TMI Blog2017 (8) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit of proviso to section 92C(2) of the Act shall also be considered. Deduction u/s 10A - amount of provision for management charges payable to its AE - Held that:- We note that the AO as well as CIT(A) has denied the claim of deduction u/s. 10A in respect of this amount of ₹ 8,01,755/- pertains to the reversal of provision for management charges payable to its parent company. The assessee has stated that this amount was allowed as business expenditure in the earlier year and therefore the business profit of the assessee for the purpose of deduction u/s. 10A was reduced by this amount in the earlier year. During the year under consideration the assessee has reversed the provision which has resulted increase in the business income of the assessee and therefore it is eligible for deduction u/s. 10A. - Matter remanded back to the record of the AO for verification of the relevant facts and then decide the claim of the assessee as per law. - IT (TP) A Nos. 1041 And 1379/Bang/2011, IT (TP) A No. 1106/Bang/2011 - - - Dated:- 28-4-2017 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER For The Appellant : Shri G. Kamaladhar, Standing counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lanco Global Systems Limited 13.65% 14.60% 3 Exensys Software Solutions Limited 70.68% 68.84% 4 Sankhya Infotech Limited 27.39% 26.49% 5 Sasken Networks Systems Limited 16.64% 19.20% 6 R S Software (India) Limited 22.98% 11.84% 7 Four Soft Limited 66.09% 26.68% 8 Thirdware Solutions Limited 8.07% 70.01% 9 Geometric Software Solutions Limited 20.34% 22.97% 10 Tata Elxsi Limited (Seg.) 24.35% 28.14% 11 Visualsoft Technologies Limited(Seg.) 23.52% 25.36% 12 Sasken Communications Limited (Seg.) 14.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted by the assessee on functional dissimilarity have been retained in the set of comparables. Thus both the assessee and revenue have filed the cross appeals against the impugned order of the CIT(A) and raised the following grounds: Grounds raised by the assessee:- I . Write back of Provision for management charges 1. During the financial year 2004-05, the appellant had reversed a provision for management charges payable to its parent company amounting to ₹ 801,775 and claimed 10A deduction on the same treating it as business income. The learned AO erred in holding that such reversal of management charge provision is not derived from export of computer software and hence, 10A deduction cannot be claimed on the same. The learned CIT(A), in his order passed under Section 250 (dated 13.09.2011) had missed adjudicating on this ground. We had filed a rectification application under Section 154 against the CIT(A) s order. Later, the CIT(A) passed a rectification order on the same. 2. The learned CIT(A) erred in dismissing the appeal on the ground that the reversal of the provision is merely an accounting entry and does not result in business income. 3. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the ambit of comparable companies. 6. The learned CIT(A) erred in not considering the claim of the assesse for provision of adjustments for risks. II . Write back of Provision for management charges 1. During the financial year 2004-05, the appellant had reversed a provision for management charges payable to its parent company amounting to ₹ 801, 775 and claimed 10A deduction on the same treating it as business income. The learned AO erred in holding that such reversal of management charge provision is not derived from export of computer software and hence, 10A deduction cannot be claimed on the same. The learned C IT(A), in his order passed under Section 250 (dated 13.09.2011) had missed adjudicating on this ground, which was later addressed in his rectification order passed under Section 154 (dated 27.10.2011). 2. The learned CIT(A) erred in dismissing the appeal on the ground that the reversal of the provision is merely an accounting entry and does not result in business income. 3. The leamed CIT(A) erred in stating that there is no separate addition in the computation of income on the above account in the AO s order. However, it may be noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable, and accordingly erred in excluding M/s Infosys Technologies Ltd. as a comparable. 7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 8. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 5 . RPT filter of 0 %:- We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The TPO applied the filter of 25% of RPT while selecting the comparables. Whereas the CIT(A) has applied a filter of 0% RPT. We find that 0% related party transaction is a impossible situation and therefore if the said filter is applied then the comparable companies will not be available for determining the arms length price. Thus to avoid this practical difficulty of selecting the comparable companies this Tribunal in a series of decisions have taken a view that a tolerance range of related party transaction can be considered from 5% to 25% depending upon the facts and circumstances of each case particularly the availability of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeal is dismissed being not pressed. 