TaxTMI 
TaxTMI 
2019 (6) TMI 1705
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.... price received for rendering such services by the Assessee from its AE has to pass the Arm's Length Price (ALP) test as provided u/s.92 of the Income Tax Act, 1961 (Act). In this appeal two of the disputes are with regard to addition made consequent to determination of ALP and consequent upward revision and adjustment made to the price at which international transactions were carried out by the Assessee with its AE in respect of (1) Software development Services and (2) IT enabled Services. TP ADJUSTMENT RELATING TO IT SERVICES (Software Development Services: 3.There is no dispute that the Most Appropriate Method chosen for the purpose of comparison of the profit margin of the Assessee with that of the comparable companies was the Transaction Net Margin Method (TNMM) and the Profit Level Indicator (PLI) chosen for the purpose of such comparison was Operating Profit to Operating Cost (OP/OC). The OP/OC of the Assessee in the SWD services segment was as follows:- Description Amount Operating Revenue Rs.6,31,98,998/- Operating Cost Rs.5,86,25,045/- Operating Profit (PBIT) Rs. 45,73,953/- Operating Profit to Cost Rati 7.80 % 4.Comparable ultimately selected by TPO and th....
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....98/- Shortfall being adjustment u/s.92CA Rs.42,99,788/- The above shortfall of Rs.42,99,788/- is treated as transfer pricing adjustment u/s 92CA." 6.Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 7.The assessee filed a chart showing turnover and the margins of the 20 comparable companies finally chosen by the TPO after giving effect to adjustment towards working capital as allowed by the TPO and also as claimed by the Assessee. The Chart also explains as to how some of the comparable companies chosen by the TPO are not comparable (a) for the reason that the turnover of those companies were beyond Rs.200 crores and therefore cannot be compared with the Assessee whose turnover is only Rs.6.31 Crores, (b) for the reason that these c....
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....39;ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity ....
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.... whose turnover is above Rs.200 Crores should be excluded from the list of comparable companies:- (1)Flextronics Software Systems Ltd. 595.12 crores (2)iGate Global Solutions Ltd. 527.91 crores (3)Mindtree Ltd. 448.79 crores (4)Persistent Systems Ltd. 209.18 crores (5)Sasken Communication Technologies Ltd. 240.03 crores (6)Infosys Technologies Ltd. 9028.00 crores The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Improper selection of comparables: 11.It was submitted by the learned counsel for the Assessee that the following 2 companies are not functionally comparable with that of the Assessee. a)KALS Information Systems Limited b)Accel Transmission Limited. In this regard our attention was drawn to the decision of the Hon'ble ITAT Bangalore Bench in the case of Trilogy E-Business Software India Pvt.Ltd. ITA No.1338/Bang/2010 for AY 2007-08 wherein these two companies were held to be not functionally comparable with that of a pure software developer like the Assessee. 12.The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Busine....
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....so find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." "(e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i)Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii)Ushus Technologies - offshore development centre for em....
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....nsel for the Assessee brought to our notice that the comparable company chosen by the TPO viz., Lucid Software Limited, has to be excluded as functionally not comparable with that of the assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. in ITA No.7821/MUM/2011, which was followed by the ITAT Bangalore Bench in the case of Logica Private Ltd. ITA No.1129/Bang/2011 for AY 07-08, wherein it was held as under:- "7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not ....
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....out the ALP. 17.As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica Pvt.Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- "14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- "7.7.Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6....
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.... 1. Maple eSolutions Ltd. 32.66 2. AllsecTechnologies Ltd 28.51 3. Datamatics Financial Services Ltd. (Seg.) 24.99 4. Transworks Information Services Ltd. 19.56 5. Cosmic Global Ltd.(Seg.) 16.03 6. Vishal Information Technologies Ltd. 19.56 7. Asit C.Mehta Financial Services Ltd. (earl known as Nucleus & GIS (India) Ltd. 34.52 8. Goldstone Infratech Ltd. (Seg.) (earl known as Goldstone Teleservices Ltd.) 29.01 9. Spanco Ltd. (seg.) (earlier known as Span Telesystems & Solutions Ltd.) 20.86 10. Ace Software Exports Ltd. 7.72 11. Apex Knowledge Solutions Pvt.Ltd. 20.48 12. R Systems International Ltd. (Seg.) 15.11 13. Flextronics Software Systems Ltd. (Seg.) 14.54 Average 24.00 22.The TPO finally passed an order u/s. 92CA of the Act and on the basis of the comparable set out above, arrived at arithmetic mean of 24.00%. After factoring the working capital adjustment of 1.00%, the adjusted arithmetic mean was determined at 23.00%. The computation of the ALP by the TPO in this regard was as follows:- "38.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the ar....
