TMI Blog2017 (4) TMI 1377X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under section 10A - AO has reduced ₹ 32,54,872/- being telecommunication charges and ₹ 9,88,27,170/- being expenses incurred in foreign currency from the export turnover. However, he has not reduced them from the total turnover which reduced the deduction claim by ₹ 1,64,75,929/- - Held that:- On assessee’s objections, the DRP following the Jurisdictional High Court order in CIT v Tata Elxsi Ltd and others [2011 (8) TMI 782 - KARNATAKA HIGH COURT] directed the AO to exclude the above expenses from ‘Total Turnover’ also for computing the deduction u/s 10 A on which the Revenue is on appeal. We heard the rival submissions. Since the DRP applied the jurisdictional High Court’s decision which is on operation as on date, we uphold the order of the DRP. - I.T (TP).A No.1487/Bang/2015, I.T(TP).A No.1496/Bang/2015 - - - Dated:- 6-4-2017 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND S. JAYARAMAN, ACCOUNTANT MEMBER Assessee by : Shri. Padamchand Khincha, CA Revenue by : Smt. Neera Malhotra, CIT-DR O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : These cross appeals are filed by the assessee and the Revenue, respectively, against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed the adjusted margin of the comparables at 23.92 % (after undertaking a working capital adjustment of 0.90%) . Accordingly, the TPO made an addition of ₹ 100,889,071/- to the total income in connection with its international transaction. 04. In respect of marketing support segment, the assessee selected 6 companies as comparables. Adopting operating profits to cost as the PLI, the arithmetic mean (weighted average) of the comparables was computed at 9.71%. The PLI of the assessee was at 7.26%. Since the margin of the assessee was within the five percent range of the arithmetic mean margin of the comparable companies, the transactions in respect of sales and marketing services were considered by the assessee to be at arm's length. The TPO did not concur with the analysis undertaken by the assessee. In his TP order , he retained only one comparable chosen by the assessee , introduced 2 new comparables and computed the average margin of the comparables at 18.25 % and accordingly, the TPO made an addition of ₹ 24,959,672/- to the total income in connection with its international transaction. Aggrieved, the assessee filed its objections before the DRP. The DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details are available and fails 75% service revenue income filter. Before us , the assessee submitted that this company needs to be rejected as it is functionally not comparable and has abnormal profits based on : Saxo India P. Ltd v. ACIT [TS-41-ITAT-2016(Bang)-Confirmed by HC ITA.682/2016] Alcatel-Lucent India P. Ltd [74 Taxmann.com-105-Delhi-AY 2010-11] 4. ICRA Techno Analytics Ltd : The assessee submitted before the DRP as follows : 1. It has substantial RPT i.e. 22.37% on sales. 2. It is functionally dissimilar since it is engaged into software development, engineering services, web development hosting, business analytics BPO as per Annual Report. The DRP rejected this company for the reason that this is Company is functionally different. Before us, the assessee submitted that this company needs to be rejected as it is functionally not comparable and fails RPT filter based on Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2010-11] On 15% RPT filter : 24/7 Customer.com [ITA.227/Bang/201028.taxmann.com 258] DCIT v. Electronics for Imaging India P. Ltd [IT(TP)A.No.212/Bang/2015 AY.2010-11] 5. Infosys Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable. 2. Turnover has increased to 181.86%, which is abnormally high. The DRP held that this company as a comparable. Before us , the assessee submitted before us that this company needs to be rejected as it is functionally not comparable based on : Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12.] 8. Persistent Systems Ltd : The assessee submitted before the DRP that this company has the following features : 1. It has a high turnover of ₹ 610.13 crores. 2. It has substantial RPT i.e, 15.41% on sales. 3. As per company s website, it is engaged in software product development . It is not a pure software development company as it is engaged in both rendering software development services has software products. 4. It possess unique software intangibles. The DRP held that this company as a comparable. Before us, the assessee submitted that this company needs to be rejected as it is functionally not comparable and fails RPT filter based on Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12] Alcatel-Lucent India P. Ltd [74 Taxmann.com-105-Delhi-AY 2010-11] Saxo India P. Ltd v. ACIT [TS- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Seg) made by the DRP on which the Revenue is aggrieved. We heard the rival submissions and gone through relevant material. Let us examine them, by extracting the relevant portion of the order of this Tribunal and others as under: 08. The relevant portion from Applied Materials India P. Ltd v. ACIT [TS- 815-ITAT-2016(Bang) ay 2011-12] is extracted as under : 9. The next ground in the assessee's appeal is regarding seeking exclusion of 4 comparable companies retained by the DRP. We will deal with the comparability of these 4 companies as under : (i) E-Jest Solution Ltd. : 9.1.1 The learned Authorised Representative has submitted that the assessee raised the objection before the DRP for exclusion of this company from the set of comparables but the DRP has not adjudicated the objections of the assessee. He has referred the objections raised before the DRP at page No. 1373 of the paper book as well as referred the relevant part of the Annual Report of this company at page Nos.39, 42 50 of the Annual Report. The learned Authorised Representative has submitted that this company is engaged in the diversified activity and reported the income under only one segment. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and licensing, royalty of software products. Thus without having the separate segmental details and data these diversified activities cannot be compared with the assessee. He has further pointed out that the company Persistent Systems Ltd. also engaged in developing products and therefore the activities are not comparable with that of the assessee. In support of his contention, he has relied upon the decision of this Tribunal dt.24.2.2016 in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) and submitted that this company was found to be not comparable with the software development services provider. He has further pointed out that in assessee's own case for the Assessment Year 2010-11, the DRP vide its order dt.24.11.2014 has excluded Persistent Systems and Solutions Ltd. from the list of comparables by holding that this company is not comparable to the assessee. 9.2.3 On the other hand, the ld. DR has submitted that the TPO as well as DRP has examined the functional comparability of these companies and found that these companies are comparable with the assessee. These two companies have satisfied all the filters applied by the TPO and DRP therefore the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration. 