TMI Blog2018 (9) TMI 1088X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness and were necessitated in view of commercial expediency and are earned year after year. Hence, it is correctly prayed that the same may be allowed as business expenses u/s 37 of the Act - Decided in favour of assessee. - I.T.A. No.1307/Del/2014 - - - Dated:- 14-9-2018 - Shri R.S. Syal, Vice President And Shri K. Narasimha Chary, Judicial Member For the Appellant : S/Shri Ravi Sharma Anubhav Rastogi For the Respondent : Shri Sanjay I. Bara, CIT DR ORDER PER K. NARASIMHA CHARY, JM Challenging the assessment order dated 6.1.2014 passed by the learned DCIT, Circle 8(1), New Delhi (hereinafter referred to as the AO ) pursuant to the directions dated 27.12.2013 issued by the learned Dispute Resolution Panel-III, Delhi, assessee preferred this appeal on several grounds, but effectively challenging the inclusion of four comparables, namely, M/s Cat Technologies Ltd.; M/s Infosys Technologies Ltd.; M/s Tata Elxsi Ltd; and M/s Thirdware Solutions Ltd. besides disputing the treatment of forex as non operating item of income/expenditure, adjustment on account of advance billing and adjustment on account of business promotion and conference. 2. Brief fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency center and IT support services. However, the learned TPO rejected the segmental approached adopted by the assessee by benchmarking the international transaction in respect of three segments i.e. software development, competency center and IT support services and clubbed all the three segments and benchmarked the same as well. 5. Learned TPO after taking into consideration the TP study made by the assessee in its economical analysis and discussing the various filters applicable to the facts of the case finally selected 17 comparables with the PLI of OP/TC of 25.44 as against PLI of 19.32% in respect of software development, 8% in respect of competency center and 7% in respect IT support services, and suggested an adjustment to the tune of ₹ 22,02,13,656/-. While doing so, learned TPO regarded the foreign exchange loss or gains as non operating item. 6. Basing on the report of the learned TPO, by draft assessment order, learned AO proposed addition of ₹ 22,02,13,656/- on account of the transfer pricing adjustment, ₹ 3,61,30,820/- on account of the amount treated by the assessee as advance billing and showing the same as part of the current liabilities and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 to 4 portals during the current financial year in the different fields. 10. However, learned TPO observed that this is just a new business opening for CAT Technologies and this activity had not contributed to their business and could be seen from the financials at page no.36 of the report. He further observed that the majority of the income is from the software development and consulting and income from the training and medical transcription is minimal, as such, CAT Technologies is primarily a software developer and a good comparable. 11. On this aspect, learned DRP, while endorsing the view taken by the learned TPO, retained this company as a good comparable. 12. It is argued on behalf of the assessee before us that the CAT Technologies derives income from training, software development and medical transcription and no segmental information is available. Further, it is submitted that during the year under consideration, this company had entered into the field of job placement portal and also plants to expand such operations. It is also submitted that the management has accepted that this company is well placed in the market as a leading HR BPO service provider. 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a perusal of the above detail of income of this company, it is apparent that it not only includes revenues from Medical transcription and Training, but the major component of ₹ 8.49 ITA No.1489/Del/2014 crore is income from 'Software Development and Consulting Services.' It is reiterated that the segment under consideration is `Software development and maintenance support services' and the assessee has a separate international transaction of 'Provision of advisory services' with the transacted value at ₹ 1.75 crore, whose ALP has been disjointedly determined by the TPO. When we come back to the revenues of CAT Technologies Ltd., it is seen that the major component of ₹ 8.49 crore is on account of `Software development and consulting services'. Since the segment of the assessee under consideration is only `Software development and maintenance support services' independent of `Advisory services', it becomes manifest that a company rendering both the software development and also advisory services, cannot be considered as comparable on entity level with the assessee's separate segment of software development maintenance support se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development and maintenance support services with income-tax support services low or high end whether onsite or offsite. Further, Schedule IX of the Profit and loss account of this company at page 36 of the annual report shows that this company is deriving a sum of ₹ 8,49,39,375/- from out of software development and consulting services whereas no segmental data is available and as stated by Item No.7 of the Accounting Policies and Notes on Account that the company s exclusive business is medical transcription and training software development and consulting services and this should be treated as the only reportable segment. For these reasons, we find it unsafe to continue this company in the final list of comparables. We, therefore, direct the learned TPO to exclude this company from the list of comparables for benchmarking the international transaction. Infosys Technologies Ltd.: 17. Assessee argued before the learned TPO for exclusion of this company on the ground of high turnover. However, learned TPO recorded that in several decisions, the Tribunal accepted the high margins companies are also good comparables and he has referred to the decisions in SAP L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he turnover of Infosys at ₹ 15648 crores. 