TaxTMI 
TaxTMI 
TaxTMI 
2016 (1) TMI 1431
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.... upholding the rejection of Transfer Pricing (TP) documentation by the learned Deputy Director of Income-tax (transfer pricing officer - V) (TPO') and thereby erred in not appreciating that the Appellant had prepared the TP documentation bona fide and in good faith and conducted the comparable analysis based on the detailed Functional Asset and Risk analysis performed with due diligence and the data available at the time of conducting the comparability analysis. 3. That the learned AO and the learned Panel erred in ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm's Length Price of the international transactions of the Appellant, but for an adjustment towards .. differences Working capital position between the Appellant and the entrepreneurial comparable companies. 4. That the learned AO and the learned Panel erred both in facts and law in confirming the action of the learned TPO of making an adjustment to the transfer price of the Appellant and thereby adjusting the tra....
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....wing the reduction in telecommunication charges incurred outside India amounting to Rs. 16,880,900 in computing the Total Turnover of the Company for the purpose of computing deduction under section 10A of the Act. 7, (i) That on the facts and in the circumstances of the case, the Learned AO erred in reducing the telecommunication charges incurred in India amounting to Rs. 2.735,887 from 'export turnover' while computing deduction under section lOA of the Act as 'expenditure attributable to delivery of software outside India' under Explanation 2(iv) to Section lOA of the Act. (ii) That the Learned AO has erred in not allowing the reduction of telecommunication expenses of Rs. 2,735,887 in computing the total turnover of the Assessee for the purpose of computing deduction under section lOA of the Act. 8. (i) That on the facts and in the circumstances of the case, the learned AO erred in considering the insurance expenses of Rs. 29.995, which comprises of y'-hicle. insurance, as 'expenditure attributable to delivery of software outside India' under E.g-$flation 2(iv) to Section lOA of the Act and reducing the same from 'export turnover' wh....
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.... of this Appeal." 3. The assessee has raised additional grounds vide petition dt.26.6.2015. The additional grounds sought to be admitted are as under :- " 1. To reject Aztec Software & Technology Services Limited ("Aztec Software") from the final list of comparables, even though Aztec Software was selected as comparable by the Appellant in its Transfer Pricing Report ("TP Report"). 2. To reject Megasoft Limited ("Megasoft") from the final list of comparables, even though Megasoft was selected as a comparable by the Appellant in its TP Report. 3. To reject Accel Transmatic Limited ("Accel") from the finalist of comparables, even though Accel was selected by the Appellant as a comparable in its TP Report. 4. To reject Geometric Software Limited ("Geometric Software") from the final list of comparables, even though the Appellant had accepted for its inclusion before the lower authorities. 5. To allow the Appellant to contest the exclusion of the below mentioned comparables on the basis of application of turnover filter of INR 1-200 crores, though the application of this filter was not put forward before the lower authorities: a. iGate Global Solutions Limited b. In....
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.... of Textron group. The assessee also provides resources of material service to other units of Textron group. The assessee reported the international transactions during the year as under :- 1. Receipts for Software Development Services Rs. 18,74,21,274/- Readjustment done by TPO 2. Receipts for Sourcing of Materials Services Rs. 60,18,598/- Treated at Arm's Length by the TPO 3. Reimbursement of Expenses - Paid Rs. 48,35,170/- 7. As regards the receipt for sourcing of material service, the TPO accepted the same at Arm's Length. Therefore there is no dispute regarding the international transactions in respect of sourcing of material services provided to its Associated Enterprises (AEs). The assessee has bench marked for its international transactions by adopting Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) and Profit Level Indicator (PLI) as OP/TC. The assessee has selected in its TP analysis 44 comparables and arrived at mean margin of 11% in comparison to the assessee's price charged to AEs at 10.45%. Therefore, the assessee claimed that its international transactions are at arm's length. The entity selected by the assess....
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....Solutions Limited 15.61 4. Infosys Limited 40.38 5. KALS Info Systems Limited 39.75 6. Mindtree Consulting Limited 14.67 7. Persistent Systems Limited 24.67 8. R Systems International Limited 22.20 9. Sasken Communication Limited (seg.) 13.90 10. Tata Elxsi Ltd (seg.) 27.65 11. Lucid Software Limited 8.92 12. Mediasoft Solutions Private Limited 6.29 13. R S Software (India) Limited 15.69 14. SIP Technologies & Exports Limited 3.06 15. Bodhtree Consulting Limited 15.99 16. Accel Transmatics Limited (seg) 44.07 17. Synfosys Business Solutions Limited 10.61 18. Megasoft Limited 52.74 19. Lanco Global Solutions Limited 5.27 20. Flextronics Software Systems Limited 27.24 Arithmetic Mean Mark-up of Comparables before Working Capital Adjustment 20.68 Arithmetic Mean Mark-up of Comparables after Working Capital Adjustment of 1.11% as determined by the TPO 19.57 Appellant's Margin : 11.58 9. The TPO has computed the arithmetic mean of the selected companies at 20,68% before working capital adjustment and at 19.57% after working capital adjustment. The TPO applied various filters for selection of the comparable comp....