9. As regards the functional comparability of the 10 companies the ld. AR of the assessee has submitted that an identical set of comparable was considered by the coordinate bench of this Tribunal in case of ITO Vs. M/s. Net Devices India Pvt. Ltd. in IT(TP)A No. 1099/Bang/2011 vide order dated 25.05.2016 and further vide order dated 23.11.2016 in MP No. 100/Bang/2016. Thus the ld. AR has submitted that the functional comparability of these 10 companies have been examined by the coordinate bench and found to be not comparable with the software development service segment of captive service provider assessee. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that the TPO has duly examined the functional comparability of these companies and therefore when the arms length price has been determined by adopting TNMM as a most appropriate method then minor variations in the functions of the comparable companies are irrelevant. 10. Having considered the rival submissions as well as relevant material on record, we note that out of the 17 comparable companies selected by the TPO the assessee is now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nimal risks as the 100 percent services are provided to AEs Nature of Services Diversified-consulting, application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book) Contract Software Development Services. Revenue Rs.9, 028 Crores Rs.16.09 Crores Ownership of branded/proprietary products Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite Finacle ) Onsite Vs. Offshore -As much as half of the software development services rendered by Infosys are onsite (i.e., services performed at the customer s location overseas). And offshore (50.20 percent) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 percent, which is less than the figure of 17 percent margin as declared by the respondent - assessee . This is the finding recorded by the tribunal . The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10 percent, as against the margin of 17 percent shown by the assessee . Details of these companies are mentioned in para 5 of the impugned order . Following the decision of the Hon'ble Delhi High Court ( supra ) , we do not find any reason to interfere with the impugned order of the CIT ( Appeals ) on this issue . C . O . No . 19 / Bang / 2012 12 . The assessee has raised the following grounds in the cross objections : 1 . That the order of the learned CIT ( Appeals ) resulting in income of the Respondent being subject to tax, is bad in law, without application of mind and liable to be quashed . 2 . That the learned CIT ( Appeals ) erred in not entirely deleting the adjustment to the arm s length price made by the ld . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO erred in considering Flextronics Software Systems Ltd . ( Seg .) that fails the test of comparability due to functional dissimilarity and thus not comparable to the Appellant in respect of its software development services . The appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing . 14 . First we take up the additional grounds raised by the assessee in respect of the exclusion of Bodhtree Consultancy Ltd . Flextronics Software Systems ( Seg . ). 15 . 1 The learned Authorised Representative of the assessee has submitted that though the assessee did not raise any objection before the authorities below in respect of the comparability of these two companies however in view of the various decisions of the Tribunal, these two companies are found to be not cocmparable with the software development services provider . Thus the learned Authorised Representative has submitted that the assessee has raised objection by filing the additional grounds which may be admitted for decidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny was found to be comparable by the authorities below and even otherwise from the Annual Report of this company the RPT are less than 15 % and therefore when the company itself has reported the RPT as less than 15 % then the same cannot be excluded from the set of comparables merely on assumption of wrong facts . 16 . 3 We have heard the rival submissions as well as considered the relevant material on record . There is no dispute that as per the Annual Report of this company, the RPT has been reported only to the extent of Rs . 