TaxTMI 
TaxTMI 
2014 (11) TMI 1159
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....ed 1 Licensing of Intellectual Property 15,854,302 8,783,405 CUP 2 Payment of Headquarters' Fees under the Service Agreement 7,797,910 2,825,500 TNMM 3 Receipts for providing software services 20,162,438,459 15,584,696,950 TNMM 4 Allocation of various costs to Assessee 347,374,901 298,131,795 - 5 Reimbursement of expenses incurred by various Cap Gemini entities on behalf of Assessee 198,780,013 174,396,814 - 6 Reimbursement of out of pocket expenses incurred by Assessee on behalf of Cap Gemini Group entities 2,637,911,454 2,189,543,752 - 7 Payment of training charges to Cap Gemini group entities 20,621,736 18,538,031 TNMM 8 Purchase of software and e-training licenses from overseas third party vendors under globally negotiated contract 8,625,970 1,576,246 TNMM 9 Bank guarantee charges paid 3,680,045 - TNMM 10 Professional fees paid to Group entities 2,547,130 - TNMM Total 18,285,109,074 3. The assessee submitted its TP Study report for the current year, wherein the assessee had entered into the f....
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.... of the PLIs of the comparables has been arrived at by considering the data for the FYs 2006-07, 2007-08 and 2008-09". 6. While declaring its results service wise, the company declared operating profit margin of 17.74% in software programming service, taking into consideration 21 comparable under TNMM. Accordingly, average profit margin of the 21 comparables came to 14.31%, considering weighted average margin on three years data, from financial years 2006-07, 2007-08 & 2008-09. 7. This basis of bench making was rejected and the AO gave a fresh list of comparables. 8. The AO, while examining the comparables as provided by the assessee observed, that some of those were inadequate. The AO, therefore, observed that certain comparables, were taken as adequate and he added certain comparables according to him, would lead the results to functionally similar. The AO, therefore, excluded those companies whose revenue from services activity was less than 75% of the total operating revenues: * "Companies whose data is not available for the FY 2008-09 are excluded. As per the Rule 106 (4), it is mandatory to use the current year data i.e. the data for the FY 2008-09.....
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....-development are excluded. This has been done primarily to exclude predominantly domestic companies which cannot be compared with you having entire transactions with your AE. This is because economic circumstances of such companies are different. Rule 1OB(2) also supports this view. * Companies who have diminishing revenues/persistent losses for the last "three years up to and including FY 200809 are excluded. Because these companies have peculiar economic circumstances which are not in line with industry trend. * Companies whose employee cost is less than 25 % of the revenues are excluded. It has been held in judicial pronouncements that if the ratio of employee cost to sales is very low, it is an indicator that the company is not a software developer. Hence, it would be proper to apply a filter that rejects companies that have a ratio of employee cost to sales of less than 25%. * Companies having different financial year ending (i.e. not March 31, 2009) or data of the company does not fall within 12 month period i.e. 01-04-2008 to 31-03-2009, are rejected. If a tested party ends its financial year in March, then takin....
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....e 205.33 segmental Operating Expenses 144.69 segmental Operating Profit 60.64 OP/TC(PLI) 41.91% Persistent Systems Ltd (Source: Annual Report 2008-09) Description Amt. (Rs in Lacs) Amt. (Rs. in Lacs) Sale of software services 51969.1 Add: :misc Income 79.9 Operating revenue 52049 Total expenditure debited in P/L a/c. 43636.3 Add: Depreciation 2947.2 Less: Donation 154.3 Less: Exchange Loss 7174.6 Less: Exchange Loss on derivative contract 1627.2 Operating expenses 37627.4 Operating Profit 14421.6 OP/TC(PLI) 38.33% Sasken Communication Technologies Ltd. (Source: Annual Report 2008-09) Description Amt. (Rs in Lacs) Amt. (Rs. in Lacs) Sale of software services 47974.68 Add: :misc Income 7.86 Operating revenue 47982.54 Total expenditure debited in P/L a/c. 43754.34 Less: Provision for doubtful deposits 36 Less: Exchange Loss 3845.08 &nb....
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....Honorable Tribunal held that CG India, being an established player in the business of software development cannot be compared to companies with turnover of less than Rs. 100 crores. * If one had to adopt this principle to the facts of the assessee for the subject AY, where comparables with turnover in excess of Rs. 100 Crores are considered for the purpose of benchmarking the software development transaction of the assessee, the arithmetic mean margins of the comparables identified by the TPO reduces from 29.03% to 22.63%. * Consequently, since the margin earned by CG India from the software development transaction (17.74%) would fall within the +/-5 range as contemplated by the proviso to section 92C(2) of the Act, the total adjustment of Rs. 201,04,71,053/- would stand deleted". 29. Based on the above, the assessee pleaded before the DRP "the Mumbai Tribunal in Assessee's own case for AY 2007-08 (order enclosed as Annexure 5has held that CG India, being an established player in the business of software development cannot be compared to companies with turnover of less than Rs. 100 crores. Without prejudice to the fact that CG India wishes to rely ....