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....epresentative has submitted that the assessee did not apply any RPT filter in its T.P. Study and further the limit of RPT at 15% is not a standard criteria to be applied in each and every case. He has further submitted that the Tribunal in its series of decisions have applied RPT from 5% to 25% depending upon the facts of the each case. Therefore, there is no fixed or standard criteria of 15% threshold limit of RPT for selecting comparables. He has relied upon the orders of the authorities below. 12. We have considred the rival submissions as well as the relevant material on record. In strict sense, the ALP has to be determined by considering uncontrol comparable prices which means uncontrolled, unrelated comparable prices has to be taken into account to bench mark the international transactions which are the control and RPTs. However, 0% RPTs of the comparable price is an impossible situation and therefore a reasonable tolerance range of the revenue from RPT can be considered for selecting the uncontrolled comparables. There cannot be a single criteria / parameter which can be applied as a general rule in all cases. Therefore, this tolerance range varies from case to case and de....
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....phs." In view of the facts and circumstances of the case when there is good number of comparables available then, we concur with the view of the co-ordinate bench that the RPT filter of 15% is proper in the case of the assessee. Accordingly we direct the Assessing Officer/TPO to exclude the comparable companies having the revenue of more than 15% from related parties. The learned Authorised Representative of the assessee has referred Annexure A to TPO order which mentions the percentage of RPTs. Thus as per the Annexure A of the TPO's order, the following companies having more than 15% of RPT are directed to be excluded. Sl. No. Comparable Company Name % of RPT Over sales 1. Aztec Software Limited 17.78 2. Geometric Software Limited 19.34 3. Megasoft Limited 17.08 13. The assessee has also raised objections against the other comparables selected by the TPO which we will deal with one by one as under :- 13.1 Kals Infosystems Ltd. 13.1.1 The learned Authorised Representative of the assessee has submitted that this company is into a product business and has earned revenue from sale of software product. Therefore this company is not functionally comparable wit....
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.... 7.4.2 as under :- " 7.1 (4) KALS Infosystems Ltd. This company was selected as a comparable by the TPO and was retained as a comparable even though the assessee objected to its inclusion before the DRP. It is the contention of the assessee that this company is into software products, and training apart from provision of software development services and therefore being functionally different, from the assessee who is purely into provision of software development services, ought to be excluded from the list of comparable companies. In support of this contention for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the coordinate bench of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra)." 13.1.4 The learned Departmental Representative has not disputed the facts considered by the co-ordinate bench of this Tribunal regarding the nature of functions and business, revenue earned by this company from the sale of software products. Therefore, by following the decisions of the co-ordinate bench (supra), we direct the A.O./TPO to exc....
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.... as mentioned above are not comparable with the software development services provider like the assessee. The identical issue has been considered by the coordinate bench of this Tribunal in the case of Misys Software Solutions (India) Pvt. Ltd. (supra) in paragraphs 8.3.1 to 8.3.2 as under : " 8.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements relied on by the assessee. We find that the co-ordinate bench in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra) has excluded these two companies from the set of comparables holding as under at paras 14 & 15 thereof :- " 14. As far as Lucid Software Ltd. and Tata Elxsi Ltd. chosen by the TPO as comparables, we find that the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Pvt. Ltd. (supra) while dealing with the case of software services provider like the assessee, considered the comparability of Lucid Software Ltd. with similar software services provider and the Tribunal held as follows :- "7.2 Lucid Software Limited. It has been submitted before us that this company, besides ....
