TMI Blog2018 (5) TMI 1785X X X X Extracts X X X X X X X X Extracts X X X X ..... d. [2015 (12) TMI 1076 - BOMBAY HIGH COURT] affirming the view of Tribunal on this issue held that the adjustment which is mandated in terms of Chapter X is only in respect of international transaction and not transactions entered into by assessee with independent unrelated third parties. The adjustment in respect of international transactions should be restricted to international transactions and not to the transactions entered into with independent parties. AR has pointed that the CIT(Appeals) has accepted this proposition in assessment years 2002-03 and 2003-04 and the Department did not file any appeal against the order of Commissioner of Income Tax (Appeals) on this issue. This fact has not been rebutted by the DR. Thus, in view of the fact that this issue has been settled by the Jurisdictional High Court we find merit in the ground raised by the assessee. - ITA No.2428/PUN/2012 - - - Dated:- 10-5-2018 - Shri Anil Chaturvedi And Shri Vikas Awasthy, JJ. Assessee by : Shri Nikhil Pathak Revenue by : Shri Rajeev Kumar ORDER Vikas Awasthy, This appeal by the assessee is directed against the assessment order dated 17-10-2012 passed u/s. 143(3) r.w.s. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see: 1.1] The assessee company is engaged in software development business. For this year, the assessee company had computed the book profit as per section 115JB at ₹ 1,00,54,626/-. In the asst. order, the learned A.O. has computed the book profit at ₹ 8,40,79,191/-. As per section 115JB, the amount of brought forward loss or an unabsorbed depreciation whichever is less can be reduced for computing the book profit. In the case of the assessee company, upto 31st March 2006, the total brought forward loss was ₹ 18,10,90,000/- and the unabsorbed depreciation was ₹ 7,32,38,000/-. For F.Y. 2006-07, there was positive income of ₹ 6,87,59,000/- and the assessee had set off the brought forward loss/depreciation against the said amount. After setting off the amount against the income for F.Y. 2006- 07, the assessee recomputed its brought forward loss and unabsorbed depreciation at ₹ 11,23,31,000/- and ₹ 7,32,38,000/- respectively. In this year, there was positive income of ₹ 97,588,084/- and the assessee company set off an amount of ₹ 7,32,38,0001- against the positive income. 1.2] According to the assessee, as per section 115JB, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed depreciation and not from the figure of brought forward loss. It is submitted that the method adopted by the A.O. is also not supported by any provision and hence, the same has to be discarded. The learned A.O. has referred to the AAR decision in the case of Rastriya Ispat Nigam Ltd. With due respect, the said decision is not binding and hence, the A.O. has erred in placing reliance on the same. 1.5] The assessee submits that the method adopted by it has been accepted by the A.O. for the asst. years 2006-07 and 2007-08. Thus, when the Id. A.O. has accepted the claim of the assessee company for two years then in that event, there is no reason to change the stand for the subsequent year. The assessee places reliance on the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang [193 ITR 321] wherein it has been held that if a view has been taken by the A.O. for the earlier years, then the same should be followed for the subsequent years as also when there is no change in facts. Accordingly, the assessee submits that the method adopted by it for determining the book profit should be accepted. 1.6] The assessee also places reliance on the decisions of ITAT, Pun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit should be reduced by an amount of ₹ 52,65,565/-. 2.3] The assessee further submits that the amount of MAT credit entitlement is also deductible from the book profit in terms of clause (i) of Explanation l. It is submitted that clause (i) states that any amount withdrawn from reserve or provision and credited to Profit and Loss account should be reduced while computing the book profit. Now, the MAT credit entitlement is reversal of income tax provision. Further, the income tax provision is not claimed as a deduction while computing book profit and therefore, the reversal of the same should also be reduced while computing the book profit. 