TMI Blog2016 (6) TMI 1361X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed through unusual or abnormal business circumstances. Under these circumstances, we do not find this company as a safe and reliable to be used as a comparable company. Sonata Software Ltd. related party transactions to sales ratio is more than 40% during the A.Y. 2009-10, but keeping in view request of Ld. CIT-DR and to meet ends of justice, we find it appropriate to send it back to the file of the AO/TPO to compute the same properly and exclude it from the list of comparables if ratio of RPT to Sales is found to be more than 25%. The assessee shall be free to raise any legal or factual issue with respect to this comparable. The AO/TPO shall give adequate opportunity of hearing to the assessee to submit requisite details and evidences and case laws in support of its claim, which shall be taken into consideration on objective basis before deciding this issue afresh. Working Capital Adjustment - MERCER CONSULTING (INDIA) PVT. LTD. VERSUS DCIT, CIRCLE-2, GURGAON [ 2014 (7) TMI 715 - ITAT DELHI] held that the issue of working capital would be relevant only when there is a situation of inventory remaining tied up or receivables being held up. The assessee contests the non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere has been some confusion with regard to appreciation of factual evidences. It has been shown to us that complete evidences including agreement and other various evidences were available. But AO has mentioned in the assessment order that the agreement filed with the AO was not eligible and it was not properly stamped. No proper discussion has been made by the DRP also in its order. Under these circumstances, we find it appropriate to send this issue back to the file of the AO to enable him to make proper verification of facts and evidences to analyze the other prescribed conditions. The deduction cannot be denied merely on the ground that the unit was acquired under slump sale. The AO shall give adequate opportunity of hearing to the assessee before deciding this issue afresh. Thus, with these directions this issue is sent back to the file of the AO with the directions given above. Reducing foreign currency expenses only from export turnover and not from total turnover while calculating the amount of deduction u/s 10A in respect of the other units - HELD THAT:- Respectfully following the decision of the Tribunal in assessee s own case for the earlier years [ 2016 (1) TMI 1415 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertently considering the interest on overdue receivables as per the submission dated 22 October, 2012 instead of submission dated 1 November, 2012 (referred to in the TP Order). Accordingly, the adjustment in relation to notional interest on overdue receivables amounted to ₹ 2,63,31,853 instead of ₹ 1,08,69,820. 3. Ground No.3 - On the facts and circumstances of the case, the Hon'ble DRP erred in not directing the Learned AO/ TPO to grant working capital adjustment by making an incorrect observation that the Appellant did not claim the working capital adjustment in its TP study. The Appellant prays that the Learned AO/ TPO be directed to grant the working capital adjustment. DT Grounds: 4. Ground No. 4 - Disallowance of project risk expenses 4.1 On the facts and in the circumstances of the case and in law, the Learned AO has erred in disallowing an amount of ₹ 1,08,17,012 in respect of project risk expenses incurred by the Appellant pertaining to contract entered with HPCL. 4.2 Without prejudice to ground no. 4.1 above, the Company requests your Honour to direct the Learned A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total turnover thereby reducing the benefit of deduction under section 10A by ₹ 6,89,82,112 in respect of the remaining units. 7. Ground No.7. Denial of set-off of brought forward losses and unabsorbed depreciation of Sema Software India Private Limited 7.1 On the facts and circumstances of the case and in law, the Learned AO erred in denying the set-off of brought forward losses and unabsorbed depreciation of entity taken over i.e. Sema Software India Private Limited. Ground No. 8- Short credit of TDS, advance taxes and self assessment tax 8.1 On the facts and in the circumstances of the case, the Learned AO has erred granting short credit of TDS, advance tax and self assessment tax to the extent of ₹ 99,05,886, ₹ 82,00,000 and 15,79,545 respectively. Ground No.9- Excess levy of interest under section 234B and 234C of the Act 9.1On the facts and in the circumstances of the case, the Learned AO has erred in levying excess interest under section 234B and 234C of the Act. 10. Ground No. 10- Initiation of penalty proceedings 10.1 On the facts and in the circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order, according to which the margin of the assessee taking OP/TC as its PLI (Profit Level Indicator) came out to be 21.52% as against 14.76% as shown by the assessee for its software segment. Consequently, an adjustment for ₹ 24,96,72,932/- was proposed by the TPO. Further, for the SSIPL software development segment, the assessee had shown OP/TC of 14.16% as against 21.52% as determined by the TPO on the basis of Accept-Reject Matrix of the comparables. Consequently, an adjustment of ₹ 17,08,627/- was proposed by the TPO. Thus, aggregate adjustment of ₹ 25,13,81,559/- (i.e. ₹ 24,96,72,932 + 17,08,627) was proposed by the TPO in its order. 