TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 355
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.... Tax Act, 1961 (hereinafter called 'the Act') by the DCIT, Circle-3(1)(2), Bengaluru, in relation to Assessment Year 2010-11. 2. As far as the appeal of the Revenue is concerned, it is not in dispute before us that the tax effect in the appeal by the Revenue is less than Rs.50 lakhs and in view of the CBDT's Circular No.17/2019, dt.08.08.2019, the appeal of the Revenue is liable to be dismissed as not maintainable and is dismissed as such. 3. As far as the appeal of the assessee is concerned, apart from one Corporate Tax issue, the main issue that arises for consideration is with regard to determination of Arm's Length Price (ALP) in respect of an international transaction of rendering software development services by the assessee to its Associated Enterprises (AE). 4. The assessee is the subsidiary of Core Objects Software Inc., USA ("Core US"), which in turn is held by Symphony Services Corp., US. The assessee was incorporated under the provisions of the Companies Act, 1956 and is engaged in the provision of software development and related services. During the previous year relevant to the assessment year 2011-12, one of the international transactions that took place between ....
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....ssessee incurred certain extraordinary expenses amounting to Rs. 7,33,39,296/-. Since these expenses are in the nature of one time extraordinary expenses, the same were reduced from the operating cost while computing the operating margin. However, the TPO rejected the computation arrived at by the assessee. 6. A comparison of the TP studies done by the assessee and TPO would show that there is not much of a difference between the approach of the assessee as well as the TPO, except the choice of companies chosen for the purpose of comparison of profit margin. The following chart would show the position of the approach adopted by the assessee and the TPO: Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/OC Database used PROWESS & CAPITALINE PLUS PROWESS & CAPITALINE PLUS Comparables selected for software development services 9 13 Period for which data used FYs ending during the period April 1, 2008 and March 31, 2011. FY 2010-11 (i.e., April 1, 2010 to March 31, 2011) 7. The Filters applied by the TPO for the purpose of inclusion and exclusion of comparable companies was as follows: Step Description 1. Companies w....
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....(DRP). Briefly, the directions issued by the DRP were as follows: (a) The following companies were directed to be excluded by accepting the contentions of the assessee: * Acropetal Technologies Ltd * E-zest Solutions * E-infochips Ltd * ICRA Techno Analytics * Infosys Limited * Larsen and Toubro Infotech Limited * Mindtree Limited * Tata Elxsi Limited (b) RS Software (India) Ltd and Evoke Technologies Ltd were suo moto directed to be excluded by the DRP. (c) The DRP rejected the contentions of the Assessee seeking exclusion of Sasken Communication Technologies Ltd., Persistent Systems Ltd., and Persistent Systems and Solutions Ltd. (d) The DRP also rejected the contentions of the Assessee seeking inclusion of comparables. (e) Working capital adjustment was directed to be computed on actuals, without putting any restrictions. 11. On giving effect to the above directions issued by the DRP, the final list of comparables is as follows: Sl. No. Name of the Company 1 Persistent Systems & Solutions Ltd. 2 Persistent Systems Ltd. 3 Sasken Communication Technologies Ltd. Pursuant to the directions of the DRP, the TP adjustment was reworked to Rs. 1,00....
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....ve working capital adjustment. It was submitted that working capital adjustment is made for the time value of money lost when credit time is given to the customers. The assessee however is not an entrepreneur but a captive service provider which is entirely funded by its AE and has no working capital contingencies. The assessee has not incurred any expenses for meeting the working capital requirement, and is running the business without any working capital risk as compared to the comparables. The assessee does not bear any market risk as the services are provided only to its AE. Therefore, requirement for adjustment of negative working capital does not arise. The learned counsel for the assessee has placed reliance the following decisions wherein consistently it has been held that negative working capital adjustment shall not be made in case of a captive service provider: (i) Adaptec (India) (P.) Ltd. v. ACIT ([2015] 57 taxmann.com 307 (Hyderabad - Trib.)); (ii) Lam Research India Pvt. Ltd. (order dated 30.04.2015 passed by this Hon'ble Tribunal in ITA No. 1473 & 1385/2014) (iii) DCIT v. Software AG Bangalore Technologies Pvt. Ltd. (order dated 31.03.2016 passed by this Hon'b....
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....observations of the Tribunal in this regard : "9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the coordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in para 60 and 61 & paras 24 to 26 as under : " Persistent Systems & Solutions Ltd. The assessee has the grievance against rejection of this company by the DRP. The Id. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with ....
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....at this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables." We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we direct the A.O./TPO to exclude these two companies from the set of comparables. (iv) Sasken Communication Technologies Ltd. 9.3.1 The Id. AR of the assessee has submitted that this company is engaged in the development of software products as it has inventories, intangible assets as well as high expenditure on R&D. Therefore this company is functionally not comparable to the assessee. The Id. AR has referred to the Annual Report of this company and submitted that it derives income from software products specifically new products launched called 'Vyaparaseva' during F.Y. 2010-11. Thus this company is engaged in product development cannot be compared with the assessee when segmental details are not available. He has relied upon the decision dt.24.2.2016 of the co-ordi....
