AI Drafter 
TaxTMI 
TaxTMI 
2020 (3) TMI 414
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.... Enterprise of rendering Software Development Services (SWD Services). These grounds reads as follows: Revenue's appeal: 1. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel was not justified in giving direction to the TPO to exclude M/s ICRA Techno Analytics Ltd as a comparable, without considering the discussion made by the TPO in respect of the comparable company in the TP order 2. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel was not justified in giving direction to the TPO to exclude M/s Infosys Ltd and M/s Tata Elxsi Ltd as a comparable without considering the facts discussed in the case of the taxpayer by the TPO in respect of the comparable company in the TP Order. 3. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel was not justified in excluding INFOSYS Ltd and Tata Elxsi Ltd as a comparable on the basis of decision in a different case when in TP rejection or acceptance of a comparable in a case on the basis of its appropriateness / inappropriateness in some other is not possible. 4. On the facts and in th....
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....lable as on the date of preparing the TP documentation for comparable companies while determining the arm's length price (e) Upholding the TPO's approach of not providing Risk Adjustment and thus ignored the limited risk nature of the services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential. even when full-fledged entrepreneurial companies are selected as comparables. 3. The Assessee is a company registered under the provisions of the Companies Act, 1956 and is a subsidiary of Emulex International Ltd. (which holds 99.998% shares) and Emulex Corporate Services Corpn. (which holds 0.002% shares). The Assessee company is engaged in providing SWD services to its affiliates, for which it received a consideration of Rs. 29,54,66,768/- during the previous year relevant to the assessment year 2010-11.Since the transaction of provision of Software service by the Assessee was an international transaction, income from such international transaction has to be determined having regard to Arm's Length Price (ALP) as laid down in the provisions of Sec.92 of the Act. Net margin on cost earned by the Assessee (as r....
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....22.71% Less: Working capital adjustment (-)5.39% Adjusted mean margin of the comparables 28.1% Operating cost Rs. 26,79,44,050/- Arm's Length Price (ALP): 128.1% of Operating Cost Rs. 34,32,36,328/- Price Received Rs. 29,54,66,7686/- Short fall being adjustment u/s. 92CA Rs. 4,77,69, 560/- The aforesaid shortfall, consequent to determination of ALP, was added to the total income of the Assessee in the draft order of assessment passed by the AO. 6. Against the proposal to make addition as above in the draft assessment order, the Assessee filed objections before the Dispute Resolution Panel (DRP). Briefly the directions issued by the DRP are as follows- (i) The DRP directed exclusion of ICRA Techno Analytics Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd. and Persistent Systems Limited. (ii) The DRP did not accept the contention that KALS Information System Ltd. ought to be excluded; (iii) The DRP directed exclusion of Persistent Systems and Solutions Ltd., and Thinksoft Global Services Ltd. on the erroneous basis that the Assessee had sought exclusion of the same. (iv) The DRP suo motto directed exclu....
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.... our attention was drawn to an order passed by ITAT Bangalore in the case of a SWD services provider such as the Assessee for the very same AY 2011-12 in the case of [2016] 70 taxmann.com 299 (Bangalore - Trib.)Deputy Commissioner of Income-tax, Circle-3(1)(2), Bangalore v. Electronics for Imaging India (P.) Ltd. For (AY 2010-11). In the aforesaid order, the Tribunal has upheld exclusion of the aforesaid four companies, which the revenue seeks to include as comparable companies. The following are the relevant observations of the Tribunal on the comparability of the aforesaid four companies: "(1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- "Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment compris....
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....mance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry. 20. In view of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE. (5) Sasken Communication Technologies Ltd. 21. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables." 22. ....
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....n design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies India (P.) Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:- "7.7 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 and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties." 33. No contrary view has been brought to our notice regarding comparability of this company with that of....
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....ent service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables." 14. Respectfully following the aforesaid decision, we hold that the aforesaid company was rightly regarded as not comparable company with the Assessee by the DRP and hence, we find no merits in the relevant grounds of appeal of the revenue. 15. The Assessee in its appeal in Gr.No.4(b) sought exclusion of KALS Information....
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.... grounds of appeal of the Assessee and allow the same. 17. In ground No.4b, the assessee has sought inclusion of LGS Global Ltd., and CAT Technologies Ltd., as a comparable company. As far as these 2 companies are concerned, the TPO rejected LGS Global Ltd., as a comparable company on the ground that the exports sales were less than 75% of the total revenue. Before the DRP, the assessee pointed out that the ratio of export sales to total sales was 98.7% and that this company was functionally comparable to SWD services company. The submissions made by the assessee to the DRP in this regard are contained in pages 180 to 182 and 231 to 232 of the assessee's Paper Book. The DRP did not adjudicate the inclusion of this company. The learned DR, in his submission, pointed out that this company should also be tested on the basis of functional comparability, if the comparability of this company is restored to the TPO for fresh consideration. Similarly, the learned Counsel pointed out that CAT Technologies Ltd., was rejected by the TPO for the reason that the details of related party transactions were not available. The plea of the assessee was that in the Annual Report, there was a colum....
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....and therefore they should not be considered as operating expenses while arriving at the operating margin of the assessee. The DRP on such submission, gave the following directions: "3.11: Computation of operating cost and operating margin: It is submitted that the TPO has excluded employees stock compensation, provision for service tax and foreign exchange loss as non-operating cost, and excluded 'other income' from the operating revenue. Having heard the assessee, we are of the view that foreign exchange gain/loss are operating in nature in case of export business. The Assessing Officer is directed to include the same as cost/income in case of assessee as well as comparables. Other items are extra-ordinory items and hence non-operating in nature. The other income, if not related to business operations, but interest on FDs etc, has rightly been excluded by the TPO from operating revenue. IT is directed accordingly." 21. In the order giving effect to the directions of the DRP, the TPO did not exclude the aforesaid two items of expenses while computing the operating margin of the assessee. Ground No.3 is raised by the assessee against su....
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....ble High Court of Karnataka in C/T v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Kar). The DRP allowed the alternate contention and directed the AO to recompute the deduction by reducing the expenses both from the export turnover as well as the total turnover. The Revenue is ground Nos. 2 and 3 of its appeal is challenging the above direction of the DRP. 25. We are of the view that the direction of the DRP is correct and is in accordance with the decisions of the Hon'ble High Court of Karnataka in CIT v. Tata Elxsi Ltd., reported at [2012] 349 ITR 98 (Kar) which has since been affirmed by the Hon'ble Supreme Court vide its order dated 24.04.2018 in C/T v. HCL Technologies Ltd. (reported at [2018] 404 ITR 719 (SC)). Consequently, ground Nos.2 and 3 by the Revenue are dismissed. 26. The other grounds which require consideration in assessee's appeal are ground Nos.5 and 6 which are grounds relating to non granting MAT credit u/s.115JAA of the Act brought forward from AY 2008-09 and the ground relating incorrect credit for advance tax paid for AY 2010-11 taken into consideration by the AO, respectively. 27. As far as Gr.No.5 is concerned, the facts are that for assessment y....