TMI Blog2015 (1) TMI 1360X X X X Extracts X X X X X X X X Extracts X X X X ..... to exclude these amounts from the total turnover, while computing the eligible deduction u/s 10A of the Act. Claim of expenditure relating to lease rental income - suh rental income was considered as part of income from other sources - Held that:- We find from the records that assessee had made such a claim before the DRP in its submissions. If the assessee had incurred expenditure for earning lease rental income which was considered under the head” Income from other sources” then the expenditure incurred by it for earning such income will have to be allowed under section 57(iii) of the Act. However, the claim of the assessee needs to be examined by the AO. We are of the opinion that the issue has to be considered by the AO and appropriate relief to be given to the assessee, if it is eligible according to law. Ground is allowed for statistical purposes. - IT(TP)A No.1189(BANG)/2011, SP No.87(Bang.)/2013 - - - Dated:- 22-1-2015 - SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER For The Assessee : Shri Arvind Sonde, Advocate For The Revenue : Shri Farhat Hussain Qureshi, CIT ORDER PER SHRI ABRAHAM P GEORGE, AM: This appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . i2 India was engaged in the development and sale of software products to i2 Inc. The i2 Group is a leading provider of enterprise software applications and solutions for dynamic value chain management. The i2 Group s solution are designed to help enterprises improve efficiencies, collaborate with suppliers and customers, respond to market demands and engage in dynamic business interactions over the internet. The i2 group s suite of products includes software solutions for supply chain management, supplier relationship management and customer relationship management. The i2 group also provides content and content management solutions as well as integration services to enable their products to work with other applications. Further, the i2 group provides services such as consulting, training and maintenance in support of these offerings. There were two segments of international transactions for the assessee which were software development services and marketing support services. The segmental results declared by the assessee in its TP report reads as under; Description Software Dev. Services (SWD) Rs. Marketing Support Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected by the assessee for justifying its profit margin were 23. Assessee had adopted the TNM Method for working out the margin on cost and this was not disputed by the TPO. However, out of 23 comparables companies considered by the assessee, TPO rejected 4 applying diminishing revenue filter, 7 based on onsite revenue filter and 4 as functionally dissimilar. This left 8 comparables out of the list considered by the assessee in the TP study. Along with these 8 companies, TPO made his own analysis, considering the assessee to be a software development company and zeroed in on 18 comparables companies as good for treating the ALP. The 26 comparables selected by the TP and their operating profit as a margin of total cost read as under; Sl.No. Company Name Sales(Rs.Cr) OP to Total Cost % 1 Accel Transmatric Ltd(Seg.) 9.68 21.11% 2 Avani Cimcon Tech.Ltd. 3.55 52.59% 3 Celestial Labs Ltd 14.13 58.35% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26 Wipro Ltd (Seg.) 9616.09 3.65% Arithmetic mean 25.14% Thereafter, the TPO worked out a negative working capital adjustment considering the above 26 comparables based on the payables and receivables of the tax payer, vis- -vis those of the selected comparables. The final adjustment recommended y the TPO read as under; Arithmetic mean PLI 25.14% Less: Working capital adjustment(Annexure-C) (-)3.41% Adjusted Arithmetic mean PLI 28.55% Operating cost Rs.102,81,11,849/- Arms Length Margin 28.55% of the operating cost Arms Length Price(ALP)@128,55% of operating cost Rs.132,16,37,782/ Price charged in the international transactions Rs.115,74,40,115/- Shortfall being adjustment u/s 92CA ₹ 16,41,97,667/- 6. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its decision in M/s NXP Semiconductors India Pvt.Ltd.(Supra) Learned AR also submitted that the adjustment for working capital also should be worked out on the basis of the results of the final set of comparables. 9. Per contra, learned DR submitted that he would take the same arguments which were preferred by him before this Tribunal in the case of M/s NXP Semiconductors India Pvt. Ltd.(Supra). 10. We have perused the orders and heard the rival contentions. Since the argument of the assessee s counsel is limited to exclusion of certain comparable companies from the list considered by the TPO, we are confining our adjudication to this. We find that the assessee s profile clearly show it to be a software development company and the profile of M/s NXP Semiconductors India Pvt. Ltd. whose case has been referred by learned AR was also similar. In the said case also assessee concerned was providing software development service to its associated enterprises abroad. The turnover of M/s NXP Semiconductors India Pvt.Ltd. favourably compares with that of the assessee. Since functional profile and the turnover of the assessee and that of M/s NXP Semiconductors India Pvt.Ltd. are similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of comparables has held as under: 2. (b) Avani Cimcon Technologies Ltd . 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company s website, which reveals that this company has developed a software product by name DXchange , it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee s contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- 7.8 Avani Cincom Technologies Ltd. ( Avani Cincom ): Here in this case also the segmental details of operating income of IT services and sale of software products ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research development company. In this regard, the following submissions were made:- i. In the Director s Report (page 20 of PB-Il), it is stated that the company has applied for Income Tax concession for in-house R D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act. ii. As per the Notes to Accounts - Schedule 15, under Deferred Revenue Expenditure (page 31 of PB-II), it is mentioned that, Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred. An amount of ₹ 11,692,020/- has been debited to the Profit and Loss Account as Deferred Revenue Expenditure (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R D activities is bad in law. 43. Further referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard. 