TaxTMI 
TaxTMI 
2023 (4) TMI 76
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.... year the international transactions between the Assessee and its AEs were the provision of software development services and ITES and therefore a reference was made to the Transfer Pricing Officer for determination of the Arm's Length Price (ALP). The TPO passed an order dated 14.01.2016 u/s. 92CA of the Act, determining a TP adjustment of Rs. 210,53,06,218 i.e., Rs. 70,93,30,168/- in the SWD segment and Rs. 139,59,76,050/- in the ITES segment. Incorporating the aforesaid TP adjustment, the AO passed the final assessment order vide order dated 16.05.2016. A rectification application was filed by the Assessee on 18.5.2016 on account of a mistake apparent from the record as the TPO had considered the operating cost for the ITES segment. Subsequently, the TPO passed a rectification order reducing the ITES adjustment to Rs. 138,79,80,037. Therefore, the total TP adjustment stood at Rs. 209,73,10,205. Aggrieved by the assessment order, the Assessee preferred an appeal before the CIT(Appeals), who vide order dated 31.01.2017 granted partial relief. Aggrieved by the order passed by the CIT(Appeals), both the assessee (IT(TP)A No.932/Bang/2017) and revenue (IT(TP)A No.844/Bang/2017) are i....
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....:- Arm's Length Mean Mark-up 22.63% Less: Working Capital Adjustment 2.30% Adjusted mean mark-up of the comparables 20.33% Operating Cost Rs. 1211,09,64,036/- Arm's Length Price - 120.33% of Operating Cost Rs. 1457,31,23,025/- Price Received Rs. 1386,37,92,854/- Shortfall being adjustment u/s. 92CA Rs. 709,330,168/- 7. On appeal, the CIT(A) accepted the contentions of the Assessee and directed exclusion of Genesys International Corpn. Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., and Spry Resources India Pvt. Ltd. The CIT(A) upheld the exclusion of the remaining comparables selected by the Assessee. IT(TP)A No.844/Bang/2017 (Revenue's appeal) 8. The revenue is in appeal before us contending the exclusion of Genesys International Corpn. Ltd., ICRA Techno Analytics Ltd., Infosys Ltd. and Spry Resources India Pvt. Ltd. by the CIT(Appeals) with regard to the Software development segment. Ground No. 1 to 4 of revenue appeal relate to the same which we will take up for adjudication first. 9. The ld AR made the following submissions with regard to the exclusion of Genesys International Corpn. Ltd and Infosys Ltd - Genesys In....
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....nt intangibles forming 96.35% of the total asset base in the company. Infosys derives more that 50% of its revenue from onsite activities. Therefore, it is submitted that the CIT(A) has rightly directed exclusion of the aforesaid company. Detailed submissions in this regard are made at pages 374-381 and 567 of the paperbook 10. The ld AR placed reliance in this regard on the decision of this Tribunal in the case of Microfocus Software India Pvt. Ltd. v. ACIT (Order dated 17.03.2020 passed in IT(TP)A No. 368/Bang/2017) wherein this Tribunal directed exclusion of above four companies from the list of comparables to a SWD service provider for the same assessment year. 11. We heard the parties. We notice that the coordinate bench in the case of Microfocus Software India Pvt. Ltd.(supra) has considered the inclusion of the above four companies and held that - 6. We heard Ld D.R and perused the record. In the case of CGI Information systems & management Consultants P Ltd (supra), following four companies were excluded with the following observations - "29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (sup....
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....y when the Assessee owns software products. The objections of the Assessee are contained in its letter dated 22.12.2015 addressed to the TPO and in annexure-B to the said letter. The relevant portion of the objection is at pages 711- 713 of the Assessee's paper book. According to the Assessee this company is engaged in providing Geographical Information Services comprising of Photogrammetry, Remote Sensing, Cartography, Data Conversion, state of the art terrestrial and 3D geocontent including location based and other computer based related services. Pagc-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO, Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey, to be innovators and leaders in the fields of location based services related geoplatforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting.....
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....he TPO to conclude that this company is predominantly into software-development services. The presence of intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of subrule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly." "Accordingly, following the decision rendere....
