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TaxTMI 
TaxTMI 
TaxTMI 
2020 (9) TMI 1093
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....and M/s. R.S. Software (India) Ltd., from the list of comparables, holding them to be functionally dissimilar as they are having significant onsite revenues, thereby 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. Also, the nature of activity, ie., software development remains the same, irrespective of the company engaged in providing onsite or offshore services. 3. The DRP erred in directing exclusion of M/s. R.S. Software Pvt. Ltd., M/s. Mindtree Ltd., and M/s. Acropetal Technologies 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. 4. The DRP erred in directing the AO to exclude M/s. Acropetal Technologies Ltd., from the list of final comparables also for the reason that clear segmental information of the employee cost and export earning filter was not available, without appreciating that proper segmental information was available on Prowess database as well as audited financia....
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....ng the position of law that there could be differences between the enterprises compared under TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises. 11. The DRP erred in directing the AO/TPO to exclude M/s. Evoke Technologies Ltd., from the list of comparables, holding it to be functionally uncomparable due to the peculiar economic circumstances without appreciating that the expenditure incurred is a normal phenomenon and a company cannot be excluded merely on abnormal profit margins. 12. The DRP erred in directing the AO/TPO to exclude M/s. R.S. Software (India) Ltd., from the list of comparables merely to maintain consistency, even in the absence of objection with respect to inclusion of the said comparables in the list. 13. The DRP erred in directing the AO/TPO to consider the foreign exchange fluctuation to be operating in nature, without appreciating that the Rule 10B(2)(d) stipulates that the net profit margin realized by the assessee in the international transaction shall alone be computed for comparability under TNMM. ITES Segment : 14. The DRP erred in directing the AO/TPO to exclude M/s. Acrope....
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....l for the assessee prayed that ground No.4(a)(b)(d)(e) & (i) in the main grounds of appeal and ground No.4(j) and 7.1 raised in the form of additional grounds alone need to be adjudicated. The relevant grounds of ground No.4 and the additional grounds 4(j) and 7.1 read as follows:- "4. Determination of arm's length price of the Appellant's international transaction of provision of software development services: (a) That, in view of the high turnovers of L&T Infotech Ltd., Persistent Systems Ltd., Sasken Communications Technologies Ltd., and Tata Elxsi Ltd., indicating, inter alia, high ownership of intangibles and significantly high brand value, they ought to stand excluded from the final list of comparable companies in respect of the Appellant's international transaction of provision of software development services. (b) That, without prejudice to the above, Tata Elxsi Ltd. ought to stand excluded from the final list of comparable companies as it is engaged in the development of niche products and the provision of product designing services which are entirely different from the services provided by the Appellant and is, hence, functionally dissimilar to the Appe....
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....ted for adjudication. 5. We shall first identify the issues to be decided in these cross appeals. The issues that arise in these cross appeals are with regard to determination of Arm's Length Price (ALP) in respect of two international transactions between the Assessee and its Associated Enterprise (AE) under the provisions of Sec.92 of the Income Tax Act, 1961 (Act) viz., (i) International Transaction of rendering of Software Development Services (SWD services) by the Assessee to its AE and (ii) rendering of Information technology enabled services (ITeS) by the Assessee to its AE. As far as the appeal of the Revenue is concerned, Gr.No.1, 18 & 19 are general grounds and need no specific adjudication. As far as Grounds 2 to 12 raised by the revenue are concerned, they relate to correctness of exclusion of comparable companies selected by the Transfer Pricing Officer (TPO) in his order u/s.92CA of the Act by the Dispute Resolution Panel (DRP) in its directions, in the SWD services segment. Gr.No.13 raised by the revenue relates to the action of the DRP in directing the TPO/AO to consider foreign exchange gain as part of operating profits of the Assessee for comparing the Assessee's....
