AI Drafter 
TaxTMI 
TaxTMI 
2018 (9) TMI 1978
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....d. cannot be taken as comparable, when it satisfies all the qualitative and quantitative filters adopted by the TPO. (ii) Whether the Hon'ble DRP is right in applying "onsite revenue filter" without appreciating the fact that the function carried out is "Software Development" irrespective of whether onsite or offshore? (iii) Whether the Hon'ble DRP in correct in excluding M/s RS Software Pvt. Ltd. and M/s Acropetal Technologies and M/s L&T Infotech Ltd on the ground that they have significant onsite revenue without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins? (iv) Whether the Hon'ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies? (v) Whether the Hon'ble DRP has erred on fact in deleting M/s E-infochips as a comparable on the ground that it fails the filter of service income less than 75 per cent of the sales, when the said company has service income being 100 per cent of the sales?....
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....he ratio laid down by the Hon'ble High Court in the case of M/s Tata Elxsi Ltd., in 349 ITR 98? (xvi) Whether on the facts and in the circumstances of the case the Dispute Resolution Panel was right in holding that expenses reduced from Export Turnover has to be reduced from Total turnover also, since no provision u/s 10A provides for exclusion of such expenses. (xvii) For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel insofar as it relates to the above grounds may be reversed. (xviii) The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 3. The assessee, in its cross objection has taken up the following grounds of cross objections. 4. Filters and qualitative criteria applied by the Respondent:- 4.1 The Honourable DRP/Learned AO have erred in upholding the TPO's use of new/modified filters for conducting TP analysis, without appreciating the Transfer Pricing documentation prepared by the Respondent; 4.2 The Honourable DRP and the learned AO/TPO have erred in law and on facts by rejecting the respon....
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....els as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments to the margins of the comparable companies. 5.4 The Honourable DRP and the learned AO/TPO have erred in concluding that there exists a single customer risk and that such a risk nullifies any risk adjustment that could be provided. 6. Other transfer pricing related grounds:- 6.1 The Honourable DRP and the learned AO/TPO have erred in law and on facts by failing to appreciate the fact that transfer pricing is an anti-avoidance mechanism. In the instant case the Respondent is registered as under the STPI and has claimed tax benefits under section 10A of the Act and has no reason to suppress its profit from its operations to manipulate the transfer prices. 6.2 The Honourable DRP and the Learned AO/TPO have failed to appreciate the Respondent's commercial judgment about the application of arm's length principle which is tied to the business realities. 6.3 The Honourable DRP and the learned AO/TPO have erred in law and on facts, in making several observations and findings which are based on incorrect inte....
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.... Limited. 8.2 Without prejudice to the above, the Honourable DRP and the Learned AO/TPO erred in considering ICRA Online Limited as comparable to the Appellant, which was identified by the TPO based on fresh search, for determination of the ALP. 8.3 Without prejudice to the above, the Honourable DRP/learned AO have erred in law in rejecting e4e Healthcare Business Services Private Limited, selected by the respondent in its TP study, suo motu based on non-contemporaneous data. 8.4 The Honourable DRP/Learned AO have erred in law in suo motu rejecting the following companies, selected by the TPO during the assessment proceedings. Mindtree Limited; Cosmic Global Limited. 8.5 Without prejudice to the above, the Honourable DRP, the learned AO/TPO has erred in law and on facts in rejecting the additional comparable companies as mentioned below, proposed by the respondent during the course of the transfer pricing proceedings, without appreciating that the companies passes all the filters adopted by the learned TPO:- Microland Limited; Datamatics Financial Services Limited; Microgenetic Systems Limited. ....
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....bjections, before commencement of/during proceedings before the Honourable Income Tax Appellate Tribunal ("ITAT"), so as to enable the Hon'ble Income Tax Appellate Tribunal to decide the appeal according to law. 4.1 The brief facts of the case are that the assessee-company is engaged in the business of export of software development and IT enabled services. The GS India provides back-end services to support business process of Goldman Sachs Group companies in the areas of technology support, operations, finance, legal and compliance, human capital management. It also provides software development services to Goldman Sachs Group companies. GS India has entered into a service agreement with Goldman Sachs Group companies on 09.03.2006 for provision of back-end support services (IT enabled services and software development services). The assessee-company has filed its return of income for the A.Y 20011-12 on 30.09.2011 and later filed revised return on 22.03.2013 declaring a total income of Rs. 10,46,76,667/-. The case was selected for scrutiny and notice u/ss 143(2) and 142(1) of the IT Act, 1961 were issued. In response to the notices, the authorised representative of the asse....
