TaxTMI 
TaxTMI 
2019 (8) TMI 1775
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....er referred to as the "learned CIT(A)"] under section 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) ....
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....ing the operating margin of Appellant and that of comparable companies. 9. The learned CIT(A) has erred in law and facts by rejecting companies for 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 th....
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....turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover: 6. The CIT(A) erred in not appreciating the fact that the jurisdictional High Court's decision 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(....
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....y assessee. Sl No. Name of the comparable Remarks 1 Akshay Software Technologies Ltd. The company passes all filters applied by the TPO 2 Ancent Software International Ltd. Rejected: Total sales less than 1 crore 3 Aztecsoft Ltd. Rejected: Export sales less than 75% of total revenue 4 CG VAK software & Exports Ltd. 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....
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....1 Kals Information Systems Ltd. 13.89% 2 Akshay Software Technologies Ltd 8.11% 3 Bodhtree Consulting Ltd. 62.27% 4 R S Software (India)Ltd. 9.97% 5 Tata Elxsi Ltd (Seg.) 20.28% 6 Sasken Communication Technologies Ltd. 27.91% 7 Persistent Systems Ltd. 41.40% 8 Zylog Systems Ltd. 7.81% 9 Mindtree Ltd.(Seg.) 5.52% 10 Larsen & Toubro Infotech Ltd. 24.72% 11 Infosys Ltd. 45.61% Comparables selected by Ld.TPO for IT enabled Service Segment Sl.No. ITES Final comparables Margin 1 Infoys 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: ....
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....le is from international transaction with its AE's, and is received in foreign exchange currency. Further gain or loss due to foreign exchange fluctuation can be computed only on accrual of income by assessee/comparable. Thus we cannot accept contention of Ld.CIT DR that fluctuation must relate to income earned from international transaction under consideration earned during the year. The moment there is no dispute regarding nexes with income earned and foreign exchange fluctuation, it has to be considered as operating revenue. Thus respectfully following decisions of this Tribunal in case of SAP Labs India Pvt. Ltd. vs ACIT (supra) and Triology Ebusiness software India Pvt Ltd. vs DCIT (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 Co....
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....e India shall be allowed to exclude from the total turnover." Respectfully following view expressed by Hon'ble Supreme Court, we 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. In the result appeal filed by revenue stands dismissed. 14.IT(TP)ANo.176/(B)/2014 along with CO No.39/(B)/2016. It has been submitted by Ld.AR that grounds raised in cross objection will overlap with certain grounds raised in assessee's appeal and certain grounds raised in assessee's appeal will overlap with certain grounds raised in revenue's appeal. 15.Ground No. 1-3 raised by assessee are general in nature and therefore do not require adjudication. 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 seek....
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....n 15 days of receipt of invoice by the AE. Assets owned: Assessee is employed with assets like computers, software is, furniture fixtures, leasehold improvements office equipment etc. It is also been submitted that assessee do not own any interest in intangibles. The trademark the processes, know-how, technical Tata software, quality standards used are developed and owned by its group companies. It has been submitted that assessee is a contract service provider for software development service Assessee earned Rs. 23,09,25,569/- as income under this segment from its AE's. Based upon the above, we shall undertake comparibility analysis as under: Based upon the above, we shall consider comparables ought for exclusion by assessee under software development service segment. 18. Comparables alledged by assessee for Exclusion: Infosys Ltd This company has been included by Ld.TPO which is objected by assessee due to very high turnover, which is more than 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....
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....in case of DCIT vs AOL Online India (P) Ltd reported in (2017) 84 Taxmann.com 70. She submitted that there is a categorical finding by this tribunal in DCIT vs AOL Online India (P) Ltd (supra) that for the year under consideration there is no software product developed by this comparable. 23. We have perused submissions advanced by both sides in the light of the records placed before us. 23.1 At page 1577-1600 of paper book volume IV, annual report of this comparable is annexed. From the schedules to profit and loss account it is observed that this company derives income from sales, services and training. Income from sales are in respect of export of software development services to AE, income from translation and interpretation and training receipts. It is observed that all these 3 segments have been separately itemised. 23.2 On perusal of 'Notes to financial statement' in Schedule 18 at page 1594, it is observed that revenue recognition by this company is primarily from software services and software products. It is further mentioned therein that revenue from time and material contract is recognised on the basis of software developed and built in accordance with terms of....
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....e contracts etc which could not be considered functionally similar with that of assessee holders only carrying out software development service at the behest of its AE's on a captive basis. Similar view has been taken by this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd (supra). Respectfully following the same we direct Ld.AO/TPO to exclude this company from the final list. 26. Tata Elxsi Ltd. This company was selected by Ld.TPO. Before Ld.TPO, assessee objected to inclusion on several counts like, functional dissimilarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. In submissions made, Ld.Counsel quoted relevant portions from Annual Report of this company and submitted that this company be excluded from the list of comparables. On the contrary Ld.CIT DR supported view taken by Ld.CIT (A) in including this company in list of comparables. 27. We have heard both parties and carefully perused and considered material on record. From details on record, we find that this company is predominantly engaged in product design....
