TaxTMI 
TaxTMI 
2018 (5) TMI 1785
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.... did not agree with the method of computation 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....
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....uced from the figure of unabsorbed depreciation and not from the 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 fo....
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....- in the P&L Account on account of MAT credit entitlement. However, this amount 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 cr....
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...., the Assessing Officer computed book profit at Rs. 8,40,79,191/- after reducing unabsorbed 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). ....
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....er has to fail. This is for the reason that he has proceeded to adjust the unabsorbed depreciation as on 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....
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....epartment. However, quantum of tax credit will depend upon the assessment framed by the AO. Thus, the right to set off 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) ....
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....ssessed tax. This led to immense hardship. The position which emerged was that due to omission on one hand MAT credit was available for set off for five years under s. 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 appea....
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....of Transfer Pricing: 3.1] The assessee is engaged in software development business. For this year, the total turnover of the assessee was Rs. 108.04 Crs. In this year, the assessee had entered 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'....
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....Ltd. 15.68% 10.33% Arithmetic Mean 22.01% 20.77% 3.6] The assessee submits that the average margin of the comparables is 20.77% while the operating margin of the assessee is 12.90%. On the said basis, the final addition of Rs. 12,27,18,401l- is made by the A.O. The various issues arising are discussed hereunder - 3.7] Objection of the assessee 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 enga....
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.... paper book. The correct margin of Helios after excluding income IS 33.40 % before allowing working capital adjustment. 4 Kals Information System 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 in different activities and hence, cannot be compared with assessee company. b. 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. 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 Em....
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....echnologies has been held to be comparable and the reason given for excluding that it has incurred loss has not been accepted by Hon'ble ITAT. The relevant issue is discussed in para 21.2 of the order. Accordingly, in view of the decision of Hon'ble ITAT, Pune, SIP Technologies should be considered as a comparable entity. 3 CG-VAK Software Exports Ltd. (Segmental) 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 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. ....
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....unsel for the assessee has stated at the Bar that he is not pressing ground No. 2.1. The same is dismissed, accordingly. 16. In ground No. 2.2 the assessee has assailed rejection of various companies considered as comparable entities by the assessee company while determining the ALP. The assessee in appeal has now sought inclusion of : i. Aztec Soft Ltd. ii. SIP Technologies and Exports Ltd. iii. CG-VAK Software Exports Ltd. (Segmental). iv. ThinkSoft Global Services Ltd. The assessee in its 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 ....
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....contention of the assessee is that the said company is not a persistent loss making company. Only for the reason that the comparable has suffered loss in one year the same should not be rejected. We find merit in the submission of the Ld. A.R. In the case of Bobst India Pvt. Ltd. Vs. DCIT in ITA No.1380/PN/2010 for A.Y. 2006-07 the Tribunal has observed that only persistent loss making companies should be held as not good comparable. The Tribunal held that the 'persistent loss' means, continuous loss for more than 3 years. 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 t....
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....present case that it has been incurred in any abnormal situation. It is also not the case of the Revenue that the said concern is a consistently loss making concern. Therefore, the said concern cannot be excluded merely because of incurrence of loss in this year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold the plea of the assessee for including 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) wher....
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....itting argument, which is not justified in the context of the present comparability analysis. Ostensibly, 'Verification' and 'Validation' are broadly speaking, a part and parcel of the process of software development. Therefore, on this aspect, we are unable to uphold the action of lower authorities in excluding the said concern from the final set of comparables. We direct, accordingly." The ld. DR has not been able to controvert the findings of Coordinate Bench on this issue. Thus, taking into consideration the facts of the case and the 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.....
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....hereby revenues from software development is recognized based on software developed and billed to the clients. It has been explained that in such a situation, expenditure for developing software would be billed in an earlier year but the income would be recognized in a subsequent year. This business model results in fluctuation in margins over the years. The counsel for the assessee submitted that the Pune Bench of the Tribunal in the case of QLogic (India) Private Limited vs. DCIT (ITA No.227/PN/2014) for assessment year 2009-10 dated 21.10.2014 has excluded the said 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 discuss....
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....is company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under: "29.1 The Ld Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted 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,....
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....rvices, whereas, the assessee is in the business of software development and related services. The Tribunal in the case of Symphony Services Pune (P) Ltd. Vs. ITO in ITA No.257/PN/2013 for A.Y. 2008-09 decided on 30-04-2014 has held as under : ―23. We have carefully considered the rival submissions. In this context, we find that before the TPO relied upon the information available on the website of the said concern and submitted that the said concern was engaged in e-business consultancy services, consisting of web strategy services, ITES services, and in technology consultancy services including portal development services, 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....
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....mitted that this comparable was rejected by the Tribunal in assessee's own case for assessment year 2007- 08 on the ground that it is functionally different. The relevant extract of the order of the Tribunal in ITA No. 1319/PN/2011 for the assessment year 2007-08 decided on 10-10-2014 is reproduced here-in-under: ―36. So far as Helios and Matherson Information Technology Ltd., is concerned, we find the Pune Bench of the Tribunal in the case of PTC Software Ltd., has excluded the same from the list of comparables by observing as under : ―20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised 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 po....
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....f Bindview India Pvt. Ltd., has observed as under : 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals' Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services 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 Hel....
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....to the assessee's segment of IT-Services. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel 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 p....
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....n of concern Goldstone Technologies Ltd. 17. The learned Authorized Representative for the assessee pointed out that before the DRP, it was pointed out that the said concern Goldstone Technologies Ltd. was engaged in the activities related to Media & IP TV and further, the company had carried inventory of set top boxes and movie rights in its Balance Sheet for the previous year. In addition, the said company had some income from sale of industrial material. Looking at the services provided by the said concern, it is clear that the same are functionally dissimilar to the services provided by the assessee and there is no merit in comparing the results of the said concern while benchmarking the international 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 allo....