AI Drafter 
TaxTMI 
TaxTMI 
2023 (4) TMI 1263
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....ar 2011-12. 2. The grounds of appeal are as under:- ITA No.179/Ind/2016 for A.Y,. 2011-12 "Based on the facts and circumstances of the case, the appellant respectfully submits that the learned Assessing Officer ('ld AO') erred in determining the total income of the appellant at Rs.383,49,26,920/- as against the returned income of Rs.156,44,35,848/- filed by the appellant. The grounds of the appellant against the action of the ld. AO are as follows : 1. on the facts and circumstances of the case and in law the assessment order passed by the ld AO under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 ('he Act') dated February 5, 2016 is without jurisdiction and is bad in law. 2. on the facts and circumstances of the case and in law the directions issued by the Dispute Resolution Panel (DRP) dated December 22, 2015 is without jurisdiction and is bad in law. The directions passed by the DRP are in violation of section 144C(8) of the Act. 3. on the facts and circumstances of the case and in law the assessment order passed by the ld AO dated February 5, 2016 is based in law and is in violation of Section 144C(13) of th....
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....adjustment as claimed by the appellant. 4.10 failing to grant the benefit of +/- 5 percent range as envisaged by the provisions of section 92C(2) of the Act. Corporate Tax related grounds 5. On the facts and in the circumstances of the case and in law, the ld AO/DRP has erred in disallowing an expense of Rs.6,07,00,658/- under Section 14A of the act read with Rule 8D of the Rules. 6. On the reacts and circumstances of the case and in law, the ld AO has erred in withdrawing the interest under section 234B of the Act. 7. on the facts and circumstances or the case and in law, the ld. AO has erred in levying interest under section 234D of the Act. 8. on the facts and circumstances of the case and in law, the ld. AO has erred in withdrawing the interest under section 244A of the act. It is prayed and the appellant claims relief that it be held that the aforesaid adjustments are bad in law and the ld. AO be directed to delete the adjustments. Each of the above grounds is independent and without prejudice to the other grounds preferred by the appellant." ITA No.292/Ind/2017 for A.Y. 2012-13 "1. That ....
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....ining the disallowance of Rs. 6,54,95,133/- did not appreciate that: (i) administrative expenses debited to the profit and loss account had no bearing to the earning of dividend and non current investment. (ii) non-current investment of Rs.1417.46 Crores was strategic investment in subsidiary companies and was not for earning any dividend. Subsidiary companies were merged with CSC India w.e.f. 01.04.2015 and during financial years 2009-10 to 2014-15, no dividend was earned from subsidiaries. Accordingly, noncurrent investment was not required to be taken into account in computing the disallowance under section 14A read with Rule 8D of the Rules." 3. Firstly we are taking ITA No.179/Ind/2016 for Assessment Year 2011-12. The assessee company is engaged in the business of software development and exports. The assessee is an Indian entity of Computer Science Corporation which is a group of Multinational Companies. The original return of income was filed on 30.11.2011 declaring total income at Rs.155,73,24,897/-. The case was selected for scrutiny and notice under Section 143(2) of the Income Tax Act, 1961 was issued to the assessee on 01.08.2012 which was duly serv....
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....es. The assessee selected 22 companies for which financial data for previous three years (i.e. Financial Years 2008-09, 2009-10 & 2010-11), which is the relevant Assessment Year, was considered. The weighted average of OP/TC of comparable companies for Financial Years 2008-09 to 2010-11 was 10.59% after risk and working capital adjustment as against 11.91% (which was revised to 14.85%, after depreciation adjustment) margin of the assessee. Since OP/TC margin of the assessee was greater than mean margin of the comparable companies, it was concluded that international transactions of the assessee were at arm's length. The Ld. AR further submitted that vide notice dated 31.10.2014 rejected some of the comparable companies and introduced some new comparable companies after conducting fresh search. The final tally of the comparable companies selected by the TPO for computing ALP is that 22 companies are comparable companies selected by the assessee company in TP study, 10 comparable companies accepted by the TPO from the TP study, and 11 fresh comparable companies introduced by the TPO. Thus, total comparable companies selected for determination of ALP was 21. The TPO on the basis of th....
