TaxTMI 
TaxTMI 
2018 (5) TMI 1785
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.... of „Book Profits‟ u/s. 115JB of the Act. Accordingly, he rejected assessee‟s method of computation of book profits and recomputed the same. In the present appeal the assessee has primarily raised two issues. The ground No. 1 along with its sub-grounds relates to computation of Book Profits u/s. 115JB and ground No. 2 along with sub-grounds relates to transfer pricing issues. 3. First we will take up the Non-TP issues i.e. the ground No. 1 relating to computation of book profits under MAT provisions. The assessee has filed abridged grounds of appeal. The ground No. 1 raised in the appeal is as under : ―On facts and in law, 1] The learned DRP 1 A.O. erred in computing the book profit for the purpose of section 115JB at Rs. 8,40,79,191/- as against the book profit shown at Rs. 1,00,54,626/- declared by the assessee company. 1.1] The learned DRP/A.O. erred in holding that the amount of brought forward loss or unabsorbed depreciation to be deducted while computing the book profit was Rs. 44,79,000/- as against Rs. 7,32,38,000/- claimed by the assessee. 1.2] The learned DRP/A.O. erred in holding that the amount of MAT credit entitlement of Rs. 52,65,565/- wa....
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....e figure of brought forward loss. According to the A.O., the method adopted by the assessee is not correct and he has relied upon the decision of Authority for Advance Ruling in the case of Rastriya Ispat Nigam Ltd. [285 ITR 1]. The learned A.O. has stated that the assessee has no option to decide the manner of set off. Accordingly, he has stated that the amount which can be reduced is only Rs. 44,79,000/- and not Rs. 7,32,38,000/- as claimed by the assessee and hence, the book profit has been increased to that extent. The Id. DRP has also confirmed the view taken by the A.O. 1.4] The assessee submits that the learned A.O. has erred in making the above addition. As clarified earlier, the brought forward loss and unabsorbed depreciation as on 31.03.2006 was Rs. 18,10,90,000/- and Rs. 7,32,38,000/- respectively. In A.Y. 2007-08, the assessee reduced an amount of Rs. 6,87,59,000/- and the same was adjusted against the brought forward loss and it was reduced to Rs. 11,23,31,000/-. It is submitted that there is no provision which specifies the manner and priority for adjustment of the amount set off against the brought forward loss or unabsorbed depreciation. Since there is no provisio....
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....ount was reduced from the book profit for the purposes of section 115JB. It was clarified to the learned A.O. that MAT credit entitlement represents prepaid Income Tax and therefore, the same should be reduced from the book profit. The assessee further submitted that for the purpose of determining the book profit, the amount of Income Tax paid/payable which is debited to P&L Account is to be added back. In the same manner, the amount of Income Tax credited to the P&L Account has to be reduced since MAT credit entitlement is nothing but prepaid Income Tax. The learned A.O. has not appreciated the claim of the assessee. According to him, there is no provision in section 115JB which provides for reduction of MAT credit entitlement while determining the book profit and hence, he has considered the said amount in the final computation of book profit. 2.2] The assessee submits that the claim made by it is correct and the A.O. has erred in not appreciating its claim. The assessee would like to clarify that MAT credit entitlement arises because of payment of taxes u/s. 115JB and section 115JAA provides for MAT credit which can be set off against the tax liability arising under the normal ....
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....ed depreciation of Rs. 44,79,000/- and adding back MAT credit entitlement claimed by assessee Rs. 52,65,565/-. The Assessing Officer while computing book profit under MAT provisions has placed reliance on the decision of AAR in the case of Rastriya Ispat Nigam Ltd. (supra). We find that the Co-ordinate Bench of the Tribunal in the case of Kirloskar Ferrous Industries Ltd. (supra) after considering the ratio in the case of Rastriya Ispat Nigam Ltd. (supra) has held as under : ―19. In this manner, the Assessing Officer computed book profits for section 115JB at Rs. 20,24,35,238/- as against nil determined by the assessee. We have examined the position set-up by the Assessing Officer. Quite clearly, clause (iii) of Explanation 1 to section 115JB envisages adjustment for the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. It is quite clear that the loss depicted in the account books which comprises of business losses and depreciation is required to be split up for the purposes of clause (iii) of Explanation 1 to section 115JB(2). So, however, the manner of determining the individual figures of loss and depreciation is not in....
