TMI Blog2015 (9) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... rmining ALP of software development services segment - Held that:- reimbursement cost should be excluded from the OC for determining ALP. As far as the contention of ld. DR that TPO may be directed to determine the ALP of the reimbursement cost on stand alone basis, we are unable to accept the same as the same does not arise out either from the order of TPO or ld. CIT(A). Since, while considering assessee’s appeal we have to restrict ourselves to the grounds raised by assessee, this issue raised by ld. DR is left open to be decided in an appropriate case. See M/s HSBC Electronic Data Process India Ltd. Vs. DCIT [2013 (9) TMI 485 - ITAT HYDERABAD ] Disallowance of foreign exchange fluctuation loss - Held that:- As could be seen from the discussions made by A.O., he has disallowed assessee’s claim of loss on foreign exchange by treating it as notional. He has not said that loss is not connected with assessee’s business. Therefore, if assessee can prove that loss on account of foreign exchange fluctuation was not notional but actually incurred same cannot be disallowed. We, therefore, remit this issue to the AO for deciding afresh after due opportunity of being heard to assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer (TPO ) in terms with section 92CA(1) of the act. In the TP study report submitted by assessee, TP analysis was done by the assessee under both the segments i.e. software development services and ITES. Transactional net margin method (TNMM) was selected as most appropriate method with operating profit to operating cost as the profit level indicator (PLI). In the search process undertaken in databases, assessee selected 12 companies as comparables in the software development services segment and 13 companies in ITES segment. As the arithmetic mean of the comparable companies under both the segments were within the tolerance band of margin declared by assessee, the price charged to the AE in respect to the international transactions under both the segments were claimed to be within arm s length. The TPO after examining the TP document of assessee along with other relevant informations on record though, agreed that TNMM is the most appropriate method with OP to OC as PLI, however, he was of the opinion that the method/process adopted by assessee in selecting comparable companies suffers from various defects which has resulted in selection of uncomparables as comparables whereas as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising as many as 14 grounds on TP issues. However, at the time of hearing ld. AR advanced his argument only in respect of ground Nos. 7, 8, 9, 10 and 12. In view of the aforesaid, the rest of the grounds on TP issues, viz., Ground Nos. 1, 2, 3, 4, 5, 6, 13 14 are dismissed as not pressed. 5. As far as ground No. 7 and 8 are concerned they relate to rejection/selection of comparables in the software development services segment. 6. At first we will take up ground No. 8 on the issue of selection of comparables by TPO and affirmed by ld. CIT(A). 7. Out of the 16 comparable companies remaining after the order of CIT(A) in software development services segment, assessee has objected to selection of following 8 comparables. 1) Bodhtree Consulting Ltd. 2) Exensys Software Solutions Ltd. 3) Sankhya Infotech Ltd. 4) Foursoft Ltd. 5) Thirdware Solutions Ltd. 6) Tata Elxsi Ltd. 7) Infosys Technologies Ltd 8) Flexitronics Ltd. 7. The submissions of the learned AR against selection of these comparables, in brief, are as under: 1. Bodhtree Consulting Ltd. i) This company should be rejected on the basis of filters applied by TPO himself, which are as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infotech Ltd. i) The learned counsel submitted that this company is functionally different as evident from the following: Various disclosures in the annual report and response to 133(6) notice indicates clearly that the company is into software products (services are supplementary to products licensing) The TPO has in subsequent year rejected this company as comparable relying on the same 133(6) response. ii) He submitted, following rulings have analysed and rejected this company as it has software products : Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) 4. Foursoft Ltd. i) The learned counsel submitted that this company is functionally different as evident from various disclosures in the annual report (Directors report, Management discussion and website information) indicating clearly that the company is into software products. The following rulings have analysed and rejected this company as it has derived income from software license and AMC s: - Intoto Software India Pvt. Ltd. (ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Hyd/2010 dt.20-02-2014 7. Infosys Technologies Ltd. i) The learned counsel submitted that this company is engaged in diversified activities including products, consultancy solutions and this company commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. ii) Further, he submitted that the issue of comparability of Infosys to a small captive service provider is no longer res-integra. The following cases have specifically anlaysed in detail the comparability of Infosys on various parameters to a small software service provider and rejected it: - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - Patni Telecom Solutions Pvt. Ltd. Vs. ACIT (ITA No. 1846/Hyd/2012) - DCIT Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) 8. Flexitronics L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this company should be rejected under the following TPO s f ilters: d) Functionally different: The company is a sof tware product and ITES company. The company owns signif icant brand intangibles (almost 60% of its net block of assets), unlike the appellant, which is a contract captive services provider. Further, various disclosures on the site of the company also indicate that it is into product development. e) Exceptional year of Operations: There was amalgamation of the company with Holool India Ltd. with retrospective effect from April 01, 2004, which had a material/signif icant impact on the results of the company for f inancial year ended March 31, 2005 and conf irmed by the company in its response to 133(6) notice. f) Error in margin computation: The ld TPO has excluded the deferred revenue expenditure while computing the net margin of the company. If the same is included, the net margin of the company would be 32.68%. It was submitted that the following rulings have analysed and rejected this company as it has sof tware products and held as not comparable to a service provider: - Intoto Sof tware India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the company is a distributor of products; As per the company s website www.thirdware.net/ourcapabilities.htm. has stated the company has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Pre-sales, sales, training, consulting, implementation and support to appl ication management services. The following rulings have analysed and rejected this company as it is into trading of sof tware licenses: - Intoto Sof tware India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - ITO Vs. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011) - ACIT Vs. Sonata Sof tware (ITA No. 3514/Mum/2010) - E-Gain Communications (P) Ltd. Vs. ITO, 23 SOT 385. 6. Tata Elxsi Ltd. The learned counsel submitted that this company shall be rejected as comparable since it is a specialized embedded sof tware development company and this company has in fact clearly stated in its response to 133(6) notice that due to the complex segments in which they are operating, it is not comparable to any other sof tware services company. The following rulings have analysed this company and relying on the same 133(6) response, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is possible with the amalgamation of Holool India Ltd. It was further mentioned that Assessee company has got benef it by advanced latest technical expertise on various technology domains of the transferor company. Further, that company has charged deferred expenditure and the amount claimed in this year is ₹ 1.22 crores as against ₹ 30.21 lakhs in earlier year. This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies. Vide page 957 of paper book, it was seen that out of gross assets of ₹ 7.95 crores, Brands alone consist of ₹ 5 crores, therefore, intangible assets comprising of substantial part of this company s assets. Not only in the correspondence with the TPO that Assessee expressed its inabil ity to furnish separate accounts for two amalgamated companies but also further it has clearly mentioned vide letter dated 26-04-2007 to the TPO that there is a gap in the expenditure expected to incur and actual expenditure incurred which made the company record high operating margin on cost. These factors indeed support assessee s contention that this exceptional prof it with the fact of amalgamat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Pvt. Ltd., complete details were not placed on record, therefore, the matter was sent to AO for verif ication whereas in this case assessee has objected even before the AO/ CIT(A), therefore, there is no need to set aside the issue to the f ile of the AO for examination as was done in the case of Intoto Sof tware(supra). We are, therefore, of the opinion that on the basis of facts placed on record, the case of Exensys Sof tware Solutions Ltd. cannot be taken as comparable. 9. Similarly, the other cases, Bodhtree consulting Ltd, Four Sof t Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies l ike assessee. Bodhtree consulting Ltd also fails RPT f ilter as contended. In view of this, we are not discussing above comparables in detail, but, suff ice to say that assessee s submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm s length margin accordingly. 10. Following the aforesaid decision, Hyderabad Bench again in case of M/s DE Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lters adopted by TPO. In support of his contentions, ld. AR relied upon the following decisions: 1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 1623/Hyd/2010, dt. 28/06/2013. 2. Market Tools Research Pvt. Ltd., ITA No. 1150/Hyd/2011, dt. 05/02/2014. 2. Nucleus Net Soft and GIS India Ltd., Ld. AR submitted, this company cannot be considered as comparable as it fails employee cost filter. Ld. AR submitted, the employee cost of this company as a percentage of operating revenue is only 19.60 percent. In support of his contentions, ld. AR relied upon the following decisions: 1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 1623/Hyd/2010, dt. 28/06/2013. 