TaxTMI 
TaxTMI 
2017 (4) TMI 1377
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....1.2011 declaring an income of Rs. 2,05,58,112/- under normal tax computation and Rs. 15,59,07,737/- as book-profits u/s.115JB. The assessee claimed deduction of Rs. 18,62,45,826/- u/s.10A under the normal computation. While completing the assessment, when computing the deduction under section I0A, the AO has reduced Rs. 32,54,872/- being telecommunication charges and Rs. 9,88,27,170/- being expenses incurred in foreign currency from the export turnover. However, he has not reduced them from the total turnover. Accordingly, the deduction claim u/s 10A has been reduced by Rs. 1,64,75,929/-. On the international transactions, the assessee had two segments as under: Description Amount (Rs) Software Development Services 1,153,947,360 Sales and Marketing Services 250,464,151 03. In its TP study , the assessee adopted Transactional Net Margin Method ( "TNMM" ) as the most appropriate method for software development services and sales and marketing services. With respect of software development services segment, the assessee selected 14 companies as comparables. Adopting operating profits to cost as the Profit Level Indicator (PL), the a....
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....le. 2. As per Annual Report, it has substantial R&D activity. 3. It fails employee cost filter (i.e, 9.8% on sales) However, the DRP rejected this company for the reason that this is an Onsite Software Company, low employee cost & functionally different. Before us , the assessee submitted that this company needs to be rejected as it is functionally not comparable and fails employee cost filter based on Applied Materials India P. Ltd v. ACIT [TS-815-ITAT- 2016(Bang) ay 2011-12] & on employee cost filter : Zavata India P. Ltd [TS-156-ITAT-2013(Hyd)] First Advantage Offshore Services P. Ltd [IT(TP)A.1086/Bang/2011] 2. E-Zest Solutions Ltd : The assessee submitted before the DRP that this company is not a pure software development company as it is engaged in rendering both software development services and software products. The DRP rejected this company for the reason that this company is functionally different. Before us, the assessee submitted that this company needs to be rejected as it is functionally not comparable and fails lower turnover filter of 10 times based on Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12] AMD India P. Lt....
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....PT filter based on : Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12] Orange Business Services India Solutions P. Ltd [TS-355-ITAT-2016 (Del) AY 2011-12] Alcatel-Lucent India P. Ltd [74 Taxmann.com-105-Delhi-AY 2010-11] On turnover filter : McAfee Software India P. Ltd v. ACIT [TS-136-ITAT-2016(Bang) -AY 2005-06] 6. Larsen & Toubro Infotech Ltd : The assessee submitted before the DRP that this company has the following features : 1. It has a high turnover of Rs. 2331.81 crores 2. It is not a pure software development company as it is engaged in rendering both software development services and software products and segmental information is not available. 3. TPO has computed incorrect margin. The DRP rejected this company for the reason that this company is an onsite software company. Before us, the assessee submitted that this company needs to be rejected as it is functionally not comparable and fails lower turnover filter of 10 times based on : Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12] Alcatel-Lucent India P. Ltd [74 Taxmann.com-105-Delhi-AY 2010-11] Saxo India P. Ltd v. ACIT [TS....
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....he DRP held that this company as a comparable. Before us , the assessee submitted that this company needs to be rejected as it is functionally not comparable based on : Saxo India P. Ltd v. ACIT [TS-41-ITAT-2016(Bang)-Confirmed by HC -ITA.682/2016] 10. Tata Elxsi (Seg) : The assessee submitted before the DRP that this company has the following features : 1. It has a high turnover of Rs. 358.19 crores 2.1t is functionally dissimilar since it is engaged into software development and services as well as systems integration & support as per Annual Report. 3. The TPO has computed incorrect margin. The DRP rejected this company for the reason that it is functionally different company. Before us , the assessee submitted that this company needs to be rejected as it is functionally not comparable based on : Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12] Alcatel-Lucent India P. Ltd [74 Taxmann.com-105-Delhi-AY 2010-11] 07. Thus, the AR pleaded for exclusion of 3 comparables , viz Persistent Systems & Solutions Ltd , Persistent Systems Ltd & Sasken Communication Technologies , mainly on dissimilar functionality, which were held as c....