4.2. Being aggrieved, the assessee had filed an objection before the DRP where no relief was given and order of the TPO was upheld. 4.3. Being aggrieved, the assessee filed an appeal before the Tribunal. 4.4. During the course of hearing before us, Ld. Counsel of the assessee submitted that with a view to reduce and narrow down the controversy, the assessee wishes to contest now only three comparables as were selected by the TPO and requests for exclusion of same, as per details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny objections made on behalf of the revenue were not considered. It was further submitted that there is no relation between margin and turnover and therefore, there was no justification of removing comparables like Infosys Ltd, merely because it has a large scale of operations. He relied upon the judgment of Mumbai Bench of ITAT in the case of Willis Processing dated 01.03.2013 in support of his proposition that Infosys Ltd. should not be excluded. He also relied upon the judgment of Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) P. Ltd. v. DCIT 376 ITR 183. 5.2. We have gone through the orders of the lower authorities and submissions made by both the sides before us. The undisputed facts before us are that during the year under consideration turnover of the assessee of software development segment was ₹ 423.71 crores and SIPL segment was ₹ 2.10 crores as against turnover of ₹ 20,264 crores of the Infosys Ltd., which is more than 45 times of the turnover of the assessee company. Further, expenditure incurred on brand building, advertising/sales promotion etc. was to the tune of ₹ 0.46 crores by the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced hereunder: 5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent- assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondentassessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:- Basic Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as fullfledged risk taking entrepreneurs Operate at minimal risks as the 100% services are provided to AEs Nature of Services Diversified-consulting, application Contract Software design, development, re-engineering Development Services and maintenance system integration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Learned counsel for the appellant Revenue during the course of hearing, drew our attention to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable when the wage and sale ratio was between 30% to 60%. By applying this filter, several companies were excluded. This is correct as it is recorded in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L T Infotech Ltd. and Infosys Technologies as comparable to work out the mean. 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at Para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the breakup of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the learned AR are valued at ₹ 69,552 crores, which comprises of brand value itself at ₹ 22,915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India s No.2 software service exporter and Third in the world as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than ₹ 13145 crores and expenditure on advertisement/sales promotion and expenditure on R D is at ₹ 69 crores and ₹ 167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of FAR i.e. function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced in para 6(iv) above, mostly shows that the profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther submitted that from the history chart of the margin earned by the company in previous and subsequent years, it is quite evident that this company was operating under abnormal business conditions. Reliance was placed on the following judgments for the proposition that companies with the abnormal profit/loss should not be considered for finding out appropriate comparable companies for the purpose of determining Arm s Length Price: (i) Adobe Systems India Pvt. Ltd. (ITA No.5043/Del/2010 (ii) Sonata Solution Ltd. (ITA No.3514/Mum/2010) (iii) NIT Ltd. (ITA No.1844/Del/2009 (iv) SAP Lab India Pvt. Ltd. v. ACIT (ITA No.398/Bang/2008 6.2. It was further submitted by the Ld. Counsel that as per law, an assessee can show even before the appellate authority for the first time that a particular company is not comparable with the assessee company, even if, it was selected as a comparable company inadvertently or by mistake by the assessee in the transfer pricing report and for this purpose Ld. Counsel relied upon following judgments: (i) OSI Systems P. Ltd. v. DCIT (ITA No.542 683/hyd/2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.03 -21.97 OP/TC 79.13% 18.14% 61.38% 28.28% -50.04% Thus, there is no doubt that margin