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.... turnover. 10. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 05.11.2015, partly allowed the objections raised by the Assessee. 11. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 16.12.2015 in which the total TP adjustment was reworked to Rs. 1,38,55,462/ for the two segments put together. Also, the DRP having accepted the contention of the Assessee that the amounts if any reduced from the export turnover in computing the deduction under Section 10A should also be correspondingly reduced from the total turnover, there was no reduction in the deduction claimed under Section 10A. 12. To the extent the TP adjustment survives post the DRP's directions, the Assessee has filed the above appeal and to the extent the Revenue is aggrieved by the DRP's directions allowing the Assessee's objections, it has filed the above appeal before this Hon'ble Tribunal. DETAILS OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS Particulars Amount in Rs. Outcome of TP Order Receipt for provision of ITe services 6,96,70,913/- Adjustment of Rs. 75,86,907/- Receipt of provision of SWD services 17,32,18,123/- Adjustm....
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....Sasken Communication Technologies Ltd. 22.79 19. Saven Technologies Ltd. 17.43 20. Thinksoft Global Services Ltd. 11.54 21. Thirdware Solutions Ltd. 21.75 22. Zylog Systems Ltd. 20.23 Arithmetical Mean 13.60 NOTE: Out of the 22 comparables selected by the Assessee, the TPO accepted the 6 highlighted above, viz. Larsen and Toubro Infotech Ltd., Evoke Technologies Pvt. Ltd., Persistent Systems Ltd., RS Software (India) Ltd., Mindtree Ltd. (at segment level) and Sasken Communication Technologies Ltd., and rejected the other 16. Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the Company Mark-up on Total Costs (WC-unadj) (in %) Mark-up on Total Costs (WC - adj) (in %) 1 Acropetal Technologies Ltd. (seg) 31.98 31.71 2 e-Zest Solutions Ltd. 21.03 21.96 3 E-Infochips Ltd. 56.44 59.21 4 Evoke Technologies Pvt. Ltd. 8.11 10.97 5 ICRA Techno Analytics Ltd. 24.83 25.84 6 Infosys Ltd. 43.39 46.51 7 Larsen & Toubro Infotech Ltd. 19.83 22.90 8 Mindtree Ltd. (seg) 10.66 12.22 9 Persistent Systems & Solutions Ltd. 22.12 24.20 10 Persistent Systems Ltd. 22.84 24.63 11 R S Software (India) Ltd. 16.37 ....
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....y 1 e-Zest Solutions Limited 2 Persistent Systems & Solutions Ltd. 3 Persistent Systems Ltd. 4 Sasken Communication Technologies Ltd. 5 Tata Elxsi Ltd. 6 L & T Infotech Limited 16. Pursuant to the directions of the DRP, the TP adjustment as regards the international transaction of provision of SWD services was reworked to Rs. 1,38,55,462/-. 17. Aggrieved by the relief allowed by the DRP, the Revenue is in appeal before the Tribunal. Aggrieved by the order of DRP not accepting some of the contentions raised by the Assessee, the Assessee is in appeal before the Tribunal. 18. As far as the appeal of the Revenue is concerned, the grounds in Revenue's appeal are as follows:- (i) That the DRP erred in suo moto applying the onsite revenue filter and in consequently excluding RS Software Pvt. Ltd. Mindtree Ltd. and Acropetal Technologies Ltd. (Ground Nos. 2 and 3) (ii) That the DRP erred in directing exclusion of Acropetal Technologies Ltd. For the reason that segmental information regarding employee cost and export earnings were not available. (Ground No. 4) (iii) That the DRP erred in directing exclusion of Mindtree Ltd. for the reason that the company is functiona....