2. Market Tools Research Pvt. Ltd., ITA No. 1150/Hyd/2011, dt. 05/02/2014. 3. Vishal Information Technologies Ltd.: Ld. AR submitted, this company cannot be considered as comparable as it fails employee cost filter. He submitted that this company was rejected by the ITAT in various cases. In support of his contentions, ld. AR relied upon the following decisions: 1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 1623/Hyd/2010, dt. 28/06/2013. 2. Market Tools Research Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TES company by the Tribunal. 18. As far as Pantasoft Tehnologies Ltd. (SEG), ld. AR submitted before us, this company is a comparable to assessee in the ITES segment as its satisfies all the filters adopted by TPO. In support of such contention, ld. AR relied upon the decision of HSBC Data Processing India Ltd. (supra). 19. The ld. DR supported the order of CIT(A) and TPO. 20. We have considered the submissions of the parties and perused the material on record. It is seen that in case of M/s HSBC Electronic Data Processing India Ltd. Vs. DCIT (supra), the coordinate bench while considering assessee s argument for inclusion of the aforesaid company as a comparable, held as under: 14. As far M/s Pantasoft Technologies Ltd., even though the assessee included the same, no arguments were available for its exclusion. Since segmental data has to be examined by the TPO, we direct the TPO to examine whether there is any segmental data and if so, whether the company is eligible for selection as comparable. Therefore, the issue of Pantasoft Technology is also restored to the file of the AO for fresh consideration. 21. Facts being materially same, following the aforesaid decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta Process India Ltd. Vs. DCIT, ITA No. 1624/Hyd/2010, dt. 28/06/2013. 25. The ld. DR submitted before us, if the reimbursement cost according to the Tribunal cannot form part of the OC, then, the TPO may be directed to determine the ALP of reimbursement cost separately. 26. We have considered the submissions of the parties and perused the material on record. The ITAT, Hyd. Bench in case of HSBC Electronic Data Process India Ltd. Vs. DCIT in ITA 1624/Hyd/10, dated 28/06/13, while dealing with identical issue held as under: 20. After considering the rival submissions and following the principles laid down in the decisions of the Tribunal cited above, we are of the opinion that reimbursement costs should be excluded as they do not involve any functions to be performed so as to consider it for profitability purposes. In the case of Four Soft Ltd. Supra, Hyderabad Bench of the Tribunal considered this issue and held as under: 15. We have considered the rival submissions and perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with its associated enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly. Respectfully following the same, we direct the Assessing Officer /TPO to exclude the reimbursement costs while working out the operating costs. This ground is considered allowed. Facts being materially same, following the view expressed by the coordinate bench hereinabove, we hold that reimbursement cost should be excluded from the OC for determining ALP. As far as the contention of ld. DR that TPO may be directed to determine the ALP of the reimbursement cost on stand alone basis, we are unable to accept the same as the same does not arise out either from the order of TPO or ld. CIT(A). Since, while considering assessee s appeal we have to restrict ourselves to the grounds raised by assessee, this issue raised by ld. DR is left open to be decided in an appropriate case. In view of the aforesaid, we direct A.O./TPO to compute ALP afresh keeping in view our directions hereinabove. 27. Besides the above grounds raised on TP issues, assessee has raised few more issues relating to corporate tax matters in ground Nos. 15, 16 17. 28. In ground No. 15 assessee has challenged the disallowance of foreign exchange fluctuation loss of ₹ 52,14,198. 29. In c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee can prove that loss on account of foreign exchange fluctuation was not notional but actually incurred same cannot be disallowed. We, therefore, remit this issue to the AO for deciding afresh after due opportunity of being heard to assessee. This ground is allowed for statistical purposes. 33. In ground No. 16, assessee has challenged the disallowance of leave encashment expenses to the extent of ₹ 94,03,525. 34. Before the first appellate authority, assessee contended that A.O. has erred in not allowing leave encashment expenses of ₹ 94,03,525. Ld. CIT(A) after considering the submissions of assessee, held that if A.O. has missed out on allowing any claim of expenditure, it will be better for assessee to file a petition u/s 154 of the Act, before A.O. Further, ld. CIT(A) observed that neither there is any discussion with regard to assessee s claim in this regard in the assessment order nor assessee furnished any evidence to indicate that such claim was made by assessee before A.O. during the assessment proceeding. He, therefore, refused to entertain the ground raised by assessee. 35. Ld. AR submitted before us, A.O. has not only disallowed deduction c ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