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.... after giving an opportunity of hearing to the assessee." 19. Respectfully following the aforesaid decision, we direct the AO to exclude Persistent Systems and Solutions Ltd., and Persistent Systems Ltd., from the list of the comparable companies and remand the question of comparability of Sasken Communication Technologies Ltd., to the TPO for fresh consideration in the lines indicated by the Tribunal in the order referred to above. 20. The next ground to be adjudicated is ground No.12 with regard to inclusion of certain comparable companies in the list of comparable companies that were excluded by the DRP. Ground No.12 reads as follows: "12. The learned TPO/ learned AO/ Hon'ble DRP erred in rejecting companies that ought to have been accepted as comparable: * Akshay Software Technologies Ltd.-/ * Comp-U-Learn Tech India Ltd. * Helios & Matheson Information Technology Ltd. * LGS Global Ltd.," * Maveric Software Ltd. * Thinksoft Global Services Ltd. * Silverline Technologies Ltd. * Evoke Technologies Ltd * R S Software India Ltd 21. At the time of hearing, learned Counsel for the assessee submitted that he wants to press for adjudication of inclusion of on....
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....xpenses would be employee related expenses, and therefore the company passes the employee cost filter applied by the TPO. Foreign currency inflow is irrelevant, when otherwise the company is comparable. 24. As far as inclusion of Evoke Technologies Ltd., is concerned, the DRP suo moto excluded this company on the ground that this company has low margin indicating existence of peculiar economic circumstance. In this regard, the contention of the learned Counsel for the assessee was that the margin of this company cannot be termed as being abnormally low nor as a result of peculiar economic circumstances and in this regard, reliance was placed on the decision of the ITAT Bengaluru Bench in the case of Applied Materials India Pvt. Ltd., (supra). 25. As far as R S Software India Ltd., is concerned, the DRP excluded this company on the ground that this company renders onsite software development services. In this regard, it has been the contention of the learned Counsel for the assessee that the conclusion of the DRP that this company derives revenue from onsite is erroneous and is based only on the existence of foreign branch expenses which cannot be sustained. In this regard, relian....
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.... as well as the relevant material on record. This company has shown the purchases and personnel cost at page 39 of the Annual Report as a combined expenditure as under : Purchases & Personnel Cost : Rs.250,61,55,607. Therefore the cost of employee is not separately reported by this company. Further it is not clear whether the goodwill is self-generated or acquired intangible asset. Accordingly, this issue is set aside to the record of the Assessing Officer/TPO to verify the relevant facts to ascertain the employee cost and then decide the functional comparability. Needless to say the information under Section 133(6) may be obtained for the purpose of ascertaining the annual employee cost of this company." 28. We remand the issue to the TPO/AO to verify the facts as indicted in the order referred to above and the light of those facts decide the comparability of this company. We are of the view that since Evoke Technologies Ltd., and R S Software India Ltd., were excluded by the DRP suo moto, the issue has to be remanded to the TPO/AO for fresh consideration to decide the comparability of these 2 companies also. We hold and direct accordingly. 29. The other company which was so....
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....ature while computing the margin of the Appellant." 16. The Hon'ble DRP has erred in rejecting the objection raised by the Petitioner in relation to computation of the operating margin of the petitioner, by stating that no submissions were made. 33. As far as ground No.13 and additional ground No.16 are concerned, the submission of the learned Counsel for the assessee was as that during the year under consideration, the assessee incurred the following one-time extraordinary expenditure: Sl. No. Nature Amount (a) Costs relating to Pune facility which was debonded post acquisition Rs. 1,88,22,000/- (b) Costs relating to Bangalore facility which was debonded post acquisition Rs. 2,70,00,000/- (c) Employee severance costs arising post-acquisition due to termination of the employees Rs. 1,30,00,000/- (d) Costs relating to post-acquisition period (September 2010 to March 2011) in respect of which there were no corresponding revenues Rs. 1,45,17,296/- Total Rs. 7,33,39,296/- Despite the assessee having filed submissions before the DRP, it erroneously rejected the objections on holding hat the assessee had not made any submissions. It was submitted t....
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....was not raised before the TPO in the assessment proceedings. Therefore, it would be appropriate if the TPO/AO are directed to consider the claim of the assessee in this regard. The TPO/AO will decide the issue after affording assessee opportunity of being heard. 35. As far as ground Nos.17 and 18 raised by the assessee are concerned, the same reads as follows: 17. The Learned Assessing Officer ["Learned AO] and Hon'ble Dispute Resolution Panel ["Hon'ble DRP"], while assessing the total income of the Appellant for the year under consideration, ought to have allowed deduction of ALP adjustment amounting to INR 1,20,30,164 inadvertently offered to tax by the Appellant twice i.e. in AY 2010-11 and AY 2011-12. 18. On the facts and circumstances of the case and in law, the Learned AO and Hon'ble DRP ought to have allowed deduction for the ALP adjustment offered to tax twice, though not claimed as a deduction by the Appellant while filing its return of income for AY 2011-12 under consideration. 36. As can be seen from the grounds of appeal, the issue arises owing to developments that took place after filing of return of income for AY 2011- 12 by the assessee. We are of t....