9911796707
TMI Blog2017 (3) TMI 1734X X X X Extracts X X X X X X X X Extracts X X X X ..... S. It filed its return on 30.9.2008 with a Nil income and a loss of Rs. 14,11,62,551/- 3. On its international transactions, the assessee had adopted Transactional Net Margin Method (TNMM) to arrive at the Arm's Length Price with 14 comparables. Although, the TPO accepted Transactional Net Margin Method but rejected the assessee's TP study, rejected 11 comparables out of 14 chosen by the assessee, introduced 17 new comparables, arrived an adjusted mean margin at 23.58% as against the assessee's margin of 27.11% and made an addition at Rs. 2,48,34,842/-. The AO made made various other additions/disallowances in respect of the domestic corporate tax front. On the assessee's objections, the 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 Rs. 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 Rs. 10,00,000/- created by your appellant during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in rejecting Saksoft Limited by concluding that the segment reports were not available while in notes to accounts it is stated that company provides IT services. (e) The TPO has erred in rejecting Sagar Soft (India) Limited by concluding that company has more than 25% related party transactions while notes to accounts of the company do not indicate any related party transaction. (f) The TPO has erred in rejecting VGL Softech Limited by Stating that no replies were received for notices sent u/s 133(6). (g) The TPO has erred in rejecting E 2 E Infotech Limited by concluding that 100% sales are forex transaction and no other reason has been specified by the 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally different, does not satisfy employee cost filter and has abnormal profit. 10. The TPO has erred in not considering Circular No.12/2001 dated 23.08.2001 issued by the CBDT which stipulates that the ALP adopted by the taxpayer will hold good if it is within the range of +/- 5% of the ALP computed by the TPO. 4. The first issue argued is that the A O has erred in disallowing and the DRP in upholding the provision for mark-to-market loss on derivatives at Rs. 1,000,000 on the basis that such loss is notional, cannot be debited to the Profit and loss account and treated as an allowable expenditure. In this regard, the assessee submitted that the ICAI had issued AS 30 - Financial Instruments: Recognition and Measurement, which 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 c ..... X 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". Since this issue is remitted back to the AO, we hold that the DRP's decision does not require any interference. 6. The next issue argued is on the disallowance of rent equalization at Rs. 18,82,944/-. The 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. The AO held that since no such known liability exists, the claim is not allowable and hence added to the total income. The assessee pleaded that the rent equalization charges are debited to the P& L account , it is in accordance with AS-19 and hence it should 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 , ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al decisions : (i) Trilogy E-Business Software India Pvt. Ltd. v. DCIT (ITA No.1054/Bang/2011) (ii) Telecordia Technologies India Pvt Ltd v. ACIT (ITA No.7821/Mum/2011) 9.3 Per contra, the learned Departmental Representative supported the inclusion of the aforesaid company in the final list of comparables by the TPO. The learned Departmental Representative argued that the ruling of the co-ordinate bench in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) relied on by the assessee was rendered in the factual context of the position that existed for Financial Year 2006-07 vis-à-vis this comparable company and Trilogy E-Business Software India Pvt. Ltd. and there cannot be an assumption that it would continue to be applicable for F.Y. 2007-08 that too vis-à-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier 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 comparabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Development, etc., with an estimated project cost of Rs. 50 Crores." (iv) "Financials" in Management Discussion & Analysis on page 16 of the Annual Report states :- " ..... The company has achieved a turnover of Rs. 2,021.12 lakhs from sales and services against the turnover of Rs. 1,412.76 lakhs in the previous fiscal year. The sales are higher by 608.36%. The growth has been achieved through services made in Bio-technology, Implementations, Product Development, I T Enabled Services and also through rational spending in costs...." (v) "Business Analysis" in the Management Discussion & Analysis on page 16 of the Annual Report states :- "Products The company has developed Taxability 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 porta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s defective. 10.5.2 Further, besides relying on the decision of the co-ordinate bench in the case of Triology E-Business Software India Pvt. Ltd. (supra), the assessee has demonstrated that the finding given therein for Assessment Year 2007-08 is applicable for this year also. Further, the assessee has also brought on record substantial evidence by quoting from various portions of the Annual Report that this company is functionally different from the assessee and hence is not comparable to the assessee in the case on hand. We agree with the submissions made by the assessee, that as per the details from the Annual Report of this company, it is functionally different from the assessee. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egmental information provided under 'Notes on Accounts' of the Annual Report provides the break-up of revenues from two segments, namely 'Application Software' and 'Training' which shows that revenue from software products forms part of Application Software and there are no segmental details. (v) The assessee also placed reliance on the judicial decisions rendered in the following cases : (a) Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) (b) Mercedes Benz Research & Development India Pvt. Ltd. (IT(TP)A No.1222/Bang/2011). 11.3 Per contra, the learned Departmental Representative contended that the decision of the 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 ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xt has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs. 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/Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles/IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the software products produced by the company. As such, no segmental data is adequately available too. 22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing it , we direct the AO/TPO is directed to exclude it from the list of final comparables for working out the arithmetic mean 8. The next issue argued is that the idle costs incurred by the assessee on account of excess capacity was wrongly considered by the TPO as operating costs for arriving the ALP. In this regard, the assessee submitted that the idle costs incurred by it on account of excess capacity was wrongly considered by the TPO as part of operating costs for arriving at the Arm's length price without giving any opportunity to the assessee to file its objections . The TPO has apportioned unallocable expenses to the extent of Rs. 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been excluded for the purpose of arriving at PLI. In any business organization, some costs are fixed and others vary with output. For example, depreciation and maintenance costs associated with plant and equipment or facility continue to be incurred regardless of the volume of revenue generating activities. Employee costs are also fixed costs. It was held in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715/53 SOT 159 (Bang.) that adjustments are to be made for underutilization of infrastructure and idle bench strength. (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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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