TaxTMI 
TaxTMI 
2017 (4) TMI 1375
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....e petition for condonation of delay. The assessee has explained the cause of delay as stated in the Affidavit that the assessee company has been acquired by an American Company M/s. Infor Inc. and the acquisition formalities completed on 18.9.2015. Due to the acquisition there has been a restructuring of team in USA which responsibility reassigned to new management and the process of transition was in progress at the time when the appeal had to be filed. Since transition process was in progress therefore the assessee could not file the appeal within the period of limitation and consequently there was a delay of 51 days in filing the appeal. Thus it is pleaded that the delay in filing the appeal is neither intentional nor deliberate but due to the unavoidable circumstances which were beyond the control of the assessee. 3. Having considered the explanation of the assessee, we are satisfied that the assessee was having sufficient cause for not presenting this appeal within the period of limitation. The assessee has given all the relevant details of acquisition of the assessee company by an American Entity therefore there was a change in the management and due to the process of tran....
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.... as 'Assessing Officer'), learned Deputy Commissioner of Income Tax TP-1(3)(1), Bangalore (hereinafter referred to as 'Transfer Pricing Officer') and Honorable Dispute Resolution Panel (hereinafter referred to as 'DRP') are bad in law and liable to be quashed. 2. The learned Assessing officer has made reference to TP officer in a mechanical manner and that there was no requirement of referring an international transaction to the TPO merely because the value of the international transaction is above a particular limit and further where the assesse enjoys 10A benefit where the tax rate in the country of the Associated Enterprises is higher than the rate of tax in India and hence the establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Honorable DRP have erred in a. Making transfer pricing adjustment of Rs. 1,51,50,722/- b. Passing the order without demonstrating that appellant had motive of tax evasion. c. Passing the orders without considering all the submissions and/or without appreciating properly the facts and circums....
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....efore or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. The appellant prays accordingly." 5. Ground Nos.1 to 3 of assessee's and Ground No.1 of the revenue's appeal are general in nature and does not require any specific adjudication. 6. Ground Nos.4 & 5 of the assessee's appeal and Ground Nos.2 to 7 of revenue's appeal are regarding the comparability of the companies selected by the TPO. Therefore we will deal with this issue simultaneously. 7. The learned Authorised Representative of the assessee has pointed out that though the DRP has applied different filters however an identical set of 13 companies was selected by the TPO in the case of Applied Materials India Pvt. Ltd. Vs. ACIT in IT(TP)A Nos.17 & 39/Bang/2016 for the same Assessment Year 2011-12 and this Tribunal vide order dt.21.9.2016 has dealt with the identical set of 13 comparables. Thus the learned Authorised Representative has submitted that the issue of comparability of these companies is now covered by the decision of this Tribunal in the case of Applied Materials India Pvt. Ltd. Vs. ACIT. The learned Authorised Repres....
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....vices. Therefore the insignificant variation in activity if any cannot be a determinative factor while computing the ALP under Transactional Net Margin Method (TNMM). He has relied upon the decision of the Delhi Bench of ITAT in the case of Toluna India Pvt. Ltd. Vs. ACIT (2014) 151 ITD 177. 9.1.3 We have considered the rival submissions as well as the relevant material on record. We find that the assessee has raised objections against this company before the DRP. However the DRP did not adjudicate the objections raised by the assessee. The decision of this Tribunal in the case of M/s. Electronics for Imaging India Pvt. Ltd. Vs. DCIT (supra) relied upon by the learned Authorised Representative is based on two aspects. (i) The information received under Section 133(6) of the Act was considered by the TPO without sharing with the assessee and (ii) nature of the activity is KPO. It is pertinent to note that the question of BPO and KPO is relevant only in ITES segment and not for software development services segment. On the contrary, the decision in the case of Toluna India Pvt. Ltd. Vs. ACIT (supra), pertains to the Assessment Year 2007-08, therefore the facts of the differe....
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....onics for Imaging India Pvt. Ltd. (supra) in para 60 and 61 & paras 24 to 26 as under : " Persistent Systems & Solutions Ltd. 60. The assessee has the grievance against rejection of this company by the DRP. The ld. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. 61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs. 6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services ....
