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2015 (10) TMI 2495 - ITAT HYDERABAD

2015 (10) TMI 2495 - ITAT HYDERABAD - TMI - Transfer pricing adjustment - selection of comparable - Held that:- E infochips Bangalore Ltd. company is functionally different from Assessee’s activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard.

Comp-U-Learn Tech India Ltd. - the issue of selection of this company is a comparable should be restored to the f .....

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o analysis on the objections of Assessee by TPO as Assessee has not objected earlier, we are of the opinion that Assessee’s objections require re-examination by TPO. Therefore, without giving any opinion, whether the company can be selected as comparable or not issue of selection of this company as comparable is restored to the file of TPO to re-examine afresh. Therefore, it is restored to the file of TPO for fresh examination.

Tata Elxsi Ltd (Seg) - Since no segmental data is availab .....

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are of the opinion that inclusion of this company as comparable company is to be analysed afresh by taking the objections from Assessee and then after due analysis, TPO should consider whether the same can be included as a comparable company. Therefore, without expressing any opinion or finding in this regard, we remit the issue relating comparability of this company for fresh adjudication by TPO.

L&T Infotech Ltd. cannot be selected as a comparable company. AO/TPO is directed to exc .....

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domestic, whereas in schedule-XII, the income is shown only from software services. Whereas the Director’s report indicate that Assessee has software services comprising 84% of revenue, BPO services at 15% and training at 1%. This indicates that Assessee has different activities, therefore, it is difficult to analyse whether the company is strictly comparable to Assessee’s software development services. However, to give a fair opportunity to Assessee, we remit the matter to the file of TPO to ob .....

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s rightly pointed out by the Ld. Counsel, the outstanding receivables on account of services cannot be equated with capital financing as provided for in the Explanation by the amendment by Finance Act, 2012 retrospectively. We are of the opinion that both on the facts of the case and principles of law, there is no need for bringing to tax the notional interest on the outstanding receivables

Addition towards communication expenses by AO invoking the Explanation 2 to Section 10A - Held .....

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r the Appellant: Shri Ajit Tolani, AR For the Respondent: Shri V. Srinivas, DR O R D E R PER B. RAMAKOTAIAH, A.M. : These are Cross-appeals by Assessee and Revenue against the order of the Assessing Officer (AO) U/s. 143(3) r.w.s. 144C(5) of the Income Tax Act [Act] consequent to the directions issued by the Dispute Resolution Panel [DRP], Hyderabad dated 26-09-2014. In this appeal, Assessee has raised as many as 12 grounds. Out of which, Ground Nos. 1, 2 and 3 pertain to general objections on p .....

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ail and also perused the Paper Books placed on record running to Pages 881. Arguments of the Counsels and evidence placed on record are considered as and when required. 3. Briefly stated, Pegasystems Worldwide India Pvt. Ltd., is wholly owned subsidiary of Pegasystems, USA, an Associated Enterprise (AE). Assessee is a software solution provider to business process management software solutions and business rules platform. Assessee filed return of income admitting NIL income on 15-10-2010 for the .....

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1,11,083 4. In the Transfer Pricing document, Assessee has carried out economic analysis and used Prowess and Capitaline Plus data base. Using certain filters, Assessee used Transactional Net Margin Method [TNMM] as most appropriate method (MAM) and short listed 21 comparables with arithmetic mean, PLI (OP/OC) was computed at 11.26% Assessee s PLI on the reported transactions was at 14.03%. The transactions relating to reimbursement to AE which are charged at cost were not considered for any ana .....

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. By stating that method of search process adopted by Assessee suffer from defects which resulted in selection of inappropriate comparables and rejection of companies that are appropriate comparables, TPO rejected Assessee s TP document and has undertaken an independent analysis. After considering the submissions of Assessee, TPO selected 18 comparables by using various filters and arrived at arm s length margin at 22.69%. By adding negative working capital adjustment, the ALP was arrived at by .....

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comparables selected by TPO and also directing to delete the negative working capital adjustment of (-) 2.39% made by TPO. Thus, Assessee got partial relief from DRP on the TP adjustment. DRP also directed AO to recalculate the computation of deduction u/s. 10AA following Special Bench decision of the ITAT in the case of ITO Vs. M/s. Saksoft Ltd reported as 121 TTJ Chennai (SB): 313 ITR (AT) 353 and CIT Vs. Gem Plus Jewellery India Ltd. [233 CTR 248] of Hon ble Bombay High Court. Revenue is agg .....