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....vt. 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 different year cannot be applied without verification. Accordingly, we set aside this issue of comparability of E-Just Solution Ltd. to the record of the Assessing Officer / TPO for deciding the same after verification of the relevant facts as well as considerin....
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....jection 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 and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the sof....
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....t of comparables." .................................................................................................................................... .................................................................................................................................... ........................................................................................... "15. The revenue is also seeking inclusion of some of the companies in the list of comparables which were reflected by the DRP. We will deal with the issues one by one as under : (i) Acropetal Technologies Ltd.(Seg.) 16.1 The DRP rejected this company on the ground of employee cost filter. The ld. DR has submitted that the TPO has applied the employee cost filter and this company satisfies the same. 16.2 On the other hand, the learned Authorised Representative of the assessee has submitted that the total employee cost of this company is 11.51 of the total operating revenue therefore it fails the employee cost filter of 25%. Further he has pointed out that this company also fails the software development services revenue filter of 75%. He has referred the deta....
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....ed 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, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables." 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure softwar....
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....segments from the software development services. Out of the software development expenses of Rs. 1,488.30 crore debited in profit and loss account, salary to overseas staff is Rs. 1200.28 crore which also indicates that the company is predominantly engaged in development of software on-site. In view of the above differences, in our view, the above company cannot be retained as comparable. The AO is accordingly directed to exclude the above company from comparable." 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 i....
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....urther note that the DRP has also recorded the fact that export revenue of this company is 73.30% which is less than 75% applied by the TPO. Therefore this company does not qualify the export earning filter applied by the TPO. Further the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in paras 30 to 33 as under : 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in 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....
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....eeking inclusion of the following companies which were rejected by the DRP. (i) Evoke Technology Pvt. Ltd. (ii) Mindtree Limited (Seg.) (iii) R S Software India Pvt. Ltd. 21.1 At the time of hearing, the learned Authorised Representative of the assessee has submitted that the assessee has no objections if these three companies are restored to the set of comparables as the assessee did not raise any objection before the DRP but the DRP rejected this company suo moto. 21.2 In view of the fact that both the revenue as well as the assessee are seeking inclusion of these companies in the set of comparables, we set aside the directions of the DRP qua these comparables and restore these three companies to the set of comparables. 21.3 As we have directed to exclude certain companies as well as include some of the companies in the set of comparables therefore the TPO/A.O is required to recompute the ALP on the basis of the final set of comparables after giving effect to this order. Needless to say the benefit of tolerance range of +/- 5% as per the proviso to section 92C(2) be also considered." 09. The relevant portion of the order fr....
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....d in providing software development services. The assessee remained unsuccessful before the DRP. 11.2. We have heard the rival submissions and perused the relevant material on record. The only basis which has been challenged by the learned Authorized Representative seeking exclusion of this company is its functional dissimilarity. We have gone through the Annual report of this company which is available in the paper book. Its Profit and loss account specifies `Income from operations'. It is further borne out that it is providing end-to-end development, software project development services. As the assessee is also engaged in the customised software development, we find this company to be functionally similar. The same is, therefore, retained in the list of comparables. (iii) L&T Infotech Ltd. 12.1. The assessee argued against the inclusion of this company in the list of comparables before the Transfer Pricing Officer by contending that it was functionally different and there was insufficient segmental information. Apart from that, it was also argued that it was exceptional year of its operations and there were significant intangible assets possessed by it....
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....issions and perusing the relevant material on record, we find from Profit & Loss Account of this company, a copy of which is placed at page 1534 of the paper book, that its income from 'Sale of software services and Products' is amounting to Rs. 6101.27 millions. The TPO has himself observed that this company does have some products, but, product revenue is only 7.2% and, hence, this company is predominantly a software service provider. This discussion is contained in para 21.67 of the TPO's order. Even Schedule-11 to the Profit & Loss Account also shows 'Sale of software services and Products.' This shows that this company is engaged in both rendering software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, yet, we are inclined to take it as non-comparable because there is no precise information about the contribution made by such small sale of software products to the total profit of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, we, therefore, order for the exclusion of th....
