TaxTMI 
TaxTMI 
2021 (4) TMI 1080
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....order passed by the Assistant Commissioner of Income-tax, Range 11, Bangalore [hereinafter referred to as the 'learned AO'] under section 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - I, (hereinafter referred to as the 'Hon'ble DRP') on the following grounds, each of which are without prejudice to one another. On the facts and in the circumstances of the case and in law: Original grounds: A. Grounds of appeal relating to corporate tax matters 1.The learned AO has erred in law and in fact, by not considering the plea of the Appellant that communication expenses (in the nature of internet charges) should not be reduced from export turnover for the purpose of computing deduction under Section 10A and 1OB of the Act, respectively 2.The learned AO has erred in law and in facts by disregarding the methodology adopted by Appellant in allocating the common/ indirect costs among its various business segments; 3.The learned DRP/ AO have erred in law and in fact by withdrawing the deduction claimed by the Assessee in th....
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....tio of research and development expenses to sales less than 3% considered by the Appellant for the purpose of selecting the companies which do not own intangibles and are pure service providers; 12. The learned TPO / learned AO have erred in law and in facts, by rejecting the filter adopted by the Appellant for selecting companies having a ratio of sum of advertising, marketing and distribution expenses to sales less than 3%; Modified grounds: 13. The learned TPO / learned AO have erred in law and in facts, by accepting/rejecting following companies based on unreasonable comparability criteria: 13.1. For software development services segment, Persistent Systems Limited should not be selected as comparable to the Appellant' 13.2. Following companies should be selected as comparable to the Appellant in relation to the software development services segment: (a) Akshay Software Technologies Limited (b) Goldstone Technologies Limited (c) LGS Global Limited (d) Reliance Infosolutions Private Limited (e) Crazy Infotech Limited (f) Teledata Marine Solutions Limited (g) Cat Technologies Limited (h) CG-Vak Software & Exports Limited (i) Cigniti Technologies Limite....
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....st 12.88% computed by the Appellant. 15F. The learned TPO/AO have erred in law and in facts, by not making suitable working capital adjustment while computing operating margins for the Appellant vis-a-vis the com parables. Original Grounds: c. Grounds of appeal relating to other matters 16.The learned AO has erred in law and in facts by providing credit to the taxes deducted at source only to the extent of INR 8,01,53,278 as against INR 8,35,65,585 claimed by the Appellant in its return of income and as allowed by the learned AO while passing the draft assessment order. 17.The learned AO has erred, in law and in facts, by considering an amount of INR 34,36,61,090 as refund issued under section 143(1) of the Act in computing the demand coupled with erroneously levying an interest amounting to INR 7,38,87,135 under section 234D of the Act. 18. The learned AO has erred in law by levying interest of INR 27,34,46,800 under section 234B of the Act, which is on account of the adjustments proposed to the returned income. 3. The grounds raised by the Revenue read as follows:- "1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case. 2. On ....
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....e filters applied by the TPO. 10. On the facts and in the circumstances of the case whether the Hon'ble Dispute Resolution Panel is correct in excluding INFOSYS BPO Ltd on the basis of decision in a different case for a different FY while the comparable is qualifying all the qualitative and quantitative filters applied by the TPO. 11. On the facts and in the circumstances of the case whether the Hon'ble Dispute Resolution Panel is correct in holding that Eclerx Services Ltd cannot be taken as comparable, being functionally different when it satisfies all the qualitative and quantitative filters applied by the PO. 12. On the facts and in the circumstances of the case whether the Hon'ble Dispute Resolution Panel was right in super imposing the decision of other benches of ITAT in the case of assessee to reject the comparables viz Mis Eclerx Services Ltd and Infosys BPO Ltd when selection of com parables in a case depends in transfer pricing on assessee specific FAR analysis. 13. On the facts and in the circumstances of the case whether the Hon'ble Dispute Resolution Panel instead of relying on decision of other benches of ITAT, ought to have decided the comparabil....
