TMI Blog2016 (3) TMI 1300X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure is acceptable. However, as seen from the order of Ld.CIT(A), even after noticing the judgment of jurisdictional High Court he did not grant the benefit in the absence of details. Before us, Learned Counsel submitted that most of the expenditure is on microsoft licenses which are renewable on an yearly basis. This aspect require examination by AO. Consequently, while accepting the principle that software licenses are revenue in nature, examination of expenditure claim is restored to the file of AO. AO after due verification should allow the expenditure accordingly For claim of tds credit pursuant to decision in COURT ON ITS OWN MOTION VERSUS COMMISSIONER OF INCOME TAX AND OTHERS & ALL INDIA FEDERATION OF TAX PRACTITIONERS VERSUS UNION OF INDIA AND OTHERS [2013 (3) TMI 316 - DELHI HIGH COURT] CDBT issued Instruction No. 5 of 2013, dated July 8, 2013, directing that where assessee approaches AO with requisite details and particulars in the form of TDS certificate as an evidence against any mismatch amount, AO sould verify whether or not the deductor had made TDS payment in the government account and, in the event, the payment had been made, credit of the same would be give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year data and for other reasons. He adopted a different filters, selected databases and finally selected 11 companies with an arithmetic mean of 24.05% after working capital adjustment and proposed an adjustment of ₹ 24,63,25,398/- in SWD. Likewise, in ITES division, the TPO selected 8 comparables with an Arithmetic mean of 25.22% after working capital adjustment and proposed ₹ 4,03,38,142/- as an adjustment. Ld.AO has passed the order making the above two additions under TP provisions. In addition, the AO also disallowed software license fee paid as capital expenditure to an extent of ₹ 3,02,80,510/-. While computing tax liability, AO did not give credit of TDS to an extent of ₹ 2.61 Crores. He also recomputed deduction u/s. 10A by reducing some expenditure from export turnover. 6. Being aggrieved by the order of AO, assessee preferred an appeal to the Ld.CIT(A) and raised various grounds on use of data, filters, functionality etc. Ld.CIT(A) accepted turnover filter and excluded Infosys in soft ware division where as on different turnover filter of (1 to 200 crores) excluded two companies (1) Aditya Birla Minacs Worldwide Ltd., and (2) Infosys BPO Ltd. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng this Tribunal s decision in the case of Genisys Integrating Systems India (P) Ltd., Vs. DCIT [15 ITR (Trib) 475], apart from other decision in Kodiak Networks Vs. ACIT [15 ITR (Trib) 610] and Trilogy E-Business Software India Pvt. Ltd., [23 ITR (Trib) 464], which are all binding on the CIT(A). There is no error in the order of the CIT(A). Accordingly, the above grounds raised by the Revenue, which in any event is misconceived insofar as assessee s SWD segment is concerned, are liable to be rejected. Even otherwise, as regard assessee s SWD segment, Infosys Ltd., has been held to be functionally dissimilar to a software development service provider by this Hon ble Tribunal in Cisco Systems (India) Private Limited Vs. DCIT [IT(TP)A No. 271/Bang/2014] therefore the same gets excluded on functionality aswell. 9.2. Further, in relation to assessee s ITeS segment, Infosys BPO Ltd., has been held to be functionally dissimilar by this Tribunal in Minteck (India) Ltd., Vs. DCIT [IT(TP)A No. 70/Bang/2014]. Also, Aditya Birla Minacs Ltd s related party transactions for FY. 2008-09 constituted 15.68% of its total revenues for that year and, accordingly, in the light of this Tribunal s de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Co-ordinate Bench and the decision is as under: 26. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open end to end web solutions software consultancy and design development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk; (iii) the company has generated several inventions and filed for many patents in India and USA; (iv) the company has substantial revenues f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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. 