TaxTMI 
TaxTMI 
2017 (7) TMI 953
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.... "2.3 Financial Results of SUNGARD INDIA, FY 2004-05 Operating Revenue Rs. 11,80,97,508/- Operating Expenses Rs. 10,32,20,464/-* PBIT Rs. 1,48,77,044/- PBIT on cost 14.41% (* Excluding foreign exchange loss of Rs. 1,78,041) 2.4 International Transactions (as mentioned in the 92 CE report) * Export of software development services- Rs. 11,80,97,508/- * Reimbursement of expenses (Received) Rs. 2,12,691/- * Write back of Management services fee Rs. 8,01,775/- 2. To bench mark its international transaction the assessee selected seven comparable companies in its TP study analysis with mean margin of 9.70% in comparison to the assessee's margin on cost at 14.41%. Thus the assessee claimed its international transaction at arms length. The TPO rejected the TP analysis of the assessee and carried out a fresh search. The TPO has selected a set of 17 comparable companies as under. Sl.No. Company Name Working Capital Unadjusted Margins FY 2004-05 Working Capital Adjusted Margins FY 2004-05 1 Bodhtree Consulting Limited 24.85% 27.69% 2 Lanco Global Systems Limited 13.65% 14.60% 3 Exensys Software Solutions Limited 70.68% 68.84% 4 Sankhya ....
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....ment charges payable to its parent company amounting to Rs. 801,775 and claimed 10A deduction on the same treating it as business income. The learned AO erred in holding that such reversal of management charge provision is not derived from export of computer software and hence, 10A deduction cannot be claimed on the same. The learned CIT(A), in his order passed under Section 250 (dated 13.09.2011) had missed adjudicating on this ground. We had filed a rectification application under Section 154 against the CIT(A)'s order. Later, the CIT(A) passed a rectification order on the same. 2. The learned CIT(A) erred in dismissing the appeal on the ground that the reversal of the provision is merely an accounting entry and does not result in business income. 3. The learned CIT(A) erred in stating that there is no separate addition in the computation of income on the above account in the AO's order. However, it may be noted that the said reversal has been added back to the 10A profits by the AO for the purpose of computing 10A deduction. 4. The learned CIT(A) erred in not appreciating the fact that being a captive service provider, the provision made for management charges pa....
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.... in holding that such reversal of management charge provision is not derived from export of computer software and hence, 10A deduction cannot be claimed on the same. The learned CIT(A), in his order passed under Section 250 (dated 13.09.2011) had missed adjudicating on this ground, which was later addressed in his rectification order passed under Section 154 (dated 27.10.2011). 2. The learned CIT(A) erred in dismissing the appeal on the ground that the reversal of the provision is merely an accounting entry and does not result in business income. 3. The learned CIT(A) erred in stating that there is no separate addition in the computation of income on the above account in the AO's order. However, it may be noted that the said reversal has been added back to the 10A profits by the AO for the purpose of computing 10A deduction. 4. The learned CIT(A) erred in not appreciating the fact that being a captive service provider, the provision made for management charges payable to its holding company is towards the conduct of its business and hence, should not be treated as not derived from export. 5. The learned CIT(A) ought to have appreciated that as the provision was allowe....
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..... DR and considered the relevant material on record. The TPO applied the filter of 25% of RPT while selecting the comparables. Whereas the CIT(A) has applied a filter of 0% RPT. We find that 0% related party transaction is a impossible situation and therefore if the said filter is applied then the comparable companies will not be available for determining the arms length price. Thus to avoid this practical difficulty of selecting the comparable companies this Tribunal in a series of decisions have taken a view that a tolerance range of related party transaction can be considered from 5% to 25% depending upon the facts and circumstances of each case particularly the availability of the comparable companies. In ordinary circumstances when there is no difficulty of selecting the comparable companies the tolerance range of 15% of related party is considered to be proper. Only in extreme and exceptional circumstances when the comparable companies are not easily available or found then this tolerance range is relaxed up to 25%. Therefore in the case of the assessee where neither the TPO nor the assessee has made out a case of exceptional difficulty in searching the comparable companies t....
