TaxTMI 
TaxTMI 
2017 (1) TMI 1572
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....142(1) of the Act were issued. In response thereto, the Senior Manager, Taxation of the assessee company appeared and filed the details called for. 2.1 A reference was made to the Transfer Pricing Officer - II, Chennai for determining the arms length price in respect of assessee's transaction with its associate enterprises. The TPO-II, Chennai, vide his order dated 26.10.2010, had proposed an adjustment of Rs..1,10,82,70,000/- to the price charged by the assessee for software maintenance and enabled back office operations rendered to its Associated Enterprises situated outside India. Hence, the total income of the assessee was accordingly adjusted upwardly Rs..110,82,70,000/- in accordance with the provisions of section 92C(4) of the Act. 2.2 The Assessing Officer passed draft assessment order under section 143(3) r.w.s.144C of the Act on 31.12.2010 incorporating the adjustment proposed by the TPO alongwith the following additions: (i) An adjustment to 'arms length price' to the extent of Rs..1,10,82,70,000/- with reference to Transfer Pricing Officer's (TPO) order in respect of international transaction dealt by the assessee with its AE. (ii) Recompu....
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....ssee is in appeal before the Tribunal raising 33 grounds. 3.1 Ground No. 1 & 2 are general in nature and no specific adjudication is called for and hence, the same are dismissed. 3.2 Ground No. 32 is regarding charging of interest under section 234B and 234D of the Act. The levy of interest is mandatory and consequential and hence the grounds are dismissed. 3.3 Ground No. 33 is regarding the initiation of penalty proceedings under section 271(1)(c) of the Act. The challenge to initiation of penalty proceedings is premature, hence this ground is also dismissed. 3.4 Ground No. 23 to 26 is with regard to recomputation of deduction under section 10A of the Act. 3.5 Ground No. 27 to 31 is with regard to disallowance of expenditure under section 14A by attributing the same towards earning of dividend income. 3.6 Ground No. 3 to 19 is with regard to transfer pricing issue and other miscellaneous grounds relating to transfer pricing issue are raised in ground No. 20 to 22. 4. As per order under section 92CA of the Act dated 26.10.2010, the TPO having rejected the CUP methodology for transactions with Citibank entities, he adopted an entity wide TNMM for benchmarking th....
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....and under the subheading "Non-financial Services" - "Services (Other than Financial)" - "Information Technology" - "Computer Software". Thus, the search for suitable comparables is based on the key word "Computer Software". Step Description No of Companies Resulted No of Companies Eliminated 1 No of companies resulted by the key word "Computer Software" 801 2 The companies for which the data is available for the FY 2006-06 477 324 3 The companies which have service income 403 74 4 The companies whose turnover is more than Rs. 1 crore 302 101 5 The companies whose service income is more than 75% of the revenues 292 10 6 The companies whose export revenues are more than 25% of the revenues 168 124 7 The companies whose employee cost is greater than 25% of the revenues 132 36 8 Related Party Transactions> 25% of the revenues 96 68 9 Balance 28 The balance companies have been examined further as follows. In some of the companies, the RPT information, segmental information, onsite revenu....
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.....47% P 22 R Systems International Ltd (Seg.) 112.01 15.07% P 23 Sasken Communication Technologies Ltd (Seg.) 343.57 22.16% P 24 SIP Technologies & Exports Ltd 3.80 13.90% P 25 Tata Elxsi Ltd (Seg.) 262.58 26.51% P 26 Thirdware Solutions Ltd 36.08 25.12% C 27 TVS Infotech Ltd 7.24 11.61% P 28 Wipro Ltd (Seg.) 9616.09 33.65% P 27.96% It is evident from the above discussion that the assessee's transactions will not be Arm's Length considering the fact that the average OP margin of the 28 comparables is 27.96% as against the operating profit (on operating cost) of 11.47%. Therefore, the assessee was requested to show-cause why the difference between the Arm's Length profit and profit arising out of the international transactions should not be added back. After considering the submissions of the assessee, the TPO finally concluded the transfer pricing analysis with 26 companies (after accepting the contention of the assessee on 2 comparable companies) and arrived at the ALP to be at....
