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TaxTMI 
TaxTMI 
TaxTMI 
2016 (9) TMI 1514
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....ed that the assessee has entered into international transactions with its AE for providing software development services to its AEs. Since the assessee's turnover with the AEs during the financial year 2009-10 was more than Rs. 15.00 crores, the AO referred the matter to the TPO for determination of the Arm's Length Price (ALP) of its international transactions. The TPO, vide order u/s 92CA(3) of the Act dated 31.12.2013, determined the ALP of the transaction at Rs. 66,01,06,695 as against the price of Rs. 60,22,99,470 received by the assessee from the AEs and determined the adjustment u/s 92CA of the Act at Rs. 5,78,67,225. The AO made the adjustment of the shortfall at Rs. 92,24,926. AO accordingly passed the draft assessment order, aggrieved by which, the assessee preferred its objections before the DRP. The DRP, vide order dated 13.11.2014, directed the AO to exclude two companies i.e. Infosys Technologies Ltd and L&T InfoTech Ltd, from the list of 18 comparables and directed the AO to re-work out the ALP. Consequent to the directions of the DRP, the AO re-computed the ALP at Rs. 65,21,84,748 and taking into consideration the fact the assessee has offered an amount of Rs. 4,84,....
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....ies selected as comparables by excluding provision for bad and doubtful debts: i) CAT Technologies Ltd; ii) E-Infochips Bangalore Ltd; iii)E-Zest Solutions Ltd; iv) Kuliza Technologies Pvt Ltd v) Kals Information Systems Ltd (Seg); and vi) Tata Elxsi Ltd (Seg) A Skillsoft Company Adjustment for risk differences 6. Not adjusting the net margins of the comparable companies taking into account the functional and risk differences between the international transaction of the Appellant and the comparable companies in accordance with the provisions of Rule 10B(1)(e); Corporate Tax Issues 7. Not allowing deduction u/ s lOA of the Act on voluntary TP adjustment of Rs. 4,84,42,265 offered by the Appellant. 8. Not considering the revised return of income filed by the Appellant while computing deduction u/ s lOA of the Act. 9. (a) Reducing the internet connection charges of Rs. 44,28,798 from the export turnover, by considering the same as expenditure not forming part of export turnover for arriving at the deduction u/ s lOA of the Act. (b) Not following the directions of the DRP for reducing communication charges from both export turnover and total turnover for the....
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.... same companies are comparables in the case of both the assessees. Therefore, we are satisfied that the decision of the Tribunal in the case of Pega Systems Worldwide (P) Ltd applies to the case before us as well. Let us therefore, now consider each of the companies in the light of the above decision. 10. As far as Comp-U-Learn Tech India Ltd is concerned, we find that the assessee had objected to taking this company as comparable before the TPO as recorded at Page 37 of the T.P. order on the ground that the said company is into software product development services. The objections of the assessee are also recorded at Page 7 of the DRP's order. In the case of Pega System, the Tribunal at Para 9 to 9.2 of its order has considered and has held that the said company is not comparable to the assessee therein which is also providing similar services as the assessee herein. For the sake of ready reference, the relevant Paras are reproduced hereunder: Comp-U-Learn Tech India Ltd., : 9. This company was selected by TPO as one of the comparable companies. Assessee objected stating that this company is engaged in two segments i.e. IT enabled services and software products solutions as per ....
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....tegy, company had exceptionally its operations in its core activity, software development, e-governance solutions, IT Services, IT enabled services etc'. In Item No. 9, it was reported that 'the company presently carries on business of software development, E-Governance solutions, IT and IT enabled services'. Referring to page 213 of the Paper Book, it was stated that it has spent sizeable amount towards R&D in pharmaceutical sector for the purpose of coming out with unique products and solutions for facilitating operational efficiency, effective inventory management and complete financial control for the sector. He later referred to the 'strategic acquisitions, alliances and subsidiaries' reported in the annual report of the company. Referring to pg. 215, it was submitted that R&D Sector was established to enhance the quality of its products. Further, referring to revenue recognition in schedule 14 (page 219 of the Paper Book), it was submitted that 'revenue in respect of brand license fee is accounted on execution of agreement. Revenue for software development is recognized on the basis of chargeable time or achievement of prescribed milestone as relevant to each contract. Revenu....
