TMI Blog2017 (1) TMI 1572X X X X Extracts X X X X X X X X Extracts X X X X ..... racity of the assessee’s claim and to rectify the same, if it so warrants by the Indian transfer pricing regulations, OECD guidelines, etc. Eligibility for tax holiday - Held that:- TPO/AO has erred by ignoring the fact that the assessee is eligible for tax holiday and there cannot be any plausible intent to shift profits thereby violating the basic intent of introduction of TP provisions. After duly considering the submissions of the assessee, we direct the TPO/AO to give a finding as to whether the assessee is eligible for tax holiday since the order of authorities below is silent on the issue. Accordingly we remit the issue back to the file of the TPO for de novo consideration. Not allowing the 5% benefit under the proviso to section 92C(2) - Held that:- TPO/AO is directed to work out the ALP of the assessee in accordance with the directions given above and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment is required to be made to the reported value of the assessee’s transaction with its AE. Accordingly, we remit the issue for de novo consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities below on this issue and direct the Assessing Officer to disallow 2% of gross income from investments towards expenditure for earning such income. - I.T.A.No.447/Mds/2016 - - - Dated:- 2-1-2017 - Shri Abraham P. George Shri Duvvuru RL Reddy For the Appellant: Shri S.Venkataraman, Advocate For the Respondent: Dr. M.M. Bhusari, CIT ORDER PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal by the assessee is directed against an order dated 29.01.2016 passed by the ld. Assessing Officer under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [ Act in short] pursuant to the ld. TPO recommendation giving effect to the directions dated 30.12.2015 of ld. Dispute Resolution Panel (herein referred as the DRP ). 2. The assessee is one of the leading software solution providers, specializing in providing quality and customized IT solutions to several multinational clients in the Banking, Financial Services and Insurance (BFSI) domain. The assessee filed return of income on 30.10.2007 admitting income of ₹.18,91,93,357/-. The case of the assessee was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued. In resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Hon'ble High Court, the TPO-II, Chennai, has passed order dated 29.01.2015, proposing an upward adjustment of ₹. 57,05,68,292/- to the arms length price charged by the assessee for software maintenance and IT-enabled back office operations rendered to its Associated Enterprises situated outside India . Subsequently, a draft assessment order dated 30.03.2015 was passed adding upward adjustment of ₹. 57,05,68,292/- to the arms length price charged by the assessee for software maintenance and IT-enabled back office operations rendered to its AEs situated outside India. Aggrieved by the draft order passed by the AO, assessee filed an appeal seeking directions before the Dispute Resolution Panel. The DRP vide directions dated 30.12.2015 not offered any relief to the assessee and hence the draft assessment order dated 30.03.2015 holds good. Accordingly, the final assessment order was completed considering the income computed in the draft assessment order by assessing the total income of the assessee at ₹.95,04,79,013/- after making various additions. 3. On being aggrieved by the final order passed by the Assessing Officer, the assessee is in appeal before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re rejected. Companies whose employee cost to operating revenues is less than 25% of the revenues were excluded. Companies whose onsite revenue is more than 75% of the export revenues were excluded. Companies that are functionally different from that of taxpayer, after giving valid reasons, were excluded. The information on related party transactions is taken from these databases and Annual Reports. In some of the cases, either the Annual Reports or the databases do not contain information in respect of export turnover, related party transactions, on site revenues etc. Such information was asked from the companies under the express provisions of section 92CA(7) read with section 133(6) of the Act. The replies have been received in most of the cases. Wherever information is not received from companies, a decision is taken based on the information available in the databases and the annual report (if available). If complete information is not available on functionality, the same is not considered as a comparable. The search process in Prowess Database was carried under the head Company Classifications and under the subheading Non-financial Services - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise information , the key word software was searched. As per TPO s order dated 26.10.2010, the search resulted in 28 comparable companies and the average OP margin of comparables is 27.96% as against the company's margin of 11.39%. The list of comparables is furnished below: Sl. No. Company Name Sales (Rs.cr.) OP to Total Cost% Database 1 Accel Transmatic Ltd (Seg.) 9.68 21.11% P (Seg.) 2 Avani Cimcon Technologies Ltd 3.55 52.59% P 3 Bodhtree Consulting Ltd (Seg.) 7.40 109.79% P 4 Celestial Labs Ltd 14.13 58.35% P 5 Datamatics Ltd 54.51 7.27% P 6 E Zest Solutions Ltd 6.26 36.12% P (Seg.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 262.58 26.51% P 26 Thirdware Solutions Ltd 36.08 25.12% C 27 TVS Infotech Ltd 7.24 11.61% P 28 Wipro Ltd (Seg.) 9616.09 33.65% P 27.96% It is evident from the above discussion that the assessee's transactions will not be Arm's Length considering the fact that the average OP margin of the 28 comparables is 27.96% as against the operating profit (on operating cost) of 11.47%. Therefore, the assessee was requested to show-cause why the difference between the Arm's Length profit and profit arising out of the international transactions should not be added back. After considering the submissions of the assessee, the TPO finally concluded the transfer pricing analysis with 26 companies (after accepting the contention of the assessee on 2 comparable companies) and arrived at the ALP to be at 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies with operating margins and the weighted average was 22.73%. Sl. No. Company Name OP to Total Cost% 1 Accel Transmatic Ltd (Seg.) 21.11% 2 Avani Cimcon Technologies Ltd 52.59% 3 Celestial Labs Ltd 58.35% 