TMI Blog2017 (3) TMI 1734X X X X Extracts X X X X X X X X Extracts X X X X ..... client. This ground is disposed off with the directions as above Disallowance of rent equalization - assessee provided this sum towards rent equalization in accordance with AS 19-Leases, as notified by the Ministry of Corporate affairs under the Companies (Accounting Standards) Rules 2006 - AO held that since no such known liability exists, the claim is not allowable - Held that:- As pointed out by the DR, we find that the assessee has not raised any objection on this issue before the DRP. Since, this issue has attained finality, we don't entertain this ground. TPA - ALP determination - MAM - assessee had adopted Transactional Net Margin Method (TNMM) to arrive at the Arm's Length Price with 14 comparables - Held that:- Assessee is into providing software development services to its AEs thus companies functionally dissimilar with that of assessee need to be deselected from final list. Idle costs incurred by the assessee on account of excess capacity considered by the TPO as operating costs for arriving the ALP - Held that:- Adjustments have been made for the expenses on idle infrastructure and manpower incurred by the assessee which was not the case with the companies ado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP but for remitting one issue, dismissed all other issues under consideration of this appeal. Aggrieved, the assessee filed a lengthy grounds of appeal and later on filed a concise grounds as under : Ground I - Toss on Derivatives disallowed ₹ 10,00,000/- 1. The Assessing authority has erred in disallowing, and the Dispute Resolution Panel (DRP) in upholding, the provision for mark-to-market loss on derivatives amounting to ₹ 10,00,000/- created by your appellant during the year based on the principles articulated in .Accounting Standard-1 and pursuant to the pronouncement of Institute of Chartered Accountants of India dated 29/03/2008. Ground II - Customs Duty disallowed ₹ 38,860/- 2. The Assessing authority has erred in disallowing, and the Dispute Resolution Panel (DRP) in upholding, the customs duty amounting to ₹ 38,860/- paid on import of equipments/ items used for client's projects which was subsequently hilled to customers and offered to tax. Ground III - Rent equalisation disallowed ₹ 18,82,94- 3. The assessing authority has erred in disallowing, and the Dispute Resolution Panel (DRP) upholding, the provision for ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO. (h) The TPO has erred in rejecting Nihar Infor Global Limited by concluding that the company is a product company while note to accounts and reply u/s 133(6) states that company provides services to clients - domestic and overseas. (i) The TPO has erred in rejecting Akshay Software Technologies Limited by concluding that the company does not qualify for (onsite revenue filter. The TPO has relied on information obtained u/s 133(6) of the Income Tax, 1961 for rejecting this company as a comparable. (j) The TPO has erred in rejecting Globsyn Infotech Limited by concluding that the current year data is not available while the data was available in public domain. 8. The TPO has erred in acting upon information collected u/s 133(6) of the Income Tax Act, 1961, which is not in the public domain and therefore not available to your appellant. 9. The TPO has erred in adopting certain companies as comparables even though they are not comparable in view of differences in functions performed, risk assumed, assets utilized, size, turnover etc. and fail the tests adopted by the TPO: (a) The TPO has erred in selecting the following companies which are functionally diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained guidance on accounting for derivatives. This Standard became recommendatory from April 1, 2009 and mandatory from April 1, 2011. However, vide an announcement dated March 29, 2008, the ICAI council had expressed their view that since the aforesaid standard contained appropriate accounting for derivatives, the same could be followed by entities from an earlier date, as the earlier adoption of a standard was always encouraged. Further, in case an entity did not follow AS- 30, keeping in view the principle of prudence as enunciated in AS-1: Disclosure of Accounting Policies, entities were required to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market. Pursuant to the ICAI's above mentioned announcement , the assessee created a provision for mark-to -market loss on derivatives amounting to ₹ 1,000,000 based on the principles of prudence enunciated in AS-1 and placed reliance on the ratios in Mumbai Special Bench of the Income- tax Appellate Tribunal in the case of Dy. CIT (International Taxation) v. Bank of Bahrain Kuwait [2010] 41 SOT 290, the Apex Court decision in the case of CIT v. Woodward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be allowed. We heard the rival submissions. As pointed out by the DR, we find that the assessee has not raised any objection on this issue before the DRP. Since, this issue has attained finality, we don't entertain this ground. 7. The next issue argued is that the assessee has objected to certain comparables selected by the TPO and upheld by the DRP. Out of the final set of 20 comparables sustained by the TPO, the assessee sought exclusion of 13 comparables , mainly on account of functional dissimilarity. In support of it, it relied on 2 of this Tribunal decisions and one decision from the Mumbai Tribunal. They are dealt as under: 7.1 The assessee submitted that the comparables, Avani Cincom Technologies, Celestial Biolabs, Infosys Techologies Ltd, Kals information Systems Ltd(Seg) , Tata Elxsi ltd(Seg) Wipro Ltd (Seg) are functionally different. Celestial Biolabs, apart from functionally different, does not satisfy employee cost filter and had abnormal profit. For excluding them, it relied on this Tribunal decision in Curam Software International (P.) Ltd v. ITO [2013] 37 taxmann.com 141/[2014] 149 ITD 458 (Bang.-Trib), which has characterized itself as a provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that it would continue to be applicable for F.Y. 2007-08 that too vis- -vis the assessee, in the case on hand, which is a different entity from Triology E-Business Software India Pvt. Ltd.. 9.4 The learned Authorised Representative, in rejoinder to the submissions of the learned Departmental Representative, contended that the functional profile of the comparable company continues to remain the same for this year also i.e. software products, whereas the assessee in the case on hand provided software development and support services to its AE and therefore it was clearly functionally different. The learned Authorised Representative also reiterated the submissions made earlier that the Annual Report of the comparable company in the public domain was not complete and that the information received by the TPO under section 133(6) of the Act has not been shared with the assessee. 9.