AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (8) TMI 1309
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....ternational transactions relating to software development services ('SWD services') and information technology enabled services ('ITE Services') as recorded in the books of accounts, as the arm's length price. The DRP erred in upholding the actions of the AO/TPO. b. The AO/TPO erred in law and facts in making an aggregate Transfer Pricing adjustment ('TP adjustment') of Rs. 339,44,00,000/- (adjustment of Rs. 286.96.00.000/- to the SWD services segment and an adjustment of Rs. 52,48,00,000/- to the ITE services segment) to the income returned by the Appellant and in holding that the international transactions of provision of SWD services and ITE services by the Appellant to its Associated Enterprises ('AEs") was not at arm's length. c. The AO/TPO has erred in rejecting the Transfer Pricing Study ('TP' study) maintained by the Appellant in the manner Prescribed under Section 92D of the Income Tax Act, 1961 ('the Act). d. The AO/TPO erred on facts and in law in conduct ing a fresh benchmarking analysis based on his own conjectures and surmises. The DRP erred in upholding the act ions of the AO/ TPO 3. ....
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....comparables as the functions performed, assets employed and risks assumed by the said companies are entirely different and incomparable to. that of the Appellant. b. That, Minvesta Infotech Limited, Eluminous Technologies Private Limited, and Ace Software Exports Limited ought to be included in the list of comparables as the functions performed, assets employed and risks assumed by the said companies are comparable to that of the Appellant. c. That the DRP erred in holding that inclusion of certain comparables need not be adjudicated for the reason that the companies did not feature in the TPO's search matrix/Appellants TP study and their inclusion would therefore amount to cherry picking. although the companies are otherwise comparable d. That the TPO and the DRP grossly erred in not including Sasken Communication Technologies Limited. Evoke Technologies Private Limited. Agilisys IT Services India Private Limited. Batchmaster Software Private Limited. DCIS Dot Corn Solutions India Private Limited. Sagarsoft (India) Ltd., [summation Technologies Private Limited. despite the functions performed. assets employed and risks assumed by the said companies a....
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....of the Act by the Assessing Officer ought to have been taken into consideration while computing the TP adjustment, by reducing the disallowed expenditure from the operating cost base of the appellant, which the DRP failed to appreciate 10. Erroneous disallowance of ESOP expenses under Section 37 of the Act. a. The AO erred in law and on facts. in disallowing the expenditure on Employee Stock Option ('ESOP') of INR 28.72.00.000 under section 37 of the Act without appreciating the submission furnished by the Appellant. b. The AO erred in law. in disregarding the decision of Hon'ble High Court of Karnataka in the case of Biocon Limited ([2020] 121 taxmann.com 351 (Kar.)) and the decision of this Hon'ble Tribunal in the case of Novo Nordisk ([2014] 42 taxmann.com 168) wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act. c The AO and DRP erred in law and on facts by not appreciating that the difference between the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees under Section 192 of the Act which is evidenced by sa....
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....ppellant. l. That the AO erred in holding that income is embedded in the reimbursement without any basis m. The AO er r ed in law and on fact s . in di s r egarding that the remittance towards recovery of ESOP charges is not taxable under the provision of India-USA Double Taxation Avoidance Agreement n. That the AO while on the one hand held that there is an element of income embedded in the reimbursement made by the Appellant to the parent entity, contradicted himself by holding on the other hand that the expenditure is notional/fictitious in nature. 11. That the AO. while assessing the total income of the Appellant for the year under consideration. ought to have allowed a deduction for education cess and secondary & higher education cess (collectively known as "education cess') paid during the year under consideration. although not claimed as a deduction by the Appellant while filing its return of income. 12. That in the computation sheet annexed to the final assessment order, the AO erroneously considered the total income at Rs 1271,74,65,420/- as against Rs. 1269,72,60,217/- computed in the final assessment order. 13. Th....
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.... materials available on record. As rightly pointed out by the Ld. A.R. in the assessment year 2015-16 in assessee's own case in ITA No.2498/Bang/2019, the Tribunal vide order dated 3.9.2021 has held as under:- "7. We notice that the coordinate bench in the case of Yahoo Software Development India Pvt. Ltd. (supra) has excluded following 3 companies holding them as not good comparable companies. (A) Persistent Systems Ltd:- 33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:- 4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the show-cause notice is reproduced below for ease of reference: e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25%....
