TMI Blog2017 (3) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... ion fee also partakes the character of the contract receipt and is to be treated as operating revenue of the international transactions more particularly since the expenses incurred by the assessee on such contract has been taken as operating cost. In view of the same, we direct the AO/TPO to consider the contract termination fee also as a part of the operational income for computing the ALP of the international transactions. - ITA No.329/Hyd/2015, C.O. 23/Hyd/2015, ITA No.318/Hyd/2015 - - - Dated:- 23-2-2017 - Smt. P. Madhavi Devi, Judicial Member AND Shri S.Rifaur Rahman, Accountant Member For The Assessee : Shri Raghunathan Sampath For The Revenue : Shri P. Chandra Sekhar, DR ORDER Per Smt. P. Madhavi Devi, J.M. The above cross appeals are filed by both the assessee as well as the Revenue against the assessment order passed u/s 143(3) r.w.s. 92CA(4) r.w.s. 144C of the I.T. Act, 1961, dated 21.09.2015. 2. Brief facts of the case are that the assessee company, engaged in the business of providing software development, quality assurance and support services to its AE, filed its return of income for the A.Y 2010-11 on 14.10.2010 admitting total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om its AEs also as part of the operating income. Vide submissions dated 30.07.2013, the assessee submitted as under: Firstly, we would like to humbly submit that the Company in its TP documentation considered the contract termination fees of ₹ 3,31,14,045/- received from AEs. Since, the Company is a captive service provider and to mitigate any loss of not providing services, the contract termination fee was received. As the same is in relation to the software services provided to the AEs, it was included in the operating income while computing the net margin under TNMM method. The same has been disclosed in the audited financial statements submitted to your good-self vide submission dated 28th February, 2013. We request your good self to consider the same for determination of arm s length price of the international transactions with the AEs) . 5. The TPO however, held that the contract termination fee is not part of the operating revenue since it does not relate to software development activity. He was of the opinion that the said termination fee is not received by the taxpayer in lieu of the provisions of software services by the assessee but is received in lieu of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Persistent Systems Solutions Ltd (Merged) 6,67,28,828 11.37 14 RS Software (India) Ltd 1,61,83,71,419 9.88 15 Sasken Communication Technologies Ltd 4,19,37,03,000 25.23 16 Tata Elxsi Ltd (Seg.) 3,37,77,99,096 18.02 17 Thinksoft Global Services Ltd 74,55,94,965 11.22 18 Zylog Systems Ltd 7,83,64,08,467 18.62 19 Persistent Systems Ltd 5,09,12,50,000 31.57 7. The assessee had also asked for risk adjustment while determining the ALP. However, the TPO rejected the assessee s contentions holding that the assessee is also undertaking certain risks which he enumerated at pages 21 and 22 of his order. Thereafter, the TPO has arrived at the Arithmetic Mean Margin of the comparables at 22.69% and after giving the working capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive analysis to reject comparable companies having: a) Diminishing revenue; b) Persistent Losses; c) Different financial year-end; and d) Export Sales Less than 75% of the sales. Selection of comparables 4. Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the software services of the Appellant: i. Camp U Learn Tech India Ltd; ii. E lnfochips Bangalore Ltd; iii. Kals Infosystems Ltd.; and iv. Tata Elxsi Ltd. (Seg). Rjection of comparables 5. Not undertaking an objective comparative analysis and interalia rejecting the following comparable companies: i. Akshay Software Technologies Ltd; ii. CG- V AK Software Exports Ltd ; iii. Satyam Computers Services Ltd; Contract Termination Fees 6. Considering Contract Termination fees as nonoperating revenue in nature: Error in Margin Computation 7. Computation of Net Margins of the following companies selected as com parables: i. CAT Technologies Ltd; ii. E-Infochips Bangalore Ltd. iii. E-Zest Solutions Ltd; iv. Kuliza Technologies Private Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in basis, for the services rendered by it, the contract termination fee is also in the nature of the operating income and should be taken into consideration for determination of the ALP of the international transactions undertaken by the assessee. Regarding the items of expenditure considered towards the payment of contract termination fee, the learned Counsel for the assessee has drawn our attention to Page 925 of the paper book wherein the expenditure relating to training and also other expenditure is given. 