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....ution Panel in so far as it relates to the above grounds may be reversed. 21. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. CORPORATE TAX MATTERS 4. The first ground in assessee's appeal is with regard to not considering the plea of the assessee that communication expenses should not be excluded from the export turnover for the purpose of computing deduction u/s 10A of the I.T.Act. 4.1 After hearing both the parties, we are of the opinion that this issue came up for consideration before the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Limited 349 ITR 98, wherein held that for the purpose of computing exemption u/s 10A of the Act, when export turnover in the numerator is to be arrived after excluding telecommunication expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. 4.2 The same judgment was followed in assessee's own case in ITA No.65 to 67/2011 for assessment years 2003-2004 and 2004-2005 vide judgment dated 18th October, 2011 by the Hon'ble jurisdictional High Court. Being so, taking a consistent view, we allow this ground of....
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....isco India has been following headcount basis for allocation from past 8 years the same basis should be followed for A.Y. 2008-2009 as well. Further, it was also submitted that the headcount basis of allocation of common expenses should be followed for A.Y. 2010-2011 as well. 5.2 After having heard the objections of the assessee, the DRP noticed that the allocation made by the assessee to the various segments is not correct which is evident from the information given in the table below :- Segment Profit % on cost of reimbursed as per the agreement with the AE Profit % as per the segmental information given by the assessee Software development 10 11 Technical Services 10 17.65 Marketing & support Services 10 10 Administrative Support Services 10 13.89 Management Support Services 10 13 5.3 The DRP observed from the above that it is clear that the profit margin shown in four out of the five segments is more than the profit as per the Agreement which indicates that the allocation method adopted by the assessee is not an appropriate method. It appears that such facts were not before the ITAT and therefore the ITAT upheld that method adopted by the assessee for the a....
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....regard to software development activity which is set up in STPI. The assessee had explained in detail before the AO the methodology and as to how the total expenditure of Rs. 207 crores has been bifurcated into Rs. 120 crores which is towards the common cost excluding IT and ommunication support cost and Rs. 87 crores which is common costs only in relation to IT and communication cost. The software development would fall within the second category i.e. IT and communication cost and its employees who are involved in such IT and communication are considered for allocation of the expenditure. The AO, in the draft assessment order, has considered number of employees in STPI and SEZ division and has 'come to the conclusion that the assessee is not following head-count method for division of allocable expenses. Before giving a finding as to whether the assessee is following the head-count method for division of allocable expenses, we would like to examine whether the method adopted by the assessee is correct. Similar question had arisen before the Hon'ble Delhi High Court in the case of M/s.EHTP India Pvt. Ltd. (cited supra) wherein apportionment of expenses between 10A and non....
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....he expenditure allocated to such employees. Ground No.3 is accordingly allowed for statistical purposes." 5.7 We also find that the Department has challenged the above order of the Tribunal before the Hon'ble High Court of Karnataka. The Hon'ble High Court in ITA No.140/2014, vide judgment dated 12th July, 2018, decided the issue in favour of the assessee. Being so, taking the consistent view, we allow this ground of appeal in favour of the assessee, and uphold the view taken by the Tribunal in the first round of appeal (in ITA No.1510/Bang/2012 - order dated 31.10.2013). 6. Ground No.3 of the assessee's appeal is with regard withdrawing the deduction claimed by the assessee in its return of income amounting to Rs. 40,23,03,313 in respect of forex fluctuation, which is capital in nature. 6.1 The facts of the case in brief are that on perusal of the order of the ITAT, the DRP noticed that in assessee's own case for A.Y. 2009-2010, wherein the DRP's direction to consider the foreign exchange gain as non-operating in nature were reversed by the ITAT in paragraph 23 by observing that "the foreign exchange gain from software development service has to be considered as part of the inc....
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....he net foreign exchange loss of Rs. 3,68,11,310/- to the 5 segments mentioned in Paragraph 25 of the order of TPO based on the % of operating revenue of the relevant segment to the total revenue and then the operating cost to be increased by adding the proportionate foreign exchange loss to the cost of relevant segment for making the adjustment uls 92CA of the Income-tax Act as it is evident from the Appendix - B to the TP documentation that exchange loss was Rs. 54,13,17,857/- was netted to the exchange gain of Rs. 20,45,06,547/- and the net foreign exchange loss of Rs. 33,68,11,310/- was debited to the profit and loss account under the head' Operating and other expenses'. Further, on perusal of computation of total income, it is noticed by us that the net foreign exchange loss has been allocated to different units / segments in the computation of total income under the head 'miscellaneous expenses' which makes it primafacie clear that the above gross foreign exchange loss and the foreign exchange gain' on revenue account. (ii) to examine the nature (revenue or capital) of the foreign exchange gain of Rs. 20,45,06,547 netted out with the gross foreign exchang....