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....uctis India Pvt. Ltd vs. ACIT (ITA No.1203/Del/2017). The Ld. AR also relied upon the decision of Bangalore Bench of the Tribunal in the case of ACI Worldwide Solutions Private Limited (TS-176- ITAT-2015(Bang)-TP). The Ld. AR also relied upon the decision of Pune Bench of the Tribunal in the case of Egain Communication (P) Limited (2009) 118 ITD 243 (Pune). Thus, the Ld. AR submitted that it is an established jurisprudence that the margins of the comparable companies should be adjusted on account of difference in depreciation between the assessee and the comparable companies. 10. The Ld. DR submitted that the Assessing Officer as well as the Transfer Pricing Officer has followed the well searched formula and the data that simple year should have been taken into account. The Ld. DR submitted that the TPO has taken cognisance of the depreciation adjustment and relied upon the order of the TPO and the Assessing Officer. 11. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has taken additional ground before the DRP while filing the objection to the draft Assessment Order thereby making adjustment o....
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....tancy; * Receivables management; and * Software development and implementation The Ld. AR further pointed out page 730 of the Paper book, para 13 (a) & (b) relating to certain details pertaining to units manufactured and raw material consumed with details of import and indigenously procured raw material which clearly shows that the company is also carrying manufacturing operations. The Ld. AR relied upon the decision of the Hon'ble Delhi High Court in the case of Ramgreen Solutions (P.) Ltd vs. CIT: [2015] 377 ITR 533 (Delhi), wherein the Court has held that functional similarity is of utmost importance while accepting or rejecting a comparable company. The Ld. AR further submitted that there is no segmental details available for this comparable. The Ld. AR pointed out that Annual Report of the company for FY 2010- 11 does not disclose segment wise profitability data for the purpose of comparability of the relevant segment with assessee. In view of the above a company with diversified functions cannot be compared to the assessee especially in the absence of segmental data. The Ld. AR relied upon the following decisions: - Pr. CIT vs. Saxo India (P) Ltd....
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....TPO and in this year the TPO has stated that the contentions of the assessee is not acceptable, which is contrary to the principle of consistency. 14.2. The Ld. DR submitted that in respect of E-Infochips Limited, the DRP has rightly included the same as it is a comparable company. The Ld. DR relied upon the order of the TPO/AO and directions of the DRP. 14.3. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the E-Infochips Limited is a product engineering and software research & development service company. The portfolio of the EInfochips Limited is totally different as the product based company cannot be the criteria for including the same as it is not the proper comparable with the assessee company. There are no segmental details available for this comparable. There are abnormally fluctuating margin related to this comparable. Besides this, the TPO has accepted in the remand report that the hardware sales during the year is 15.07% and whereas in the last year it was 18% and therefore, rejected this comparable in A.Y. 2010-11. Thus, all these aspect held this company as noncomparable to the assessee compa....
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....on the basis that it is a product engineering company and it cannot be compared with software development services: - Cadence Design Systems India Private Limited vs. ACIT: ITA No. 6315/Del/2015 - Hewlett Packard India Software Operation Private Limited vs. DCIT: IT(TP)A No. 1304/Bang/2011 - Symantec Software & Services India Private Limited vs. DCIT: ITA No. 614/Meds/2016 - Mphasis Limited vs ACIT: IT(TP)A No. 14/Bang/2012 - Trianz Holdings Private Limited vs. DCIT: IT(TP)A No. 1568/Bang/2012 - Novell Software Development (India) Private Limited vs. DCIT: IT(TP)A No.1287/Bang/2011 - Symphony Services Pune Private Limited vs. ITO: [2014] 65 SOT 30 (Pune Tribunal) - DCIT vs. Amber Point Technology India Private Limited: ITA No. 756/Pune/2014 (Pune Trib) 14.5. The Ld. DR relied upon the directions of the DRP and the order of TPO/AO. 14.6. We have heard both the parties and perused all the relevant material available on record. E-zest Solutions Limited is engaged in the diversified activities and providing product engineering services and, therefore, it cannot be treated as comparable to assessee company. Be....
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....oducts and rendition of software services. It has created software platforms, which are sold to customers. This company is functionally different and therefore cannot be compared with assessee. The Ld. AR submitted that Lucid Software Limited is providing software development services by using in-house developed software products (intangible) In view of the same, Lucid Software Limited (a) is a software product company, (b) even the software services that are being provided by Lucid Software Limited are provided by using-in-house developed software. The Ld. AR further submitted that the said company has developed its own software product for rendition of software services and has also incurred expenditure of Rs.83,80,045/- on research development on yearly basis. Thus, the Ld. AR submitted that it is clearly evident that the said company is functionally not comparable to the assessee. The Ld. AR relied upon the following decisions relating to the comparable regarding software product company: - 3DPLM Software Solutions Limited: (TS-359-ITAT-2013 (Bang)- TP) - Citrix R&D India Pvt. Ltd vs. ITO: TS-242-ITAT-2017(Bang)-TP - ACIT vs. Curam Software Internatio....