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....ring the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we direct the A.O./TPO to exclude these two companies from the set of comparables. (iv) Sasken Communication Technologies Ltd. 9.3.1 The ld. AR of the assessee has submitted that this company is engaged in the development of software products as it has inventories, intangible assets as well as high expenditure on R&D. Therefore this company is functionally not comparable to the assessee. The ld. AR has referred to the Annual Report of this company and submitted that it derives income from software products specifically new products launched called 'Vyaparaseva' during F.Y. 2010-11. Thus this company is engaged in product development cannot be compared with the assessee when segmental details are not available. He has relied upon the decision dt.24.2.2016 of the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra). 9.3.2 On the other hand, the learned Departmental Representative has submitted that the inventory shown at p....
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.... seeking inclusion of some of the comparables in the set of comparable companies which are as under : (i) Akshay Software Technology Ltd. (ii) Powersoft Global Ltd. (iii) R Systems International Ltd. (i) Akshay Software Technology Ltd. 12.1 This company was selected by the assessee in the TP Study however the TPO rejected this company on the ground that its functions appear to be more in the nature of support services or ITES. The DRP has confirmed the rejection on a different ground by applying a filter that the expenditure in foreign currency was higher when compared to its total revenue. Thus DRP was of the view that this company was predominantly engaged in the 'on site' development of software. The ld. AR has submitted that such filter was neither applied by the TPO nor sought to be applied by the assessee. Therefore the DRP was not asked to apply this filter. Secondly the DRP did not arrive at the finding that the said company was in fact engaged in 'on site' development of software. The finding of the DRP are based mainly on the assumption that because of its expenditure in foreign currency was high it must have been engaged in the 'on site' development of sof....
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....ded by the assessee, leading to its rejection, we find that assessee had at para 5.172 and 5.173 of its objections before DRP, submitted that RPT of the said company was 4.33% only, compiling the figures from previous years'data available in Annual Report of Financial Year 2010-11 of the said company. This working stands unrebutted. We are, therefore of the opinion that the assessee has to succeed in its claim that M/s. Akshay Software Technologies Ltd, is a proper comparable. We direct the TPO to include the said company as a comparable along with the two comparables, namely, M/s. R. S. Software (India) Ltd and M/s. Thinksoft Global Services Ltd, and rework the mean PLI. ALP adjustment, if any, required shall be based on such mean PLI, after considering the working capital adjusted. Ordered accordingly. Ground 12 of the assessee is allowed. 09. Vide its ground 13, we find that assessee is aggrieved that DRP had directed treatment of foreign exchange loss/gain as non-operating in nature. We find that DRP had at para 2.9 of its directions dated 26.11.2014 directed inclusion of foreign exchange gain / loss as part of the operating expenditure and not the other way. Therefore, the sai....
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....ost : Rs. 250,61,55,607. Therefore the cost of employee is not separately reported by this company. Further it is not clear whether the goodwill is self-generated or acquired intangible asset. Accordingly, this issue is set aside to the record of the Assessing Officer/TPO to verify the relevant facts to ascertain the employee cost and then decide the functional comparability. Needless to say the information under Section 133(6) may be obtained for the purpose of ascertaining the annual employee cost of this company. 14. The assessee is also seeking inclusion of couple of companies which were selected by the TPO but rejected by the DRP as under : (i) Evoke Technology Ltd. (ii) R S Software (India) Ltd. 14.1 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. These two companies were selected by the TPO in the set of comparables however the DRP has rejected these companies on the ground that the company Evoke Technology Ltd. is having low margin and the company R S Software (India) Ltd. is engaged in 'on site' activity. Both the assessee as well as revenue are seeking inclusi....
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....ent, consultancy, licensing and sublicensing, annual maintenance charges for software support. WEB development and hosting has been reported in one segment, thus in absence of segmental information, we concur with the view of the DRP in preceding year and accordingly direct the Assessing Officer to exclude this company from comparables." 17.2 We further note that the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in paras 14 to 16 as under : " (1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- "Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engine....
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....company by recording the facts at page 15 as under : We further find that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in paras 62 to 65 as under : " 62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related party transaction (RPT) of this company is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable. 63. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the ld. AR submitted this company is also in the software products and therefore ....
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....the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum). 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra). 32. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies Pvt. Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.....
