TMI Blog2016 (10) TMI 1238X X X X Extracts X X X X X X X X Extracts X X X X ..... s.143(3) r.w.s. 144C(13) of the I.T. Act, 1961 for the Assessment Year 2009-10. 2. The first ground raised by the assessee relates to disallowance of deduction u/s.35D of the I.T. Act amounting to ₹ 37,60,272/-. 3. The Ld. Counsel for the assessee at the time of hearing did not press this ground for which the Ld. Departmental Representative has no objection. Accordingly, this ground is dismissed as not pressed . 4. The Ld. Counsel for the assessee did not press grounds of appeal No.3 to 3.2 for which the Ld. Departmental Representative has no objection. Accordingly, the above grounds are dismissed as not pressed . 5. Grounds of appeal No.2, 3.3 and 3.4 by the assessee read as under : 2. The Ld. DRP erred in restricting the claim of deduction u/s.10A to ₹ 274,503,805/- as against the claim of ₹ 336,351,781/- made by the assessee. 3.3 The Ld. AO erred in holding that the deduction u/s.10A was not allowable in respect of the disallowance made u/s.40(a)(ia) and 43B. 3.4 The Ld. AO failed to appreciate that the amount disallowed u/s.40(a)(ia) and 43B resulted in higher business income of the assessee company and hence, the deduction u/s.10A ough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions cited before us. The only question to be decided in the impugned grounds is the allowability of deduction u/s/10A on the income due to disallowance u/s.40(a)(ia) and 43B. It is the case of the Assessing Officer that no deduction u/s.10A is allowable on the income increased due to disallowance u/s.40(a)(ia) and 43B. It is the case of the assessee that in view of the decision of the Hon ble Bombay High Court in the case of Gem Plus Jewellery India Pvt. Ltd. (Supra) increased income owing to disallowance u/s.40(a)(ia) and 43B has to be taken into consideration for calculation of deduction u/s.10A. 14.1 The Hon ble Bombay High Court while deciding an identical issue for computation of deduction u/s.10A where disallowance was made u/s.43B has observed as under : For the purposes of the appeal it is necessary to refer to the admitted position which is that the assessee had deposited both the employer's and the employees' contribution towards PF and ESIC, though beyond the due date including the grace period. The AO added these payments to the total income of the assessee and made an addition in the amount of ₹ 71.59 lacs. However, for the deduction under s. 10A, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... answered against the Revenue and in favour of the assessee. 14.2 Respectfully following the decision of the jurisdictional High Court cited (Supra) we hold that the Assessing Officer is not justified in restricting the deduction u/s.10A on account of disallowance u/s.40(a)(ia) and 43B. Grounds of appeal No.4 and 4.1 by the assessee are accordingly allowed. 17.1 The Ld. DR has not been able to controvert the findings of Tribunal in assessee s own case with respect to disallowance u/s. 10A. We do not find any reason to take a different view as there is no material change in the facts and circumstances in the present case. Accordingly, this ground of appeal of the assessee is accepted. The Assessing Officer is directed to allow deduction u/s. 10A to the assessee in the aforesaid terms. 8. Since the facts of the impugned assessment year are identical to the facts of the case decided by the Tribunal in assessee s own case in the immediately preceding assessment year, following the reasonings given therein and in absence of any contrary material brought to our notice against the order of the Tribunal, we direct the AO to allow the claim of the assessee. Grounds raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Reimbursement of expenses incurred by JDIPL on behalf of AEs 10,34,16,525 Reimbursement of Expenses Total 301,77,11,120 12. While the assessee has selected TNMM for the first 4 items, however, the TPO noted that no method has been selected by the assessee for reimbursement of expenses incurred by JDIPL on behalf of AEs. He observed that in TNMM analysis, the operating profits earned by comparables have been computed on operating cost. For benchmarking the international transaction, the assessee has identified comparable companies on the basis of FAR analysis, i.e. Function performed, Risk assumed and Asset utilised. The assessee has referred Prowess and Capitaline plus database to get the information of the comparable companies. It is further mentioned in the TP study report that assessee has selected 21 comparables for benchmarking the Software Development Service transaction. Average PLI of the comparable is arrived at 14.13% whereas the PLI of the assessee is 11.06%. 13. Similarly, in respect of Design Engineering S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies initially selected by the assessee as comparables the TPO rejected 6 companies and introduced 2 new comparables. After allowing the working capital adjustment the TPO computed the margin of 9 comparables in the Software Division at 27.80%. For the Design Engineering Division he computed the margins of comparables at 27.80% in respect of the 8 companies, the details of which are as under : For Software Development Services : Sr. No. Name of the comparable PLI margin (OP/OC) After allowing working capital adjustment 1 Kals Information Technology System Ltd. (SEG.) 41.91% 38.80 2 Goldstone Technologies Ltd. 4.16% 8.98 3 Thirdware Solutions Ltd. 21.90% 20.01 4 Infosys Technologies Ltd. 40.39% 39.60 5 Bodhtree Consulting Ltd. 62.29% 62.33 6 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order, the AO accepted Mindtree Ltd. and R.S. Software (India) Pvt. Ltd. as comparables and rejected Quintegra Solutions Ltd. and Zylog Systems Ltd. as comparable on functional grounds in the Software Division. Similarly, on the basis of the direction of the DRP, the TPO excluded Informed Technologies Ltd. from the list of comparables as ratio of exports to total revenue is only 52.04%. Accordingly, in the final assessment order the AO selected the following 11 companies in the case of Software Division and 7 companies in the case of Design Engineering Division and determined the PLI at 26.10% in the Software Division and 28.29% in the Design Engineering Division, the details of which are under : I. Software Division : Sr.No. Name of the comparable Working capital adjusted margin 1 Kals Information Technology Ltd. 38.80 2 Goldstone Technologies Ltd. 8.98 3 Thirdware Solutions Ltd. 20.01 4 Infosys Technologies Ltd. 39.