TaxTMI 
TaxTMI 
2017 (11) TMI 565
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....nces or the case and in law, the Ld. CIT(A) erred in allowing the benefit of +1- 5% in computation of Arm's Length Price under second proviso of section 92C(2) of Income Tax Act. 1961, without appreciating the retrospective amendment made by subsection 2A of section 92C of the IT Act. 1961. "2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to exclude the company Exensys Software Solutions Ltd., from the set of comparables taken or Benchmarking the IT and ITES segment for computation of Arm's Length Price on Account of Transfer Pricing adjustment." Assessee has raised following ground for exclusion of the comparables: - "1.1. On the facts and in circumstances of case and in law, the learned Commissioner of Income tax (Apepals)-15, Mumbai[CIT(A)] has erred in upholding the action of the TPO / AO in including the following companies that are dissimilar to that of the Respondent: 1. Bodhtree Consulting Limited. 2. Sankhya Infotech Limited; 3. Foursoft Limited; 4. Thirdware Solutions Limited; 5. Tata Elxi Limited; 6. Flextronics Limited; 7. Infosys Limited; 8. Saffron Global Limited; 9. Vishal Te....
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....nal. The copy of the appeal in Form No. 36 filed by the department was served on the Cross Objector on 4 October, 2013. 5. The Respondent harbored a bonafide belief that in view of Hon'ble CIT(A) granting relief of the Respondent in respect of 5% standard deduction, the amount of adjustment's decided against the Respondent (i.e. inclusion of companies dissimilar to the Respondent) being not significant, the Respondent needs merely to defend the appeal. However, in view of the subsequent decision of the Hon'ble Income Tax Appellate Tribunal. Delhi Special Bench, in the case of ITO vs. WIG IT Services (India) Private Limited, the favourable ruling of the Hon'ble CIT(A) in relation to granting standard deduction of 5% is likely to get reversed and would consequently increase the amount of adjustment significantly 6. When the matter came up for discussion with Respondent tax our consultant, the Respondent was advised that the Respondent should file cross objection against the said appeal 7. Pursuant to the said advice, this cross-objection is being filed by the Respondent along with the petition for condonation of delay in filing the said cross-objections. I furthe....
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....the Tribunal Rules, which we allow now. 6. Now we will take up the appeal of Revenue and the arguments raised by assessee under rule 27 of the Tribunal Rules. 7. Brief facts are that during the year under consideration the assessee has provided software development services i.e. IT services and also IT enable services i.e. ITES services to its associate enterprises. The TPO adopted Transactions Net Margin Method (in short 'TNMM' as the most appropriate method and conducted a fresh comparability analysis whereby, he selected 17 comparables in IT services segment and 9 comparables in ITES segment for determining arm's length price of both the transactions. Accordingly, TPO made TP adjustment in respect to IT services and ITES services to its AE. The assessee preferred the appeal before CIT(A), who partly allowed the appeal of the assessee, whereby he excluded the comparable in in IT services segment i.e. Exensys Software Solutions Limited and also granted standard deduction of +/- 5%. 8. As regards to the exclusion of comparable taken for bench mark of the IT segment of the assessee, the revenue contested the exclusion made by CIT(A) of Exensys Software Solutions Limited and argue....
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....the company has earned an income of Rs. 737.79 lakhs which consists of an export turnover of Rs. 691.76 lakhs. This was due to amalgamation of Hollon India Ltd. with the assessee and amalgamation was approved by Hon'ble Andhra Pradesh High Court vide his order dated 05-09-2005 effective from 01-04-2004. In view of these facts, this company cannot be compared with the assessee due to extra ordinary event of amalgamation during the year under consideration. Accordingly, we are of the view that the CIT(A) has rightly directed for exclusion. We confirm the order of CIT(A) on this issue and the appeal of Revenue is dismissed. 11. Similarly, the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of Infosys Technologies Ltd. in IT segment, which was not excluded by CIT(A). According to CIT(A), scale of operation is not comparable with assessee and Infosys Technologies Ltd. But, according to him, scale of operation and economy of scale does not affect the profitability in the service industry as would be there in the brick and mortar companies and manufacturing companies. According to CIT(A), even the assessee could not brought out any facts or figures....
