TaxTMI 
TaxTMI 
2016 (10) TMI 1238
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....s under : "2. The Ld. DRP erred in restricting the claim of deduction u/s.10A to Rs. 274,503,805/- as against the claim of Rs. 336,351,781/- made by the assessee. 3.3 The Ld. AO erred in holding that the deduction u/s.10A was not allowable in respect of the disallowance made u/s.40(a)(ia) and 43B. 3.4 The Ld. AO failed to appreciate that the amount disallowed u/s.40(a)(ia) and 43B resulted in higher business income of the assessee company and hence, the deduction u/s.10A ought to have been granted." 6. Facts of the case, in brief, are that in computation of income the assessee had claimed deduction of Rs. 33,63,51,781/- u/s.10A of the I.T. Act. The AO during the course of assessment proceedings observed that the assessee has certain disallowance u/s.40(a)(ia) and 43B as per the provisions of the I.T. Act. However, the assessee has also claimed deduction u/s.10A for the profit of STPI unit office for disallowance under the above sections. Rejecting the various explanations given by the assessee the AO recomputed the deduction u/s.10A on account of disallowance u/s.40(a)(ia) and 43B. The DRP upheld the action of the AO. The AO in the order passed allowed deduction of Rs. ....
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....re disallowance was made u/s.43B has observed as under : "For the purposes of the appeal it is necessary to refer to the admitted position which is that the assessee had deposited both the employer's and the employees' contribution towards PF and ESIC, though beyond the due date including the grace period. The AO added these payments to the total income of the assessee and made an addition in the amount of Rs. 71.59 lacs. However, for the deduction under s. 10A, the addition made on account of the employees' contribution was ignored in calculating the profits eligible for deduction on the ground that these receipts were not generated out of the manufacturing activity of the assessee company. By reason of the judgment of the Supreme Court in CIT vs. Alom Extrusions Ltd. (2009) 227 CTR (SC) 417 : (2009) 32 (SC) DTR 49 : (2009) 319 ITR 306 (SC) the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the AO has not, the Court is informed, been challenged by the assess....
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....s directed to allow deduction u/s. 10A to the assessee in the aforesaid terms." 8. Since the facts of the impugned assessment year are identical to the facts of the case decided by the Tribunal in assessee's own case in the immediately preceding assessment year, following the reasonings given therein and in absence of any contrary material brought to our notice against the order of the Tribunal, we direct the AO to allow the claim of the assessee. Grounds raised by the assessee are accordingly allowed. 9. Grounds of appeal No.4 to 12 by the assessee relate to addition of Rs. 32,87,25,130/- u/s.92CA of the I.T. Act. 10. Facts of the case, in brief, are that the assessee filed its return of income on 28-10-2009 declaring total income of Rs. 1,26,81,606/-. A reference u/s.92CA(1) of the I.T. Act, 1961 was made by the AO on 18-11-2010 for computation of the ALP of the international transactions detailed in the audit report filed in Form 3CEB. Accordingly, the TPO issued a notice u/s.92CA(2) of the I.T. Act and asked the assessee to furnished the details. 11. The TPO observed from the various details furnished by the assessee that it is engaged in providing Software Developm....
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.... in respect of Design Engineering Services 14 comparable companies are selected for benchmarking the international transactions and arrived at average PLI of the comparables at 18.55% whereas the PLI of the assessee is 13.07%. In respect of Business Support Services 17 comparable companies have been selected for benchmarking the international transactions to arrive at average PLI of the comparables at 14.05% whereas the PLI of the assessee is 12.68%. It was accordingly claimed in the TP study report that the transactions mentioned are at Arm's Length Price. 14. During the course of assessment proceedings the TPO, on the basis of the TP study report and other information furnished with the international transactions, was of the opinion that the international transactions in respect of Software Development Services and Design Engineering Services are not at ALP. He, therefore, issued a show cause notice asking the assessee to justify its TP study report. The assessee in response to the same raised the following objections : "1. Use of contemporaneous data 2. Use of single year data, is not appropriate 3. Rejection of TP documentation 4. Additional/modified filters are ....