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own case for A.Y. 2007-08, a copy of which is placed at pages 1 to 54 of the paper book, at para 34 of the order has rejected the said company as a comparable entity on the ground that it is functionally not comparable. Referring to the order of the Tribunal in assessee s own case for A.Y. 2008-09, copy of which is placed at pages 55 to 101 of the paper book, the Ld. counsel for the assessee drew the attention of the Bench to para 20.4 of the order and submitted that the said company has been rejected as a comparable entity in assessee s own case. He accordingly submitted that Infosys Technologies Ltd. should be excluded from the list of comparables. 19. As regards Kals Information Technology System Ltd. is concerned the Ld. Counsel for the assessee drew the attention of the Bench to pages 39 and 40 of the order of the TPO and submitted that the TPO added this company as comparable because there is nothing mentioned at all about the sale of products or development of products in the profit and loss account of the company. The R D expenditure of the company is zero. Further, it was included in the last year. Referring to the order of the DRP he submitted that the DRP observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Bench to para 20.1 of the order and submitted that after thoroughly considering the various submissions made by the assessee the Tribunal has held that Bodhtree Consulting Ltd. is not functionally comparable to the services rendered by the assessee and accordingly directed the AO to exclude the said company from the list of final set of comparables. He accordingly submitted that in view of the decision of the Tribunal in assessee s own case in the immediately preceding assessment year Bodhtree Consulting Ltd. should be excluded from the list of comparables. 23. So far as Aztec Soft Ltd. is concerned the Ld. Counsel for the assessee referred to page 32 of the order of the TPO and submitted that this company has been excluded on the ground that it has related party transactions of more than 25%. Referring to the order of the DRP he submitted that the DRP held the action of the AO for rejecting the same on related party transaction filter is correct and rejected the contention of the assessee. He submitted that while computing the percentage of related party transactions the TPO and the DRP are considering the related party revenue and expenditure in numerator while only reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So far as Design Engineering Division is concerned the Ld. Counsel for the assessee submitted that the turnover of the Design Engineering Division of the assessee company is ₹ 143,01,92,449/- on which the assessee has earned operating profit at 13.07%. The AO made addition of ₹ 19,25,66,724/- by rejecting 6 comparables and considering 2 new comparable companies. The DRP has excluded 1 company and therefore there are total 7 companies in the final list of comparables. The operating margin of the final set of comparables as per the AO comes to 28% as against 13% declared by the assessee. 28. So far as inclusion of Coral Hubs (earlier known as Vishal Information Technologies Ltd.) by the TPO as a comparable is concerned the Ld. Counsel for the assessee drew the attention of the Bench to page 52 of the order of the TPO and submitted that the TPO included the same on the ground that it was also selected by the TPO as a comparable for A.Y. 2008-09. He submitted that Coral Hubs is engaged in e-publishing which itself indicates that the business model of the said company is not comparable with that of the assessee company. Referring to para 24.1 of the order of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... galore Bench of the Tribunal in the case of 3DLPM Ltd. he submitted that the Tribunal has accepted the Bodhtree Consulting Ltd. as a comparable company. Therefore, Bodhtree Consulting Ltd should be considered as comparable company. 33. So far as various other comparables are concerned he heavily relied on the order of the TPO/DRP. 34. The Ld. Counsel for the assessee in his rejoinder referring to page 185 of the paper book submitted that in the case of Kals Information System Ltd. under the head revenue recognition it has been mentioned that the company derives its revenues primarily from Software Services and Software products. Referring to page 183 of the paper book he submitted that the company has inventory of ₹ 71.48 lakhs under the head Software Development . Therefore, this company cannot be considered as a comparable company with that of the assessee company. 