AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (3) TMI 1138
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....-99 i.e. upto the 7th year from the establishment of the company. Sub-section 1B of the Act was introduced by the Finance Act, 2000 to section 80HHE of the Act w.e.f 1.4.2001 and simultaneously, provisions of section 10A of the Act were amended to the effect that deduction would be available for 10 Assessment Years. The new undertakings had an option not to claim deduction u/s 10A of the Act. Since the deduction was optional, the assessee claimed deduction u/s 80HHE of the Act and opted for not claiming deduction u/s 10A of the assessee Act. In view of the introduction of section (1B) to section 80HHE of the Act, the assessee switched over to deduction u/s 10B/10A of the Act. 5. The Assessing Officer was of the firm belief that the switch over of the assessee has been done with a specific motive to claim excess deduction and avoid payment of taxes. The Assessing Officer formed a belief that the claim of the assessee was not bonafide or genuine but had been made merely with an intention to defraud the revenue. The Assessing Officer found that for similar reasons, deduction had been disallowed in A.Ys 2005-06 and 2006-07 and taking a leaf out of the said A.Ys, the Assessing Off....
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.... any perversity, ambiguity, perversity or any other valid reason to interfere with the findings of the Commissioner of Income Tax(A). Per contra, we clearly observe that the Assessing Officer ignored this fact that the assessee's 100% EOU was established in AY 1997- 98 related to AY 1998-99. The Assessing Officer denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold the findings of the Commissioner of Income Tax(A) in the impugned order. Accordingly, ground no.2 of the revenue is dismissed." 11. Similar issue was considered by the Tribunal in Assessment Year 2006-07 in ITA No. 5720/DEL/2010. The relevant findings of the Tribunal read as under: "3. We have heard rival argument of both the parties and careful perused the record placed before us. At the outset Ld. Counsel of the Assessee filed a copy of decision of ITAT Delhi 'C' Bench in ITA No. 2339/Del/2010 for the Assessment Year 2005-06 dated 29/11/2013 and submitted that the issue of allowability of deduction u/s 10B of the Act ....
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....ion prior to the due date for filing of return but filed it along with the return and, therefore, the assessee is disqualified from claiming exemption on this ground also. We do not find any force in such objection because this objection is merely of super technical nature. In view of the above, we are liable to concur with the fining of the Ld. CIT(A) and set aside the same. Consequently, we allow the ground of appeal taken by the assessee and direct that the assessee shall be entitled to claim exemption u/s 10B in the assessment year under consideration." 8. On careful consideration of rival contentions and careful perusal of record and citations submitted before us, we observe that the revenue has not disputed this point that the assesssee got approval as 100% EOU as per approval dated 27/1/1997. We further observe that in the impugned order, the Commissioner of Income Tax (A) has held that the Assessing Officer was completely in error in holding that since the assessee started its business in A.Y 1992-93 then the prescribed period of 10 years for the purpose of exemption u/s 10B of the Act had come to an end by A.Y 2001-02. We also observe that the said Section 10B of ....
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....t disputed that the above issue stands covered in favour of the Assessee and against the Revenue by the decisions of this Court in Commissioner of Income Tax v. Infra Soft Technologies Limited (decision dated 21st October 2010 in ITA No. 708 of 2008) and Commissioner of Income Tax v. Interra Software India Limited (2011) 238 CTR (Del) 23. In both decisions the deduction claimed was under Section 10A of the Act which is in pari materia Section 10B of the Act. 4. These appeals are accordingly dismissed." 13. As no distinguishing decision has been brought to our notice by the Revenue, respectfully following the findings of the co-ordinate bench and Hon'ble High Court, we direct the Assessing Officer to allow the claim of deduction u/s 10B of the Act. Addition of Rs. 7,54,85,392/- is directed to be deleted. Ground No. 2 with all its sub grounds is allowed. 14. We will now address to the Transfer Pricing adjustments. 15. The underlying facts in issue are that the appellant company was established as a back-end software services company and works mainly for its parent Infogain, USA. The appellant company is also registered under the STP Scheme and has been claiming ....
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.... iGatc Global Solutions Ltd 7 Infosys Technologies Ltd 8 Kals Information Systems Ltd 9 Lucid Software Ltd 10 Mediasoft Solutions Pvt. Ltd 11 Megasoft Ltd 12 Mindtree Ltd 13 Persistent Systems Ltd 14 Quintegra Solutions Ltd 15 R S Software (India) Ltd 16 R Systems International Ltd 17 SIP Technologies & Exports Ltd 18 Sasken Communication Technologies 19 LTtVdS Infotech Ltd 20 Tata Elxsi Ltd 21 Wipro Ltd 22. The Assessing Officer finally computed the ALP and made adjustments as under: "19. Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmctic, mean PLI : 25.00% Less: Working capital adjustment (Annexure-C) : (-1.49%) Adj. Arithmetic mean PLI : 26.49% Arm's Length Price: Operating Cost Rs. 461, 781,432/- Arms Length 26.49% of the Operating Cost Arms Length Price (ALP) Rs. 584,107,333 /- 20. Price Received vis-a....