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....responding amount of Rs. 40,23,03,313/- has been credited to the profit and loss account. (b) The Assessing Officer is also directed to consider the foreign exchange fluctuation (loss or gain) as operating In nature while computing the margins in respect of comparables retained by this order to determine the mean margin of the comparables for the relevant segments for the purpose of adjustment u/s 92CA of the Income-tax Act. 6.3 The contention of the AR is that for assessment year 2009-2010 also, the assessee has incurred foreign exchange loss of Rs. 33,68,11,257 and the same has been credited to the profit and loss account. The learned AR further submitted that in the computation of income has reduced the foreign exchange in on capital account transaction (given that such income is already included in the profit and loss account) amounting to Rs. 40,23,17,330 since, the same is capital in nature and not taxable (i.e. in relation to repayment of share application money amounting to Rs. 25,26,39,693 and repayment of fixed asset/ capital creditors amounting to Rs. 14,96,77,637). (Refer page 338 of the paper-book) In the TP documentation maintained, the Appellant had disclosed an a....
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.... application money, it is submitted that same is capital in nature, in view of Delhi HC decision in case of Jagatjit Industries Ltd (337 1TR 21), which has held that since amount raised through issue of equity shares is to be treated as capital receipt irrespective of the end use of the share capital and, therefore, the gains on account of foreign exchange fluctuations in respect of share capital collected in foreign exchange is capital receipt. Given the above, the assessee wishes to submit that foreign exchange gain on account of capital account transactions amounting to Rs. 40,23,17,330 was claimed as a reduction in the computation of income, as it was already included in the net foreign exchange loss amounting to Rs. 33,68,11,257 (debited to P&L account). Accordingly, non-granting of reduction of the said foreign exchange gains would tantamount to taxing it which is against the principals of tax laws, since the said amount pertains to capital account transactions. Given the above, the assessee prays before the Hon'ble Tribunal to reverse the directions of the Hon'ble DRP and direct the AO to allow the reduction in respect of forex gain which is capital in nature amount....
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....statements etc. was a sum of Rs. 179,01,08,756. Out of the above, the assessee on his own has excluded foreign exchange fluctuation on account of advances towards share capital charged to P&L account and foreign exchange fluctuation in the matter of purchase of fixed assets charged to P&L account. It is thus clear from the chart that a sum of Rs. 37,89,23,185 which was sought to be added as part of the operating income on rendering software development services is only on account of transactions of rendering software development services by the assessee to its AE and the foreign exchange fluctuation at the time of realization of the payment for rendering software development services. It is therefore clear that the foreign exchange fluctuation in question has to be treated as part of the operating income of software development services segment of the assessee and the operating profit to operating cost has to be determined accordingly. The DRP has refused to follow the decision of ITAT Bangalore Bench in the case of SAP Labs India Pvt. Ltd. (supra). In our view, the decision rendered by the Tribunal is binding on the DRP and the DRP cannot be heard to say that the decision rendered....
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.... "Having heard the contentions, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables." 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosuign and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings o....
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....e Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products fro banking industry. 20. In view of the above facts that Infosys Ltd. Having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE." 7.2.3 In view of the decision of the Co-ordinate Bench, cited supra, we direct the AO/TPO to exclude ....
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.... and accordingly, they directed the AO to exclude the said company from the list of comparables. 7.4.1 After hearing both the parties and perusing the material on record, we find that Persistent Systems Limited has been excluded from the list of comparables by the Tribunal in the case of CGI Information Systems and Management Consultants Private Limited v. ACIT in IT(TP)A No.586/Bang/2015 & 183/Bang/2017 for assessment years 2010-2011 and 2012-2013 (order dated 11.04.2018) for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparision with the profit margin. Therefore, in view of the order of the Co-ordinate Bench of the Tribunal (supra), we direct to exclude Persistent Systems Limited from the final list of comparables. Tata Elxsi Limited 7.5 The learned AR submitted that the company operates in two segments i.e., software development & services; and system integration & support. Software development and services comprises of services such as the embedded product design, industrial design services, animation and visual effects, therefore, the above company is not functionally comparable with the assessee company. The learned AR furthe....
