TaxTMI 
TaxTMI 
2019 (12) TMI 1318
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....d the same as current year income while the TPO has excluded the same in the computation of margins of the Company for the FY 2009-10. 2 Erroneous data used by the TPO * The learned TPO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of alleged comparable companies as such data had an influence in determining the transfer pricing policy of the Assessee. 3 Determination of arm's length price by the TPO in relation to the 'Software Development Services' segment * The TPO erred in law in not rejecting certain companies originally selected as comparables in the TP study even though the underlying functional/ business profile of those companies squarely disqualified them being comparables. The TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparable to the Assessee, without establishing functional comparability. The TPO also erred on facts in arbitrarily accepting companies without considering companies having varied turnovers, difference in the size and scale of operations which have a direct impact on their profitability consid....
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....ng Rs. I4,19,80,333/- claimed by the Company as deduction under section 10B of the Act. On the facts and in the circumstances of the case and in law, the learned JCIT and DRP has wrongly adopted a position that, approval from Inter Ministerial Standing Committee ("IMSC") constituted under section 14 of Industries (Development and Regulation) Act, 1951 ["IDRA"] is not valid for the purpose of section 10B of the Act, disregarding the fact that IMSC is constituted under section 14 of the IDRA, as stipulated for the purpose of section 10B of the Act. On the facts and in the circumstances of the case and in law, the learned JCIT and DRP has erred in disregarding the fact that once STPI approves the unit as a 100% export oriented undertaking, the Company should be allowed the bonafide claims of related income tax benefits under the Act as the doctrine of indoor management is equally applicable to public law. On the facts and in the circumstances of the case and in law, the learned JCIT and DRP has violated the settled position of law that tax holiday contemplated for a block period, which was consistently allowed in earlier years, cannot be disallowed in subsequent year....
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....he appeal. 3. Ground Nos. 2, 6, 7 and 8 were not pressed by the assessee before us and hence, they are dismissed as not pressed. 4. The first Ground, Ground No. 1 is with regard to prior period income of the company in the software development and ITeS segment for determination of ALP. 4.1 The facts of the issue are that the prior period income (which are of the nature of income from services, excess gratuity accounted in the previous year rectified and rent expenses) amounting to Rs. 55,451,678/- was not considered while computing the margin of F.Y. 2009-10. The TPO was of the view that the prior period adjustment was a result of material error discovered in Financial Statement of a prior period that had already been published and this was a below the line item which had no effect on the current period net income. 5.2 On appeal, the DRP confirmed the findings of the TPO that the TP study was undertaken of a particular year, in order to compare Arm's Length Margin based on independent comparables considering the fact that the operating cost of the income pertaining to prior period was debited in the preceding year and there is no rationale to treat the prior period inco....
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....-10. All the expenses relating to this income had already been accounted for in the earlier assessment year 200910. Being so, this amount cannot be considered as operational income of the current assessment year 2010-11. Being so, the DRP is justified in observing that the TP study was undertaken of a particular year, in order to compare Arm's Length Margin based on independent comparables considering the fact that the operating cost of the income pertaining to prior period was debited in the preceding year and the prior period income cannot be treated as part of the operating revenue of subsequent year. We have also gone through the case laws relied upon by the Ld. AR which were delivered in different context and have no application to the facts of the present case. Hence, this ground of appeal of the assessee is rejected. 6. The next ground is with regard to determination of arm's length by the TPO in relation to the software development services segment. 6.1 The facts of the issue are that assessee has challenged the inclusion of the following companies from the list of comparables: 6.2 Larsen & Turbo Infotech Ltd. The facts of the issue are that from the Annual Report ....
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.... company and also there is significant onsite services. It was observed that there is no segmental data available coupled with L & T Infotech Ltd. is having huge brand value. Hence, it cannot be compared with the assessee company. 6.5 In view of the above order of the Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables. This ground of appeal of the assessee is allowed. 7. iGATE Global Solutions Ltd. The Ld. AR submitted that the turnover of this company is more than 22 times the turnover of the assessee. It was submitted that the turnover of the assessee was only INR 39.61 crores as against that of this company at Rs. 893.4 crores which is more than 10 times of the assessee and hence, it should be excluded. The Ld. AR relied on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in ITA No. 223/2017 wherein it was held that a tolerance range of 10 times on both sides of the assesses turnover should be applied. The Ld. AR relied on the decision of the Tribunal in the case of Zafin Software Centre of Excellence vs. ACIT in IT(TP)A No. 331/Coch/2017 dated 16/05/2018 for the assessment year 2013-14....
