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2015 (11) TMI 1582 - ITAT MUMBAI

2015 (11) TMI 1582 - ITAT MUMBAI - TMI - Transfer pricing adjustment - selection of comparable - Held that:- 3D PLM Software Solutions Ltd.- TPO is directed to verify the related party transactions of 3D PLM and if the contention of the assessee, that the RPT of 3D PLM is more than 25%, is found to be correct, 3D PLM Software Solutions Ltd. will be excluded from the final set of companies comparable to the assessee - Bodhtree Consulting Ltd. being a software product manufacturer, is not comp .....

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rvices, which is not at all the calling of the assessee. To reiterate, the assessee company is engaged in the business of providing low and contract software development services to its AE. Therefore, on this very basis, Genesys needs to be excluded from the set of comparables. - As seen if the Forex gain and the first three comparables, i.e., 3D PLM, Bodhtree Consulting Ltd. and Genesys International Corporation Ltd. are excluded, the OP/OC of the remaining nine comparable companies, as ta .....

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uded in the export turnover for computing deduction u/s 10A of the Act. - For computation of deduction u/s 10A of the Act, the total turnover in the denominator and the export turnover in the numerator have to be read in the same manner. Therefore, the assessee is correct in contending that an equivalent amount of foreign exchange gain attributable to the delivery of goods outside India, as included in the total turnover by the AO, is also entitled to be included in the export turnover for p .....

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t the separate orders each dated 01.10.2013 & 20.09.2014, passed by the ld. DRP, for the assessment years 2009-10 & 2010-11. The assessee has also filed Stay Application. ITA No.668/Mum/2014 2. This is the assessee s appeal for the assessment year 2009-10, taking the following grounds: On the facts and circumstances of the case, the Dispute Resolution Panel ( DRP ), the learned Assessing Officer ( AO ) and the learned Transfer Pricing Officer ( TPO ) on the following grounds making an ad .....

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ating in nature for the computation of profit level indicator (PLI) 1.1 On the facts and circumstances of the case, and in law, the DRP has erred in excluding the amount of Foreign Exchange Gain amounting to INR 15,99,29,779 from the operating revenue of the Appellant and treating the same as non-operating. 1.2 On the facts and circumstances of the case, and in law, the DRP has erred in enhancing the order ignoring the fact that TPO himself has agreed the treatment of foreign exchange as operati .....

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mparable companies identified by the Appellant. 2.1 On the facts and circumstances of the case, and in law, the DRP have erred in selectively excluding Computech International Ltd. a comparable company identified by the Appellant, having negative operating margin, from the finanl set of comparable companies stating that the company is not comparable in the absence of segmental information without appreciating that the annual report of the relevant year contains the segmental information and only .....

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g that the revenue of the said companies are actually diminishing over a period of time. 2.3 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in excluding R Systems International Ltd. and Roita India Ltd., identified by the Appellant from the final set of comparable companies stating that the said companies are not comparable on the ground that they have a different financial year ending. 2.4 On the facts and circumstances of the case, and in law, the DRP have e .....

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g filters applied, are having high turnover and are having higher margins. 3.1. On the facts and circumstances of the case, and in law, the TPO and DRP have erred in selectively including Geneysys International Corporation Ltd., in the final set of comparable companies and falling to follow the order of the DRP in the Appellants own case for AY 2008-09 without appreciating that the said company is functionally different compared to the appellant. 3.2 On the facts and circumstances of the case, a .....

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n law, the TPO and DRP have erred in including KALS information Systems Ltd. and persistent Systems Ltd. In the final set of comparable companies without appreciating that the said companies are functionally different compared to the appellant. 3.4 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in including infosys Technologies Limited, Igate Global Solutions Ltd., Mindtree Ltd. and Persistent Systems Ltd. in the final set of comparable companies without appre .....

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st in the cost base at the time of calculating the PLI of the appellant 4.1. On the facts and circumstances of the case, and in law, the TPO and the DRP has erred in ignoring the fact that the outsourcing third party service cost of INR 7,95,55,035/- is a pass through cost and no value addition is created by the Appellant on such services. It is a pure reimbursement of costs and accordingly the same should not be considered in the cost base at the time of calculating the PLI of the Appellant. 4. .....

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Ground no.6: No working capital risk adjustment granted 6.1. Notwithstanding the aforementioned grounds, the TPO and DRP has erred in not making a further downward margin adjustment to consider working risk differentials between the Appellant and the comparable companies. 6.2 The Appellant prays that the working capital risk adjustment be granted to the appellant. Ground no.7: Granting of benefit of +7-5 per cent range to the Appellant. 7.1. The Appellant prays that the benefit of +7-5 per cent .....