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....xamined by the coordinate bench and found to be not comparable with the software development service segment of captive service provider assessee. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that the TPO has duly examined the functional comparability of these companies and therefore when the arms length price has been determined by adopting TNMM as a most appropriate method then minor variations in the functions of the comparable companies are irrelevant. 10. Having considered the rival submissions as well as relevant material on record, we note that out of the 17 comparable companies selected by the TPO the assessee is now seeking exclusion of 10 companies. The details of which are as under. 1. Bodhtree Consulting Limited 2. Exensys Software Solutions Limited 3. Four Soft Limited 4. Sankhya Infotech Limited 5. Thirdware Solutions Limited 6. Geometric Software Solutions Limited 7. Tata Elxsi Limited (Seg.) 8. Flextronics Software Systems Limited (Seg.) 9. Satyam Computer Services Limited 10. Infosys Technologies Limited 10. At the outset we note that the functional comparability of an identical set ....
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.....20 percent) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore services (i.e., remotely from India) Expenditure on Advertising/Sales promotion and brand building Rs.61 Crores Rs. Nil (as the 100 percent services are provide to AEs) Expenditure on Research & Development Rs. 102 crores Rs. Nil Other 100 percent offshore (from India) "6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondentassessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent- assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue h....
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....parability analysis performed by the ld. TPO in the TP order. b) Arbitarily rejecting the filters applied by the Respondent while undertaking the TP Study. c) Modifying some of the filters applied by the ld. TPO in the TP order, without providing an opportunity of being heard to the appellant. d) Arbitrary arriving at a set of companies as comparable to the Respondent. e) Disregarding application of multiple year / prior year data and holding that current year (i.e. opportunity of being heard to the appellant. f) Upholding the ld. TPO's approach of using data as at the time of assessment proceedings. g) Upholding the approach adopted by the ld. TPO of collecting selective information of the companies by exercising power granted to him under section 133(6) of the Income Tax Act, 1961 that was not available to the Respondent in the public domain. h) Not providing appropriate adjustment towards the risk differential between the Respondent and the entrepreneurial companies selected as comparábles, while determining the arms length price. That the Respondent craves leave to add to and/or alter, amend, rescind, modify the grounds herein above or produce further docu....
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....e find that there are some decisions of this Tribunal wherein the comparability of these two companies have been considered and decided by this Tribunal. Therefore, once the assessee has brought on record some decisions of the Tribunal wherein these two companies were held to be not good comparables then the facts and circumstances and in the interest of justice, we admit the additional grounds raised by the assessee. Accordingly, we will deal with the comparability of these two companies on merits. 16. Bodhtree Consultancy Ltd. 16.1 The learned Authorised Representative of the assessee has submitted that this company is required to be rejected the RPT of 34.68% of the total sale which is in excess of 15% taken as proper threshold limit. In support of his contention, he has relied upon the decision of the Hyderabad Bench of ITAT in the case of NTT Data Enterprises Pvt. Ltd. Vs. ACIT Dt.23.10.2013 in ITA No.1612/Hyd/2010 and submitted that in the said case the Tribunal has noted that the RPT of this company are 34.68%. The learned Authorised Representative has submitted that by following the said decision, the coordinate bench of this Tribunal in the case of ACIT Vs. McAfee So....