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....lusion of these companies from the final list of comparable companies chosen by the TPO, by the DRP was arbitrary because the TPO did not apply any filter as regards onsite revenues nor did the Assessee seek to apply these filters either before TPO or DRP. It was also rightly contended that the filter was not applied by defining or setting out a particular threshold or percentage at which it was applied with reference to the actual figures of onsite revenues in these companies. We find that out of the aforesaid 3 companies the following two companies were rejected on application of the onsite development of software filter alone, viz., RS Software (India) Ltd. and Mindtree Ltd. We are of the view that for the reasons given above, these two companies have to be included in the list of comparables and therefore allow in part Gr.No.2 & 3 and allow Gr.No.5. In this regard we also note that these two companies were selected by the Assessee in its TP study and subsequently included by the TPO in the final list of comparables. They pass all the filters applied by the TPO. In fact, the Assessee is also seeking inclusion of RS Software (India) Ltd. in the list of comparables vide Gr.No.4(e)....
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....aras 16.1 to 16.4 at pages 1606-1607]; Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 15 at page 1744]; Electronic Imaging India P. Ltd v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib) para 8 at pages 1725-1726] and Commscope Networks (I) Pvt. Ltd. v. ITO [TS-161-ITAT-2017(Bang)-TP at para 9 on pages 1639-1640] held that this company should be excluded from the list of comparable companies in the case of companies engaged in rendering SWD services such as the Assessee. Thus, Gr.No.4 is dismissed and Gr.lNo.2 & 3 are also partly dismissed to the extent of exclusion of Acropetal. 21. As far as Gr.No.6 raised by the Revenue is concerned, the revenue in this ground has challenged exclusion of E-Infochips Ltd. on the ground that it failed the software service income filter at 75%. At the outset, the 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) there is presence of significant inventory and (iii) it failed the software service income filter at 75% (Pages 17-18 of the DRP's directions). The Revenue, in its a....
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....is ground has challenged the action of the DRP in excluding ICRA Techno Analytics Ltd. This company was rejected by the DRP for the reason that the entire revenue of the company has been reported under one segment, and in the absence of segmental information regarding the same, the company could not be held as a comparable to the Assessee. At the outset it is submitted that the action of DRP in rejecting this company is right in law and does not require any interference by this Hon'ble Tribunal. We find that this company is engaged in diversified activities of software development and consultancy, licensing and sub-licensing, annual maintenance for software support, web development & hosting and revenue from all the activities are reported under one segment, without any segmental information regarding the same made available. Therefore, in the absence of segmental information, it cannot be ascertained whether the company passes all the filters applied by the TPO and therefore ought to stand excluded from the final list of comparables. We also find that this Tribunal in Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A Nos. 17 & 39/Bang/2016] at paras 17.1 to 17.2 at pages 1607-16....
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.... 25. As far as Gr.No.10 is concerned, it is a general ground without reference to any instance where there was no material difference on price or cost charged or profits and hence rejected. 26. As far as Ground Nos. 11 and 12 raised by the Revenue is concerned, the revenue in these grounds seeking the inclusion of RS Software (India) Ltd. and Evoke Technologies Ltd. in the final list of comparables. Submissions as regards RS Software (India) Ltd. As far as RS Software (India) Ltd., is concerned, this company has already been included in the list of comparable companies and therefore Gr.No.12 is allowed. As far as Gr.No.11 is concerned, we find that the company Evoke Technologies Ltd., was selected by the Assessee in its TP study and was subsequently accepted by the TPO as having passed all the filters applied by him (page No. 7 of the TPO's order). In the proceedings before the DRP, the Assessee did not object to its inclusion in the list of comparables. However, despite the above, the DRP on its own directed its exclusion solely on the ground that its margin was held to be abnormally low at 8.11% despite its revenues having increased 33% from the preceding year. The DRP was of ....
