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2015 (11) TMI 538 - ITAT BANGALORE

2015 (11) TMI 538 - ITAT BANGALORE - TMI - Exclusion of telecommunication expenditure and foreign currency expenditure from total turnover while computing the deduction available u/s.10A - Held that:- Parity has to be there between export turnover and total turnover while excluding items from the export turnover. CIT (A) correctly directed exclusion of telecommunication expenditure and foreign currency expenditure from total turnover while computing the deduction available u/s.10A as relying on .....

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. Vis-a-vis argument of the Ld. AR that a few of the companies which come back to the list of comparables, still had to be excluded, for other reasons, we are of the opinion that the submission warrants consideration. These companies will be considered by us when we take up the appeal of the assessee, while adjudicating on the grounds taken by the assessee seeking exclusion of certain comparable companies. - Partly in favour of revenue.

Eligiblity for 5% deduction while making the ALP .....

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India P. Ltd (supra), wherein it was held that prior to the substitution, the second limb of the old proviso could be construed as a standard deduction available to the assessee. - Decided against revenue.

Exclusion of certain companies from the list of comparables questioned by assessee - Held that:- . Though abnormal profits as such may not be a reason for exclusion of a company from the list of comparables, if such abnormal profits were caused due to amalgamation then unless contri .....

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in software development services. Its revenue stream does show some licence income, but there was substantial software services income also. We are therefore of the opinion that the issue whether Thirdware Solutions Ltd can be considered as a good comparable requires a fresh look by the AO / TPO, after getting requisite information from the concerned company. Hence, comparability of Thirdware Solutions Ltd is remitted back to the file of AO / TPO.

Tata Elxsi Ltd, and Sankhya Infotech .....

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td was properly considered as a good comparable.

Coming to Foursoft Ltd, admittedly RPT was in excess of 15% is directed to be excluded.

Geometric Software Solutions Co. requires a fresh look by the AO so as to verify whether RPT exceeded 15% - I.T(TP).A No.1107/Bang/2011, I.T(TP).A No.1093/Bang/2011 - Dated:- 8-10-2015 - Smt. Asha Vijayaraghavan, Judicial Member And Shri. Abraham P. George, Accountant Member For the Petitioner : Shri. Dhanesh Bafna, CA For the Responde .....

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(A) directed exclusion of telecommunication expenditure of ₹ 2,74,80,645/- and foreign currency expenditure of ₹ 3,73,26,570/- from total turnover while computing the deduction available u/s.10A of the Income-tax Act, 1961 ( the Act in short). 04. We find that the direction given by the CIT (A) is in consonance with the judgment of Hon ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd (349 ITR 98). Their Lordships held that parity has to be there between export turn .....

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ransactions of the assessee. 06. Ld. DR submitted that 0% of the RPT directed by the CIT (A) went against various decisions of the Tribunal. Specific reliance was placed on the decision of Bangalore Bench of the Tribunal in the case of 24/7 customer.com Pvt Ltd vs DCIT (2013) 140 ITD 344. 07. Per contra, Ld. AR submitted that though he was not having any objection for adopting the 15% RPT filter, as held in the case of 24/7 Customer.Com P. Ltd (supra), the RPT worked out for Geometric software L .....

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these companies had to be excluded for reasons like functional differences, non-availability of segmental results and non-availability of reliable financial data. 08. We have perused the orders and heard the rival contentions. This Tribunal in the case of 24/7 customer.com Pvt Ltd (supra) had held as under : In respect of the ground raised at S.No.1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued t .....

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on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - " ………..We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15 percent of total revenue. Within the above limit, transactions cannot be .....

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e list with related party transactions or controlled transactions in excess of 15 percent of total revenues for the financial year 2003- 04. 09. Accordingly we are of the opinion that CIT (A) fell in error in directing exclusion of comparables which were having any RPTs. RPT ratio has to be considered at 15% in accordance with the above decision. Vis-a-vis argument of the Ld. AR that a few of the companies which come back to the list of comparables, still had to be excluded, for other reasons, w .....

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ow the functions discharged, assets deployed and risks assumed by such companies were different from that of the assessee. 12. Per contra, Ld. AR submitted that assessee had sought exclusion of comparables based on non-availability of segmental details, non-availability of reliable financial results and on different functionalities and not for abnormal profits. According to him, in one of the comparables considered namely, Exensys Software Solutions Ltd, there was an extra-ordinary and such extr .....

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ons Ltd and M/s. Thirdware Solutions P. Ltd, were directed for exclusion was that they had abnormal profits. As per the Ld. AR, there are other reasons why these companies had to be excluded from the list of comparables. These will be discussed by us while adjudicating the grounds raised by the assessee. Comparability of both Exensys Software Solutions Ltd and Thirdware Solutions P. Ltd, are dealt with in later part of this order. In line with this ground 4 of Revenue is treated as partly allowe .....

