TaxTMI 
TaxTMI 
2016 (1) TMI 1431
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.... and the learned Dispute Resolution Panel (,Panel') erred in 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 adj....
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....chnology Park of India. 6. That on the facts and in circumstances of the case, the Learned AO has erred in not allowing 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 deli....
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....1,065 paid by the Company That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing 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 th....
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....in part. The assessee undertakes contract software design & development services to the parent company and received a fixed mark up of the costs incurred for the said services. The primary work of the assessee is to undertake contract software design and development services to various units 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 In....
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....ftware & Technology Services Ltd., Megasoft Ltd. and Accel Transmatic Ltd. however, the operating profit of these companies were revised by the TPO by considering the current year data. The TPO has undertaken fresh search for selecting separate set of comparables and added 17 more companies for determining the ALP by considering 20 comparables as under :- Sl. No. Comparable Company Name OP to Total Cost % as per TP Order (Pre WC Adj) 1. Aztec Software Limited 18.09 2. Geometric Software Limited 6.70 3. iGate Global 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. S....
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....TPO in determining the ALP and consequential adjustment. 11. Before us, the learned Authorised Representative of the assessee has submitted that has applied that the issue of filter of RPT has been decided by this Tribunal in assessee's own case for the Assessment Year 2005-06 wherein the Tribunal has held that the CIT/TPO ought to have adopted a threshold limit of 15% which is attributable to the RPT as a ground for rejecting the comparable company. Thus the learned Authorised Representative has submitted the filter of RPT should be applied at 15% and the comparable companies selected having more than 15% RPT should be excluded from the list of comparables. On the other hand, the learned Departmental Representative 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 th....
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....als). Although 12 comparable which were rejected on the basis of RPT being more than zero percent, one comparable viz., Four Soft Ltd, will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd. and Infosys Technologies Ltd. will get excluded for the reason that the financial results are not reliable in the case of Sathyam Computers Ltd. and for the reason that the high turnover, brand value, high risks etc. The remaining 9 comparable companies which were excluded by the CIT (Appeals) by applying the RPT filter of 0% related party transaction willnot have to be included. Their comparability with the assessee in terms of other filters will be discussed in the following paragraphs." 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 men....
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....eld the finding of the TPO about the functional comparability of this company. 13.1.3 We have considered the rival contentions as well as the relevant material on record. At the outset we note that the functional comparability of this company to that of software development service provider has been examined by this Tribunal in a series of decisions as relied upon by the assessee and referred (supra). In the case of Triology e-Business Vs. DCIT in ITA No.1054/Bang/2012 (supra), the Tribunal has dealt with this issue in paragraphs 46 & 47. We further note that in the case of Misys Software Solutions (India) Pvt. Ltd. in IT(TP)A No.1425/Bang/2010 Dt.23.9.2015, the Tribunal has again considered functional comparability of this company in paragraphs 7.1 to 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 asses....
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....Pvt. Ltd. Vs ACIT (ITA No. 1129/Bang/2011) (Page 20-21, Para 14) Misys Software Solutions India Private Limited - IT(TP) A No.1425/Bang/2010 Telcordia Technologies India Pvt. Ltd. Vs ACIT (AY 2007-08) Thoughtworks Technologies (India)Private Limited- IT(TP)A No.1326/Bang/2010 13.2.2 We have considered the rival submissions as well as the relevant material on record. At the outset we note that this company is not in the activity of pure software development services but engaged in the diversified product development activity which includes Multi-media, Wimax, Imaging and Imaging Process. Further, this company is also involved in the activities such as hardware design, industrial design, engineering design and visual computing. Therefore, the diversified activities 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....
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.... In our view, due to non-availability of full information abut the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arm's length price in the case of the assessee." 15. In view of the aforesaid decision of the Mumbai Bench of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Lucid Software Ltd. and Tata Elxsi Ltd. are also to be excluded as comparables while determining the ALP of the international transaction impugned in this appeal." 8.3.2 As far as the company Tata Elxsi Ltd., is concerned, following the decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we 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. Addi....