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.... TPO has drawn the following final list with 34 companies with operating margins and the weighted average was 22.73%. Sl. No. Company Name OP to Total Cost% 1 Accel Transmatic Ltd (Seg.) 21.11% 2 Avani Cimcon Technologies Ltd 52.59% 3 Celestial Labs Ltd 58.35% 4 Datamatics Ltd 7.27% 5 E*Zest Solutions Ltd 36.12% 6 Flextronlcs Software Systems Ltd (Seg.) 25.31% 7 Geometric Ltd (Seg.) 10.71% 8 Helios & Matheson Information Technology Ltd 40.35% 9 IGate Global Solutions Ltd 7.49% 10 Infosys Technologies Ltd 40.30% 11 Ishir Infotech Ltd 30.12% 12 KALS Information Systems Ltd (Seg.) 30.55% 13 LGS Global Ltd (Lanco Global Solutions Ltd) 15.75% 14 Lucid Software Ltd 54.85% 15 Mediasoft Solutions Ltd 3.66% 16 Megasoft Ltd (Seg.) 23.11% 17 Mindtree Ltd 16.90% 18 Persistent Systems Ltd 24.52% 19 Quintegra Solutions Ltd 12.56% 20 R S Software (India) Ltd 13.47% 21 R Systems International Ltd (Seg.) 15.07% 22 Sask....
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....ist of comparables. 6. Per contra, the ld. DR supported the orders of authorities below. 7. We have heard both sides, perused the materials available on record and gone through the orders of authorities below. At the time of hearing, the ld. Counsel for the assessee, under Rule 29 of the Income Tax (AT) Rules, filed an application for acceptance of additional evidence of DRP's order for the assessment year 2008-09 holding that CUP method is most appropriate method. We have carefully gone through the order of the DRP for the assessment year 2008-09 and after considering the arguments advanced by the ld. Counsel for the assessee, we have no quarrel with his submission that the TP regulation calls for transaction by transaction towards ALP determination. In the assessment year 2008-09 also, the TPO clubbed all these transactions - which include the transactions with the Citigroup entities as well as with other associated enterprises, and proceeded to apply TNMM. However, DRP held CUP to be the most appropriate method. As per DRP, when TP regulations called for transaction-by-transaction ALP determination, such clubbing was not in order unless there was a strong reason. As per DR....
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....l. Therefore, we cannot hold that the CUP method was the most appropriate method as claimed by the assessee. In the circumstances, according to us, TNMM was rightly considered as the appropriate method. 8. Having held the TNMM is the most appropriate method, after considering the case of the assessee for analysing with international transactions relating to its associated enterprises, we have to deal with the exclusion and inclusion sought by the assessee from the list of comparables finally selected by the TPO. 8.1 Vis-à-vis Avani Cimcon Technologies Ltd., the arguments of the assessee are that it is having super normal profit and it is engaged in both software products and services. The ld. AR of the assessee relied on the decision in the case of NXP Semiconductors India Pvt. Ltd. in I.T(TP).A. No. 1174/Bang/2011 vide order dated 14.11.2014, AOL Online India Pvt. Ltd. ITA 1036/Bang/2011 dated 18.03.2016 as well as LSI Research (India) P. Ltd. in ITA No. 1048/Bang/2011 and pleaded that Avani Cimcon should not be taken as comparable. On perusal of the details available with regard to Avani Cimcon, this company has developed a software product by name "DXchange" and it ....
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....previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the assessee and are of the view that the same deserves to be accepted. The reasons given by the assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable." Accordingly, we hereby order to exclude this company from the final list of comparables. 8.2 Vis-à-vis Accel Transmatic Ltd., the argument of the assessee is that segmental break-up was not provided and the said concern was engaged in rendering outsourced product development services and imaging technologies. The ld. AR of the assessee relied on the decision in the case of NXP Semiconductors India Pvt. Ltd. in I.T(TP).A. No. 1174/Bang/2011 vide order dated 14.11.2014, AOL Online India Pvt. Ltd. IT....
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....company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. 20. Respectfully following the decision of the Tribunal in similar set of facts, these companies are directed to be excluded from the list of comparables." Respectfully following the above decision of the Tribunal, we direct to exclude this company from the final list of comparables. 8.3 Vis-à-vis Celestial Ltd., the argument of the assessee is that this company is functionally different. This company is engaged in production of enzymes, development of....
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.... Therefore, considering the facts of the case, we are of the considered opinion that Celestial Lab was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the assessee that this company ought not to have been considered as comparable." 8.4 With regard to E-Zest Solutions Ltd., this company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. It was the submission of the ld. Counsel for the assessee that as per Annual Report (Notes to accounts or Director's report) of the company for financial year 2006-07 does not provide any information on the nature of software development income. Further, there was no other detail available in Notes to Accounts of FY 2006-07 on the related party transactions. Further, as the details relating to foreign exchange earnings are not available, it is not clear whether the company would fulfil t....
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.... by the company in its website It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the Hyderabad Bench of this Tribunal in the case of Capital IQ Information Systems (India)(P) Ltd. in ITA No.1961(Hyd)/2011 dt. 23.11.2012 that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed. 8.5 Vis-a-vis Ishir Infotech Limited, the assessee has submitted before the TPO that as per the financial statements, the company fails the employe....
