TaxTMI 
TaxTMI 
2014 (10) TMI 936
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....Facts of the case, in brief, are that during the course of assessment proceedings the Assessing Officer observed that assessee has increased its issued, subscribed and paid up share capital by making direct expenses of Rs. 33,17,360/- on account of stamp duty and registration charges. He observed that in the computation of income the assessee company claimed deduction of Rs. 6,63,472/- u/s.35D of the I.T. Act. by amortizing the said expenses over a period of 5 years. According to the Assessing Officer the assessee must have incurred further indirect expenses for increasing the share capital. Therefore, the Assessing Officer made adhoc disallowance of Rs. 33,174/- treating the said expenses as capital expenditure. The assessee approached the DRP but without any success. The Assessing Officer accordingly made disallowance of Rs. 33,174/-. 3.2 Aggrieved with such order of the Assessing Officer the assessee is in appeal before us. 4. The Ld. Counsel for the assessee strongly challenged the order of the Assessing Officer. He submitted that the assessee has incurred expenditure of Rs. 33,17,360/- on stamp duty and registration charges. There is no evidence that the assessee has incurre....
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....sessing Officer accordingly made addition of Rs. 33,17,360/- to the total income of the assessee. 7.2 Aggrieved with such order of the Assessing Officer the assessee is in appeal before us. 8. The Ld. Counsel for the assessee submitted that the addition made by the Assessing Officer is devoid of any merit. According to him, the share capital was increased by the assessee company which is available for various purposes and it is not a case that the capital is increased only for making the investment in the subsidiary company. He submitted that the utilisation of funds raised on account of increase in the share capital is not to be considered for making the disallowance u/s.14A. Referring to page 98 of the paper book he submitted that the assessee has already disallowed itself an amount of Rs. 39,92,272/- and has not claimed any expenditure. Referring to page 29 of the paper book he submitted that the auditors in clause 15 of the Tax Audit Report have mentioned that the deduction is allowable u/s.35D at Rs. 39,99,272/- and the assessee has debited an amount of Rs. 33,17,360/-. He submitted that since the assessee in its grounds of appeal has not pressed for the addition of Rs. 39,9....
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....ssee, the Assessing Officer noted that both the units, i.e. STPI and non STPI (exempt and taxable) are rendering their total IT and IT enabled services to their parent/holding company. He noted that no separate books of accounts are maintained for the said two units. Therefore, in absence of the same, he was of the opinion that the book results shown by the assessee are not fully verifiable. He noted that the auditors while certifying the eligibility of deduction of Rs. 9,22,90,403/- u/s.10A have given the following note : "4. The indirect costs have been allocated to the eligible STPI unit based on the assumptions made and determined appropriate by the management and we have relied upon the same. 5. In determining the profit of the undertaking, operating and other overhead costs have been allocated based on the assumptions made as determined appropriate by the management of the company and the auditors have not ascertained their propriety". 11.2 He, therefore, was of the opinion that the correctness/reasonableness of the expenses allocated by the assessee company between the taxable/non-taxable unit is not at all verifiable for the following reasons : "(a) The assessee has ....
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....of the paper book submitted that the assessee has given complete details and has made addition to the total income u/s.40(a)(ia) and 43B. He submitted that because of the disallowances the business income of the assessee has gone up and the assessee has claimed higher deduction u/s.10A. Referring to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Pvt. Ltd. reported in 330 ITR 175 he submitted that the Hon'ble High Court in the said decision has held that increased income owing to disallowance has to be taken into account for the purpose of calculation of deduction u/s.10A. He submitted that the Assessing Officer has completely ignored the decision of the Hon'ble Bombay High Court cited (Supra). He submitted that the assessee has maintained separate books of account. The assessee has apportioned the common expenses on the basis of number of employees whereas the Assessing Officer has allocated the expenses on the basis of turnover. In any case, in view of the decision of the jurisdictional High Court in the case of Gem Plus Jewellery India Pvt. Ltd. (Supra) the Assessing Officer is not justified in restricting the deduction u/s.10A on ac....
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....ry to refer to the admitted position which is that the assessee had deposited both the employer's and the employees' contribution towards PF and ESIC, though beyond the due date including the grace period. The AO added these payments to the total income of the assessee and made an addition in the amount of Rs. 71.59 lacs. However, for the deduction under s. 10A, the addition made on account of the employees' contribution was ignored in calculating the profits eligible for deduction on the ground that these receipts were not generated out of the manufacturing activity of the assessee company. By reason of the judgment of the Supreme Court in CIT vs. Alom Extrusions Ltd. (2009) 227 CTR (SC) 417 : (2009) 32 (SC) DTR 49 : (2009) 319 ITR 306 (SC) the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the AO has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that ....
