2017 (7) TMI 1345
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....es qualify all the qualitative and quantitative filters applied by the TPO. 3. The DRP erred in directing the AO to exclude M/s, ICRA Techno Analytics Ltd., M/s. KALS- Information Systems Ltd., M/s, Tata Elxsi Ltd., M/s, Mindtree Ltd from the list of comparable in Software development segment as being functionally different without appreciating the fact that these companies qualify all the qualitative and quantitative filters applied by the TPO, 4. The DRP erred in holding that M/s. Infosvs Ltd. cannot he taken as comparable, being functionally different, big brand by relying on the its own decision in the case of Systech Integrators India Pvt Ltd in ITA No.1283/Bang/2012 and Delhi ITAT in the case of Agntity India Pvt Ltd (Supra) without appreciating the fact that the company qualify all the qualitative and quantitative filters applied by the TPO. 5. The DRP erred in holding that M/s. Sasken Communication Technologies Ltd cannot be taken as comparable for the reason that no segmental information available without appreciating the fact that the company qualify all the qualitative and quantitative filters applied by the TPO. 6. The DRP erred in holding that M/s. Persistent S....
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.... reproduced by the TPO in para 2 page 2 as under:- Particulars Sales to AE Total Revenue SWD Market support Revenue from operations 33,10,23,928/ 1,32,85,437/- 34,43,09,365/- Adjustment: (2,71,92,287) 2,71,92,287 1,44,30,858 (i) On account of wrong classification of revenue (30,82,781) 30,32,781 (96,59,520) 96,59,520 (1,44,30,858/-) (ii) Royalty Operating Revenue 29,11,39,339 3,87,39,168 Operating Cost 25,61,46,554 2,91,75,757 Operating Profit 3,49,92,786 95,63,410 OP/OC 14% 33% 6. The international transactions of the assessee during the financial year 2009-10, as per the 92CE report, as given in Para 3 of the TP order, is as follows : SI No Type of transaction Amount (Rs.) 1 Amount paid for purchase of software licence 12,77,379 2 Receipts on account of software development service 33,10,23,928 3. Royalty paid 1,44,30,857 4 Amount received for marketing services rendered 1,32,85,437 Total 34,43,09,365 7. The assessee, after applying certain filters, has selected a set of 21 comparables in respect of software developmen....
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....tions Ltd. 6,67,28,828 5,78,33,452 13,58% 7 Persistent Systems Ltd. 5,04,41,30,000 3,86,97,20,000 30.35% 8 R S Software (India) Ltd. 1,81,83,71,419 1,46,73,31,694 10.29% 9 Sasken Communication Technologies 4,01,50,89,000 3.42.12,53,000 17.36% 10 Tata Elxsi (seg) 3,36,94,00,000 2,78,62,43,000 20.93% 11 Thinksoft Global Services. Ltd 74,56,94,965 63,70,04,595 17.05%" AVERAGE MARGIN 22.71% 10. However, after giving working capital adjustment, the ALP determined was restricted to 1.98% with an adjusted margin of 20.73%. Thus the TPO has proposed an adjustment of 30,92,45,735/- being 120.73%) of operating cost and shortfall being adjustment u/s.92CA is Rs.l,81,06,396/-. 11. The assessee challenged the action of the TPO before the DRP and raised objections against some of the comparables selected by the TPO. 12. The DRP in its directions rejected eight comparables out of the eleven comparables selected by the TPO. Thus the Revenue is aggrieved against the directions of the DRP insofar as the companies directed to be excluded, which are as follows : 1. ICRA Techno Analytics Ltd (seg) 2. Infosys Ltd 3. Kals Information Systems ....
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....ficer is directed to exclude the above company from the comparables." 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. (2) Infosys Ltd 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs. 21,140 crores, which is 442 times higher than the assessee. 18. The DRP accepted the objections of the assessee and by following the decision of the Delh....
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....ftware product business. Further, by following the decision of this Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540 (Bang, - Trib.), this company was found to be not comparable with that of the assessee. 23. We have heard the ld. DR as well as Id. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India (P.) Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs. 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persistent Systems Ltd. 24. We have heard the ld. DR. as well as id. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product dev....
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....gins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. (6) Tata Elxsi Ltd. 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1. 31. The DRP found that this company is not functionally comparable with assesse....