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22.10 5. Kulilza Technologies Pvt Ltd., - 25.92 6. Mindtree Ltd (Seg) - 20.47 7. Persistent Systems and Solutions Ltd., - 11.37 8. RS Software India Ltd., - 9.88 9. Thinksoft Global Services Ltd., - 11.22 10. Zylog Systems Ltd., - 18.62 11. E infochips Bangalore Ltd., - 72.32 12. Comp-U-Learn Tech India Ltd., - 19.96 13. Kals Information Systems Ltd (Seg) - 22.05 14. Persistent Systems Ltd., - 31.57 15. Tata Elxsi Ltd (Seg) - 17.24 16. Sasken Communication Technologies Ltd., - 25.23 17. L&T .....

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s Ltd., mentioned in the ground. Assessee s request is for inclusion of two companies, which will be dealt with at a later point of time. Assessee s objections on inclusion of the comparables and the decisions are as under: E infochips Bangalore Ltd., : 8. This company is selected by TPO even though Assessee objected to the same (vide page 34 and 35 of the order of TPO). Assessee objected that the information for FY. 2009-10 was not available in public domain. It was further contended that compa .....

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the notes to the accounts has stated that it is engaged in the development and maintenance of computer software. The production and sales of software cannot be expressed in any generic unit. Thus, TPO rejected Assessee s objections and retained it as a comparable. DRP also agreed with TPO. 8.1. It was contended that AO relied on the annual report of FY. 2010- 11 and used the information applicable to FY. 2009-10 from that report, as the information for FY. 2009-10 was not available in public do .....

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ed the disclosures in annual report of FY. 2008-09 and annual report of FY. 2009-10 to submit that the company is primarily engaged in software development and IT enabled services and has reported both of them as one segment. Therefore, company is not comparable with Assessees on functional analysis. It was further submitted that company has merged in 2012 with another company and it will be difficult to obtain further information/segmental information about the company now. In view of its fluct .....

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E-Infochip Bangalore Ltd., we find that in the annual accounts of the company, with respect to the segment information it is stated that the company is primarily engaged in software development and I.T enabled services which is considered the only reportable business segment as per Accounting Standard AS-17 segment reporting prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available …………………&h .....

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e are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year s annual report .....

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this assessment year. We are also aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally different from Assessee s activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard. Comp-U-Learn Tech India Ltd., : 9. This company was sele .....

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p;D in pharmaceutical sector for the purpose of coming out with unique products and solutions for facilitating operational efficiency, effective inventory management and complete financial control for the sector. TPO however, considered the exceptional growth was only 1.6 times compared to last year and not an exceptional increase. Further, he extracted schedule 12, to come to a conclusion that as per annual report income from software development was about ₹ 14.11 Crores as against total .....

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y. With regard to objection on R&D, he considered that it was a general note as no expenditure appears to have been booked in P&L A/c. He was of the opinion that in most of the cases, R&D will actually be activities aimed at cost cutting and improving organizational set up etc. In view of the above, the contentions of Assessee are rejected and company is retained as comparable. 9.1. Relying on the objections raised before DRP who rejected the same, Ld. Counsel submitted that this yea .....

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173(2) of the Companies Act, at item No. 8, it was reported as under: As part of overall growth strategy, company had exceptionally its operations in its core activity, software development, e-governance solutions, IT Services, IT enabled services etc . In Item No. 9, it was reported that the company presently carries on business of software development, E-Governance solutions, IT and IT enabled services . Referring to page 213 of the Paper Book, it was stated that it has spent sizeable amount .....

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ion in schedule 14 (page 219 of the Paper Book), it was submitted that revenue in respect of brand license fee is accounted on execution of agreement. Revenue for software development is recognized on the basis of chargeable time or achievement of prescribed milestone as relevant to each contract. Revenue from sale of software products and courseware materials is recognized when the same has been completed with the passing of title or licenses or raising invoices as the case may be . Referring t .....

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g to software development services, then only the company can be taken as comparable company. In the absence of such information, it is very difficult to hold that the selected company is comparable to Assessee-company. There is no information about the segmental profits. What that company has reported in its annual report is Income from software development which cannot be equated as Income from services . The software development may include sale of products. In the absence of segmental inform .....

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any is a comparable should be restored to the file of AO/TPO to examine the available data in public domain/or obtaining information U/s. 133(6) of the Act for segmental information pertaining to software development services and then decide after giving due opportunity to Assessee whether the said company can be selected as comparable. For the time being, Assessee s objections are considered valid and issue is restored to the file of AO for undertaking analysis afresh as far as this company is .....

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segmental information indicates that revenue is shown to have been earned from application software and training. Accordingly, he rejected Assessee s objections and included as the comparable company. DRP confirmed the same. 10.1. Assessee s main objection before us is on functionality of the comparable company. As seen from the annual report of 2008-09 and 2009-10 and comparative statement placed by Assessee, the company classified itself as the company engaged in development of software and s .....

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vt. Ltd., in ITA No. 464/Hyd/2014 where in it was held that company is engaged in development of software products. Since its annual report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee s objections are accepted and AO is directed to exclude the company. Persistent Systems and Solutions Ltd. : 11. This comparable was not objecte .....

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ompany was rejected as it is engaged in outsourcing software product development and product designing. Further, segmental details were not available. Since there is no analysis on the objections of Assessee by TPO as Assessee has not objected earlier, we are of the opinion that Assessee s objections require re-examination by TPO. Therefore, without giving any opinion, whether the company can be selected as comparable or not issue of selection of this company as comparable is restored to the fil .....

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TAT in the case of Conexant Systems India Pvt. Ltd. (ITA No.1429/Hyd/2010 and 1978/Hyd/2011) and other cases as stated by TPO in page 41 of his order. However, TPO did not agree with the objections stating that the company has two segments including software development services and revenue from software development services is ₹ 33,649 Crores out of total turnover of ₹ 37,637 Crores, which is at 89.52%. This signified the fact that company is predominantly into software development .....

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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 Co-ordinate 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 company like Tata Elxsi Ltd., which has com .....

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less the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same. Sasken Communication Technologies Ltd: 13. This comparable was not objected to either before TPO or before DRP. Objections were raised before us on the comparability of this company on the reason that this company is having product sales and also a provider of telecommunication s .....

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Assessee as they have not objected earlier, we are of the opinion that inclusion of this company as comparable company is to be analysed afresh by taking the objections from Assessee and then after due analysis, TPO should consider whether the same can be included as a comparable company. Therefore, without expressing any opinion or finding in this regard, we remit the issue relating comparability of this company for fresh adjudication by TPO. L&T Infotech Ltd: 14. Assessee has objected bef .....

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ed it as a comparable and there is no consistency. These objections were rejected by TPO vide his analysis in page 40 of the order and from the earnings in foreign exchange reported, TPO considered the company as involved in software development services. The same objections were reiterated before DRP, but DRP rejected.. 14.1. It was the submission of the Ld. Counsel that DRP at Hyderabad in the case of M/s. Sumtotal Systems India Pvt. Ltd., [PAN: AABCC9379C] for the same assessment year has exc .....

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reported. We also noticed that meaning of the words used in the notes on accounts are not defined. Based on certain ITAT decision, the earlier directions of this panel and other panels, the huge turnovers involved, huge brand value, their predominant presence in the market, in view of incomplete details etc., this panel is of the view that the following comparables selected by TPO should be excluded from the list of final comparables chosen by TPO in the ALP computation. i) Infosys Technologies .....

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ies and not L&T Infotech Ltd., 14.3. After considering the objections of Assessee and perusing the order of DRP in the case of M/s. Sumtotal Systems India Pvt. Ltd., (supra), as extracted above, we are of the opinion that this company cannot be selected as comparable by the same reasons which DRP in the above referred case accepted. Moreover, there are no segmental details and as seen from the annual report, revenues are reported from software development services and products, how much is f .....

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he income schedules, engineering services reported in earlier year were not there in this year, therefore, it is very difficult to analyse whether the company is functionally similar or not? Keeping in view of the above difficulties in analyzing the data and considering the reasons given by DRP in the case of M/s. Sumtotal Systems India Pvt. Ltd., (supra), we are of the opinion that L&T Infotech Ltd., cannot be selected as a comparable company. AO/TPO is directed to exclude the same from the .....

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tional variation in the turnover of the company and effect on the income was due to market circumstances and external factors. As there are no external factor that affected the company or its customers, the same is includable as a comparable company. TPO however, relied on the annual report disclosures particularly results of operations noted that 90% of the revenues are from Dubai and due to steep pricing pressure and huge discounts requested by the clients, its business severely got affected . .....

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h is from services and how much is from products is not available. Since above company also is having the products division, for the same objections raised by Assessee with reference to other comparables already selected by TPO discussed above, we are of the opinion that this company cannot be selected as a comparable for the same reasons accepted above while rejecting some companies. Since, there is no segmental data of software services and products and since the above company is also into pro .....

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yees. TPO rejected the above said company on the reason that it fails employee cost filter and was also opined that there is no clarification given in the notes to amount in FY. 2009-10, whereas Assessee is relying on the notes to account for FY. 2007-08. Since Assessee did not satisfy the employee cost, no analysis can be carried out and therefore, company was not considered as comparable. It was the submission of Assessee that this company was accepted in LAM Research (India) Pvt. Ltd., in ITA .....