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unrealized foreign exchange for determining the deduction under section 10A of the Act. 9.1 On the facts and in the circumstances of the case and in law, the AO and the DRP have erred in concluding that unrealized foreign exchange gain, relating to the activity of export, amounting to INR 3,75,69,434/- is not derived from the activity of export and therefore not entitled for deduction under section 10A of the Act. 9.2. The Appellant prays that the unrealized foreign exchange gain be included in .....

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Appellant prays that the foreign exchange gain be excluded from the total turnover of the Appellant and the relief under section 10A of the Act be recomputed accordingly. 10.3 Without prejudice to the above, even if accepting the ground of TPO and DRP to consider realized foreign exchange gain to be considered as part of Total Turnover the assessee prays that a similar adjustment be made to the Export Turnover for computing deduction under section 10A of the Act. Ground no.11: Levy of Interest b .....

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, i.e., Ground nos. 1 to 8, Ground nos.1 to 4 have been amended by filing the following Modified Grounds: 1. That the TPO/DRP erred on facts and in law in not considering foreign exchange gains amounting to ₹ 15,99,29,779 as part of the operating income for computation of operating profit margin of the appellant for undertaking benchmarking analysis applying TNMM. (Original ground of appeal Nos.1,1.1 to 1.3) 2. That the TPO/DRP erred on facts and in law in considering following companies i .....

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l set of comparable companies allegedly on the ground that segmental information of the said company is not available. (Original ground of appeal No.2.1) 4. That the TPO/DRP erred on facts and in law in not excluding the pass through cost of ₹ 7,95,55,035 on translation work outsourced to third parties from the total operating cost for determining the operating profit margin for the purpose of undertaking benchmarking analysis applying TNMM. (Original ground of appeal No.4, 4.1 to 4.2) The .....

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ing captive service provider as opposed to the comparable companies who were independent service provider. 1.1 That on the facts and in the circumstances of the case and in law, the DRP erred in rejecting the contention of the applicant regarding risk adjustment without giving the applicant an opportunity to provide workings to support the claim of risk adjustment. 2. That on facts and circumstances of the case and in law, the DRP/TPO ought to have excluded the following companies from the set o .....

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ive service provider. 4. That on the facts and circumstances of the case and in law, the DRP/TPO ought to have excluded Bodhtree Consulting Ltd. and Cosmic Global Ltd. from the final set of comparable companies on account of the fact that the year under consideration is the exceptional year of operation of both the companies. 5. That on the facts and circumstances of the case and in law, the DRP/TPO ought to have excluded Cosmic Global Ltd. on account of non-availability of information regarding .....

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e to the assessee. These comparables are also the subject matter of Additional Ground nos. 2 to 6. 6. An application for additional evidence has been filed, seeking to place on record the following documents: 1. Audited financial statement of 3D PLM Software Solutions Ltd. for the financial year 2008-09- Refer page 940 of Paper Book. 2. Audited financial statements of Genesys International Corporation Ltd. for the financial year 2006-07-Refer page 975 of Paper Book. 3. DRP order in the case of t .....

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o be considered. It has been contended that the legal position in this regard is that there is no estoppel in Income-tax proceedings and the assessee can make a claim, notwithstanding that the same was not made in the return of income. Of the five comparables taken in the Modified Ground, the assessee contends that three comparable Companies, i.e., 3D PLM Software Solutions Limited, Bodhtree Consulting Limited and Cosmic Global Ltd., were undoubtedly taken by the assessee itself in its Transfer .....

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61 (SC) ii) CIT vs. V.M.R.P. Firm , 56 ITR 67 (SC) iii) National Thermal Power Co. Ltd. vs. CIT , 229 ITR 383(SC) iv) CIT vs. Enron Expat Services Ind. , 327 ITR 626 (Uttrakhand) v) R.B.Jessa Ram Fateh Chand vs. CIT , 81 ITR 409 (All.) vi) Pandit Seho Nath Prasad Sharma vs. CIT , 66 ITR 647 (Del.) vii) CIT vs. Bharat General Reinsurance Co. Ltd. , 81 ITR 303 (Del). viii) DCIT vs. Quark Systems Pvt. Ltd. , ITA No.s 100 & 115/Chd/2009 (SB) [approved by the Hon ble P & H Court). ix) Honeywe .....

