TaxTMI 
TaxTMI 
2019 (8) TMI 350
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....("CSG India" or the "Company" or the "Appellant") respectfully craves leave to prefer an appeal under section 253 of the Income-tax Act, 1961 ("the Act") against the order dated 21 August 2017 passed by the Commissioner of Income-tax (Appeals), Circle - 3 ["CIT(A)"], Bangalore under section 250 of the Act on the following grounds: That on facts and circumstances of the case and in law: 1. The learned CIT(A) has erred in law and facts, by upholding adjustment made by the learned Assessing Officer ("AO") / Transfer Pricing Officer ("TPO") to the arm's length price of the international transactions of software development services rendered by the Appellant to its Associated Enterprise ("AE"); 2. The learned CIT(A) has erred in law and facts by not accepting the Appellant's plea in entirety and upholding the action of the learned AO/TPO of rejection of Transfer Pricing Documentation ['TP Documentation'] including economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("the Rules") by erroneously invoking provision of section 92C(3)(a) and (c) of the Act without providing ....
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....hat companies having different financial year ending or data of the company which do not fall within 12 month period (i.e. April 1. 2009 to March 31, 2010) should not be rejected. f) The learned CIT (A) has erred, in law and in facts, by upholding the action of the learned AO/TPO of not applying upper limit to the turnover filter. 7. The learned CIT(A) has erred, in law and in facts, by upholding the action of the learned AO/TPO of rejection of advertisement. marketing and distribution expenses less than or equal to 3 percent of sales as a comparability criterion for the purpose of selection of comparable companies: 8. The learned CIT(A) has erred, in law and facts, by upholding the action of the learned AO/TPO of selecting companies such as Infosys Limited, Persistent Systems Limited and retaining companies such as Larsen & Toubro Infotech Limited and Sasken Communications Limited as comparables which are functionally dissimilar; 9. The learned CIT(A) has erred, in law and facts, by upholding the action of the learned AO/TPO of rejecting Akshay Software Technologies Limited as a comparable company on the ground that the company is earning 90 per....
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....r TP issues. The grounds of appeal against the rejection are as follows: 1. KALS information systems Ltd: i) Whether the Hon'ble CIT(A) erred in fact and law in holding the company M/s Kals information Systems Ltd as a software product company when there is no revenue reported from sale of products in the annual report of the company and rejecting the company as a comparable. ii) Whether the Hon'ble CIT(A) erred in fact and law in holding the company M/s Kals Information Systems Ltd as a software product company when there is no inventory as either part of the stock in trade or work in progress accounted in the profit & loss account. iii) Whether the Hon'ble CIT(A) erred in fact and law in holding the company M/s Kals Information Systems Ltd as a software product company without appreciation the fact that the company in its annual report in point no 06 page no 22 disclosed that the revenue earned is from the business of development of computer software and other related services. The production and sale of such software is not capable of being expressed in any generic unit. iv) Whether the Hon'ble CIT(A) was right in fact....
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....) has rejected the following comparables for TP issues. The grounds of appeal against the rejection are as follows: 1) Tata Elxsi Ltd 2)ICRA Techno Analytics Ltd: Grounds of Appeal: i) On the fact & circumstances of the case and in law Ld. CIT(A) erred in seeking exact comparability, while searching for comparable companies of the assessee under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparable companies? ii) Further, while seeking the exact comparability as mentioned above whether the Ld. CIT (A) was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. iii) Further, whether the Ld.CIT(A) is correct in fact and law in disregarding the position of law that there could be differences between the enterprise compared under TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises?" 5. Regarding assessee's appeal for Assessment Year 2010-11, it was submitted that ground nos. 1 to 14 are in r....