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venue, BPO services at 15% and training at 1%. This indicates that Assessee has different activities, therefore, it is difficult to analyse whether the company is strictly comparable to Assessee s software development services. However, to give a fair opportunity to Assessee, we remit the matter to the file of TPO to obtain necessary information if required and take Assessee s objections and analyse whether the company can be selected as comparable or not? The ground no 5 is partly allowed for s .....

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eipts. TPO proposed to charge interest at 12% on the outstanding receivables. While replying that assessee is a fully funded entity of the AE and the amounts outstanding are on services but not loan or advances given. It also does not have any working capital risk and there is no interest payment also. It relied on the order of the ITAT in the case M/s. Evonik Degussa India Private Limited in ITA No. 7653/Mum/2011, wherein it was held that TP adjustment cannot be done on hypothetical issues. Ass .....

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od. As can be seen from the table in page 45 of the TP order, TPO charged interest for the supposed delay not only during the year but also for the period beyond the assessment year concerned. Thus, he made a proposal to make adjustment of ₹ 1,26,40,592/- as an adjustment u/s. 92CA and total income was enhanced accordingly. Before the DRP, Assessee objected to the same and submitted that: • The outstanding receivables relate to the provision of services and not in the nature of any ad .....

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jected Assessee s contentions but accepted alternate plea of charging interest at LIBOR Plus 2½ points on the inter-company receivables from the overseas AE. Assessee is aggrieved. 17.2. Ld. Counsel submitted that the issue of charging of interest beyond the period was not adjudicated and DRP reduced the rate of interest from 12% LIBOR plus 2.5 points. It was submitted that Assessee was a debt free company, AE takes care of funding, no interest was charged and there is no liability of int .....

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ing used there particularly refers to loans or advances given for capital financing, whereas in Assessee s case, these are outstanding services rendered but not capital financing. The words are to be interpreted invoking the principles ejusdem generis and so the outstanding receivables cannot be equated to capital financing as amended by the provisions of the Act. It was further submitted that working capital adjustments are being made while analyzing the operational performance of the companies .....

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me material on record that there has been under charging of real income. Thus on the facts and circumstances of the case, we are of the opinion that addition on account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case. Even though DRP tried to distinguish the above decision on facts, as seen from the facts in both the cases, we are of the opinion that the above decision will equally apply to Assess .....

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ance Act, 2012 retrospectively. Even otherwise, as rightly held by the Logix Micro Systems Ltd v. ACIT [42 SOT 525] (supra), TPO should have allowed some interest free period for receiving the outstanding service charges. While acknowledging the order of the ITAT, TPO did not even bother to exclude the reasonable period and levied interest not only from the date of invoice to the date of realization during the year but also for the period beyond 31-03-2010 in later year. We were informed that no .....

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Bad and doubtful debts; b. Bank charges; and c. Un-allocable expenses in segmental financials. 18.1. Ld. Counsel submitted that these are all part of operational expenditure, hence should have been considered while computing the margins of comparable companies. However, it was fairly admitted that if some of the comparables objected to in Ground No. 4 are rejected, this ground will become academic. Hence, without adjudicating the issue, we dismiss the ground with an option to assessee to contest .....

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e principles of law and the orders of ITAT/High Court on this issue before levying any interest u/s. 234B. Ground Nos. 11 & 12 pertain to initiation of penalty proceedings which are little premature to be adjudicated at this point of time. Accordingly, grounds are rejected as academic in nature. 20. In the result, appeal of the assessee is partly allowed for statistical purposes. Revenue s Appeal in ITA No. 1936/Hyd/2014: 21. Revenue has raised three grounds which as are under: 2. DRP ought .....

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therefore, the same was withdrawn in the course of proceedings. 22. Ground No.2 pertains to rejection of Infosys Technologies Ltd., from the list of comparables by DRP. We have already considered the opinion of DRP which is consistent not only in Assessee s case but also in the case of M/s. Sumtotal Systems India Pvt. Ltd., (supra), extracted above while considering the exclusion of L&T Infotech Ltd. Since DRP s decision is consistent with the stand taken by the Revenue in other cases and al .....

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ame from total turnover. It was submitted before DRP that Assessee has not incurred any expenses towards delivery of software outside India and the expenses are for inter office and intra-office communication over the web and for general purposes and the same is not incurred for delivery of services outside India. Even assuming but without admitting that internet service charges are incurred for delivery of software, the same is not specifically received from the customer, the same cannot be red .....

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