TaxTMI 
TaxTMI 
2019 (10) TMI 1241
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....m/2017 (A.Y.2010-11) Assessee Appeal 2. The only issue to be decided in this appeal of the assessee is as to whether the ld. CIT(A) was justified in upholding the action of the ld. AO in proportionately allocating the head office expenses while computing the profit eligible for deduction u/s.10A/10B of the Act. 3. We have heard the rival submissions. Both the parties before us fairly conceded that this issue has been remanded back to the file of the ld. AO for fresh adjudication in A.Y.2009-10 by the order of this Tribunal for the A.Y.2009-10 in ITA No.4142/Mum/2018 dated 25/09/2017 wherein it was held as under:- "13. We have heard both the parties and considered the materials available on record. The AO has allocated head office expenses proportionately for units claiming exemption u/s 10A / 10B, on the basis of the turnover of the units. According to the AO, the assessee has parked its head office expenses for the units generating taxable income without any valid reasons for not allocating expense to the units claiming exemption u/s 10A / 10B. The assessee claims that head office expenditure in no way connected to the units claiming exemption u/s 10A / 10B and the ....
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....arables considering the assessee's turnover of Rs. 22.29 crores from software development services segment and also erred in not applying the filter of large scale of operations to the other companies selected as comparables by the TPO particularly M/s LGS Global Ltd., M/s Sasken Communication Technologies Ltd. and M/s Mindtree Ltd., which had large scale of operations in comparison to the software development segment of the assessee?" (ii) "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to exclude companies namely M/s Thirdward Solutions Ltd., M/s Persistent Systems Limited, M/s Tata Elxsi Limited and M/s Kals Information Systems Ltd. from the final set of comparables for benchmarking assessee's international transaction of provision of software development services segment even though these companies are functionally comparables to the software development services provided by the assessee?" (iii) "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to grant working capital adjustment to the assessee?" (iv) "Whether on the facts and in th....
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....44 2. Purchase of finished goods 1,39.85,262 3. Receipt of sales commission 46,44,934 4. Provision of engineering and related services 208,78,36,974 5. Provision of IT support and related services 22,61,62,710 6. Provision of software development and related services 22,29,12,328 7. Provision of facilitation support services 3,39.17,838 8. Import of capital assets 1,12,74.302 9. Broadband Connectivity charges 1,10,19,538 10. Reimbursement of expenses 2,02,20,517 11. Recovery of expenses 31,55,04,848 5.2. The assessee company had entered into international transaction with its AEs in respect of provision of software development and related services. The operating margin of the assessee from its software development segment was 8.03% which was worked out as under:- Particulars Rs. Operating Income (A) 22,29,12,328 Less: Operating expenses 20,83,41,962 Operating Profit (OP) (B) 1,65,70,366 OP/TC (B)/(A) 8.03% 5.3. The arm's length price of the international transactions representing software services provided to the AEs was determined by appl....
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....ning to operations. Similarly extraordinary expenses or income which does not recur every year like donations, preliminary expenses written off were not considered as part of operating expenses by the ld. TPO. After excluding certain comparables chosen by the assessee in the TP study report and after including certain fresh comparables for the purpose of benchmarking the international transaction of software development services provided to AE by the assessee, the final set of comparables chosen by the ld. TPO together with the respective margins were as under:- S. No. Company Name Margins on single year bases (%} OP/TC 1 Akshay software technologies limited -1.07 2 FCS Software Solutions Ltd. 49.03 3 LGS global Ltd (Lanco global systems limited) 11.96 4 Mindtree limited 16.13 5 Sasken Communication Technologies Ltd. 19.42 6 Synetairos Technologies Ltd. 18.02 7 Zensar Obt Technologies Ltd. 19.87 8 Teledata Marine Solutions Ltd., - Software development & sales -2.98 9 Thirdware solutions Ltd. 33.93 10 Infosys Ltd. 45.01 11 Sonata software Ltd 35.32 12 Thinksoft Global Se....
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....n its submissions has heavily relied upon following jurisdictional decisions to support its case: * Pentair Water India Pvt Ltd (Appeal No. 18/2015) (Bombay High Court) * UCB India Pvt Ltd (ITA No. 7691/Mum/2012) * Atos India Pvt Ltd (ITA No. 1467/Mum/2014) 7.13.5 Further, the Appellant also highlighted that the Tribunal in the case of Willis Processing Services India Pvt Ltd pertaining to AY 201011, has departed from the earlier position in AY 2007-08 relied upon by the TPO in relation to high turnover in light of the Delhi High court decision in the case of Agnity India Technical Pvt Ltd. 7.13.6 The submissions made by the Appellant have been examined. On examining the Annual Reports, the turnover of the above comparable companies vis-avis that of the Appellant (being Rs. 22.29 crores) were observed to be as follows: S. No Name of comparable Turnover in AY 2010-11 No. times of Appellant's turnover (i) Infosys Ltd Rs. 21,140 crores 961 times (ii) L&T Ltd Rs. 1,776 crores 81 times (iii) Wipro Ltd Rs. 22,920 crores 1,041 times 7.13.7 The reliance placed by the Appellant on....