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 ₹ 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 functionally different from software companies. The relevant extract are as follows: 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude two companies Thinksoft Global Services Private Limited ( Thinksoft for short) and FCS Software Solutions Private Limited ( FCS Software for short). The said two companies were initially proposed as comparables by the TPO in her show cause notice dt. 14-11- 2012 (page 789 of the Paper Book), but were subsequently not included as comparables by the TPO despite assessee having accepted the said companies as comparables. The TPO having accepted that the said companies are functionally similar to assessee, excluded them on the sole ground that when their respective working capital adjustment is coming to more than 4%. It is submitted that the ad hoc rejection of the said companies on the ground of working capital impact of more than 4% on profit has no basis in law and is, therefore, liable to be set aside as the said companies satisfied all the filters applied by the TPO and there having been no filter applied by the TPO to the above effect, their exclusion is unsustainable. The working capital adjustment has been arrived at on the basis of a scientific calculation and by adopting the methodology prescribed by the OECD Guidelines. Thus, once a working capital adjustment is arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded. 21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and Loss account of M/s. Thinksoft Global Solutions for the relevant previous year is placed at paper book page.247. Software service revenues of the said company came to ₹ 920921452/-. Other income of the said company came to ₹ 35,738,801/-. Break-up of the other income as given at schedule 10 placed at paper book page.256 show that out of such amount ₹ 26,536,978/- was exchange gain. Interest received from deposits with banks and others came to ₹ 29,15,080/- only. For better clarity this bre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Microland Ltd (Both segments) 1.65% 2. Allsec Technologies Ltd., 15.82% 3. Accentia Technologies Ltd., 0% 4. Informed Technologies India Ltd., 9.82% 5. Cosmic Global Ltd., 0% 6. E-clerx Services Ltd., 13.76% 12.1. Assessee is objecting to the inclusion of three comparables: (1) Accentia Technologies Ltd., ; (2) Cosmic global : (3) E-clerx Services Ltd., on the basis of decisions of Capital IQ in ITA No. 170/Hyd/2014 and other decisions. 12.2. Co-ordinate Bench at Hyderabad has already considered (one of us, AM is the author) the same comparables in the case of Capital IQ Information Systems (India) P. Ltd., in ITA No. 124/Hyd/2014 dt. 31-07- 2014 as under: i. Accentia Technologies Limited : 21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at ₹ 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at ₹ 9.90 lacs, Translation charges at ₹ 6.99 crore and Accounts BPO at ₹ 27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he coordinate bench of the Tribunal(Delhi) in the case of M/s. Mercer Consulting (India) Pvt. Ltd., (supra), assessee submits that this company cannot be selected as a comparable. 18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded. 18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee s services. We therefore, direct the Assessing Officer/TPO to exclude this company. 12.3. Respectfully following the above, we direct the TPO to exclude the above comparables and arrive at the addition, if any, on the basis of provisions of Section 92C. Ordered accordingly. Corporate Tax issues: 13. Assessee is aggrieved on treating the expenditure on software licenses as capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure is acceptable. However, as seen from the order of Ld.CIT(A), even after noticing the judgment of jurisdictional High Court he did not grant the benefit in the absence of details. Before us, Learned Counsel submitted that most of the expenditure is on microsoft licenses which are renewable on an yearly basis. This aspect require examination by AO. Consequently, while accepting the principle that software licenses are revenue in nature, examination of expenditure claim is restored to the file of AO. AO after due verification should allow the expenditure accordingly. TDS: 15. Assessee submitted that while filing the return of income for the AY. 2009-10, it has claimed a total TDS credit of ₹ 2,61,44,238/-. However, the AO has restricted the claim of the company to ₹ 45,20,737/-. In this regard, the Ld Counsel placed reliance on the decision of Allahabad High Court in the case of Rakesh Kumar Gupta [TS-321-HC-2014 (ALL)], wherein it was held that the mismatch of Tax Deducted at Source (TDS), with the details shown in Form 26AS, is not attributable to the taxpayer, and the fault solely lies with the deductor. Further, the Allahabad High Court referred to the De ..... X X X X Extracts X X X X X X X X Extracts X X X X
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