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....t of this company. It is stated in page 44 of the Annual report (Running page 2364 of assessee's paper book) that this company is engaged in the software development & consultancy, engineering services, web development & hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing. It is further stated under the head "Revenue recognition" (page 45 of the Annual report) that a. the revenue from services consists of revenue earned from services performed for software development & consultancy, licensing & sub- licensing fee, annual maintenance charges for software support, web development and hosting which is recognized to the extent services are performed. b. Revenue from sales is recognized as and when the delivery of branded software is made is booked net of trade discount..... Page no.2 of Annual Report (Running page 2379 of paper book) contains Profit and Loss account. The Revenue from sale of services is mentioned therein, but break-up details is not given. Thus, we notice that this company is engaged in various types of services and break-up details of each of the services are not available. The L....
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....xt company that was sought by the Ld A.R to be excluded is M/s Spry Resources P Ltd. It is the submission of the assessee that this company is engaged in the development of software products and outsourcing activities. The segmental details are also not available. It was further submitted that this company is engaged in rendering onsite activities. Accordingly he sought for exclusion of this company. 10. We have heard Ld D.R and gone through the Annual Report of this company. The Revenue recognition policy given under Significant Accounting policies (Page 2790 of paper book) states that the assessee is recognizing revenue from software consultancy and also from sale of products. This company is possessing inventories also, which is shown in Note no. 18 (page 2787 of paper book). The revenue from operations, however, consists of Income from software development. Hence it is not clear as to whether this company has sold any of its inventories or not during the year under consideration. We notice that the TPO has not examined the aspects relating to software products. We notice that in the case of CGI information systems & Management Consultants (P) Ltd (supra), M/s Spry Reso....
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....ean 12.50% 23. The TPO accepted three comparables highlighted above i.e., Informed Technologies India Ltd., Jindal Intellicom Limited and Accentia Technologies and rejected the remaining 6 comparables selected by the Assessee. The TPO applied new filters and arrived at a fresh set of comparables as under:- Sl. No. Name of the Company Mark-up on Total Costs (WC-unadj) (in %) Mark-up on Total Costs (WC-adj) (in %) 1 Accentia Technologies Ltd. 11.75 9.11 2 Universal Print Systems Ltd. (Seg) (BPO) 52.46 54.52 3 Informed Technologies India Ltd. 6.08 6.42 4 Infosys BPO Ltd. 36.30 32.96 5 Jindal Intellicom Ltd. -0.05 0.46 6 Microgenetic Systems Ltd. 19.61 19.99 7 TCS E-Serve Ltd. 63.69 62.10 8 BNR Udyog Ltd. (Seg) (Medical Transcription) 41.58 47.19 9 Excel Infoways Ltd. (Seg) (IT/BVPO) 29.79 35.02 10 e4e Healthcare Business Services Pvt. Ltd. 19.85 18.99 AVERAGE MARK-UP 28.11 28.68 24. The TPO re-computed the arm's length price (ALP) to arrive at the TP adjustment as under:- Arm's Length Mean Mark-up 28.11% Less: Working Capi....
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.... customer relationships. (ii) Its functions do not include maintaining business/customer relations and, therefore, it is not functionally comparable to the Assessee. (iii) Excel has employed software and hardware experts to render its services to its customers and is equipped with an extensive fleet of the IT sector related equipments including advanced mechanisms in IT sector and latest software to conduct its operations smoothly. This would clearly demonstrate that Excel is engaged in providing high end services as well which are wholly dissimilar to the services provided by the assessee. (iv) A perusal of its annual report clearly discloses that Excel provides innovative solutions services unlike the Assessee. (v) It is disclosed in its annual report that Excel considered closing down its IT and BPO segments of the company and to diversify into construction, development and real-estate. (vi) During FY 2014-15, the company changed its name from "Excel Infoways Ltd." to "Excel Realty Infra Ltd." which suggests an altogether different nature of services being provided by the company. (vii) Excel fails the employee cost filter applied by ....
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....company and, therefore, it is clear that it is functionally dissimilar to the Assessee. Moreover, the functions performed by UPSL do not fall within the definition of IT enabled services as defined in Rule 10TA(e) of the Income-tax Rules, 1962, and thus for this reason as well it can be concluded that UPSL is not engaged in providing ITE services and is, hence, not comparable to the Assessee. The TPO held that the pre-press BPO segment as comparable to the Assessee and the DRP upheld the same despite the above submissions. Detailed submissions in this regard are made at pages 442-444 of the paperbook. Thus, this company ought to stand excluded from the final list of comparables Infosys BPO Ltd.: Infosys BPO enjoys huge brand value and has also made significant investments in creating intangibles and owns several intellectual properties. In view of its substantial brand value, the company enjoys an advantage in the market and has high bargaining power. As a result of the brand value, the company receives a premium in the market. The company owns significant intangibles. Further the company has had an exceptional year of operation where in Infosys BPO has acquired 1....