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....etween product and service segment of this company. Even Infosys Technology Limited is having huge turnover as reported in FY 2004-05 at Rs. 6859.66 crores, the details are enclosed in assessee's paper book at page 609. Even the Brand Intangibles has value of Rs. 14,153 crores and the details of the same are provided by the assessee in its paper book at page 690. In view of these differences, and the fact that this company excluded in the IT segment by co-ordinate Bench in the case of Intoto Software India Private Limited (supra). Respectfully following the co-ordinate Bench decision, we direct the CIT / TPO to exclude this company from comparables. We direct the CIT accordingly. 14. Similarly, the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of Thirdware Solutions Ltd. in IT segment, which was not excluded by CIT(A). The CIT included as comparable to this company for the reason that the company qualifies all the required filters proposed by the TPO and is deriving 78.3% revenue from software services and is functionally comparable. But the assessee in its reply to notice u/s 133(6) of the Act stated that there are no software products th....
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....ntal margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables. 26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no softrware products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that ther....
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....o-ordinate Bench decision in the case of DBOI Global Services Pvt. Ltd vs. ACIT in ITA No. 812/Mum/2012 for AY 2005-06 dated 24-08-2016 and also by the decision of Hon'ble Delhi High Court in the case of Rampgreen solutions Pvt. Ltd. Vs. CIT in ITA No. 102/2015 dated 10-08-2015. Hon'ble High Court has considered the issue as under :- "38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced There was no material for the Tribunal to conclude that the outsourcing of ser....
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....ence, this company should not be included in the set. The AO/ TPO stated that this company qualifies all the filters applied by the TPO. As per the details available in public domain the company is functionally comparables and had more than Rs. 1 Cr. turnover did not have significant related party transactions. The company's profit and loss account was reproduced by the TPO from the Prowess data base. The CIT(A) noted that there is no doubt that the scale of operation is not comparable. But the scale of operation and economy of scale does not affect the profitability in the service industry as would be there in the brick and mortar companies of the manufacturing companies. Further the assessee in its submission has not brought out any facts/ figures which could prove that the economy of scale has affected the profitability of this economy of scale has affected the profitability of this company. It is also seen that in the software industry even the small companies have earned much better margins and vice-versa. Accordingly, the contention of the assessee to exclude this company from the set of comparables is not found to be acceptable by the CIT(A). 22. At the outset Ld. Counsel f....
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....t excluded by CIT(A). The assessee contended that the company has intangibles to the extent of Rs. 83,88,737/- and the presence of intangibles would enable the company to have an edge over similar companies functioning in the same sector as the company and also enable it to have a better brand recall over its competitors. Accordingly, it is not comparables to the assessee's operation. The AO / TPO and CIT(A) was of the view that the company is into ITES and satisfies all the filters applied by the TPO. The CIT(A) noted that the presence of intangible assets is specifically not pointed out in the annual report of the company by the assessee. Further from schedule 5 (fixed assets of the annual report presence of any intangible assets is not seen). It is also not clear if there is any intangible asset then what kind of it is? Sometimes even the software licenses used for general business purposes are also termed as intangible assets. Under such facts and circumstances, the contention of the assessee that the company would have different profitability because of the presence of intangible is not found to be acceptable, and accordingly, the contention of the assessee to exclude this com....
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....were found engaged in fraudulent activities. Accordingly, we direct the AO / TPO to exclude this comparable. We direct the AO accordingly. 27. The second issue in this appeal of Revenue is as regards to the order of CIT(A) in allowing deductions under section 10A of the Act. For this Revenue has raised following ground No. 3: - "3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to recomputed deduction U/s. IOA of the I.T. Act by reducing expenses of Rs. 12.3204,901/- towards onsite consultancy services telecommunication insurance, travel, commission and communication etc. from total turnover." 28. Briefly stated facts are that the AO during the course of assessment proceedings noticed that the assessee for the purposes of computation of income and deduction under section 10A of the Act is reflected an amount of Rs. 41,35,81,870/- as export turnover. On verification of records, the AO found that the assessee company is included within the turnover the following expenses for its information technology (IT) and Information Technology Enable services (ITES) units as under: - IT ITES Foreign Nil Nil Telecommunication R....