TMI Blog2014 (11) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... Treatment of grant received by the assessee from government - revenue or capital expenditure - Held that:- Respectfully following the decision of Hon’ble Supreme Court in Ponni Sugars (2008 (9) TMI 14 - SUPREME COURT ) we reverse the orders of the revenue authorities and direct the AO to treat the grant as capital in nature and delete the disallowance. - IT(TP) A No. 540/Mum/2014 - - - Dated:- 21-11-2014 - R. C. Sharma (Accountant Member) And Vivek Varma (Judicial Member) For the Appellant : M. P. Lohia, Nikhil Tiwari For the Respondent : Kishan Vyas ORDER Vivek Varma (Judicial Member) Instant appeal is filed by the assessee against the order of Dispute Resolution Panel I, Mumbai (DRP), passed under section 144C(5), dated 31.10.2013. 2. The fact are that the assessee is company, which is substantially owned by Capgemini US LLc USA (CG US LLc) and it acts as captive delivery centre of Capgemini group, which delivers services to customers in North America, UK, Continental Europe and Asia Pacific. It provides services in the fields of Software Technology Services Outsourcing Services Customised software development services to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction with its Associated Enterprises (AEs) Total value of transactions AY 2009-10 1 Trademark License fees 15,854,302 2 Payment for Service fees to Capgemini Service SAS (CG Service ) 7,797,910 3 Software Programming Services 20,162,438,459 4 Bank guarantee charges to Capgemini group entities 20,621,736 5 Purchase of software and e-training licenses from overseas third party vendors under globally negotiated contract 8,625,970 6 Professional fees paid by CIPL to its group entities 2,547,130 7 Allocation of various costs to CIPL 347,374,901 8 Purchase of software and e-training licenses from overseas third party vendors under globally negotiated contract 8,625,970 9 Reimbursement of expenses incurred by var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of bench making was rejected and the AO gave a fresh list of comparables. 8. The AO, while examining the comparables as provided by the assessee observed, that some of those were inadequate. The AO, therefore, observed that certain comparables, were taken as adequate and he added certain comparables according to him, would lead the results to functionally similar. The AO, therefore, excluded those companies whose revenue from services activity was less than 75% of the total operating revenues: Companies whose data is not available for the FY 2008-09 are excluded. As per the Rule 106 (4), it is mandatory to use the current year data i.e. the data for the FY 2008-09. The proviso to Rule 1 O (4) says that data for earlier two year can also be used if it is shown that such earlier year's data had an influence in determining the transfer price. Further, the use of earlier year data is in addition to the current year data, provided the conditions are satisfied. This view is upheld by various ITAT decisions. Hence companies, for whom data for FY 2008-09 is not available, are excluded. Companies whose software development income Rs.1 Cr. are excluded. By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies whose employee cost is less than 25 % of the revenues are excluded. It has been held in judicial pronouncements that if the ratio of employee cost to sales is very low, it is an indicator that the company is not a software developer. Hence, it would be proper to apply a filter that rejects companies that have a ratio of employee cost to sales of less than 25%. Companies having different financial year ending (i.e. not March 31, 2009) or data of the company does not fall within 12 month period i.e. 01-04-2008 to 31-03-2009, are rejected. If a tested party ends its financial year in March, then taking companies whose financial year ends in March will be an appropriate filter and may lead to a proper comparability. Companies that are functionally different from the taxpayer are excluded. Companies that are having peculiar economic circumstances are excluded. Any other peculiar circumstances of a company which is divergent from the taxpayer and the environment in which the taxpayer and the comparables are working makes it incomparable. Thus peculiar economic circumstances which are specific to the comparable enterprises are being looked in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LGS Global Ltd 20.46% Arithmetic Mean 29.03% The PLI is computed as under: Kals Information Systems Ltd. (Seg) Description Amt. (Rs in Lacs) Amt. (Rs. in Lacs) Segmental revenue 205.33 segmental Operating Revenue 205.33 segmental Operating Expenses 144.69 segmental Operating Profit 60.64 OP/TC(PLI) 41.91% Persistent Systems Ltd (Source: Annual Report 2008-09) Description Amt. (Rs in Lacs) Amt. (Rs. in Lacs) Sale of software services 51969.1 Add: :misc Income 79.9 Operating revenue 52049 Total expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se facts the assessee is in appeal before the ITAT. 18. At the time of hearing, the AR submitted a chart describing the GOA raised, with remarks. 19. Ground no. 1 is general, does not need separate adjudication. 20. Ground no. 2 is general, does not need separate adjudication. 21. Ground no. 3 is general and not pressed, hence rejected. 22. Ground no. 4 is general and not pressed, hence rejected. 23. Ground no. 22 is general and not pressed, hence rejected. 24. Ground no. 24 is general and not pressed, hence rejected. 25. Ground no. 25 is general and not pressed, hence rejected. 26. The chart, as submitted by the AR also mentioned that effective grounds for adjudication are grounds no. 5, 14 and 15. Accordingly grounds 6 to 13 would become academic if the relief is granted in grounds no. 5, 14 15. The AR, therefore, placed his arguments on these three grounds only and grounds no. 6 to 13 were technically not argued. 27. Ground no. 4 pertains to not following earlier years order in the case of the assessee, while making the TP adjustment. 28. Before the DRP, the assessee placed the following Application of lower limit turnover filter of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CG India, which is fortified by the decision of Delhi High Court in the case of Agnity India Technologies private Limited [TS-189-HC-2013(DEL)-TP] (enclosed as Annexure 7). Further, Delhi High Court has reiterated its position on rejection of Infosys as a comparable in the case of Agnity India Technologies Private Limited itself for the subsequent Assessment Year (ITA No. 6485/Del/2012)(enclosed as Annexure 8). - In light of the above, it is submitted that Infosys cannot be comparable to the Assessee and hence to be excluded from the final comparable set . 