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....e hold and direct that this company be excluded from the list of comparables for the software development services of the assessee. It is ordered accordingly." In view of the above discussion, as well as the decision of the co-ordinate bench, we direct the A.O./TPO to exclude this company from the set of comparables for determining the ALP. 14. Additional Grounds. 14.1 The assessee has also sought the exclusion of certain more companies from the list of comparables in the additional grounds raised before this Tribunal. The companies sought to be excluded are discussed as under : 14.2 As regards M/s. Aztec Software & Technology Services Ltd. & Megasoft Ltd, since these two companies have not satisfied with the filter of RPT at 15%, therefore, in view of the consistent view taken by the Tribunal and our finding in the foregoing paragraphs, these two companies stand excluded from the list of comparables. 14.3 In the additional grounds, the assessee is also seeking exclusion of some more companies on the ground of turnover filter. The turnover filter was neither applied by the assessee nor by the TPO for selecting comparable companies. Further, the assessee did not rais....
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....ee commits some mistakes in the assessment proceedings that results incorrect assessment of the tax liability then the assessee cannot be barred from raising such a plea at the appellate stage in order to assess correctly the tax liability of the assessee. We find that the functional comparability of these companies namely Accel Transmatics Ltd., Geometric Software Ltd., Flextronic Software System Ltd. and Infosys Technologies Ltd. has been examined in a number of cases by this Tribunal and therefore in view of the findings of the Tribunal on the issue of comparability of these companies, we incline to admit the additional grounds of the assessee raising objection on the ground of functional dis-similarity of these companies mentioned (supra) for deciding the issue on merits. 15. Accel Transmatics Ltd. (Seg.) 15.1 Though this company was part of the T.P. analysis of the assessee and also part of the 44 comparables selected by the assessee itself for bench marking its international transactions, however, the assessee objected the inclusion of this company in the list of comparables selected by the TPO on the ground that this company is functionally not comparable. The TPO as wel....
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....rability of the company has been examined by this Tribunal in a series of decisions and it has been consistently held that this company cannot be considered as functional comparable to a pure software development services provider. The Tribunal in a number of decisions as relied upon by the assessee mentioned (supra) has given this consistent finding. In the case of Misys Software Solutions Pvt. Ltd. (supra), the functional comparability has been examined by the Tribunal in paragraphs 7.2 to 7.4.2 which is reproduced below :- " 7.2 (5) Accel Transmatics Ltd. This company was selected as a comparable by the TPO and was retained as a comparable even though the assessee objected to its inclusion before the DRP. It is the contention of the assessee that the above company is functionally different from the companies engaged in business of providing software development services to its AEs. It is submitted that apart from software development services, this company is engaged in provision of Accel Animation Studies Services in the form of ACCEL IT and ACCEL Animation Services for 2D and 3D Animation. It was also engaged in various business activities, some of which are Ushu....
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....r test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "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 th....
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....company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assesses engaged in software development....
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.... 24/7customer.com vs DCIT (AY : 2004-05) ITA No.227/Bang/2010 Agnity India Technologies P. Ltd. (ITA No. 1204/2011)(Del HC) Adaptec India Private Limited (AY : 2007-08) ITA No. 1801/Hyd/09. Misys Software Solutions India Private Limited - IT(TP) A No.1425/Bang/2010 - Turnover Mercedes Benz R & D India Pvt. Ltd. (AY : 2007-08) ITA No. 1222/Bang/2011. Verisign Services India Private Limited IT(TP)A No 1404 bang 2010 - Turnover CSR India Pvt. Ltd. (AY : 2007-08) ITA No. 1119/Bang/2011, [2013] Thoughtworks Technologies (India)Private Limited- IT(TP)A No.1326/Bang/2010 - Turnover Witness Systems Software India Pvt Ltd (AY : 2007-08) ITA No. 1366/Bang/2011. FOR CASES INVOLVING JOINT OPERATION, LARGE INTANGIBLES, HIGH BRAND VALUE, RISK BEARING & HIGH PROFIT MARGIN CASES Agnity India Technologies Pvt Ltd ITA No. 3856(Del)/2010], ITAT Delhi" This ruling has been upheld by the High Court (ITA No. 1204/2011, dated July 2013). Scale of operation, brand value etc. NTT Data India Enterprise Application Services Pvt. Ltd. [ITA No. 1612/Hyd/2010.] Motorola India Electronics Private Limited vs. ACIT ITA No. 1274 & 1413/Bang/2008. Logic....
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....s to be seen from the angle of functions formed by the company, size of the company in terms of the sale revenue, stage of business cycle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at Rs. 69,522 crores, which comprises of brand value itself at Rs. 22,915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India's No.2 software service exporter and Third in the World as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than Rs. 13145 crores and expenditure on advertisement/sales promotion and expenditure on R&D is at Rs. 69 crores and Rs. 167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of 'FAR' ie. function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced in para 6(iv....