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45.From the material available on record, it transpires that the TPO has accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee s claim that this company was functionally different was accepted. DRP therefore directed the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Software Development Services such as the Assessee. The following were the relevant observations of the Tribunal: 14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in e- Business Consulting Services , consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally catego ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period under consideration in the case on hand. The A.O. /TPO is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04-ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in Outsourced Software Product Development Services for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd.(supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies. (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 27. Respecfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. Accordingly, we direct the exclusion of the above four companies also from the comparables. 13. M/s Helios Matheson Information Technologies Ltd was directed to be excluded by the Co-ordinate Bench in M/s NXP Semiconductors India Pvt.Ltd.(Supra) vide paragraph 28, which is reproduced here under; 28. As far as comparable chosen by the TPO at Sl.No.8 of the final list of comparable viz., M/S.Helios Matheson Information Technology Ltd., we find that the said company has been held to be not comparable with a software service provider like the Assessee by the ITAT Pune Bench in the case of PTC Software (India)Pvt.Ltd. ITA.No.1605/PN/2011 (Asstt. Year : 2007-08) order dated 30.4.2013. The following wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee s segment of ITServices. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d.(Seg.) were directed to be excluded from the list of comparables in the case of M/s NXP Semiconductors India Pvt.Ltd.(Supra) with the following observations; 24. As far as comparable companies listed at Sl.No.10, 24 26 of the final list of comparable companies chosen by the TPO viz., M/S.Infosys Technologies Limited, Tata Elxsi Ltd. (Seg.) Wipro Limited are concerned, this Tribunal in the case of M/S.Curam Software International Pvt.Ltd. Vs. ITO ITA No.1280/Bang/2012 for AY 08-09 order dated 31.7.2013 has held that the aforesaid companies are not comparable companies in the case of software development services provider. The following were the relevant observations in the case of M/S.Curam Software International Pvt.Ltd.(supra): 12. (4) Infosys Technologies Ltd . 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 13.0 (5) Wipro Limited 13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO s own filter of rejecting companies with consolid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and (c) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fshore Services Pvt.Ltd.(supra) are one and the same. This fact would be clear from the fact that the very same 26 companies were chosen as comparable in the case of the Assessee as well as in the case of First Advantage Offshore Services Pvt.Ltd.(supra). The following were the relevant observations in the case of First Advantage Offshore Services Pvt.Ltd.(supra): 22. The learned counsel for the assessee submitted that these two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations in the case of First Advantage Offshore Services Pvt.Ltd.(supra): 27. As far as adoption of Mega Soft Ltd., as one of comparables, the learned counsel for the assessee submitted that there is an error in computing its net margin. He has drawn our attention to the order of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd., at para 24 to 27 at page 18, wherein the error in computing the net margin of this company has been taken note of and it has been directed as under: 3. (a) Megasoft Ltd. : 24. This company was chosen as a comparable by the TPO. The objection of the assessee is that there are two segments in this company viz., (i) software development segment, and (ii) software product segment. The Assessee is a pure software services provider and not a software product developer. According to the Assessee there is no break up of revenue between software products and software services business on a standalone basis of this comparable. The TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was also adopted by the TPO in his show cause notice (Page 84 of PB-I). The segmental results i.e., results pertaining to software services segment of this company was: Segmental Operating Revenues Rs.63,71,32,544 Segmental Operating Expenses Rs.51,75,13,211 Operating Profit Rs.11,96,19,333 OP/TC (PLI) 23.11% 26. It was reiterated that in the given circumstances only PLI of software service segment viz., 23.11% ought to have been selected for comparison. 27. It was further submitted that the learned TPO in case of other comparable, similarly placed, had adopted the margins of only the software service segment for comparability purposes. Consistent with such stand, it was submitted that the margins of the software segment only should be adopted in the case of Megasoft also, in contrast to the entity level margins. 28. Computation of the net margin for Mega Soft Ltd. Is therefore remitted to the file of the TPO to compute the correct margin by following the direction of the Tribunal in the case of Trilogy E- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee has no case that such expenditure was not incurred in foreign exchange for providing technical services outside India. However, its claim that foreign travel expenditure of ₹ 11,32,13,112/- as well as telecommunication expenses of ₹ 2,57,58,869/- once excluded from the export turnover have also to be excluded from the total turnover, while computing the deduction u/s 10A of the IT Act, is acceptable in view of the decision of the Honble jurisdictional High Court in the case of CIT Vs M/s Tata Elxsi Ltd., (349 ITR 98). We therefore, direct the AO to exclude these amounts from the total turnover, while computing the eligible deduction u/s 10A of the Act. 22. Vide its ground no.9 the grievance raised by the assessee is that the DRP and the AO did not consider submissions with regard to the claim of expenditure relating to lease rental income, when such rental income was considered as part of income from other sources. 23. Learned counsel for the assessee submitted that it had during the course of proceedings before the DRP submitted that the lease rental received by it on sub-leasing of premises, if considered under the head Income from other sources the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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