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TMI Blog2016 (11) TMI 1482X X X X Extracts X X X X X X X X Extracts X X X X ..... urred by the assessee as Management services fees on the ground that the assessee failed to deduct tax at source in terms of section 195 of the Act. 4.2. Briefly stated, the facts of this ground are that the assessee incurred an expenditure of Rs. 26.63 crore as remuneration for Management services to Groupe Steria SCA (Steria France). No deduction of tax at source was made before making this payment. Invoking the provisions of Section 40(a)(i) read with section 195 of the Act, the AO disallowed this expenditure. In doing so, he noticed that the assessee's application filed before the Authority for Advance Ruling (AAR) was dismissed vide Ruling dated 2.5.2014 holding that the payment made by the assessee for the Management services provided by Groupe Steria SCA will be taxable as 'Fee for technical services' and, accordingly, the assessee is liable to withhold tax as per the provisions of section 195 of the Act. 4.3. We have heard the rival submissions and perused the relevant material on record. The ld. AR has brought to our notice that the said Ruling of the AAR was challenged by the assessee before the Hon'ble Delhi High Court. Vide order dated 28.7.2016, the Hon'ble Delhi Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputation of deduction u/s 10A. It is so for the reason that `Total turnover' always includes `export turnover' and if a particular item is not a part of export turnover, that cannot partake the character of total turnover as well. The Hon'ble Bombay High Court in CIT vs. Gemplast Jewellery India Ltd. (2011) 330 ITR 175 (Bom) has held to this extent. Similar view has been taken by the Delhi Bench of the Tribunal in assessee's own case for the A.Y. 2009-10, a copy of which order is available on record. Respectfully following the precedent, we direct that the total of the above referred three expenses be simultaneously excluded from the amount of 'Total turnover' as well. 6.1. Ground no. 7 is against excluding proportionate amount of interest income from the total profits in the re-computation of deduction u/s 10A of the Act. The facts of this ground are that the AO in recomputing the amount of deduction u/s 10A observed that the assessee earned interest income amounting to Rs. 15,77,91,539/- which was rightly offered as 'Income from other sources'. The AO apportioned the total interest income of Rs. 15.77 crore amongst different units on the basis of their turnover and computed sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. From this unitwise Profit & Loss Account, it can be seen that the assessee computed Profit before tax of Noida Unit - IV at Rs. 1,56,686/- (in Rs. 000). In computing such profit, the assessee included interest on bank deposits at Rs. 62 (in Rs. 000). While computing the amount of deduction u/s 10A as per Annexure 10, the assessee started with this figure of Rs. 15,66,85,756/- as profit before tax as per the P&L Account. Thereafter, interest income of Rs. 62,481/- was reduced as 'Income to be assessed separately.' After making certain additions and deletions, being the items inadmissible and admissible under the Income-tax Act, 1961, the assessee computed income under the head 'Profit and gains of business or profession' relatable to Noida Unit-IV at Rs. 26,37,50,768/-. It is this figure, which the AO has taken in para 4.2(x) from which interest, as allocated by him at Rs. 3,72,83,704/-, has been reduced. Thus, it is apparent that the interest income allocated by the AO to Noida Unit-IV is not a part of the profits of Noida Unit-IV amounting to Rs. 26,37,50,768/-. The only interest income included by the assessee in such computation at Rs. 62,481/- was suo motu excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansacted value of Rs. 3,31,67,83,807/-. The Transactional Net Margin Method (TNMM) was selected as the most appropriate method with the Profit level indicator (PLI) of Operating Profit/Operating Cost (OP/OC). Certain companies were selected, whose mean OP/OC was shown within the permissible range of the assessee's declared profit rate. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. In the original order dated 17.1.2014 passed by the TPO, 16 companies were considered as comparable with an average of OP/OC at 33.45%. The Dispute Resolution Panel (DRP), vide its order dated 20.10.2015, directed to consider the forex fluctuation gain/loss as an item of operating nature and also to exclude three companies from the final set of comparables drawn by the TPO, namely, Infosys Ltd., Persistent Systems Pvt. Ltd. and Wipro Technologies Services Ltd. The AO, in his final order dated 30.11.2015, giving effect to the DRP's direction, considered foreign exchange fluctuation as an item operating nature in the hands of comparables only. Thereafter, certain rectification proceedings were taken up before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides that Steria Ltd., UK, undertakes software projects primarily for UK clients and the assessee is engaged in providing similar services as Steria Ltd., UK. There is no detailed elaboration of services to be rendered except a brief mention in clause 2 of the Agreement, as per which Steria Ltd., UK, shall identify specific requirements/projects in respect of which it may wish to avail, inter alia, software services from the assessee at the prescribed rates of remuneration. This shows that the assessee is basically engaged in providing software development services to its only client, Steria Ltd., UK, catering to its customers in Public sector, Financial services, Telecommunications and media, Retail, Utilities and Transport. With this backdrop of the nature of services rendered by the assessee, we will proceed to examine the comparability or otherwise of the companies assailed before us. 12.1. Before that, we would like to deal with a submission advanced by the ld. AR, which is common to most of such companies, that certain Benches of the Tribunal in other cases have held them to be not comparable. In that view of the matter, it was urged that those companies, being ex facie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'B', does not per se make it incomparable in all the subsequent cases to follow. Not only company 'A' held to be incomparable to company 'B' can be comparable to company 'C', but company 'X' held to be comparable to company 'Y' can also be incomparable to company 'Z', depending upon the functional profile and the applicability or otherwise of the related factors. Thus, it is clearly deductible that if a particular company has been held to be not comparable in the case of another company, then such former company will also cease to be comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile and the relevant reasons of the other company. Ergo, this preliminary contention raised on behalf of the assessee is rejected as devoid of merits. 