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....e hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected." 35.Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as a comparable company with a company which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007-08 dated 23.11.2012 wherein this Tribunal took the following view:- "64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pri....
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....ompared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly." 36. It is seen that the TPO in coming to the conclusion that the onsit....
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....-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon'ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon'ble Delhi High Court (C) INFOSYS LTD. 39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- "Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit & loss account ....
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.... advanced by both sides in light of records placed before us. It is observed that the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that this company is basically into application development for web and mobile and provides customised services to its offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns software licenses. 14.3.3. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Accordingly we direct this comparable to be excluded from finalist." 9. Following the above said decisions rendered by co-ordinate benches, we direct exclusion of Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd. & Infobeans Technologies Ltd. from the final list of comparables." 3.6 Further, in the assessment year 2016-17, the coordinate bench of Hyderabad Tribunal in the case of ADP P....
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....mit that the RPT to turnover ratio of Persistent is 32.40 percent and thus, it fails the RPT filter of 25% applied by the learned TPO. The correct computation of related party filter is as below: Particulars Amount in INR Million Revenue from operations A 14,471.36 Related party transactions (Income and expenditure) B 4,636.67 Related party transactions % B/A*100 32.40% 4.1 The company is engaged in product development and hence it is functionally dissimilar. The Appellant submits that Persistent Systems is engaged in product development along with software development services. The Appellant would like to submit that Persistent is mainly involved in software product development and development of end-to-end solutions. 4.2 The company has been rejected in Appellant's own case for AY 2015-16 [ITA No.2498/Bang/2019 and since the company has the same functional profile in AY 2015-16 and AY 2016-17 (He referred Annual Report Compilation Pages: 1443, 1713) he requested to exclude this company from the list of comparable companies. The comparable has been rejected by the Tribunal in AY 2014-2015 as well in appellant's own cas....
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.... (P.) Ltd. v. ACIT in ITA No. 2307/Hyd/2018, the Co-ordinate Bench of the Tribunal has considered similar objections of the assessee therein and has held that these two companies along with Thirdware Solutions Ltd is not comparable to the software development company like the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two companies are also directed to be excluded from the final list of ITA No 2233 of 2018 ADP Private Ltd Hyderabad comparables. Thus, assessee's ground of appeal No. 2 is partly allowed." 6.3 In the said decision, it has been held that the company is functionally different and engaged in diversified activities and since the revenue could not controvert the said decision nor brought any contrary decision, following the same, we direct the AO/TPO to exclude this company from the final list of comparables." 4.8 In view of the above decision of the Tribunal, we are inclined to hold that Persistent Systems Ltd. cannot be considered as a comparable and to be excluded from the list of comparables. iii. Infobeans Technologies Ltd. 5. The Ld. A.R. submitted that Infobeans....
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..... (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No.405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise's reportable segment explanatory available at page No.A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable visà- vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent ....
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....eshold limit considered by the Ld.TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon'ble Mumbai Tribunal, we direct the Ld.TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set. Unquote 5.4 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal and the company has also been excluded in the case of Red Hat India Private Limited [TS-117-ITAT- 2022(Mum)-TP] AY 2016-2017 by the Mumbai Tribunal. 5.5 In view of the above mentioned reasons, Ld. A.R. requested to to direct the AO/TPO to exclude this comparable from the final list of SWD/IT Segment. 5.6 Ld. D.R. relied on the order of Ld. DRP. 5.7 We have heard the rival submissions and perused the materials available on record. Infobeans Techonogies Ltd. was considered as comparable in the case of ADP Pvt. Ltd. by the coordinate bench of Hyderabad cited (supra) wherein it was held as under:- "7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The ....
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....bles. iv. Infosys Ltd. 6. Ld. A.R. submitted that the company Infosys Ltd. is engaged in diversified activities, which include IT activities, consulting activities during the current financial year. The Segmental information is not available and the segmental break-up of revenue attributable to software product segment and software services segment is not available. (He referred page 1961 of the paper book) 6.1 The company has been rejected in Appellant's own case for AY 2015-16 [ITA No.2498/Bang/2019 and since the company has the same functional profile in AY 2015-16 and AY 2016-17 (He referred Annual Report Compilation Pages: 1443, 1713) and requested to exclude this company from the list of comparable companies. The comparable has been rejected by the Tribunal in AY 2014-2015 as well in appellant's own case (EIT Services India Private Limited - ITAT Order ITA No.3399/Bang/2018). 6.2 Further, in the case of Sandisk India Device Design Centre Pvt Ltd [TS-464-ITAT-2022(Bang)-TP], AY 2016-2017 at Page 24 of the Order, the Bangalore Tribunal has directed the Ld. TPO to exclude Infosys Ltd from the final list of comparable under the IT Segment. 6.3 The company has a....