25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filter of information technology revenue applied by the TPO itself. Accordingly, we do not find any reason to interfere with the order of the DRP for this issue. (ii) Icra Techno Analytic Ltd. 17.1 We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. The DRP has rejected this company by recording the fact as under : We examined the annual report from which it is evident that the entire revenue has been shown under service segment which indicates that the revenue from software development, consultancy, licensing and sublicensing, annual maintenance charges for software support. WEB development and hosting has been reported in one segment, thus in absence of segmental information, we concur with the view of the DRP in preceding year and accordingly direct the Assessing Officer to exclude this company from comparables. 17.2 We further note that the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in paras 14 to 16 as under: (1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power. It also contended that the turnover of this company is ₹ 21,140 crores, which is 442 times higher than the assessee. Following the decision of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) , we do not find any reason to interfere with the directions of the DRP on this issue. (iv) L T Infotech Ltd. 19. We have heard the learned D.R. as well as learned D.R. and considered the relevant material on record. The DRP rejected this company by recording the facts at page 15 as under : On perusal of schedule to the notes of the accounts, it is noticed by us that expenses incurred in foreign currency are 938.94 crore (48.84%) out of the total expenses of ₹ 1920.46 crore debited in profit and loss account, these expenses include the sub contracting expenses to the extent of ₹ 118.01 crore, which indicates that the company has the on-site revenue of about 50%. It is also noticed by us that in the profit and loss account, the revenue has been shown from software development services and products. In the segmenting account it is mentioned that the segment revenue include sales directly identifiable with / allocable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables. In view of the facts recorded by the DRP as well as the decision of the coordinate bench, we do not find any reason to interfere with the directions of the DRP. (v) Tata Elxsi Ltd. (Seg.) : 20. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. The DRP has rejected this company by discussing the fact at page 16 as under : Directed to exclude as per paragraph 2.7 of the order. Further on perusal of annual report, it is noticed by us from page 14 that software development and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm s length price for the assessee, hence, should be excluded from the list of comparable parties. 33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP. In view of the facts recorded by the DRP as well as thedecision of the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at ₹ 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables. (ii) E-Zest Solutions 11.1. The Transfer Pricing Officer considered this company as comparable by observing that it provided sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee contended that this company was dealing in software products along with software development services and its revenue from licensing of software products was included in total revenue. The TPO observed from the Annual report of this company that it was providing support in software development, consultancy and system integration services. He, therefore, considered it as comparable. The assessee is aggrieved. 13.2. We have heard the rival submissions and perused the relevant material on record. The Annual Report of this company has been placed in the second paper book, from which it is lucid that this company is engaged only in providing software development and consultancy services, which is similar to those rendered by the assessee. When confronted, the ld. AR did not raise any objection to the inclusion of this company in the final set of comparables. We, therefore, uphold the impugned order in treating this company as comparable. v) Persistent Systems Ltd. 14.1. The assessee objected to the inclusion of this company in the tally of comparables by arguing that it was functionally different and there was insufficient segmental information. The TPO negatived this conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Saxo India (P) Ltd in [(2016] 74 taxmann.com 88 (Delhi), held that no substantial question of law arises and confirmed the decision of the Delhi Tribunal. 11. Thus, it is clear from the above that the assessee has made out a clear case in its favour . Following them, we direct the AO/TPO to exclude 3 comparables , viz Persistent Systems Solutions Ltd , Persistent Systems Ltd Sasken Communication Technologies. Since the assessee accepted the exclusion of 3 comparables viz Evoke Technologies, Mindtree Ltd (seg) RS Software (India) Ltd, which were rejected by the DRP on which Revenue is on appeal and thus supported Revenue s appeal grounds, these three companies are restored to the set of comparables. We uphold the DRP s directions to exclude the 7 comparables viz Acropetal Technologies Ltd (seg), E-Zest Solutions Ltd, E Infochips Ltd, ICRA Techno Analytics Ltd, Infosys Technologies Ltd, Larsen Toubro Infotech Ltd Tata Elxsi (Seg) also . To that extent, the assessee s grounds and the Revenue s grounds are allowed. 12. In respect of marketing support segment, the gist of the AR s submissions are extracted as under: 1. Asian Business Exhibition Conferences Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE's, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be considered as a comparable to the assessee. Therefore, for the aforestated reasons the DRP, in our view, was justified in excluding this company as a comparable. As far as the contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by the DRP, we may observe, such argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder from ITO v Interwoven Software Services (India) P Ltd [IT(TP)A.No.461/Bang/2015 dt 26.8.2016 for a y 2010-11 is extracted as under : 28. For this segment, the assessee is seeking exclusion of two comparables i.e. M/s Acentia Technologies Ltd., and M/s ICC International Agencies Ltd., The claim of assessee regarding exclusion of M/s Acentia Technologies Ltd. is also covered in favour of the assessee by the same Tribunal order rendered in the case of M/s Electronics for Imaging India (P)Ltd.,(Supra) and respectfully following the same Tribunal order, we direct the AO/TPO to exclude this company from the list of final comparable because the ld. DR of the revenue could not point out any difference in facts. 29. Regarding exclusion of second company, it was submitted by the learned AR of the assessee that i.e. M/s ICC International Agencies Ltd., (Supra) this is the claim of the assessee that annual report of this company available on page-1100 1104 of the paper book. As per the same, we find that this company is deriving income from trading activity and also maintaining inventories. Both these arguments are supported by annual report of this company available on page-1100 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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