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....ard are made at pages 450-451 and 567, 587 of the paperbook. Without appreciating the above submissions the CIT(A) upheld the findings of the TPO holding that brand is irrelevant and that in any event the Appellant was part of a group having high brand value, which conclusion is without any basis. BNR Udyog Ltd. The Assessee submits that BNR Udyog Ltd. ('BNR' for short) is liable to be excluded from the list of comparables as it fails the RPT and ITE service revenue filters applied by the TPO. It is submitted that the ratio of BNR's RPT to sales amounts to 49.60% and, therefore, fails the RPT filter applied by the TPO. The computation in this regard is set out at page 453 of the paperbook. Thus, BNR ought to be excluded on this ground. That apart, BNR also fails the ITE service revenue filter applied by the TPO. As per the disclosures in its Annual Report, its income from ITE services constitutes only 42.92% of its total revenue and thus fails the said filter applied by the TPO and, therefore, BNR is liable to be excluded on this ground as well. Detailed submissions in this regard are made at pages 452-455 of the paperbook. 34. We notice that the exclu....
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....) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue. 48 to 51... 52. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost ....
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....he 5 companies which the Assessee seeks to exclude from the list of comparable companies viz., Infosys BPO Ltd. TCS B-service Ltd. and Excel Infoway Ltd., were considered for exclusion by the Tribunal in the case of a similar Assessee such as the Assessee engaged in providing ITES in the case of Baxter (I) (P.) Ltd. v. A.CIT [2017] 85 taxmann.com 285 (Delhi - Trib.). The learned DR relied on the order of the DRP/TPO. 45. We have considered the rival submissions. In the case of Baxter (I) (P.) Ltd., (supra) the Delhi ITAT Bench considered comparability of the aforesaid three companies with a company engaged in providing ITBS such as the Assessee. The functional profile of the Assessee and the Assessee in the case of Baxter (I) (P.) Ltd. (supra) are identical inasmuch as 7 out of the 10 companies chosen by the TPO in the case of the Assessee were chosen as comparable in the case of Baxter (I) (P.) Ltd. (supra). The Tribunal held on the comparability of the three companies Infosys BPO Ltd., TCS E-service Ltd. and Excel Infoway Ltd., as follows: (i) In paragraph 23 of its order the Tribunal held that Infosys BPO Ltd., is not comparable with a company providing ITES be....
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....bove said decision of co- ordinate bench, we direct exclusion of M/s Infosys BPO Ltd, TCS E-serve Ltd., M/s BNR Udyog Ltd and M/s Excel Infoway Ltd., from the list of comparable companies and the issue of exclusion Universal Print Systems Ltd is restored to the file of AO/TPO for examining it afresh 36. Through Ground No. 2(k) the assessee is contending the exclusion of Jindal Intellicom Limited by the CIT(A). 37. The ld AR submitted that Jindal is a comparable company selected by the Assessee its TP study and accepted by the TPO as being comparable to it and thus, the CIT(A) erred in suo motu rejecting the same, that too without putting the Assessee on notice as regards the same. It is submitted that the CIT(A) has arbitrarily excluded the said comparable on the ground that there is no reliable segmental information with respect to the ITES segment. In this regard, it is submitted that the company is engaged only in the business of call centre services and therefore, the company has only one reportable segment. The company passes all the filters applied by the TPO and therefore, ought to be included in the final list of comparables. 38. We notice that the coordinate bench....
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.... case, the CIT(A) has suomoto excluded company on the ground that there is no reliable segmental information with respect to the ITES segment. Considering the facts of the case and the decision of the coordinate bench in the case of CGIInformationSystems & Management Consultants (P.) Ltd (supra) we remit the issue back to the TPO/AO. The TPO/AO directed to verify the segmental details and consider the issue in the light of the decision of the coordinate bench. It is ordered accordingly Ground No. 4: Negative working capital adjustment: 40. The TPO made a negative working capital adjustment and the CIT(A) upheld the order of the Assessing Officer. 41. In this regard it is submitted that the adjustment is made without appreciating that although the Assessee has some receivables appearing in its books, since the Assessee is a captive service provider, it does not carry any working capital risk since it is always funded by its AEs. 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 the AEs. This being so, the Assess....
