TaxTMI 
TaxTMI 
2019 (8) TMI 1775
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....ion 250 of the Income-tax Act, 1961 ("Act") on the following grounds: That on the facts and circumstances of the case and in law, 1. the learned CIT(A) has erred in law and facts in confirming the addition of Rs. 2,88,48,573 and Rs. 1,67,67,670 made by the AO/TPO to the total income of the Appellant on account of adjustment in the arm's length price of the provision of software development services transaction and provision of IT enabled services transaction, respectively, entered by the Appellant with its Associated Enterprises ("AEs"); 2. the learned CIT(A) has erred in law and facts by not accepting the Appellant's plea in entirely and confirming with the Learned AO/TPO on not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("Rules"), and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length; 3. the learned CIT(A) has erred in law and facts by upholding the action of AO/TPO in determination ....
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....r which working capital adjustment resulted in reduction of profit margins by more than 4% and further erred in computing the quantum of working capital adjustment benefit for the Appellant's international transaction incorrectly. 10. The learned CIT(A) has erred in law and facts by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables by holding that once the AO/TPO has granted working capital adjustment, there is no necessity of providing any further adjustments. 11. The learned CIT(A) has erred, in law and in facts, by ignoring the fact that since the Appellant is availing tax holiday u/s 10A of the Act, there is no motive or reason to shift profits out of India, curbing which is the basic intention of introducing the transfer pricing provisions. 12. The learned CIT(A) erred in confirming the imposition of interest under section 234B of the Act. 13. The learned CIT(A) erred, in law and in facts, by holding that the initiation of penalty proceedings u/s 271(1)(c) is premature. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appel....
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....ecision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 7. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the AO be restored. 8.The appellate craves leave to add, to alter, to amend or delete any of its grounds that may be urged at the time of hearing of the appeal. CO No.39/Bang/2014(Assessment year : 2009-10) 1.The ld. CIT(A) has erred in not considering the respondents contentions as per the grounds of appeal raised before him. 2. The ld.CIT(A) has erred in not adjudicating on the application of employee cost filter by TPO in respect of software development services transaction and further not deciding on the inconsistency of TPO by not applying the same filter in respect of ITES segment. 3. The ld.CIT(A) has erred in holding that it I not open to the assessee to demand that information technology enables services be further dissected and business of same sector but operating in a different line need not be considered as functionally dissimilar. Respondent submits th....
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....td. Rejected: Employee cost 25% 5 Goldstone Technologies Ltd. Rejected: Functionally different engaged in iTES 6 Helios & Matheson Information Technology Ltd. Rejected: Export sales 75%. 7 Indium Software (India() Ltd. Rejected: Revenue earnings in forex is NIL 8 Infosys Technologies Ltd. The company passes all filters applied by the TPO. 9 KPIT Ciummins Infosystems Ltd. Rejected since RPT is 100% 10 Larsen & Toubro Infotech Ltd. The company passes all filters applied by the TPO 11 LGS Global Ltd Rejected: Export sales 75% 12 Maars Software International Ltd. Rejected by TPO: Employee cost 25% 13 Mindtree Ltd.(Seg.) The company is into software development services and qualifies all the filters applied by TPO. The IT services segment is taken as comparable. Thus the company is considered as a comparable. 14 Persistent Systems Pvt.Ltd. The company passes all filters applied by the TPO 15 Quintegra Solutions Ltd. Rejected: Export sales 75% of total sales (38%). 16 R S Software (India) Ltd. The company is into software development services and qualifies all the filters applied by the TPO. Thus the company is considered as a comparable. 17 Sask....
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.... BPO Ltd. 24.41% 2 Adita Birla Minacs Worldwide Ltd. 23.86% 3 Microland Ltd.(both segments) 1.53% 4 Allsec Technologies Ltd. -16.63% 5 Accentia Technologies Ltd. 46.40% 6 Informed Technologies India Ltd. 22.61% 7 Cosmic Global Ltd. 40.61% 8 Eclerx Services Ltd. 57.50% Average PLI 25.04% Thus margins computed for these segments by Ld.TPO with different set of comparables were 24.32% for software development service segment and 25.04% for IT Enabled Service Segment, adjustment was proposed as under: Adjustment in Software development services 2,88,48,573 Adjustment in IT enabled services segment 1,67,67,670 Total 4,56,16,243 Ld.TPO denied considering foreign exchange gain/loss as operating revenue for computing margins of comparables under both segments 5. Aggrieved by proposed adjustments, assessee raised objections before Ld.CIT(A). Ld.CIT (A) allowed claim of assessee regarding deduction claimed under section 10 A of the Act and also allowed assessee's claim of considering foreign exchange gain/loss as operating revenue for computing margin of comparables under both segments. However Ld.CIT (A) upheld comparables selected by Ld.TPO. ....