35. We have considered the rival arguments made by the both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee company during the impugned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also his submission that there is some calculation error of operating profit in the case of Persistent Systems Pvt. Ltd. 38. We find some force in the above submission of the Ld. Counsel for the assessee. So far as Infosys Technologies Ltd. is concerned, we find the TPO considered this company as a comparable company on the ground that the assessee itself in its TP study report has selected this company as a comparable company. When the assessee approached the DRP for exclusion of the aforesaid company the DRP rejected the objection of the assessee on the ground that the said is an afterthought and cannot be entertained at this stage. We find identical issue had come up before the Tribunal in assessee s own case for A.Y. 2007- 08 where the TPO had considered this company as a comparable company and the DRP had rejected the contention of the assessee to exclude the same. The Tribunal at Para 34 of the order directed the TPO/AO to exclude Infosys Technologies Ltd. from the list of comparables. We find following the decision of the Tribunal in assessee s own case the Tribunal in A.Y. 2008-09 has discussed the issue and directed the TPO/AO to exclude the same from the list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys Technologies Ltd. is about ₹ 20,000/- crores as against the turnover of the assessee company at ₹ 100/- crores, therefore, in view of the decision of the Tribunal in assessee s own case for A.Y. 2007-08 as well as for A.Y. 2008-09 Infosys Technologies Ltd. cannot be considered as a comparable company due to substantial disparity in the scale of operation. We therefore direct the TPO/AO to exclude the same from the list of comparables for the impugned assessment year. 40. So far as Kals Information System Ltd. is concerned we find it is the submission of the Ld. Counsel for the assessee that the said company is functionally different. The TPO added the same company as comparable on the ground that it was included in the list of comparables in the preceding assessment year also. We find the Tribunal in assessee s own case for A.Y. 2007-08 has excluded this company from the list of comparables by relying on various decisions. We find in A.Y. 2008-09 also the Tribunal following the order of the Tribunal in assessee s own case for A.Y. 2007-08 has directed the TPO/AO to exclude this company as comparable by observing as under : 20.5 Kals Information System : T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F. Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services. 37.2 xxxxxxxxxx 37.3 In view of the decision of the Pune Bench of the Tribunal giving reasons for exclusion of Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables because of different functions, we find merit in the submission of the Ld. Counsel for the assessee that the above two companies cannot be included in the list of comparables. We accordingly direct the TPO/AO to exclude Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables. In the assessment year under consideration, no material change has been pointed out by the Revenue in the facts or functions/activities of the assessee. Therefore, for the similar reasons, we direct the TPO/Assessing Officer to exclude Kals Information System Ltd. from the list of comparables. 41. Since the facts of the impugned assessment year are identical to the facts of the case in the two preceding assessment years, therefore, following the order of the Tribunal in assessee s own ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oping 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 Ltd., by referring to the discussion in para 14.1 of the order of TPO. As per the TPO, the material on record does not justify the assertions of the assessee that the said concern was engaged in development and sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, this company has revenue from ITES activity to the extent of ₹ 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3......... 30. We have considered the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing to substantiate its submission that the related party transactions in case of Aztec Soft Ltd. is less than 25% : Name of the party Nature of transactions Amount of Related Party Transactions Aztec Software Inc., USA Onsite Consultancy rendered by the subsidiary 405,528 Aztecsoft Disha Inc., USA Revenue from software development services 518,158 Subsidiaries Reimbursement paid (Aztec Inc Disha Inc) 899 MindTree Limited Income from software development 6,664 Sub-contract services 8450 Total (a) 939,699 Sales as per P L 2,737,798 Expenses as per P L 2,710,035 Total (b) 5,447,833 % of RPT to Total Sales and Expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valid reason in the observations made by the TPO in rejecting the Aztec Soft Ltd. as comparable entity. We, accordingly, direct the TPO/Assessing Officer to include the same in the list of comparables. 46. Since there is some confusion regarding the percentage of the related party transactions, therefore, under the facts of the case, we deem it proper to restore the issue to the file of the AO with a direction to verify the correctness of the related party transactions as given by the assessee in the paper book and, if found correct, to include the same in the list of comparables. 47. As regards the SIP Technologies and Exports Ltd. is concerned, we find the TPO has rejected this company on the ground that it is a persistent loss making company and having diminishing revenue. Further, the said company was rejected by the DRP in A.Y. 2008-09. We find the Tribunal in assessee s own case for A.Y. 2008-09 at para 21.2 has discussed this issue and has directed the TPO/AO to include the said company as comparable entity. The relevant observation of the Tribunal reads as under : 21.2 SIP Technologies and Exports Ltd. : The said company has been excluded from the list of compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the assessee the correct operating margin is 12.52% prior to working capital adjustment. We therefore restore this issue to the file of the TPO/AO to verify the correctness of the operating margin before working capital adjustment and adopt the correct percentage. 