TMI Blog2014 (11) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... tisement, marketing and distribution spend in this segment is less than 3%, being the filter applied by the assessee - the inclusion of the Software service segment of Accel Transmatic Limited in the list of comparables is upheld. Celestial Labs limited –Functionally different company - Held that:- From the annual accounts it has been found that it is engaged mainly in the developing the software products in the shape of tools etc., which are protected using the patent. -This company developed a tool, "CELSUITE" to drug discovery in finding the lead molecules for drug discovery - As this company is engaged in developing software tools after enough research and development activity and the tools so produced by it are its intellectual property, it cannot be considered as comparable to the assessee which is, also albeit in software development, but is doing it on contract basis without having any I.P. rights in the software developed by it – the DRP is directed to exclude the company from the list of comparables. E-Zest Solutions Limited - Held that:- The comparability of a company is tested on various parameters and a view is taken as to its comparability or otherwise by consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity – Decided partly in favour of assessee. Disallowance u/s 40(a)(ia) – TDS not deducted as per rates applicable – Held that:- As decided in COMMISSIONER OF INCOME TAX, KOLKATA-XI Versus M/s SK. TEKRIWAL [2012 (12) TMI 873 - CALCUTTA HIGH COURT] - short deduction of TDS cannot be the basis for disallowance u/s 40(a)(ia) of the Act – the disallowance is to be deleted – Decided in favour of assessee. - ITA No. 431/Del./2012 - - - Dated:- 14-11-2014 - Shri B. C. Meena And Shri C. M. Garg,JJ. For the Petitioner : Shri Ashwani Taneja Rahul Khare, Advocates For the Respondent : Shri Peeyush Jain, CIT DR ORDER Per B. C. Meena, Accountant Member : This appeal is filed by the assessee against the Assessing Officer s order u/s 143 (3) read with section 144C of the Income-tax Act, 1961. The return of income filed on 30.10.2007 declaring income of ₹ 15,550/- and paid taxes u/s 115JB of the Act. Return was revised on 13.11.2007. Assessee is an IT Service Provider to its parent company EK, USA. Assessee provides design and development support services for online courseware to its parent company. These services are provided at an agreed cost plus mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . FY 2006-07) data; and 2.4.2. holding that at the time of creating/ maintaining the TP documentation, the appellant could have procured current single year data (i.e. FY 2006-07 data) from sources other than the electronic data bases, when in fact practically no such other sources were available in case of most companies; 2.5. collecting information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the appellant in the public domain and relying on selective information for comparability purposes (and to the extent of completely ignoring reliable data available in public domain/ annual reports in numerous cases); 2.5.1. and in doing so violating the fundamental principles of natural justice by relying on the information sourced under section 133(6); and also by 2.5.2. not sharing with the appellant, in case of a number of comparables, the information/ reply received by the TPO/ AO u/s 133(6); 2.6. benchmarking the appellant wrongly as a software development service provider without providing any reasoning or basis of such treatment despite the fact that the appellant has been characterized as a provider of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, assets employed and risks assumed; 2.12. ignoring the business/ commercial reality that since the appellant is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a bench marking analysis, the appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; 2.13. committing a number of factual errors in accept-reject of comparables and/ or in the computation of the operating profit margins of the comparables; 2.14. disregarding judicial pronouncements in India in undertaking the TP adjustment; 3. The Ld. AO erred in not verifying the factual errors in computation of the operating margins of the comparables and accordingly re-computing the ALP accordingly while passing the order, pursuant to the directions of the Ld. DRP; 4. The Ld. AO and Ld. DRP erred in rejecting the claim of the appellant for deduction under section 10A of the Act, in respect of profits derived by its STP unit in Chennai on the allegation that it was formed by reconstructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee with parent company by holding that they were not at arm s length. This addition has been approved by the DRP though it was objected by the assessee. 5. Assessee has raised several sub-grounds in this regard in the ground no.2 of the appeal but all the grounds assail the TP adjustment of ₹ 1,18,59,033/-. 