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....omparables by observing as under:- "Wipro Ltd and Infosys Ltd 7.13.12 Further, based on the detailed submissions filed, it is noted that the Appellant is operating at minimal risk basis and does not engage in any marketing functions as it caters only to its AEs. On the other hand, from the annual report (page 55 and 99 respectively), that Infosys Ltd and Wipro Ltd incur substantial expenses to the tune of Rs. 76 crores and Rs. 250 crores respectively on advertising and brand building activities. Further, as highlighted by the Appellant in page 29, 30 and 57 of their submissions, both Infosys Ltd and Wipro Ltd undertake significant R&D activities own significant intangibles such as brands and patents. This indicates that Infosys Ltd and Wipro Ltd are -.-:'. market leaders with huge brand value associated with them. It has been brought to attention (pages 27, 28, 55 and 56 of the submission) that the Appellant is a limited risk software development services provider, primarily engaged in rendering services to its AEs, whereas Infosys Ltd and Wipro Ltd are operating their business as full-fledged entrepreneurs. 7.13.13 It is noted from page 18 of the ann....
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....* Bodhtree Consulting Ltd. * Sonata Software Ltd. * Zensar Obt Technologies Ltd. C) Functional Dissimilarities 6.4. The ld. CIT(A) observed as under: "Functional dissimilarity 7.13.49 The Appellant has objected to inclusion of the following companies on the basis that they are functionally not comparable to the Appellant. In this regard, the Appellant's submissions and my observations are as follows: (i) Thirdware Solutions Ltd ('Thirdware') 7.13.50 The Appellant has submitted extracts from the website to evidence that Thirdware is engaged in end to end solutions application implementation, management and development services with core competencies in areas of ERP, business intelligence, technology and sales force. These services are completely different from the services rendered by the Appellant wherein the software development activities undertaken by the Appellant are based on guidance and instructions from the AFs. 7.13.51 Further, the Appellant has submitted that Thirdware is engaged in developing a software product 'PAPA' since July 2009 which evidences that the company is en....
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....er, the Appellant has also submitted that Thirdware derives revenue from sources such as export from SEZ and STPI unit and the nature of the revenue is unavailable. The Appellant has relied on the Delhi Tribunal decision in the case of Sun Life India Service Centre Pvt. Ltd. [ITA No. 5799/ Del/2012] wherein Thirdware was rejected considering that the nature of revenue from STPI and SEZ units were unknown. 7.13.54 In this regard, the contentions of the Appellant has been examined. It is noted from page 22 of the annual report that the revenue from software services is only Rs. 5.7 crores (i.e. 8.47% of operating revenue). It is observed that Thirdware predominantly derives its revenue from export from STPI and SEZ units (i.e. 87.02% of operating revenue). It is further observed that there is no information available in the annual report of Thirdware which indicates the nature of revenue from the exports from STPI and SEZ units. Therefore, I find force in the Appellant's arguments that in the absence of such information Thirdware's revenue from software service is only Rs. 51 crores and therefore is not comparable to the Appellant. The Hon'ble Delhi Tribunal deci....
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....Appellant has also highlighted from the annual report that Persistent is a software product company and has released over 3000 products over five years. The Appellant has also submitted in detail the differences between a software product company and a software services company. The Appellant, relying on Mumbai Tribunal decision, Roche Diagnostic P Ltd (supra) has contended that in the absence of segmentation, Persistent cannot be considered as a comparable company. 7.13.57 The submission of the Appellant has been examined. It is observed from the financial statements of Persistent (page no. 18 and 19) that the company is not just engaged in software development services but is also a software product company. Further, the distinction between a product based company such as Persistent and a software development service company like the Appellant was brought to our attention (page 51 of the submission). It is observed that product based companies like Persistent undertake significant functions such as conceptualizing, designing, coding etc. while the Appellant which is a captive service unit of the AE performs routine functions and does not undertake functions such as conce....
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....and at R. 3.92 cmre, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables." 3DPLM Software Solutions Ltd (supra) "It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development s....
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.... is observed that this company is predominantly engaged in product designing services and not purely software development services. The details on page 15 of the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the Appellant. 7.13.64 Further, as highlighted by the Appellant, the Mumbai Tribunal decision in the case of Telcordia Technologies India Pvt Ltd (supra) has held Tata Elxsi is not a software development service provider and therefore is not functionally comparable. The Hon'ble Mumbai Tribunal decision in case of Telcordia Technologies India Pvt Ltd (supra) was examined and it was noted that the Hon'ble Tribunal directed Tata Elxsi to be excluded from the comparables. The relevant extracts of the decision is reproduced below. "From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed a....