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.... by the Id. Sr. Counsel that Infosys and Wipro have substantial income from sale of branded software but the argument based on volume as pointed out earlier is not relevant for the purpose of margin nor any material as been produced before us to show that the margin was very high in case of sale of branded software. The assessee, a multinational, is an established player in the field, capable of selling software developed by it as a branded product but instead of doing that, it is supplying the same to the parent company and that is the reason TP adjustments are required to be made. The Id. Sr. Counsel has also pointed out that Infosys and Wipro have substantial revenue, 51.7% in case of Infosys, and 45.3% in the case of Wipro from on-site work done overseas at the site of clients whereas the onsite work in the case of the assessee is just 5%. It has been pointed out that the employees if sent overseas have certain dead hours, which cannot be properly utilized as can be done in the home country. But this argument as rightly pointed out by the Id. CIT-DR does not support the case of higher margin in case of onsite work because dead hours would mean less output with the same employee....
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....he assessee to arrive at the rationale OP/TC and then, if required, make the TP adjustment. 32. Ground no. 15 pertains to working capital adjustment. 33. At the time of hearing, the AR pointed out that the ITAT in assessment year 2007-08 in assessee's own case has allowed the working capital adjustment, which was ignored both by the DRP. 34. In the proceedings before the AO/TPO, the assessee prayed for allowance of working capital adjustment, but the AO/TPO rejected the submissions by observing, "In case of the assessee, the relevant transactions are all foreign currency transactions. For working capital adjustment comparability can be established only when comprehensive data regarding relevant borrowing rates and quantum of foreign transactions are available. It is not know if the case of comparables, it was the foreign parties which delayed payments or the domestic buyers who delayed payments. Working capital adjustment therefore, is not allowable to the assessee". The AO also placed reliance on the decision of ITAT Mumbai in the case of Symantec Software Solutions Pvt. Ltd. to deny the adjustment as asked for by the assessee. 35. The issue was taken befor....
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....nt cannot be denied to the assessee only on the ground that the assessee had not made any claim in the TP study if it is possible to make such adjustment. In our view, working capital adjustment" 37. We find that the issue has been restored to the AO/TPO, likewise, for the sake of consistency, we also restore the issue to the AO/TPO to make the working capital adjustment as being done in assessment year 2007-08. 38. Ground no. 15 is therefore, allowed for statistical purposes. 39. Ground no. 14 pertains to ignoring loss/gain arising on account of foreign exchange fluctuation as non operating expenditure/income while computing the margins of comparables. 40. The issue has been considered by the DRP, wherein it was observed, "As regards the treatment of foreign exchange loss, this panel is of the view that Foreign exchange fluctuation (loss or gain) is the difference between the invoice amount booked at the time of accrual and the cash amount actually as a result of the prevailing exchange rates on the respective dates. Thus, foreign exchange fluctuation (loss or gain) does not impact the income from operations as recognized by these companies and accordingly is ....
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....in ITA No. 2501 of 2001 (APB 140 to 146) in assessment year 2006-07, wherein the Hon'ble Bombay High Court observed, "... the first ground relates to the adjustment contemplated by section 10A of the Income Tax Acts 1961. The Tribunal has directed that loss of one unit can be adjusted against the profit of another unit but after allowance of deduction under section 10A of such profitable units. The loss of one unit under section 10A of the Act shall be adjusted against the income liable for deduction under the same but in relation to the income from other unit. As far as that aspect is concerned the counsel agree that the same is answered in favour of the assessee and against the revenue. This controversy has been dealt with by a Division Bench of this Court in the case of Hindustan Uni Liver Ltd vs Deputy Commissioner of Income Tax & anr., reported in (2010) 325 ITR 102. The parties agree that the discussion of the Division Bench and particularly at paragraph 17 of the judgment covers the point". 48. Respectfully following the order of the Bombay High Court, we direct the AO to recompute the exemption under section 10A in view of the decision of Hon'ble Bombay High Cou....
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.... business of development and export of computer software. The software development work was carried out in India at its development centers in India and also in some cases on sites. The assessee was not engaged in any technical services outside India. It did not incur any freight expenses. It explained that the telecommunication charges were incurred in the business of software development at the software undertakings of the assessee in India. The alternate argument was that the exercise that the assessee had undertaken was justified in the light of the law laid down by the Tribunal and particularly the Special Bench in the case of Income Tax Officer v/s Sak Soft Ltd, reported in 313 ITR (AT) 353. Reliance was also placed upon a judgment of this Court in the case of Commissioner of Income Tax v/s Gem Plus Jewellery India Ltd, reported in (2011) 330 ITR 175 (Bom). The Tribunal may have discussed the alternate contention but what it has expressed on primary contention, according to us, does not raise any substantial question of law. The primary contention was that the expenses which the Assessing Officer desired to pick were not incurred in relation to export and, therefore, cannot b....
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....assessee declared was for capital outlay, whereas the revenue authorities treated the same as revenue. 60. It was pointed out by the assessee to the revenue authorities that the grant in the shape of allotment of land was allocated to the assessee with the condition to generate income and employment for 3,000 people. 61. However, the revenue authorities treated it as revenue receipt, though objected to by the assessee. 62. Before us, the AR submitted that the issue now is settled by the decision of the Hon'ble Supreme Court in the case of CIT vs Ponni Sugars & Chemicals Ltd reported in 306 ITR 332, wherein, the Hon'ble Supreme Court held that such grant is to be treated as capital in nature. 63. Respectfully following the decision of Hon'ble Supreme Court in Ponni Sugars (supra) we reverse the orders of the revenue authorities and direct the AO to treat the grant as capital in nature and delete the disallowance. 64. The assessee has raised two additional grounds, which are as follows: "Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Income-tax Offi....