4 Datamatics Ltd 7.27% 5 E Zest Solutions Ltd 36.12% 6 Flextronlcs Software Systems Ltd (Seg.) 25.31% 7 Geometric Ltd (Seg.) 10.71% 8 Helios Matheson Information Technology Ltd 40.35% 9 IGate Global Solutions Ltd 7.49% 10 Infosys Technologies Ltd 40.30% 11 Ishir Infotech Ltd 30.12% 12 KALS Information Systems Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ti group entities that the authorities below have went in wrong in rejecting comparable uncontrolled price (CUP) method as the most appropriate method for determining the arm s length price for the assessment year under consideration. By filing copy of the order of the ld. DRP for the assessment year 2008-09 dated 12.04.2013 passed under Rules 13 of the DRP Rules r.w.s. 144C(5) of the Act, the ld. Counsel for the assessee has submitted that the ld. DRP has observed that comparable uncontrolled price (CUP) method is the most appropriate method for determining the arm s length price for the assessment year 2008-09, which is violating the principles of consistency and prayed that the Assessing Officer may be directed to accept CUP method. Referring to the grounds of appeal, the ld. Counsel for the assessee has submitted that the TPO/AO has selected certain companies as comparables which are functionally different and do not satisfy certain well accepted comparability criteria and pleaded that such functionally different companies are to be excluded from the list. Moreover, certain companies were included which had various extraordinary events, including merger/amalgamation, etc. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar April 01, 2006 to March 31, 2007 was not available in most of the cases. Over and above multiple year data cannot be adopted by the assessee without giving a valid reason for the same. In view of the provisions of section 10B(4) of the Act, current year s data has to be adopted for the purpose of comparing controlled and uncontrolled transaction. However, the assessee has considered the past 2 year s data which is not correct and hence the same were rightly rejected by the authorities below. Apart from that the assessee has also used comparables, whose financial year ended on dates other than March 31, which is also not acceptable since the Indian Income Tax Act follows financial year April to March. The transactions between assessee and Citigroup and assessee and others fell in the same class though features of the software may have been not identical. In such circumstances, TNMM was definitely more appropriate than CUP. Under the above facts and circumstances, the reliance placed by means of additional evidence of DRP s order for the assessment year 200809 holding that CUP method is most appropriate method, has no application to the facts in the assessment year under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis. It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FY 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics 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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the primary business of this company is software development services as indicated in the annual report for FY 06-07. Per contra, the ld. DR has submitted that the Celestial Bio Labs is into software development relating to bio IT vertical. The TPO has observed that the company is into software services. Celestial Labs has been providing customized enterprise solutions, bio informatics services to health and life science sector, like gene sequence comparison and analysis, prediction modelling, design and development of drug molecules and development of industrial enzymes. Further, the company is having very low profits. Moreover, all the other quantitative and qualitative filters are met by this company and therefore, the TPO has selected this company as comparable. We have considered the submissions of both the parties. From the website of the company, the TPO has noted that Celestial Biolabs is recognized by DSIR(GOI) for its R D endeavours in the Insilco Drug Discovery software development. Celestial has been providing customized solution and services in Bio-IT as well as research services over a decade. With regard to segmental data at the entity level from this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy implementation, work flow design and optimization. Therefore, the TPO has observed that the company is predominantly into software development services and hence functionally comparable and this company is catering to financial services sector. We have considered rival submissions. 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 was submitted by the learned Authorised Representative that this company is engaged in e-Business Consulting Services , consisting of Web Strategy Services, IT design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ( KPO ) services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accelerate the creation of software products, reduce product marketing time and assist in making schedules more predictable . Considering these functions, Ishir Infotech was taken to be a comparable. Before us, the ld. Counsel for the assessee has objected to the inclusion of Ishir Infotech as a comparable, since that company fails employee s cost filter of 25% revenue. According to the learned AR, the Ishir InfoTech employee cost as a percentage of revenue is only 3.96%. The learned DR however objected to the exclusion of this company from the list of comparables. On a careful perusal of the material on record, the TPO has rejected the plea of the assessee not to include this company as comparable only on the ground that the assessee has not furnished any documentary evidence with regard to Ishir Infotech. However, the TPO has also not assigned any valid reason for inclusion of this company as comparable. The main objection of the assessee is that Ishir Infotech has not satisfied the 25% employee cost filter and therefore, it should not included as comparable. We find that in the case of 24/7 Co. Pvt. Ltd in ITA No. 227/Bang/2010 vide order dated 09.11.2012, the Bangalor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sale of software products which is functionally different from the services undertaken by the assessee in its IT services segment. As per the discussion in para 13 at page 43 of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern s application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern is not comparable to the assessee s segment of IT services and accordingly, we direct to exclude the same for the list of comparables. 