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....wed decision of ITAT Hyderabad Bench in the case of Adaptec (India) (P.) Ltd. v. Asstt. CIT [2015] 57 taxmann.com 307. The learned DR relied on the order of the TPO/DRP on the issue. 17. On the above ground, it is undisputed that the Hyderabad Bench of the ITAT in case of Adaptec (India) (P.) Ltd. (supra) held that no such addition can be made for the following reasons:- 'Ground No. 8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : 14. Ground No. 11 : Negative Working Capital adjustment - Making a negative work....
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....ing capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment. 19. It is undisputed that the Assessee is also a captive service provider such as the Assessee in the case decided by the ITAT Hyderabad Bench and therefore making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks, was not correct. No other contrary decision was brought to our notice. Following the aforesaid decisions, we allow Gr.No.2.6 raised by the Assessee. 43. Respectfully following the above decision of the coordinate bench we direct the TPO not to make negative working capital adjustment. The TPO is further directed to recomputed the ALP of the ITeS segment in accordance with the directions given in this order. CORPORATE TAX Ground No. 7: Deduction under Section 10AA of the Act: 44. The Assessee had claimed a sum of Rs. 12,83,55,202/- as deduction under Section 10AA of the Act in respect of its SEZ unit at Chennai. The claim f....
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..... Though the company was filing the softex forms on regular basis with the in-charge authorities, the authorities were not endorsing the same. It is submitted that nonendorsement of the softex forms submitted to the requisite authorities is attributable to a lapse on the part of the authorities and the Appellant should not be put into undue hardship on account of the same by disallowing the tax holiday claim made under Section 10AA of the Act. Further, it is submitted that the lower authorities failed to appreciate the evidences produced by the Assessee during the assessment proceeding. It is submitted that the submission of Softex Form and certification of the said form by STPI is a post facto procedure prescribed by the Reserve Bank of India to ensure timely and appropriate collection of export proceeds. Filing of softex forms is not a pre-requisite under Section 10AA of the Act and only a procedural requirement as per the SEZ Act. Reliance in this regard is placed on the decision of the Hon'ble Tribunal in the case of Microsemi India (P.) Ltd v. DCIT ([2016] 65 taxmann.com 318 (Hyderabad - Trib.)). 50. Chennai unit was formed by splitting up of the existing units, The ld AR s....
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.... private network to the remote site. It enables a computer to send and receive data across shared or public networks as if it is directly connected to the private network, while benefiting from the functionality, security and management policies of the private network. A VPN is created by establishing a virtual point to point connection through the use of dedicated internet connections, virtual tunnelling protocols or traffic encryptions. A VPN connection across the internet is similar to the wide area network link between sites. Thus, the employees of the Assessee access the servers at the customer's end over this VPN and process the data. Thus, the Assessee exports its services through internet and no separate IPLC connection is required for the same. 53. The ld DR submitted that the coordinate bench of the Tribunal in assessee's own case for AY 2010-11 had not given any finding with regard to the allowability and the assessee had also not contended the issue further. Therefore the ld DR argued that the issue of denial of deduction u/s.10A has been accepted by the assessee. 54. The ld AR submitted counter argument stating that the Hon'ble Tribunal in assessee's own case for....
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....ments submitted by the assessee for the year under consideration. Further, copies of the invoices and softex forms submitted to the authorities and the letters addressed to them requesting endorsement are furnished by the assessee before is in the additional evidence (pages 1-42 of the additional evidence compilation). In view of this we remit the issue to the AO to verify the evidences submitted keeping in mind the ratio laid down by the Hon'ble Tribunal in the case of Microsemi India (P.) Ltd (supra) that submission of Softex Form and certification of the said form by STPI is a post facto procedure prescribed by the Reserve Bank of India to ensure timely and appropriate collection of export proceeds and is not a pre-requisite under Section 10AA. 57. Next we will consider the issue of denial of claim of the Asseessee on the ground that the Chennai unit was formed by splitting up of the existing units. Para 2 & 3 of the CBDT Circular No.14/2014 [F.NO.178/84/2012-ITA.I] dated 18.10.2014 reads as follows:- "2. Representations have been received stating that the aforesaid limit of 20% is inadequate and restrictive since it impacts the competitiveness of Indian Software Ind....