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....9;s turnover in respect of the comparable companies then by considering the turnover of assessee of Rs. 18.18 Crores, the companies which are having the turnover less than Rs. 1.8 Crores and more than Rs. 181 Crores will be excluded. Accordingly, apart from the functional dissimilarity, the following companies will be excluded by applying this parameter of turnover tolerance range of 10 times of assessee's turnover on both sides : 1. Infosys Technology Ltd. Rs.25,385 Crores. 2. L&T Infotech Ltd. Rs.2,331.81 Crores. 3. Mindtree Limited (Seg.) Rs.871.30 Crores. 4. Persistent Systems Rs.610 Crores. 5. R S Software Ltd. Rs.188.26 Crores. 6. Sasken Communications Ltd. Rs.394.20 Crores 7. Tata Elxsi Ltd. (Seg.) Rs.358.20 Crores. It is pertinent to note that the DRP has applied the turnover filter and the revenue has challenged the same therefore, the issue of turnover filter has been a subject matter in these appeals. Accordingly, these 7 companies are directed to be excluded. 10. Further in view of the functional comparability has been considered by this Tribunal in the case of Applied Materials, the following companies namel....
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....ntal data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables." Accordingly following the order of the Delhi Bench of ITAT, we direct the TPO/A.O. to exclude this company from the set of comparables. 13. After excluding these 11 companies from the set of comparables only 2 companies are left viz. Evoke Technologies Ltd. and Persistent Systems & Solutions Ltd. which are not disputed by the assessee. We find that the DRP has rejected the company Evoke Technologies Ltd. and the revenue is seeking inclusion of this company therefore when the assessee has no objection in inclusion of this company, this company is restored to the set of comparables. Accordingly, the TPO/A.O. is directed to recompute the ALP on the basis of remaining companies. 14. The Ground Nos.8 & 9 of the revenue's appeal is regarding exclusion of the expenditure incurred in foreign currency from export turnover as well as total turnover while computing the deduction under Section 10A of the Act. 15. We have heard rival submissions as well as carefully considered the material on record and the judicial de....
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.... a definition of the expression "export turnover" in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight a....
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....port business and domestic business, the legislature intended to have a formula to ascertain the profits from export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10A, the export profit is to be derived form the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after ....
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....n of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra), we uphold the finding of DRP in directing the Assessing Officer to reduce the expenditure incurred in foreign currency from both export turnover and total turnover for the purpose of computing the deduction under section 10A of the Act in the case on hand. Consequently this ground raised by revenue is dismissed. 16. In the result, the assessee's appeal is allowed and revenue's appeal is partly allowed. Order pronounced in the open court on the 18th day of April, 2017. ============= Document 1 Sl.No. Name of the Company Operating Margin Adjusted Margin on on Cost Cost 1 Acropetal Technologies Ltd (seg) 31.98% 28.41% 2 E-Zest Solutions Ltd 21.03% 18.69% 3 E-Infochips Ltd 56.44% 55.82% 4 Evoke Technologies 8.11% 7.71% 5 ICRA Techno Analytics Ltd. 24.83% 22.54% 6 Infosys Technologies Ltd. 43.39%. 43.16% 7 Larsen & Toubro Infotech Ltd. 19.83% 19.57% 8 Mindtree Ltd.(seg) 10.66% 8.97% 9 Persistent Systems & Solutions Ltd. 22.12% 20.89% 10 Persistent Systems Ltd. 22.84% 2....
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....at expenses reduced from Export Turnover has to be reduced from Total turnover also, since no provision u/s 10A provides for exclusion of such expenses. 10. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 11. The appellant craves leave to add, alter, amend and /or delete any of the grounds mentioned above. Document 4 On perusal of schedule to the notes of the accounts, it is noticed by us that expenses incurred in foreign currency are 938.94 crore (48.84%), out of the total expenses of 1920.46 crore debited in profit and loss account, these expenses include the sub contracting expenses to the extent of 118.01 crore, which indicates that the company has the on-site revenue of about 50%, it is also noticed by us that in the profit and loss account, the revenue has been shown from software development services and products, in the segmenting account it is mentioned that the segment revenue include sales directly identifiable with/allocable to the segment. In Schedule 18, the ....