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.... company from the final list of comparables.' 9.4 On perusal of the entire financial statements, we observe that the company is functionally not comparable and selling and marketing expenses are 5% of revenue and there were extraordinary events also noted i.e. transfer of product - financial & edge services as well as diversified activities like artificial intelligence, products services, platforms, consulting etc. Also onsite revenue was 52.7% and no segmental details like services, consulting products are available. In view of the above observations, the co-ordinate bench in assessee's own case for AY 2014-15 directed to exclude this company as comparable. Respectfully following the said decision, we direct the AO/TPO to exclude this company as comparable from the list of comparables. 6.7 In view of the above judgement of Tribunal, taking a consistent view, we direct the AO/TPO to exclude Infosys Ltd. from the list of comparables. IT(TP)A No.210/Bang/2021 EIT Services India Pvt. Ltd., Bangalore Page 25 of 66 7. In ground No. 4(b), the assessee wants inclusion of following comparables:- i. Isummation Technologies Ltd. ii. Batchmaster Software Pvt. Ltd.....
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....in the software development services." 7.7 In view of the above, we do not find any reason to exclude this company viz. Isummation Technologies Ltd. from the list of comparables in the assessment year 2016-17. Directed accordingly. ii. Batchmaster Software Pvt. Ltd. 8. The Ld. A.R. submitted that Batchmaster Software Pvt. Ltd. is primarily engaged in Software development services, which is evident from page 11 of the Annual Report and the company qualifies the quantitative filters applied by the learned TPO and hence Batchmaster ought to be considered as a comparable for the software development services rendered by the Appellant. 8.1 The Ld. TPO (at page 50 of TP Order) has alleged that the company is engaged in sale of products as is seen from the head of purchases shown in Note 17 on Cost of Materials Consumed. Also, the company has shown separate category of expenses for Selling and Distribution Expenses in Note 20 of the Profit & Loss Account. Hence, the company is rejected as a comparable. The Assessee submits that Batchmaster is engaged in software development services. The relevant extract from the annual report at page 11 of the Annual Report (He referred page ....
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.... Appellant has discussed the functional similarity and the application of quantitative filters as applied by the learned TPO and the company passes all the filters applied by the TPO (refer page 2012 of the paper book). Accordingly, DCIS ought to be accepted. 9.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment. 9.5 Ld. D.R. relied on the order of Ld. DRP. 9.6 We have heard the rival submissions and perused the materials available on record. According to Ld. A.R., M/s. DCIS Dot.com Solutions Pvt. Ltd. is also engaged in software development services and filed a copy of the financials of that company for the year ended 31.3.2016. In our opinion, this has to be examined by the AO/TPO and if it is engaged in software development as argued by the Ld. A.R., it has to be included as a comparable. Accordingly, the issue is remitted to the file of AO/TPO for fresh consideration. iv. Sagar Soft India Ltd. 9.7 Ld. A.R. submitted that the learned TPO in in the TPO order (Page 49) has erroneously rejected Sagarsoft by stating that it fails service revenue filter. To this the Ld. A.R. state....
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..... In this case, it was excluded by Ld. DRP in assessment year 2017-18. We do not find any reason to exclude in the assessment year 2016-17. Being so, we direct the AO/TPO to include this company in the list of comparables. vi. Sasken Communication Technology Ltd. 11. The Ld. A.R. submitted that in the search matrix provided by the learned TPO, the company is rejected on the ground that segmental information is not available for the year. The Appellant submitted that the company does operates in two reportable segments namely; Software Services and Software Products. The learned TPO at page 15 of the TP Order has proposed to reject Sasken on the ground that the company was engaged in software products as well as software services activities. However, the Ld. A.R. submitted that the software products segment constitutes for less than 1.00% of the total revenue from operations (He referred page 81 of the Annual Report). 11.1 The Ld. A.R. further submitted that Sasken is engaged in software development services along with other activities. From the annual report of FY 2015-16, it is evident that the company earns majority of its revenue from software services segment. Further,....