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....T (supra), we direct Ld.AO/TPO to consider gain/loss earned by comparable due to foreign exchange fluctuation as operating revenue for computing its margin. We therefore do not find any infirmity in the view taken by Ld. CIT (A) and the same is upheld. Accordingly this ground raised by revenue stands dismissed. 11. Ground No. 5-6 is in respect of computation of deduction under section 10 A of the Act. Revenue is agitated that Ld.CIT (A) by following decision of Hon'ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd reported in 349 ITR 98 directed Ld.AO to compute deduction under section 10 A as per ratio laid down by SAP Labs India Pvt. Revenue is agitated that Ld.CIT (A) by following decision of Hon'ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd reported in 349 ITR 98 directed Ld.AO to compute deduction under section 10 A as per ratio laid down by SAP Labs India Pvt. It has been agitated that telecommunication expenses and expenses incurred in foreign currency cannot be reduced from total turnover for computing section 10 A of the Act, as there is no such provision. It is submitted by ld.CIT, DR that section 10 A (iv) is very clear that such expenses are to ....
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....16.Ground No. 4-7 are in respect of comparables selected/excluded by Ld. TPO which are dealt with as under. At the outset, Ld.Counsel submitted charts in respect of segments for which addition has been made to ALP of transactions. It has been submitted that issues arose due to inappropriate comparables selected/excluded by Ld.TPO, which is sought to be excluded by assessee under both segments. I. Software Development Service segment: Assessee seeks exclusion of following comparables under this segment: * Infosys Ltd * Persistent Systems Ltd * Larsen and Toubro Infotech Ltd * Bodhtree consulting limited * Tata Elxsi Ltd (segmental) * KALS Information Systems Ltd Assessee seeks inclusion of following comparables under this segment: * Aztec soft limited * CG-VAK software and exports Ltd * Quinten Groh solutions Ltd * MaaRs software international Ltd II. IT enabled Services Segment: Assessee seeks exclusion of following comparables under this segment: * cosmic global Ltd * Eclerx services Ltd * Infosys BPO Ltd * Accentia technologies Ltd * informed technologies India Ltd Assessee seeks inclusion of following comparables under this segment: * Microg....
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....n 200 crores. It has been submitted by Ld.Counsel that this company for during year ending 31/03/10 had turnover of about Rs. 21,140 crores, which is much higher than that of assessee. Further she submitted that this company is a joint and software development space while assessee is a small captive service provider, providing exclusive services only to its AE's. It is also been submitted by Ld. counsel that this company has heavy R&D expenses and thus has intangibles associated with it. On the contrary Ld. CIT DR supported the view of Ld. AO. 19. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that in case of Agnity India Technologies Pvt Ltd reported in (2015) 58 Taxmann.com 167 Delhi benches of this Tribunal after analysing various aspects took a view that this company is not a fit comparable for a captive service provider . The said view has been upheld by Hon'ble Delhi High Court wherein, Hon'ble Court upholding the view taken by the Tribunal, observed that company having brand value as well as intangible assets cannot be compared with an ordinary entity who provide captive services. It is observed that thi....
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....ther mentioned therein that revenue from time and material contract is recognised on the basis of software developed and built in accordance with terms of contract whereas revenue from fixed-price contract is recognised on completion of milestone in contracts, as per percentage of completion method. Income from training is recognised on time proportionate basis. Thus, in our considered opinion though segmental information has been shown as income from "software development -export", it includes software products also which has not been separately categorised. 23.3 Ld.TPO considered this comparable only on basis that in annual reports, segment information is given in respect of software development services and there are no products mentioned therein. However Ld.TPO missed out Notes to accounts regarding revenue recognition, as observed herein bove. With due respect, decision relied upon by Ld.CIT DR in case of DCIT vs AOL Online India (P) Ltd (supra) did not consider this aspect as well. We therefore placing reliance upon reasoning adopted in decision of this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd (supra) and ACIT vs Broadcom India Research (P) Ltd (sup....
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.... and considered material on record. From details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. Details in Annual Report show that "software development services" segment of this company relates to design services and are not similar to software development services performed by assessee. Mumbai Tribunal in case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit rat....