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....ble since it earns income from exhibitions and events, sponsorship income, income and delegate fee and entry charges as per Annual Report. Further , the company operates in a single segment i.e., income from exhibitions and events. The DRP did not accept the assessee's plea. Before us, the assessee submitted that this company be rejected as it is functionally not comparable based on : DCIT v. Electronics for Imaging India P. Ltd [IT(TP)A.No.212/Bang/2015 -AY.2010-11] DCIT v. Aruba Networks India P. Ltd [TS-820-ITAT-2016(Bang)-TP - AY 2010-11] ACIT v. RGA Services India P. Ltd [TS-580-ITAT-2015 (Mum)-TPAY. 2010-11] 13. The relevant portion of the order from DCIT v. Electronics for Imaging India P. Ltd [IT(TP)A.No.212/Bang/2015 -AY.2010-11 is extracted as under : "53. We have considered the rival submissions and considered the relevant material on record. As it is clear that the assessee is providing sales and marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and the like, the working also includes educating potential users of the benefit and features of the AEs range of p....
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....s the issue raised by the department in the present appeal is confined to exclusion of Asian Business Exhibition and Conferences Limited as a comparable. As far as objection of learned departmental representative that assessee itself has selected this company as a comparable, we may observe, that cannot be the sole criteria to reject assessee's objection with regard to selection of a comparable. At the time of preparing T.P. Study report assessee had selected some comparables by considering multiple year data and information available at the relevant time. However, if subsequently on the basis of information available in public domain it is found on the basis of functionality or some other reason a company is not at all comparable, assessee cannot be precluded from objecting to selection of the company as a comparable. This legal proposition is fairly well settled by the decision in case of DCITv. Quark Systems (P.) Ltd. (2010) 132 TTJ (Chd) (SB) 1 as well as decisions relied upon by the counsel for the assessee. In view of the aforesaid, we do not find any infirmity in the directions of DRP in excluding Asian Business Exhibition and Conferences Limited as a comparable. The gro....
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....& 1104 of the paper book. Since the assessee is not engaged in trading activity, in our considered opinion, this company cannot be considered as good comparable in the present case and hence, we direct the AO/TPO to exclude his company from the list of final comparable. 30. In the combined result, the appeal of the assessee and revenue are partly allowed." We heard the rival submissions and gone through relevant material. Following the above decision, the assessee's plea and the DRP's directions are upheld and the Revenue's appeal is dismissed. 13. The revenue is on appeal against the DRP's direction for allowing working capital adjustment for marketing support services. We have considered the rival submissions and uphold the directions of the DRP to allow working capital adjustment on similar principles/ method as it was computed for software development services. 14. The revenue is also on appeal against the DRP's direction for treating the foreign exchange loss as an operating in nature. We have considered the rival submissions and uphold the directions of the DRP to the extent of foreign exchange loss which arose out of the current year's transactions alone as an op....
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....t is raising all the following grounds: Computation of Arm's Length Price for software development segment The lower authorities have erred in:- a. adopting inappropriate filters like one sided turnover filter, 25% RPT filter, etc., for selecting comparables. b. computing the arm's length price based only on the data for the Financial Year 2010-11 of the comparables, which was not available when the Appellant undertook transfer pricing documentation and reporting obligations; C. not computing the ALP considering weighted average margin of comparables considering data of FY 2008-09, 2009-10 and 2010-11; d. rejecting comparables selected by the Appellant in the TP study and additional comparables proposed by the Appellant on unjustifiable grounds; e. Rejecting Transfer pricing analysis performed by the Appellant on unjustifiable grounds and performing fresh TP analysis; Document 3 f. Selecting inappropriate comparables and selecting companies as comparables despite unusual business circumstances, high margin, high turnover, which are not functionally comparable, which fail RPT filter and other filters; g. inappropriately computing the....
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.... not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies. Not granting adjustment for working capital differential while computing ALP; and not recognizing that the appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account. 10. not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justify the price paid/charged on the basis of any one comparable only. 11. Corporate Tax Grounds The lower authorities have erred in concluding that Internet charges and travel expenses should be excluded from export turnover on the ground that it is attributable for the delivery of software outside India. Document 5 1. The order of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case. Software Development Segment : 2. The DRP erred in directing the AO/TPO to exclude M/s. Acropetal Technologies Ltd., M/s. Mindtree Consulting Ltd., M/s. R.S. Software (India)....