5. On the other hand Shri Rajeev Kumar representing the Department vehemently defended the assessment order. The ld. DR submitted that identical issue had come up before the Authority for Advance Ruling (AAR) in the case of Rastriya Ispat Nigam Ltd. (supra). Once, the amount of brought forward loss or unabsorbed depreciation, whichever is less is deducted in computing book profit of a company, the amount of such loss or depreciation, whichever is so deducted to be carried forward to the subsequent years get reduced to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower of brought forward loss or unabsorbed depreciation. Therefore, the Legislature envisaged that while computing book profits for 115JB, reduction be allowed for the lower of carried forward losses or unabsorbed depreciation of the past years. Therefore, the determination of such losses or depreciation in the past years be also made on similar proposition, in the absence of any specific provision in the Statute. Even in the past years, the losses and depreciation to be carried forward be determined on the similar principles, i.e. after setting off of the lower of depreciation or losses. Apart from the fact that there is no specific provision in the Statute, we are also guided by the spirit of section 205(1)(b) of the Companies Act, 1956. In terms of section 205(1)(b) also, the surplus is to be determined after reducing lower of the loss or depreciation. Though strictly speaking the rule of section 205(1)(b) of the Companies Act is not applicable, inasmuch as for the purposes of the said section the expression ―loss includes depreciation, whereas for the purposes of section 115JB it is specifically provided that for clause (iii) of Explanation 1 the expression ―loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the next year has to be done after reducing from the current year s profit either the loss or depreciation, whichever is lower. 8. We find that the decision rendered by AAR in the case of Rastriya Ispat Nigam Ltd. (supra) and the order of Tribunal in the case of Kirloskar Ferrous Industries Ltd. (supra) are unanimous in the manner of computation of book profits, as provided in clause (iii) to Explanation 1 of section 115JB of the Act. We are of considered view that the issue raised in ground No. 1.1 of the appeal needs revisit to the file of Assessing Officer for fresh computation of book profits in line with the manner explained by the Co-ordinate Bench in the case of Kirloskar Ferrous Industries Ltd. (supra). 9. As regards MAT credit entitlement of ₹ 52,65,565/- is concerned, the contention of the assessee is that the same is arising on account of prepayment of Income Tax. The Hon‟ble Supreme Court of India in the case of Tulsyan NEC Ltd. (supra) has held as under : ―9. We have discussed hereinabove the scheme of s. 115JA(1) and s. 115JAA. The entire scheme of ss. 115JA(1) and 115JAA shows that if an assessee is entitled to a tax credit as a consequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dice to provisions of sub-s. (2), an intimation will be sent to the assessee specifying the amount so payable and such intimation shall be deemed to be a notice of demand under s. 156 and all the provisions of the Act shall apply thereto. This section itself makes it clear that whilst the AO determines the tax payable he has to give credit for all taxes paid either by way of deduction at source, advance tax, self-assessment tax or tax paid otherwise which would include or which cannot exclude tax credit under s. 115JAA(1). However, the question before us is of priority of adjustment for the MAT credit. In this connection, it is important to bear in mind that the credit allowed is the excess of the normal tax liability over MAT liability in the subsequent years. In this connection the following illustration on MAT credit be seen : Particulars Amount (Rs.) Year 1 115JB liability 1,600 Normal tax liability 400 Credit which can be carried forward-I 1200 Year 2 115JB liability (A) 600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next ground raised in the appeal is with respect to transfer pricing adjustment. The grounds raised by the assessee in appeal reads as under : ―2] The learned DRP/A.O. erred in making an addition of ₹ 12,27,18,401/- by recomputing the transfer price of the international transactions relating to software development services provided by the appellant to its AEs. 2.1] The learned DRP/A.O. erred in rejecting the CUP method as the most appropriate method in respect of software services provided to Dimension Data Management Services (Pty) Ltd., Data Craft Asia and Dimension Data Advanced Infrastructure Ltd. without appreciating that the said method was the most appropriate method for determining the ALP. 2.2] The learned DRP / A.O. erred in rejecting the various companies considered as comparable entities by the assessee company while determining the ALP in respect of the provision of software development services without appreciating that the companies selected by the assessee were comparable