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....n before the Co-ordinate Bench of the Tribunal in the case of Tesco Hindustan Service Centre Pvt. Ltd. in IT(TP)A No.191/Bang/2015. The Tribunal vide order dated 25th January, 2017 for assessment year 2010-2011 held as under:- "13. As regards Accentia Technologies Ltd. and ICRA Online Ltd. this Tribunal in the assessee's own case for the Assessment Year 2008-09 has excluded these two companies from the set of comparables in para 5 as under : "5. Thereafter he submitted that the following companies should be excluded on the basis of functional dissimilarity and in support of his contention, he placed reliance on the Tribunal order rendered in the case of M/s. Flextronics Tech. (India) Pvt. Ltd. Vs. DCIT in IT(TP)A No.1559(B)/2012 dated 23.10.2015, copy available on page Nos.17 to 38 of compilation of case laws submitted before the Tribunal. a) Accential Tech. Ltd. (Seg.) b) Acropetal Tech. Ltd. (Seg.) c) Coral Hubs Ltd. Tesco Hindustan Service Centre Pvt. Ltd. d) Crossdomain Solutions Ltd. e) Eclerx Services Ltd. f) Genesys International Corpn. Ltd. g) Mold Tek Technologies Ltd." We further note that the functional comparability has been examined in detailed ....
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....earing both sides, we find that similar issue was considered by the Tribunal in the case of Tesco Hindustan Service Centre Pvt. Ltd. (supra), wherein the held as under:- "14.1 We have considered the rival submissions and relevant record. At the out set, we note that the comparability of M/s Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India ) (P) Ltd (supra) in para 82 and 83 as under : "82. In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting ....
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.... the nature of high end services. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the ITES. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables." 8.2.2 Being so, the exclusion of Eclerx Services Limited from the list of comparables is justified. ICRA Online Limited 8.3 The ld.DRP observed that the total foreign currency earning during the year is 11.14 crore as against the total service revenue of 18.35 crore which indicates that only 60% revenue is coming from export as against the 100% export of the assessee-company. The ld.DRP further held that 75% export earning filter needs to be applied consistently for the ITS segment also as against the 25% export earning filter applied by the TPO. Accordingly the ld.DRP held that this company cannot be retained as comparable and directed the AO to exclude ICRA Online Limited from the list of comparables. 8.3.1 After hearing both sides, we find that similar issue was considered by the Tribunal in the case of Tesco Hindustan Service Centre Pvt. Ltd. (supra), wherein the held as under:- "12. We have considered the rival submiss....
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....f ICRA Online Limited from the list of comparables. Infosys BPO Limited 8.4 The ld.DRP observed that this company is an established player in the BPO industry and also a market leader and has tremendous brand value attached to it which has a significant impact on its pricing in the market and consequently on the margins earned. Further, the company has incurred huge selling and marketing cost and this has been increasing on a year on year basis. The company has also spent significant amounts in building and retaining the brand value and undertaking branding campaigns during the yea and has also won awards for corporate brand building. The ld.DRP, thus, directed the AO to exclude this company from the list of comparables. 8.4.1 After hearing both sides, we find that similar issue was considered by the Tribunal in the case of Tesco Hindustan Service Centre Pvt. Ltd. (supra), wherein the held as under:- "15.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on....
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....y on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 15.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys BPO Ltd. is not functionally comparable since it has the benefit of market value as well as brand value. This company enjoys the benefits of scale and market leadership. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. Since we have directed the A.O/TPO to exclude these companies from the set of comparab....
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....After hearing both the parties and perusing the material on record, we find that this issue was considered by the Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. in IT(TP)A No.212/Bang/2015 (order dated 24.02.2016), wherein it was held as under:- "41. The assessee objected against inclusion of this company in the list of comparables on the ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, the assessee referred to Notes to the Accounts wherein the company's operations comprise of payroll processing services is mentioned and hence it is not possible to give the quantitative details of sales and certain information separately. 42. The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the company is engaged in marketing and sales support services comparable to the assessee. Accordingly, the DRP directed the AO to exclude the said company from the comparables. 43. We have heard the ld. DR as well as ld. AR and considered the relevant material on rec....