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....arted 28.6.2013 considered comparability of these companies in the case of a company engaged in rendering IT enabled services to its AE similar to that of the Assessee in the present case. The tribunal held that the aforesaid companies are not comparable. The following were the relevant observations of the Tribunal. "8. The first objection is with reference to selection of comparable data by the TPO with reference to the following five companies- (a)Vishal Information Technologies Ltd. (b)Goldstone Infratech Ltd. (c)Datamatic Financial Services Ltd.(seg) (d) Maple e-Solutions Ltd. (e) Nucleus Netsoft & GIS(India) Ltd. (now known as (Asit C. Mehta Financial Services Ltd.) Vishal Information Technologies Ltd. 9. The assessee's objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee's case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates t....
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....is company was rejected in the case of Stream International Services Pvt. Ltd. V/s. ADIT(International Taxation) by the Mumbai Bench of the Tribunal, vide its order dated 11.1.2013 in ITA No.8997/Mum/2010 for assessment year 2006-07. 10.1. After considering the rival contentions, we are of the opinion that the business model of the above company is different from that of the assessee. In this case, the foreign exchange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. This issue was considered by the coordinate Bench (Mumbai Bench) of the Tribunal in the case of Stream International Services Ltd.(supra) wherein it was considered as under- "14. The inclusion of second case objected to by the Id. AR is that of Goldstone Infratech Limited (Seg) (earlier known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of 'Companies with export revenues more than 25% of the revenues'. Annual accounts of Goldstone Teleservices Limited indicate total revenue o....
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....1.13 crore. It was submitted that the percentage of transaction with related parties is much more than 25%, being, the filter adopted by the TPO himself and hence the same should be excluded. 12.In the opposition, the learned Departmental Representative contended that the major transaction of Rs. 99.14 lakh of Datamatics Financial Services Limited with Datamatics Limited was towards 'Reimbursement of expenses'. Since the reimbursement of expenses does not include any profit element, the Id. DR urged that the same be excluded. He stated that once this transaction is excluded, the other transaction of Rs. 14.31 lakh are less than 25% of the total transaction with related parties. 13.We do not find any force in the contention advanced by the learned Departmental Representative for the exclusion of transactions with Datamatics Limited towards 'Reimbursement of expenses' from the overall transactions entered into by Datamatics Financial Services Ltd. with its AEs. Section 92F(v) defines 'transaction' in the context of transfer pricing provisions to include an arrangement, understanding or action in concert whether or not it is formal or in writing or whether or not it is intended ....
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....9 and also in the case of Stream International Services (supra). Further, the assessee also relied on the DRP order in assessment year 2007-08, with reference to the above company. 12.1.We have considered the rival sub missions. We agree with the objections of the assessee. In the case of Stream International Services P. Ltd. (supra), it is held with reference to this company as under : "18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed - one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal - that the case of Maple eSolutions Limited has been directed to be excluded from the list of comparables. As the assessment year under consideration is 2006-2007 and the Delhi Bench of the Tribunal has also considered the same assessment year while directing the exclusion of the case of Maple e Solutions Limited from the list of comparables, we are unable to accept the contention of the Id. DR in this regard. It is more so because no contrary view has been brought by the Ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from the final lis....
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.... after giving the benefit of the second proviso to Sec.92(2) of the Act. The relevant grounds of appeal of the Assessee are treated as allowed. 28.Ground No.5 raised by the Assessee with regard to determination of ALP in the ITES segment requires consideration. Gr.No.5 raised by the Assessee reads as follows:- "5. Mistakes apparent from record and erroneous computation of net cost plus margin by the AO/TPO a)The AO/TPO has erred on facts and in law in disregarding the segmental details as provided by the Appellant and in considering incorrect net profit margins of the Appellant. b)The AO/TPO has erred on facts in computing the operating cost of the Appellant in relation to the ITES segment." 29.To appreciate the aforesaid ground, it is necessary to look into the basis on which the TPO computed the Operating expenditure to arrive at PLI (OP/OC) of the Assessee in its ITES segment. The OP/OC computed by the Assessee in the ITES segment was as follows:- Description Amount Operating Revenue Rs.4,87,32,573/- Operating Cost Rs.4,10,87,673/- Operating Profit (PBIT) Rs. 76,44,900/- Operating Profit to Cost Ratio 1 8.61 % The TPO computed the OP/OC in all the three bus....