as per the FAR analysis and hence, there was no reason to reject them. 2.3] The learned DRP / A.O. erred in including various companies as comparable with the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Paracon S A (Pty) Ltd. Channel commission paid 79,77,206/- 7 Dimension Data Network Services Ltd. Reimbursement of rent 4,85,227/- CUP Total 33,41,89,034/- 3.2] The assessee followed Comparable Uncontrolled Price (CUP) Method for determining the Arm's Length Price (ALP) of the software services provided to Dimension Data Management Services (PTY) Ltd., Data Craft Asia and Dimension Data Advanced Infrastructure Ltd. For the software services provided Paracon SA (PTY) Ltd. and Nihilent Technologies Inc., the assessee followed Transactional Net Margin Method (TNMM) to determine the ALP. 3.3] The assessee while applying TNMM identified 26 companies as comparables and the list of the companies is given on page 11 of the TPO's order. The assessee computed the operating margin at 12.61% while the operating margin of the assessee for this year was 12.90%. Accordingly, it was contended that the transactions entered into with the AEs were at ALP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arithmetic Mean 22.01% 20.77% 3.6] The assessee submits that the average margin of the comparables is 20.77% while the operating margin of the assessee is 12.90%. On the said basis, the final addition of ₹ 12,27,18,401l- is made by the A.O. The various issues arising are discussed hereunder 3.7] Objection of the assessee in the inclusion of foreign companies- 1 Bodhtree Consulting Ltd. a. ITAT, Pune in the case of Barclays Technology Centre India (P) Ltd. has held that the said company is not exclusively engaged in software development services and hence, the same cannot be considered as comparable entity. Refer paras 20-24 of the order. Pages 126 - 142 of the legal compilation. b. Similar view has also been taken in the case of John Deere India Pvt. [ITA No. 2236/Pn/2012 for A.Y. 2008- 09. The copy of the said decision is given on pages 143- 189 of legal compilation. The issue regarding exclusion of Bodhtree is discussed in para 20.1 [pages 161-164 of the legal compilation]. c. Similar view has been taken by Hon'ble ITAT, Pune in the case of Emptoris Technologies Pvt. Ltd. which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 94 - 95 of the paper book. The correct margin of Helios after excluding income IS 33.40 % before allowing working capital adjustment. 4 Kals Information System a. ITAT, Pune in the case of Symphony Services Pune (P) Ltd. for A.Y. 2008-09 has held that the said company IS engaged in different activities and hence, cannot be compared with assessee company. b. ITAT, Pune in the case of Barclays Technology Centre India (P) Ltd. has held that the said company is not exclusively engaged in software development services and hence, the same cannot be considered as comparable entity. c. Similar view has been taken by Hon'ble ITAT, Pune in the case of Emptoris Technologies Pvt. Ltd. which was also engaged in software development. The asst. year involved was also A.Y. 2008 - 09. (Refer paras 10, 11 14 of the said order) d. Similar view has been taken in the case of PTC Software India Pvt. Ltd. for A.Y. 2008- 09 wherein it has been held that Helios is functionally not comparable. Refer paras 5 - 8 of the order, pages 212 - 224 of the legal compilation. 5 Goldstone Technologies Ltd. a. This company has been rejected as a comparable entity by Hon'ble ITAT, Pune in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2008 - 09, SIP Technologies has been held to be comparable and the reason given for excluding that it has incurred loss has not been accepted by Hon'ble ITAT. The relevant issue is discussed in para 21.2 of the order. Accordingly, in view of the decision of Hon'ble ITAT, Pune, SIP Technologies should be considered as a comparable entity. 3 CG-VAK Software Exports Ltd. (Segmental) a. During the course of the proceedings before the TPO, the assessee contended that this company IS comparable and should be considered in the final list of comparables. This was an additional comparable submitted by the assessee which was not selected in the original transfer pricing study. b. The TPO has rejected CG V AK on the ground that it is a loss-making entity. c. The assessee submits that in the case of TIBCO Software India Pvt. Ltd. for the same asst. year has held that CG- V AK is to be considered as a comparable entity. Hon'ble ITAT has discussed this issue in paras 26 - 29, pages 16 - 18 of the legal compilation. d. It has been held by Hon'ble ITAT that CG VAK is not a persistently loss-making entity and therefore, the rejection of the said company by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g issue 15. The ld. Counsel for the assessee has stated at the Bar that he is not pressing ground No. 2.1. The same is dismissed, accordingly. 