TaxTMI 
TaxTMI 
2017 (3) TMI 1734
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....ts and specifications provided by Trianz US. It filed its return on 30.9.2008 with a Nil income and a loss of Rs. 14,11,62,551/- 3. On its international transactions, the assessee had adopted Transactional Net Margin Method (TNMM) to arrive at the Arm's Length Price with 14 comparables. Although, the TPO accepted Transactional Net Margin Method but rejected the assessee's TP study, rejected 11 comparables out of 14 chosen by the assessee, introduced 17 new comparables, arrived an adjusted mean margin at 23.58% as against the assessee's margin of 27.11% and made an addition at Rs. 2,48,34,842/-. The AO made made various other additions/disallowances in respect of the domestic corporate tax front. On the assessee's objections, the DRP but for remitting one issue, dismissed all other issues under consideration of this appeal. Aggrieved, the assessee filed a lengthy grounds of appeal and later on filed a concise grounds as under : Ground I - Toss on Derivatives disallowed Rs. 10,00,000/- 1. The Assessing authority has erred in disallowing, and the Dispute Resolution Panel (DRP) in upholding, the provision for mark-to-market loss on derivatives amoun....
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....IT and ITES was not available while in notes to accounts it is stated that company provides computer software and service. (d) The TPO has erred in rejecting Saksoft Limited by concluding that the segment reports were not available while in notes to accounts it is stated that company provides IT services. (e) The TPO has erred in rejecting Sagar Soft (India) Limited by concluding that company has more than 25% related party transactions while notes to accounts of the company do not indicate any related party transaction. (f) The TPO has erred in rejecting VGL Softech Limited by Stating that no replies were received for notices sent u/s 133(6). (g) The TPO has erred in rejecting E 2 E Infotech Limited by concluding that 100% sales are forex transaction and no other reason has been specified by the TPO. (h) The TPO has erred in rejecting Nihar Infor Global Limited by concluding that the company is a product company while note to accounts and reply u/s 133(6) states that company provides services to clients - domestic and overseas. (i) The TPO has erred in rejecting Akshay Software Technologies L....
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....ubstantial revenue from software products, incurred huge expenses towards research and development and owns significant intangible assets in the form of Patents, Intellectual property rights, etc, (c) The TPO has erred in selecting Celestial Biolabs as a comparable as it is functionally different, does not satisfy employee cost filter and has abnormal profit. 10. The TPO has erred in not considering Circular No.12/2001 dated 23.08.2001 issued by the CBDT which stipulates that the ALP adopted by the taxpayer will hold good if it is within the range of +/- 5% of the ALP computed by the TPO. 4. The first issue argued is that the A O has erred in disallowing and the DRP in upholding the provision for mark-to-market loss on derivatives at Rs. 1,000,000 on the basis that such loss is notional, cannot be debited to the Profit and loss account and treated as an allowable expenditure. In this regard, the assessee submitted that the ICAI had issued AS 30 - Financial Instruments: Recognition and Measurement, which contained guidance on accounting for derivatives. This Standard became recommendatory from April 1, 2009 and mandatory from April 1, 2011. However, vide a....
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.... that "The Panel after taking into consideration of the facts deems it appropriate to direct the AO to revisit this issue and examine the claim that the impugned customs duty of Rs. 38,860 on imports pertaining to equipments/items procured for clients projects and the same was subsequently billed to the client. This ground is disposed off with the directions as above". Since this issue is remitted back to the AO, we hold that the DRP's decision does not require any interference. 6. The next issue argued is on the disallowance of rent equalization at Rs. 18,82,944/-. The assessee provided this sum towards rent equalization in accordance with AS 19-Leases, as notified by the Ministry of Corporate affairs under the Companies (Accounting Standards) Rules 2006. The AO held that since no such known liability exists, the claim is not allowable and hence added to the total income. The assessee pleaded that the rent equalization charges are debited to the P& L account , it is in accordance with AS-19 and hence it should be allowed. We heard the rival submissions. As pointed out by the DR, we find that the assessee has not raised any objection on this issue before the DRP. Since, t....
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....urther contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions : (i) Trilogy E-Business Software India Pvt. Ltd. v. DCIT (ITA No.1054/Bang/2011) (ii) Telecordia Technologies India Pvt Ltd v. ACIT (ITA No.7821/Mum/2011) 9.3 Per contra, the learned Departmental Representative supported the inclusion of the aforesaid company in the final list of comparables by the TPO. The learned Departmental Representative argued that the ruling of the co-ordinate bench in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) relied on by the assessee was rendered in the factual context of the position that existed for Financial Year 2006-07 vis-à-vis this comparable company and Trilogy E-Business Software India Pvt. Ltd. and there cannot be an assumption that it would continue to be applicable for F.Y. 2007-08 that too vis-à-vis the assessee, in the case on hand, which ....
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....rating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Trilogy E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonst....