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....d' restatement of value of assets &.liability, are operating in nature. The assessee placed reliance on the decision of coordinate Bench of this Tribunal in the case of SAP Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156 wherein it has been held that foreign exchange gain need to be considered as operating in nature, if it arises on realization of sale proceeds or on payment against supplies. The DRP has accepted the contention of the assessee by following the decision in the case of SAP Labs India (P.) Ltd (supra) and accordingly directed the AO to consider the foreign exchange fluctuation in respect of assessee company as well as comparables as operating in nature. 35. We have considered the rival submissions as well as the relevant material on record. There is no quarrel on the point that if the foreign exchange fluctuation gain/loss arises in relation to the realization of sale proceeds or payment against supplies, then it will be in the nature of operating gain/loss. Only in the case where the foreign exchange gain/loss pertains to non-trading receipts or payment, the same cannot be considered as part of the operating margins. Similar view has been taken by the coor....
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....irect the TPO to retain Mindtree Ltd, as one of the comparable. R.S. Software (India) Ltd : The TPO has selected this comparable on the ground that it is functionally comparable to the assessee company. However, the DRP has suo motu rejected this company on the ground that it is earning from onsite services . The assessee as well as the Revenue are seeking inclusion of this company as comparable. In our view, the DRP has applied a new onsite filter while rejecting this comparable. Undoubtedly, the on-site filter can be applied by the DRP suo motu after giving the notice to the parties concerned. However, we are of the opinion that as and when a new filter is applied, then the same should be applied to all the comparables selected by the TPO and by applying the on site filter, if after apply the filter new comparables are available or the selected comparables can be excluded, then it should be applied without any discrimination. Accordingly, we remand the matter to the file of the TPO for applying the on site filter on all the comparables selected by the TPO. Accordingly this issue is allowed for statistical purpose. Larsen & Toubro Ltd : 20. The TPO selected this company as com....
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..... He has further contended that in a series of decisions, the Tribunal has applied 15% RPT filter and since this company is having 'more than 15% RPT, the same cannot be considered as a good comparable. 64. On the other hand the ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPC to apply 15% RPT filter in respect of all the comparables. 66.As regards the functional comparability of this company is concerned, the assessee has referred to the income under the head....
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....s submitted that the Company has intangibles worth INR 410,609,258 during FY 2009-10. Having heard the assessee, we gone through the decisions on which reliance has been placed by the assessee. It is noticed that the company was excluded by application of outer turnover filter of 200 crores. It has been held by us following the various judicial pronouncements that a company cannot be excluded merely on the basis of turnover, if on function, it is comparable. We examined the Annual Report of the Financial year from which it is noticed that during the year company did not: carry out Engineering Service Business which was carried out till last Financial Year'. The entire revenue during the year is from IT Services Page 1 of Director's Report). As regards to the onsite revenue and expenditure is concerned, the assessee should not have any grievance considering the fact that the onsite development will reduce the margin of the company. Further, the annual report-does not Indicate that any other services rendered other than the Software Development Services as entire revenue has been shown against IT Services. Hence, the objection in respect of the exclusion of the above compan....
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....he RPT has no where been defined in the IT Act or in the Rules. The Delhi Tribunal, while deciding the RPT filter of 25% has relied upon the definition of associate enterprises, which in view of the Tribunal was akin to RPT ( related party transaction) and further relied upon the definition of 'interested person' given u/s.40A(2)(b) of the Act. The Transfer Pricing chapter was introduced under the Act, for the purpose of preventing the fiscal evasion or avoidance of tax and is a complete code in itself. As per Rule 10B(2), the FAR (Functions, Assets and Risk assumed) analysis is to carried out for comparable company viz-a-viz the tested company. If the FAR of the tested party as well as the comparable company are comparable, then only the ALP of the tested party is required to be determined in relation to the international transactions. However, for the purpose of finding a suitable comparable efforts should be made by the TPO to iron out or minimise the differences if any between the comparable and tested party. It is an admitted position, in some case, that if the transaction is between the two related' parties, then the prices can be controlled, and the transaction w....
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....atent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights ; or (h) ninety per cent, or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise ; or (i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or (j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or (k) where one enterprise is controlled by a Hindu Undivided Family, the other enterprise is controlled by a member of such Hindu Undivided Family, or by a relative of a member of such Hindu Undiv....