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....n 31.3.2003, whereas the correct approach would have been to compare and determine the losses in each of the financial years starting from the financial year 1996-97 and determine the loss or depreciation which is required to be carried forward in accordance with the aforesaid discussion. In fact, we find that even the working adopted by the assessee in the return of income also does not correspond to the aforesaid principles. Under these circumstances, we, therefore, deem it fit and proper to set-aside the order of the Commissioner of Income-tax (Appeals) and to remit the matter back to the file of the Assessing Officer, who shall revisit the working of book profit for the purposes of section 115JB in so far as it relates to clause (iii) of Explanation 1 to section 115JB(2) of the Act. The Assessing Officer shall carry out the aforesaid limited exercise in accordance with our aforesaid discussion and after allowing the assessee a reasonable opportunity of being heard as per law." In para 12 of the order, the Tribunal after considering the decision in the case of Rastriya Ispat Nigam Ltd. (supra) observed as under : ―12. ..........In so far as the reliance on the judgment ....
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.... arises as a result of the payment of tax under s. 115JA(1) although quantification of that right depends upon the ultimate determination of total income for the first assessment year. Further, an assessee has a right to take into account the set off even while estimating its liability to pay advance tax on the "current income" in accordance with the provisions of Chapter XVII-C. Although s. 209(1)(d) does not make any specific provision either before or after the amendments carried out by the Finance Act, 2006 to the effect that an assessee is entitled to set off the tax credit that would be available in terms of s. 115JAA(1) while computing the quantum of advance tax that is to be paid it must follow that an assessee would be entitled to do so otherwise it results in absurdity, viz., that an assessee pays advance tax on the footing that it is not entitled (when in fact it is so entitled as discussed above) to the credit and thereafter claims a refund of such advance tax paid as a consequence of the set off. Moreover, when an AO makes an intimation under s. 143(1) he accepts the return filed by the assessee to which the AO may make an adjustment and consequently makes a demand or ....
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..... 115JAA but the same was not available for set off while calculating advance tax. This dichotomy was more spelt out because s. 115JAA did not provide for payment of interest on the MAT credit. To avoid this situation, Parliament amended Expln. 1 to s. 234B by Finance Act, 2006 w.e.f. 1st April, 2007 to provide along with tax deducted or collected at source, MAT credit under s. 115JAA also to be excluded while calculating assessed tax." 10. Thus, in the light of decision of Hon‟ble Apex Court, in principle we hold that the assessee is eligible for claiming MAT credit entitlement as reversal for Income Tax provisions. At the time of assessment proceedings the Assessing Officer has failed to examine as to whether MAT credit entitlement claimed by the assessee is on account of prepayment of tax. This fact requires verification. Accordingly, we direct the Assessing Officer to verify the same and decide the issue accordingly. 11. In the result, the ground No. 1 and sub-ground Nos. 1.1 and 1.2 raised in the appeal by the assessee are allowed for statistical purpose in the terms aforesaid. 12. The next ground raised in the appeal is with respect to transfer pricing adjustment. Th....