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....l report of the company and it was found that this company is acting as an agent for various foreign principals for sale of dredgers, dredging equipment and also offers after sales service. Therefore, this company was found to be in the business of marketing support services which is similar to the assessee. 48. On the other hand, the ld. AR has submitted that this company is engaged in the business of construction equipments and earth moving machinery and is not into marketing support services. 49. Having considered the rival submissions as well as relevant material on record, we note that in the profit & loss account for the year under consideration, this company has shown sales (export of Rs. 1,18,00,000 and commission/service charges of Rs. 2,19,00,000. Therefore, export income revenue of this company is less than 75% of the total revenue, a filter applied by the TPO. Once the TPO has applied a filter of 75% of export sale, then this company which fails the filter applied by the TPO cannot be considered as a good comparable. Further, we note that this company is entirely in a different activity with that of the assessee. Undisputedly, this company is acting as agent fo....
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....e with support services provided by the assessee to its AE in respect of reinsurance and actuarial activities. Thus, the ld. AR has submitted that this company cannot be considered as functionally comparable with he assessee's activity of providing sales and marketing services to its AE. 53. We have considered the rival submissions and considered the relevant material on record. As it is clear that the assessee is providing sales and marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and the like, the working also includes educating potential users of the benefit and features of the AEs range of products. However, products for which the assessee is providing sales and marketing services is only software/information technology products. Therefore, Asian Business Exhibition & Conference Ltd. which is mainly engaged in the organization of exhibitions and events as well as conducting conferences on behalf of the various clients for their various products and businesses. The functions of this company are entirely different from the assessee who is providing sales and marketing support services to its AE for software/IT p....
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.... relevant time. However, if subsequently on the basis of information available in public domain it is found on the basis of functionality or some other reason a company is not at all comparable, assessee cannot be precluded from objecting to selection of the company as a comparable. This legal proposition is fairly well settled by the decision in case of DCIT V/s. Quark Systems (P) Ltd. (2010)132TTJ(Chd)(SB)1 as well as decisions relied upon by the counsel for the assessee. In view of the aforesaid, we do not find any infirmity in the directions of DRP in excluding Asian Business Exhibition and Conferences Limited as a comparable. The ground raised is therefore dismissed." 54. In view of the above facts as well as decision of the Mumbai Bench of the Tribunal, this company cannot be considered as a good comparable with the assessee. 55. Accordingly, we direct the AO/TPO to recompute the ALP in marketing support services segment by excluding Asian Business Exhibition & Conference Ltd. from the comparables." 12.2 After hearing both the parties and perusing the material on record, we direct the A.O. to exclude Asian Business Exhibition and Conferences Limited from the list of co....
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....d risks. The OECD Transfer Pricing guidelines also recognize adjustments to be made to account for differences between controlled and uncontrolled situations that would significantly affect the price charged or return required by independent enterprises. Accordingly, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in terms of risks assumed is made. 17.3 In the submissions made to the leaned TPO, the Appellant has computed the adjustment for the risk difference of the Appellant vis-à-vis of the comparable companies by placing reliance on the methodology of risk adjustment as stated in the decision of the Hon'ble Bangalore Tribunal in case of Philips Software Centre Private Limited vs. Asst. Commissioner of Income Tax (119 TTJ 721) (2008 26S0T226) as below. Average prime lending rate during FY 2008-09 (A)1 12.75 percent Average bank rate during FY 2008-09 (B) 6.00 percent Difference between the prime lending rate and bank rate C = (A - B) 6.75 percent Risk Adjustment (C) 6.75 percent The rates have been considered as per the details as available in the Economic Survey analysis ....
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....ase of the taxpayer there being only one client, the entire risk is concentrated on one client, and therefore, if the client is out of business the taxpayer will also be out of business. Earlier the argument given about the country risk was that EU & US are having better credit rating as compared to India. This argument is not longer valid as their credit rating is also on a downward trend and moreover in case of uncontrolled comparables we are taking the filter of export sales >75%. Most of the exports of software services from India are primarily to EU & US and therefore in case of uncontrolled comparables also the risk level will be equated. So far as the methods suggested by taxpayers in this regard are concerned, they are statistical methods available in standard books of statistics and financial management. A careful study of these methods would show that in all of them a number of assumptions are made to draw the conclusions. Transfer pricing regulations in India is against any assumption in respect of any adjustment. In support, reference is made to Rule 10B discussed above which speaks of reasonably accurate adjustment. If accurate adjustment cannot be made, then altern....