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....able by Delhi Tribunal in case of Agnity India Technologies Pvt. Ltd vs ITO reported in (2015) 58 Taxmann.com 167. 29. We have perused submissions advanced by both sides in light of the records placed before us. Assessee placed the annual accounts of this company at page 1543-1576 of paper book volume IV, revels that this company entered into sale of services as well as sale of products. It is also observed that there is no segmental information available in respect of services and products demonstrated separately by this company. 29.1 Further this company has been considered to be comparable by Delhi Tribunal in Agnity India Technologies Pvt.Ltd vs ITO (supra) for following reasons: "14. Larsen and Toubro Infotech Ltd had an operational margin of 20% for assessment year under consideration, and it was considered as a comparable in assessee's own case for assessment year 2006-07 which was upheld by the tribunal and the said order of Tribunal had already been upheld by orderable High Court (supra) and so we direct the inclusion of Larsen and Toubro Infotech in the list of comparables." It is clear from the above observation by Delhi Tribunal that since this comp....
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....ed that annual report of this company has been placed at page 1016-1091 of paper book volume III. Perusal of the same at page 1061 reveals that, revenue recognised by this company is from software development and are builled to clients directly. It is further observed in Profit and loss Account at page 1055 that income is only from export sales amounting to Rs. 17,61,57,405/-. Further at page 1030 in Director's report it has mentioned as under: "Segment wise and Product wise performance Bodhtree has only one segment, namely software development. Being a software solution company, it is engaged in providing open and end to end web solutions, off shoring data management, data warehousing, software consistency, design and development of solutions, using the latest technologies." As we peruse decision relied upon by Ld.CIT DR in case of Agnity India Pvt.Ltd (supra), this comparable has been included for following reasons: "26. Having considered the rival submission, we notice that this company was a comparable in assessee's own case for assessment year 2008-09. At the time the assessee did not contest the inclusion of this company and allowed it to remain as a comp....
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....r of assessee under this segment is Rs. 18,12,83,620/- with operating margin of 14.99%. With this background we shall analyse the comparables sought for exclusion under ITeS sgment. 34. Cosmic Global Ltd It has been submitted that Ld.TPO included this comparable in final list even though it has been alleged to be functionally different with assessee. Ld.Counsel submitted that this company provides services which are in the nature of KPO, whereas assessee is carrying out back office services to support activities of AE's. 35. Ld.Counsel placed reliance upon following decision in support of exclusion of this comparable: DCIT vs M/s Informatica Business Pvt. Ltd ITA (TP) a No. 1285, 1294/Bang/2014; M/s Brady Company Pvt. Ltd. vs DCIT (ITA No.1223/Bang/2018; Finestra Software Solutions (India) Pvt. Ltd., ITA (TP) a No. 1329, 1577/Bang/2014; TE Connectivity Global Shared Services India Pvt.Ltd., ITA (TP) a No. 1280/Bang/2014; Alteria engineering Pvt.Ltd. ITA (TP)A No. 171/Bang/2014 Ld. CIT DR opposed exclusion of this comparable from finalist and placed reliance upon orders of authorities below. 36. We have perused submissions advanced by ....
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....any. 38. Ld.CIT DR opposed exclusion of this comparable from the finalist and placed reliance upon the orders of authorities below. 39. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that annual report of this company has been placed at page 2444-2539 of paper book volume V. At page 2465 of paper book, 'Income from operations' has been held to be consisting of revenue from data analytics services and process solutions and comprises of both time/unit price and fixed feebased service contracts. Is observed that this company supports core and complex activities for its clients, using proprietary processes and scalable offshore delivery model. This company has access to capital market and therefore, this company is a public listed KPO company in India. The company is also engaged in consulting services and process outsourcing as well as in the activity of process re- engineering and automation apart from middle office and back office support to capital market. In support of the observations from annual report is, we draw support from decision of the Special Bench in case of Maersk Global Centres (India) (P.) td. ....
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....d in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in provid....
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....iness process management services as under: "Segment reporting The company's operations primarily relate to providing business process management services to organizations that outsource their business processes. Accordingly. revenues represented along industry classes comprise the primary basis of segmental information set out in these financial statements. Secondary segmental reporting is performed on the basis of the geographical location of customers. The accounting principles consistently used in the preparation of the financial statements are also consistently applied to record income in individual segments. These are set out in the note on significant accounting policies." From above, it is clear that this company is functionally not comparable with captive service provider. We therefore direct this company to be excluded from list of comparables. 43. Accentia Technologies Ltd Ld.TPO considered this comparable and assessee objected to the same for the reason that during the year under consideration this company acquired M/s.Oak Technologies Inc, USA and therefore, there is extraordinary event of acquisition of another company.....
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....ude this company on this count. 47. Informed Technologies India Ltd Ld.TPO included this company which has been objected by assessee for the reason that this company has several other sources of income for which there are no segmental details. It has been submitted by Ld.Counsel that this company does not passes through all filters applied by Ld.TPO. 48. Ld.CIT DR however placed reliance upon orders passed by authorities supported inclusion. 49. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that this comparable has been not disputed for functional dissimilarity by DRP. However the observation that segmental information are not available needs to be verified. In an order passed by coordinate bench of this Tribunal in case of M/s Nielson Sports India Pvt.Ltd. Vs ACIT in IT(TP)A No.196(B)/2017 (supra) following observations has been made in respect of this comparable: Respectfully following aforestated decision, we are of considered opinion that, this comparable needs to be set-aside to Ld.TPO for verification afresh. Needless to say that assessee shall be granted proper opportunity as per law to repre....