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....unal in para 9 as under : " 9. Even though detailed submissions were made with reference to the above 7 companies, the learned counsel fairly admitted that even one company i.e. Exensys Software Solutions Ltd. is excluded, inclusion of other companies will become academic in nature as the arm's length margin is within Assessee's margin of 16.74%. With reference to this company, the learned counsel referring to replies given to AP/TPO in response to the notices under Section 133(6) and their annual reports, which are available in its paper book, submitted that this company is functionally different and the operations are exceptional as there was a merger in the year with another company which had a material/significant impact on the profit margins and further the computations are also wrong as the differed revenue expenditure, which was claimed regularly on the basis of accounting policy of the company, was excluded by the TPO in arriving at a different higher profit margin, which is not correct." Thus it is manifest from the order of the Tribunal that only the submissions of the learned Authorised Representative of the assessee were recorded by the Tribunal but there was ....
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....s submitted that the TPO has examined the functional comparability of this company and it had qualified all the parameters and filters applied by the TPO. The objections raised by the assessee at this stage were not available before the TPO and therefore the same cannot be accepted in the absence of the examination of the fact by the TPO. 17.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that the comparability of this company has been examined by this Tribunal in various cases as relied upon by the learned Authorised Representative of the assessee. In the case of McAfee Software (India) Pvt. Ltd. (supra), the co-ordinate bench of this Tribunal has again considered this issue in para 10.10 as under : "10.10 This company was objected to on functional dissimilarity. This was considered in ITO Vs. M/s. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 dt.11.6.2015 (supra) as under : " 26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incur....
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....nquest Information Systems (India) Pvt. Ltd. (IT(TP)A No.1302/Bang/2011 & 92/Bang/2012) iii) Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 18.1.2 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO. 18.1.3 We have considered the rival submissions as well as relevant material on record. At the outset, we note that the functional comparability of this company has been examined by the Tribunal in a series of the cases as relied upon by the learned Authorised Representative of the assessee. In the case of ITO Vs. M/s. Sunquest Information Systems (India) Pvt. Ltd. (IT(TP)A No.1302/Bang/2011 & 92/Bang/2012), the Tribunal has considered and decided an identical issue in paras 19 & 20 as under : " Sankhya Infotech Limited ('Sankhya') 19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Theref....
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....re development services provider. Accordingly, we direct the A.O/TPO to exclude this company from the list of comparables. Foursoft Ltd. 18.2. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that the RPT of this company is 19.89%. Therefore in view of our finding on the threshold limit of RPT at 15%, this company cannot be considered as a good comparable having more than 15% RPT. We find that this fact of RPT at 19.89% has not been disputed by the Revenue. Accordingly, we direct the A.O./TPO to exclude this company from the list of comparables. Geometric Software Solutions Ltd. 18.3.1 The learned Authorised Representative of the assessee has submitted that the RPT of this company is 22% whereas the TPO has wrongly considered the RPT at 10.97%. The learned Authorised Representative has referred the computation of RPT at page 561 of the paper book containing Annual Report and submitted that if all the RPTs are taken into consideration as reported in the Annual Report of this company then it comes to 22.52% of the total sales. 18.3.2 On the other han....
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....ons as well as considered the relevant material on record. At the outset, we note that the functional comparability has been considered by this Tribunal in assessee's own case for the Assessment Year 2006-07 vide order dt.30.6.2015 in ITA No.1485/Bang/2010 in para 13 to 18 as under : " 13. Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz., 2006-07 in the case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 & 13 of its order, has held as under: "12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): Xxxxxx Xxxxxx 17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench ....
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....ted to exclude this company from the list of comparables. Satyam Computer Services Ltd. 18.5.1 The learned Authorised Representative of the assessee has submitted that the financial results and information of this company is not reliable due to the financial irregularity and fraudulent activities by the Directors of this company. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 & 1388/Bang/2011. ii) M/s. Agnity India Technologies Pvt. Ltd. (ITA No.3856/Del/2010). iii) M/s. Symbol Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. iv) M/s. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 18.5.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 18.5.3 We have considered the submissions of rival parties and the relevant material on record. At the outset, we note that an identical issue has been considered by the co-ordinate bench of this Tribunal in case of Textron Global Technology Pvt. Ltd. (supra) in para 14 as under : " 14. Ground No.3 raised by the Revenue is misconceive....