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....he TPO. The assessee was also informed of the reasons for rejection of companies in each case. In response to notice, the assessee vide letter dated 10.10.2013, furnished its objections. The detailed submissions made by the assessee was reproduced by the TPO in its order at para 5 at pages 5 to 8. The TPO after considering relevant objections of the assessee, selected final set of comparables of 13 companies and worked out average mean margin of 24.52% in respect of software development service segment. Insofar as ITES segment, the TPO selected 10 final set of comparables and worked out average margin of 24.77%. The TPO also allowed working capital adjustments of 1.63% in respect of software development services segment and 1.47% in respect of ITES services. Thus, the TPO has rejected TP study conducted by the assessee and made a fresh TP study by inclusion and exclusion of certain comparable and after taking final set of comparables in respect of both segments made adjustment of shortfall in respect of software development segment of Rs. 23,64,87,475/- and Rs. 41,93,62,940/- in respect of ITES segment u/s 92C of the Income-tax Act, 1961. The details of computation of arm's len....
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....by the A.O u/s 92C of the Income-tax Act, 1961. The assessee has challenged rejection of TP documentation, filters and qualitative criteria applied by the TPO, rejection of companies, viz, software development services and related services is less than 75% of total operating revenue, rejection of companies with related party transactions is greater than 25% of the sales, rejection of companies having different financial year ending and other filters adopted by the TPO in respect of both segments. The assessee also challenged selection of additional comparable companies without considering the detailed submissions of the assessee in respect of both segments. 8. The DRP, vide its order dated 08.12.2015 directed the A.O to exclude certain companies for the detailed reasons recorded in its order and accordingly, rejected Acropetal Technologies Ltd, E-zest Solutions Ltd, E-infochips Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., L&T InfoTech Ltd., as not comparable to the profile of the assessee-company in respect of software solutions development service segment, however, upheld inclusion of Persistent Systems Solutions Ltd., and Persistent System Ltd. by holding that there is no r....
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....s Ltd, as comparable companies to the profile of the assessee-company, but the larger issue has not been considered by the DPR in applying onsite revenue filter on pick and choose basis to select comparables, ignoring the fact that once a particular filter is applied in respect of comparables, it should be applied for all comparables on board. The DR further submitted that once particular filter is adapted to select comparables it cannot be applied to a few companies on pick and choose basis. In this case the DRP, has applied onsite revenue filter to M/s. RS software (India) Ltd., Acropetal Technologies Ltd., M/s L&T Infotech Ltd., only. There is no reference in the order of the DRP insofar as onsite revenue filter for other comparables. The DP further submitted that all these companies have satisfied quantitative filters adopted by the TPO. Once, a company is functionally similar to the profile of the assesee-company in respect of segmental business, it is immaterial whether it generates revenue from onsite or offshore services. The DR further submitted that onsite development of software services is more cost and thereby results in lower profit margin therefore, merely for the re....
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....chnologies Ltd, L&T Infotech Ltd., and E-infochips Ltd, on the ground that the DRP has suo motu excluded above three companies by applying fresh filter in respect of onsite revenue filter, without applying such filter to all comparable selected by the TPO. We find that although the DRP has taken one of the reasons for excluding these companies on the basis onsite revenue filter but given other reasons to exclude these companies by holding that these companies are functionally not comparable to the profile of the assessee-company. Let us examine each company and reasons given by the DRP to direct A.O to exclude from the list of comparables. 12. Acropetal Technologies Ltd. The DRP has directed the TPO to exclude Acropetal Technologies Ltd on the ground that on examination of annual report of the company the following facts are noticed:- (i) Acropetal Technologies Ltd Having considered the submissions, we examined the Annual Report from which the following facts are noticed :- ♦ The foreign currency expenses are Rs. 64.94 crore (55 per cent) of the total expenses of Rs. 118.68 crores debited in profit and loss account which makes it clear that the company is....