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....tered into International Transactions with its AEs. The assessee had entered into various transactions with its AEs and the relevant details are given as under - Sr. No. Associated Enterprise Nature of transaction Value of transactions (Rs.) Method used 1 Dimension Data Management Services (PTY) Ltd. Software Services 7,78,32,435/- CUP 2 Data Craft Asia Software Services 9,71,043/- CUP 3 Dimension Data Advanced Infrastructure Ltd. Software Services 1,05,53,369/- CUP 4 Paracon S A (Pty) Ltd. Software Services 21,79,67,864/- TNMM 5 Nihilent Technologies Inc. Software Services 1,84,04,890/- 6 Paracon S A (Pty) Ltd. Channel commission paid 79,77,206/- 7 Dimension Data Network Services Ltd. Reimbursement of rent 4,85,227/- CUP Total 33,41,89,034/- 3.2] The assessee followed Comparable Uncontrolled Price (CUP) Method for determining the Arm's Length Price (ALP) of the software services provided to Dimension Data Management Services (PTY) Ltd., Data Craft Asia and Dimension Data Advanced Infrastructure Ltd. For the software services provided Paracon SA (PTY) Ltd. and Nihilent Technologies Inc., the assessee followe....
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.... in the inclusion of foreign companies- 1 Bodhtree Consulting Ltd. a. ITAT, Pune in the case of Barclays Technology Centre India (P) Ltd. has held that the said company is not exclusively engaged in software development services and hence, the same cannot be considered as comparable entity. Refer paras 20-24 of the order. Pages 126 - 142 of the legal compilation. b. Similar view has also been taken in the case of John Deere India Pvt. [ITA No. 2236/Pn/2012 for A.Y. 2008- 09. The copy of the said decision is given on pages 143- 189 of legal compilation. The issue regarding exclusion of Bodhtree is discussed in para 20.1 [pages 161-164 of the legal compilation]. c. Similar view has been taken by Hon'ble ITAT, Pune in the case of Emptoris Technologies Pvt. Ltd. which was also engaged in software development. The asst. year involved was also A.Y. 2008-09. (Refer paras 13-14 of the said order, pages 204 - 208 of the legal compilation) 2 E-Zest Solutions Ltd. a. ITAT, Pune in the case of Symphony Services Pune (P) Ltd. for A.Y. 2008-09 has held that the said company IS engaged 10 different activities and hence, cannot be compared with a company engaged 10 software development. ....
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....eld that the said company is not exclusively engaged in software development services and hence, the same cannot be considered as comparable entity. c. Similar view has been taken by Hon'ble ITAT, Pune in the case of Emptoris Technologies Pvt. Ltd. which was also engaged in software development. The asst. year involved was also A.Y. 2008 - 09. (Refer paras 10, 11 & 14 of the said order) d. Similar view has been taken in the case of PTC Software India Pvt. Ltd. for A.Y. 2008- 09 wherein it has been held that Helios is functionally not comparable. Refer paras 5 - 8 of the order, pages 212 - 224 of the legal compilation. 5 Goldstone Technologies Ltd. a. This company has been rejected as a comparable entity by Hon'ble ITAT, Pune in the case of Emptor is Technologies Pvt. Ltd. which was also engaged in software development. The asst. year involved was also A.Y. 2008 - 09. (Refer paras 16-17 of the said order refer pages 209- 210 of the legal compilation) 3.8] The assessee further submits that following companies should be included in the final list of comparables: Sr. No. Comparable Remarks 1 Aztec Soft Ltd. a. This company has been rejected on the following grounds by A....
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....y IS comparable and should be considered in the final list of comparables. This was an additional comparable submitted by the assessee which was not selected in the original transfer pricing study. b. The TPO has rejected CG V AK on the ground that it is a loss-making entity. c. The assessee submits that in the case of TIBCO Software India Pvt. Ltd. for the same asst. year has held that CG- V AK is to be considered as a comparable entity. Hon'ble ITAT has discussed this issue in paras 26 - 29, pages 16 - 18 of the legal compilation. d. It has been held by Hon'ble ITAT that CG VAK is not a persistently loss-making entity and therefore, the rejection of the said company by the TPO is not correct. e. It is also to be noted that CG VAK IS accepted as a comparable entity by the TPO in A.Y. 2009 - 10 and the copy of the order passed is given on pages 759 - 808 of the Paper Book. 4 ThinkSoft Global Services Ltd. a. During the course of the proceedings before the TPO, the assessee contended that this company is comparable and should be considered in the final list of comparables. This was an additional comparable submitted by the assessee which was not selected in the origina....