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assessee had itself taken these companies as comparables in its TP documentation, it cannot now seek to withdraw these companies as comparables. It has been contended that without prejudice, in case the Additional Grounds are admitted, the matter may be restored to the file of the TPO. So far as regards the additional evidence, it has been submitted that no reason has been given as to why the assessee could not produce the same before the Authorities below. In the alternative, it has been conten .....

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he assessee and no objection to its inclusion was taken before the Authorities below, such request at the second appellate stage was not sustainable. Rejecting this contention, the Special Bench of the Tribunal held that even if the comparable had been taken by the assessee in its Transfer Pricing audit, the assessee was entitled to point out to the Tribunal that the company had been taken wrongly as a comparable. It was held that the Tribunal is a fact finding body and, therefore, it has to tak .....

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some mistake on its part. Quark Systems Pvt. Limited (supra), was approved by the Hon ble Punjab & Haryana High Court. This decision of the Special Bench has since been followed, inter-alia, in DCIT vs. BP India Services Pvt. Ltd. (supra). 10. In view of the above, the Additional Grounds are admitted. The request for additional evidence is accepted too, particularly keeping in view that this evidence is also available even otherwise in the public domain. 11. Concerning Modified Ground No.1, .....

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y financial nature are required to be excluded therefrom. It has been submitted that the ld. DRP erred in upholding the TPO s finding that the foreign exchange gain/loss is neither a consideration, nor can it be considered to negotiate or determine the price of the product or service, since it is uncertain and indefinite and can fluctuate either direction. As per the assessee, in its case, as well as in the case of the comparable companies, the exchange gain/loss is on the trading account and is .....

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K. Uttamlal Exports Ltd. vs. DCIT , 133 Taxman 248 (Mum.) 8. Mohindra Impex vs. ACIT , 121 Taxman 326 (Del.) 9. ITO vs. Banyan Chemicals (P) Ltd. , 310 ITR 384 10. Livingstones Jewellery (P) Ltd. , 31 SOT 323 11. DCIT vs. Accentures Services (P) Ltd. ITA No.4540/M/08 (Mum. ITAT) 12. Sujata Grover , 74 TTJ 347 (Del.) 13. Deutsche Bank A.G. vs. DCIT , 86 ITD 431 14. Bestobell (India) Ltd , 117 ITR 789 (Cal.) 15. Khandelwal Brothers Pvt. Ltd. v. CIT , 117 ITR 452 (Cal. 16. CIT vs. Oil India Ltd. 14 .....

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47/Del/2007). 23. CISCO Systems (India) Ltd. vs. DCIT , [IT (TP) A. No.271/Bang/2014] 24. Four Soft Limited , ( ITA No.1495/Hyd/10) 25. M/s. Mercendex Benz Research & Development India Pvt. Ltd. vs. DCIT , ( ITA No.1222/Bang/2011) 26. M/s. Premier Exploration Services Pvt. Ltd. vs. ITO ( ITA No.5293/Del/2012 27. S. Narendera vs. ACIT 28. Rusabh Diamonds vs. ACIT ( ITA No.7215/Mum/2012) 29. Trilogy E-Business Software India (P) Ltd. vs. DCIT (ITA No.1054/Bang/2011). 30. M/s. Sap Labs India Pv .....

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rating income should be upheld. It was further contended that however, without prejudice, in case, foreign exchange gain, is to be treated as operating income, the true effect of the ratio of the judgment in the case of Techbook International , (supra) of the Tribunal be given. Attention in this regard was drawn to para 4.6 of this decision, as per which, when the foreign exchange gain directly emanates from the consideration received for rendering of services by the assessee to its AE, the fore .....

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id not have the benefit of the details of foreign exchange gain and its various components; that there are 3 components of the net foreign exchange gain of ₹ 15.99 crores: (1) Unrealised exchange gain on account of Sundry Debtors ₹ 14,54,16,911 (2) Realized exchange loss related to Sundry Creditors ₹ 1,09,51,295 (3) Exchange gain related to other revenue items ₹ 2,54,64,153 According to the ld. DR, a different treatment is to be given to each of the above components of th .....

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but it cannot be treated as operating receipt; it may be on account of reinstatement of interest receivable on account of foreign exchange currency; that interest is not treated as operating income or expense for the purpose of computation of the PLI; that on the other hand, without prejudice, if it is to be so considered, it will go to increase the operating revenue and not cost. It has been urged that here, the denominator in the computation of the PLI (OP/OC) is the operating cost or the tot .....

