TMI Blog2017 (10) TMI 1376X X X X Extracts X X X X X X X X Extracts X X X X ..... AYs 2002-03 & 2003- 04 after considering the method of providing for warranty liability by way of a provision, specified that the provision made was based on past history and was on scientific method of estimating liability on account of warranty claims. It is clear from the chart which has been extracted in the order of assessment that as and when the period of warranty expires, the assessee writes back the provision made in the books of account to the extent it relates to the warranty liability which the assessee does not incur and which was already provided by way of a provision and allowed as deduction in the past. It appears to us that the provision made by the assessee is scientific and is based on past history. - Decided against assessee TPA - determination of ALP of the international transactions entered - Held that:- The assessee is in the business of rendering software development services, thus companies functionally dissimilar need to be deselected from the final list. Action of the CIT(A) excluding companies with turnover of above ₹ 200 crores from the list of comparable companies is held to correct and such action does not call for any interference. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue is general in nature and calls for no specific adjudication. 5. Ground No.2 raised by the revenue reads as follows:- 2. The Ld CIT(A) erred in directing the AO to deduct telecommunication expenses from total turnover and export turnover while computing the eligible deduction u/s l0A, as this is against the provisions of section 10A. 6. The Assessee is in the business of rendering software development services. It has STPI (software technology Parks of India) in Bangalore and Hyderabad, which are eligible for deduction u/s.10A of the Income Tax Act, 1961 (Act). Ground No.2 raised by the Revenue project the grievance of the Revenue regarding the action of the CIT(A) in excluding expenses incurred on telecommunication from export turnover as well as total turnover. The Assessee had incurred a sum of ₹ 17,07,43,928 in respect of the Bangalore STPI Unit and ₹ 11,82,59,570 in respect of the Hyderabad STPI Unit towards telecommunication charges, which were incurred in connection with providing call centre services to various Dell entities overseas. The telecommunication charges were considered as part of 'export turnover' while computing the deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce on the decision of the Hon'ble High Court of Karnataka in the appellant's owns case for AY 2002-03, 2003-04 2004-05 (ITA No. 450 of 2008, ITA no. 451 of 2008 ITA no. l37 of 2010) wherein it was held that telecommunication charges should be excluded both from export turnover and total turnover while applying the formula for allowing deduction u/s.10A(4) of the Act. 8. The AO did not accept the plea of the Assessee and he reduced telecommunication charges only from the Export Turnover and did not reduce it from the total turnover while applying the formula for allowing deduction u/s.10A(4) of the Act. As a result, the deduction u/s.10A of the Act was allowed at a much lower sum than what was claimed by the Assessee. 9. Before CIT(Appeals), the reiterated submissions made before AO and further 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 telecommunication charges should be excluded both from the total turnover and export turnover while applying the formula u/s.10A(4) of the Act while allowing deduction u/s.10A of the Act. The CIT(A) accepted the alternativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 2003-04 and 2004-05, wherein similar claim was held to be a liability of the Assessee and allowable as deduction while computing income from business of the Assessee. The Assessee thus claimed that the liability in question was not contingent liability and should be allowed as deduction. 14. The AO examined the aspect whether the provision by the Assessee on account of warranty liability was made on scientific basis with minimum margin of error. He was of the view that in making a provision on account of warranty liability the Assessee merely adopts a formula and by doing so claims that the liability was an ascertained liability. He was of the view that the estimation made should be more or less equal to the actual expenditure incurred. The AO examined the provision made for liability on account of warranty claims by the Assessee in the past and the actual liability it discharged on account of such claims, which was as follows: Financial Year Opening Balance Accrual during the year Payments made during the year Movement during the year Closing Balance 2000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the ITAT s decision was not accepted by the Department and the matter was agitated before the Hon'ble High Court of Karnataka. 17. For the above reasons, the AO held that the provision made by the assessee in its books and debited in the profit and loss account, towards warranty expenditure, in excess of the actual expenditure has to be treated as a contingent liability. Accordingly, an amount of ₹ 2,49,81,000/-, being the excess provision made, was disallowed and added back to the assessee's total income. 