TMI Blog2017 (11) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... this appeal of Revenue and the CO of the assessee is as regards to allowing benefit of 5% in the computation of arm s length price under section 92C(2A) of the Act. For this Revenue has raised following grounds No. 1 and 2: - 1. On the facts and in the circumstances or the case and in law, the Ld. CIT(A) erred in allowing the benefit of +1- 5% in computation of Arm's Length Price under second proviso of section 92C(2) of Income Tax Act. 1961, without appreciating the retrospective amendment made by subsection 2A of section 92C of the IT Act. 1961. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to exclude the company Exensys Software Solutions Ltd., from the set of comparables taken or Benchmarking the IT and ITES segment for computation of Arm's Length Price on Account of Transfer Pricing adjustment. Assessee has raised following ground for exclusion of the comparables: - 1.1. On the facts and in circumstances of case and in law, the learned Commissioner of Income tax (Apepals)-15, Mumbai[CIT(A)] has erred in upholding the action of the TPO / AO in including the following companies that are d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - I ['the CIT(A)'] on certain additions I disallowances and certain Transfer Pricing adjustments 3. The CIT(A) vide order dated 23 August, 2012, partly allowed the appeal and partly deleted the transfer pricing adjustment. 4. Against the order of the CIT(A). the Department preferred an appeal before the Hon ble Tribunal. The copy of the appeal in Form No. 36 filed by the department was served on the Cross Objector on 4 October, 2013. 5. The Respondent harbored a bonafide belief that in view of Hon'ble CIT(A) granting relief of the Respondent in respect of 5% standard deduction, the amount of adjustment's decided against the Respondent (i.e. inclusion of companies dissimilar to the Respondent) being not significant, the Respondent needs merely to defend the appeal. However, in view of the subsequent decision of the Hon ble Income Tax Appellate Tribunal. Delhi Special Bench, in the case of ITO vs. WIG IT Services (India) Private Limited, the favourable ruling of the Hon'ble CIT(A) in relation to granting standard deduction of 5% is likely to get reversed and would consequently increase the amount of adjustment significantly 6. When the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the present case, we are of the view that the assessee has raised the issue for exclusion of comparables decided against it by the CIT(A), even though it has not filed any appeal and the cross objection is belated, for which delay cannot be condone, against the order of CIT(A), challenging the same on few comparables by invoking the Rule 27 of the Tribunal Rules, which we allow now. 6. Now we will take up the appeal of Revenue and the arguments raised by assessee under rule 27 of the Tribunal Rules. 7. Brief facts are that during the year under consideration the assessee has provided software development services i.e. IT services and also IT enable services i.e. ITES services to its associate enterprises. The TPO adopted Transactions Net Margin Method (in short TNMM as the most appropriate method and conducted a fresh comparability analysis whereby, he selected 17 comparables in IT services segment and 9 comparables in ITES segment for determining arm s length price of both the transactions. Accordingly, TPO made TP adjustment in respect to IT services and ITES services to its AE. The assessee preferred the appeal before CIT(A), who partly allowed the appeal of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year might have impacted the margin of this company, we agree with the learned Commissioner (Appeals) that it cannot be treated as a comparable. 10. From the above the facts of the case, we find that it has nowhere brought out as to how this company is a product company. Further, this company has only one segment and as per Director s report during the year under consideration the company has earned an income of ₹ 737.79 lakhs which consists of an export turnover of ₹ 691.76 lakhs. This was due to amalgamation of Hollon India Ltd. with the assessee and amalgamation was approved by Hon ble Andhra Pradesh High Court vide his order dated 05-09-2005 effective from 01-04-2004. In view of these facts, this company cannot be compared with the assessee due to extra ordinary event of amalgamation during the year under consideration. Accordingly, we are of the view that the CIT(A) has rightly directed for exclusion. We confirm the order of CIT(A) on this issue and the appeal of Revenue is dismissed. 11. Similarly, the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of Infosys Technologies Ltd. in IT segment, which was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra). 21. In the result, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 13. We find that Infosys had hybrid business model of supplying products and providing services to its customers which cannot be compared a pure software service provider, which the assessee is and therefore, this company should be excluded as comparables. There is no segmental data available between product and service segment of this company. Even Infosys Technology Limited is having huge turnover as reported in FY 2004-05 at ₹ 6859.66 crores, the details are enclosed in assessee s paper book at page 609. Even the Brand Intangibles has value of ₹ 14,153 crores and the details of the same are provided by the assessee in its paper book at page 690. In view of these differences, and the fact that this company excluded in the IT segment by co-ordinate Bench in the case of Intoto Software India Private Limited (supra). Respectfully following the co-ordinate Bench decision, we direct the CIT / TPO to exclude this company from comparables. We direct the CIT accordingly. 