TMI Blog2019 (9) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... plete annual report of the company. If required, the TPO may gather information u/s 133(6) of the Act form the company. He shall provide a copy of the information to the assessee also. Infobeans Technologies Ltd.-Margin 48.97% - Annual report has provided details of earning in foreign exchange, which mentioned that export of goods/services amounting to ₹ 32,96,59,883/- have been calculated on FOB basis. The Note - 20 of the annual report mention revenue from operations earned on sale of software (export) amounting to ₹ 32,96,59,883/-. Thus, in view of the Note 27, the quantum of export of the goods and export of the services cannot be ascertained and thus in view of no segmental data of export of the goods and export of the services available separately, we are of the opinion that the company cannot we selected as comparable at entity level. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of the comparables. Persistent Systems Ltd. - As forming part of the financial restatement of the company, under the head segmental information, it is mentioned that the company operates predominantly for providing software products, services and technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and off-site developments services are rendered in different geographical locations. In case of on-site development, the company charge higher revenue from the customers in view of the expenses incurred in foreign currency and higher input costs on human resources, whereas in case of off-site development all expenses on human resources are incurred domestically and thus revenue or fee charge from the customer would be generally less than what would be charged in case of on-site customers. This business model difference makes difference in FAR analysis. As relying on MICROSOFT INDIA (R AND D) PVT. LTD. VERSUS DCIT, CIRCLE 16 (2) , NEW DELHI [ 2019 (1) TMI 1136 - ITAT DELHI] the company becomes functionally dissimilar to the assessee CAT Technologies Ltd. - Revenue receipts also include consultancy fee received and there is no separate segment for consultancy in the annual accounts of the company. In our opinion, in absence of any separate segmental date of software development services, the company cannot be treated as comparable at entity level Mavrick Systems Ltd. - In view of no documentary evidence filed in support of its claim of functional similarity, we reject the requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26A-S, is income of the assessee for the year under consideration or advance or otherwise. We, therefore, direct the assessee to produce all necessary documents in support of its claim that receipt are not income taxable in the year under consideration. The Assessing Officer may decide the issue in dispute in accordance with law. The ground of the appeal is accordingly allowed for statistical purposes Allowing TDS credit - HELD THAT:- The matter is only of verification at the level of the Assessing Officer, and accordingly, we direct the Assessing Officer to verify the claim of the assessee and decide the issue in accordance with law. The ground of the appeal is accordingly allowed for statistical purposes. - ITA No.7290/Del/2018 - - - Dated:- 24-9-2019 - Shri Amit Shukla, Judicial Member And Shri O.P. Kant, Accountant Member For the Appellant : Shri Ajit Karode, Adv. For the Respondent : Shri Sanjay I. Bara, CIT(DR) ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 11/10/2018 passed by the Ld. Additional Commissioner of Income Tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.2 That on the facts of the case and in law, the Ld. TPO / Hon ble DRP has erred in rejecting the Appellant s claim to use multiple year data for computing the arm's length price and, I instead, has adhered to the use of single year (i.e. FY 2013-14) updated data to conclude I the ALP of the international transaction which was not available to the Appellant at the time of undertaking transfer pricing study required to be maintained under Section 92D of the Act. 3.3 That on fact of the case and in law, the Ld. TPO/ Hon ble DRP has erred in application of inappropriate filters such as different financial year end and export service income filter for identifying companies comparable to the Appellant. 3.4 That on the facts of the case and in law, the Ld. TPO / Hon ble DRP have erred, in law and on facts and circumstances of the case, by wrongfully rejecting comparable companies and including certain non-comparable companies to the final set of comparable companies for the purpose of determining the ALP of the impugned international transactions on an ad-hoc basis, thereby resorting to cherry picking of comparable companies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction pertaining to provision of software services. 3.5 That on the facts of the case and in law, the Ld. TPO / Hon ble DRP have erred, in law and on facts and circumstances of the case, by selecting companies which are earning supernormal profits as compared to the Appellant. 3.6 That on the facts of the case and in law, the Ld. TPO / Hon ble DRP have erred, in law and on facts and circumstances of the case, by treating foreign exchange gain/ loss as nonoperating items while determining the ALP of the subject international transaction. 3.7 That on the fact of the case and in law, the Ld. TPO / Hon ble DRP has erred in not allowinga risk adjustment to the Appellant on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full- fledged risk taking entrepreneurs. TP adjustment in relation to notional interest on outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income filed for AY 2014-15 vis-a-vis the amount of receipts as appearing in the Form 26 statement for AY 2014-15. Non-grant of additional TDS credit amounting to INR 94,054 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not granting the additional TDS credit amounting to INR 94,054, without appreciating the fact that corresponding income has been offered to tax by the Appellant in the return of income filed for AY 2014- 15. Levy of interest under section 234A and 234B of the Act 7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A and section 234B of the Act. Initiation of penalty proceedings 8. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions carried out by the assessee to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO after considering submission of the assessee proposed adjustment to International transactions of software development services and marketing support services . 2.2 Under software development services segment, the Ld. TPO accepted the Transaction Net Margin Method (TNMM) as appropriate method for benchmarking Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI). The learned TPO Identified 16 comparables, including 3 comparables chosen by the assessee and computed net average margin (PLI) of the comparables at 23.92% and worked out adjustment of ₹ 16,32,10,833/- to the price received by the assessee. 2.3 Similarly, under the marketing support services segment, the learned TPO benchmarked the transaction using TNMM as most appropriate method and OP/OC as profit level indicator. The learned TPO Identified 10 comparables including one comparable chosen by the assessee and worked out their average profit margin (PLI) at 19.65% and accordingly, computed adjustment of ₹ 6,93,82,803/-to the price received. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Marketing support services NIL 3. Interest on receivables 3,81,58,172 Total 24,37,19,280 2.6 In the impugned assessment order, the Assessing Officer accordingly made addition of transfer pricing adjustment of ₹ 24,37,19,280/- and addition on account of TDS reconciliation of ₹ 34,72,945/-. 2.7 Aggrieved with the additions made, the assessee is before the Tribunal raising the grounds as reproduced above. 3. Before us, the Ld. counsel submitted that the ground No. 1 and 2, 3 and 3.1, 3.3 are general in nature. Accordingly, we are not required to adjudicate upon those grounds. 3.1 He also did not press ground No.3.2, 3.4.3 and 3.4.4. In ground No. 3.4.6, he did not press inclusion of Lucid Software Ltd. for set of comparable companies. Accordingly, all these grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 7. Cigniti Technologies Ltd. 8. R S software (India) Ltd. 4.4 The learned counsel challenged inclusion of following company in the set of comparables for software service segment finally selected after the direction of the learned DRP: 1. Cat Technologies Ltd 2. Mavric Systems Ltd. 4.5 We have heard rival submission of the assessee as well as of the Revenue on the exclusion/inclusion of the comparables challenged by the assessee. The arguments of the parties and our decision in respect of the each company are discussed below: 5. Thirdware Solutions Ltd. 5.1 The learned TPO held the company as functionally comparable in view of observation that it is engaged in the implementation and consulting services of software based on ERP and business intelligence, however, the learned DRP observed that company was engaged in different business segments and directed to retain this company as comparable only if segment data is available. 5.2 The learned counsel of the assessee submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at service and products have been used interchangeably in the annual report and no sufficient segment information is available. He submitted that in segment reporting expenses of ₹ 20,580 lakhs have not been allocated to the segment of service cluster, industrial cluster, telecom discontinued business. The learned counsel submitted that coordinate bench of the Tribunal in the case of Piteny Bowes Software India Private Limited in ITA No. 5052/Del/2018 for assessment year 2014-15 has rejected the company as comparable on account of insufficient segmental information. 6.3 The learned DR, on the other hand, referred to page 250 of the assessee s paper book and submitted that revenue has been only shown from IT services and there is no sale of products by the company. He submitted that, the service cluster, industrial cluster telecom (PES) discontinued business are only verticals wherein the company has provided software services and thus the company is a valid comparable to the assessee. Decision 6.4 We have heard submission of the parties. On perusal of the extract of the annual reports filed in the paper- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Xchanging Technology Services India Pvt. Ltd. Vs DCIT, Circle-27(2),New Delhi, ITA No.1222/Del/2015 (Assessment Year: 2010-11), wherein it is held that the company cannot be accepted as comparable in absence of sufficient financial information. 7.3 The learned DR, on the other hand, relied on the order of the lower authorities. 7.4 We have heard rival submission of the parties. We find that the Note - 27 of the annual report has provided details of earning in foreign exchange, which mentioned that export of goods/services amounting to ₹ 32,96,59,883/- have been calculated on FOB basis. The Note - 20 of the annual report mention revenue from operations earned on sale of software (export) amounting to ₹ 32,96,59,883/-. Thus, in view of the Note 27, the quantum of export of the goods and export of the services cannot be ascertained and thus in view of no segmental data of export of the goods and export of the services available separately, we are of the opinion that the company cannot we selected as comparable at entity level. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee referred to page 248 of the paper-book and submitted that in background to significant accounting policies, it is reported that the company is engaged in providing wide range of services and thus it is functionally dissimilar to the assessee. The learned counsel referred to page 245 and submitted that the company invested in products and platforms and it owns significant intellectual property. He referred to 19 patents filed by the company mentioned in annual report. The learned counsel submitted that in view of no segmental information available, the company should be excluded from the set of comparables. He submitted that the company has been excluded by the Tribunal in the case of Nokia Siemens Networks India Ltd. in ITA No. 333/Del/2013 on account of functional dissimilarity because of wide range of services. 