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.... of comparables." It is clear from the above observation by Delhi Tribunal that since this comparable was considered to be a good comparable in preceding year in that case, which was upheld by Hon'ble Delhi High Court, the same was considered to be good comparable for subsequent assessment year that was considered. In the facts of present case, this Tribunal for assessment year 2005-06 have held this comparable to be not functionally similar to that of assessee due to high turnover filter. This Tirbunal while deciding so, observed that this Tribunal in case of Autodesk India Pvt.Ltd vs ACIT reported in IT(TP)A No.220/Bang/2016, after considering various views held it to be not comparable with assessee, who is performing limited functions in process of software development carried out by AE's. 30. For year under consideration, we have already observed hereinabove that this company has no segmental details available for software services rendered and software products and financial results are combined. Further holding that this company owns high intangibles as much as 33.33% which makes it one of a giant company in category of Software Development Company, which cannot be anyways....
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....the inclusion of this company and allowed it to remain as a comparable. However this year, just because profit margin is higher, this company does not cease to become a comparable. Therefore we find no infirmity in the order of Ld. CIT (A) and the uphold the same." It is clear from above that company was included since assessee therein had not objected in preceding years for its inclusion by. In present facts of the case it is observed that this Tribunal in assessee's own case for assessment year 2005-06 excluded this comparable. Even otherwise it is observed that, this comparable is full-fledged software development service provider and therefore cannot be compared with company like assessee which is providing Ltd services to its AE in the process of software development carried out by AE. Respectfully following the view taken by this tribunal in assessee's own case for assessment year 2005-06 as well as the discussion on the basis of annual accounts of this company, we direct Ld.AO/TPO to exclude this comparable from the list. 33. IT enabled Services Segment: Before we start compatibility analysis of comparables alleged for exclusion with assessee, it is sine qua non to under....
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....y both sides in the light of the records placed before us. It is observed that annual report of this comparable has been placed at pages 2426-2443 of paper book volume V. In Profit and Loss account placed at page 2434 it is observed that revenue is earned by this company from operations, details of which has been provided in schedule 8 at page 2438. In schedule 8, revenue from operations has been received by assessee from medical transcription and consultancy services and translation charges. Further it is relevant to note revenue recognition in Schedule 13 at page 2440, which has been stated to be as under: Schedule 13 ........ 1.2. Revenue recognition: in respect of medical transcription services, and translation services the company follows the practice of raising monthly invoices job wise on the clients based on the number of lines and number of words respectively, etc., As accepted by them and in respect of accounts BPO services the invoices are raised after acceptance by the client on mutually agreed basis. This year the company has raised the bill on all the jobs accepted and hence the application of proportionate completion method according to AS-9 has not arisen. Ex....
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.... [2014] 43 taxmann.com, wherein it has been observed as under: (i) On the other hand, learned Departmental Representative has submitted that this company is undisputedly in the business of ITeS and therefore, the nomenclature that of KPO will not make it functionally different from the assessee. He has relied upon the orders of the authorities below. (ii) We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity ofproviding services including analytic services and data process solutions to its global clients. The service provided by Eclerx Services Ltd., is in various areas including capital market and therefore, the services are in the nature of consultancy and end to end support through trade centre including trade confirmation, settlement, transaction, maintenance and analytic and reporting. Thus it is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of providing high-end services involving decision making analysis which requires thought process and evaluation of various ....
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....83. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tec Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP." Respectfully following the aforestated observations, and the discussions on basis of analysis of annuaL report, we are of considered opinion that this company being a public listed company is not a good comparable. Accordingly we direct Ld. TPO to exclude this company from the list. 40. Infosys BPO Ltd Assessee objected for inclusion of this comparable primarily on the basis of functional incompatibility and presence of intangibles. It has been submitted that this company owns huge brand and not a fit comparables for company like assessee, who provide captive service to its AE's. 41....
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....e considered as a good comparable with assessee. Apart from this objection, 44. Ld.Counsel submitted that even otherwise this company is not functionally comparable with assessee in so far as services provided to AE. He referred to various business transactions and services provided by this company and submitted that this company provides services under various segments of like medical transcription, medical coding, medical billing, etc directly to its clients. He thus where mentally argued that business model of this company is much different from that of assessee, who is a captive service provider providing services to its AE is only. 45. Ld.CIT DR opposed the exclusion and placed reliance upon orders passed by authorities below. 46. We have perused submissions advanced by both sides in the light of the records placed before us is. It appears that this company purchased up to 96% of share holding of M/s. Oak Technologies. If it is only a transaction of purchase of shares of said company, it may be a case of purchase as an ongoing business, and may not be a case of merging the same with business of Accentia Technologies Ltd and M/s.Oak Technologies still remains an independent....