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e to the TPO, though they were furnished before the AO. Accordingly, we remit this matter to the file of the TPO, to be decided afresh in accordance with law, in the light of the decision of the Tribunal in Tech Book International (Supra), on calling for necessary details from the assessee, by affording due and adequate opportunity of hearing to the assessee. 16. As such, Modified Ground No.1 is treated as allowed, for statistical purposes. 17. Turning to Ground No.2 of the Modified Grounds of A .....

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is 69.93. The contention of the assessee is that since the related party transactions (RPT) of 3D PLM is more than 25%, it does not satisfy the filter applied by the TPO. In this regard, the assessee has sought to rely on the decision of the Delhi Bench of the Tribunal in the case of Global Logic India Pvt. Ltd. vs. DCIT , rendered in ITA No.5110/Del/2010. 19. Here, it is seen, that as per the record, the related party transactions to sales ratio of 3D PLM is as follows: Related Party transactio .....

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100%. The TPO has applied RPT filter of 25%. It is submitted that 3D PLM may not be excluded on functional comparability. The same may be decided subject to verification of RPT. 21. As regards the RPT of 3D PLM, it is submitted that there cannot be any situation where related party transaction exceeds one hundred percent The TPO has applied related party transaction filter of 25%. It is submitted that 3D PLM may not be excluded on functional comparability. The same may be decided subject to ver .....

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e s contention that 3D PLM is a software product company, for which reason also it is not comparable to the assessee. 23. Apropos Bodhtree Consulting Ltd., which was also taken as a comparable by the assessee itself in its TP study, the assessee s objection against its inclusion for the final set of comparable companies is that it is a software product manufacturing company, which is the assessee is not and, therefore, it is not functionally comparable to the assessee. In this regard, it has bee .....

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rables. 24. The ld. DR s objection in this regard is that the assessee is also a product manufacturing company and, therefore, Bodhtree Consulting Ltd., ought not to be excluded from the final set of comparables. 24(a) In the Department s written submission at page 4, para 3.2.3, as also by way of his oral arguments, the ld. DR has sought to place reliance on the assessee s Transfer Pricing Report ( TPR), as per which, according to the ld. DR, the assessee is into application development , which .....

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, it refers to the product release only in the context of application development , software development being the sole business activity of the assessee. 24(b) Here also, the argument of the ld. DR is found to be misplaced. He has sought to develop this argument out of para 3.2.2 of the TPR of the assessee, as contained at page 72 of the assessee s paper book for AY 2009- 10. It would be apt to reproduce the relevant portion thereof: Application development includes testing, application buildin .....

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the assessee is a product manufacturing company. Rather, the assessee was found to be in the calling of localization and software services, as recorded by the TPO in para 5.1 of his order. This finding of the TPO was confirmed by the ld. DRP. The Department cannot now be allowed to set up a new case, as is sought to be done. Even otherwise, the case sought to be now set up at this stage, i.e., that the assessee manufacturing company is a product company, is factually incorrect. 26. On the basis .....

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Transfer Pricing study. Rather, it was the TPO who considered it in the set of comparables. The assessee s objection against such inclusion of Genesys International Corporation Ltd. in set of comparable is that Genesys is engaged in the business of providing Geospatial Information System or GIS services, which comprises of photogrammetric remote sensing, cartography, data conversion related computer based services and other related computer based services and that, therefore, this company is al .....

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te to three comparables and the reasons are given in the table below: Sr. No. Name of the Companies Reasons 1 Cosmic Global Ltd. Abnormal profit margin on account of the exceptional circumstances in the financial year ending on 31st March, 2009. 2 Bodhtree Consulting Ltd; Abnormal profit margin on account of specific functional difference viz. company is engaged in development and sale of software products. 3 3D PLM Software Solutions Ltd. Abnormal profit margin on account of specific functional .....

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owever, the TP calculations under Chapter X of the Act do not mandate benchmarking on the basis of industry average; that further, the assessee has also not chosen any criterion to align results of industry averages in its TP Study Report; that also, this issue was never before the TPO/DRP; that the some of the comparables have outperformed in terms of percentage of operating profits; that the assessee has applied this criterion selectively to the comparables which are showing higher gain and th .....

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estment Advisors (I) Pvt. Ltd. , (2015) 56 taxman.com 417 (Del), as per which, wide fluctuations in profits margins of the same entity on an year to year basis would be offset by taking the arithmetic means of all the comparables in the assessment year in question. It has been contended that, therefore, Genesys cannot be excluded as a comparable, particularly when the assessee has itself selected Rolta India Ltd. , which is at parity with Genesys as a comparable. Whereas Genesys is involved in G .....

