TMI Blog2018 (4) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... OUNTANT MEMBER For The Appellant : Shri C.H Sundar Rao, CIT For The Respondent : Shri T Suryanarayana, Advocate ORDER PER SHRI N.V VASUDEVAN, JUDICIAL MEMBER : This is an appeal by the assessee against the order dated 20/1/2016 of Dy. Commissioner of Income-tax, Circle-2(1)(1), Bangalore relating to assessment year 2011-12 in respect of an order passed by the DCIT, Circle 2(1)(1), Bangalore, u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (Act). The Assessee has also filed a Cross Objection against the very same order. The Cross- Objection is partly supportive of the order of the DRP. 2. The Assessee is a wholly owned subsidiary of CGI Technology and Solutions Inc., USA, and is a part of the worldwide CGI Group of companies. The Assessee is engaged in the business of providing contract software development services and related services to its Associated Enterprises ( AE for short). In its return of income for AY 2011-12, the Assessee claimed a deduction under Section 10A of the Act of ₹ 3,36,51,428/-, being the profits of business of its Hyderabad unit. In computing the said deduction, the Assessee had not reduced telecommunication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computer software outside India and therefore the exclusion from export turnover as done by the AO was not correct. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the Hon ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn) wherein it was held that while computing deduction u/s.10A of the Act expenses that are reduced from the export turnover should also be reduced from the total turnover. 6. The DRP accepted the alternate prayer of the Assessee and directed that the expenses reduced from the export turnover should also be reduced from the total turnover. As a result, the deduction as claimed by the Assessee u/s.10A of the Act stood allowed. Aggrieved by the relief allowed by the DRP, the revenue has preferred Ground No.1 in its appeal before the Tribunal. 7. We have heard the ld. counsel for the assessee who relied on the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Cost Rs.430,24,69,961/- Operating Profit (Op. Income Op. Cost) ₹ 59,34,29,782/- Operating/Net mark-up (OP/TC) 13.79% The Assessee as well as the TPO adopted Transaction Net Margin Method as the Most appropriate Method for determination of ALP and the Profit Level Indicator for comparison was Operating Profit to Total Cost (OP/TC) 11. The Assessee selected 16 companies as comparable companies and computed the arithmetic mean of the profit margins of those companies at 13% which was much lower than the profit margin of the Assessee which was 13.79%. The Assessee therefore claimed that the price received in the international transaction was higher than the arithmetic mean of profit margin of comparable companies and therefore the price received is at Arm s Length. 12. The TPO accepted only two of the 16 companies selected as comparable companies by the Assessee viz., Mintree Ltd. and Persistent Systems Solutions Ltd. The TPO identified 11 other companies as comparable companies and arrived at a set of 13 comparable companies with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Rs. 430,24,69,960/- Arm s Length Price h Price 123.19% of Operating Cost ₹ 530,02,12,745/- Price Received Rs.489,58,99,743/- Shortfall being adjustment u/s. 92CA Rs.40,43,13,002 /- The TPO restricted the working capital ( WC for short) adjustment to 1.63% as against the actual working capital adjustment which amounted to 3.47%. No reasons have been assigned by the TPO for doing so. 14. The Assessee objected to the manner of determination of ALP by the TPO before the DRP. Briefly, the directions issued by the DRP are as follows: Functionality Filter: The following companies were directed to be excluded by accepting the contentions of the Assessee: (i) Acropetal Technologies Ltd. (ii) E-Infochips Limited (iii) ICRA Techno Analytics Ltd. (iv) Infosys Ltd. (v) Tata Elxsi Ltd. The DRP, however, rejected the contentions of the Assessee that Persistent Systems Ltd. and Sasken Communication Technologies Ltd. were not functionally comparable to it and consequently upheld their inclusion in the final list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the DRP erred in suo moto applying the onsite revenue filter ( Ground No. 3 ) (iii) That the DRP erred in deleting E-infochips Ltd. on the ground that it fails the filter of service revenue income less than 75% of the sales. ( Ground No.5 ) 17. The grounds in the cross-objections which are being pressed are as follows: (i) That the TPO erred and the DRP further erred in including two companies, viz. Persistent Systems Ltd. and Sasken Communications Technologies Ltd., in the list of comparables although they fail the test of comparability. ( Ground No.1(g) ) (ii) That the DRP erred in suo moto rejecting RS Software Pvt. Ltd.from the list of comparables ( Ground No.3 ). 18. As far as Gr.No.2 is Revenue s appeal is concerned, the sum and substance of the ground of appeal is that the DRP ought not to have excluded 3 comparable companies from the list of final comparable companies chosen by the TPO for comparison of profit margin of the Assessee with comparable companies. The three companies that were excluded by the DRP which is in challenge by the Revenue before the Tribunal are (i) Acropetal Technologies Ltd., (ii) L T Infotech Ltd. and (iii) RS Software (Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany was directed to be excluded by the DRP for the following reasons: (i) 48.84% of its total expenses are incurred in foreign currency, which includes substantial expenses on sub-contracting, indicating that the company has high onsite revenue; (ii) the TPO has considered the entire revenue from its 3 segments, viz. financial services, manufacturing and telecom as was disclosed in its Annual Report for FY 2010-11, for the purposes of comparability to the Assessee s software development services; and (iii) predominantly engaged in the onsite development of software in FY 2010-11. The learned DR submitted before us that the Assessee s profile also is similar to the profile of L T Infotech Ltd. and therefore this company should be included as comparable company. He also submitted that what is the quantum of on-site revenue has not been spelt out by the DRP. In this regard it was argued by him that on-site revenue beyond 25% of the total revenue of the company would be beyond the tolerance level and without a finding that on-site revenue is more than 25% of the total revenue, this company ought not to have been excluded from the list of comparable companies. We agree with the subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filter and thereby rejected companies on the basis that they were predominantly engaged in the onsite development of software in FY 2010-11. 23. In this regard, we are of the view that On-site revenue filter is an accepted filter to be applied for choosing comparable companies engaged in software development and falls within the parameters of Rule 10B(2) of the Income Tax Rules, 1961 (Rules). In any event, the three companies whose exclusion from the list of comparable companies is challenged before the Tribunal, go out of comparability for other reasons and not solely on the application of on-site revenue filter. Therefore, we find no merit in Gr.No.3 raised by the Revenue. 24. As far as Ground No.4 raised by the revenue is concerned, the said ground of appeal is vague and in any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the Act and Rules. As far as Ground No. 5 in Revenue s appeal is concerned, the Revenue seeks to challenge the exclusion of E-Infochips Ltd. on the ground that it failed the software service income filter at 75%. At the outset, the Assessee submits that E-Infoc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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