of this company has been fluctuating from (-) 50.4% to (+) 79.13%. Further perusal of the above chart shows that turnover of the company remain in the range of 10 crore to 22 crores but margin of the said company has been fluctuating between (-) 50.4% to (+) 79.13%. Such a huge variation in the margins despite the fact that scale of operation did not change that much, shows that the business circumstances of the assessee company were not normal and said company indeed passed through unusual or abnormal business circumstances. Under these circumstances, we do not find this company as a safe and reliable to be used as a comparable company. It is further noted by us that similar view has taken in various judgments as have been relied by the Ld. Counsel whose names have been mentioned above. 6.6. With regard to the other issue of raising of the objection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e product company and not a software development service company. Further, the said assessee himself had originally included this company in the list of comparables. Further, it is noted that this comparable was excluded also by Hon ble Banglore Bench in the case of Mindteck India Ltd. (supra) on the ground of high fluctuation in the operating margins, with the following observations: 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centers (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspect held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit if abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid of the Special Bench and in view of the admitted position that the assessee follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us that the DRP has misunderstood the facts and made wrong computation and these facts can be got verified through AO/TPO. In our considered view, it is a matter of fact to be ascertained from financial statements of the said company and other supporting documents that how much exact amount of transactions is on account of related party transactions. In our view, without verifying the facts properly final decision should not be taken by the assessee. Though, Ld. Counsel has drawn our attention on the judgment of Delhi Bench of Tribunal in the case of Fiserv India Pvt. Ltd. v. ITO 60 taxmann.com 48 wherein it was held that in the case of Sonata Software Ltd-related party transactions to sales ratio is more than 40% during the A.Y. 2009-10, but keeping in view request of Ld. CIT-DR and to meet ends of justice, we find it appropriate to send it back to the file of the AO/TPO to compute the same properly and exclude it from the list of comparables if ratio of RPT to Sales is found to be more than 25%. The assessee shall be free to raise any legal or factual issue with respect to this comparable. The AO/TPO shall give adequate opportunity of hearing to the assessee to submit requisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficult to apply due to the lack of accurate and reliable data. It also held that the issue of working capital would be relevant only when there is a situation of inventory remaining tied up or receivables being held up. The assessee contests the non-granting of the working capital adjustment. 8.2. We find that this issue has been aptly addressed by the Hon ble Bench in the case of Mercer Consulting India Ltd. (supra). This issue could not have been brushed aside by the lower authorities in the manner as has been done in this case. We find that ample details have already been filed by the assessee before lower authorities, therefore, in all fairness and justice we send this issue to the file of the AO/TPO who shall consider this decision and shall give an adequate opportunity of hearing to the assessee to file further details and evidences as may be required and considered appropriate by the assessee and shall decide this issue afresh on objective basis after considering the details and evidences as may be placed on record by the assessee. 9. Since, we have decided the issues raised by the assessee with respect to comparables in favour of the assessee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own peculiarities. The assessee has entered in to agreement with the AE.s. and value of the transaction will have to be decided. The arguments of factoring of delayed payment in the value of service cannot be brushed aside especially when it is found that the OPTC margin earned by the assessee was 29.41 % and it was quite higher than the parties compared with i.e.app.15%.The TPO had not considered these vital issues and had applied the flat rate of 2%,as mentioned in the agreement. In our, opinion the alternate argument advanced by the assessee of adopting LIBOR rate is worth considering, if the facts of the case under appeal are deliberated upon. We are of the opinion that in the interest of justice interest rate should be fixed at LIBOR+200 points for the delayed payments received by the assessee from its AE.s. for the period as mentioned in the agreements.AO is directed to recalculate the interest amount accordingly. Ground no.4-5 are decided in favour