AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 355
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....ection 143(3) r.w.s. 144C(13) of the Income 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 in....
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.... 10.46% It was the plea of the assessee that during the year under consideration, the assessee 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 t....
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....ortfall being adjustment u/S. 92CA Rs.10,44,44,180/- 10. The addition suggested by the TPO was incorporated by the AO in the Draft Order of Assessment. The assessee filed objections against the Draft Order of Assessment before the Dispute Resolution Panel (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 compute....
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.... 9. The learned TPO/ learned AO/ Hon'ble DRP has erred in making the following errors in the computation of working capital adjustment by: a) not considering the fact that the Appellant does not have any working capital risk, therefore, no negative working capital adjustment should be allowed. 15. As far as ground No.9(a) is concerned, it was submitted that the TPO has erroneously determined a negative 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 ....
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.... Year 2011-12, the TPO had chosen 13 comparable companies which are one and the same as chosen by the TPO in the case of the assessee in this appeal. The Tribunal had to consider the comparability of the aforesaid 3 companies and the Tribunal held that the Persistent Systems and Solutions Ltd., and Persistent Systems Ltd., are to be excluded from the list of comparable companies and that Sasken Communication Technologies Ltd., should be set aside to the AO for fresh consideration. The following were the relevant 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, th....
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....These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that 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 ....
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....articularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP." We further note that the DRP has not adjudicated the objections of the assessee whereas for the Assessment Year 2010-11, the DRP rejected this company as comparable. Accordingly, we set aside this issue to record of the A.O./TPO to verify the relevant facts and compare with the facts recorded by the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) for the Assessment Year 2010-11 and then decide the issue 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....
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....bal Ltd., on the ground that it was not possible to ascertain whether this company passes the employee cost filter. The contention of the assessee for inclusion of this company was that under Schedule VI to the Companies Act, 1956, all categories of expenditure incurred on account of salary and wages are not required to be disclosed under the head 'personnel expenditure'. Employee costs incurred by many companies are not separately clubbed as 'Employee expenses' in their financial statements. For instance, some companies club the employee costs under the head 'Cost of Services'. Some others, like LGS Global Ltd., club the expenses under the head 'Personnel and Purchase Cost'. The purchase and personnel cost are 83.91% of total sales. For a software company, major component of its expenses 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 circumst....
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....ider the major component is employee cost and there is hardly any purchases therefore even if the employee cost is not separately reported, the composite of purchase and employee cost constitute 83.91% of sales. Thus he has submitted that this company should be included in the list of comparables. 13.3 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that there is no dispute that this company has not reported employee cost separately and therefore it is not possible to ascertain the employee cost and to apply employee cost filter. Further this company has also shown its goodwill in its balance sheet and therefore the intangible assets renders this company non-comparable to the assessee. 13.4 We have considered the rival submissions 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-ge....
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....he list of comparable companies." 31. We have given a careful consideration to the submission and we find that exclusion of Thinksoft Global Ltd., was on the ground of onsite revenue and not on the ground of working capital adjustment to be done being very high. So also, in the case of FCS Software Solutions Ltd., inclusion was not challenged by the assessee before the DRP. In these circumstances, we are of the view that it would be just and appropriate to remand the question of comparability of these 2 companies also to the TPO/AO for consideration afresh leaving all contentions for exclusion and inclusion of these 2 comparable companies open. 32. The next ground that requires adjudication is ground Nos.13 and 16 which reads as follows: "13. The learned TPO/ learned AO/Hon'ble DRP erred in considering certain extraordinary expenditure as operating in nature 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 con....
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....raordinary expenses Rs. 22,13,75,158/- Operating expenditure after reducing extraordinary expenses Rs. 14,80,35,862/- Operating profit Rs. 1,54,83,580/- Net margin on cost 10.46% 34. As already stated, in this regard, the assessee has also filed application to file additional evidence before the Tribunal. We find that on this issue, the DRP in para 2.27 of its order at page 22 has merely observed that no submissions were made on the above ground of appeal. Learned Counsel for the assessee has however pointed out that in Annexure 1.26 of the objections filed by the assessee before the DRP, the submissions have been made with regard to the computation of operating margin. Since this issue has not been adjudicated by the DRP, we are of the view that it would be just and appropriate to remand this issue to the TPO/AO for consideration afresh with liberty to the assessee to file additional evidence before AO/TPO. The issue 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 opportuni....