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bunal in the case of Sap Labs India P. Ltd v. ACIT [(2011) 44 SOT 0156]. CIT (A) had followed the Coordinate Bench decision in Sap Labs India P. Ltd (supra), wherein it was held that prior to the substitution, the second limb of the old proviso could be construed as a standard deduction available to the assessee. We do not find any reason to deviate from the view taken by the CIT (A) since it was in consonance with the Special Bench decision. Ground 5 of the Revenue is dismissed. 15. Now we take .....

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f software development to its AE abroad. According to him, assessee had adopted TNMM as the most appropriate one for analysing the pricing of its international transactions with AE. Assessee had considered itself to be a software development service provider and selected 15 comparable companies from the prowess and capitaline data base. As per the Ld. AR, arithmetic mean of the operating margin over cost of the said 15 companies came to 9.78% against assessee s own PLI of 10.35%. As per the Ld. .....

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Sasken Communication Technology Ltd and Visualsoft Technologies Ltd. Ld. AR pointed out that during the course of TP proceedings assessee had offered three more companies as good comparables. Of these, only iGate Global Solutions Ltd (seg) was accepted by the TPO. Thus, according to him, TPO had accepted five comparables out of the total 18 companies suggested by the assessee. There after TPO made his own analysis of the prowess and capitaline data bases and selected seventeen comparable compani .....

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by the TPO in the list of comparables. As per the Ld. AR, CIT (A) had directed removal of 12 comparables from the list of seventeen applying 0% RPT filter. In addition, CIT (A) had also excluded Exensys Software Solutions Ltd and Thirdware Solutions Ltd, for a reason that they had super normal profits. Latter was also found by CIT (A) to have RPT. CIT (A) also found that Infosys Technologies Ltd was not functionally comparable with the assessee due to its size and economics of scale. Ld. AR subm .....

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guments, Ld AR submitted that once RPT filter of 15% were adopted, Flextronics Software Systems Ltd, Geometric Software Ltd, iGate Global Solutions Ltd, Infosys Technologies Ltd, L & T Infotech Ltd, R S Software (India) Ltd, Sasken Communications Ltd, Sasken Networks Ltd, Satyam Computers Ltd, Tata Elxsi Ltd, and Thirdware Solutions Ltd, would come back to the list of comparables. According to him, assessee had no objections in iGate Global Solutions Ltd, L & T Infotech Ltd, R S Software .....

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gard. 19. Coming to the issue of comparability of M/s. Exensys Software Solutions Ltd, Ld. AR submitted that it was not due to extra-ordinary profits, but due to extra-ordinary events that happened during the relevant previous year that exclusion was sought. Reliance was placed on the coordinate bench in the case of ACIT v. Symbol Technologies India P. Ltd [supra]. 20. Vis-a-vis Thirdware Solutions Ltd, argument of the Ld. AR was that segmental details were not available and this was specificall .....

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Ltd (supra). Similar arguments were raised for Sankhya Infotech Ltd, and Flextronics Software Systems Ltd. Vis-a-vis, Four Soft Ltd, Ld. AR submitted that lower authorities have themselves found their RPT to be 19.89%. Ld. AR submitted that he was not pressing for exclusion of Bodhtree Consulting Ltd. However, vis-a-vis Geometric Software Solutions Ltd, it was argued that their RPT was incorrectly worked out at 11.49%. According to him, RPT of Geometric Software Ltd was 26.64% and this was clea .....

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clusion of comparables. According to him, assessee had consciously not applied the turnover filter since many of the comparables convenient to it would go out of the list of selected comparables. As per the Ld. DR, logic of application of RPT filter of 15% was not clear. Even if comparables were having related party transactions of less than 15%, still it required exclusion. Assessee was attempting selective application of filters according to its choice. As per the Ld. DR this type of approach .....

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;D services in respect of development of EDA tools and software. 2.6 EDA software comprises sof tware programs that are used by engineers as tools in designing ICs. IC's are distinguished by the speed at which they run, their area, the amount of power they consume and the cost of production Synopsys products in the form of EDA software/tools offers its customers the opportunity to design ICs that are optimized or speed. area, power consumption and production cost while reducing overall desig .....

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under : 24. In the above list Geometric Software Solutions Co. Ltd, R. S. Software India Ltd, Sasken Communications Ltd (seg), Visualsoft Technologies Ltd, (seg) and iGate Global Solutions Ltd (seg), were in the list provided by the assessee itself. One among the above, namely M/s. Geometric Software Solutions Co. Ltd, is sought by the assessee for removal from the list of comparables due to application of RPT filter of 15%. For this, reliance has been placed by the assessee on the decision of c .....

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he details of the RPT in AY 05-06. We therefore deem it fit and proper to remand the question of excluding this company as a comparable to the TPO. If the RPT is more than 15% of the total revenues than this company should be excluded from the list of comparable companies. We hold and direct accordingly. 25. The decision in the case of Symbol Technologies India P. Ltd (supra) was also for the very same assessment year, viz., A. Y. 2005-06 and the said company was also considered to be a software .....