20. Per contra, it is the argument of the learned DR that it is incorrect to say that the Infosys is a giant company, because giantness a comparative factor. He submits that assessee is also a giant with sizable magnitude of its turnover and as a matter of fact, this argument was advance before the learned TPO but the learned TPO with reasons rejected the same. According the learned DR the reasons recorded by the authorities below are cogent and convincing and cannot be interfered with. 21. Vide paras 17 to 20 in ITA No.5922/Del/2012 for the Asstt. Year 200809 in assessee s own case, a coordinate bench of this Tribunal recorded the facts and figures and for the purpose of clarity, we deem it necessary to extract the same: 17. The taxpayer sought to exclude Infosys from the final set of comparables on the grounds inter alia that Infosys is functionally dissimilar; it has huge sales/turnover of ₹ 15648 crores having substantial intangible assets incurring huge amount on R D for developing new area of functions; it owns products/leverages on its premium banking solution 'Finacle'; and relied upon the cases of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal for excluding Infosys from the list of comparables for the reason that Infosys is a giant company in the area of development of software, assumption of risk leading to higher profits etc. Keeping in view the aforesaid discussion, we are of the considered view that Infosys being a giant company operating on full-fledged risk leading to maximum profit having huge revenue and expending 1.3% of its turnover on R D having huge intangibles is not a suitable comparable vis- -vis taxpayer which is a captive service provider operating on a minimum risk and only having turnover of ₹ 109 crores as against turnover of Infosys of ₹ 15648 crores. So, we order to exclude Infosys from the final set of comparables. 3K TECHNOLOGIES LTD. (3K). 22. The above findings of fact could not be controverted by the Revenue with reference to any material to say that the turnover of Infosys Technologies is around ₹ 15,648 crore whereas the turnover of the assessee is around ₹ 109 crore as recorded in the immediately preceding assessment year. No change of facts is brought to our notice to take a different view. On consideration of the facts and figures involved in this matter, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company is engaged in the software development and services, product designing services, Innovation Design Engineering, Visual Computing Lab Division (animation and special effects) etc. Under product design services, this company is developing operating software on a wide variety of software ranging from automotive systems, VLSI design, embedded systems, networking, digital signal processing and multimedia systems. They serve sectors such as automotive, aerospace, consumer products, networking, semiconductors, multimedia, telecom and instrumentation with cost effective product engineering services. Under the head Visual Computing Labs they deliver 3D computer graphics, animation and special effects in the pre production, production and post production of content for the film, television, gaming and advertising industry. It is also further stated that during the year VLC successfully completed first fully animated commercial film. 27. At page 26 of the annual report it stated that the business of Tata Elxsi involved in designing technology products including hardware, software across the product lifecycle in industries such as Automotive, consumer electronics, networking, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shows that the company derives revenue from various services, sale of licences, export from SEZ unit, revenue from subscription etc. and the company engaged in diversified business including software products and hence cannot be treated as comparable with the assessee at all as it is not possible to work out and exclude the receipts and expenditure of different categories of income not related to the software development. Besides this, he further submitted that there is no information relating to segmental break up in the annual report of this company for the Asstt. Year 2009-10 providing information on revenue and expenditure from software services and hence, segmental margin cannot be computed for benchmarking the international transaction of providing software development services with attendant ITSS. 34. Per contra, it is the submission of the learned DR that the Thirdware Solutions ltd. Is also involved in software development and other services but of course, there is revenue from sales also. He also relied upon the observations and findings of the authorities below in respect of this company. 35. We have gone through the record including the annual report of this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of individual companies. 39. Learned DRP on this aspect held that the operating income/expenditure has not yet been decided by the legislature and it has been conventional wisdom which went into the component of operating income/expenditure while calculating the operating profit, but the position has changed since notification of the CBDR issued on 18.9.2013 which is the Safe Harbor Rules. Learned DRP further recorded that Rule 10TA(j)(k) and (l) define the concept of operating expense operating revenue and operating profit respectively according to which loss or income arising out of foreign currency fluctuations are excluded from the calculation of operating expense and operating income respectively. On this term, learned DRP held that the learned TPO was correct in excluding the forex item from the calculation of operating profit. 40. It is argued by the learned AR before us that while working out operating margin, amount of foreign exchange gain/loss is required to be considered as an item of operating revenue/cost both in case of assessee as well as comparables. The Special bench of the Tribunal in ACIT vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter hearing the assessee, learned AO recorded that similar disallowance was allowed in the earlier years in assessee s own case and as a matter of fact an appeal was admitted in the Hon ble Delhi High Court as a question of law and in these circumstances, learned AO has chosen to disallow a sum of ₹ 3,61,820/- and added back to the income of the assessee. 44. At the outset, learned AR submitted that this issue is no longer res integra and is covered in assessee s own case for the asstt. Year 2001-02 to 2003-04 in ITA No.584 585/Del/2006 322/Del/2007. He further submitted that a similar issue has arisen and disposed of in favour of assessee s in the case of UGS India (P) Ltd. Vs ACIT and relied upon in assessee s own case for Asstt. Year 2007-08 and 2008-09. 45. On a perusal of the record and the decision of a coordinate bench in assessee s own case for Asstt. Year 2008-09, we found that in para 55 to 58, this issue was dealt and the Tribunal while placing reliance on the decisions of the coordinate benches in assessee s own case for earlier years more particularly in ITA Nos.584 585/Del/2006 and 322/Del/2007 answered the issue in favour of the assessee. This fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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