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.... Engineering; Enterprise Integration; and « Business Intelligence. T Related Staffing Services Infogain India provides IT related staffing services to associated enterprises through their Resourcing Group (RG). RG identifies candidates either front its non employees or from outside, in accordance with specifications provided by associated enterprises and thereafter facilitates hiring of such candid a'eg by associated enterprises Adds.\v,ia!!y. Infogain India may at times equip recruited personnel witli additional skill sets at the instance of associated enterprises. RG also handles the internal/ local requirements of lnfogain India. Even though the recruitment services provided by lnfogain India have increased during the financial year 2006-07, they still constitute less than 1 percent of the entire revenue and almost the entire revenue has been earned from software services. 28. Keeping in mind the aforementioned business profile of the assessee, we will now consider the exclusion of the comparables as contended by the ld. counsel for the assessee before us. 1. Infosys Technologies Ltd and WIPRO Ltd 29. The Annual Report of bo....
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....s a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value: that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld." 19. The same decision also noted that one reason for exclusion was the "unavailability of the segmental data" for the above comparable. 20. In M/s. Oracle (OFSS) BPO Services Pvt. Ltd. (decision dated 5th February 2018 in ITA 124 of 2018) while upholding the exclusion of M/s.Wipro Ltd. from the list of comparables it was noted that the ITAT took into account the Related Party Transactions ("RPT‟).The filter adopted was to exclude comparables with unrelated party transactions equal to or in excess of 75% of their business. The ITAT did that on the basis that Wipro Ltd. had a significant brand presence in the market and could, therefore, not be deemed to be a comparable entity. This Court explained the RPT filter as under: ....
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....hardware and software), Industrial design and engineering (mechanical design with a focus on industrial design) and Animation and Visual Effects. Since this company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable to the assessee company which is simply providing software related services. The Tribunal in the case of Toluna India Pvt. Ltd., and Motorola Solutions India Pvt. Ltd., has treated this company as not comparable. We also order accordingly." 36. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Megasoft Ltd 37. The Annual report of this company shows that this year was of extraordinary events as there have been acquisitions in this year. The Annual Report further shows that there was amalgamation of Visualsoft Technologies Ltd. Moreover, we find that 35% of the revenue is from sale of software products and there are no segmental details. 38. The co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd ITA No. 5857/DEL/2011, for similar reasons, has directed for exclusion of this company from the final ....
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.... software products which makes it functionally dissimilar. For similar reasons, the co-ordinate bench in the case of Tata McGrawI Hill Education Pvt Ltd [supra], has directed for exclusion of this company from the final set of comparables. The relevant findings read as under: "16.1. Here again, we find that there have been certain acquisitions which is evident from the Annual report of this company, that is available on page 781 of the paper book. Note no. 6 states that : `The company received sanction from the Bombay High Court, Mumbai and Bombay High Court, Goa Bench for amalgamation of ControlNet (India) Pvt. Ltd. (ControlNet) effective from April 1, 2006. Pursuant to this, all assets, liabilities and losses of ControlNet are merged with the assets, liabilities and reserves of the Company with effect from April 1, 2006 by following "pooling of interest method" as prescribed in Accounting Standard 14 (AS-14) as issued by the Institute of Chartered Accountants of India.' Thus, the acquisition took place in this company during the relevant to the assessment year under consideration. Following the reasons given above while discussing the case of Megasoft Ltd., we order ....
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....es. This company is also into cloning and purification and industrial biotechnology area and manufacturing enzymes, alpha amylase and alkaline protease. For these reasons, the co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd [supra] has directed for exclusion of this company from the final set of comparables. The relevant findings read as under: 9.1. The TPO observed that this company is engaged in the provision of software development services. Notice u/s 133(6) of the Act was issued. As per the reply received from the company, the TPO noted that: "It is mainly a software development company" qualifying all the filters. He, therefore, included this company in the list of comparables. 9.2. Having heard the rival submissions and perused the relevant material on record, it is observed that this company is not only engaged in providing software development services, but also into the software products. It is noticeable from the TPO's order page 73 that the assessee ITA No.5857/Del/2011 objected to the inclusion of this company by stating that it developed a new drug design tool 'Çelsuite' to drug discovery in finding the lead ....
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....to network equipment providers, handset manufacturers, service providers and business process outsourcing sectors. From the Notes to the financial statements of this company, it can be observed that: "The activities of the company include development of package software, providing software consulting services and other ancillary products and services, primarily for use in the telecommunications industry." In view of the fact that it is a software products company and is also providing software development services, even the segmental results of software development services cannot be equated with the activities undertaken by the assessee for its ITA No.5857/Del/2011 AEs. We, therefore, order to exclude this company from the list of comparables." 47. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Thirdware Solutions Ltd 48. The Annual Report of this company shows that this company derives revenue from various sources such as sale of license, software services, export from SEZ unit, revenue from subscription, etc. which makes this company functionally dissimilar from the appellant....