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....e is concerned, we find that the assessee's objections are recorded in the TPO's order at Page 39 and at Pages 7 & 8 of the DRP's order. We find that in the case of Pega Systems, this company was also considered at Para 8 to 8.3. The Tribunal has considered the issue at length and held as under: "E infochips Bangalore Ltd., : 8. This company is selected by TPO even though Assessee objected to the same (vide page 34 and 35 of the order of TPO). Assessee objected that the information for FY. 2009-10 was not available in public domain. It was further contended that company is functionally different and is having two different segments i.e., software development services and ITES. Company offers broad portfolio of services comprising new products, product development, product sustenance and maintenance, Product Qualitative Analysis (QA) and independent testing hardware and software design etc. TPO did not accept Assessee's documents by referring to the schedules like research and development, inventories, sales and other incomes. He also reported that company in the notes to the accounts has stated that it is engaged in the development and maintenance of computer software. The produ....
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.... two companies needs to be excluded while working out the comparability analysis and therefore uphold the plea of the Assessee in excluding the margins of the aforesaid 2 companies". 8.2. Ld. DR, however, referred to the extracts made by TPO in the order to submit that Assessee is a comparable company with that of Assessee. 8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES....
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....nd software products and a training centre engaged in training of software professionals on on-line projects. This indicates that company is engaged in development of software and products and its inventory also indicates that Assessee has been using its readymade libraries for sales. This company was rejected in earlier year on functional analysis by ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 where in it was held that company is engaged in development of software products. Since its annual report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee's objections are accepted and AO is directed to exclude the company". 14. For the above reasons, this company is directed to be excluded from the final list of comparables. 15. As regards Tata Elxsi Ltd, we find that the assessee's objections are recorded at Page 46 of the T.P. order and at page 7 of the DRP's order. We also find that this company is also directed to be excluded in the case of Pega Systems Worldwide (P) Ltd and relevant portion of t....
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.... as a segment by TPO cannot be considered as segmental data, unless the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same". 16. For the above reasons, we direct the AO to exclude this Company also from the final list of comparables. Accordingly, Ground of appeal No.3 is allowed. 17. As regards Ground No.4 against the exclusion of three companies which have been selected by the assessee as comparable to the assessee, the learned Counsel for the assessee submitted that if Ground of appeal No.3 is allowed the assessee's case would fall within (+/_) 5% of the margin of the comparable companies and thereafter adjudication of this ground of appeal would become only academic. Since we have already allowed Ground No.3 and directed the exclusion of the companies mentioned therein, we do not see any reason to adjudicate this ground of appeal at this stage. This ground is accordingly rejected. 18. As far as Ground No.5 is concerned, it is the case of the assessee that the margins of the comparable companies have been computed errone....
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....t the TPO to re-compute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies" 19. Respectfully following the decision of the Coordinate Bench we direct the AO to treat the provisions for bad and doubtful debts of the comparable companies as part of their operating expenses and to re-compute the margins of the comparable companies accordingly. This ground of appeal is treated as allowed for statistical purposes. 20. As regards Ground No.6 against not adjusting the net margins of the companies by taking into account the functional and risk differences between the international taxation of the assessee and the comparable companies, we reject the same as adjudication of the same would only result in an academic exercises consequent to the allowing of Ground No.3 in the appeal. 21. As regards Grounds No. 7 & 8 are concerned, we find that they are against the non-allowing of deduction u/s 10A of the Act on voluntary TP adjustment of Rs. 4,84,42,265 offered by the assessee by not considering the revised return filed by the assessee for computing the....