....
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....s engaged in the business of textile machines. ICC International Agencies is acting as a commission agent. This fact is evident from the web page of the said company and business profile of the said company enclosed on pages 435 - 437 of P.B. - II. Thus, the said company is engaged in a totally different line of business and hence, this company is functionally different from the assessee company. This issue has also been clarified by the assessee in its submission to the DRP [para 7.5 on page 573 of P.B. - III]. Accordingly, he submitted that ICC should be excluded from the list of final comparables since it is functionally not comparable. Without prejudice, he submitted that ICC has earned Operating Margin of 82.92% which is highly improbable in the business support services sector especially considering the fact that the assessee is a captive unit. Accordingly, he submitted that ICC is not comparable with the assessee company and the same may be excluded from the list of final comparable entities. ICRA ONLINE LTD. (ICRA) - 30. The Ld. Counsel for the assessee submitted that this company is discussed by the TPO on page 44 of his order. He has reproduced a small para from the....
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....ins Turbo Technologies Ltd. v. DDIT [ITA No. 118/PN/2011] c. Mentor Graphics (Noida) (P) Ltd. vs. Dy. CIT [112 TTJ 408(Del)] d. E-Gain Communication (P) Ltd. vs. ITO [118 TTJ 354 (Pune)] e. Sony India (P) Ltd. vs. Dy. CIT [118 TTJ 865 (Del)] 30.3 The Ld. Counsel for the assessee submitted that the assessee company is a captive unit which bears very low risks as compared to other companies operating in the open market which have been considered as comparable with the assessee company and further, it does not own any intangibles or technology. As a corollary, the profits earned by the assessee company would be much lower as compared to the other companies. This issue has been clarified by the assessee in the submission to the DRP. [para 9 on pages 575 - 576 of P.B. - III]. Accordingly, he requested that 20% adjustment to the ALP may kindly be granted on account of the above differences. For the above proposition, he relied on the decision of the Delhi Bench of the Tribunal in the case of Sony India Ltd. [114 ITD 448] and the following decisions : a. Mentor Graphics (Noida) Pvt. Ltd. v. DCIT [109 ITD 101 (Del)] b. Philips Software Centre....
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....rable and addition of another comparable, namely KLG Systel which was otherwise comparable but was rejected by the assessee. He submitted that the final set of two comparable companies was selected by the TPO whose average PLI margin (OP/OC) was arrived at 23.13%. Referring to the reasoning given by the TPO for arriving at PLI margin of the comparables at 23.13% as against 10.82% worked out by the assessee, the Ld. Departmental Representative submitted that the TPO is justified in rejecting the comparables given by the assessee and addition of the comparable selected by the TPO. 31.4 So far as Ace Software Exports Ltd., taken by the assessee as comparable is concerned, he submitted that this company is engaged in e-publishing and CAD/CAM. No segmental data was available, hence, the company is functionally different and not considered as a comparable. So far as Federal Technologies Ltd., is concerned, he submitted that the financial data of this company for F.Y. 2006-07 was not available in public domain for which this company was not considered as a comparable. So far as Pentasoft Technologies Ltd., is concerned, he submitted that as per the information in Annual Report, this co....
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.....) (Hyd.) 310 7. DCIT Vs. Delloite Consulting (India) Pvt. Ltd., reported in (2011) 61 DTR (Trib.) (Hyd.) 101 8. Marubeni India Pvt. Ltd., Vs. Addl.CIT - ITA No. 809/Del/2009 9. Vedaris Technology Pvt. Ltd., Vs. ACIT reported in (2011) 44 SOT 316 (Delhi) 32. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions relied on by both the sides before us. There is no dispute to the fact that the assessee company during the impugned assessment year has provided 3 types of services to its AE's namely, (a) Software Development Services, (b) Design Engineering, Testing and Authoring Services, Development, Maintenance and Testing of Embedded Systems Software Services and (c) Business Support Services. The details of the above transactions have already been given in Para 16.1 of the impugned order and the assessee in all the transactions have adopted TNMM method as the most appropriate method for determining the ALP of the international transaction entered into by it. 32.1 So far as the provisions of Software Developmen....