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....ers or board of directors. Thus the concept of an associated enterprise was brought in to address the management control of one enterprise with that of the other enterprise with whom the international transactions are being entered, whereas the term "related party transactions" is of wider import and it is working on transaction level instead of managing control level Under the Companies Act, 2013, related party transaction requires the mandatory disclosure in the financial statements of the company. Therefore in our view the same parameters of 26% of shareholding should not be applied for eliminating the RPT i.e fixing the RPT as 25%. Therefore, keeping the abovesaid in mind, for many years, the RPT filter had been adopted by the TPOs to exclude the otherwise comparable company from the list of comparables, if the RPT was found to be more than 25%. Theoretically, 0% RPT filter adopted by the DRP is correct, but with a view to appreciate the practical difficulties in finding out the comparable, the RPT filter was relaxed in some matters by the Tribunal to the extent of 25% and in some matters, it was relaxed up to 15%. In our view, a balanced view is required to be adopted and wh....
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....bmitted that the TPO has restricted the working capital adjustment from 2.3% to 1.91% on the ground that the same represents optimum working capital adjustment. However, the DRP on appeal of the assessee, has held that the working capital adjustment should be given without putting any restriction. Now the Department is in appeal against the said direction. 25. In our view, the issue of working capital adjustment is no more a res integra and the assessee is required to be given working capital adjustment based on actual basis. This has been so held by the Tribunal in the following decisions : * ARM Embedded Technologies (P.) Ltd. v. Dy. CIT [2015] 64 taxmann.com 445 (Bang.-Trib) * Mercedes-Benz Research & Development India P. Ltd v. Asstt. CIT [2017] 71 taxmann.com 225 (Bang.-Trib) Following the above decisions of the coordinate bench of the Tribunal, we dismiss the ground raised by the Revenue in respect of working capital adjustment. Corporate Tax issues : 26. Ground 9 of the Revenue : The learned AR for the assessee has submitted that the CIT, Bangalore-I has granted approval for gratuity fund with effect from 27.09.1996. The gratuity fund entered into a group gratuity sc....
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....re made in the books of account, but actually payment was made to the gratuity fund and therefore, the provisions of Section 40A(7) are not applicable and instead thereof, the provisions of Section 36(1 )(v) are applicable r.w.s.40A(7) and it was contended that the deduction was allowable. In this regard, the assessee relies on the following decisions: * DCIT v. Dy. Baroda Gujarat Gramin Bank ITA No. 479/AHD/2010 * Capital IQ Information Systems (India) (P.) Ltd. v. Addl. CIT [2014] 49 taxmann.com 313 (Hyd. - Trib.) * CIT v. Warner. Hindustan Ltd. [1985] 151 ITR 701 (Andhra Pradesh-HC) * CIT v. Bitoni. Lamps Ltd. [2005] 144 Taxman 330 (Punj. & Har.). 30. We have heard the rival contentions and perused the record. In our view all the judgments referred by the ld. AR except Bitoni Lamps Ltd were of the Tribunal. In our view, the issue before us is squarely covered by para 5 of the Hon'ble Punjab & Haryana High Court in Bitoni Lamps Ltd (supra), wherein it was held as under : 5. A bare perusal of the above provision shows that as per clause (a) no deduction in respect of any provision for payment of gratuity is admissible. Clause (b), however, provides for two exception....
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.... nominal exempt income of Rs. 62,500. The AO was not satisfied with the explanation given by the assessee and held as under in paras 5.4 to 5.9 5.4 From the Balance Sheet, it is quite visible that the assessee had actively made certain investment decisions. This was not possible without the efforts of the managerial staff and the directors. But it is seen that the assessee has not disallowed any corresponding expense attributable to earn the tax-free income. The assessee's claim that there is no expenditure has been incurred is therefore rejected and this is a fit case for arriving at the expense incurred for earning exempt income as per the provisions of Rule 8D. Rule 8D has been prescribed to arrive at the figure of expenditure attributable to the exempt income, if it could not arrived at directly. Since the assessee has not made any disallowance on its own, Rule 81) should be applied in this case. 5.5 Reliance is placed on cases of Cheminvest Ltd. v. ITO(ITAT-SB- Del) 121 1TD 318 and Pradeep Kar Vs. ACIT (Kar) 319 ITR 416, wherein it was held that expenditure in relation to exempted income is to be disallowed u/s.l4A even when no exempted income is earned during the year....