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on functionality for the former and unreliable financial results for the latter. Revenue has not moved in appeal against such directions. Vis-a-vis Exensys Software Solutions Ltd, what we find is that its comparability was an issue that came up before this Tribunal in the case of Symbol Technologies India P. Ltd. This Tribunal had held at para 14 of the order, as under : 14. The Ground raised by the Revenue with regard to the action of the CIT(A) in excluding companies with abnormal profits is .....

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isk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore the grievance as projected by the Revenue in ground No.5 is misconceived. On the facts of the present case, we are of the view that the CIT(A) .....

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as follows: During the year ending on March 2005, Exenys under a scheme of amalgamation, amalgamated with a company Holool India Limited ('Holool ), with effect from April 01, 2004. Export turnover achieved by Exensys during FY 2004-05 is primarily on account of the amalgamation with Holool. This is substantiated by the following statement of the Directors of Exensys as given in the Directors' Report for FY 2004-05 under performance review on page 16 (attached herewith as Annexure 15.2): .....

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opinion, comparability gets eroded. We are therefore of the opinion that Exensys Software Solutions Ltd, has to be excluded from the list of comparables. 29. Coming to Thirdware Solutions Ltd, argument of the Ld. AR is that the said company was also into software product segment and segmental results were not available. Reliance has once again been placed on coordinate bench decision in the case of Symbol Technologies India P. Ltd (supra), wherein this Tribunal had held as under, quoting from a .....

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r that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 30. Though this Tribunal had directed exclusion of Thirdware Solutions Ltd, what we find is that Hyderabad bench decision of the Tribunal in the case of Invensys Development Centre I. P. Ltd (supra), was admittedly against exclusion of Thirdware Solutions Ltd. Argument of the assessee before us is that segmental results of Thirdware S .....

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TAVE DETAILS:- The company is engaged in trading and development of software. The production and sale of developed and traded software cannot be expressed in any generic unit. Hence it Is not possible to give quantitative details of sales and certain information required under pargraphs 3, 4C, 4D of part II of schedule VI of the Companies Act 1956, 31. The above note, in our opinion, would not be sufficient to come to a conclusion that Thirdware Solutions Ltd was into software product developmen .....

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khya Infotech Ltd, assessee had taken a plea before the CIT (A) that these companies were functionally different. Functional comparability of these companies was an issue which came up before this Tribunal in the case of Symbol Technologies India P. Ltd (supra), which was also for the very same assessment year. Relevant paras of this decision is reproduced hereunder : 15.7. TATA ELXSI LIMITED : The objection of the assessee is that TATA Elxsi operating two segments -system communication services .....

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as a comparable but not the entire software development service. Since company s operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22. "22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the .....

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se its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to r .....

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see services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to assessee. 23. Though the issue has been set aside to the AO in t .....

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, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies. Sankhya Infotech Limited ( Sankhya ) 3. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in pu .....

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(Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activitie .....

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609I/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the assessee therein which was also in the business of software development. 20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is dir .....

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ment services segment and the decision was also for very same assessment year. Hyderabad bench had held as under at para 27 of its order : Flextronics Software Systems Ltd: 27. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional di .....

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his reply to it : 15.3.1.8 Flextronics Software Systems Ltd : (Tax payer s objections) The taxpayer had rejected this company in the TP study based on company s turnover. In any case, turnover in NASSCOM categorisation has been rejected by the taxpayer. The turnover filter is not an appropriate filter for selection of comparables as has been discussed above. As the company satisfies all the filters applied by the TPO, the same was proposed to be considered as a comparable vide this office lette .....

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elfs ready reference. At the outset the company submits the business review of Flextronics from the Director's Report for FY 2004-05 which states as follows.......... Income from products: Flextronics has income from products and this is evident from the data available in the Annual Report for FY 2004-05. Some of the products introduced by Flextronics during the year 2004-05 are: OSA Application Server, IMS client Framework, IP Phone Toolkit, nexGen SS7 platform, GSNLite Solution. (Source: P .....

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9.6% during the fiscal year 2005 on account of high license sales and royalties" Segment data not available: The revenue mix of Flextronics comprises 15% from sale of products and related services, 81 % from software services and 4% from SPO services. In its segmental data disclosure, Flextronics has disclosed data for 'products and services' as a composite segment and therefore no bifurcation is available between the two activities of the Company (Source: Page 11 and page 42 of the .....

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ure 8.4) In conclusion, Flextronics ought to be rejected by applying the filter established by your goodself as above, on the grounds of functionally not comparable based on the review of the Annual Report-including the Directorsi- Report for FY 2004-05." (TPO s comments to above objections) Any reference to the product business of the company is of no help to the taxpayer because the total product sales constitute only 16% of the turnover. Companies, which receive more than 75% of their op .....

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velopment service income. Assessee had in a letter written to TPO mentioned that said company was providing product development services, citing the annual report of the said company for F. Y. 2004-05 which inter alia mentioned three streams of its business as software services, sale of product and related services and business of project outsourcing services. TPO had noted that 81% of the revenue of the said company were from billings done on man-hours spent on services and its fixed price reve .....

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