13. With the above parameters and the factual matrix on hand, we will distinctly examine in seriatim the companies challenged by the assessee to ascertain if they are really comparable. i) E-Infochips Bangalore Ltd. 14.1. The TPO proposed this company as comparable which was objected to by the assessee. Not convinced, the TPO held this company comparable as it was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial on record. The Annual accounts of this company are available on pages 222 onwards of the paper book. From the copy of Profit & Loss Account, it can be seen that there are two items of income, viz., `Sales' and `Other income'. Bifurcation of `Sales' as per Schedule 12 consists of Export from SEZ units, Export from STPI unit, Revenue from subscription, Sale of Licence and Software services. It is further discernible from the Segment reporting, as reproduced on page 76 of the TPO's order, that the figures have been given on the basis of Geographical segments, viz., `India' comprising of Products and other services and `Overseas' comprising of Software services. The TPO has taken only the `Overseas' segment for the purposes of inclusion in the list of comparables, which encompasses only export of software services. As the segment of the assessee under consideration is also only Software services, it is vivid that this segment of Thirdware Solutions taken by the TPO fully matches and is hence comparable. We, therefore, hold that the TPO was justified in including this company in the list of comparables. iii) Tata Elxsi Ltd. 16.1. This company was chosen by the TPO as comparable b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudy report, the ld. DR pointed out that this company has been consistently treated by the assessee as comparable, not only in the year under consideration, but immediately two preceding years as well. On merits, it was pointed out that segmental information has been given by this company in Note no. 9 to the Notes to Accounts. He invited our attention towards Segmental Profit & Loss Account giving break-up of revenue amounting to Rs. 40,150.89 lac in three parts, namely, from Software services at Rs. 37,736.22 lac, Software products at Rs. 2,041.90 lac and Other services Rs. 372.77 lac. It was shown that there is also a mention in the Annual report of separate profits in respect of the above three segments. It was, ergo, argued that there was no warrant for excluding this company from the final set of comparables. 17.3. We are disinclined to sustain the preliminary legal objection taken by the ld. DR that the assessee should be prohibited from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the TPO. It goes without saying that the object of assessment is to determine the income in respect of which the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded the same by noticing that it was operating in I.T. and ITES segments. The assessee is aggrieved against such exclusion. 19.2. We have heard the rival submissions and perused the relevant material on record. The Annual report of this company is available on pages 1-42 of the paper book. It can be seen from the Profit & Loss Account of this company that the first item under the head 'Income' is 'Income from Software Development, Services & Products', which has been split into two parts, namely, `Overseas' and `Domestic' markets. Under the head 'Significant Accounting Policies', this company has provided under the head 'Revenue recognition' that the revenue from software development services and products are recognized on completion of contract or stage of completion as per the applicable terms and conditions agreed with customers. When we peruse Schedule-12 detailing `Income from Software Development, Services & Products' in `Overseas' market, it comes to the fore that apart from earning income from Software services, this company also earned income from 'Business process outsourcing services', which falls in the realm of I.T. enabled services. Note no. 6 to Notes annexed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivision" amounting to Rs. 17.40 Millions. The above discussion amply proves that it is not only exclusively engaged in rendering Software development services, but also I.T. enabled services and has also earned income from Media Division. No separate segmental information for deducing the PLI of this company from Software development is available on record. As we are considering the assessee's `Software development' segment alone, this company at entity level, ceases to be comparable. We, therefore, uphold the impugned order on this score. (iii) Quintegra Solutions Ltd. 21.2. The assessee treated this company as comparable which version was rejected by the TPO on the ground that it was also a Product company having declining sales and very high debtors. The assessee has challenged the exclusion of this company. 21.2. Having heard both the sides and perused the relevant material on record, we find that the sales of this company are on falling trend. In the year ending 31.3.2008, this company made sales of Rs. 88.12 crore which in the next year stood reduced to Rs. 77.2 crore and in the year under consideration to Rs. 37.38 crore, with a further slide to Rs. 17.69 crore in the nex ..... 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