TMI Blog2018 (5) TMI 1381X X X X Extracts X X X X X X X X Extracts X X X X ..... to international transactions of providing software development services, distribution of software products and reimbursement of costs by AE during the relevant financial year, thus companies functionally dissimilar with that of assessee need to be deselected from final list. - ITA No.486/Hyd/2015 - - - Dated:- 18-5-2018 - Smt. P. Madhavi Devi, Judicial Member And Shri S. Rifaur Rahman, Accountant Member For The Assessee : Shri Ravi Bharadwaj For The Revenue : Dr.K. Srinivas Reddy, DR ORDER Per Smt. P. Madhavi Devi, J.M. This is assessee s appeal for the A.Y 2010-11 against the assessment order passed u/s 143(3) r.w.s. 144C of the I.T. Act dated 23.2.2015. The assessee has raised the following grounds of appeal: Based on the facts and circumstances of the case and in law, the Learned Assessing Officer ( AO ) / Learned Transfer Pricing Officer ( TPO ) and the Hon'ble Dispute Resolution Panel, Hyderabad ('DRP') erred in the following: On the facts and in the circumstances of the case and in law, the Learned AO/ DRP has: TRANSFER PRICING MATTERS - Relating- to determination of Arm's Length Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n margin computation 8. Computation of net margins of the following companies selected as comparables: a) Considering Provision for bad debts as Non- Operating expenses in computing margins for the following companies: i) E -lnfochips Bangalore Ltd; ii) E-Zest Solutions Ltd; and iii) Kuliza Technologies Private Ltd. b) Computing the net margins of CAT Technologies Ltd by excluding Advertisement expenses written off considering it as inoperative expenses. c) Not segmenting the unallocable cost in the computation of the net margins for the following: i) Kals Information Systems Ltd (Seg); ii) and Tata Elxsi Ltd (Seg). Adjustment for risk differences 9. Not adjusting the net margins of the comparable companies taking into account the functional and risk differences between the international transaction of the Appellant and the comparable companies in accordance with the provisions of Rule 10B(1)(e). CORPORATE TAX ISSUES 10. Non - grant of TDS credit to the extent of ₹ 3,68,560. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debts was considered as part of operating expenses only when the same expenses are incurred every year for the last three years upto and including the financial year 2009-10 and these expenses are incurred at almost consistent level in terms of its ratio with the turnover. He adopted the TNMM as the most appropriate method and arrived at the mean margin of the 19 comparables at 26.9% as against the assessee s margin of 15.38% and proposed the adjustment of ALP at 28.37% after granting working capital adjustment. In accordance with the directions of the TPO, a draft assessment order was passed, against which, the assessee preferred its objections before the DRP. The DRP granted partial relief to the assessee and accordingly final assessment order was passed, against which, the assessee is in appeal before us. 5. Ground of appeal No.5 is seeking exclusion of foreign exchange fluctuation loss from the operating expenses. It is submitted by the assessee that it has suffered huge abnormal fluctuation and exchange loss which is to be considered as nonoperating in nature and has to be excluded in calculation of the cost as it is almost 8.5% of the total cost and such impact does not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een an exceptional year of operation. It is also submitted that the segmental data of the transactions is not available. He has drawn our attention to the financials of the said company which are at pages 1 to 12 of the Paper Book to demonstrate the point. 9. The learned DR, however, supported the orders of the authorities below. 10. Having regard to the rival contentions and the material on record, we find that in the Directors Report of CompU Learn Tech India Ltd, which is at page No.1 of the Paper Book, it is mentioned that during the year under review, the company has grown manifold and has consolidated turnover of ₹ 28.46 crores and net profit of ₹ 3.68 crores registering growth of 423% in turnover and 281.37% in net profit over the previous year. It is also reported that it was originally into business of software development and education training and that during the past two years, their focus was shifted to e-governance solutions to Govt. Departments of State and Central Govts. It was also stated that the company has expanded its operation in its core activity i.e. software development, e-governanace solutions, IT Services, IT Enabled Services etc., It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which are considered as only one business. Thus, it is seen that the E-Infochips Bangalore Ltd, is not only into software development services but is also into consultancy services and there is no segmental data available and only the aggregate results are reported. As held by the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd (Supra) the said company cannot be held to be comparable to the assessee. The relevant paragraph of the ITAT order is reproduced below: 1. E Infochips Bangalore Ltd., 1.