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....even if it is reduced from export turnover, the same expenditure should be reduced from total turnover also. Ld. CIT(A) held that such expenditure should be reduced from export turnover as well as total turnover while calculating deduction u/s. 10A. Now this issue is squarely covered in favour of the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. (supra) in which it is held that total turnover is sum total of export turnover and domestic turnover and if an amount is reduced from export turnover then the total turnover also goes down by the same amount automatically. Since the direction of ld. CIT(A) is in line with this judgment of Hon'ble Karnataka High Court, we find no reason to interfere in the order of ld. CIT(A) on this issue. Accordingly, this ground of the revenue's appeal is rejected. 7. On TP issues, the revenue has two grievances i.e. regarding direction of ld. CIT(A) to exclude two comparables i.e. KALS information systems Ltd. and Tata Elxsi Ltd. As per the chart submitted by ld. AR of assessee, this is the submission of ld. AR of assessee that the issue regarding exclusion of KALS information syst....
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.... assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum). 16. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra). 17. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engin....
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....ed appeals. However, from the decisions extracted, supra, the assessee has made out a case for the exclusion of ICRA Techno Analytics Ltd. (seg), Infosys Technologies Ltd., KALS Information Systems Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd, Tata Elxsi Ltd and L&T Infotech Ltd. Following them, we direct the TPO to exclude them from the list of comparables. To that extent, the assessee's appeal grounds are allowed and the Revenue's appeal grounds are dismissed. With regard to the comparable Mindtree Ltd (seg), since the assessee has not opposed the Revenue's appeal, the Revenue's appeal on that comparable is treated as allowed." 11. Respectfully following this Tribunal order rendered in the case of Cerner Healthcare Solutions P. Ltd. Vs. ITO (supra) which is for the same Assessment Year i.e. Assessment Year 2010-11 and we have noted that in para 2 of this Tribunal order, this is noted by the Tribunal in this case that Cerner Healthcare Solutions P. Ltd. Vs. ITO (supra) that Cerner Healthcare Solutions Pvt. Ltd. is a captive service provider engaged in the business of rendering software development services to its AE. Hence the functional profile of the pre....
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....inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, ITA No.1054/Bang/2011 dated 23.11.2012, this company was found to be not comparable with that of the assessee. 8. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs. 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP." 14. The issue regarding exclusion of KALS information systems Ltd. (seg) was ultimately decided by the Tribunal as per para no. 14. This is also reproduced hereinbelow for ready r....
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....dissimilarity as held by the Tribunal in the case of DCIT vs. Electronics for Imaging India (P.) Ltd. (supra), no interference is called for in the order of ld. CIT(A) regarding this direction to exclude KALS information systems Ltd. 16. In the result, this appeal of the revenuel is dismissed in the terms indicated above. 17. Now we take up the assessee's appeal. In assessee's appeal, as per ground no. 8 of assessee's appeal, the assessee is seeking exclusion of four comparable companies i.e. 1) Infosys Ltd. 2) Persistent Systems Ltd. 3) Larsen & Toubro Infotech Ltd. and 4) Sasken Communications Ltd. 18. Regarding the assessee's request for exclusion of these four comparable companies, reliance has been placed on the Tribunal order rendered in the case of Cerner Healthcare Solutions P. Ltd. Vs. ITO (supra), copy available on pages 1 to 12 of the case law paper book. Regarding exclusion of Infosys Ltd., para 12 of this Tribunal order is reproduced hereinbelow. "12. We have considered the rival submissions and gone through relevant materials. The relevant portion of the order from the case of Electronics for India Imaging India P Ltd ay 2010-11in IT (TP)A no. 212/Ba....
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....power. It also contended that the turnover of this company is Rs. 21,140 crores, which is 442 times higher than the assessee. 3. The DRP accepted the objections of the assessee and by following the decision of the Delhi Benches of the Tribunal in the case of Agnity India Pvt. Ltd. v. ITO [2015] 58 taxmann.com 167 (Delhi - Trib), directed the TPO to exclude this company from the list of comparables. 4. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Pvt. Ltd. (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing techni....
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....ra no. 13 of this Tribunal order reproduced below:- "13. The relevant portion of the order from the case of Pegasystems Worldwide India P Ltd ay 2010-11 ITA No 1758/Hyd/2014 & 1936/Hyd/2014 dt 16.10.2015 is extracted as under : " L&T Infotech Ltd: 14. Assessee has objected before TPO that the department in earlier years is rejecting this comparable as it has revenue from software services and products and segmental information was not available. Further, company did not respond to the notice issued u/s. 133(6) and challenged the said notice before the Hon'ble Bombay High Court. It was further objected to on the reason that company had less margin in earlier year and therefore, rejected by the department, however, margin is high in this year, the department proposed it as a comparable and there is no consistency. These objections were rejected by TPO vide his analysis in page 40 of the order and from the earnings in foreign exchange reported, TPO considered the company as involved in software development services. The same objections were reiterated before DRP, but DRP rejected." 14.1. It was the submission of the Ld. Counsel that DRP....