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Trilogy E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer/TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. 10. (2) Celestial Biolabs Ltd. 10.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Prediction tool CLL-TOX to predict the toxicity of a given molecule. Your company filed IPR by filing under the Copyright/Patent Act (Appraised and funded by Department of Scientific Industrial Research.) The company has developed an ERP product CELL VISION using Microsoft Technologies. Cell Vision is a custom implemented product which caters to the needs of many industrial segments. The company is foreseeing good reserves during the years to come. Your company also developed a portal called Sanjeevani India.Com. (vi) Schedule 7 of the financial statements on page 25 of the Annual Report indicates that the company has significant product development expenditure pertaining to Drug Molecule and Celsuite. (vii) Turnover under Notes on Accounts for financial statements on page 35 of the Annual Report states that the turnover from bio informatics services, data warehousing and mixing, software development, products and services for F.Y. 2007-08 is 2021.12 lakhs. 10.2.2 The assessee also placed reliance in support of its stand that this company be excluded from the list of comparable companies on the following decisions of the co-ordinate benches of this Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In view of the fact that the financial profile and other parameters of this company have not changed during the year under consideration, which fact has been demonstrated by the assessee, following the decision of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra), we hold that the company ought to be excluded from the list of comparables. It is ordered accordingly. 11.0 (3) KALS Information Systems Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on the grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 11.2 Before us, the assessee con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-ordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details called out from the Annual Report and quoted above (supra). 11.4 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. As discussed earlier in this order, there is merit in the contention of the learned Departmental Representative that the ruling rendered in the case of Triology E-Business India Pvt. Ltd. (supra) was with respect to an earlier period i.e. F.Y. 2006-07 and there cannot be an assumption or presumption that it is applicable for the year under consideration as well. At the same time, we find that the TPO has drawn conclusions on the basis of information obtained under section 133(6) of the Act, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development expenditure to the tune of approximately ₹ 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions:- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. - (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 14.0 (6) Tata Elxsi Ltd. 14.1 This company was a comparable selected by the TPO. Before the TPO, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. ' Since this Tribunal has found that the comparables, Celestial Biolabs, Infosys Techologies Ltd, Kals information Systems Ltd (Seg) , Tata Elxsi Ltd (Seg) Wipro Ltd (Seg) are functionally different, following it , the TPO/AO is directed to exclude them from the list of comparables. However, the issue related to the comparable , Avani Cincom Technologies , which was included on the basis of information obtained u/s 133(6) by the TPO is remitted back to him for re-adjudication in the similar manner, this Tribunal has done in the above case. 7.2. The assessee submitted that the comparables, E-Zest Solution ltd, Persistent Systems Ltd, Quintegra Solution Ltd, Thirdware Solution Ltd and Lucid S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q InformationSystems (India) (P) Ltd. (Supra) that KPO ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 16. Lucid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 17. Persistent Systems Ltd. 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 18. Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of the Tribunal in the case of M/s. Wilts Processing Services (I) P Ltd. (supra) wherein it was mentioned that the TPO 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 ld 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 lates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO has apportioned unallocable expenses to the extent of ₹ 10,68,65,255/- based on the proportion of sales to Associated Enterprises and Non- Associated Enterprises. These expenses were in the nature of costs relating to idle capacity during the year arising from underutilizing the premises/employees. Hence, allocation of the same to the AE or non AE segments is not correct since it does not relate directly or indirectly to those transactions. These costs represent costs on excess/idle capacity in respect of infrastructure and bench costs which were not used for these transactions at all. It was venturing into the newer markets and had set up branches/sales offices outside India in order to expand its business. In the IT services business, the people form the backbone and as an operating model, the plan was to create the pool of resources in the technology spaces where the appellant company was expecting the potential in respective markets. From a marketing and sales point of view, it is important that it has skilled resources pool available to take on new projects. These idle costs are an essential part of acquiring new clients and entering into business and certainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (as per annexure M of Paper book I Page no 14). Reliance was also placed on the following decisions: (a) Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1 (Delhi) (b) ACIT v. Fiat India (P.) Ltd. 2010-TII-30 ITAT Mum TP (c) Google India (P) Ltd. v. Dy. CIT [2013] 29 taxmann.com 412/55 SOT 489 (Bang.-Trib) Hence, adjustments have been made for the expenses on idle infrastructure and manpower incurred by the assessee which was not the case with the companies adopted as comparables by the assessee. Hence, margins of transactions with AEs excluding idle costs have been considered. The margin on cost calculated by the TPO after apportionment of idle cost was - 8.95% as against the margin of 27.11% computed by the appellant. In view of that the assessee sought suitable adjustment for idle costs for excess capacity. We have heard the rival submissions. We find that this issue is a purely factual one and minute details are required to be verified and examined. Therefore, this issue requires proper verification and examination. Accordingly, we set aside this issue to the record of the TPO/AO to verify all the facts and then decide this issue as per law. 9. In the resul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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