8.7 Vis- -vis Lucid Software Ltd., according to the assessee, this company is not functionally comparable because the company into sale of software products. Further, it was submitted before the TPO that the company had amortized product development expenses amounting to ₹.1866703/- during the year. On perusal of the Capital line data base, the TPO has noticed that predominantly the company is catering into software development and services sector. After considering the fact, the TPO has observed that amortization would be spread over a number of years still the debit in the P L account on account of product development expenses is not very substantial and hence this company has been taken as a comparable. Before us, the ld. Counsel for the assessee has submitted that this company is engaged in provision of both software products and software services and moreover, not provided segmental details. In the absence of segmental details, the company should be rejected as comparable. Further, it was also submitted that the margin as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 200809, we direct the TPO to exclude this company from the list of comparables as it is functionally different; (being engaged in software product development) from the assessee in the case on hand who is rendering only software development services. It is ordered accordingly. 8.8 Megasoft Ltd.: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same from the Prowess database. Since this company is functionally different, engaged in development of software products, we direct to exclude from the list of comparables. 8.10 With regard Thirdware Solutions Ltd, no detail is emanating from the order of the TPO. Since this company is functionally different viz., trading in software products and derives revenue from licensing of software products, this company cannot be included as comparable. Turnover filter 9. We further find from the TPO s order that he has selected 28 comparables and applied a lower turnover filter of ₹.1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a ₹.1000 crores company cannot be compared with the transaction entered into by a ₹.10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The Bangalore Bench of the Tribunal in the case of M/s. Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT ITA No.1231/Bang/2010 vide order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. Turnover ₹. 1 Flextronics Software Systems Ltd. 848.66 crores 2 iGate Global Solutions Ltd. 747.27 crores 3 Mindtree Ltd. 590.39 crores 4 Persistent Systems Ltd. 293.74 crores 5 Sasken Communication Technologies Ltd. 343.57 crores 6 Tata Elxsi Ltd. 262.58 crores 7 Wipro Ltd. 961.09 crores 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t financial year i.e., 2006-07 relevant to the assessment year 2007-08 is required to be considered in view of the provisions of Rule 10B(4) and moreover, multiple year data cannot be adopted by the assessee without giving valid reason. Thus, the ground raised by the assessee is rejected. 14. In ground No. 22, the assessee has contended that the authorities below have erred in not allowing the 5% benefit under the proviso to section 92C(2) of the Act. The TPO/AO is directed to work out the ALP of the assessee in accordance with the directions given above and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment is required to be made to the reported value of the assessee s transaction with its AE. Accordingly, we remit the issue for de novo consideration. 15. Against the draft assessment order under section 143(3) r.w.s. 144C(1) of the Act dated 31.12.2010, the assessee preferred an appeal before the ld. DRP by raising various issues including corporate tax matters. 16. With regard exclusion of expenses incurred in foreign exchange from total turnover, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round raised by the assessee is that the Assessing Officer has failed to exclude the export proceeds, which have not been realized in time, both from export turnover as well as from total turnover. In determination of total turnover, the Assessing Officer has failed to exclude the export proceeds, which have not been realized in time, both from export turnover as well as total turnover. By relying on various case law, the assessee has pleaded that the export proceeds not realized to the tune of ₹.8,47,41,795/-, which have been reduced from the export turnover, should also be reduced from the total turnover of the assessee company. However, the ld. DRP has held that the objection of the assessee is devoid of merit and finds no need for interference in the action of the Assessing Officer to exclude export proceeds which have not been realized in time from total turnover and confirmed the order of the Assessing Officer. 17.1 Before us, by reiterating the submissions as made before the authorities below, the ld. Counsel for the assessee has submitted that the export proceeds which have not been realized in time should be excluded from both export turnover as well as total turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contentions and perused the orders of authorities below. With regard to the disallowance under section 14A of the Act in computing income under normal provisions, the ld. Counsel for the assessee has argued that Rule 8D is not applicable to the assessment year under consideration. We find force in the argument of the ld. Counsel for the assessee. The Hon ble Mumbai High Court in the case of Godrej Boyce Mfg. Co. Ltd. v. DCIT 328 ITR 81 has held that Rule 8D cannot be applied retrospectively but only from the assessment year 2008-09. In this case, the Assessing Officer has worked out the expenditure component and disallowed ₹.11,09,719/- as expenditure for earning dividend income. However, the ld. Counsel for the assessee has strongly contended before us that the assessee has not incurred any expenditure towards earning the dividend income. However, in the case of Godrej Boyce Mfg. Co. Ltd. v. DCIT (supra), the Hon ble Mumbai High Court has also held that application of provisions of 14A are 'Constitutionally valid' and provisions of section 14A are still applicable for earlier assessment years and the Assessing Officer is duty bound to determine expenditure by ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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