TaxTMI 
TaxTMI 
2020 (12) TMI 928
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....ection 92CA(3) r.w.s. 92C(3) of the Act. 1.2 The learned CIT(A) grossly erred, in facts and In law,: 1.2.1 in upholding Ld. TPO/AO's action of rejecting following companies taken by the appellant as comparables: i. Akshay Software Technologies Ltd. ii. Cat Technologies Ltd. iii. C G-V A K Software & Exports Ltd. iv. Cherrytec Intelisolve Ltd. v. Infotech Enterprises Information Technology Services Pvt. Ltd. vi. NUCSOFT Ltd. vii. Winfoware Technologies Ltd. 1.2.2 in computing export turnover ratio of Infotech Enterprises Information Technology Services Pvt. Ltd at 66.36% on the basis of financial data of succeeding financial year i.e. FY 2012-13 instead of computing the same on the basis of current year's financial data which come to 95.1% and thereby rejecting it as comparable on the ground of incorrect export turnover ratio. 1.2.3 in upholding Ld. TPO/AO's action of selecting following as comparable companies or company's segment which are functionally or otherwise not comparable to the appellant. i. VAMA Industries Ltd. (Segment) ii. Cybermate Infotek Ltd. iii. Infobeans Systems India Pvt. Ltd. iv. Cybercom Datamatics Information Solu....
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....e dated 06.01.2016, are comparable to the appellant and shall be taken as comparable in case the Ld. TPO upon their examination concludes that all or some of the aforesaid companies are not comparable to the appellant. i. Ace Software Exports Ltd. ii. C T I L Ltd. iii. Celstream Technoloqies Pvt. Ltd. iv. F C S Software Solutions Ltd. v. Goldstone Technologies Ltd. vi. Kals Information Systems Ltd. (Segmental) vii. R Systems International Ltd (Segmental) viii. S Q S India 8 F S I Ltd. (Formerly known as Thinksoft Global Services Ltd.) ix. Silverline Technologies Ltd. 2. Ground no. 2 : Disallowance of leased line /data link charges of Rs. 2,77,754/- under section 40 (a)(ia) of the Act on account of non deduction of tax at source 2.1. The learned CIT(A) grossly erred, in facts and in law, in holding the treatment of the leased line/ internet service charges paid to service providers as 'royalty'. 2.2. The learned CIT(A) grossly erred, in facts and in law, in upholding the disallowance of leased line /internet service charges under section 40 (a)(ia) of the Act on account of non deduction of tax at source under section 194J of the Act. Ground no. 3 : ....
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....on made by the Appellant is factually incorrect. The Appellant vide Annexure # D to its reply dated 14.01.2016 to show cause notice which is placed as Annexure # 5 in PB has brought out the fact that this company did not pass R&D filter applied by the Ld. TPO. As evident from page # 22 (relevant extract is reproduced below) of AR, this company has spent more than 3% (3.67% to be precise) on R&D. (Rs. in lakhs) Expenditure on R & D 2011-12 2010-11 Capital 51.39 Nil Recurring Nil 43.95 Total 51.39 43.95 Total R & D expenditure as % of total turnover 3.67% 4.36% Thus this company has spent more than the 3% threshold set by the Ld. TPO for this filter and thus it is not comparable as per the Ld. TPO's own standard. Further, the earning from export of this company is Rs. 3,28,66,174 (relevant 'extract is reproduced below) as shown on page # 51 of AR whereas the total revenue is Rs. 14,01,76,936 as evident from page # 42 AR. Thus, the export earning is 23.41 % only. Note No: 33 Earning in foreign currency Particulars As at 31.03.2012 (Rs) As at 31.03.2011 (Rs) From Engineering Services 3,22,64,105 2,88,64,954 From Software Development ....
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....ering services are not at all software development services. Thus, this segment of the company is mainly into design engineering services which are functionally different than software development service business. Thus, this segment of Varna Industries Ltd. is not functionally comparable to software development service business of the Appellant. 7. The total turnover of the software development service which may be compared with Appellant's business is meagre Rs. 6,02,069/-and this amount is included in the engineering services. There is no further details about profitability of this small portion of revenue from software services. 8. Even if the income from engineering service is included, the total income from software service shown is Rs. 3,28,66,174/- which is much below the threshold limit of Rs. 5 crores the Appellant has applied to select the comparable companies in its TPSR. Therefore, even on terms of level of operation also, this segment of the company is not comparable to the Appellant. 9. The Ld. TPO, in A Y 2010Q11, himself has rejected this company on the ground of export filter. It is strange that in spite of this company not passing export filter in the c....