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To reiterate, the assessee company is engaged in the business of providing low and contract software development services to its AE. Therefore, on this very basis, Genesys needs to be excluded from the set of comparables. It is noteworthy that this company was excluded by the ld. DRP in the assessee s case for AY 2008-09. However, while upholding the inclusion this was of Genesys in the set of comparables for the year under consideration, the ld. DRP has not pointed out any distinguishing featur .....

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ain and the first three comparables, i.e., 3D PLM, Bodhtree Consulting Ltd. and Genesys International Corporation Ltd. are excluded, the OP/OC of the remaining nine comparable companies, as taken by the TPO, works out at 19.56%, as against the assessee s OP/OC of 18.15%, which falls within the +/- 5% range, as provided in the proviso to section 92C(1) of the Act. Therefore, we find no need to go into the merits of the comparability of the remaining two companies, i.e., Cosmic Global Ltd. and Inf .....

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re not doing so. 35. Now, turning to the remaining effective Grounds in the Original Grounds of Appeal, the ld. Counsel for the assessee has chosen not to press Ground Nos. 5, 7 & 8. Ground nos. 5, 7 & 8 are, therefore, rejected as not pressed. 36. Ground no.9 of the Original Grounds pertains to the Cororate-tax issue. It challenges the exclusion of unrealized Forex gain from the profits of the business of the undertaking, for computing deduction u/s 10A of the Act. As per the record, du .....

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item 2,54,64,163 15,99,29,779 37. This amount was credited to the profit & loss account and was offered for tax as business income. However, the AO disallowed an amount of ₹ 3,75,69,434/- representing unrealized foreign exchange gain arising on account of reinstatement of debtors and creditors outstanding at the end of the relevant financial year. The AO observed that mere reinstatement of books of account cannot be treated as profit of the undertaking or export turnover from the expor .....

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ra), the net foreign exchange fluctuation gain booked by the assessee in its books of account is directed to be included in the export turnover for computing deduction u/s 10A of the Act. Accordingly, Ground no.9 of the Original Grounds of Appeal is accepted. 40. As per Ground no.10 of the Original Grounds of appeal, realized Forex gain needs to be included in both, the export turnover and the total turnover, for computing deduction u/s 10A of the Act. 41. Here, the AO included foreign exchange .....

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hat for the computation of deduction u/s 10A of the Act, the total turnover in the denominator and the export turnover in the numerator have to be read in the same manner. For this reliance has been placed on the following case laws: i) CIT vs. Gem Plus Jewellery India Ltd. , 330 ITR 175 (Bom.) ii) M/s. Microchiop Technology Designs (India) Pvt. Ltd. , ITA No.1161/Bang/2007 (Bang.) iii) M/s. Alternative Food Process P. Ltd. vs. ITO , ITA No.52/Bang/2008 (Bang.) iv) M/s. Goodrich Aerospace Servic .....

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042/Bang/07 (Bang.) xi) Mphasis Ltd. vs. ACIT , ITA No.884/Bang/07 (Bang). xii) Patni Telecom (P) Ltd. v. ITO , 22 SOT 26 (Hyd.) xiii) DCIT vs. Softsol India Ltd. , 22 SOT 271 (Hyd) xiv) CIT vs. Sitel Operating Corpn. India Ltd. , IT no. 153 of 2011 (Kar HC) xv) DCIT vs. Binary Semantics Ltd. , 109 TTJ 556 xvi) ITO vs. Sak Soft Limited , 313 ITR (AT) 353 (Chennai ITAT) 44. Here also, the Department has remained unable to effectively controvert the assessee s contention. In Gem Plus Jewellery Ind .....

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on u/s 10A of the Act, the total turnover in the denominator and the export turnover in the numerator have to be read in the same manner. Therefore, the assessee is correct in contending that an equivalent amount of foreign exchange gain attributable to the delivery of goods outside India, as included in the total turnover by the AO, is also entitled to be included in the export turnover for proper computation of the deduction u/s 10A of the Act. This contention by way of Ground no.10 of the Ori .....

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is issue, it is seen, has been decided in favour of the assessee by the ld. DRP, relying on the decision of the Hon ble Jurisdictional Bombay High Court in the case of CIT vs. Gem Plus Jewellery India Ltd. , (supra). 49. The Department contends that it has not accepted the decision of the Hon ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. (supra) and an appeal there against is pending before the Hon ble Supreme Court. 50. Here, we find that it is the decision of the Hon ble J .....