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....ofit and loss account of the Company, as was submitted before the TPO: Particulars Software Services IT enabled services Distri-bution segment Unallocable income Total Income Income from associated enterprises 63,193,998 48,732 573 243,666 - Income from maintenance services - - 41,368,166 453,435 Income from sale of licences - - 62,723.218 - 63,198,998 48,732.573 104,335,049 453,435 216,720,054 Personnel cost 31,411,196 20,421,978 41,165,573 - 92,998,747 Royalty paid to associated enterprises - - 30,199,854 - 30,199,854 Other operating expenses 22,788,880 17,660,493 40,297,943 - 80,747,316 Depreciation 4,424,969 3005,202 3,605,483 11,035,654 Total operating expenses 58,625,045 41,087,673 115.268.853 214,981,571 Gross profit 32,523,364 Operating profit/ (loss) 4,573,953 7,644 900 (10,933.804) 453.435 1,738,....
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.... The operating expenses of the Assessee in relation to the ITES segment was computed by the TPO at Rs. 56,427,676 vis-a-vis Rs. 41,087,673 as submitted on 15 September 2009 by the Assessee." 31. The DRP has however not considered the issue in proper perspective and has decided the issue as follows:- "7. Ground no. 8 - Erroneous computation of net cost plus margin of the assessee The ground of objection no.8 is as under The TPO has erred on facts in computing the operating cost of the assessee, at Rs.5,29,76,947 instead of Rs.4,10,87,673 in relation to the ITES segment. In this connection the assessee has submitted that all expenses were recovered by the assessee based on the agreement between the assessee and its AE. The assessee had also submitted that expenses were recovered on actual basis. The assessee has further submitted that in view of these facts, the addition of recovery of expenses to the operating revenue and cost of the assessee for the purpose of computing the transfer pricing adjustment u/s 92CA, by the TPO for the ITES segments was erroneous. We have considered the submissions made by the assessee. This issue has been discussed by the TPO in para ....
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....s of the domestic unit of Rs.3,617,542." 35.As far as this ground is concerned, the issue is with regard to the set off of losses of the non-10A unit against the eligible profits of the 10A unit while allowing deduction u/s.10A of the Income Tax Act, 1961 (Act). The assessee had claimed deduction u/s 10A of the Act before setting of losses of the non-10A unit. The AO was of the view that deduction u/s 10A of the Act was not in the nature of exemption provision and, therefore, the business loss and unabsorbed depreciation of the earlier years has to be first set off against the income of the eligible unit and only on the reminder deduction u/s 10A of the Act has to be allowed. The view of the AO was confirmed by the CIT(A), hence this ground of appeal by the Assessee before the Tribunal. 36.At the time of hearing it was agreed by the parties before us that this issue is no longer res integra and has been concluded by the Hon'ble Supreme Court in the case of Yokogawa India Ltd., 391 ITR 274 by its order dated 16.12.2016 and in the aforesaid decision the Hon'ble Supreme Court took the following view :- *That from a reading of the relevant provisions of section 10A it is more than....
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.... of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained. We therefore hold that deduction u/s.10A of the Act has to be allowed without setting off losses of non-10A unit before allowing the deduction under section 10A of the Act. In view of the aforesaid decision of the Hon'ble Supreme Court, the AO is directed not to set off the losses of non-10A units against profits of 10A units before allowing deduction u/s. 10A of the Act. 38.Gr.No.10 raised by the Assessee reads as follows: 10Grant of lower deduction under section 10A of the Income-tax Act, 1961 The learned AO has erred and the Honorable DRP has further erred in confirming the computation of deduction under section 10A of the Act. Without prejudice to the generality of the above, the AO has erred, inter alia, in: a)Reducing foreign currency expenditure of Rs 3,245,683 from the export turnover; b)Reducing insurance charges of Rs 421,997 from the export turnover; c)Reducing communication charges of Rs 4,214,060 from the export turnover; and d)Not making any corresponding reduction in the total turnover after having reduced the items mentioned in (a), (b) and (c) above from the export ....