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is functionally different and segmental information is not available. He submitted the ITAT has rejected this company in the following cases: 1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014, AY 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Allscripts (India) Pvt. Ltd., ITA No. 771/Ahd/2014 AY 2009-10 1.2 Ld. DR relied on the orders of revenue authorities and submitted as under: i) that the company is engaged in development of software (Ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td., we find that in the annual accounts of the company, with respect to the segment information it is stated that the company is primarily engaged in software development and I.T enabled services which is considered the only reportable business segment as per Accounting Standard AS-17 segment reporting prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available. With respect to E-infochip Ltd. Assessee had raided objection against its inclusion to which TPO in the order had directed to verify the facts and it was held that it cannot be included on the basis of diminishing of Revenues so long it was a not a consistent loss making company. Considering the aforesaid facts, we are of the view that the aforesaid two companies needs to be excluded while working out the comparability analysis and therefore uphold the plea of the Assessee in excluding the margins of the aforesaid 2 companies. We therefore deem it fit to restore the issue back to the file of A.O/TPO, who after excluding the aforesaid 2 companies rework the addition as per facts and law. Needless to state that A.O/TPO shall grant adequate opportunity of hearing to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e software development are as under: Business strategy and development Product conceptualization and planning Architecture design Software programming and documentation Testing and quality control Integration Project Management Training of employees Packaging and branding of software Marketing and sales Post sales services 17. On comparison of these two services, we find that the services rendered by the assessee and also the E-Zest Solutions Ltd appears to be similar and therefore, E-Zest Solutions Ltd cannot be considered as carrying on KPO services. Therefore, the said company cannot be excluded from the final list of comparables. 18. As far as Kals Information Systems Ltd (Seg.) is concerned, it is the case of the assessee that the company has revenue from software products and software development services and that the company has inventory which is 26% of the total revenue. It is also argued that the Companies Website extracts state that it is into ITES as well. We find that this company has been directed to be excluded from the final list of comparables in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd (Supra) by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts. Accordingly, Assessee's objections are accepted and AO is directed to exclude the company. 2.4 In the case of Planet Online Pvt. Ltd. (supra), the coordinate bench held as follows: 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal :- (d) KALS Information Systems Ltd. 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 report, the salary cost debited under the software development expenditure was ₹ 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Respectfully following the same, we direct this company to be excluded. 20. As far as Persistent Systems Ltd is concerned, we find that the assessee has itself has taken this company as a comparable in its TP study but has raised its objection against this company for the first time before the Tribunal and has filed an application for treating this ground as an additional ground of appeal. 21. The learned DR has filed the report of the AO dated 26.2.2018 stating that this company was not objected to by the assessee and therefore, cannot be considered to be excluded at this stage. As the assessee is raising its objection to this company for the first time before us, we deem it fit and proper to remand this issue to the file of the AO for de novo consideration in accordance with law. 22. As regards Tata Elxsi is concerned, we find that the learned Counsel for the assessee is arguing that it is functionally different due to the diverse nature of its business and specialization. We find that the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd has directed the exclusion of this company on the ground of functional dissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was many times Assessee's turnover and therefore cannot be exactly considered as a similar company unless the nature of activity, the incomes are analysed in detail. Since no segmental data is available, considering the software development services as a segment by TPO cannot be considered as segmental data, unless the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same. 3.4 In the case of Planet Online Pvt. Ltd. (supra), the coordinate bench held as follows: 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins under the TNMM. 26. Having gone through the decision of the Coordinate Bench of the Tribunal, we find that the Tribunal has held that bad debts and provision for bad and doubtful debts are part of the operating expenses and that the margins of the comparable companies should be computed by including bad debts and provisions of bad debts as provisions of expenses for the purpose of computing P L of comparable companies. 27. The learned DR has not been able to bring any other material, contrary to the above decision, to our knowledge. In fact the Tribunal has followed the decision of the Coordinate Bench of the Tribunal at Delhi in the case of Sony India (P) Ltd vs. DCIT in ITA No.1189/Del/2005 and others. Respectfully following the same, we remand the issue to the file of the AO with a direction to recompute the margins of the companies by including the bad debts/provision for bad and doubtful debts as operating income of those companies as well as the assessee. 28. As regards the assessee s contentions that there is an error in the computation of margin of CAT Technologies Ltd, we remand this issue also to the file of the TPO for de novo consideration in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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