AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (3) TMI 1787
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....ciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 3. The CIT (Appeals) erred in not appreciating the fact that the decision of the jurisdictional High Court in the case of' Tata Elxsi Limited in ITA No. 70 of 2009 has not reached its finality as the department's appeal before the Supreme Court is pending. 4. The CIT (Appeals) erred in holding that the AO had not brought anything on record to repudiate the assessee's contention that the expenses of Rs. 68,875 incurred on Club Membership Fee was wholly or exclusively for its own business without appreciating the fact that the Membership Fee is a onetime payment whose benefit endures for a period of years and therefore the expenditure is capital in nature. 5. The CIT(A) erred in rejecting the diminishing revenue or persistent losses filter as an inappropriate filer for the selection of' comparables without appreciating that the TPO was justified in excluding some cases as not comparable, as persist....
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....of the CIT (A) be reversed and that of the Assessing Officer be restored. 13. The appellant craves leave to add, alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 3. Ground No. 1 is general in nature, hence needs no independent adjudication. Ground Nos. 2 and 3 relate to the computation of deduction under section 10A of the Income Tax Act (hereinafter called the 'Act'). During the course of hearing, the learned counsel for the assessee invited our attention that this issue is squarely covered by the judgment of the Jurisdictional High Court in the case of Tata Elxsi 349 ITR 98 in which it has been held that once item is included in the export turnover, it should also be included in the total turnover. Following the judgment of the Jurisdictional High Court, we restore the issue to the file of the AO with the direction to readjudicate the deduction under section 10A of the Act in the light of judgment in the case of Tata Elxsi. 4. With regard to ground No. 4, our attention was invited that the assessee has made the payment for club membership fee of Rs. 68,875/- and claimed to be the revenue expenditure but the AO treate....
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....sactions as per section 92B of IT Act. Accordingly, the case was referred to the TPO in order to determine the Arm's Length Price (ALP). The order under section 92CA was passed by the TPO which was received by the AO on 03.11.2008 and consequently, the adjustment at ALP to the extent of Rs. 3,48,72,821/- was made under section 92CA of the Act of which breakup is hereunder: Description Software Development services ITES Services Total Arms Length Price of operating cost Rs. 14,46,29,504 Rs. 16,22,61,474 Rs. 30,68,90,978 Price Received Rs. 12,88,92,858 Rs. 14,31,25,117 Rs. 27,20,17,975 Adjustment u/s 92CA Rs. 1,57,36,464 Rs. 1,91,36,357 Rs. 3,48,72,821 9. Against this adjustment to ALP, the assessee preferred an appeal before the CIT(A) and the CIT(A) partly accepted the contentions of the assessee and directed the AO/TPO to recompute the ALP in terms indicated in his order. 10. The assessee as well as the revenue are in appeal before the Tribunal. During the course of hearing, the learned counsel for the assessee invited our attention to the fact that the assessee Google India Pvt. Ltd., provides information technology services a....
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....e has filed a chart with the submissions that rejection of Bodhtree Consulting Ltd, Sankhya Infotech Ltd., Four Soft Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd., was covered by the judgment of the Tribunal in the case of ACIT Vs. McAfree Software (India) Pvt. Ltd., in IT(TP)A No. 04/Bang/2012 and DCIT Vs. Kodiak Networks India Ltd., in IT(TP)A No. 532/Bang/2013 in which the Tribunal has held that these comparables are functionally different with the profile of the assessee company. The learned counsel for the assessee further contended that the profile of the assessee is almost similar to the McAfree Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., where the assessee is also engaged in providing software development services to its AE. 14. With regard to Bodhtree Consulting Limited, the learned counsel for the assessee has contended that besides functional dissimilarity, this comparable fails on RPT filter as related party transaction in this case is 35%. 15. The learned DR however contended that the rejection of this comparable is not proper and therefore can be included in the list of comparables. 16. Having carefully examined the functional p....