30. The AR, thereafter referred to the order of the ITAT in assessment year 2007-08, in assessee s own case, wherein in para 5.3, the issue had been brought to light and after elaborate discussion held, 5.3.7 However, we may make it clear that for the purpose of comparison, the turnover would be relevant only from the limited purpose to ensure that the comparable selected is an established player capable of executing all types of work relating to software development as the assessee is also an established company in the field. In other words, it must have a certain critical mass to compete successfully in the market, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be eliminated by increasing number of comparables. These new comparables, therefore, in our view have to be considered. We, however, note that one of the comparables, i.e. SIP Tech has only revenue of 3.6 crores. Obviously, the company has some problems as it is not able to procure enough orders and cannot be considered as established player in the field. It is, in our view, has to be excluded outright. The new comparables also include L T Infotech and as has been pointed out by the Id. Sr. Counsel this is a subsidiary of L T, which is against the filter applied by the assessee that the comparable should not be a subsidiary of another company. We find that, on this ground, we have already excluded Datamatics Ltd. Therefore, this company has to be excluded outright. We are thus left with only two new comparables submitted at the level of DRP i.e. Goldstone which has turnover of 41.03 crores and Lanco Infotech, which has turnover of 45.56 crores. As we have held earlier, the comparables must have certain minimum size as these have to be compared with well established players in the field. In our view on the facts of the case, minimum turnover of ₹ 100 crores has to be f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP. The reason given by the authorities below is that the assessee had not made any claim for working capital adjustment in its TP study and that it is not possible to make accurate adjustment on this account as it is difficult to find the account receivable/payable at different points of time during the year. The Id. Sr. Counsel has referred OECD guidelines as per which if the account receivable/payable on the last date do not give a representative level of working capital for the whole year, average may be used if it reflects the better level of working capital over the year. In our view, working capital adjustments are required to be made because these do impact the profitability of the company. Rule 1OB(2)(d) also provides that the comparability has to be Judged with respect to various factors including the market conditions, geographical conditions, cost of labour and capital in the market. Accounts receivable/payable effect the cost of working capital. A company which has a substantial amount blocked with the debtors for a long period cannot be fully comparable to the case which is able to recover the debt promptly. In our view, the average of opening and closing balance i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocessing Service(India) Ltd. vs. DCIT ITA No. 2152/Mum/2014 42. In the case of Rushab Diamonds (supra), it has been held, It is clear that in case of hedging of foreign currency exposure on the underlining trade receivable or payable the profit of loss will be treated in the same way in determining the net profit. 10.2 In view of the facts that the assessee has entered into forward contracts for the purpose of hedging of foreign currency exposure on the export and import of diamond, the gain or loss arising of the said, will be treated as part and parcel of the operating profit . 43. On the basis of the above cases as decided by the coordinate Benches at Mumbai, we do not find any reason to deviate our attention and findings against the already existing ratios laid down by the Courts, which we follow and reject the order of the DRP and direct the AO to compute the OP. 44. Ground no. 14 is therefore allowed. 45. Grounds no. 18 19 pertain to reducing the loss of loss making unit from profit making units for the purposes of section 10A. 46. This issue has been in dispute and the revenue authorities have held the issue against the assessee. 47. The AR poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... communication expenses were not attributable to the delivery of computer software in India and had been incurred in the business of software development at the software units of the assessee in India. Thus the decision of the honourable ITAT in assessment year 2006-07 is not applicable to the facts of this year. As regards the foreign currency expenditure, it may be stated that these expenses are nothing but the expenses incurred overseas for providing the software development services which are technical services. Be it as it may, these are the expenses incurred in foreign currency and, therefore, to be excluded while determining the export turnover as per express provision in the Act. We find that similar finding was also given by DRP in AY 2008-09 also. We, therefore, reject these objections 52. The AR pointed out that the issue became the subject matter for consideration before the Hon ble Bombay High Court in the case of the assessee in ITA No. 2501 of 2001 wherein the Hon ble Court held, The dispute was regarding deduction of data line costs from export turnover. The assessee incurred the data line costs and which have been worked out before the Assessing Officer. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Section 10A of the Act. In such circumstances, we are of the opinion that any wider controversy or larger question does not require any answer. We can leave that aspect open for the decision in an appropriate case. In the facts and circumstances of the present case and in relation to the business of the assessee before us, it is not necessary to go into the other contentions raised before us by the revenue . 53. Respectfully, following the order of Hon ble Bombay High Court, we set aside the orders of the revenue authorities and direct the AO to delete the disallowance and compute the exemption as per law and keeping in view the decision of the Hon ble Bombay High Court in the case of the assessee. 54. Ground no. 20 is allowed. 55. Ground no. 21 pertains to disallowance of foreign exchange expenditure for the computation of exemption under section 10A. 56. The decision on this issue is akin to ground no. 20. 57. We, therefore, set aside the orders of the revenue authorities and direct the AO to compute the exemption as per law, keeping in view the decision of Hon ble Bombay High Court, in the case of the assessee and other decisions cited by the AR, which are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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