of the assessee, in part. 10.3. Both parties agreed that facts are similar; under these circumstances we send this issue back to the file of the AO/TPO with the directions to follow the order of the Tribunal for A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of Bangalore unit acquired on slump sale. In the assessment order, the AO denied the benefit of deduction relying upon the assessment order for the preceding years i.e. A.Y. 2008-09 on the ground that the said unit was not a newly established undertaking and that it was acquired by assessee company by virtue of a slump sale transaction entered into by the assessee company with FCI Technology Services Limited, and thus, the claim of deduction was not in accordance with sub-section (7A) of section 10A of the Act which provides for admissibility of deduction under this section to a unit transferred by virtue of any scheme of amalgamation or merger but there is no mention there in with regard to any provision for allowing deduction with respect to unit which is acquired by way of slump sale . It was further mentioned by the AO that the assessee did not provide properly stamped copy of agreement of slump sale entered into by the assessee with the said company. Before the DRP also the assessee did not get any relief as the order of the AO was confirmed. 12.1. During the course of hearing before us, Ld. Counsel drew our attention on page no.486 of the paper boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d herein for the sake of ready reference: (iv)WHETHER TAX BENEFIT UNDER SECTION 10A, 10AA, AND 10B WOULD CONTINUE TO REMAIN AVAILABLE IN CASE OF SLUMP SALE OF A UNIT/UNDERTAKING. The vital factor in determining the above issue would be facts such as how a slump sale is made and what is its nature. It will also be important to ensure that the slump sale would not result into any splitting or reconstruction of existing business. These are factual issues requiring verification of facts. It is, however, clarified that on the sole ground of change in ownership of an undertaking, and the tax holiday can be availed of for the unexpired period at the rates as applicable for the remaining years, subject to fulfillment of prescribed conditions. 12.4. In addition to the above, this issue also came up before Hon ble Bombay High Court in the case of CIT v. Sonata Software Ltd, (supra). The relevant portion containing useful observations of Hon ble High Court is reproduced hereunder: 11. The Tribunal in the present case has come to the conclusion that where a running business is transferred lock, stock and barrel by one assessee to ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business already in existence. Unless the formation of the undertaking takes place by the splitting up of a business already in existence, the negative prohibition would not be attracted. In the present case, the entire business of the software undertaking was transferred to the Assessee. The undertaking of the Assessee was not formed by the splitting up of the business. 13. For the aforesaid reasons, the first question of law would have to be answered in the affirmative in favour of the assessee and against the Revenue. 12.5. Thus, the position of law is very clear the benefit of deduction shall not be denied to the assessee merely because the undertaking was acquired by the slump sale. The deduction is attached to the undertaking and therefore should be allowed to the assessee provided other prescribed conditions are fulfilled. But there has been some confusion with regard to appreciation of factual evidences. It has been shown to us that complete evidences including agreement and other various evidences were available. But AO has mentioned in the assessment order that the agreement filed with the AO was not eligible and it was not properly stamped. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange towards technical services provided outside India amounting to ₹ 6.65cr from export turnover alone was not as per law, that same had also to be reduced from total turnover. 5.2. During the course of hearing before us,the DR left the issue to the discretion of the bench. The AR stated that the Hon ble Bombay High Court in assessee s own case has decided the issue in ts favour for the AY.s. 2002-03-2005- 06. We have heard the rival submission and perused the material before us we find that the Tribunal as well as the Hon ble Bombay High Court has decided the issue against the AO and in favour of the assessee (IT Appeal No.3733 of 2010, 1446 of 2011 and 1409 of 2011 and 1410 of 2011 dt. 29.7.11, 8.2.13., 11.1.2013 and 11.1.2013).Respectfully, following the same effective ground of appeal, raised by the AO, is decided against him. 13.3. Thus, respectfully following the decision of the Tribunal and judgment of Honble High Court in assessee s own case for the earlier years, we decide this issue in favour of the assessee and direct the AO to follow the orders of the earlier years. The AO should reduce the amount of impugned expenses incurred on fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