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....cates that it is a software product company. It is not engaged in man power driven software development services business, wherein generally ratio of employee cost to total cost is generally higher than 50%. In case of assessee, this ratio is 74.95%. 4. The view that it is a software product company is also corroborated and fortified on perusal of composition of fixed asset of the company. On perusal of fixed asset schedule (i.e. Note No.10&11 on Pg 36 of AR), a copy of which is enclosed as Sub-Annexure #D1, it can be seen that company has intangible asset of Rs. 11,17,77,945 and web development expense of (capitalised) Rs. 11,95,44,216 as on 31/03/2012, totaling to Rs. 23,13,22,161/- . Thus, intangible assets constitute 73% of total gross block of fixed assets (i.e. Rs. 23.13 Cr / Rs. 31.68 Cr. Such a high level of intangible assets can be found only in a software product company. In addition to aforesaid, due to such high intangible assets, the asset base of this company is quite different from the assets of the assessee. Thus, on functions & assets, this company is not at all comparable to assessee." 8. The assessee has further contended as follows : "1. Before making our s....
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....pment services business, wherein generally ratio of employee cost to total cost is generally higher than 50%. In case of Appellant. this ratio is 74.95%. The Ld. TPO did not take cognizance of this submission of the Appellant while passing his order. iv. The view that it is a software product company is also corroborated and fortified on perusal of composition of fixed asset of the company. On perusal of fixed asset schedule (i.e. Note No.10 & 11 on page # 36 of AR), a copy of which is enclosed as Sub-Annexure # D1, of reply to show cause placed as Annexure # 5 of PB, it can be seen that company has intangible asset of Rs. 11,17,77,945 and web development expense of (capitalised) Rs. 11,95,44,216 as on 31/0312012, totalling to Rs. 23,13,22,161/-. Thus, intangible assets constitute 73% of total gross block of fixed assets (i.e, Rs. 23.13 Cr / Rs. 31.68 Cr.) Such a high level of intangible assets can be found only in a software product company. In addition to aforesaid, due to such high intangible assets, the asset base of this company is quite different from the assets of the Appellant. Thus, on functions & assets, this company is not at all comparable to Appellant As evident, the....
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....ew of this extra-ordinary and peculiar event, the financial statement and profit margin of the company is not comparable to that of the assessee. Therefore, this comparable company deserves to be excluded solely on this ground. The assessee has further submitted as follows : "1. The Ld. TPO is factually erred in stating that the date of the merger is 26/09/2012. The date of merger is 1st April 2011 as evident from page # 3 of AR and the date mentioned by the Ld.TPO is the date high court order approving the merger as evident from page # 24 of AR. 2. It is not clear how the Ld. TPO came to conclusion that it is a technical merger whereas it is a case of demerger as evident from the submission made in the ensuing paragraphs. 3. Software business of Seed Enterprises Pvt. Ltd is demerged and transferred to Infobeans Systems India Pvt. Ltd. This arrangement has been given effect to in the financial statement. In view of this extra ordinary and peculiar event, the financial statement and profit margin of the company is not comparable to that of assessee. Therefore, this comparable deserves to be excluded solely on this ground. This fact is evident from extract reproduced below from....
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....ordinary event. 5. Based on the above contentions, it is submitted to exclude this company from the list of comparable companies. 6. Similarly, the Ld. TPO is placing reliance on the case of TCL Holdings Pvt. Ltd. for the proposition that company cannot be rejected as comparable merely on the ground that they were loss making and that it was necessary to examine if the loss had occurred due to extraordinary factors which have affected the comparability of the transactions of the comparable company. In this context, it is submitted that the comparable company under consideration is not loss making yet the Appellant also agrees on this proposition that merely losses suffered by the company does not call for rejection of comparable. However, as laid down by the Hon'ble IT AT in the case cited by the Ld. TPO , examination needs to conduct for finding whether the loss is suffered due to extraordinary factors or in the normal course of business in order to select the said company as comparable. What it essentially mean that even if the company is selected as comparable despite extra ordinary event, further examination is called for to find if the abnormality in profitability is o....