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.... 18 Crores, a company of up to Rs. 3,600 crores would be considered as a good comparable which itself defies this filter of Rs. 1 Crore to Rs. 200 Crores. In view of the above facts and circumstances of the case on hand, we decline to grant leave to the assessee to raise this new plea of applying turnover filter on the selective companies. 14.4 However, the plea taken by the assessee in the additional ground regarding the functional dis-similarity even in respect of those comparables selected by the assessee itself cannot be rejected merely on the ground that the assessee has raised its plea for the first time at this stage because if a particular company is found functionally not comparable with the assessee ought to have been excluded from the set of comparables to avoid incorrect results. Even otherwise, in case if the assessee 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., Geometri....
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....s Software India Pvt. Ltd. Vs DCIT in IT A No. 1054/Bang/2012 (AY - 2007-08) Thoughtworks Technologies (India) Private Limited- IT(TP)A No.1326/Bang/ 2010 15.3 On the other hand, the learned Departmental Representative has submitted that this company was part of the T.P. analysis of the assessee and the assessee did not object the comparability of this company before the authorities below. Therefore, this company cannot be excluded from the list of comparables when the assessee itself has selected this company as a comparable. She has relied upon the orders of the authorities below. 15.4 We have considered the rival submissions as well as the relevant material on record. Though this company was part of the T.P. analysis of the assessee and also included in the comparables selected by the assessee however, the functional comparability 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 cons....
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....and Accel Transmatics Ltd. chosen by the TPO as comparables, this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are functionally different. The following are the relevant observationsof the Tribunal in this regard :- (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter 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 com....
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....ics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee 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 direct....
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.... and has large focus on R&D apart from substantial selling and marketing expenses. This company has a finance BPO and there is no sub-segment in the software segment. The learned Authorised Representative has referred to the Annual Report of this company and submitted that this company has brands and intangibles having diversified operations at large scale. Further this company is engaged in the development of mixed products like Finacle. This company is carrying out a large scale R&D activities and therefore cannot be considered as a good comparable with the assessee. The learned Authorised Representative has relied upon the following decisions :- CASES PERTAINING TO ASSTT. YEAR : 2006 - 07 CASES PERTAINING TO OTHER ASSTT. YEARS Cypress Semiconductor technology India Private Limited IT (TP) A No 1167/Bang 2010 Triology E -Business Software India Pvt. Ltd vs. DCIT ITA No. 1054/BANG/2012 (AY : 2007-08) Agnity India Technologies Pvt Ltd ITA No. 3856(Del ITAT)/2010 (AY 2006-07) 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/0....
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....nch of ITAT Bangalore in the case of Logica Pvt.Ltd. Vs. ACIT ITA No.1129/Bang/2011 (AY 07-08) that this company is a full fledge risk assuming entrepreneur, holds technology and marketing intangible and is functionally different providing end-to-end solutions encompassing technical consulting, design, development, re-engineering, maintenance, systems integration and package evaluation and implementation. The company generates around 3.96% of its revenue from software products. The relevant observations of the Tribunal in the case of Logical Pvt. Ltd. (supra) were as follows: "13. So also, the comparables listed at Sl.Nos. 10, 14 and 26 have to be rejected as functionally not comparable with that of the assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. in ITA No.7821/MUM/2011, wherein it was held as under:- "7.2 Lucid Software Limited ......... ......... 7.4 Infosys Technologies Ltd.: The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sale revenue, stage of....
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...., re-engineering, maintenance, system integration and implementation. This company also generates revenue from the software products and has brand value and huge intangible assets. In view of the above facts and circumstances as discussed above, this company is functionally not comparable with that of the assessee. Accordingly, we direct the A.O./TPO to exclude this company. 17. Flextronics Software System Ltd. 17.1 The assessee has opposed inclusion of this comparable before the TPO on the ground that it is engaged in the R&D development activity giving rise to IPR. The TPO did not accept the contention of the assessee and obtained the information by invoking the provisions of section 133(6) of the Income Tax Act, 1961 (in short 'the Act'). The TPO held that this comparable has a software development services segment and therefore is functionally similar to the business activity of the assessee in providing software development services. The DRP has concurred the view of the TPO. 17.2 Before us, the learned Authorised Representative of the assessee has submitted that apart from the turnover dis-similarity, this company is also not functionally comparable with the ....
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....roviding the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court; ........In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method ....