6. Ld. Counsel for the assessee drew our attention towards Pages 130, 158 and 159 of the TPO order. TPO selected 26 companies as comparable companies having the average mean of profits at 25%. These companies and their profit PLI (OP/TC) as reproduced in the TPO order are as under:- S. No Company Name Sales (Rs. Cr) OP to Total Cost % 1 Accel Transmatic ltd (Seg.) 9.68 20.90% 2 Avani Cimcon Technologies Ltd 3.55 50.29% 3 Celestial Labs Ltd 14.13 58.35% 4 Datamatics Ltd 54.51 1.38% 5 E-Zest Solutions Ltd 6.26 35.63% 6 Flextronics Software Systems Ltd (Seg.) 848.66 25.31% 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No. 5568 and 5680/Del/2010 and 2011 dated 31.10.2012 to the effect that such decision in the case of Toluna, supra, cannot be followed. 8. After hearing both the sides and having gone through the material placed on record, we hold that assessee is a wholly owned subsidiary of Element K Corporation, USA. It provides content design and development support services for online coursesware under a service agreement with its parent company. Assessee is remunerated on cost plus 15% markup for the services rendered. Thus, assessee is a low risk captive service provider. According to TPO also, assessee was IT service provider in the field of software development services to its parent company. TPO considered 26 companies mentioned above as comparable with average mean margin of 25%. We have gone through the order of TPO and order of the Tribunal in the case of Toluna India Pvt. Ltd. supra. Comparison of both the orders shows that in the case of Toluna, the Assessment Year was 2007-08. TPO has taken these very 26 companies as comparables. Therefore, the action of the TPO itself suggests that assessee s case is comparable with the case of Toluna India Pvt. Ltd. Assessment year invol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of related party transactions is considered as controlled. In other words, if the related party transactions in a company are less than 25%, then, it cannot be considered as controlled and hence qualifies to be comparable, if it is otherwise so. 16.4. Since both the objections taken by the assessee against the inclusion of this company are not sustainable, we uphold the inclusion of the Software service segment of Accel Transmatic Limited in the list of comparables. The assessee fails. Avani Cimcon Technologies Limited: 17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to get complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such contention by relying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software development company engaged in providing software development and consulting IT services to its clients. This company was concentrating on internet enabled business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied by the TPO. After considering the objections of the assessee, the TPO held it to be includible in the list of comparables. The DRP upheld the draft order on this count. 20.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be comparable to that of the assessee company, because it is also engaged in rendering software development services to outsiders. The Id. AR needlessly tried to distinguish this company by contending that the services rendered by it were different from that of the assessee. We do not find any force in this submission. The comparability of a company is tested on various parameters and a view is taken as to its comparability or otherwise by considering the entirety of the facts and circumstances. Simply because the nature of software development services provided by a company is different from those provided by the assessee, the same does not become incomparable. Here is a case in which this company is also providing software development services as is done by the assessee on contract basis for others without having any intellectual property rights in them. A small variation in the nature of serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of this company, a copy of which is available on page 88 of the paper book, that it consolidated its existing product portfolio and took steps to expand into further technologies by increasing the momentum in key initiatives in WIMAX, IMS, SIP ISS/ESS domains. This company has its own products such as ASN, W1MAX, Gateway Product with ASN Light. It is further relevant to note that the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO has adopted the relevant figures for comparison. In view of the foregoing discussion, we hold this company to be not comparable and direct its exclusion from the list of comparables. The assessee succeeds. Geometric Limited (Segmental): 22. The assessee has no objection to the inclusion of this company in the list of comparables. Helios Matheson Information Technology Limited: 23.1. The TPO noticed from the annual accounts of this company that it was engaged in the software development services and also qualified employee cost filter. The assessee objected to its inclusion by, inter alia, contending that the PLI of this company was incorrectly worked out by the TPO. Correcting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation received u/s 133(6). The assessee objected to the inclusion of this company by contending that its related party transactions were more than 15% and employees cost was only 4%. The TPO rejected both the contentions by noticing that the employees cost was, in fact, more than 25% as was apparent from the information received u/s 133(6) and, further, the RPTs also did not exceed 25%. 