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....me of the comparable PLI margin (OP/OC) After allowing working capital adjustment 1 Informed Technologies Ltd. 22.95 24.33 2 R Systems Ltd. 16.94 16.40 3 E4e Health Solutions Ltd. 32.22 30.83 4 Microgenetics Systems Ltd. 1.28 0.77 5 Cosmic Global Ltd. 40.66 39.58 6 Coral Hubs (Vishal Information Technologies Ltd.) 36.93 37.06 7 Tata Elxsi Ltd. 18.53 18.53 8 Genesys International Corporation Ltd. 58.45 54.88 Arithmetic Mean 28.50% (227.96/8) 27.80% (222.38/8) 16. The assessee approached the DRP, who upheld the selection of most of the companies in the case of Software Division as selected by the TPO. However, the DRP directed the TPO to consider the rejection of Mindtree Ltd. and Verification of facts in respect of Quintegra Solutions Ltd., R.S. Software (India) Ltd. and Zylog Systems Ltd. Similarly, in the case of Design Engineering Division while DRP upheld the selection of most of the comparables as per the TPO, however, it directed the TPO to exclude Informed Technologies Ltd. from the list of comparables as ratio of exports to total....
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.... Technologies Ltd. cannot be considered as a comparable entity with that of the assessee company. He submitted that this company was also considered as comparable entity in its own case for A.Y. 2007-08 and 2008-09 by the TPO. However, the Tribunal in assessee's own case for A.Y. 2007-08, a copy of which is placed at pages 1 to 54 of the paper book, at para 34 of the order has rejected the said company as a comparable entity on the ground that it is functionally not comparable. Referring to the order of the Tribunal in assessee's own case for A.Y. 2008-09, copy of which is placed at pages 55 to 101 of the paper book, the Ld. counsel for the assessee drew the attention of the Bench to para 20.4 of the order and submitted that the said company has been rejected as a comparable entity in assessee's own case. He accordingly submitted that Infosys Technologies Ltd. should be excluded from the list of comparables. 19. As regards Kals Information Technology System Ltd. is concerned the Ld. Counsel for the assessee drew the attention of the Bench to pages 39 and 40 of the order of the TPO and submitted that the TPO added this company as comparable because there is nothing mentioned at a....
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....ration he retained Bodhtree Consulting Ltd. as comparable. 22. Referring to the order of the Tribunal in assessee's own case for A.Y. 2008-09, a copy of which is placed at pages 55 to 101 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to para 20.1 of the order and submitted that after thoroughly considering the various submissions made by the assessee the Tribunal has held that Bodhtree Consulting Ltd. is not functionally comparable to the services rendered by the assessee and accordingly directed the AO to exclude the said company from the list of final set of comparables. He accordingly submitted that in view of the decision of the Tribunal in assessee's own case in the immediately preceding assessment year Bodhtree Consulting Ltd. should be excluded from the list of comparables. 23. So far as Aztec Soft Ltd. is concerned the Ld. Counsel for the assessee referred to page 32 of the order of the TPO and submitted that this company has been excluded on the ground that it has related party transactions of more than 25%. Referring to the order of the DRP he submitted that the DRP held the action of the AO for rejecting the same on related part....
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....e submitted that the correct operating margin of Persistent Systems Pvt. Ltd. is 12.52% prior to working capital adjustment whereas the TPO has considered the same at 16.18%. Therefore, the operating profit should be considered correctly. 27. So far as Design Engineering Division is concerned the Ld. Counsel for the assessee submitted that the turnover of the Design Engineering Division of the assessee company is Rs. 143,01,92,449/- on which the assessee has earned operating profit at 13.07%. The AO made addition of Rs. 19,25,66,724/- by rejecting 6 comparables and considering 2 new comparable companies. The DRP has excluded 1 company and therefore there are total 7 companies in the final list of comparables. The operating margin of the final set of comparables as per the AO comes to 28% as against 13% declared by the assessee. 28. So far as inclusion of Coral Hubs (earlier known as Vishal Information Technologies Ltd.) by the TPO as a comparable is concerned the Ld. Counsel for the assessee drew the attention of the Bench to page 52 of the order of the TPO and submitted that the TPO included the same on the ground that it was also selected by the TPO as a comparable for A.Y.....