10,73,871 in the nature of manager remuneration to the Managing Director and therefore the said transaction is almost NIL and in any case is less than 15 % of the total sales . The learned Authorised Representative of the assessee has placed reliance on the decision of the Hyderabad Bench of ITAT in the case of NTT Data India Enterprise Application Services Pvt . Ltd . ( supra ) , we find that the Tribunal has recorded the submissions of the counsel of the assessee in para 7 as under : 7 . Bodhtree Consulting Ltd . The learned counsel submitted that this company should be rejected under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on the said issue did not arise . In the case of M / s . Mc Afee Software ( India ) Pvt . Ltd . ( supra ) , the Tribunal has not gone into the fact of the RPT and even no record relating to the said fact has been examined but the Tribunal has just reproduced the submissions of the assessee as pleaded in case of NTT Data India Enterprise Application Services Pvt . Ltd . ( supra ) and therefore it is a clear case of assumption of unexamined facts . Accordingly, we are of the view that when the relevant record showing the RPT at 34 . 68 % as claimed by the learned Authorised Representative of the assessee is not available or produced either before the authorities below or before us, then this objection of the assessee cannot be accepted for want of the supporting evidence . However, in the interest of justice, we set aside this issue to the record of the A . O ./ TPO to verify the fact as alleged by the assessee and if need arises the information under Section 133 ( 6 ) of the Act may also be called for and decide the RPT issue . 17 . Flextronics Software India Pvt . Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1302 / Bang / 2011 dt . 11 . 6 . 2015 ( supra ) as under : 26 . As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R D expenditure for development of the products . The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies . The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable . Wherever, the Assessing Officer / TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables . Therefore, we direct the Assessing Officer / TPO to exclude these three companies from the list of comparables . . Respectfully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative of the assessee . In the case of ITO Vs . M / s . Sunquest Information Systems ( India ) Pvt . Ltd . ( IT ( TP ) A No . 1302 / Bang / 2011 92 / Bang / 2012 ) , the Tribunal has considered and decided an identical issue in paras 19 20 as under : Sankhya Infotech Limited ( Sankhya ) 19 . It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products services and training . The company focuses on the development of niche products for the transport and aviation industry . However, segmental information in relation to the above mentioned activities is not available in public domain . Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant . The products developed and owned by Sankhya are listed below : ( 1 ) SILICONTM Training Suite of Products : The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment . It comprises of four products :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative and considered the relevant material on record . At the outset, we note that the RPT of this company is 19 . 89 %. Therefore in view of our finding on the threshold limit of RPT at 15 % , this company cannot be considered as a good comparable having more than 15 % RPT . We find that this fact of RPT at 19 . 89 % has not been disputed by the Revenue . Accordingly, we direct the A . O ./ TPO to exclude this company from the list of comparables . Geometric Software Solutions Ltd . 18 . 3 . 1 The learned Authorised Representative of the assessee has submitted that the RPT of this company is 22 % whereas the TPO has wrongly considered the RPT at 10 . 97 %. The learned Authorised Representative has referred the computation of RPT at page 561 of the paper book containing Annual Report and submitted that if all the RPTs are taken into consideration as reported in the Annual Report of this company then it comes to 22 . 52 % of the total sales . 18 . 3 . 2 On the other hand, the learned Departmental Representative has submitted that the TPO has considered the RPT as taken from the Annual Report of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redominant activity of this company is software development and therefore it is considered as functionally comparable . 18 . 4 . 3 We have heard the rival submissions as well as considered the relevant material on record . At the outset, we note that the functional comparability has been considered by this Tribunal in assessee's own case for the Assessment Year 2006 - 07 vide order dt . 30 . 6 . 2015 in ITA No . 1485 / Bang / 2010 in para 13 to 18 as under : 13 . Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz . , 2006 - 07 in the case of M / s . Ariba Technologies India Pvt . Ltd . this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service . We find that the Tribunal, at para . 12 13 of its order, has held as under : 12 . The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E - Business Software India Pvt . L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny in the year under consideration in comparison to the Assessment Year 2006 - 07 . We further note that a similar view has been taken by this Tribunal in the other cases as relied upon by the assessee pertaining to the Assessment Year 2005 - 06 . Accordingly, by following the earlier decisions of this Tribunal, we are of the view that this company cannot be considered as a good comparable to the assessee . Hence, the Assessing Officer / TPO is directed to exclude this company from the list of comparables . Satyam Computer Services Ltd . 