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....f the Assessee in its appeal with regard to the SWD services segment. Ground No. 4(a) of the Assessee's appeal the Assessee, is seeking the exclusion of Sasken Communication Technologies Ltd. from the list of comparables. 29. Sasken Communication Technologies Ltd. - As far as exclusion of Sasken Communication Technologies Ltd. ('Sasken' for short) is concerned, the reasons for exclusion of this company by the DRP was that this company is engaged in the development of software products, as it has inventories, intangible assets and also because it has high expenditure on R&D, and is therefore functionally not comparable to the Assessee. The first aspect that it is to be noticed that this company was selected as comparable company by the Assessee in its TP study and did not challenged the inclusion of this company before the DRP. For this reason alone, the Assessee cannot be denied the right to seek its exclusion before the Tribunal and in this regard the learned counsel for Assessee has rightly placed reliance on the decision of the Special Bench of the Hon'ble Tribunal in the case of DCIT v. Quark Systems (P.) Ltd. ([2010] 38 SOT 307 (CHD.) (SB)) for the proposition that the Assess....
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....ng the expenses 'cost to services' being made available, it was not possible to ascertain if the company was engaged in sub-contracting its software development services. After hearing the rival submissions we find that this company is engaged in the provision of routine software development services, and therefore, the major portion of expenses under the head 'cost of services' could only relate to employee cost. The ratio of cost of services to total sales amounts to 77.65% and therefore it could be held that the company passes the employee cost filter. Detailed submissions in this regard are made at pages 231-233 of the paperbook. This company has been consistently included in the final list of comparables in case of assessees placed similarly that of the Assessee herein. Further, the DRP's observation that the company could be engaged in sub-contracting of services for the reason that expenses have been debited under the head 'cost to services' is without any basis more so, when there is no filter regarding sub-contracting of services applied by the TPO or the DRP. We also find that in the decision of this Tribunal in the cases of Cisco Systems (India) (P.) Ltd. v. DCIT ([2014....
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.... functionally not comparable with a company rendering SWD services such as the Assessee. The Assessee seeks to rely on the decision of the Special Bench ITAT Chandigarh in the case of DCIT Vs. Quarks Systems Pvt. Ltd., 42 DTR 414 (Chandigarh-SB) wherein it was held that there cannot be estoppel against law and that non-comparable companies even if selected by the assessee in TP study can be sought to be excluded by the assessee based on functional comparability or other valid reasons. We therefore admit the relevant ground of appeal seeking exclusion of these two companies. Since the TPO/AO did not have opportunity to decide the issue, we are of the view that it would be just and appropriate to remand the issue to the TPO for deciding the correctness of choosing this company as a comparable company. The TPO/AO shall afford opportunity of being heard to the Assessee. 35. As far as the comparable company Sasken Communications Ltd., is concerned, while dealing with Gr.No.4(a) raised by the Assessee, we have already excluded this company from the list of comparable companies and hence no separate adjudication on this company is required on the basis of Gr.No.4(j) raised by the Assesse....
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....fficer (TPO) to whom the determination of ALP was referred by the AO, accepted 4 out of the 12 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 6 other companies as comparable companies with the Assessee. Thus a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows: Net mark-up on cost earned by the assessee as computed by the TPO in the TP Order: Operating Income Rs. 6,96,70,912/- Operating Cost Rs. 6,07,56,385/- Operating Profit (Op. Income - Total. Cost) Rs. 89,14,527/- Operating/Net mark-up (OP/TC) 14.67% Comparables selected by assessee and their arithmetic mean: Sl. No. Name of the company Weighted Average (%) 1 Aditya Birla Minacs Worldwide Ltd. 0.30 2 CG-VAK Software & Exports Ltd. -2.39 3 Caliber Point Business Solutions Ltd. 18.09 4 Cepha Imaging Pvt. Ltd. 1.94 5 Cosmic Global Ltd. 23.83 6 Fortune Infotech Ltd. 9.95 7 Informed Technologies India Ltd. 19.33 8 Infosys BPO Ltd. 22.53 9 Jeevan Softe....