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....suance to the Scheme of Arrangement as approved by the Hon'ble Madhya Pradesh High Court dated 26/09/2012 vide Appointed date 1st April 2011. Accordingly these are the Revised financial statements including the Financial Statements of the said "Software Business" of Demerged Company." 13. That further, in the Auditors Report at Page 739 in the Paper Book at Clause VIII, it is written as follows : "VIII. A scheme of Arrangement ("Scheme") between (he Company, InfoBeans Systems India Pvt. ltd. Limited ("the Demerged Company", currently known as Seed Enterprises Pvt. Co.), InfoBeans Software Solutions Private Limited ("Resulting Company, currently known as InfoBeans Systems India Pvt. Ltd.) and their respective shareholders under sections 391 to 394 read with section 100 to 103 of the Act was sanctioned by the Hon'ble High Court of Judicature at Madhya Pradesh on 26th September 2012, a certified copy whereof was issued on 5th October, 2012.The Scheme had become effective from 26th September 2012 ("Effective Date") (with April 1, 2011 as appointed date) on filling the certified copy of the High Court Order with the Registrar of Companies. Under the Scheme, the Resulting Comp....
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.... different stand following the principle of 'theory of estoppels'. 4. It is not clear why the Ld. TPO is talking about 'theory of estoppel', TNMM, OECD guidelines etc. at this stage when the Appellant has not at all contended on any of these grounds in its reply to show cause notice or otherwise. 5. The Appellant has not challenged the export filter. 6. The Appellant never sought working capital adjustment in its TPSR or during transfer pricing proceedings and the Ld. TPO never granted working capital adjustment. Thus, the Ld. TPO is factually incorrect in stating that the Appellant has been granted working capital adjustment. 7. This company is not functionally comparable to Appellant owing to following reasons: i. This company is mainly in the business of providing technical and consulting services in the field of Information Technology and connectivity. It is not engaged in-the business of software development services. The aforesaid is evident from perusal of company's website (www.cybercom.com). The relevant extract from company's website on its business activity are enclosed herewith as Sub-Annexure # D2 of reply to show cause placed as Annex....
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....ompanies shall be excluded from the final list of comparables in respect of the assessee, therefore, this matter is remitted back to the file of AO/TPO directing him to exclude the aforesaid companies and freshly determine the assessee's Arms Length Price (A.L.P.). These grounds are allowed for statistical purposes. 18. The next issue for adjudication in this appeal is with regard to disallowance u/s 40(a)(ia) of the Act. 19. That at the assessment stage on verification of the expenses which were found by the AO/TPO that the assessee has incurred an amount of Rs. 11,33,431/- as leased line / date link charges. It was further revealed that the assessee has not deducted TDS of Rs. 2,77,754/- out of the total amount of Rs. 11,33,431/-. It was the submission of the assessee that Internet charges are not covered under Sec.194J of the Act. The assessee submitted that amount paid to internet companies is neither any Technical service covered under Sec.9(1)(vii) nor any Professional services covered u/s 194J of the Act directly. The said payments are also not 'Royalty' as per section 9(1)(vi) of the Act. The assessee further relied on the decision of Hon'ble Supreme Court in the case of ....
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.... assessee to SSA and as held by Ahmedabad Bench of this Tribunal in the case of Sterling Abrasives Ltd. by its order dated 23.12.2010 cited by the Ld. Counsel for the assessee, the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. In the said case, Explanation to sec.9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976 and it was held by the Tribunal that it was impossible for the assessee to deduct tax in the financial year 2003-04 when as per the relevant legal position prevalent in the financial year 2003-04, the obligation to deduct tax was not on the assessee. The Tribunal based its decision on a legal Maxim lex non cogit ad impossiblia meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform and relied on the decision of Hon'ble Supreme Court in the case of Krishna Swamy S. PD and Another vs. Union of India and others 281 ITR 305 wherein the said legal Maxim was accepted by the Hon'ble apex court. 26. In view of the above discussion, we are of the view that the amount in question paid by the ass....