16. In ground No. 2.2 the assessee has assailed rejection of various companies considered as comparable entities by the assessee company while determining the ALP. The assessee in appeal has now sought inclusion of : i. Aztec Soft Ltd. ii. SIP Technologies and Exports Ltd. iii. CG-VAK Software Exports Ltd. (Segmental). iv. ThinkSoft Global Services Ltd. The assessee in its TP study report had selected 26 companies as comparables. The TPO rejected some of the companies and introduced some fresh companies as comparables. We find that from the above mentioned four companies Aztec Soft Ltd. and SIP Technologies and Exports Ltd. were already part of assessee‟s TP study report. As far as other two companies are concerned the assessee during proceedings before the TPO had prayed for including these companies in the list of comparables. Before we proceed to decide this issue it would be relevant to point that during transfer pricing proceedings the TPO had applied following filters for selecting the comparables : (i) Singl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.12% F.Y. 2007-08 -33.20% The contention of the assessee is that the said company is not a persistent loss making company. Only for the reason that the comparable has suffered loss in one year the same should not be rejected. We find merit in the submission of the Ld. A.R. In the case of Bobst India Pvt. Ltd. Vs. DCIT in ITA No.1380/PN/2010 for A.Y. 2006-07 the Tribunal has observed that only persistent loss making companies should be held as not good comparable. The Tribunal held that the persistent loss means, continuous loss for more than 3 years. Thus, where the comparable entity is not under persistent loss, the same should not be rejected as comparable. Similar view has been taken in the case of Goldman Sachs (India) Securities Pvt. Ltd. Vs. ACIT, ITA No.7724/Mum/2011, and Brigade Global Vs. ITO, ITA No.1494/Hyd/2010. In the present case, the comparable entity SIP Technologies Exports Ltd. has suffered loss in F.Y. 2007-08 only. Therefore, it cannot be said to be a persistent loss making company. The authorities below have thus erred in excluding the same from the list of comparable entities. We direct the TPO/AO to include the aforesaid company as comparable entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d there is nothing to suggest in the present case that it has been incurred in any abnormal situation. It is also not the case of the Revenue that the said concern is a consistently loss making concern. Therefore, the said concern cannot be excluded merely because of incurrence of loss in this year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. Thus, on this aspect, assessee succeeds. Thus, in view of the facts of the case and the decision of Co-ordinate Bench of the Tribunal we direct the TPO/Assessing Officer to include CGVAK Software Exports Ltd. (Segmental) in the final list of comparables. (iv). ThinkSoft Global Services Ltd. The TPO has rejected the company on the ground of functional disparity. The ld. AR has drawn our attention to the order of Tribunal in the case of TIBCO Software India Pvt. Ltd. Vs. Dy. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development, in our view is a hairsplitting argument, which is not justified in the context of the present comparability analysis. Ostensibly, Verification and Validation are broadly speaking, a part and parcel of the process of software development. Therefore, on this aspect, we are unable to uphold the action of lower authorities in excluding the said concern from the final set of comparables. We direct, accordingly. The ld. DR has not been able to controvert the findings of Coordinate Bench on this issue. Thus, taking into consideration the facts of the case and the decision of Co-ordinate Bench, we direct the TPO/Assessing Officer to include ThinkSoft Global Services Ltd. in the final list of comparables. 17. Thus, in view of our above findings with respect to inclusion of various companies in the list of comparables, the ground No. 2.2 raised in the appeal by the assessee is partly allowed. 