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.... TP study report had selected 26 companies as comparables. The TPO rejected some of the companies and introduced some fresh companies as comparables. We find that from the above mentioned four companies Aztec Soft Ltd. and SIP Technologies and Exports Ltd. were already part of assessee‟s TP study report. As far as other two companies are concerned the assessee during proceedings before the TPO had prayed for including these companies in the list of comparables. Before we proceed to decide this issue it would be relevant to point that during transfer pricing proceedings the TPO had applied following filters for selecting the comparables : (i) Single year data; (ii) Export turnover of minimum 75%; (iii) Companies with different accounting year to be rejected; (iv) Turnover filter Rs. 1 crore to Rs. 200 crores and (v) Related party transaction - less than 25% to be selected. (i). Aztec Soft Ltd. - The TPO has rejected the company from the list of comparables on account of extra ordinary event i.e. restructuring and RPT more than 25%. In the case of John Deere Vs. ACIT (supra) the Coordinate Bench has held the above said company to be a good comparable after overruling similar o....
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.... Thus, where the comparable entity is not under persistent loss, the same should not be rejected as comparable. Similar view has been taken in the case of Goldman Sachs (India) Securities Pvt. Ltd. Vs. ACIT, ITA No.7724/Mum/2011, and Brigade Global Vs. ITO, ITA No.1494/Hyd/2010. In the present case, the comparable entity SIP Technologies & Exports Ltd. has suffered loss in F.Y. 2007-08 only. Therefore, it cannot be said to be a persistent loss making company. The authorities below have thus erred in excluding the same from the list of comparable entities. We direct the TPO/AO to include the aforesaid company as comparable entity." The ld. DR has not been able to controvert the findings of Coordinate Bench in selecting the company as comparable where it has suffered loss in only one year. In the facts of the case and in the light of the decision of Co-ordinate Bench we direct the TPO/Assessing Officer to include SIP Technologies and Exports Ltd. in the list of comparables. (iii). CG-VAK Software Exports Ltd. (Segmental) - The TPO rejected the said company on the ground that it is loss making entity. The ld. AR pointed that in the subsequent assessment year i.e. assessment year 200....
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....cluding the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. Thus, on this aspect, assessee succeeds." Thus, in view of the facts of the case and the decision of Co-ordinate Bench of the Tribunal we direct the TPO/Assessing Officer to include CGVAK Software Exports Ltd. (Segmental) in the final list of comparables. (iv). ThinkSoft Global Services Ltd. - The TPO has rejected the company on the ground of functional disparity. The ld. AR has drawn our attention to the order of Tribunal in the case of TIBCO Software India Pvt. Ltd. Vs. Dy. Commissioner of Income Tax (supra) wherein the said company was rejected by the TPO on account of functional difference. The Tribunal after analyzing the activities carried out by the company held as under : ―33. We have carefully considered the rival submissions. We have also perused the orders of TPO as well as the DRP in this context. Although, the order of the TPO is quite sketchy on this point, but the DRP has discussed the matter in a slight detail. One of the observations of the DRP is that the ―primary activity of the appellant is to carry out part ....
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....he decision of Co-ordinate Bench, we direct the TPO/Assessing Officer to include ThinkSoft Global Services Ltd. in the final list of comparables. 17. Thus, in view of our above findings with respect to inclusion of various companies in the list of comparables, the ground No. 2.2 raised in the appeal by the assessee is partly allowed. 18. In ground No. 2.3 of the appeal the assessee has assailed inclusion of following companies in the final list of comparables : i. Bodhtree Consulting Ltd. ii. E-Zest Solutions Ltd. iii. Helios & Matheson Information Tech. iv. Kals Information System. v. Goldstone Technologies Ltd. 19. The ld. Counsel for the assessee has assailed the inclusion of above companies on the ground of functional disparity. i. Bodhtree Consulting Ltd. - The ld. AR submitted that the assessee is engaged in software development services, whereas Bodhtree Consulting Ltd. is engaged in product engineering and engineering services which are in the nature of ITES. The ld. AR has placed reliance on the decision of John Deere India Pvt. Ltd. (supra). We find that the Co-ordinate Bench of the Tribunal in the case of John Deere India Pvt. Ltd. (supra) rejected Bodhtree Cons....