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.... companies are wrongly mentioned in the above said list. Hence the impugned order is modified under para 7.3 last part and may be read as under : Sl. No. Comparable Company Name % of RPT Over sales 1. Geometric Software Limited 19.34 6. The next mistake has been pointed out by the learned Authorised Representative that in para 8.1, the name of the comparable company has been mentioned as Acentia Software Solution Ltd. whereas correct name of the company is Exensys Software Solutions Ltd. This mistake has been repeated again in para Nos.8.2 & 8.3. he has further submitted that in para 8.3 there is a reproduction of finding by the Tribunal in case of M/s. Textron Global Technology Centre Pvt. Ltd. however wrong part of the said order has been reproduced in the impugned order. The learned Authorised Representative has pointed that the correct part of the finding is given in para 14 whereas the reproduction of paras 19 & 20 have been made. Therefore the learned Authorised Representative has submitted that there is a mistake in para 8.3 of the order as a wrong part of the earlier order in the case of Textron Global Technology Centre Pvt. Ltd. has been reproduced. 7. On the o....
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....Exensys Software Solutions Ltd. is functionally different and there is an extra ordinary event of amalgamation during the year under consideration with M/s. Honlool India Ltd. He has referred the Annual Report of this company in support of his contention. The learned Authorised Representative has further submitted that even otherwise this company is engaged in diversified operation including software products as well as intangible assets, brands which comprise a substantial part of growth of assets. Therefore, this company cannot be considered as comparable to the assessee which is a captive service provider. In support of his contention, the learned Authorised Representative has relied upon a number of decisions of this Tribunal including the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 & 1388/Bang/2011. ii) M/s. Citrix R&D India Pvt. Ltd. in IT(TP)A Nos.841/Bang/2013 & 172/Bang/2013. iii) M/s. Symbol Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. iv) Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 8.3 We have considered the rival submissions as well as relevant material on record. We no....
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....utions Ltd. from the list of comparables." 12. Following the orders of the coordinate bench (supra) we direct the AO / TPO to exclude 7 companies from the set of comparables and reconsider the functional comparability in case of Geometric Software Solutions Ltd. by verifying the R.P.T. 13. Since we have directed the AO / TPO to exclude certain companies from the set of comparables therefore and also remanded certain companies for verification of fact therefore the TPO/AO is directed to recompute the arms length price on the basis of the remaining set of comparables. Needless to say the benefit of proviso to section 92C(2) of the Act shall also be considered. In the appeal in IT(TP)A No. 1379/Bang/2011, against the order passed u/s. 154 the assessee has raised the following grounds. I. Write back of Provision for management charges 1. During the financial year 2004-05, the appellant had reversed a provision for management charges payable to its parent company amounting to Rs. 801,775 and claimed 10A deduction on the same treating it as business income. The learned AO erred in holding that such reversal of management charge provision is not derived from export of computer softw....
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....llowed on the same. The CIT(A) did not adjudicate this issue while passing the main order therefore, the assessee filed a petition u/s. 154 but CIT(A) has rejected the claim of the assessee on the reason that the reversal of provision is merely an accounting entry which does not result in business income and therefore the AO was justified in excluding the said income from the business profits for computing deduction u/s. 10A. 15. Before us, the ld. AR of the assessee has submitted that this provision made in the earlier year was allowed by the AO as business expenditure and therefore it has reduced the claim of deduction u/s. 10A in the earlier years. In the year under consideration when the assessee has reversed this provision the income from business of the assessee has been enhanced and which is eligible for deduction u/s. 10A. On the other hand, the ld. DR has submitted that since this is only an accounting entry and does not result in business income during the year under consideration therefore it is not eligible for deduction u/s. 10A. 16. We have considered the rival submissions as well as relevant material on record. We note that the AO as well as CIT(A) has denied the c....