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. ITA No.7415/Mumbai/2014 52 This is the assessee s appeal for the assessment year 2010-11 against the order dated 26th Sept., 2014, passed by the ld. DRP. The assessee has taken the following grounds: Based on the facts and circumstances of the case, the appellant respectfully submits that the learned AO erred in determining the total income of the appellant at ₹ 17,61,98,340 as against the returned income of ₹ 8,98,670 fled by the Appellant. The grounds of the Appellant against the .....

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th IT and ITES activity undertaken by the Appellant with its Associated Enterprises (AE) In doing so, the AO has erred in law and in facts a follows: 2.1. Rejecting the transfer pricing analysis undertaken and the comparable companies identified by the appellant. 2.2. Not computing ALP in respect of the international transactions as computed by the Appellant and in ignoring the provisions of Rule 10B (4) of the I.T. Rules, 1962 which authorizes usage of multiple year data of comparable companies .....

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f the Act. Corporate Tax related grounds. 3. The AO has erred in law and in facts in disallowing the foreign exchange loss of ₹ 4,80,35,675 on account of the same being neither accrued nor an actual loss. 4. The AO has erred in law and in facts in proposing to levy interest u/s 234B of the Act. 53. The following Additional Ground has also been sought to be taken : Based on the facts and circumstances of the case, the appellant respectfully submits that the learned AO erred in determining t .....

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see has stated at the bar that the Additional Ground is not pressed. Rejected as not pressed. 55. Ground No.1 is general in nature. 56. Ground No.2 challenges the adjustment of ₹ 12,72,63,996/- to the arm s length price determined by the assessee in respect of international transactions in connection with IT and ITES activity undertaken by the assessee with its Associated Enterprise (AE). 57. The Taxing Authority selected/rejected certain comparables. The TPO computed 12.10% as the assesse .....

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. R.S. Software (India ) Ltd. 8.34% 12 R Systems International Ltd . 18.49% 13. S Q L Star International Ltd. 7.20% 14. Sagarsoft (India) Ltd. -8.12% 15 Synetairos Technologies Ltd. 20.91% 16. Zylog Systems (India) Ltd. -0.01% 17. Core Projects & Technologies Ltd. (seg) 36.03% 18. Roltaiondia Ltd. (seg) 12.45% Average (Arithmetic man) 14.42% 58. As per the record, during the TP proceedings, the assessee was required to submit the updated OP/TC for the comparable companies using data for the .....

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ems International Ltd. 20.85% 13. S Q L Star International Ltd. -14.31% 14 . Sagarsoft (India) Ltd. 11.85% 15 Synetairos Technologies Ltd. 19.00% 16. Zylog Systems (India) Ltd. 6.55% 17. Core Projects & Technologies Ltd. (seg) 63.23% 18. Roltaiondia Ltd. (seg) 1 4.75% Average (Arithmetic man) 16.61% 59. As evident, the arithmetic mean of the operating profit margin of these comparable companies was 15.51%. As such, according to the assessee, the assessee s OP/TC fell within permitted AL rang .....

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e, seven comparables, Infosys Technololgies Ltd., Kals Information Systems Ltd., and Persistent Systems Ltd. are the companies introduced by the TPO, though not taken as comparables by the assessee. The TPO, thus, arrived at an average profit margin of 25.62%. 62. On the basis of the above, the TPO made addition on account of TP adjustment amounting to ₹ 12.72 crores. The DRP upheld this addition, bringing the assessee now before us. 63. The assessee is aggrieved with the action of the DRP .....

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ces, such as software development services & application maintenance, testing services, localization services. It has been contended that so, the three companies have wrongly been taken as comparables, since the assessee is not into software product manufacturing. 64. Apropos Persistent Systems Ltd., it has been contended that this company is functionally not comparable with the assessee; that on perusal of the annual report, it is observed that the company is engaged in outsourced software .....

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5. So far as regards the Infosys Technologies Ltd., it has been contended that functionally not comparable with the assessee; that on perusal of the annual report, it is observed that it provides end to end business solutions that leverage cutting-edge technology, thereby enabling clients to enhance business performance; that further, Infosys also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, system .....

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revenues primarily from software services and software products; that some of the products sold by the company are Shine - ERP software, Docuflo, Dac4Cast, CMSS, La Vision Virtual Insure etc.; and that since KALS Ltd. does not report separate segmental information for the development of software and software products, it cannot be considered as a comparable. 67. On the other hand, the ld. DR has sought to place reliance on the assessee s Transfer Pricing Report (TPR), as per which, according to .....