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....ompute correct margin. 13. Further, the assessee wants exclusion of following comparables in IT enabled services. i. Infosys BPO Ltd. ii. SPI Technologies Pvt. Ltd. iii. Eclerx Services Ltd. i. Infosys BPO Ltd. 13.1 The Ld. A.R. submitted that that Infosys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the profit and loss account indicates that the income is earned from 'Revenue from business process management services' which suggests that the company is engaged in consultancy and management services unlike the Appellant which is involved only in providing ITES as a captive service provider entity. 13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 - 21). Below is the relevant extract from the order for ready reference: 11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified ....
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....ns. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected. 16. Regarding the lack of segment data to reject it as a comparable, the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument. 16. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the pres....
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.... has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 13.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 13.5 Ld. D.R. relied on the order of Ld. DRP. 13.6 We have heard the rival submissions and perused the materials available on record. This company has been considered as in the case of ADP Pvt. Ltd. cited (supra and held that this company cannot be included by observing as under:- "16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Fu....
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....ue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co-ordinate Benches in excluding the above three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010- 11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also th....
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....es. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.' We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment. ii. SPI Technologies Pvt. Ltd. 14. The Ld. A.R. submitted that the company is into diversified business activities. The Company is engaged in data processing and relat....
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....ns this Court has taken a view that merger/amalgamation is an extra ordinary event and would have an impact /effect on the financial results of the company. Thus, in both the aforesaid decisions, this Court upheld the view of the Tribunal that where merger/amalgamation have taken place and it is not a normal event then such a company would cease to be comparable. This of course is subject to the Revenue being able to show that amalgamation/merger did not have any effect of the profitability of the company. This has not been shown by the Revenue either to the Tribunal or before us. Therefore, this issue stands covered by the decision of this Court in Aptara Technology (P.) Ltd.'s case (supra) and PTC Software (I) (P.) Ltd.'s case (supra) in favour of the respondent. This more particularly in view of the absence of the Revenue even attempting to show that the merger and amalgamation that took place in the case of comparable M/s. Keynote Corporate Securities Limited was such that it would not have any impact on its profitability. It is true that in case of PTC Software (I) (P.) Ltd. case (supra) this question has been admitted, however, the admission was on the facts and circu....
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....td. v. ACIT (2016) 72 taxmann.com 352 (Pune - Trib) and Cummins Turbo Technologies Ltd. v. DCIT (2017) 79 taxmann.com 260 (Pune - Trib) has held that the said concern cannot be accepted as comparable. The Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (supra) held as under:- "14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No.2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No.267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:- "13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different activities. It was pointed out that the said concern is engaged i....
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....of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables." 13. Following the same parity of reasoning as in Aptara Technologies Pvt. Ltd. v. ACIT (supra) and Cummins Turbo Technologies Ltd. v. DCIT (supra), we hold that Accentia Technologies Ltd. cannot be compared as comparable because of extraordinary events of acquisition and amalgamation during the year. Accordingly, we direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables." 10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final s....
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....rit of the objection, as the stand alone financials of this company are considered for comparability. 25. The assessee also raised the objection that there is increase in revenue, but according to the DRP, it has failed to bring on record any evidence to suggest that this abnormal inorganic growth has impacted the profit margin of the company. It is observed that the profit margin of this company has been consistently at the same level during the last few years. The ALP margin is determined with reference the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. The DRP was of the opinion that it will not be proper to reject a comparable only on account of inorganic growth of top line, which otherwise is functionally comparable. 26. The DRP further observed that it was consistently held that high profit margin as such cannot be reason for exclusion when it is otherwise functionally comparable. Accordingly, there is no need to reject a functionally comparable company on account of having super profits. 27. The Assessee submitted that E....
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....aterials available on record. This company is not considered as comparable in the case of ADP Pvt. Ltd. cited (supra) in assessment year 2016-17, wherein they excluded the comparable ground No.7 of that order vide para 17 to 17.4 wherein held as under:- "17. Eclerx Services Ltd.: The ld. AR of the assessee submitted that this company may be excluded as comparable from the final set of comparables as this company is engaged in providing KPO services, different to low end BPO services provided by the assessee. He submitted that Safe Harbor Rules recognizes ITeS activities under tow distinct categories i.e., BPO and KPO and activities of this company falls under KPO services. He submitted that the services provided by this company of following: (a) Contract Risk Review, (b) Margin Exposure Management, (c) Online Operations and web analytics, (d) CRM and business intelligence, (e) Content creation, (f) business process consulting. 17.1 He further submitted that as per NIC code provided in the annual report, this company has been classified as KPO and has been awarded as leading KPO's in India, basis award and a....