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.... software exports reported therein exclusively pertain to services or products. As there are no segmental details, it is very difficult to analyse whether the incomes earned by the said company do really pertain to the similar services rendered by Assessee. As also seen from the income schedules, engineering services reported in earlier year were not there in this year, therefore, it is very difficult to analyse whether the company is functionally similar or not? Keeping in view of the above difficulties in analyzing the data and considering the reasons given by DRP in the case of M/s. SumTotal Systems India Pvt. Ltd., (supra), we are of the opinion that L&T Infotech Ltd., cannot be selected as a comparable company. AO/TPO is directed to exclude the same from the list of comparables. Ground No.4 is allowed for statistical purposes................................................................ 22. Ground No.2 pertains to rejection of Infosys Technologies Ltd., from the list of comparables by DRP. We have already considered the opinion of DRP which is consistent not only in Assessee's case but also in the case of M/s. SumTotal Systems India Pvt. Ltd., (supra), extr....
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....t in respect of the turnover of the present year, then such working of profit percentage will be incorrect because numerator is changed by including foreign exchange gain / loss arising in respect of the turnover of some other year but the denominator remains same because the turnover is not related to the present year and therefore, the resultant profit percentage will be incorrect. Hence such gain / loss cannot be considered for TP analysis if such gain / loss is not in respect of turnover of the present year. Since the details in this regard is not available and there is no finding of any of the authorities below in this regard, we feel it proper to restore the matter back to the file of AO / TPO for fresh decision with the direction that if it is found that foreign exchange fluctuation gain / loss of the tested party i.e. of the assessee or of the comparable companies is in respect of the current year's turnover then the same should be considered for TP analysis but if such gain / loss is not in respect of current year's turnover, then the same should be ignored in case of both i.e. the tested party and of the comparable companies. In case the data in this regard regarding comp....
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.... for granting the working capital adjustment and has consequently granted the same. However, it is seen that the working capital adjustment was restricted to 1.01% which is the average cost of capital of the comparable companies selected by the TPO, In this regard, the DRP held as under: We have considered the submissions of the assessee as well as the reasons of the TPO. The argument propounded by the TPO that the average cost of comparables should provide the upper cap on the working capital adjustment is not the correct position. This implies that the average working capital of the industry is being forced upon the assessee and in other words the assessee is being asked to keep the debtors, inventory and creditors at a fixed level, defined by the level of such capital of the comparables. This would mean that the TPO is forcing the assessee to fund its working capital requirements in a specific way which is not the domain of the TPO, Another argument of the TPO is that since the debtors and inventory are zero, no adjustment should be carried out by considering only the position of creditors. In this regard we find ourselves in agreement with the contention of the assesse....
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....enue in Assessment Year 2010-11 and same can be decided on same line in Assessment Year 2011-12 also. This issue was decided against revenue and in favour of assessee by respectfully following the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. (supra). On the same line, in the present year also, this issue is decided against revenue and in favour of the assessee on similar line. 29. In addition to this, the grievance of the revenue is regarding direction of ld. CIT(A) to exclude two comparables i.e. Tata Elxsi Ltd. and ICRA Techno Analytics Ltd. For exclusion of both these comparables i.e. Tata Elxsi Ltd. and ICRA Techno Analytics Ltd., reliance has been placed on the Tribunal order rendered in the case of AMD India P. Ltd. vs. ACIT (supra), copy submitted and kept on record. It was submitted that the relevant finding of the Tribunal on this issue is available on page nos. 25 and 32 of this Tribunal order which is for the same Assessment Year i.e. Assessment Year 2011-12. The ld. DR of revenue supported the order of TPO. 30. We have considered the rival submissions. We find that the Tribunal has reproduced the relevant portion ....