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....ailable and it was not possible to ascertain if it passed the export earnings and/or employee costs filters; and (ii) a substantial portion of its software development activities have been outsourced on sub contract and it could, therefore, not be retained as a comparable. The DRP in directing exclusion of this company followed decision of Hyderbad Bench of ITAT in the case of Capital IQ Information Systems (India) Pvt. Ltd. (ITA No.1961/Hyd/2011). The DRP also observed that this company was predominantly doing on site development of software and therefore cannot be compared with a company which develops software offshore. One of the filters applied by the TPO was that companies where employee costs are less than 25 per cent of turnover cannot be regarded as comparable. In the absence of segmental information, it was not possible to ascertain as to whether this company passes the test adopted by the TPO himself for comparison. The learned DR submitted that the required data can be culled out from the information available in the public domain or by resorting to a process of calling for information from this company u/s.133(6) of the Act. The learned counsel for the Assessee in this....
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.... of the company would be beyond the tolerance level and without a finding that on site revenue is more than 25 per cent of the total revenue, this company ought not to have been excluded from the list of comparable companies. We agree with the submission of the learned DR that for application of on site revenue filter, the DRP ought to have given a finding regarding the quantum of revenue from on-site software development. Nevertheless, this company goes out of comparability on the ground that the profit margins adopted by the TPO was from 3 divisions of the Assessee. We also find, as submitted by the learned counsel for the Assessee this company was held to be functionally not comparable as it is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles and intellectual property rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, the Assessee submits that the company is a product company having significant intangibles and is thus not comparable to captive software service providers such as the Assessee. In this regard the learned counsel for the Assessee has pl....
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....e Assessee submits that E-Infochips Ltd. was excluded by the DRP on the ground that: (i) no segmental information regarding its diverse functions is available; (ii) it failed the software service income filter at 75 per cent; (iii) there were major fluctuations in profit and turnover every year which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence of inventory (Pages 10 and 11 of the DRP's direction). The Revenue, in its appeal, has challenged its exclusion only the second ground. In other words, the Revenue has not challenged its exclusion on the other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and cannot be disturbed by this Hon'ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that the company's software development service revenue for FY 2010-11 was less than 75 per cent of its total operating revenue for that year. Thus, the above action of the DRP in rejecting the above company is correct. 16. In this view of the matter and consistent with the view taken by the Coordinate Bench of this Tribunal in the case of CJ Information Syst....
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....s Ltd, from the list of comparables on the ground that segmental information is not available. 19. Ld. DR submitted that when the company had classified itself to be operating in one segment i.e provision of ITeS, then there is no reason to exclude this company from the list of comparables on the ground that segmental information is not available. 20. The Ld. AR for the assessee submitted that the DRP was right in rejecting M/s iGate Global Solutions Ltd from the list of comparables, as it is earning income from information technology services and information technology enabled services, and no segmental information is available. The AR further submitted that it has debited manufacturing cost amounting to Rs. 8,30,094/- thereby indicating that the company also dealing in products therefore, the DRP was right in exclusion of iGate Global Solutions Ltd. 21. We have heard the rival contentions and perused the material on record. The ld. DRP has excluded iGate Global Solutions Ltd., on the ground that though it is earning revenue from IT Services and IT enabled services, it is considered revenue received from both segment as one segment. In the absence of segmental information....
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....ies Ltd. (supra), we are of the considered view that the DRP is right in directing the A.O to exclude expenses deducted from export turnover from total turnover. We do not find any error in the findings of the DRP, hence we are inclined to upheld the DRP findings and reject the ground raised by the Revenue. 27. In the result, the appeal filed by the Revenue is dismissed. 28. The next issue that came up for our consideration from assessee's C.O is disallowance of expenses incurred in relation to exempt income u/s 14A of the Income-tax Act, 1961. The AO has disallowed expenses of Rs. 75,730/- on the ground that the assessee has investments in share and securities which are capable of earning exempt income, but failed to disallow any expenses attributable to such investments. Therefore, he opined that whether dividend income is earned or not expenses incurred in relation to exempt income shall be disallowed u/s 14A of the Income-tax Act, 1961 by invoking Rule 8D(2) of the Income-tax Rules, 1962 and accordingly, disallowed admin and other expenses @ 0.5 per cent at average value of investments under Rule 8D(2)(iii) of Income-tax Rules, 1962. It is a claim of the assessee befo....
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....ning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P) Ltd. (decision dated 5th September 2014 in ITA No. 486/2014). In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. CIT (2009) 317 ITR 86. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in Commissioner of Income Tax, Faridabad v. M/s. Lakhani Marketing Incl. (decision dated 2nd April 2014 of the High Court of Punjab and Haryana in ITA No. 970/2008) which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Limited [2010] 323 ITR 518 and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204. The second was of the Gujarat High Court in Commissioner of Income Tax-I ....