18. On appeal by the assessee, the CIT(Appeals) accepted the submission of the assessee that similar disallowance made in assessee s own case for the AYs 2002-03 2003-04 was deleted by the Tribunal and the CIT(A) found that the facts and circumstances under which the disallowance was made in the present assessment year was identical to the facts as it prevailed in AYs 2002-03 2003-04. The CIT(Appeals) accordingly deleted the addition made by the AO. The CIT(A) was of the view that provision for warranty as made by the assessee company was in conformity with the ruling of the Hon ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. v. CIT, 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the method of providing for warranty liability by way of a provision, specified that the provision made was based on past history and was on scientific method of estimating liability on account of warranty claims. It is clear from the chart which has been extracted in the order of assessment that as and when the period of warranty expires, the assessee writes back the provision made in the books of account to the extent it relates to the warranty liability which the assessee does not incur and which was already provided by way of a provision and allowed as deduction in the past. It appears to us that the provision made by the assessee is scientific and is based on past history. We are also of the view that in view of the parity of basis of provision of warranty in AYs 2002-03 2003-04 and AY 2005-06, the ruling of the Tribunal in AYs 2002-03 2003-04 is squarely applicable to AY 2005-06 also. For the reasons stated above, we do not find any merit in ground No.3 raised by the revenue and accordingly the same is dismissed. 23. Ground Nos. 4 to 8 raised by the revenue in its appeal and the grounds raised by the assessee in the CO No.21/Bang/2016 are with regard to det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnologies Ltd., on RPT being more than 0%, has grossly erred in not adjudicating on the following grounds: Functional dissimilarity Presence of Intangibles High Turnover 6. The Ld. CIT(A) while rejecting Flextronics Software Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds: Functional dissimilarity 7. The Ld. CIT(A) while rejecting Satyam Computer Services Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds: Unreliable financial statements Presence of Brand 8. The Ld. CIT(A) while rejecting Infosys Technologies Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds: Presence of Brand Economies of scale Functionally Dissimilar 9. The Ld. CIT(A) while rejecting Sankhya Infotech Ltd., on the ground of functional dissimilarity has erred in not adjudicating on the following ground: Fails employee cost filter The respondent craves leave to add, alter, amend and/or delete any of the ground mentioned above. 24. As we have already seen, the assessee is in the business of rendering software development services. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue was Operating Profits to Total Cost (OP to TC) for the purpose of comparing the profit margins of comparable companies in similar transactions. The assessee in its TP report filed to justify the price received from the AE was at Arm s Length, selected the comparable companies and the average PLI of those comparable companies was compared with OP to TC of the assessee and it was claimed that the price received by the assessee was at arms length. The TPO after rejecting the methodology applied by the assessee came to the conclusion that the companies as per list enclosed as Annexure-I to this order alone were comparable and arrived at the average arithmetic mean of profits of the those comparable companies at 26.59%. 26. The TPO thereafter computed the ALP as follows:- 13.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as: Arithmetic mean PLI : 26.59% Less Workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nover, companies will have to be categorized as companies having turnover of 200 crores as small, companies having turnover of 200 2000 crores as medium and companies having turnover 2000 crores as large. By doing so, the CIT(Appeals) found that the assessee s turnover was only 109.86 crores and thereafter comparable companies chosen by the TPO which had turnover beyond 200 crores had to be excluded from the list of comparable companies, as they were medium sized companies and assessee was a small sized company and therefore it cannot be compared. By this process, 5 companies were excluded from the list of comparable companies. These 5 companies, as we have already mentioned, also got excluded by application of RPT filter. These companies are:- (1) iGate Solutions Ltd. (2) Infosys Technologies Ltd. (3) Satyam Computer Services Ltd. (4) L T Infotech Ltd. and (5) Flextronics Software Systems Ltd. 30. Companies which got excluded by application of RPT filter alone are:- (1) Sasken Network Systems Ltd. (2) Four Soft Ltd. (3) Thirdware Solutions Ltd. (4) R S Software (India) Ltd. (5) Geometric Software Solutions Ltd. (6) Tata Elxsi Ltd. (7) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35. The ld. counsel for the assessee also made oral submissions that Bodhtree Consulting Ltd. ought to have been rejected as not comparable because it was functionally dissimilar and had abnormal growth and fails the RPT filter of more than 15%. Though the CO has been filed, the above objection has been orally raised as the decision of CIT(Appeals) on this aspect is against the assessee and therefore in terms of Rule 27 of the ITAT Rules, the assessee is entitled to raise any issue decided against the assessee, even without filing a CO. Reliance is placed on the decision of Hon ble Gauhati High Court in the case of Assam Company (India) Ltd. Vs. CIT 256 ITR 453 (Gau) wherein it was held that it is permissible on part of Tribunal to entertain a ground beyond those incorporated in memorandum of appeal though party urging said ground had neither appealed before it nor had filed a cross-objection in appeal filed by other party provided relevant facts on which such ground are to be founded are available on record. 