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....ee Consulting Ltd. is concerned he submitted that it is a Software Development Company and functionally comparable. Therefore, the TPO/DRP has rightly considered the same company as comparable company. Referring to the decision of the Bangalore Bench of the Tribunal in the case of 3DLPM Ltd. he submitted that the Tribunal has accepted the Bodhtree Consulting Ltd. as a comparable company. Therefore, Bodhtree Consulting Ltd should be considered as comparable company. 33. So far as various other comparables are concerned he heavily relied on the order of the TPO/DRP. 34. The Ld. Counsel for the assessee in his rejoinder referring to page 185 of the paper book submitted that in the case of Kals Information System Ltd. under the head 'revenue recognition' it has been mentioned that the company derives its revenues primarily from Software Services and Software products. Referring to page 183 of the paper book he submitted that the company has inventory of Rs. 71.48 lakhs under the head 'Software Development". Therefore, this company cannot be considered as a comparable company with that of the assessee company. 35. We have considered the rival arguments made by the both the side....
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....formation Technology System Ltd., Bodhtree Consulting Ltd. should be excluded from the list of comparables while Aztec Soft Ltd. and SIP Technologies and Exports Ltd. should be included in the list of comparables. Further, it is also his submission that there is some calculation error of operating profit in the case of Persistent Systems Pvt. Ltd. 38. We find some force in the above submission of the Ld. Counsel for the assessee. So far as Infosys Technologies Ltd. is concerned, we find the TPO considered this company as a comparable company on the ground that the assessee itself in its TP study report has selected this company as a comparable company. When the assessee approached the DRP for exclusion of the aforesaid company the DRP rejected the objection of the assessee on the ground that the said is an afterthought and cannot be entertained at this stage. We find identical issue had come up before the Tribunal in assessee's own case for A.Y. 2007- 08 where the TPO had considered this company as a comparable company and the DRP had rejected the contention of the assessee to exclude the same. The Tribunal at Para 34 of the order directed the TPO/AO to exclude Infosys Technolog....
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....ar 2007-08 for the similar reasons. We direct the TPO/Assessing Officer to exclude the same from the list of comparable entity in the impugned assessment year as well." 39. Since in the impugned assessment year the turnover of Infosys Technologies Ltd. is about Rs. 20,000/- crores as against the turnover of the assessee company at Rs. 100/- crores, therefore, in view of the decision of the Tribunal in assessee's own case for A.Y. 2007-08 as well as for A.Y. 2008-09 Infosys Technologies Ltd. cannot be considered as a comparable company due to substantial disparity in the scale of operation. We therefore direct the TPO/AO to exclude the same from the list of comparables for the impugned assessment year. 40. So far as Kals Information System Ltd. is concerned we find it is the submission of the Ld. Counsel for the assessee that the said company is functionally different. The TPO added the same company as comparable on the ground that it was included in the list of comparables in the preceding assessment year also. We find the Tribunal in assessee's own case for A.Y. 2007-08 has excluded this company from the list of comparables by relying on various decisions. We find in A.Y. 20....
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.... software products which is functionally different from the services undertaken by the assessee in its IT-services 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., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F. Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software ser....
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.... 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 the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services." 37.2 xxxxxxxxxx 37.3 In view of the decision of the Pune Bench of the Tribunal giving reasons for exclusion of Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables because of different functions, we find merit in the submission of the Ld. Counsel for the assessee that the above two companies cannot be included in the list of comparables. We accordingly direct the TPO/AO to exclude Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables." In the assessment year under consideration, no material change has been pointed out by the Revenue in the facts or functions/activities of the assessee. Therefore, for the similar reasons, we direct the TPO/Assessing Officer to excl....
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.... said concern operates under a different pricing model, i.e. fixed price project method, whereby 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 R....
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.... (I) P Ltd (supra) wherein it was mentioned that the TPO described this 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) o....