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.... of the TPO/AO. 14.12. We have heard both the parties and perused all the relevant material available on record. This comparable Lucid Software Limited is engaged in development of software products and the assessee is not dealing in software product. Thus, functionally this comparable is not a valid comparable. Besides this, no segmental research are available for the current Assessment Year in respect of Lucid Software Limited. There is an observation that the company has fluctuating margins for a period of three years. Therefore, this comparable is not justifiable. We direct the TPO/AO to exclude this comparable from the final list of comparables. 14.13. Persistent Systems Limited: This comparable company is functionally dissimilar. The company is engaged in rendering outsourced product development services and product design services as against software development services Further the Company maintains its own intellectual property which has created a significant non-linear revenue stream for the company. The company has been involved in merger/ demerger activities during the F.Y. 2010-11. This unusual event is helping the Company in its operations and has an impact on t....
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....both the parties and perused all the relevant material available on record. Persistent System Limited is engaged in rendering outsourced product development services and product design services but the assessee company is primarily relates to provision of software development service. Thus, there is dissimilar function in this comparable. Persistent System Limited was involved in merger/demerger activities during the F.Y. 2010-11 and thus this is unusual event which will set out as non-comparable company. Besides that, income from sale of software product and IP business was not bifurcated and no segmental information is available. Therefore, we direct the TPO/AO to exclude this comparable from the final list of comparables. 14.16. Sankhya Infotech Limited: The company is engaged in design and development, installation and maintenance of simulators and systems for varied customers such as defence, aerospace, automobile and security etc. The company is engaged in the field of simulation operations, which are functionally different from software development services rendered by the assessee. The Ld. AR relied upon the following judicial precedents wherein the company has been held....
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....f 2017] - Colt Technology Services India (P ) Ltd [IT Appeal No. 609 (Delhi) of 2011] - Bechtel India (P.) Ltd. vs. DCIT: [ITA No 6779/Del/2019] - Saxo India (P) Ltd. vs. ACIT: [2016] 176 TTJ 540 (Delhi - Trib.) - Shipnet Software Solutions India (P) Ltd. [IT Appeal No.3404/MDS/2016 14.17. The Ld. DR relied upon the directions of the DRP and the order of the TPO/AO. 14.18. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that Sankhya Infotech Limited is engaged in the field of simulation operations which are functionally different from software development business. There are no segmental available regarding software related to this comparable. This comparable company undertakes R&D and owns intangibles which makes it dissimilar from the assessee's portfolio. Therefore, we direct the TPO/AO to exclude this comparable from the final list of comparables. 14.19. Wipro Technology Services Limited: The Ld. AR submitted that this comparable company is functionally different. The company is engaged in providing software related support services primarily, information technology so....
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.... AR relied upon the following decisions wherein companies which are having substantial brand presence (in the present case Wipro) are not comparable to the company which are not enjoying such brand presence: - Pr. CIT vs. Oracle (OFSS) BPO Services (P) Ltd. [2018] 303 CT 284 (Del). The SLP filed by the Revenue against the order of the Hon'ble High Court has also been dismissed vide order dated 30.11.2018 in SLP Civil Diary No. 32469/2018. - Pr. CIT vs B C Management: 1064 of 2017 (Del HC) The TPO in the report dated January 16, 2019, has merely commented that the revenue from software sales is quite miniscule as compared to software services revenue; therefore, this contention of the assessee is not tenable. The TPO has further stated that the contention is of the assessee that the said company is earning super normal profit is also not acceptable because PLI margin of 40.56% on cost cannot treated as Super Normal. The Ld. AR submitted that the TPO has however, failed to appreciate that the company cannot be compared, not just because of super normal profits, but also bees use of (a) brand presence, (b) high related party transaction and (c) fluctuating margins....