36. We have heard the rival submissions. As far as ground No.4 raised by the revenue is concerned, the submission of the learned DR was that only where the related part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. IT (TP) A.No. 464/Bang/2013 and M/S. Net Devices India Pvt. Ltd. IT(TP) No. 1099/Bang/2011 and M.P.100/Bng.2016. It was also submitted that Sasken Communication Technologies Ltd., has high turnover and owns intangibles which will render its comparability with the Assessee as inappropriate. (4) M/s. Geometric Software Solutions Ltd., which according to the learned counsel for the Assessee, fails RPT test as the percentage of RPT in the case of this company is 18.19% and not 11.49% as wrongly computed by the revenue authorities. In this regard our attention was drawn to the decision of the Hon ble ITAT in the case of Net Devices India Pvt.Ltd., wherein at paragraph 7.3 the Tribunal has referred to the RPT of M/s. Geometric Software solutions Ltd., as computed by the TPO himself as 19.34% for the very same AY 05-06. Hence according to him this company has to be regarded as not comparable by applying RPT filter. Besides the above, the learned counsel for the Assessee also pointed out that this company is not functionally comparable as stated by the Assessee in the various submissions filed before the CIT(A) and since the CIT(A) excluded this company by applying 0% RPT filter, the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f being heard to the Assessee. 39. As far as Ground No. 5 6 raised by the revenue is concerned, the learned DR submitted that this Tribunal has in the case of Robert Bosch Engineering and Business Solutions Ltd., (supra) has taken the view, after considering the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. According to him, therefore, the order of CIT(A) excluding companies with huge turnover was not proper. 40. The learned counsel for the Assessee however placed reliance on the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Banglore-Trib) wherein the Tribunal after noticing the decision of the Hon ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. 42. The Assessee s turnover was around ₹ 110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than ₹ 200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above ₹ 200 crores from the list of comparable companies is held to correct and such action does not call for any interference. 43. In view of the above conclusion, the grounds raised in CO for excluding Flextronics Software Ltd., Satyam Computer Services Ltd. and Infosys Technologies Ltd., from the list of comparable companies on the ground of functional and other dissimilarities has become academic and hence is not being adjudicated and left open. 44. As far as Ground Nos .7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany has to be excluded from the list of comparables on the ground of functional dissimilarity, abnormal growth and RPT filter, which according to the Assessee is 34.68%. On the question of comparability of this company, the Assessee in its TP study regarded this company as comparable. However before CIT(A), the Assessee argued that this company was not comparable for the reason of functional dissimilarity and other reasons. The CIT(A) refused to consider the argument on the ground that the Assessee on his own has accepted this company as comparable. 48. The learned counsel for the Assessee submitted that the above company is to be excluded as functionally not comparable with a software development service provider such as the Assessee as held by this Tribunal in the case of Electronics for Imaging India Pvt. Ltd. IT (TP) A.No. 464/Bang/2013 and M/S. Net Devices India Pvt. Ltd. IT(TP) No. 1099/Bang/2011 and M.P.100/Bang/2016. 49. On the aspect whether comparability of this company can be considered in the present proceedings, we find that the Hon ble Gauhati High Court in the case of Assam Company (India) Ltd., (supra) taken the view that it is permissible on part of Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in filing in appeal was due to the delay in taking a decision whether the file an appeal or not before the tribunal keeping in mind the time and efforts involved in litigation. We are of the view that decision to file appeal has to be taken within the time limit provided by the relevant statutory provision. The period of limitation for filing appeal cannot be extended on the ground that a decision could not be taken within the time permitted in law. There are no other facts or circumstances which will warrant taking a liberal view as the grievance of the Assessee has already been addressed in the CO filed by the Assessee against the very same order of the CIT(A) against which the present appeal has been filed. We therefore refuse to condone the delay in filing the appeal as there is no reasonable or sufficient cause made out for filing the appeal belatedly. 53. In the result, appeal by the Assesse is dismissed. ITA No. 1026/Bang/2014 54. This is an appeal by the Revenue against the order dated 18.4.2014 of the CIT(A), LTU, Bangalore. This appeal arises out of assessment of the total income of the Assessee for AY 2005-06 under Sec.147 of the Act. 55. The only ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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