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..... It is the submission of the Ld. Counsel for the assessee that the related party transactions of Aztec Soft Ltd. is only 17.25% which is less than 25%. From the details furnished by the assessee in the paper book at page 112 we find the assessee has given the following to substantiate its submission that the related party transactions in case of Aztec Soft Ltd. is less than 25% : Name of the party Nature of transactions Amount of Related Party Transactions Aztec Software Inc., USA Onsite Consultancy rendered by the subsidiary 405,528 Aztecsoft Disha Inc., USA Revenue from software development services 518,158 Subsidiaries Reimbursement paid (Aztec Inc & Disha Inc) 899 MindTree Limited Income from software development 6,664 Sub-contract services 8450 Total (a) 939,699 Sales as per P&L 2,737,798 Expenses as per P&L 2,710,035 Total (b) 5,447,833 % of RPT to Total Sales and Expenses (a)/(b)*100 17.25% 45. We further find in assessee's own case in A.Y. 2008-09 the Tribunal has directed the TPO/AO to include this company in the list of....
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.... correctness of the related party transactions as given by the assessee in the paper book and, if found correct, to include the same in the list of comparables. 47. As regards the SIP Technologies and Exports Ltd. is concerned, we find the TPO has rejected this company on the ground that it is a persistent loss making company and having diminishing revenue. Further, the said company was rejected by the DRP in A.Y. 2008-09. We find the Tribunal in assessee's own case for A.Y. 2008-09 at para 21.2 has discussed this issue and has directed the TPO/AO to include the said company as comparable entity. The relevant observation of the Tribunal reads as under : "21.2 SIP Technologies and Exports Ltd. : The said company has been excluded from the list of comparable by the TPO on the ground that it is a loss making company. The assessee has brought on record the operating margin of the three preceding assessment year of the said company. The same are as under: F.Y. 2005-06 21.09% F.Y. 2006-07 10.12% F.Y. 2007-08 -33.20% The 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 i....
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....ral Hubs, Genesys International Corporation Ltd. and Cosmic Global Ltd. 51. So far as Coral Hubs Ltd. (earlier known as Vishal Information Technologies Ltd.) is concerned we find the TPO has selected this company as comparable mainly on the ground that it was also considered as comparable for A.Y. 2008-09. We find on the basis of the submission of the assessee that this company is engaged in e-publishing and therefore the business model of the said company is not comparable with that of the assessee company, the Tribunal in assessee's own case for A.Y. 2008-09 has rejected this company as comparable. The relevant observation of the Tribunal at para 24.1 of the order reads as under : "24.1 Coral Hubs Ltd. (earlier known as Vishal Information Technologies Limited) : The objection of the assessee is that the said company is engaged in E-publishing which is quite different in function from the activities carried out by the assessee. The another objection raised by the assessee is that the operating margin of the said comparables is abnormally high i.e. 51.79%. The Ld. Counsel pointed that in the case of Symphony Marketing Solutions India Pvt. Ltd. Vs. ITO in IT(TP) A.No.1316/Bang....
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....act in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library & Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- "IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also different as it sub-contracts majority of its ITES works to third party vendors and has also made significant payments to those vendors. The payments made to vendors towards the data entry charges also supports the fact that the company outsources its works. In the circumstances, it cannot be taken as a comparable to the ITES functions performed by the assessee. Since this company is acting as agent only by out....
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....ces Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:- "36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee's own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR's argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, where 38 comparably less skilled employees are employed. In the ITES segment, the entire work is to be done by the employees and, therefore, even though they may be less skilled compared to software development segment, the number of employees would definitely be more and thus the employee cost would be high and thus application of employee cost filter to the ITES sector is also ju....
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....rabad Bench of the Tribunal in the case of Hyundai Motors India Engineering Pvt. Ltd. (supra) is as under: "V. GENESYS INTERNATIONAL CORPORATION LTD. : This company is listed at Sl. No.11 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this company performs R&D services and also owns intangibles. This company is a geospatial services content provider specialising in land based technologies. From the notes to accounts of this company, it is seen that this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing cartography, data conversion related computed based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. Besides the above, this company also carries out R&D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. Similar view was also taken in the case of Symphony Marketing Solutions Ind....
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.... "13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs. 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs. 9.90 lacs, Translation charges at Rs. 6.99 crore and Accounts BPO at Rs. 27.76 lac. The Ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges....