TMI Blog2015 (10) TMI 2495X X X X Extracts X X X X X X X X Extracts X X X X ..... ee’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 available, considering the software development services as a segment by TPO cannot be considered as segmental data, unless 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 - since AO/TPO did not have the opportunity to analyse the objections of 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total turnover for the purpose of computation of deduction U/s. 10AA - I.T.A. No. 1758/HYD/2014 & I.T.A. No. 1936/HYD/2014 - - - Dated:- 16-10-2015 - SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER For 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 procedure adopted by the Transfer Pricing Officer [TPO] which are not pressed specifically. Ground Nos. 4 5 pertain to selection and rejection of comparables. Ground No. 6 pertains to risk adjustment. Ground Nos. 7 8 pertain to interest on outstanding receivables and Ground No. 9 pertains to incorrect margin computation. Ground Nos. 10, 11 12 are with reference to initiation of penalties and imposing interest u/s. 234B. 2. We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 TPO at 25.08% and ALP of international transactions was determined at 32,00,12,725/-, thereby making adjustment of ₹ 2,79,16,567/- u/s. 92C(3) of the Act. In addition, TPO also made adjustment on receivables at ₹ 1,26,40,592/- thereby determining total adjustment at ₹ 4,05,57,159/-. 5. Assessee raised objections before DRP, Hyderabad, who considered 14 objections raised by Assessee and rejected most of them except deletion of Infosys Technologies Ltd., as a comparable out of 18 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. L T Infotech Ltd., - 19.97 7. Out of the above 17 comparables, Assessee has no objection in selecting the comparables at Item No. 1 to 10, Assessee is objecting to the comparables from 11 to 17. The 18th comparable of Infosys Technologies Ltd., which was excluded by DRP is being contested by Revenue. Apart from selection of comparables, Assessee is also contesting the comparable companies rejected by TPO in Ground No.5. Out of the three companies, Assessee has not pressed for Satyam Computer Services 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 company is functionally different and is having two different segments i.e., software development serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to 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 ..Considering the aforesaid facts, we are of the view that the aforesaid two companies needs to be excluded while working out the comparability analysis and therefore uphold the plea of the Assessee in excluding the margins of the aforesaid 2 companies . 8.2. Ld. DR, however, referred to the extracts made by TPO in the order to submit that Assessee is a comparable company with that of Assessee. 8.3. After considering the rival contentions and perusing the annual reports placed on record, we 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... predominantly software development services and accordingly comparable for software development services provider for the year. He also stated that company categorically stated that it was pure software development services provider. He also rejected objection on strategic acquisitions stating that the same does not have any impact on standalone financials of Assesseecompany. 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 year is an exceptional profit year for the company and referred to the report of the company for the year under consideration. Vide page 207 of the Paper Book, Ld. Counsel referred to the structural initiatives, wherein it was stated your company was originally into business of software development and education training. During t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 information, this case cannot be selected as comparable. However, whether TPO could obtain any segmental information is not known to us. we are of the opinion that TPO should examine whether there are any segmental information which can be obtained from the company or available in the public domain so as to compare Assessee s software development services with that of software development services of Comp-U-Learn Tech India Ltd. Therefore, we are of the opinion that the issue of selection of this company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed in annual report of the earlier year and in this year and relies on the decision of the Hon'ble ITAT in case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 AY. 2009-10 (supra), wherein this company 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 file of TPO to re-examine afresh. Therefore, it is restored to the file of TPO for fresh examination. Tata Elxsi Ltd (Seg): 12. Before TPO, Assessee contended that the above said company is functionally different as it specialized in embedded software development technology. It was also objected before TPO that in earlier year this company has clearly stated that it cannot be compared to any other software services company due to complex nature of its business. Assessee relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the comparability of this company on the reason that this company is having product sales and also a provider of telecommunication software services. Since there is no break-up of cost available, Assessee submits that they have difficulty in comparing the said company on FAR analysis. Assessee also relies on the decision of ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein the ITAT remitted the issue to comparability of this company for fresh adjudication by AO/TPO in an earlier year. Considering the view taken earlier, since AO/TPO did not have the opportunity to analyse the objections of 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 before TPO that the department in earlier years is rejecting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the companies and DRP has excluded only Infosys Technologies 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 from services and how much is from products could not be analysed. Even though TPO considered the software exports reported in earning in foreign currency as that of software development services, we are not sure whether the software exports reported therein exclusively pertain to services or products. As there are no segmental details, it is very difficult to analyse whether the incomes earned by the said company do really pertain to the similar services rendered by Assessee. As also seen from the income schedules, engineering services reported in earlier year were not there in this year, therefore, it is very difficult to analyse wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected as a comparable. Therefore, we agree with the rejection of this comparable by TPO and DRP, even though for other reasons also. Assessee s grounds on this is accordingly, rejected. CG VAK Software and Exports Ltd: 15.3. It was the submission of Assessee before TPO that this company satisfies the filter of employee cost which is about 76.10% and notes to the accounts in annual report clearly mentioned that cost on services is incurred towards salaries to employees. 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 No. 1437/Bang/2014 and Mindteck (India) Ltd., in ITA No. 70/Bang/2014. Since detailed information is not available, we cannot give any finding whether the company is comparable or not? As seen from the annual report plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 advance/loans. These are closely linked to the provision of services and hence have to be aggregated for the purpose of economic analysis. The company has been fully funded by its AE since its inception for all its working capital requirements and receivables are running accounts. Any fund requirement being made good by the AEs. 17.1. It is also submitted that company does not bear working capital risk. It relied on the same objections as relied before TPO. DRP however, vide its para 17, rejected Assessee s contentions but accepted alternate plea of charging interest at LIBOR Plus 2 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest liability at all so notional interest cannot be brought to tax under the provisions of TP. As 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. 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 such addition was made in the later year on Assessee s receivables. 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. Accordingly, we allow the grounds 7 8 of Assessee and direct AO/TPO to delete the said addition made. 18. Ground No. 9 is regarding incorrect computation of mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 also by the ITAT in a number of cases on reason of turnover, brand equity, functional dissimilarity, we are of the opinion that DRP is correct in excluding the above company from the list of comparables. Therefore, there is no merit in the Revenue s ground and the same is rejected. 23. Ground No. 4 pertains to deletion of addition towards communication expenses by AO invoking the Explanation 2 to Section 10A. Issue arises as AO reduced communication cost from export turnover and not reducing the same 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 rece ..... X X X X Extracts X X X X X X X X Extracts X X X X
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