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....enue from software services, this company earned total gross revenue from exports from SEZ/STPI units and sale of licence which distinguishes this company as non comparable. 9.1 We have heard the rival submissions. We find this issue does not arise from the direction of the DRP or the order of the TPO. Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected. 10. The next ground is with regard to determination of ALP in relation to the ITeS segment. The assessee was in appeal against the inclusion of the following comparables: 10.1 Informed Technologies India Ltd. The facts of the issue are that after perusing the Annual Report, the DRP noticed that the company was functionally comparable with the assessee and therefore, rejected the contention of the assessee 10.2 Against this, the assessee is in appeal before us. The Ld. AR submitted that the turnover of the assessee was only 0.07 times that of this company. The Ld. AR relied on the judgment of the Karnataka High Court in the case of Acusis Software India Private Li....
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....tion to exclude this company from the list of comparables. 11.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that the turnover of the assessee was INR 29.78 crores as against that of this company whose turnover was INR Rs. 1.45 crores which is less than 10 times of the assessee and hence, should be excluded from the list of comparables. The Ld. AR relied on the judgment of Karnataka High Court in the case of in the case of Acusis Software India Private Limited vs. ITO in ITA No. 223/2017 wherein it was held that a tolerance range of 10 times on both sides of the assesses turnover should be applied. The Ld. AR submitted that this company was functionally dissimilar as it was engaged in medical transcription and it has significant related party transactions which is 739.62% of operating revenue and hence, it should be excluded from the list of comparables. The Ld. AR relied on the following case laws: 1. M/s. Arctern Consulting Pvt. Ltd. vs. DCIT IT(TP)A No. 352/Bang/2017 which is engaged in medical transcription. 2. Teradata India Private Limited vs. DCIT ITA No.1833/Del/2914 (Delhi Trib.) which is engaged in medical transcriptio....
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.... Pvt. Ltd. (TS-309-ITAT-2016(PUN) wherein it was held that it was not comparable as extraordinary events took place in the said concern. 2. Hyundai Motors India Engineering P. Ltd. vs. ACIT (ITA No. 1743/Hyd/2014) wherein it was held that it was not comparable as extraordinary events took place in the said concern. 3. Cummins Turbo Technologies Limited, United Kingdom - India Branch vs. DCIT ITA No.438/PUN/2015. 4. GTS e-Services Private Limited vs. ITO ITA No.1231/Mum/2017 which is engaged in medical transcription. 12.2 We have heard the rival submissions and perused the material on record. As seen from the paper book pg. nos. 1184, 1193 to 1201, 1225, 1227 and 1233, the company is engaged in medical transcription, medical coding and billing and receivable management services as against the assessee's business of software development and providing information enabled services. No segmental data is available and the company has considerable intangible assets coupled with onsite activity which is 13.79% of the total operating cost. Further, the company had undergone business restructuring during the F.Y. 2009-10 and amalgamation with Asscent Infoserve P....
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....n to grant alternate claim available for the company u/s. 10A. It was also submitted that section 10A of the Act is pari material with section 10B of the Act. For this purpose, the ld. AR relied on the following case laws: 1. M/s. US Technology International Pvt. Ltd. vs. JCIT in ITA No. 133/Coch/2016 dated 19/04/2018. 2. ACIT vs. M/s. QBurst Technologies P. Ltd. (ITA Nos. 172&173/Coch/2015 dated 17/11/2015. 3. Cronos Consulting India (P) ltd. (ITA No. 105/Coch/2014 dated 06/06/2014) 4. ITO vs. Device Driven (India) Pvt. Ltd (ITA No. 282/Coch/2013 dated 29/11/2013). 13.4 Further, the Ld. AR relied on the judgment of the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. in ITA Nos. 47 & 77 of 2015 wherein the alternate claim for exemption u/s. 10A of the Act granted by the Tribunal was upheld. 13.4 We have heard the rival submissions and perused the record. A similar issue was considered by the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. 87 taxmann.com 77 where it was held as follows: "6. We have considered the submissions made. Admittedly, the assessee initially claime....
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.... directed that when the matter is reconsidered by the Tribunal as directed in the judgment above, the Tribunal shall examine the claim of the assessee for the benefit of Section 10A. Therefore, in fact, this order of the Delhi High Court supports the claim of the assessee. In the aforesaid circumstances, we do not find any illegality in the order passed by the Tribunal. Therefore, the questions of law framed have to be answered in favour of the assessee and against revenue. Accordingly, the appeals are dismissed." 13.5 In view of the above judgment of the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. supra, this ground of appeal of the assessee is allowed. 14. The next ground is with regard to treatment of foreign exchange fluctuation gain or loss. 14.1 The facts of the case are that the DRP observed that foreign exchange fluctuation in respect of reinstatement on account of receivables and payables should be considered as operating in nature. The DRP relied on the following judicial pronouncements: i) Curram Software International (P) Ltd. in ITA No. 1280/Bang./2012 in which it was held that foreign exchange gain is to be tr....
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.... case laws: i) Infac India P. Ltd. DCIT in IT(TP)A No. 27/Cheny/2018 dated 05/10/2018 ii) M/s. Ambattur Clothing Ltd. vs. JCIT ITA Nos. 1436 & 1643/mds/2014 and 910/Mds/2015 dated 28/12/2015 (Chennai Trib.) 14.4 The ld. DR relied on the order of the TPO. 14.5 We have heard the rival submissions and perused the material on record. Regarding foreign fluctuation expenses, the Ld. AR strongly relied on the order of the ITAT, Chennai in the case of India Pvt. Ltd. vs. DCIT in IT(TP)A No. 27/Chennai/2018 dated 05/10/2018 wherein it was held as under: "8. We have considered the rival submissions on either side and perused the relevant material available on record. An identical issue was considered by the co-ordinate Bench of this Tribunal after referring to safe Harbour Rules, found that the loss incurred by the assessee in foreign exchange fluctuation due to international transaction does not give any extra benefit to the Associated Enterprise who supplies the material. The loss arose due to exchange difference between the foreign currency and Indian currency. Therefore, the co-ordinate Bench of this Tribunal found that the foreign exchange loss or gain h....
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....ow are concerned is opposed to law on the facts and circumstances of the case. 2. The learned Dispute Resolution Panel-1, Bangalore has erred in allowing working capital adjustment to the assessee. The assessee has negative working capital. Working capital adjustments are primarily given to account for difference in the working capital Inputs. Since the assessee is a captive service provider, its debtors and creditors are Associate Enterprises. The assessee has not also incurred any interest expenditure. Thus, the assessee is not eligible for working capital adjustments, reliance is placed on the decision ITAT, Chennai In the case of Mobis India Pvt Ltd. 3. The ld Dispute Resolution Panel had directed to exclude certain companies in the IT segment as they have substantial onsite revenues. However the DRP has not fixed an upper filter for onsite revenue. The filter for onsite revenue is generally taken as 75%, The ld DRP ought to have noted that even though there are functional differences between onsite development and offshore development of software, the same is not significant to exclude comparables generating onsite revenue. In the decisions of various ITATs i....
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.... directed the Assessing Officer to allow the working capital adjustment based on comparables retained after giving effect to the directions given in the order. 19. Against this, the revenue is in appeal before us. The Ld. DR submitted that working capital adjustment should not have been allowed for the reason that the assessee has negative working capital. It was submitted that working capital adjustments are primarily given to account for difference in the working capital inputs. Since the assessee is a captive service provider, the Ld. DR contended that its debtors and creditors are actually the AEs. The assessee had not also incurred any interest expenditure. Thus, the assessee is not eligible for working capital adjustment. The Ld. DR relied on the decision of the Tribunal in the case of Mobis India Pvt. Ltd. vs. DCIT (61 SOT 40) (Chennai) wherein it was held as follows: "29. Coming to the aspect of adjustment pleaded by the assessee for negative working capital, no doubt, in the case of Demag Cranes & Components (India) (P) Ltd, (supra), it was held that adjustment had to be granted for eliminating material effects, if any, arising out of difference in working capi....
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....in IT(TP)A No. 331/Coch/2017 for the assessment year 2013-14 dated 16/05/2018 wherein it was held as follows: "5.3 We have heard the rival submissions and perused the record. The Ld. AR relied on the decision of the ITAT, Chennai Bench in the case of Foxtex Services India (P) Ltd. vs. ACIT in 74 taxman.com 216 where in it was held as under: "7. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee objected to the adjustment made by the Transfer Pricing Officer. With regard to working capital adjustment, the assessee claims that the difference in working capital between the assessee and the comparable companies would materially affect the profit determined. Therefore, certain adjustment needs to be made to bring them on equal footing. The assessee also brought to the notice of the DRP that the working capital adjustment, which was to ensure the profit derived by the comparable companies, can be compared with the profit of the assessee. This Tribunal is of the considered opinion that the capital employed by the assessee, including the working capital, and that of comparable companies needs t....