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.... the Ld. Departmental Representative has no objection. Accordingly, ground of appeal No.4.2 is dismissed as 'not pressed'. 16. Grounds of appeal No. 5 to 5.6 by the assessee reads as under: "5. The Ld. DRP erred in confirming the addition of Rs. 10,29,90,870/- made u/s.92CA of the Act". 5.1] The learned DRP erred in making an adjustment of Rs. 5,03,92,400/- u/s 92CA in respect of provision of software development services by the appellant company to its AE. 5.2] The learned DRP erred in making an adjustment of Rs. 4,63,25,506/- u/s 92CA in respect of provision of design engineering & testing services by the appellant company to its AE. 5.3] The learned DRP erred in making an adjustment of Rs. 62,72,964/- u/s 92CA in respect of provision of regional supply management Services by the appellant company to its AE. 5.4] Without prejudice to the above grounds, the learned DRP erred in not appreciating that the adjustment on account of working capital as well as marketing cost was required to be made for determining the ALP in respect of the International Transaction relating to provision of software development, design engineering & testing & regional supply management service....
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....software development services are mainly in the nature of computer programming, code development, integration, etc. The total turnover of software development services in this year was Rs. 39,29,09,065/-. In the TP Study Report, the assessee had initially selected 28 companies as comparable entities for determining ALP of software services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 27 comparable entities on the basis of single year data. The list of comparable entities selected by the assessee is as under : Sr. No. Companies selected as comparable by the TPO OM (%) 1 Akshay Software Technologies Ltd 6.20 2 Aztech Software & Technology Services 18.93 3 Four Soft Ltd 18.94 4 Gebbs Infotech Ltd NA 5 Genysis International Corporation 12.89 6 Goldstone Technologies Ltd 20.31 7 Helios & Matheson Information Tech. Ltd . 40.60 8 Infosys Technologies Ltd 40.87 9 KPIT Cummins Infosystems Ltd 17.32 10 Lanco Global Systems Ltd 19.87 11 L & T Infotech Ltd 15.15 12 Marrs Software International Ltd 6.44 13 Melstar Information Technology Ltd 1.42 14 Mindtree ....
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....ware development services rendered by the assessee. The assessee approached the DRP but without any success. Accordingly, the TPO made adjustment of Rs. 5,03,92,400/- u/s.92CA of the I.T. Act. 18. The Ld. Counsel for the assessee strongly challenged the order of the TPO. He submitted that the addition made by the TPO is not justified. The Ld. Counsel for the assessee gave reasons for not excluding the following companies as comparable, the details of which are as under: MAARS SOFTWARE INTERNATIONAL LTD. [MAARS] : 19. The Ld. Counsel for the assessee submitted that the TPO has discussed this company on page 33 of his order. He rejected Maars as a comparable entity on the ground that it is carrying out significantly different functions. For the above proposition, the TPO referred to the following para in the Directors' Report - "During the year, the company will continuously focus on the areas of products and consulting based on the considerable progress achieved during the previous year. With the continuous efforts during the year too, the company is confident of achieving growth on the areas ofproducts and services especially in the regions of Middle - East and Far - East.....
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....y because VJIL has incurred loss in this year, there is no reason to reject the said company from the list of final comparable entities. For the above proposition, he relied on the decision of the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd. v. DCIT [ITA No. 118/PN/2011] wherein it has been held that a company should not be rejected merely because it has incurred losses, unless it is shown that the said company is a persistent loss making company. Referring to the decision of the Delhi Bench of the Tribunal in the case of Qualcomm India Pvt. Ltd. v. ACIT reported in 147 ITD 17 he submitted that the Tribunal in the said decision has held that simply because a company has incurred loss in one year cannot be a ground to reject the said company. Accordingly, he submitted that the TPO is not justified in rejecting VJIL as a comparable entity with the assessee company. QUINTEGRA SOLUTIONS LTD. (QUINTEGRA) : 21. The Ld. Counsel for the assessee submitted that the TPO has discussed this company on page 33 of his order. He rejected this company on the ground that it is functionally different. The TPO has relied upon the following para in the Directors' Rep....