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....ubmitted that apart from the turnover dis-similarity, this company is also not functionally comparable with the assessee. 17.3 On the other hand, the learned Departmental Representative has submitted that the TPO has used the segmental data of this company and given a finding that this company is functionally comparable with the assessee. He has relied upon the orders of the TPO and DRP. 17.4 Having considered the rival submissions and relevant material on record, we note that the objection raised by the assessee regarding the activity of this company in R&D and also acquiring IPRs has not been dealt with by the authorities below. Accordingly, in the facts and circumstances of the case, we direct the A.O/TPO to readjudicate this issue after considering the objections of the assessee on functional dis-similarity. 17.5 Since we have directed to exclude certain comparables from the set of comparables, therefore, the TPO/A.O is directed to recompute the ALP, as directed above. 18. The next ground of the assessee is regarding not allowing the deduction of telecommunication and conveyance charges incurred in foreign exchange outside India while computing the total turnover of the....
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....basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would ne....
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....the Hon'ble jurisdictional High Court was in respect of the dispute for the assessment year 1994-95 and there is an amendment in the provisions of sec.10A and 10B of the Act vide Finance Act, 2000 w.e.f. 1/4/2001. By virtue of the amendment and substitution of provisions of sec.10A and 10B, the incentive u/s 10A and 10B was no longer in the nature of exemption but it is in the nature of deduction. By considering the amendment/substitution of sec. 10A and 10B vide Finance Act, 2000 w.e.f. 1/4/2001, Hon'ble jurisdictional High Court vide judgment in the case of Yokogawa India Ltd.(supra) has held in paras.16 to 23 as under: "16. The substituted s. 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of the total income". It may be noted that when s. 10A was recast by the Finance Act, 2001 (sic2000), the Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do not form part of total income. If the Parliament intended that the relief under s. 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses th....
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....arriving at the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level. 2nd substantial question of law 20. Prior to the introduction of sub-s. (6) of s. 10A and s. 10B by the Finance Act, 2000, which came into effect from 1st April, 2001, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year, sub-s. (2) of s. 32, cl. (ii) of sub-s. (iii), s. 32A cl. (ii) of sub-s. (3) of s. 32A, cl. (ii) of sub-s. (2) of s. 33 and sub-s. (4) of s. 35 of the Act or the second proviso to cl. (ix) of sub-s. (1) of s. 36 shall not be applicable in relation to any such allowance or deduction. Similarly no loss as referred to in sub-s. (1) or in s. 72 ....
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....gion. This makes clear the legislative intention of providing relaxation wherever it deems fit and in the present case, such relaxation has been made in s. 10A but not in s. 10C. 23. It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that the notional computation of business income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to provisions of ss. 70, 71, 72 and s. 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday period should be determined so that the same may be set off against the income post tax holiday period. 19.4 We further note that this view has been reiterated by the Hon'ble juris....
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....r the computation of total income at all and therefore the profits of these units need not be set off against the loss of non-10B unit by invoking the provisions of section 72 of the Act. The CIT(Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Himatsingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon'ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon'ble Court took the view that the aforesaid provision was only an exemption provision. The CIT(Appeals) noticed that the aforesaid decision was followed by the ITAT Bangalore Bench in the case of Intelnet Technologies India Pvt. Ltd. v. ITO, ITA No.1021/Bang/2009 dated 12.3.2010. Similar view expressed by the Delhi Bench of the Tribunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DEL) was also referred to by the CIT(A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT, 120 TT....
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....plied) 64. The expression "Deduction" and "shall be allowed from the total income of the Assessee" used in the aforesaid provisions was considered by the Hon'ble High Court and it held in para 13 to 15 of its judgment that the expression " shall be allowed from the total income of the Assessee" does not mean total income as defined u/s.2(45) of the Act but that expression means "profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. The Hon'ble Court thereafter held that though the expression used in Sec.10A was "Deduction" but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon'ble Court's judgment. 65. The situation with which we are concerned in the present case is a situation where there is positive income of the eligible unit then the same should be allowed deduction u/s.10B of the Act without setting of the loss of non-eligible unit. The Hon'ble Karnataka High Court in the c....
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.... facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday which means that they need not be so set off as mandated in the decision of the Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar), it was held that even after s. 10A/10B were converted into a "deduction" provision w.e.f 1.4.2001, the benefit of relief u/s 10A/10B is in the nature of "exemption" with reference to "commercial profits" and that as the income of the s. 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year's or the ....