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....the jurisdictional Tribunal, the TPO is directed to exclude Tata Elxsi from the list of comparables. (iv) Kals Information Systems Ltd ('Kals') 7.13.67 The Appellant has contended that Kals is not comparable as it is not just engaged in software development services but is also engaged in development of software products. The TPO has rejected the contentions of the Appellant stating that the company qualifies all the filters. 713.68 The Appellant drew attention to page 21 of annual report of Kals in support of its contentions that apart from software service, Kals is also engaged in development of software product unlike the Appellant which is engaged in rendering only software development services. In this regard, the Appellant highlighted the Pune Tribunal decision in case of TIBCO Software India Pvt. Ltd. [ITA No.2536/PN/2012] and Mumbai Tribunal decisions in case of Nethawk Networks India Pvt Ltd (ITA No. 7633/M/2012) and Prana Studios Pvt Ltd (ITA No. 2077/Mum/2014) 7.13.69 It is observed from the annual report that Kals is engaged in software product development activities and considering that the Appellant is engaged in software se....
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.... Roche Diagnostics India P. Ltd (supra). 7.13.71 The submission of the Appellant has been examined and I find merit in the argument of the Appellant that in the absence of segmented financials indicating the profitability of the software development services, Kals is to be excluded. In this regard, it is observed that this view is also supported by the jurisdictional tribunal decision in the case of Roche Diagnostics India P. Ltd (supra) and DelhiTribunal decisions such as Saxo India Pvt Ltd (supra) 7.13.72 Accordingly, based on facts and respectfully following judicial precedents, the TPO is directed to exclude Kals from the comparables.)" 6.5. With regard to working capital adjustments, the ld. CIT(A) by placing reliance on the following decisions directed the ld. TPO to grant working capital adjustment to the assessee in respect of final comparables that are to be decided pursuant to his order:- * ACI Worldwide Solutions Pvt. Ltd (ITA No. 651/Bang/20l2) * Sun Life India Service Centre Pvt. Ltd (ITA No.l489/Del/2014) * Apigee Technologies (India) Pvt. Ltd (ITA No. 870/Bang/2013) * OSI Systems Pvt Ltd (ITA No. 683/Hyd/2014) ....
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....pute that applying the same turnover filter, three more comparables i.e. LGS Global Ltd, Sasken Communication Technologies Ltd and Mindtree Ltd should also be excluded due to largescale of operations from the final list of comparables. We find that these three comparables were sought to be included by the ld. TPO and which has not been disputed by the assessee. Moreover, the exclusion of these three comparables i.e. LGS Global Ltd, Sasken Communication Technologies Ltd and Mindtree Ltd does not emanate out of the orders of the lower authorities. Hence, we hold that the ld. DR is only trying to improve the case of the revenue which cannot be done before the Tribunal, which exercises only appellate jurisdiction. Accordingly, the ground No.1 raised by the revenue is dismissed. 9. With regard to exclusion of comparables i.e. Thirdware Solutions Ltd, Persistent Systems Ltd, Tata Elxsi Ltd and Kals Information Systems Ltd. from the final set of comparables as directed by the ld. CIT(A) on the ground of functional dissimilarities, the ld. DR argued that anything related to automizing the operations in digital format tantamount to software development and accordingly, non-availability o....
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.... the respondent assessee renders software services to its holding company. b) The Tribunal in the impugned order records that for the preceding assessment year i.e. A.Y. 2006-07,the TPO had found that KALS Ltd. and Helios & Matheson Ltd. were functionally not comparable with the respondent assessee. In the subject assessment year also, on the basis of Annual Report, it was noted that the KALS was engaged in selling of software products which is different from the activity undertaken by the respondent assessee, namely, rendering of software service to its holding company. Further, the impugned order also records that no attempt was even made by the Revenue before it to bring on record any change in the nature of activities carried out by KALS Ltd. and Helios & Matheson Ltd. in the subject assessment year, making them functionally comparable to the respondent assessee. In the aforesaid facts, the Tribunal rendered a finding of fact that KALS Ltd. and Helios & Matheson Ltd. are not comparable with the respondent assessee. c) Even before us, no submissions were advanced justifying the order of the Assessing Officer that the services rendered by KALS Ltd. and Helios & ....
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.... do not deem it fit to interfere in the said order of the ld CIT(A). Accordingly, the ground No.3 raised by the revenue is dismissed. 11. With regard to exclusion of Teledata Marketing Solutions Ltd, the decision rendered by us in ground No.2 on functional dissimilarity and absence of segmental data will hold good for this comparable also. Accordingly, the ground No.4 raised by the revenue is dismissed. Corporate Tax Issue:- 12. The only corporate tax issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in allowing the claim of assessee for service tax refund for the eligible unit for the purpose of claiming deduction u/s.10A of the Act in the facts and circumstances of the case. 12.1. We have heard rival submissions. We find that assessee had claimed service tax refund of Rs. 22,45,475/- for its EDEC Mohali division which unit is eligible for deduction u/s.10A of the Act and accordingly, computed deduction of proceeds u/s.10A of the Act. We find that the ld. AO rejected the claim of deduction u/s.10A of the Act to the tune of Rs. 22,45,475/- pertaining to the refund of service tax of EDEC unit. Similarly, the assessee has claimed service tax....