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....he TPO has proposed this company for inclusion as comparable, on review of the annual report of the company for the year ended 31st march, 2007, the assessee has observed that the company is into provision of software development services as well as ale of software products. Before the TPO, the assessee has pointed out that "Inventories" under the Schedules to the financial statements on page 16 of the Annual Report discloses "Software development" as inventory and work-in-progress. It is to be noted that a pure software services provider would not be able to disclose such details as it does not carry any such inventory or work-in-progress. Further, it was also pointed before the TPO that the company is engaged in development of software and software products since its inception and earn revenues from the development of software product viz. software La Vision and Virtual Insure as its fixed asset. The company consisting of STPI unit engaged in development of software and software products and a training centre engaged in training of software professionals on online projects. Further, under "Revenue recognition" under the Notes to the financial statements on page 18 of the annual r....
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....he said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services. Before us, apart from reiterating the points raised before the TPO and the DRP, by relying on the decision in the case of Novell Software Development (India) P. Ltd. v. DCIT in ITA No. 1287/Bang/2011 dated 31.03.2016 for the assessment year 2007-08, the Bangalore Bench of the Tribunal has observed that in the immediately preceding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable and 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. 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 as....
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....hand also. Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. We have heard the rival submissions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 200809 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16.3 thereof is extracted hereunder: "16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft....
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....chnologies Ltd. being an extraordinary event and thus cannot be taken as comparable. We find force in the argument of the ld. AR. In our considered opinion, the factor of amalgamation or merger or acquisitions, etc., has its own implications on the financial results of a company as these are abnormal financial characteristics which distort the normal profitability. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the above decisions of the Coordinate Benches of the Tribunal, we are of the opinion that in case there was a merger by way of amalgamation during the year itself, we hold that this company cannot be considered as comparable due to this extraordinary financial event. This fact needs verification. Accordingly, we direct the TPO to verify and decide afresh for inclusion of this company in the final set of comparables. ....
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.... the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200 crores only should be taken into consideration for the purpose of making TP Study." 9.1 The above view has been followed by the Bangalore Benches of ....
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....rework the PLI of the above comparables and recomputed the Arms Length Price adjustment if any necessary. Ordered accordingly. Economic adjustments (ground No. 19) 11. We have duly considered the submission made by the assessee on this issue. To be precise, it was the contention of the assessee that the working capital adjustment has been wrongly worked out by the TPO which requires reconciliation. Since the assessee's ground requires to be reconciled at the AO/TPO's level, the issue is remitted back on the files of the AO/TPO with a direction to verify the veracity of the assessee's claim and to rectify the same, if it so warrants by the Indian transfer pricing regulations, OECD guidelines, etc. 12. By referring to ground No. 20, the ld. Counsel for the assessee has vehemently argued that the TPO/AO has erred by ignoring the fact that the assessee is eligible for tax holiday and there cannot be any plausible intent to shift profits thereby violating the basic intent of introduction of TP provisions. After duly considering the submissions of the assessee, we direct the TPO/AO to give a finding as to whether the assessee is eligible for tax holiday since the order of author....
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....this appeal is squarely covered by the decision of the Special Bench of ITAT, Chennai in the case of ITO v. Sak Soft Ltd. [121 TTJ 865]. 16.2 We have heard both sides, perused the materials on record and gone through the orders of authorities below. We find that the Assessing Officer has excluded the expenses incurred in foreign exchange only from export turnover and not from the total turnover. We are of the opinion that this issue is squarely covered by the order of the ITAT, Chennai Special Bench in the case of M/s. Sak Soft Ltd. (supra), wherein, it was held as under: " .... we hold that for the purpose of applying the formula under sub-s (4) of s.10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. .. " 16.3 Just because the Department has preferred an appeal before the Hon'ble High Court, we cannot take a different view against the d....
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....t turnover as well as total turnover. Thus, the ground raised by the assessee is allowed. 18. The next ground raised in the appeal of the assessee is with regard to the disallowance under section 14A of the Act. In the assessment order, the Assessing Officer has disallowed the expenditure of Rs..11,09,719/- under section 14A of the Act read with Rule 8D in earning of dividend income. The assessee contended before the ld. DRP that Rule 8D is not applicable to the assessment year under consideration. Moreover, it was also contended that the assessee has not incurred any expenditure in relation to the exempt income. Therefore, the disallowance made by the Assessing Officer should not be legally sustainable. By relying on various case law, the ld. DRP sustained the disallowance made by the Assessing Officer. On being aggrieved, the assessee is in appeal before the Tribunal. 18.1 Before us, by relying on various case law including the decision of the Coordinate Bench of the Tribunal in assessee's own case in I.T.A. No. 394 & 395/Mds/2006, wherein, the Tribunal has held that only actual expenditure incurred in earning exempted income to be disallowed on actual basis and not on adho....