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....odhtree Consulting Ltd., is not a good comparable. Therefore, we uphold the order of the CIT(A) who has rightly excluded this comparable from the list of comparables. 18. With regard to Sankhya Infotech Ltd., it was contended that this comparable is functionally dissimilar from the profile of the assessee and more so the segmental data are not available and these aspects were examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd. Similarly, the profile of Four Soft Ltd., Geometric Software Solutions Limited and Tata Elxsi Ltd., was also examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd. and Kodiak Networks India Ltd., in which the Tribunal has held that Four Soft Ltd., is functionally dissimilar and RPT is at 19%. With regard to Geometric Software Solutions Limited, it was also held that this comparable is functionally dissimilar. Similar is the position with regard to Tata Elxsi. The relevant observations of the Tribunal in the case of McAfee Software (India) Pvt. Ltd. are extracted hereunder: "Sankhya Infotech Ltd., Thirdware Solution Ltd., & Tata Elxsi Ltd., : 10.5. These three companies are rejected as comparables o....
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....6) has held that the said company is not a comparable to the Assessee therein which was also in the business of software development. 20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies. 22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- "15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product development....
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.... the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA. No. 1252 / Bang/2010 wherein these companies were directed to be excluded from the list of comparables. 23. The learned D.R. however, supported the Orders of the authorities below. 24. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to ....
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....t of the 10 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability. It was his submission that this company will however, have to be excluded as this company was held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005- 2006 order dated 12.2.2014. 28. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: "15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and Assessee's objection is that the software development services segment itself comprise....
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.... clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to Assessee." 29. Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services Pvt.Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee. 30. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies. "13. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdw....
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....s company was retained. We are of the opinion that being a product based company, the same is not strictly comparable to a service company like Assessee. In the absence of segmental profit of service income, we have to exclude the same. Following the decision in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 (supra), this company is accordingly excluded. 19. Since the Tribunal has examined the profile of these comparables in the case of McAfee Software (India) Pvt. Ltd., in the light of other orders of the Tribunal and has categorically held that these comparables are not good comparables for determining the ALP in the case of McAfee Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., whose profile is similar to assessee's profile, we find no justification to re-examine the profile of these comparables again. We therefore hold that Sankhya Infotech Ltd., Four Soft Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd., are not good comparables. Therefore they have to be excluded from the final list of comparables. We accordingly confirm the order of the CIT(A) with respect to exclusion of Bodhtree Consulting ....
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....nstance, it was observed that Vishal Information Technologies Limited has a low employee cost of 1.25% of operating revenue. The Tribunal also observed that the TPO had himself referred to the NASSCOM survey that the average wages and salaries to sales ratio of IT/ITES industry in India was 46.1%. The assessee's wages to sales is 53% which is not comparable to Vishal Information Technologies Ltd., whose wages to sales is 1.25%. This is a finding of fact and there is nothing to indicate that the same is erroneous much less perverse. The exclusion of Vishal Information Technologies Limited is, therefore, justified. 6. The only contention regarding the exclusion of Nucleus Netsoft and GIS (India) Limited is that there is no reasoning. This, however, is not even a ground taken in the appeal filed before us. In any event, we perused the 22nd annual Report for the year 2005-06 of Nucleus Netsoft and GIS (India) Ltd. Schedule 12 furnishes the operating & other expenses. The data processing charges are Rs. 1.04 crores out of the total operating & other expenses of about Rs. 2.41 crores. Thus, an amount of over 40% is outsourced. The finding of the Tribunal, therefore, cannot be he....
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....rable for the purpose of Transfer Pricing analysis. This perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO service providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centres (Ind.) Pvt. Ltd (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases, a classification of BP0 and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. Howev....
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....t of comparables by holding as under: "We have heard the parties. The sole contention of the assessee for excluding the aforesaid company is the employee cost as a percentage of the operating revenue is much lower compared to the assessee. On a perusal of the order passed by the co-ordinate bench in the case of HSBC Electronic Data Processing India Pvt. Ltd. (supra), it is to be noted that the co-ordinate bench while considering the objection of the assessee with regard to the aforesaid company in para-13 accepted assessee's contention that the company outsourced its work and has held that the company cannot be selected as a comparable on account of its low employee cost. In view of such order of the co-ordinate bench, we direct the AO/TPO to examine this aspect and if there is substantial difference between the assessee the aforesaid company, then this company cannot be treated as a comparable". Respectfully following the co-ordinate bench decision, we hold that the learned CIT(A) is justified in giving direction to delete M/s Nucleus Netsoft & GIS Ind. Ltd. as a comparable. Hence, this ground of appeal filed by the revenue is dismissed." 22. Since the Tri....