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....m software developmentactivity [page 37 of TPO's order]. He submitted that Infosys owns a large number of brands/proprietary products which is not the case of the assessee company. Further, in the TPO's order for A.Y.2006 - 07 in the assessee's own case, the TPO has held that Infosys is not comparable with the assessee company on the ground that its turnover is far more than that of the assessee and hence, it is not comparable. He also relied on the following decisions wherein it has been held that considering the huge 'differences in revenues, assets and risks assumed by Infosys and other smaller companies, Infosys cannot be considered as a comparable entity with smaller companies : a. CIT vs. Agnity India Technologies Pvt. Ltd. [ITA No. 1204/2011 - Delhi High Court] b. Adaptec (India) Pvt. Ltd. vs. DCIT [ITA No. 1801/Hyd/09] c. Willis Processing Services (India) Pvt. Ltd. v. DCIT [(2013) 57 SOT 339 (Mum)] He accordingly submitted that Infosys should be excluded from the list of comparables. TRANSWORLD INFOTECH LTD. (TRANSWORLD) : 23. The Ld. Counsel for the assessee referring to page 459 of paper book-III submitted that the revenue from export of services....
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....s and hence, it was not comparable with the assessee. The Tribunal held that Helios was not comparable with companies rendering software development services and thus, the said company was excluded. He submitted that like PTC Software (India) Pvt. Ltd., the assessee is also engaged in rendering software development services and hence, the facts and the year under consideration being similar as in that case, therefore, Helios has to be held as functionally not comparable with the assessee company in view of the above cited decision. He accordingly submitted that Helios may be excluded from the list of final comparables while determining the ALP. 24.1 Without prejudice, the Ld. Counsel for the assessee submitted that in this year, Helios has earned Operating Margin of 40.60% which is far more than the normal profit margin earned by the companies engaged in software development business. He submitted that Helios was established in 1991 and thereafter, it has acquired various entities including 'The Laxmi Group Inc.', USA acquired in 2001 and 'The A Consulting Team', USA acquired in 2006. He submitted that Helios has overseas subsidiaries and offices in the US and Sing....
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....ages 424 - 427 of P.B.- II. Referring to the decision of the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. [ITA No. 1386/PN/10] and PTC Software (India) Pvt. Ltd. [ITA No. 1605/PN/l 1] he submitted that the Tribunal in the aforesaid cases has held that Kals is engaged in software products business and therefore, it cannot be considered as a comparable entity in respect of a software development service provider. He accordingly submitted that Kals cannot be considered as a comparable entity. COMPUCOM SOFTWARE LTD. (COMPUCOM) : 26. The Ld. Counsel for the assessee submitted that Related Party Transactions in the case of Compucom are more than 25%. In this year, the RPT expenses incurred by Compucom are Rs. 6.75 Crs. against the total expenses of Rs. 15.77 Crs. incurred by the said company. [Refer para (a) on page 36 of TPO's order]. Therefore, the proportion of RPT transactions works out to 42.80%. He submitted that for the purposes of computing the RPT transactions, one has to check the proportion of RPT Sales to Total Sales or RPT Expenses to Total Expenses and if either of the two ratios exceeds the prescribed limit, then the company should not be consid....
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....sting and authoring services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 2 comparable entities on the basis of single year data, the details of which are as under : Sr. No. Companies selected as comparable by the TPO OM 1 Ace Software Exports Ltd. (%)-7.04 2 Genesys International Corporation Ltd. 12.52 Avg. Operating Margin 2.74 He submitted that as per the said list, the Avg. Operating Margin [Operating Profit/Operating Cost] of the comparable entities was worked out at 2.74% as against the Operating Margin of the assessee company of 11.29%. Hence, it was submitted that the design engineering and other allied services rendered by the assessee to its AE were at ALP. 27.1 He submitted that the TPO did not accept the contention of the assessee. Out of the 2 comparable companies selected by the assessee, the TPO has rejected 1 company and has newly introduced one additional company. The final list of comparable entities in this segment is on page 40 of the TPO's order which is as under : Sr. No. Companies selected as comparable by the TPO OM (%) 1 Genesys Inte....