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.... adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co-ordinate Benches in excluding the above three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS e-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010- 11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS eSERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken no....
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....ores as against the turnover of TCS e-Serve Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Co-ordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables. We observe from the financial statements that this company is functionally dissimilar and engaged in KPO and BPO services and amalgamation of Agilest Consulting Pvt. Ltd., vide page No. 23 of paper book volume -1 para 8 and acquisition of CLX Europe which impacts on the profits of the company. From the financial statements of the Chairman's message placed at page No. 18 of paper book volume - 1, it has been categorically stated that after acquisition of CLX Europe, the revenue has grown by 30%, which clearly shows that it impacts on the profitability of the company. These are extraordinary events. Th....
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....ly 67.7% and therefore fails the service income filter applied by the TPO. 10.2 Before us, the learned AR for the assessee contended that this company 'Informed' is functionally comparable to the assessee as it is an ITES provider and qualifies the service income filter of 75% applied by the TPO. It was submitted that the entire service income of 'Informed' at Rs. 2,58,53,362/- is from rendering of ITES only and the TPO/DRP have wrongly considered "other income" of Rs. 1,22,85,303/- as "Service Income". In support of this contention, the learned AR drew the attention of the Bench to the relevant portion of the Annual Report of 'Informed' (placed at pages 391 to 443 of Paper Book). In this regard, reliance was placed on the decision of the Co-ordinate Bench of this Tribunal in the case of CGI Information Systems & Management Consultants (supra) wherein this company 'Informed' was held to be comparable to companies rendering ITES. It was prayed that, in the light of the above, this company 'Informed Technologies Ltd.,' be included in the final set of comparables in the case on hand. 10.3 Per contra, the learned DR for Revenue ....
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....s TP study. The TPO in his order rejected this company stating that since 'Informed' is being primarily engaged in the business of Business Process Outsourcing, it fails the service income filter. On the objections filed by the assessee, the DRP concurred with the finding of the TPO by observing that the Annual Report shows that the sale of services is Rs. 2,58,53,362/- as against the total revenue of Rs. 3,81,86,665/- which comes to only 67.7% and therefore fails the service income filter applied by the TPO. 10.2 Before us, the learned AR for the assessee contended that this company 'Informed' is functionally comparable to the assessee as it is an ITES provider and qualifies the service income filter of 75% applied by the TPO. It was submitted that the entire service income of 'Informed' at Rs. 2,58,53,362/- is from rendering of ITES only and the TPO/DRP have wrongly considered "other income" of Rs. 1,22,85,303/- as "Service Income". In support of this contention, the learned AR drew the attention of the Bench to the relevant portion of the Annual Report of 'Informed' (placed at pages 391 to 443 of Paper Book). In this regard, reliance was ....
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.... assessee. Crystal Voxx Ltd.:- 17. Assessee wants for inclusion of Cystal Voxx Ltd. in the list of comparables. 17.1 In this regard, Ld. A.R. submitted that the learned TPO has rejected Crystal Voxx by stating that data is not available in the public database. The Ld. A.R. highlighted that the annual reports are available in the public database. The Appellant submits that Crystal Voxx is engaged in the business of providing medical billing, coding, transcription, software and other enabled services. These said services would fall under the category of ITeS and therefore, the Appellant submits that Crystal Voxx is comparable to the functional profile of the Appellant. 17.2 Further, the Appellant submits that Crystal Voxx is functionally comparable and qualifies all the quantitative filters applied by the learned TPO and the Appellant. 17.3 The comparable has been accepted by the Ld. DRP in AY 2017- 18 in Appellant's own case (He referred Page 72 of the Case Law Compilation). 17.4 Further, Crystal Voxx has been included in the case of Ocwen Financial Solutions (P.) Ltd. [2019] 108 taxmann.com 306 (Bangalore - Trib.) AY 2014-2015 (He referred Page 178-179 of the ....