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....1 ITR 385) as well as the decision in the case of CIT vs. M/s.Auringene Discovery Technologies Ltd. in ITA No.549/2013 dated 05/09/2014 and submitted that the Hon'ble High Court has reiterated the view taken in the case of Yokogawa India Ltd.(supra). He has also relied upon the decision of this Tribunal dated 30/4/2014 in the case of CIT vs. M/s.Biocon Ltd. in ITA Nos.248, 368 to 371 & 1206/2010. 19.2 On the other hand, learned Departmental Representative has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Himatsinghika Seide Ltd. (156 Taxman 151) and submitted that the decision of the jurisdictional High Court has been confirmed by the Hon'ble Supreme Court and the SLP filed by the assessee has been dismissed. 19.3 We have considered the rival submissions as well as the relevant material on record. There is no dispute that the Hon'ble jurisdictional High Court in the case of Himatsinghika Seide Ltd. (supra) had decided this issue in favour of the revenue and against the assessee. However, it is pertinent to note that the said decision of the Hon'ble jurisdictional High Court was in respect of the dispute for the assessment....
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....the provisions of this Act, before making any deduction under this chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not include s. 10A. In other words, the gross total income would be arrived at after considering s. 10A deduction also. Therefore, it would be inappropriate to conclude that s. 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted. 18. It is after the deduction under Chapter VI-A that the total income of an assessee is arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions. 19. From the aforesaid discussion it is clear that the income of 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of ....
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....d loss suffered during the tax holiday period. The circular dt. 5th Sept., 2003 reads as under : "20. Providing for carry forward of business losses and unabsorbed depreciation to units in Special Economic Zones and 100 per cent export oriented units. 20.1 Under the existing provisions of ss. 10A and 10B, the undertakings operating in a Special Economic Zone (under s. 10A) and 100 per cent export oriented units (under s. 10B) are not permitted to carry forward their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the existing tax incentives in respect of such units sub-s. (6) in ss. 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation. The amendments have been brought into effect retrospectively from 1st April, 2001 and have been made applicable to business losses or unabsorbed depreciation arising in the asst. yr. 2001-02 and subsequent years." 22. It is interesting to note that such relaxation has not been made in s. 10C which provides for exemption in respect of profits of certain undertakings in north eastern region. This makes c....
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....filed by the assessee, the assessee sought to carry forward the loss of non-10B units for set off against the profits of non-10B units in the subsequent assessment years. The AO firstly noticed that there was income from other sources to the extent of Rs. 4,71,15,896 and such had to be set off against the loss of the non-10B units. Accordingly, the AO held that the loss of the non-10B units that had to be considered for carry forward would be Rs. 101,21,03,280. Thereafter, the AO was of the view that income of the 10B units had to be set off against the loss of the non-10B units and if it is so set off, there will be no loss that needs to be carried forward. In coming to the aforesaid conclusion, the AO expressed the opinion that provisions of section 10B are deduction provisions and therefore effect will have to be given to the provisions of section 72 of the Act, even in respect of profits of the 10B unit. Accordingly, the claim of the assessee for carry forward of loss of non10B unit was not allowed by the AO. On appeal by the assessee, it was contended that the provisions of section 10A and section 10B are exemption provisions and therefore the profit of 10A and 10B un....
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....inst the profits of the non-eligible unit. This issue has already been settled by the Hon'ble Karnataka High Court in the case of Yokogawa India Ltd. (supra). The Hon'ble Karnataka High Court in the case of Yokogawa (supra) had to deal with two substantial question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eligible unit on which deduction u/s.10B was to be allowed. The Hon'ble Court in para 10 to 20 of its judgment dealt with the issue. The Hon'ble Court noticed that Sec.10A(1) of the Act (which is in pari materia with Sec.10-B of the Act) read as follows: "10B. Special provisions in respect of newly established undertaking in free trade zone etc.,-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the Previous-year in which the under-taking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income ....
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....ts of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be setoff against income from other sources. It was also claimed that the profits had to be computed on a "commercial" basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the order of the CIT. On appeal by the department, the High Court in CIT Vs. Himatasingike Seide Ltd. 286 ITR 255 (Kar) reversed the order of the Tribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. In Civil Appeal No.1501 of 2008 dated 19.9.2013 against the aforesaid decision of the Hon'ble Karnataka High Court, the Hon'ble Supreme Court observed as follows while dismissing the appeal:- "Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly." 67. Thus the ratio has to be confined to the facts and cir....