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....y of IPLC connection in our considered view is not justifiable particularly when IPLC connections is not the only mode of communication by which IT and ITES services can be provided to overseas customers. We therefore direct the AO not to deny the claim on this basis in the remanded proceedings. 61. The ld AR during the course of hearing made a without prejudice submission that while re-computating the deduction under Section 10A of the Act the expenses towards telecommunication charges in foreign currency should be reduced from the export turnover and the total turnover. 62. We notice that the issue is settled now by the decision of the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. which is affirmed by the Hon'ble Supreme Court in CIT v. HCL Technologies reported in [(2018) 404 ITR 719] that any adjustment made to the export turnover ought to be correspondingly made to the total turnover as parity is to be maintained between the two. We therefore direct the AO accordingly to make the adjustment, if any, towards telecommunication charges in foreign currency from the export turnover and the total turnover in the remanded proceedings. GROUND NO. 8: Di....
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.....04.2022 passed in M.P No. 22-23/Bang/2022), wherein the Assessing Officer was directed to delete the disallowance of loss for the reason that loss on account of foreign exchange fluctuations is allowable as a deduction under Section 37(1) of the Act. For the year under consideration, the Assessing Officer did not dispute the fact that the loss incurred by the Assessee is in the ordinary course of its business. Therefore considering the facts of the case and that the issue being covered by the decision of the coordinate bench in assessee own case we hold that no disallowance is warranted for MTM loss incurred and the AO is directed to delete the addition. GROUND NO. 9: Disallowance of Advances written off: 67. The Assessee had advanced certain amounts to its employees and the money advanced could not be recovered from the employees as they had either left the organisation or were terminated. The Assessee had written off the advances for an amount of Rs.1,89,26,071 in the profit and loss account and claimed the same as a deduction under Section 28(i) of the Act. The Assessing Officer disallowed the same on the ground that no details were furnished regarding the effort made to ....
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....n for not allowing the deduction is that the assessee has not furnished sufficient evidence in support of the claim. It is noticed that the Assessee has filed employee-wise listing of advances written off which are available at pages 1452-1470 of the paper book and detailed submissions are placed at pages 794-796 and 808 of the paper book. The ld AR during the course of hearing submitted additional evidence towards details of the advances written off (pages 88-139 of the additional evidence compilation (Vol II)). The ld.AR prayed for admission of additional evidences before the Tribunal as these evidences when considered would substantiate the claim of the assessee. The additional evidences now produced go the root of the issue and the core reason for not allowing the claim of the assessee. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record. 71. Considering the facts of the case and respectfully following the above decision of the coordinate bench we remit the issue to the AO for a de novo consideration based on the evidences and supporting furnished by the assessee after giving a reasonable opportunity of be....
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....ort of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Makalakshmi Sugar Mills Co. also relied on the decision of the apex court in the cases of Prakash Cotton Mills Pvt Ltd. v. CIT [1993] 201 ITR 684; Malwa Vanaspati and Chemical Co. v. CIT [1997] 225 ITR 383 and CIT v. Ahmedabad Cotton Manufacturing Co. Ltd. [1994] 205 ITR 163. In all these cases, the court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure. Further liability for interest which had been incurred by the assessee therein was regarded as compensatory in nature and allowable as business expenditure. 16. The ratio of those cases is not applicable here. Income- tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce and Industries [1998] 230 ITR 733, rejected the argument advanced by the assessee that retention....
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....as undergoing a transition phase on account of the merger and thus, certain employees were not covered under the gratuity scheme of the merged entity. Therefore, certain employees were paid gratuity directly by the company on account of settlement at the time of termination of employment. It is submitted that in the computation of income for the assessment year 2012-13, the entire gratuity amount of Rs. 19,11,94,712/- which was debited to the profit and loss account was disallowed and deduction was claimed for the total payment of Rs. 45,74,46,960/- (clause 17(i) of Form 3CD at page 1614). On the Assessing Officer asking for evidence, gratuity challans for Rs.38,62,09,368/- were submitted before the Assessing Officer. It is submitted that as the said amount was debited and paid during the year, the same would not be covered under the provisions of Section 43B as well as Section 40A(7) of the Act and therefore, is not disclosed in the tax audit report. Detailed submissions in this regard are placed at pages 797-798, 824, 980, 1426-1430 of the paperbook. 78. The ld DR submitted that the reason for disallowance by the lower authorities is that the assessee has not submitted any evi....