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....aid concern from the list of comparables in a similar situation by following the decision of the Bangalore Bench of the Tribunal in the case of M/s. Mindteck (India) Ltd., vide I.T.(TP).A.No.70/Bang/2014 dated 21-08-2014. The decision of the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. vide ITA No.7633/M/2012 dated 06-11-2013 for assessment year 2008-09 has also been relied upon for excluding the said concern from the final set of comparables. 21. On the other hand the Ld. CIT-DR appearing for the Revenue has defended the inclusion of Bodhtree Consulting Ltd., by referring to the discussion in para 14.1 of the order of TPO. As per the TPO, the material on record does not justify the assertions of the assessee that the said concern was engaged in development and sale of software products. The Ld. CIT-DR has opposed the plea of the assessee by referring to the stand of the TPO as contained in his order. 22. We have carefully considered the rival submissions with respect to Bodhtree Consulting Limited. The plea of the assessee is that the said concern is engaged in the sale of software products, apart from considering software services, and that no se....
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....bmitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3......... 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had deve....
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...., etc.. It is sought to be explained that such kind of services are ITES services which are understood as KPO services. It was also pointed out that the said concern has not provided any segmental data in its Annual Report. Before us, it is sought to be contended that the KPO services are not comparable to the software development services being rendered by the assessee and therefore concerns which render KPO services cannot be considered as functionally comparable to the concerns who render software development services. For the said p1ro3position, reliance has been placed on the decision of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) which has indeed been rendered in the context of the same comparable, which is the subject-matter of consideration before us, i.e. E-Zest Solutions Limited. 24. We find that the factual assertions made by the assessee before the TPO as well as before us with regard to the functions being performed by EZest Solutions Limited have not been controverted by the Revenue. Ostensibly, E-Zest Solutions Limited is rendering product development services and technology services, and the latter falls in the category....
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....ised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." 36.1 Since the Pune Bench of the Tribunal in the case of PTC Software Ltd., (Supra) has already taken a view that Helios and Matherson Information Ltd., is not a comparable and is functionally different, therefore, we direct the TPO/AO to exclude the same from the list of comparables." In view of the fact that the Co-ordinate Bench o....
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....s and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." 37.1 Similarly, we find the Pune Bench of the Tribunal in the case of PTC Software Ltd., (Supra) has observed as under : ―16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its ITservices segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., i....
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....ounsel pointed out that 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. 19. 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 assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by th....
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....onal transaction of the assessee. Accordingly, we direct the Assessing Officer to exclude Goldstone Technologies Ltd." Thus, in view of the facts of the case and the decision of Co-ordinate Bench we direct the TPO/Assessing Officer to exclude Goldstone Technologies Ltd. from the final list of comparables. 20. Thus, in view of our above findings, the ground No. 2.3 raised in the appeal by the assessee relating to inclusion of various companies in the list of comparables is allowed. 21. The ld. AR of the assessee has submitted that the he is not pressing ground No. 2.4 raised in the appeal. The same is dismissed, accordingly. 22. In ground No. 2.5 of the appeal the assessee has raised an alternate prayer that if the addition is to be made by applying net profit rate the same should be applied to be expenditure incurred by the assessee for providing services to its AEs only. To support his contentions reliance has been placed on the decision of Hon‟ble Bombay High Court in the case of Commissioner of Income Tax Vs. Thyssen Krupp Industries India (P.) Ltd. reported as 70 taxmann.com 329. The Hon‟ble High Court affirming the view of Tribunal on this issue held that the a....