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....ble entities for determining ALP of business support services rendered to its AE. These companies were selected on the basis of multiple year data. Thereafter, the assessee submitted a revised list of 11 comparable entities on the basis of single year data. The list of companies selected by the assessee is as under - Sr. No. Companies selected as comparable by the TPO OM (%) 1 Capital Trust Ltd -6.71 2 Crisil Ltd 21.41 3 Cyber Media Events Ltd 8.43 4 Educational Consultants Ltd 10.64 5 Electronica Machine Tools Ltd 10.49 6 ICRA Management Consulting Services Ltd 15.23 7 IDC India Ltd 15.33 8 NTPC Electric Supply Company Ltd 16.78 9 Priya International Ltd 13.97 10 T S R Darashaw Ltd 44.47 11 Times Information Media Ltd -26.59 Avg. Operating Margin 11.22% 28.1 As per the said list, the Avg. Operating Margin [Operating Profit/Operating Cost] of the comparable entities was worked out at 11.22% as against the Operating Margin of the assessee company of 10.95%. Hence, it was submitted that the design engineering and other allied services rendered by the assessee to its AE were within the margin of +/- 5% from the ALP and hence,....
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....ompany and the same may be excluded from the list of final comparable entities. ICRA ONLINE LTD. (ICRA) - 30. The Ld. Counsel for the assessee submitted that this company is discussed by the TPO on page 44 of his order. He has reproduced a small para from the Annual Report of ICRA Online to justify that the said company is comparable with the assessee company. He submitted that ICRA Online is engaged in functionally different from the assessee company and it is also engaged in providing software services and thus, the said company is not comparable with the assessee company. He referred to the extract of the web pages wherein it is mentioned that ICRA Online is a leading Information Services and Technology Solutions provider [page 438 of Paper Book - II]. Further, in the Directors' Report of ICRA Online, it is mentioned that the said company is engaged in providing Information Products to various mutual fund houses and the flagship product of the said company is 'MFI Explorer'. He submitted that it is engaged in providing business support services to its AE and unlike ICRA Online, the assessee is not engaged in development and sale of products. Accordingly, ICRA Onlin....
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.... of the Delhi Bench of the Tribunal in the case of Sony India Ltd. [114 ITD 448] and the following decisions : a. Mentor Graphics (Noida) Pvt. Ltd. v. DCIT [109 ITD 101 (Del)] b. Philips Software Centre Pvt. Ltd. v. ACIT [119 TTJ 721 (Bang)] 30.4 Lastly, the Ld. Counsel for the assessee submitted that if, after allowing the above adjustments, the difference between the Operating Margin of the assessee company and the Avg. Operating Margin of the various comparable companies does not exceed 5%, then the benefit of second proviso to section 92C(2) may be granted to the assessee company and accordingly, no addition should be made in the case of the assessee. 31. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO/TPO/DRP. So far as the adjustment of Rs. 5,03,32,400/- to the ALP of the International Transaction of Software Development is concerned, he submitted that the TPO has given a detailed reasoning for arriving at the PLI margin of the comparables at 23.38% as against 14.53% worked out by the assessee. After taking into account of these facts and after taking into account the objections raised by the assessee, the DRP has confirmed th....
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....n public domain for which this company was not considered as a comparable. So far as Pentasoft Technologies Ltd., is concerned, he submitted that as per the information in Annual Report, this company is earning income from Product Services and is not engaged in Design Engineering Services. Secondly, the related party transactions are exceeding 25%, therefore, this company cannot be considered as comparable. 31.5 As regards the request of the assessee for exclusion of KLG Systel Ltd. is concerned, he submitted that the assessee itself has rejected this company as a comparable stating that it is functionally different. However, the TPO has noticed from the Director's report that this company is engaged in planning, design and erection and large scale infrastructural projects in India. The website of this company also states so. Further, the website of the company shows that this company is engaged in Design Engineering Services, therefore, this company is engaged in Design Engineering Services which is functionally similar to the assessee company, therefore, the action of the TPO is justified. 31.6 As regards the adjustment of Rs. 62,72,964/- to the ALP of International Transaction....
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....ermining the ALP of the international transaction entered into by it. 32.1 So far as the provisions of Software Development Services are concerned, we find as against the value of transaction of Rs. 39.29 crores, the TPO made adjustment of Rs. 5,03,92,400/-. While doing so, he rejected the average operating margin of 13.07% shown by the assessee in respect of 27 companies as comparable. We find the TPO rejected 16 companies out of the 27 companies and added 2 new companies as comparable entities, namely Kals Information Systems Ltd., and Compucom Software Ltd. From the 16 companies so rejected by the TPO out of the 27 companies shown by the assessee, we find the assessee is objecting to the exclusion of the following companies as comparables : 1. Maars Software International Ltd., 2. VJIL Consulting Ltd., 3. Quintegra Solutions Ltd., 4. Infosys Technologies Ltd., 5. Transworld Infotech Ltd., 6. Helios and Matherson Information Technology Ltd., 32.2 From the various details furnished by the assessee, we find Maars Software International Ltd., (Maars) was rejected by the TPO as a comparable on the ground that it is carrying out significantly different functions. The bas....