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....exclusion by the TPO. List of Comparables post the DRP's Directions As per the DRP's directions, the final list of comparables was as follows: SI. No. Name of the Company 1 e4e Healtchcare Business Services Pvt. Ltd. 2 Infosys BPO Ltd. 3 Mindtree Ltd. 4 Jindal Intellicom Pvt. Ltd. 40. Pursuant to the directions of the DRP, as the arithmetical mean of the working capital adjusted margins of the above comparables was within the +/-5% range of the Assessee's NCP mark-up for provision of ITE services, the TP adjustment made towards the said international transaction was deleted in the final assessment order. Aggrieved, the revenue is in appeal before the Tribunal. Briefly, the grounds in the Revenue's appeal are as follows:- ● That the DRP erred in holding that Acropetal Technologies Ltd., Jeevan Scientific Technology Ltd., Accentia Technologies Ltd., iGate Global Solutions Ltd. and ICRA Online Ltd. cannot be taken as a comparable to the Assessee as segmental information of the companies were not available (Ground No. 14) ● That the DRP erred in directing exclusion of Cosmic Global Ltd. for the reason that it was functionally incomparable to the Assessee. (....
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....) dated 26.09.2000. If the BPO segment is considered, the company fails to satisfy the TPO's own filter of service revenue from the relevant segment having to be in excess of Rs. 1 crore as the revenue from the BPO segment of the said company is Rs. 79 lakhs only. The company is therefore not comparable to the Assessee. This Tribunal in the case of Swiss Re Shared services (India) Pvt. Ltd. v. ACIT (order dated 08.07.2016 in IT(TP)A No. 380/Bang/2016) directed the TPO to verify as to whether the TPO's filter of Sales > 1 Crore is satisfied by this company. In the present case, as can be seen from the annual report of the company the sale of the company in respect of the BPO segment amounts to only 79 lakhs, and therefore it fails the TPO's filter. As far as exclusion of Accentia Technologies Ltd., is concerned, we find that this company was excluded by the DRP for the reason that the details regarding its diverse functions were reported under one segment, without segmental details regarding the same being made available. In the absence of segmental details being made available, the comparability of the company with that of the assessee cannot be determined. In any event, Accentia i....
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....e Ltd., is concerned, the DRP excluded this company for the reason that the details regarding its diverse functions are reported under one segment without segmental details regarding the same being made available. Therefore, the comparability of the company cannot be determined. In any event, this company is functionally dissimilar for the reason that the outsourced services segment of the company is engaged in the provision of high end consultancy services which cannot be compared to the assessee who is into provision of low end IT enabled services which are routine in nature. Further, the company fails the TPO's own filter of export turnover in excess of 75% of total sales as the export turnover of the company amount to only 61.88% of its sales. Therefore, the company cannot be held as a comparable to the assessee. 42. As far as Gr.No.15 raised by the revenue is concerned, the Revenue is seeking the inclusion of Cosmic Global Ltd. in the final list of comparables. The above comparable was selected by the Assessee in its TP Study and by the TPO and thus included by him in the list of comparables. In the proceedings before the DRP, the Assessee did not object to its inclusion in ....
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....s incurred in foreign currency and communication charges only from export turnover. In its return of income for AY 2011-12, the Assessee claimed a deduction under Section 10A of the Act of Rs. 3,72,68,882/-, being the profits of business of its unit eligible for deduction under Section 10A of the Act. In computing the said deduction, the Assessee had not reduced telecommunication charges to the extent of Rs. 13,70,475/- from its export turnover as the said charges were not attributable to the delivery of computer software outside India. Further, the Assessee had also not reduced travel expenses to the extent of Rs. 8,35,695/- incurred in foreign currency from its export turnover as it was not engaged in the provision of technical services outside India which alone would have warranted reduction of such charges from its export turnover. The AO, however, proceeded to re-compute the deduction by reducing the telecommunication charges and travel expenses incurred in foreign currency from only its export turnover without making a corresponding reduction in its total turnover. Thereby, the AO made a disallowance of Rs. 22,06,170/- from the deduction claimed under Section 10A. 47. Althou....