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.... tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services are located. Hence, the companies in which more than 75 percent of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO." 21.3 According to the Ld. DR, in this case the taxpayer was engaged in the business of providing software development services to its AE and was captive unit operating on cost plus basis. The Ld. DR submitted that the TPO rejected the comparables selected by the taxpayer for the reason that they do not satisfy the onsite revenue filter i.e., if revenues of comparable companies from rendering onsite softwar....
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....sulting, implementation and post production services. It was also submitted that the company had incurred the expenses o the extent of 34.49% of the total revenue in foreign currency which include 38.59 crores in the branch offices outside India. It was also submitted that during the year Aztecsoft Limited had been amalgamated with effect from 1-4-2009, all the above facts made the company as not comparable. 23. Zylog System Ltd. On this issue, the DRP examined the Annual Report and found that out of the total revenue of Rs. 778.12 crores, the on-site revenue was Rs. 22.58 crores which made it clear that the above company was predominantly engaged in on-site development of software and therefore, cannot be retained as comparable. However, on the same rationale, the following companies also need to be excluded from the comparables:- (i) In the case of Akshay Software Technologies Ltd., on the perusal of the Annual Report, the DRP found that out of the total operating expenses of Rs. 11.33. crores incurred during the year, the expenses in foreign currency were incurred to the extent of Rs. 9.57 crores which established that the company was predominantly engaged in develop....
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....t this company cannot be retained as comparable and directed the Assessing Officer to exclude the company from the list of comparables. 24.2 Against this, the Revenue is in appeal before us. The Ld. DR submitted that suitability of FCS Software Solutions Ltd., as a comparable was upheld in the case of Navisite India Ltd. vs. ITO (TS-193 ITAT 2013 (DEL). 24.3 The Ld. AR submitted that the company was engaged in 3 segments, i.e., IT Consulting, Education and infrastructure, IT Consultancy Division provided application maintenance for which no segmental information was available. It was also submitted that the company was predominantly engaged in onsite development of software. It was also engaged in R&D and had significant intangibles. Further, the company had undergone restructuring during the year. The Ld. AR relied on the decision of the Tribunal in the case of DCIT vs. Barclays Technology Centre India Pvt. Ltd. in ITA No. 125/PUN/2015 dated 29/09/2017 on the reason that it was functionally different and no segmental information was available. He also relied on TIBCO Software India Pvt. Ltd. vs. DCIT. The DRP observed that no segmental information was available with r....
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....15 dated 16/01/2017 and ITO vs. M/s. CSR India Pvt. Ltd. in IT(TP)A Nos.256 & 506/Bang/2015 dated 24/01/2018. 25.3 We have heard the rival submissions and perused the material on record. We do not find any infirmity in the order of the CIT(A) in holding that that this company cannot be retained as comparable since it was engaged in software products and the company had inventories amounting to Rs. 1.66 crores which indicated that the company is not a purely software development company. Further, the company had undergone restructuring during the year and it was engaged in R&D and technology absorption and had significant intangibles. By placing reliance on the decisions of the Tribunal in the case of Cerner Healthcare Solutions P. Ltd. vs. ITO in IT(TP)A Nos.44 & 69/Bang/2015 dated 16/01/2017 (Bang.) and ITO vs. M/s. CSR India Pvt. Ltd. in IT(TP)A Nos.256 & 506/Bang/2015 dated 24/01/2018 (Bang), we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the Revenue is dismissed. 26. Eclerx Services Ltd. On this issue, on perusal of the annual report, the DRP noticed that the company is engaged in the provision of IT enab....
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.... form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise. The KPO services include all kinds of research and information gathering. Thus it can be seen that even though both BPO and KPO are offering information technology based services, the skill and expertise and may be even the tools required are different which may result in different economic results of both the segments. Thus in such circumstances, we are of the opinion that they cannot be compared with each other and have to be excluded from the list of comparables". (Emphasis supplied) 26.2 The DRP relied on the decision of the Tribunal in the case of Symphony Marketing Solutions India Private Limited Vs. ITO [1TA No. 1316/Bang/2012]: "(5) Eclerx Services Ltd. 20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO.....................This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- ....