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....sociated Enterprises. Under the circumstances, business of the assessee will also be affected the same way as the business of the comparable. In view of the above since the market in which the assessee as well the comparable operate is similar and any adverse effects of government policies affects business for tie comparable as well as the assesseet alike, it cannot be said that any fall in business due to government policies is an extraordinary event peculiar to the above mentioned comparable company. 15.2. The Ld. DR submitted that this comparable was not justifiable as the profile of Maveric Systems Limited also includes testing services which is totally different from the assessee's profile. 15.3. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note it is persistently loss making company and the performances was due to government policies but this comparable company was excluded in A.Y. 2010-11. In the present A.Y., the TPO has not disputed the functional comparability of this company and the TPO has accepted this comparable in A.Y. 2012-13 and 2013-14. The contention of the Ld. DR that this company includes tes....
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....d that it has high RPT, which, in view of the above submissions has been shown to be incorrect. 15.5. The Ld. DR submitted that this comparable company should not be included as it is primarily delivering software validation and software services. 15.6. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the TPO has not disputed final portfolio and only rejected on the basis of high RPT but from the perusal of annual report the observation of the TPO appears to be factually incorrect. Therefore, we direct the TPO/AO to verify the same and if all the filters are applied, then include this comparable in the final list of comparable. 15.7. R System International Limited: R Systems International Ltd. has two segments firstly Software Development segment and customisation services and secondly Business Process Outsourcing. The Ld. AR submitted that the Assessee has chosen Software development and customization services segment as held to be comparable to the Assessee who is engaged in the business of software development, maintenance and enhancement services (customization etc.). Segmental quarter wise audited f....
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....lters adopted by the TPO. The said comparable company has been included by the TPO in the previous A.Y. 2010-11 when it had earned a profit however, for the impugned year since the company has incurred losses the TPO has rejected company under the garb of having abnormal profit pattern. Both profit and losses are part of the business and if in one year a company has incurred losses does not mean it has an abnormal profit pattern. The Ld. AR submitted that it is not the case that the company has incurred any abnormal costs, neither is it a persistent loss making company. The Ld. AR further submitted that it has earned a healthy margin of 30.75% and 14.72% for the past two AYs, i.e., 2010-11 and 2009-10, respectively. Therefore, the Ld. AR submitted that the said company should be included in the list of comparable companies. The Ld. AR submitted that the coordinate Benches of the Tribunal have clearly held that at least three years' data must be considered for a company to be considered as a persistent loss making and declared as incomparable. The Ld. AR relied upon the following cases wherein comparables have been excluded on the basis of persistent loss making, if the comparab....
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.... Operating Profit 3,12,10,08,792 25,20,00,4000 Margin considered (OP/OC) 14.85% 11.68% 17. This approach of the TPO has been affirmed by the DRP. Consequently, the assessee's operating profit to operating cost ratio has been calculated at 11.68%, without considering foreign exchange gain of Rs.3,31,37,000/- which forms part of operating income and depreciation adjustment claimed by the assessee. The Ld. AR submitted that the entire foreign exchange gain has accrued to the assessee during the relevant financial year and the same was solely because of the export proceeds in convertible foreign exchange and had direct nexus with the exports of the assessee. Thus, the foreign exchange gain must be considered as operating income for the purpose of computing the margins, being inextricably linked with the core business operations. i.e. provision of software development services. The Ld. AR further submitted that in assessee's case own case for the A.Y. 2010-11 the aspect of foreign exchange gain or loss whether to be considered operative was decided in ITA No.160/Ind/2015. Ld. AR relied upon the decision of Delhi High Court in the case of PCIT vs. Ameriprise India Pvt.....
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....s identified expenditure of Rs.20,37,506/-, representing salary cost of two employees, related to long term investment in subsidiary and current investments in non-trading in various mutual funds. The Ld. AR submitted that the expenditure was in respect of treasury operation and managing such investments which was incurred for earning the exempt income. The Ld. AR further submitted that as per tax audit report the amount was Rs.20,37,506/- only as the salary expenses of those employees. The Ld AR further submitted that the nexus of expenditure sought to be disallowed without earning of exempt income and, therefore, relied upon the CBDT Circular No.14 dated 11.11.2001, clarifying the provisions of Finance Bill 2001. The Ld. AR relied upon the decision of Hon'ble Apex Court in the case of CIT vs. Calcutta Agency Limited, 19 ITR 191, CIT vs. Walfort Share and Stock Brokers (P) Limited, 326 ITR 1. The assessee has made suo moto disallowance of Rs.20,37,506/- at the time of purchase and sale of mutual fund. The Ld. AR submitted that the Assessing Officer has not recorded satisfaction regarding incorrectness of the assessee's claim on the basis of objective analysis and cogent reasons. T....