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he ld. Counsel for the assessee, if the TPR is correctly construed, it refers to product release only in the context of application development , software development being the sole business activity of the assessee. 68. Referring to page 72 of the APB, it was pointed out that as declared by the assessee itself, LB India has two development centres in Mumbai and Chennai employing more than 1200 professionals. The services rendered by LB India include low-end, routine development and maintenance .....

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her pointed out that Global Development and Testing (GDT) through its GDT solutions, LB India provides applicaton-outsourcing services, including new low-end, routine, software development, maintenance and user support. Application development includes testing, applications building, quality assurance, program assembly and product release. Application maintenance includes minor modifications changes, maintenance of already existing low-end, routine, software depending upon the customer s require .....

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ith the client content management processes and technology. LB India is able to manage the content development in a semi-automated manner for large volumes of content. Examples of client content requiring these types of services include online support site maintained in multiple languages, learning programs and marketing product databases all of which are frequently updated to reflect the latest products and terminologies. 71. It has been argued that the services rendered by the assessee give ri .....

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on. The assessee is also rendering a mixture of high-end services and release of products. Therefore, according to the Ld. DR, KALS is definitely comparable to the assessee. Moreover, since it was accepted last year, the assessee cannot cherry-pick for the year under consideration. Besides, there are four companies taken as comparables which are product manufacturing companies, i.e., 3 D PLM Software Solutions, R Systems International Ltd., Goldstone Technologies Ltd., and Zylog Systems (India ) .....

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hile dealing with ITA No.668/M/2014 (supra) that Kals is into product manufacturing services ( As per APB-291), whereas the assessee is only providing services. Complete segmental data regarding software is available at APB 292 which is, as follows: Year Ended 31.3.2010 31.3.2009 1. Segment Revenue Application Software 21692935 20533880 Training 1352209 870807 Net Sales/Income from operations 23045144 21404686 2. Segment Results Profit/loss before tax and interest from each segment Application s .....

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48 166123 So, it is not possible to make a comparison. 74. In this regard, the DRP has held as follows: 2.2 Before us the ARs objected to selection of 3 fresh comparable by the TPO as erroneous inclusion. Two out of three comparables viz. M/s. Infosys technologies Ltd. and M/s. KALS Infosys Ltd. were rejected by the TPO in the previous year as well, which was agitated before the predecessor DRO. After a detailed discussion the panel had upheld the action of the AO in considering these two compar .....

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into the business of software development and training. Segmental results are available. There cannot be dispute if segmental results of software segment are used for comparison. TPO is directed to determine the mean profitability on the basis of segmental results of software development of this company for comparison and determination of mean PLI. So, for the AY 2009-10, segmental data regarding products manufactured and services rendered was available. 75. Thus, for the assessment year 2009-1 .....

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r call, the assessee was not required to go into the other comparables. 77. However, the said finality of the DRP order in AY 2009-10 regarding KALS cannot be taken in any manner detrimental to the assessee qua the year under consideration. It is trite that each year is independent and facts are to be viewed and decided for each year separately. 78. So, we have to consider the comparability or otherwise of KALS with the assessee regarding the year under consideration separately and now we are pr .....

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oducts since its inception. The company consisting of STPL unit engaged in Development of Software and Software products and a Training Centre engaged in training of Software professionals on online projects. 80. This clearly shows that KALS is into development of software and software products. 81. The segmental information of KALS is available at APB 293, as follows: Year Ended 31.3.2010 1.Segment Revenue Application Software 21692935 20533880 Training 1352209 870807 Net Sales/Income from oper .....

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Application Software 21692935 20533880 Domestic Training 267961 704683 Translation & Interpretation 1084248 166123 82. From the above, it is evident that segmental information of KALS regarding its software development segment is not available. Therefore, comparison of the assessee, who is into software development only, with the software development segment of KALS is not possible. Therefore, finding the functionality of KALS incomparrable with the assessee, we reject this company as a comp .....

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utilizes its product engineering processes to develop best-in-class solutions for its customers who are players in the technology, telecommunication, life science, healthcare, banking and consumer products sectors. 84. On the other hand, the ld. DR, again, like in the case of KALS, states the assessee to be a product manufacturing company. 85. However, while dealing with KALS, we have rejected this company as a comparable. Like-wise, we hold that Persistent Systems Ltd., has also not been correc .....