12. The learned DR, however, supported the orders of the authorities below and submitted that though the agreement contains the clause for contract termination fee, the assessee has not been compensated in accordance with the said agreement and therefore, this amount cannot be treated as such. Further, he submitted that the assessee had itself, in its books of account, shown it as the exceptional item and not as operating income. Therefore, according to him, the assessee itself has not treated it as operational income in its books and hence should not be treated as operating income for determination of ALP. 13. Having regard to the rival contentions and the material on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee further submitted that the said company has also been rejected by the tax authorities themselves due to lack of availability of segmental information. Further, it is submitted that the said company has abnormal financials with significant fluctuation in its margins on a year to year basis. The learned Counsel for the assessee has drawn our attention to the fact that this company has been taken as a comparable by the TPO in the cases of companies which are also into similar business as the assessee herein, and its comparability with such companies had come for consideration before the Coordinate Bench of this Tribunal for the very same A.Y and in the following cases, ITAT has directed the exclusion of the same from the final list of comparables on the ground of lack of availability of segmental data between the I.T. and I.T. enabled services. i) Pegasystems Worldwide India Pvt Ltd vs. ACIT in ITA No.1758 and 1936/Hyd/2014, dated 16.10.2015 ii) Oakton Global Technology Services Centre (India) Pvt. Ltd vs. ACIT in ITA No.434/Hyd/2015 dated 5.8.2016 iii) Parexel International (India) Pvt. Ltd vs. ACIT in ITA No.1918/Hyd/2014 dated 08.01.2016. 17. The learned DR, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Systems Ltd: 20. The learned Counsel for the assessee submitted that this company is also to be excluded from the final list of comparables as it is not functionally similar and further that the company is engaged in the business of software products and that the website of the company shows the product owned by Kals information Systems Ltd and it has inventories equivalent to 27% of the total sale. Further, he also submitted that the issue of comparability to this company to the assessee has also arisen in the assessee s own case for the A.Ys 2008-09 and 2009-10 and the said company was rejected by the Income Tax Appellate Tribunal in its own case. He also submitted that in the cases referred to in Para 15 above, the Income Tax Appellate Tribunal has directed the exclusion of this company also. 21. The learned DR, however, supported the orders of the authorities below. 22. Having regard to the rival contentions and the material on record, we find that the TPO has taken note of the assessee s objections that this company has inventories and has observed that the inventory is only of computers and not of any products. On the other hand, the assessee has stated that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has directed its exclusion. 25. The learned DR, however, supported the orders of the authorities below. 26. We find that in the case of M/s. Pegasystems Worldwide India Pvt Ltd, the Coordinate Bench of this Tribunal has considered all these facts as under: Tata Elxsi Ltd (Seg) 12.1. It was the objection of Assessee that above company is predominantly into product design services, Innovation Design Engineering and visual computing labs division which are specialized services. He referred to the order of ITAT in AY. 2009-10 in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this company was rejected on the reason that it is engaged in multiple segments. There is no break-up in the annual report and data on which margin from software services activity only can be computed is also not available. Moreover, the company itself has indicated that it cannot be compared with any other software service company because of its complex nature. Similar view was taken by many of the Coordinate Benches in earlier years that Tata Elxsi Ltd., cannot be selected as comparable company. Consistent with the above view, we are of the opinion that a compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emature. Hence rejected. 33. In the result, assessee s appeal is partly allowed. ITA No.318/Hyd/2015 34. Coming to the Revenue s appeal which is against exclusion of L T Infotech Ltd from the final list of comparables on the ground of exceptionally large scale of operation, it is the case of the Revenue that the assessee has itself taken this company as a comparable and therefore, it cannot challenge the same before the higher authorities. We find that though the assessee has taken this company as comparable in its TP study, has challenged its comparability before the TPO itself. Further, in the case of Kenexa Systems, this Tribunal has held that it is open to the assessee to challenge the comparability of a company taken by itself as a comparable in its TP study. Therefore, we do not agree with the contentions of the learned DR that the assessee having considered the same as comparable cannot challenge it before the authorities below. 35. As regards its comparability to the assessee, we find that the Coordinate Bench of this Tribunal in the case of M/s. Pegasystems Worldwide Pvt. Ltd and Others (cited Supra) has considered its comparability and held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X
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