9.2 The learned DR, on the other hand, relied on the order of lower authorities and submitted that though the company owned intellectual property right, however, the company was engaged only in providing software development services. He submitted that the assessee has not demonstrated as how owning of intellectual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 664 crore), graphic animation and gaming (₹ 18.43 crores) and system integration and support (₹ 42.39 crores). In our opinion, in absence of any segmental result of trading as well as services rendered, the company cannot be selected as comparable at entity level, accordingly, we direct the learned AO/TPO to exclude the company from the set of the comparables. 11. Cigniti Technologies Ltd. 11.1 The learned DRP observed that the company was included by the DRP in assessment year 2012-30 and, therefore, should be retained in the year under consideration also for the same reasons. The learned counsel of the assessee referred to Page No. 293 of the paper-book and submitted that the company has acquired Gallop Solutions Inc., USA during the year under consideration and due to which, total Revenue has increased by 72% by way of addition of more than 50 new clients. He submitted that in view of this extraordinary event, the company is liable to be excluded from the set of the comparables. He also referred to page 295 of the paper book and submitted that the company was engaged in software testing business. The Ld. counsel relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the company has been chosen as comparable in the assessment year 2012-13 also by the Ld. DRP. 12.4 We have heard rival submission of the parties. We find that in case of on-site development and off-site developments services are rendered in different geographical locations. In case of on-site development, the company charge higher revenue from the customers in view of the expenses incurred in foreign currency and higher input costs on human resources, whereas in case of off-site development all expenses on human resources are incurred domestically and thus revenue or fee charge from the customer would be generally less than what would be charged in case of on-site customers. This business model difference makes difference in FAR analysis. The company has been excluded in the case of Microsoft India (R D) Private Limited in ITA No. 507/Dell/2017 as it was involved in R D activities for software development services. In view of the decision of the Tribunal (supra), the company becomes functionally dissimilar to the assessee. Accordingly, keeping in view the difference of business model and functional dissimilarity, we direct the Ld. AO/TPO to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as contested to be different from the software development services. 15.3 We have heard the rival submissions of the parties. Before us the learned counsel has requested for sending the matter of examination of the comparability of the company to the learned DRP, however, the Ld. counsel has not filed complete annual report of the company before us for justifying, whether the company is functionally similar to the assessee. In view of no documentary evidence filed in support of its claim of functional similarity, we reject the request of the learned counsel for sending the matter of examining comparability of the company back to the learned DRP. 16. The grounds raised by the assessee in respect of exclusion/inclusion of comparables, are accordingly allowed partly for statistical purposes. 17. In ground No.3.6, the assessee has objected for treating of foreign exchange gain/loss as non-operating items by the learned DRP while determining the ALP of international transactions. 17.1 The learned TPO stated that forex gain/loss arising on account of change in fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue after analysis of facts of the case and application of relevant laws. We agree with the contention of the learned DR that there are no details, whether the foreign exchange gain/loss appearing in the annual reports of the comparable is related only to the revenue transactions. We also agree with the contention that the transaction of overseas purchase or sales in foreign currencies are booked in books of accounts in Indian rupees at relevant foreign exchange rate. So once, a transaction has been converted into Indian rupees, it becomes at par with other transaction, removing the effect of transaction made in other currency. Now, if subsequently, in the year under consideration or in subsequent year, the taxpayer gains or loss on account of those overseas transaction, such forex gain or loss is purely on account of subsequent financial forex market and should not impact the value of the overseas purchase or sale transaction for the purpose of comparability with the International transaction of the assessee. Accordingly, we uphold the finding of the learned DRP on the issue in dispute and reject the ground of the assessee. 18. Regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue/receipts corresponding to TDS statement in form No. 26AS and the receipt shown in TDS claimed by the assessee, is concerned on the direction of the learned DRP, the Assessing Officer in final assessment order, verified the amount of ₹ 23,23,38,224/- out of ₹ 23,58,11,169/- related to Bharti Group and made addition for the balance amount of ₹ 34,72,945/-, which the assessee could not reconcile. In our opinion, this is a matter of verification, whether the amount represented in in Form No. 26A-S, is income of the assessee for the year under consideration or advance or otherwise. 20.1 We, therefore, direct the assessee to produce all necessary documents in support of its claim that receipt of ₹ 34,72,945/- are not income taxable in the year under consideration. The Assessing Officer may decide the issue in dispute in accordance with law. The ground of the appeal is accordingly allowed for statistical purposes. 21. In ground No. 6, the assessee has sought for allowing TDS credit of ₹ 94,054/-. In our opinion, the matter is only of verification at the level of the Assessing Officer, and accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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