50. So far as rejection and selection of certain comparables in the Design Engineering Division are concerned we find the issue is confined to only 3 companies, namely Coral Hubs, Genesys International Corporation Ltd. and Cosmic Global Ltd. 51. So far as Coral Hubs Ltd. (earlier known as Vishal Information Technologies Ltd.) is concerned we find the TPO has selected this company as comparable mainly on the ground that it was also considered as comparable for A.Y. 2008-09. We find on the basis of the submission of the assessee that this company is engaged in e-publishing and therefore the business model of the said company is not comparable with that of the assessee company, the Tribunal in assessee s own case for A.Y. 2008-09 has rejected this company as comparable. The relevant observation of the Tribunal at para 24.1 of the order reads as under : 24.1 Coral Hubs Ltd. (earlier known as Vishal Information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer / TPO to exclude Vishal Information Technologies Ltd. from the list of comparables. 15. Following the decision of the Tribunal referred to above, we hold that Coral Hubs Ltd. cannot be considered as a comparable. It may also be relevant to point out that the TPO in his order has observed that this company is retained as a comparable on the basis of detailed discussion in the TP order for the A.Y. 2007-08. In fact in A.Y. 2007-08, there was no determination of ALP and therefore there was no occasion for any order being passed by the TPO. It is also seen that this company entered into an area of business known as New Vertical Digital Library Print on Demand in F.Y. 2007-08. In the case of Capital IQ Information Systems India Pvt. Ltd. (supra), the ITAT Hyderabad Bench in the case of ITES company considered the comparable of this company as an ITES company and held as follows:- IV. Coral Hub Limited (Earlier known as Vishal Information Technologies Ltd.): 16. The assessee has objected for this company being taken as comparable mainly on the ground that the activities of the company is not only functionally different, but the business model of the company is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Maersk Global Service Centre, (supra), we accept that this company cannot be taken as a comparable. 16. It is also further noticed that the employee cost/operating sales of this company is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%. This Tribunal in the case of First Advantage Offshore Services Ltd. v. CIT, IT(TP)A No.1086/Bang/2011, order dated 30.4.2013, has taken the following view:- 36. Having heard both the parties and having considered their rival contentions and the material on record, we find that this issue had arisen in the assessee s own case for the assessment year 2006-07. This Tribunal has held that employee cost filter is to be the same even for ITES segment also. The learned DR s argument that the employee cost filter is applicable only to software development segment and not to ITES segment is not acceptable. Though it is without any dispute that the software development would require skilled employees and, therefore, the employee cost would definitely be more than 25% of the total expenses, it cannot be said that the said filter is not applicable to ITES segment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the said company is 46.82% which is very much on the higher side. The Ld. Counsel has further pointed out that in the case of Hyundai Motors India Engineering Pvt. Ltd. (supra) and Symphony Marketing Solutions India Pvt. Ltd. (supra), Genesys International Corporation Ltd. have been rejected on the ground of functional disparity. The relevant extract of the order of Hyderabad Bench of the Tribunal in the case of Hyundai Motors India Engineering Pvt. Ltd. (supra) is as under: V. GENESYS INTERNATIONAL CORPORATION LTD. : This company is listed at Sl. No.11 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this company performs R D services and also owns intangibles. This company is a geospatial services content provider specialising in land based technologies. From the notes to accounts of this company, it is seen that this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing cartography, data conversion related computed based services and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Data Research Services P. Limited (supra), following the decision of the Delhi Bench of the Tribunal in the case of Mercer Consulting (India) Ltd. V/s DCIT (vide order dated 6th June, 2014 in ITA No.966/Del/2014), wherein M/s. Cosmic Global Limited was not accepted as comparable by the Tribunal for the following reasons given in paras 13.2 and 13.3 of its order- 13.2. Now coming 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed to exclude the same from the list of comparables. We may clarify here for the sake of completeness that the Learned Departmental Representative has pointed out at the time of hearing before us that M/s. Cosmic Global Limited was initially selected by the assessee company itself as a comparable in the TP study report. In our opinion, this aspect on its own is not sufficient to include M/s. Cosmic Global Ltd. in the list of comparables, as the assessee has always a right to object selection of a company taken as comparable earlier, if it is subsequently found to be not comparable, as a result of difference in functions performed etc., and such objection is required to be considered on merits. The Ld. DR has not been able to controvert the findings of the Tribunal. A perusal of the above order shows that Cosmic Global Ltd. is primarily engaged in providing BPO Services. Outsourcing activity carried out by the said company constitutes 57% of the total operating cost. Hence, the assessee and Cosmic Global Ltd. are functionally different. Accordingly, we hold that Cosmic Global Ltd. has to be excluded from the list of comparable. 56. Facts being similar, therefore, follo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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