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....by the decision of the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd., (Supra) wherein it has been held that the company should not be rejected merely because it has incurred losses. Similarly, the Delhi Bench of the Tribunal in the case of Qualcomm (India) Pvt. Ltd., has held that simply because the company has incurred loss in one year the same cannot be a ground to reject the company from the list of comparables. Since the Revenue has not shown that VJIL Consulting Ltd., is a persistent loss making company, therefore, merely because this company has incurred loss during the impugned financial year, the same in our opinion cannot be a ground to reject the same from the list of comparables. We accordingly direct the AO/TPO to include the same in the list of comparables. 32.4 So far as Quintegra Solutions Ltd. is concerned, we find the TPO rejected the same from the list of comparables on the basis of certain paras in the report of the Directors. It is the submission of the Ld. Counsel for the assessee that Quintegra Solutions Ltd., is engaged in the business of software development. From the profit and loss account of the company placed at page 516 of t....
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.... the Ld. Counsel for the assessee that although certain companies were accepted by it as comparable in the TP study report and if due to subsequent evidence that has come to its notice that these companies are not to be included in the list of comparables, then in that case those companies can be excluded. 34. Now coming to the merit of each case, we find the assessee in its TP study report has included Infosys Technologies Ltd., as comparable. From the various details furnished by the assessee, we find the TPO in its order for A.Y. 2006-07 in assessee's own case has held that Infosys is not a comparable company with that of the assessee company because of huge disparity between the turnover of Infosys Technologies Ltd. with that of the assessee company. 34.1 We find the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd., (Supra) has held that Infosys Technologies Ltd., cannot be considered as a comparable entity with that of smaller companies. In various other judicial decisions it has been held that considering huge difference in revenues, assets and risks assumed by Infosys and other smaller companies, Infosys Technologies Ltd., cannot be consi....
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....the TPO/AO to exclude Transworld Infotech Ltd., from the list of comparable. 36. So far as Helios and Matherson Information Technology Ltd., is concerned, we find the Pune Bench of the Tribunal in the case of PTC Software Ltd., has excluded the same from the list of comparables by observing as under : "20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that t....
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....nformation Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F. Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application ....
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....al aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services." 37.2 Similarly, in the case of PTC Software (India) Pvt. Ltd., (Supra), we find the Pune Bench of the Tribunal has rejected Compucom Software Ltd., as a comparable on the ground that the RPT Transactions (Expenses) of the assessee with that the said company are more than 25% for A.Y. 2007-08. The relevant observation of the Tribunal is as under : "14. Similarly, in the case of Compucom Software Ltd., the TPO has observed in para 6.3.19 of his order that the said concern has nil sales revenue from related parties against total sales of 23.82 crores, but has incurred RPT expenses of Rs. 6.65 crores against total expenses of 17.78 crores. The ratio of RPT to total transactions has been computed at 15.19% by the TPO. Again the TPO has adopted the denominator of Rs. 41.60 crores inclusive of total sales whereas the numerator is Rs. 6.65 crores, comprising of only RPT expenses and no RPT sales. Therefore, the denominator is to be corrected at Rs. 17.78 crores and the correct percentage of RPTs would ....
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....reign exchange from revenue items was only Rs. 29,01,158/- which comes to 0.23% of the total revenue. Although this was submitted before the DRP, however, they have not considered the same. Further, from para 6.98 of page 569 of the paper book we find the assessee has submitted before the DRP that KLG Systel Ltd., is not a comparable with the assessee company since KLG Systel Ltd.,is engaged in variety of business support services such as providing enterprise project management, automation and manufacturing and enterprise business. In view of the above, we are of the considered opinion that KLG Systel Ltd., cannot be considered as a comparable entity with that of the assessee company. We accordingly direct the TPO/AO to exclude the same from the list of comparables. 39. So far as the addition of Rs. 62,72,964/- in respect of business support services segment is concerned, we find as against 11 companies selected by the assessee as comparables with average operating margin of 11.22%, the TPO rejected 5 companies and introduced 2 new companies. Although assessee has not vehemently argued for any exclusion of certain companies, however, he strongly challenged the inclusion of ICC Int....