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n and implementation, testing and infrastructure management services. This company also offers software products for the banking industry. 87. It has been contended that (as available at APB 452 in para 4 & 7 and at APB 461 in para 5 ) 4. Finacle from Infosys - partners with banks across the globe to power their innovation agenda, enabling them to differentiate their products and services, enhance customer experience and achieve greater operational efficiency. Finacle solutions address world .....

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Financial Inclusion solutions. These offerings make Finacle a strong innovation facilitator enabling banks to accelerate growth while maximizing value from their large-scale business transformation. Finacle is the chosen solution in over 130 banks across 65 countries helping them serve more than 30,000 branches. These include over 2,000 branches of regional rural banks in India which are leading the financial inclusion initiative in the country Independent reports by renowned research firms have .....

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conduct business. • Ranked as the most admired company in India according to the Wall Street Journal Survey. • Ranked among the 50 most respected companies in the world by Reputation Institute s Global Reputation Pulse 2009. • Ranked among the top 25 companies in Business Week s Infotech 100. • Ranked among the top 25 companies in the world for developing leaders by Fortune/Hewitt. • Ranked as the best company to work for in India for Business Today s ninth survey of Be .....

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thought leadership articles across various industry for a and publications. We leveraged social media platforms and engaged with our stakeholders and investors on You Tube, Slide Share. Twitter and Facebook. Leading global publications wrote about us, our leadership, our talent and our performance. We continued to have leadership presence at premier industry events like Oracle Open World and Sapphire. Our annual client events in the U.S. and Europe were well attended and highly appreciated. At .....

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In addition, we continually evaluate and train our professionals in new technologies and methodologies. Finally, we ensure the integrity of our service delivery by utilizing a scalable and secure infrastructure. We generally assume full project management responsibility in each of our solution offerings. We strictly adhere to our SFI-CMM Level 5 internal quality and project management processes. Our project delivery focus is supplemented by a robust knowledge management system that enables us t .....

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ulting and implementation and technology consulting services represented a majority of our total revenues in fiscal 2010. 88. Infosys is into customized solutions, which is not the calling of the assessee. It has been pointed out that as per APB 464, Infosys is into software services and products, onsite and offshore. It has been contended that the assessee is not doing any onsite business. It has been submitted that as per APB 464 [Para 1(b)], Infosys is earning revenue from software products. .....

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addition, the company offers software products for the banking industry. 89. It has also been pointed out as per APB 454, para 20, Infosys has a strength of 92,688 employees. It has further been pointed out that per contra, the assessee company has a team of approximately 4600 employees only, out of whom, 1600 are professionals. It has been contended that in the case of Agnity India Technologies P. Ltd. , ITA/1204/11 (HC Delhi), Infosys has been rejected as a comparable. 90. On the other hand, .....

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aluation and implementation and business process management, etc., high turnover exceeding ₹ 20,000 crores, having large numbers of patented products, spends about ₹ 276 crores in R & D, and has about 50% onsite development revenue. Further reliance is also placed on the judgment of Delhi High Court in case of CIT vs. Agnity India Technologies Private Limited (ITA No.1204/2011) wherein it was concluded that Infosys is not comparable since it is a large and bigger company in the a .....

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nclusion for exclusion of a comparable are prescribed in Rule 10B(2). The reasons for exclusion argued by the assessee don t find place in the Rules prescribed. ITAT Mumbai in case of Wills Processing in ITA No.4429/Mum/2012 in order dated 01.03.2012 has held in para 47.5 that there is no relationship between turnover and margin of an entity. The turnover is not a criteria prescribed under Rule 10B(2) for selecting the comparable. Further Infosys BPO Ltd. has been held in Wills Processing case a .....

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nfosys is functionally different from the assessee, as above. 93. This grievance of the assessee is also found to be correct. Infosys has not been shown to be at parity with the assessee, on the basis of functionality. Its functionality is entirely different from that of the assessee, as seen in the preceding paragraphs. Therefore, we reject Infosys as a comparable. 94. Therefore, Ground No.2 is accepted, as indicated. 95. In view of the above, the final set of companies comparable to the assess .....

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een decided in favour of the assessee in assessee s own case by the Mumbai Bench of the Tribunal for the assessment year 2009-10. 98. This contention of the assessee is found to be correct. At APB 563 to 581 is a copy of the order of the Mumbai Tribunal in the assessee s own case for AY 2009-10. 99. With regard to the assessee, it has been held as follows: 10.1 In the draft assessment order, the AO has proposed disallowance of foreign exchange loss on the ground that loss is only contingent and .....

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