18. In ground No. 2.3 of the appeal the assessee has assailed inclusion of following companies in the final list of comparables : i. Bodhtree Consulting Ltd. ii. E-Zest Solutions Ltd. iii. Helios Matheson Information Tech. iv. Kals Information System. v. Golds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . fixed price project method, whereby revenues from software development is recognized based on software developed and billed to the clients. It has been explained that in such a situation, expenditure for developing software would be billed in an earlier year but the income would be recognized in a subsequent year. This business model results in fluctuation in margins over the years. The counsel for the assessee submitted that the Pune Bench of the Tribunal in the case of QLogic (India) Private Limited vs. DCIT (ITA No.227/PN/2014) for assessment year 2009-10 dated 21.10.2014 has excluded the said concern from the list of comparables in a similar situation by following the decision of the Bangalore Bench of the Tribunal in the case of M/s. Mindteck (India) Ltd., vide I.T.(TP).A.No.70/Bang/2014 dated 21-08-2014. The decision of the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. vide ITA No.7633/M/2012 dated 06-11-2013 for assessment year 2008-09 has also been relied upon for excluding the said concern from the final set of comparables. 21. On the other hand the Ld. CIT-DR appearing for the Revenue has defended the inclusion of Bodhtree Consulting Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under: 29.1 The Ld Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as, the assessee is in the business of software development and related services. The Tribunal in the case of Symphony Services Pune (P) Ltd. Vs. ITO in ITA No.257/PN/2013 for A.Y. 2008-09 decided on 30-04-2014 has held as under : ―23. We have carefully considered the rival submissions. In this context, we find that before the TPO relied upon the information available on the website of the said concern and submitted that the said concern was engaged in e-business consultancy services, consisting of web strategy services, ITES services, and in technology consultancy services including portal development services, etc.. It is sought to be explained that such kind of services are ITES services which are understood as KPO services. It was also pointed out that the said concern has not provided any segmental data in its Annual Report. Before us, it is sought to be contended that the KPO services are not comparable to the software development services being rendered by the assessee and therefore concerns which render KPO services cannot be considered as functionally comparable to the concerns who render software development services. For the said p1ro3position, reliance has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le was rejected by the Tribunal in assessee s own case for assessment year 2007- 08 on the ground that it is functionally different. The relevant extract of the order of the Tribunal in ITA No. 1319/PN/2011 for the assessment year 2007-08 decided on 10-10-2014 is reproduced here-in-under: ―36. So far as Helios and Matherson Information Technology Ltd., is concerned, we find the Pune Bench of the Tribunal in the case of PTC Software Ltd., has excluded the same from the list of comparables by observing as under : ―20. With regard to the inclusion of Helios Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved as under : 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals' Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. 37.1 Similarly, we find the Pune Bench of the Tribunal in the case of PTC Software Ltd., (Supra) has observed as under : ―16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios Matheson Information Technology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. 17. The learned Authorized Representative for the assessee pointed out that before the DRP, it was pointed out that the said concern Goldstone Technologies Ltd. was engaged in the activities related to Media IP TV and further, the company had carried inventory of set top boxes and movie rights in its Balance Sheet for the previous year. In addition, the said company had some income from sale of industrial material. Looking at the services provided by the said concern, it is clear that the same are functionally dissimilar to the services provided by the assessee and there is no merit in comparing the results of the said concern while benchmarking the international transaction of the assessee. Accordingly, we direct the Assessing Officer to exclude Goldstone Technologies Ltd. Thus, in view of the facts of the case and the decision of Co-ordinate Bench we direct the TPO/Assessing Officer to exclude Goldstone Technologies Ltd. from the final list of comparables. 20. Thus, in view of our above findings, the ground No. 2.3 raised in the appeal by the assessee relating to inclusion of various companies in the list of comparables is allowed. 21. The ld. AR of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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