26.2. Having heard both the sides and perused the relevant material on record, we find this company to be comparable to that of the assessee. The assessee's objection that employee cost of this company was 4% only, is not correct because of the exercise carried out by the TPO indicating that the employees cost was more than 25%. The Id. DR has taken us through the Annual accounts of this company which show that some part of the employees cost was also included in 'Administrative expenses' apart from direct Establishment expenses. It can be seen that the company has included Professional fees of ₹ 3.41 crore a long with Director's salary, etc., under the head 'Administrative expenses'. When this objection was taken by the assessee before the TPO that the employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjection to the inclusion of this company in the list of comparables. Lucid Software Limited: 29.1. The TPO noticed that this company was a pure software development services company and did not have any related party transactions. On being called upon to explain as to why this company be not treated as comparable, the assessee replied that Lucid Software Limited has developed Rs.Muulam' software, the details of which were collected from the website of Lucid Software itself. In view of such details, it was contended that this company was a software product company having intellectual property rights. Rejecting the assessee's objections, the TPO included this company in the list of comparables. 29.2. After considering the rival submissions and perusing the relevant material on record, it can be seen that the assessee categorically objected before the TPO to the effect that this company was mainly into software product business having license of such products. The TPO ignored the assessee s submissions despite the fact that sufficient material taken from the website of this company was placed before him in support of the contention. It can be seen from page 192 of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It can be seen that a subsidiary company was merged into this company pursuant to judgment of Hon'ble Bombay High Court w.e.f. 1.4.06. Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds. Quintegra Solutions Limited: 34. The assessee has no objection to the inclusion of this company in the list of comparables. R S Software (India) Limited: 35. The assessee has no objection to the inclusion of this company in the list of comparables. R Systems International Ltd. (Segmental): 36.1. The TPO included this company in the list of comparables and determined its OP/OC at 15.07%. The Id. AR has no objection to the inclusion of this company in the list of comparables. His only objection was confined to the calculation of OP/OC at 15.07%. He contended that the TPO erred in excluding the amount of Rs. Provision for doubtful debts' from Operating costs. 36.2. We are not agreeable with the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Annexure to the Director's report of this company, that the nature of its activity is quite distinct from that of the assessee. It can be seen that this company is into development of hardware and software for embedded products such as multimedia and some other electronics, etc. Apart from that, this company is also engaged in making some programmes developing technology intellectual property. As the nature of activity carried out by the assessee in question is nowhere close to that of Tata Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds. Thirdware Solutions Limited (Segmental): 40. The assessee has no objection to the inclusion of this company in the list of comparables. Wipro Limited (IT Services segment): 41. After considering the rival submissions and perusing the relevant material on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon ble Delhi High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not dispute this. Ld. CIT DR did not controvert this factual aspect. Therefore, we hold that deduction u/s 10A is to be allowed to the assessee. We order accordingly. Hence, this ground is decided in favour of the assessee. 12. Ground No.5 is relating to disallowance u/s 40(a)(ia) amounting to ₹ 8,09,447 made on the ground that though the tax has been deducted at source but it was not deducted at the rates applicable. DRP confirmed the action of the Assessing Officer by holding that there was short deduction of TDS and thus disallowance was in order. 13. Ld. AR for the assessee argued that no disallowance can be made u/s 40(a)(ia) on account of short deduction. Disallowance u/s 40(a)(ia) can be made only when there is absolute failure to deduct the tax. Ld. AR relied on the order of Hon'ble Kolkata High Court in the case of CIT vs. S.K. Tekriwal reported in 361 ITR 432 (Cal). Ld. CIT DR supported the order of Assessing Officer and DRP. 14. After hearing both the sides on the issue, we delete the disallowance keeping in view the decision of Hon'ble Kolkata High Court in the case of CIT vs. S.K. Tekriwal, cited supra, according to which short deduction of TDS c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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