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....32.3 So far as the VJIL Consulting Ltd., is concerned, we find the same was rejected by the TPO on the ground that the comparable incurred losses during the year. From the various details furnished by the assessee in the paper book at page 402, we find the company was earning profit from 31-03-2002 till 31-03-2006 and only for the year ending 31-03-2007 it has incurred losses. Therefore, it is not a persistent loss making company. We find from the details furnished by the assessee that the company has earned the following profit in the last 5 years, i.e. Rs. 0.73 crores for the year ending 31-03-2002, 0.53 crores for the year ending 31-03-2003, Rs. 0.86 crores for the year ending 3103-2004, Rs. 0.53 crores for the year ending 31-03-2005 and Rs. 0.34 crores for the year ending 31-03-2006. Only for the year ending 31-032007, the company has incurred loss of Rs. 10.43 crores. The profit for the past 5 years was profit before tax. Therefore, merely because VJIL Consulting Ltd., has incurred loss in this year, the same in our opinion cannot be rejected from the list of comparables. This view of ours is supported by the decision of the Pune Bench of the Tribunal in the case of Cummins Tu....
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....reported in 132 TTJ 1 (Chd. (SB) has held that a taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. It was accordingly held that when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the otherside cannot claim to have a vested right in injustice being done due to some mistakes on its part. Accordingly, the comparable which was taken by the assessee as well as the AO was directed to be excluded from the list of comparables and the matter was restored to the file of the AO for fresh adjudication. Similarly, the Delhi Bench of the Tribunal in the case of Sapient Corporation Pvt. Ltd., (Supra) and the Mumbai Bench of the Tribunal in the case of Teva India Pvt. Ltd., (Supra) has held that even where the assessee has identified certain companies as comparable at the time of TP study report such companies may be excluded at a later stage if they are found to be not comparable on facts. 33.2 In view of our above discussion, we proceed to accept the contention of the Ld. Counsel for the assessee that altho....
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.... of comparables. 35.1 We further find the profit and loss account of Transworld Infotech Ltd., gives the year ending as 30-06-2007 and 30-06-2006 for the preceding year whereas the assessee is following financial year as its accounting year. Therefore, we also find merit in the submission of the Ld. Counsel for the assessee that in view of the provisions of Rule 10B(4) of the I.T. Rules, 1961 that the data to be used in analyzing the comparability of an uncontrolled transaction with an International transaction shall be the data relating to the financial year in which the international transaction has been entered into. 35.2 Similar view has been taken by the Pune Bench of the Tribunal in the case of PTC Software (Supra) wherein the Tribunal has excluded Transworld Infotech. Ltd., on the ground that the data adopted of Transworld Infotech Ltd., does not relate to the financial year in which the International Transaction has been carried out by the assessee. On this point the said concern was excluded from the list of comparables. In view of the above we hold that Transworld Infotech is not a comparable entity. In view of the above, we direct the TPO/AO to exclude Transworld I....
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....enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." 37.1 Similarly, we find the Pune Bench of the Tribunal in the case of PTC Software Ltd., (Supra) has observed as under : "16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS....
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....functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having reg....
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....of comparables. We accordingly direct the TPO/AO to exclude Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables. 38. Now coming to the addition of Rs. 4.63 crores in respect of Design Engineering and Testing Authoring Services Segment, we find the assessee had selected 4 companies as comparable entities for determining the ALP and finally he submitted a revised list of 2 comparables, namely Ace Software Exports Ltd., and Genesis International Corporation Ltd. We find Ace Software Exports Ltd., was rejected by the TPO because it has shown negative operating profit by operating costs (OP/OC). While the TPO retained Genesis International Transaction, however, he added KLG Systel Ltd., as a comparable having OP/OC at 33.74%. It is the submission of the Ld. Counsel for the assessee that KLG Systel Ltd., is not a comparable company since the revenue from export services of KLG Systel Ltd., is only 0.24% of the total revenue as against 100%. Revenue generated by the assessee company from the export services. 38.1 From the details furnished by the assessee in paper book at pages 570 and 571, we find that as against total income of Rs. 122.98 crores ....