14. Similarly, the assessee in its plea taken under rule 27 of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own as employee cost is only personnel cost which might relate to the personnel employed for supervising and administrative set up. According to CIT(A), the assessee is distributor company or its employee cost to the total turnover ratio is less than 25%, the argument is not found to be acceptable. Hence, he rejected this as comparable. 18. At the outset Ld. Counsel for the assessee stated that the this comparable is covered in favour of assessee by co-ordinate Bench decision in the case of DBOI Global Services Pvt. Ltd vs. ACIT in ITA No. 812/Mum/2012 for AY 2005-06 dated 24-08-2016 and also by the decision of Hon ble Delhi High Court in the case of Rampgreen solutions Pvt. Ltd. Vs. CIT in ITA No. 102/2015 dated 10-08-2015. Hon ble High Court has considered the issue as under :- 38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal s expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect the AO/ TPO to exclude this comparable and this plea of the assessee is allowed. We direct the AO accordingly. 21. The next issue by the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of WIPRO BPO SOULTIONS LIMITED in ITES segment, which was not excluded by CIT(A). The assessee contended that Scale of Operations are not comparable with the assessee and the turnover of the WIPRO BPO SOULTIONS LIMITED is ₹ 647 crores, and hence, this company should not be included in the set. The AO/ TPO stated that this company qualifies all the filters applied by the TPO. As per the details available in public domain the company is functionally comparables and had more than ₹ 1 Cr. turnover did not have significant related party transactions. The company s profit and loss account was reproduced by the TPO from the Prowess data base. The CIT(A) noted that there is no doubt that the scale of operation is not comparable. But the scale of operation and economy of scale does not affect the profitability in the service industry as would be there in the brick and mortar companies of the manufacturing companies. Further the assessee in its submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 647.71 crores for the FY 2004-05, which is at least 153 times of the turnover of the assessee. The turnover of the assessee is merely ₹ 6.33 crores. The details are given at page 47 and 770 of assessee s paper book. In view of the above, we direct the AO/ TPO to exclude this comparable and this issue of assessee is allowed. 24. The next issue by the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of MAPPLE E-SOLUTIONS LIMITED in ITES segment, which was not excluded by CIT(A). The assessee contended that the company has intangibles to the extent of ₹ 83,88,737/- and the presence of intangibles would enable the company to have an edge over similar companies functioning in the same sector as the company and also enable it to have a better brand recall over its competitors. Accordingly, it is not comparables to the assessee s operation. The AO / TPO and CIT(A) was of the view that the company is into ITES and satisfies all the filters applied by the TPO. The CIT(A) noted that the presence of intangible assets is specifically not pointed out in the annual report of the company by the assessee. Further from schedule 5 (fixed ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord, even in assessee's own case the ITAT, Hyderabad Bench and DRP respectively for the assessment years 2007 08 and 2008 09 have directed not to treat this company as a comparable. In such view of the matter, we direct the AO/TPO not to consider this company as a comparable. 26. Similar arguments were placed before us, and on perusal of case records, we find that the financials of Mapple E-Solutions Limited cannot be relied upon for the purpose of comparability with the assessee because the directors of the company were found engaged in fraudulent activities. Accordingly, we direct the AO / TPO to exclude this comparable. We direct the AO accordingly. 27. The second issue in this appeal of Revenue is as regards to the order of CIT(A) in allowing deductions under section 10A of the Act. For this Revenue has raised following ground No. 3: - 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to recomputed deduction U/s. IOA of the I.T. Act by reducing expenses of ₹ 12.3204,901/- towards onsite consultancy services telecommunication insurance, travel, commission and communication etc. from total turnover. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case, and in view of the rulings of' Hon'ble ITAT in the cases mentioned at Point No. (iii) above, it is held that the exclusion of wise expenses totaling to Its. 12,32,04,901 towards on-site consultancy services. telecommunication, Insurance, Travel, Commission and Communication and others from export turnover alone is not correct. The same has also to be reduced from total turnover. The A.O. is directed to re-compute deduction u/s10A, accordingly. 30. Aggrieved, now Revenue is in second appeal before Tribunal. The learned Counsel for the assessee stated that in assessee s own case for the AY 2004-05 Hon ble Bombay High Court in Income Tax Appeal No. 3474 of 2010 dated 30-06-2011 has allowed the claim of the assessee vide para 7 and 8 as under: - 7. The question to be considered in this Appeal is whether the ITAT was justified in holding that under Section 10A of the Income Tax Act, the expenditure liable to be excluded from the export turnover is also liable to be excluded from the total turnover . 8. This Court in the case of Commissioner of Income Tax V/s. Gem Plus Jewellery India Ltd reported in [2011] 330 ITR 175 (Bom) has held the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X
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