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....cates that the company is into large scale development of bio tech products. " .... Your company is setting up a manufacturing facility to manufacture Industrial Enzymes, Active Pharmaceuticals Ingredients and Herbal Pharmaceuticals. ...." (iii) "Public Issue" in the Directors Report on page 13 of the Annual Report states :- "...... The company has raised Rs. 30 Crores for production of Enzymes, Bio Tech Products and Drug Molecule Development, etc., with an estimated project cost of Rs. 50 Crores." (iv) "Financials" in Management Discussion & Analysis on page 16 of the Annual Report states :- " ..... The company has achieved a turnover of Rs. 2,021.12 lakhs from sales and services against the turnover of Rs. 1,412.76 lakhs in the previous fiscal year. The sales are higher by 608.36%. The growth has been achieved through services made in Bio-technology, Implementations, Product Development, I T Enabled Services and also through rational spending in costs...." (v) "Business Analysis" in the Management Discussion & Analysis on page 16 of the Annual Report states :- "Products The company has developed Taxability Pr....
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....the facts relevant to an earlier financial year and there cannot be an assumption that it would continue to be applicable to all other assessees for this year as well. At the same time, we find that the TPO also seems to have selected this company as a comparable, based on the reasoning given in the TPO's order for the earlier year i.e. F.Y. 2006-07. Evidently, in this view of the matter, the TPO has not conducted any independent FAR analysis for this company for the year under consideration and therefore the selection process adopted by the TPO is defective. 10.5.2 Further, besides relying on the decision of the co-ordinate bench in the case of Triology E-Business Software India Pvt. Ltd. (supra), the assessee has demonstrated that the finding given therein for Assessment Year 2007-08 is applicable for this year also. Further, the assessee has also brought on record substantial evidence by quoting from various portions of the Annual Report that this company is functionally different from the assessee and hence is not comparable to the assessee in the case on hand. We agree with the submissions made by the assessee, that as per the details from the Annual Report of thi....
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....isting of STPI unit engaged in Development of Software and Software Products and a Training Centre engaged in training of software professionals on online projects" (emphasis provided). "Revenue Recognition" under Notes to the financial statements on page 18 of the Annual Report states :- "The company derives its revenues primarily from software services and software products." (iii) As per the Website of KALS, the company has developed two products, namely; 'Virtual Insure' and 'La-Vision' establishing the fact that KALS earns revenues from the development of software products. (iv) The segmental information provided under 'Notes on Accounts' of the Annual Report provides the break-up of revenues from two segments, namely 'Application Software' and 'Training' which shows that revenue from software products forms part of Application Software and there are no segmental details. (v) The assessee also placed reliance on the judicial decisions rendered in the following cases : (a) Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) (b) Mercedes Benz Resear....
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....scussed above, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the set of comparable companies. 12. (4) Infosys Technologies Ltd. 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the U....
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....assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO's own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of reve....
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.... contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. v. ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and servi....
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.... this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learn....
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....from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04-ITAT- PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have hea....
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....-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development. The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the....
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....ned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e.....
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....y the company are described as under : "Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies." (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : " Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company ............... have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks." (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's ....
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....gaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider." Since this Tribunal has found that the comparables, E-Zest Solution ltd, Persistent Systems Ltd, Quintegra Solution Ltd, Thirdware Solution Ltd and Lucid Software Ltd are functionally different, following it, the TPO/AO is directed to exclude them from the list of comparables. 7.3 Although the assessee objected the inclusion of LGS Global Ltd, it could not furnish any evidence and hence its plea is rejected. 7.4 In respect of the comparable, Bodhtree Consulting Ltd, the assessee pleaded that it is functionally different and relied on the decision of the Mumbai Tribunal in the case of Nethawk Networks India (P.) Ltd. v. ITO [2014] 41 taxmann.com 250 which engaged in the business of software development services required for telecommunication related parts manufactured by its parent company i.e., M/s. Nethawk Oyj Finland and is a 100% captive unit for its parent as a solitary customer. The relevant portion of the order is extracted as under :' C. Bodhtree Consulting Ltd : 21. On this comparable, case of the assessee ....
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....ing 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 developed the software application .................. 23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO. Accordingly, we dismiss the argument of the Ld. DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean." Since the Mumbai Tribunal has found that the comparables, Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysi....
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....was around 300 employees at that time. Unfortunately, the growth plans did not take off as desired with the market slowdown. The rental contract for the building hired by the assesse for carrying out the operations could not be terminated on account of the lock in period and such costs were incurred by the appellant and were not recoverable from the clients. This excess capacity was subsequently sublet from FY 2010-11 (w.e.f 19-07-2010) onwards. Accordingly, the rent paid towards vacant spaces have been considered as idle resources and costs thereof have been excluded for the purpose of arriving at PLI of transactions with AE. Thus , 50% of the rent expenses of the Bangalore Office considered as rent towards unutilized space (50% of Rs. 7,76,40,996/- = Rs. 3,88,20,498/-). Rent expenses debited to P/L account in respect of this premises was Rs. 7,76,40,996/-. Similarly, there were several employees who were not working on any billable projects during certain periods of the year. The assessee had hired new employees during this time to ramp up its capability and capacity. However, the projects did not materialize as planned. These employees were on bench during this time. Hence the s....