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....ion of this company, 'Crystal' is factually incorrect. Taking into consideration that the company 'Crystal' is otherwise comparable to the assessee in the case on hand as it is operating as a BPO company which is a provider of ITES, we direct that this company, Crystal Voxx Ltd., be included as a comparable company in the final set of comparables in the case on hand. The AO/TPO are accordingly directed." 17.5 In view of the above-mentioned reasons, we humbly request the Hon'ble Tribunal to direct the TPO to include this comparable to the final list of ITeS Segment. 17.6 Ld. D.R. relied on the order of Ld. DRP. 17.7 We have heard the rival submissions and perused the materials available on record. This company has been considered as not comparable in the case of Ocwen Pvt. Ltd. vide para 11 of that order, which is extracted as follows:- "11. Crystal Voxx Ltd., ('Crystal') 11.1 This company, 'Crystal' was proposed by the assessee before TPO as an additional comparable to be included in the final set of comparables. The TPO, however, rejected the assessee's proposal on the ground that this company had not reported any earn....
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....." 17.8 Accordingly, in view of the above order, we remit this issue to the file of AO/TPO to examine it in the light of above findings of the Tribunal. 18. No other comparable has been pressed before us in ITeS segment. Hence, other comparables not considered. 19. Next ground is with regard to non-grant of working capital adjustment. We remit this issue for the file of AO/TPO to grant working capital adjustment on actual basis. 20. With regard to ground No.10 regarding disallowance of ESOP expenses u/s 37 of the Act the Ld. A.R. submitted that the employees of the Appellant are eligible to participate/get the shares of the Hewlett Packard Enterprise Company ('Ultimate Holding Company') based on their eligibility, performance, and certain other parameters. 20.1 The shares granted to the employees of the Appellant are considered as a part of 'perquisite' taxable in the hands of employees under section 17(2) of the Act. Accordingly, the Appellant deducts the appropriate tax at source ('TDS') under section 192 of the Act. 20.2 The cost of shares granted by the Ultimate Holding Company to the eligible employees of the Appellant are cross charged to the Appellant by th....
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....urther, the Learned AO has mentioned that the ESOP expense does not satisfy the conditions of allowance as specified by section 37 of the Act and has disallowed such expenditure. b) DRP Direction 20.9 In the directions issued, DRP panel said that they are in agreement with the following reasons provided by the Learned AO: - the perquisite has been charged to the employee on mere amortisation of the expenses though option had not been exercised by the employees as on the date of charge of perquisite. Under such circumstances, the company cannot claim the expenditure as an allowable deduction prior to the date of exercise of option by the employee. - Expenditure towards ESOP recharge is a fictitious cost, being discount offered on self-generated asset. - Expenses booked by the company and reimbursed to the holding company is a colourable device for shifting of profit from India. 20.10 Further, Ld. DRP also said that even if ESOP expenses is considered as capital receipt the short collection of securities premium cannot be considered as expenditure and it will also be considered as capital in nature. 20.11 Ld. DRP relied on the decision of Hon'bl....
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....es, shall be eligible for deduction in computation of total income". 20.19 The ESOP schemes for stock options enables in attracting and retaining the employees of the Company, resulting in better performance of the Company's business operations. The scheme is designed primarily to incentivise and for retaining the employees and thereby, earn more revenue by securing consistent and concentrated efforts of dedicated employees. 20.20 Further, the share-based compensation under the ESOP scheme is construed both by the employees and the Company as a part of employment remuneration package, which is an expenditure inextricably linked to the business of the Company. Therefore, the same is deductible in nature. 20.21 Ld. A.R. submitted that the incurrence of expenditure towards ESOP for employees is a clear and explicit expenditure incurred for the employees and directly affects the performance of employees, which in-turn is critical for the Company's business and its long-term growth. Accordingly, Ld. A.R. submitted that the expenditure incurred is deductible under section 37(1) of the Act. Applicability of TDS provisions on the remittance towards ESOP expenses 20.22 At the ou....
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.... - CIT vs PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.); - Lemon Tree Hotels Ltd. IT Appeal No. 107/2015 dated 18-8- 2015; - Principal Commissioner of Income Tax vs Nova Technocast (P.) Ltd [2018] 94 taxmann.com 322 (Gujarat HC); - Commissioner of Income-tax vs Prism Cement Unit [2015] 61 taxmann.com 273 (Madhya Pradesh HC); - Commissioner of Income-tax -IV vs Himalya International Ltd. [2014] 51 taxmann.com 213 (Delhi HC); - Indo Overseas Films vs Income Tax Officer, International Taxation [2017] 81 taxmann.com 378 (Chennai - Trib.); 20.26 Ld. D.R. relied on the order of Ld. DRP 20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before the Hon'ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was held as under:- "From a perusal of section 37(1) of the Income-tax Act, 1961 it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a payout. If an expenditure has been incurred, section 37(1) of the Act would be a....