18 . 5 . 1 The learned Authorised Representative of the assessee has submitted that the financial results and information of this company is not reliable due to the financial irregularity and fraudulent activities by the Directors of this company . In support of his contention, he has relied upon the following decisions : i ) M / s . McAfee Software ( India ) Pvt . Ltd . in IT ( TP ) A Nos . 4 / Bang / 2012 1388 / Bang / 2011 . ii ) M / s . Agnity India Technologies Pvt . Ltd . ( ITA No . 3856 / Del / 2010 ). iii ) M / s . S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e finding of the co - ordinate bench of this Tribunal, we direct the A . O ./ TPO to exclude this company from the list of comparables . 11. We further note that the comparability of two companies namely Geometric Software Solutions Limited and Exensys Software Solutions Limited were further dealt with in the Miscellaneous Petition no. 100/Bang/2016 vide order dated 23.11.2016 in para 5 to 8 as under. 5. Having considered the rival submissions and relevant material on record, we find that the Tribunal has ordered the exclusion of three companies on the ground of having more than 15 % RPT at page 15 as under : Sl . No . Comparable Company Name % of RPT Over sales 1. Aztec Software Limited 17.78 2. Geometric Software Limited 19.34 3. Megasoft Limited 17.08 We find that the company Aztec Softwre Ltd . and Megasoft Ltd . are not part of the TPO set of comparables therefore these two co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in para 8 . 3 there is a mistake in reproduction of the earlier order in the case of Textron Global Technology Centre Pvt . Ltd . and instead of the relevant finding in para 14, the wrong part of the order in para 19 20 was reproduced . Thus there is a mistake in the order which requires to be rectified . In view of the above facts and circumstances, mistake in paras 8 . 1 to 8 . 3 are hereby rectified and the same may be read as under : 8 . 1 Ground No . 4 is regarding exclusion of the companies having more than 50 % of profit margin . The learned Departmental Representative has submitted that the CIT ( Appeals ) has excluded two companies viz . Exensys Software Solutions Ltd . and Thirdware Solutions Ltd . on the ground that these companies are having abnormal profits of more than 50 %. Thus the learned Departmental Representative contended that high profits or high loss cannot be a reason for exclusion of a company in the list of comparables . He has relied upon the order of the TPO and submitted that the TPO found that these two companies are in the similar business and therefore functionally comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 004 vide order dt . 5 . 9 . 2005 . Therefore, undisputedly there was an extra - ordinary event during the year under consideration in respect of this company . Further we find that the co - ordinate bench of this Tribunal in case of M / s . Textron Global Technology Centre Pvt . Ltd . in IT ( TP ) A No . 29 / Bang / 2012 has considered the comparability of this company in paras 14 as under : 14 . Ground No . 3 raised by the Revenue is misconceived and the issue does not arise out of the order of the CIT ( A ). As we have already seen the CIT ( A ) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter . The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd . Infosys Technologies Ltd . , was excluded for reasons of high turnover and high risk profile . Satyam Computer Services Ltd . , has to be excluded from the comparable companies for non - reliability of financial dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed a rectification application under Section 154 against the CIT(A) s order. Later, the CIT(A) passed a rectification order on the same. 2. The learned CIT(A) erred in dismissing the appeal on the ground that the reversal of the provision is merely an accounting entry and does not result in business income. 3. The learned CIT(A) erred in stating that there is no separate addition in the computation of income on the above account in the AO s order. However, it may be noted that the said reversal has been added back to the 10A profits by the AO for the purpose of computing 10A deduction. 4. The leamed CIT(A) erred in not appreciating the fact that being a captive service provider, the provision made for management charges payable to its holding company is towards the conduct of its business and hence, should not be treated as not derived from export. 5. The learned CIT(A) ought to have appreciated that as the provision was allowed in the financial year 2003-04 (when the same was created) as a business expenditure pertaining to 10A unit, the reversal of the same ought to be considered as an income from business of the 10A unit only. The Appellant craves leave to add ..... X X X X Extracts X X X X X X X X Extracts X X X X
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