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....erations were in software products, software services and training. Information u/s 133(6) of the Act was called from this company, which has been reproduced on page 94 of the TPO's order. From such submissions, the TPO inferred that the software products constituted only 3% of its revenues and training constituted only 8.56%, thereby leaving around 88% of the total revenues to the software services. That is how, the assessee's objections were repelled and this company was considered as comparable. 13.2. After considering the rival submissions and perusing the relevant material on record, we find that the entire premise of the TPO's inclusion of this company in the list of comparables is that the software products constitute only 3% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: "the use of readymade object laboratories is only to the tune of about (0.33 to 3) % in the year 2005-06 and 2006-07. " We fail to comprehend as to how the above line conveys that the software products' revenue stands at 3%. What has been written is that the company's use the readymade object labo....
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....d Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd.....
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....nsulting company. In his opinion, all the filters applied by him were fulfilled and, as such, this company was liable to be considered as comparable. The assessee objected to the inclusion of this company before the DRP by contending that not only the turnover of this company was much lower, but also the profits were extremely high. Rejecting the assessee's contentions, the DRP upheld the TPO's view on the inclusion of this company in the final set of comparables. 10. It can be seen from the Annual accounts of this company, a copy of which is available on record, that albeit it is a pure software development service provider, but, is utilizing its own softwares in rendering such services. The Tribunal in Motorola Solutions India Pvt. Ltd., has held this company to be incomparable by accepting the assessee's contention that the high operating margins of this company were on account of difference in its asset base. It is further relevant to note that this company, apart from rendering software development services, is also engaged into the sale of software products and the accounts maintained by it are on entity level without there being any segregation for....
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.... considered as not comparable." 57. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Ishir Infotech Ltd 58. The Annual Report of this company shows that this company is engaged in outsourcing work and is having heavy outsourcing activities as well as having different business model. The Hon'ble High Court of Delhi in the case of Rampgreen Solutions Pvt Ltd 377 ITR 533 has held that a company cannot be taken as a comparable which has a different business model. The relevant findings of the Hon'ble High Court read as under: "38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitab....
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....owever, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable arm's length price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis. 44. Consideration for a transaction would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken /functions performed is important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be apposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator." The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.* 20. A perusal of the above decision reveals that....
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.... (ii) Brescon Advisors Limited - In the case of Brescon, the ITAT analysed the annual reports and noticed that the income of Brescon is from fee based financial services, from debt resolution and debt syndication. Brescon also earned revenue from sale of investments. The ITAT has equated `Advisory services related to debt financing' with `financial services from debt resolution and debt syndication'. These two are not identical services. Whereas the former is advisory in nature, the latter is executory in nature. While there could be some overlap between the former and latter, the matter requires deeper analysis and examination. (iii) Ladderup Corporation Limited - The ITAT noticed that Ladderup had shown operational income from financial and management consultancy services as also fee based activities such as 'Debt Syndication, IPO Advisory, Private Equity Placement, Merger and Acquisitions, Corporate Restructuring and a host of other corporate advisory services.' The ITAT, thereafter, simply held that Ladderup had similar functions as that of the Assessee and was a comparable that deserved to be retained. 22. Broadly, it appears that the....
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....tion (ii) 26. In view of the above discussion on the various comparables, the findings of the ITAT in respect of Sumedha, Brescon and Ladderup are set aside. We have been informed by the learned counsel for the parties that subsequent to the order of the ITAT, the TPO passed an order which resulted in a final assessment order being passed by the AO. The matter is currently pending in appeal, by the Assessee, before the CIT (A). All those consequential orders would not survive in view of the present order. 27. In order to not brook any further delay, this matter may be placed before the CIT (A) to consider as to whether these three companies can be held to be comparables in the light of observations made in Rampgreen Solutions (supra) and in this order. The CIT (A) would, thereafter, pass a comprehensive order and determine the ALP for the international transactions. Question (ii) is answered in the affirmative i.e. in favour of the Assessee and against the Revenue. 61. Ground No. 1 with all its sub grounds is allowed. 62. In the result, the appeal of the assessee in ITA No. 5870/DEL/2011 is allowed. The order is pronounced in the open court on 17....
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....007. Moreover as per the/reply received. from the company, it has stated clearly that it generates its predominant revenues from e-commerce website. Thus the The company is a software product company and hence rejected as a comparable The company has RPT of 28.10% on sales and hence the company is not considered as a comparable Acceptable as a comparable. The company was asked to clarify on export earnings as well as onsite revenues. As per the information available in the Annual Report, the exports (in terms of foreign exchange earnings) Acceptable as a comparable The company has export turnover of only 14.62% on sales and hence the company is not considered as a comparable The company has RPT of 56.89% on sales and hence the company is not considered as a comparable Intertec Communications Ltd The company has RPT of 100% on sales and hence the company is not considered as a comparable KALS Information Systems Ltd KP1T Cummins Infosystems Ltd Lanco Global Systems Ltd Acceptable as a comparable The company has RPT of 106.40% on sales and hence the company is not considered as a comparable Acceptable as a com....