TMI Blog2016 (9) TMI 1514X X X X Extracts X X X X X X X X Extracts X X X X ..... doubtful debts of the comparable companies as part of their operating expenses and to re-compute the margins of the comparable companies accordingly. This ground of appeal is treated as allowed for statistical purposes. Non-allowing of deduction u/s 10A - voluntary TP adjustment offered by the assessee - not considering the revised return filed by the assessee for computing the deduction u/s 10A - HELD THAT:- We find that this issue is covered in favour of the assessee by the judgment of iGATE Global Solutions Ltd [ 2014 (6) TMI 1007 - KARNATAKA HIGH COURT] we direct the AO to allow the deduction u/s 10A of the Act on the ALP adjustment voluntarily offered by the assessee Exclusion of the internet connection charges only from the export turnover while computing deduction u/s 10A - HELD THAT:- We direct the AO to exclude them from both the export turnover as well as total turnover for the purpose of computation u/s 10A as held in the case of Tata Elxsi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT . This ground of appeal is accordingly allowed. Levy of interest u/s 234B and 234C is consequential in nature - AO is directed to give consequential relief to the assessee, if a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,43,013. Thereafter, while computing the taxable income of the assessee, the AO excluded Telecommunication charges attributing to delivery of software outside India and also the TP adjustment made u/s 92CA of the Act for the purpose of the deduction u/s 10A of the Act included. He accordingly determined the taxable income of the assessee at ₹ 5,32,01,336. 3. Aggrieved, the assessee is in appeal before us by raising the following grounds of appeal: TRANSFER PRICING MATTERS - Relating to determination of Arm's Length Price ( ALP ) in respect of provision of software services provided to the Associated Enterprises ( AEs ) under Transactional Net Margin Method ( TNMM ) Based on the facts and circumstances of the case and in law, the learned Assessing Officer ( AO ) / learned Transfer Pricing Officer ( TPO ) and the Hon'ble Dispute Resolution Panel ('ORP') erred in: Rejection of transfer pricing documentation maintained 1. Rejecting the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('Rules') and making adjustment of ₹ 14,43,013. Rejection of u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th export turnover and total turnover for the purpose of computing deduction u/ s 10A of the Act. 10. Not granting the Appellant an opportunity to provide explanation/clarification on the proposed adjustments in draft assessment order and thus violated the principles of natural justice. 11. Imposition of interest u/ s 234B and 234C of the Act. 12. Initiating penalty proceedings u/s 271(1)( c) of the Act. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal . 4. At the time of hearing, the learned Counsel for the assessee placed reliance upon the averments made by the assessee before the authorities below and also on the case law submitted in the form of paper book before us. The learned DR, on the other hand, supported the orders of the authorities below. 5. Having regard to the rival contentions and the material on record, we proceed to dispose of the appeal as under: 6. Ground No.1 being general in nature, needs no adjudication. 7. Ground No.2 is against the rejection of use of contemporarious data and mul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in two segments i.e. IT enabled services and software products solutions as per the annual report and it has exceptionally abnormal growth of profits of 160% as against industrial norm of 13 to 15%. It was also objected stating that the growth is more than 10 times the industrial growth and company in its standard financial performance has mentioned that it has spent sizeable amount towards R D in pharmaceutical sector for the purpose of coming out with unique products and solutions for facilitating operational efficiency, effective inventory management and complete financial control for the sector. TPO however, considered the exceptional growth was only 1.6 times compared to last year and not an exceptional increase. Further, he extracted schedule 12, to come to a conclusion that as per annual report income from software development was about ₹ 14.11 Crores as against total income of ₹ 14.31 Crores. The Soft ware services worked out to 98% of total revenue. He concluded that the company is predominantly software development services and accordingly comparable for software development services provider for the year. He also stated that company categorically state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of chargeable time or achievement of prescribed milestone as relevant to each contract. Revenue from sale of software products and courseware materials is recognized when the same has been completed with the passing of title or licenses or raising invoices as the case may be . Referring to the above, it was submitted that, that company is in diversified activities and not exclusively as software development service provider in which Assessee is functioning. Therefore, the company is functionally different. 9.2. After considering the rival contentions, we are of the opinion that on the basis of information available, Comp-U-Learn Tech India Ltd., cannot be selected as a functionally comparable company as it has diversified activities. Only if there are segmental reports pertaining to software development services, then only the company can be taken as comparable company. In the absence of such information, it is very difficult to hold that the selected company is comparable to Assesseecompany. There is no information about the segmental profits. What that company has reported in its annual report is Income from software development which cannot be equated as Income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otes to the accounts has stated that it is engaged in the development and maintenance of computer software. The production and sales of software cannot be expressed in any generic unit. Thus, TPO rejected Assessee s objections and retained it as a comparable. DRP also agreed with TPO. 8.1. It was contended that AO relied on the annual report of FY. 2010- 11 and used the information applicable to FY. 2009-10 from that report, as the information for FY. 2009-10 was not available in public domain. It is also submitted that this company was never selected either by TPO in earlier year or in later year. It was also submitted that profitability varies from year to year and in this year, there was arbnormally very high margin, the reasons of which could not be analyzed in the absence of annual report. It was further contended that segmental information was not available. On the argument that the said company is providing both software development and IT enabled services Ld. Counsel placed the disclosures in annual report of FY. 2008-09 and annual report of FY. 2009- 10 to submit that the company is primarily engaged in software development and IT enabled services and has reported bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee s case in this assessment year. We are also aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally different from Assessee s activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard Respectfully following the same, we direct the AO to exclude the said company from the final list of comparables while determining the ALP of the international transaction. 13. As far as KALS Information Systems Ltd is concerned, we find that the objections of the assessee are recorded in page 44 of the T.P order and at Pages 7 8 of the DRP s order. We find that for the very same reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the DRP s order. We also find that this company is also directed to be excluded in the case of Pega Systems Worldwide (P) Ltd and relevant portion of the Tribunal s order at Paras 12 to 12.1 are reproduced hereunder: Tata Elxsi Ltd (Seg): 12. Before TPO, Assessee contended that the above said company is functionally different as it specialized in embedded software development technology. It was also objected before TPO that in earlier year this company has clearly stated that it cannot be compared to any other software services company due to complex nature of its business. Assessee relied on the decisions of ITAT in the case of Conexant Systems India Pvt. Ltd. (ITA No.1429/Hyd/2010 and 1978/Hyd/2011) and other cases as stated by TPO in page 41 of his order. However, TPO did not agree with the objections stating that the company has two segments including software development services and revenue from software development services is ₹ 33,649 Crores out of total turnover of ₹ 37,637 Crores, which is at 89.52%. This signified the fact that company is predominantly into software development services. TPO rejected the objections of Assessee so as DRP. 12.1. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und is accordingly rejected. 18. As far as Ground No.5 is concerned, it is the case of the assessee that the margins of the comparable companies have been computed erroneously by not considering the provision for bad and doubtful debts from their operating income. He submitted that the issue is covered by the decision of the Coordinate Bench of this Tribunal in the case of Kenexa Technologies Private Ltd vs. DCIT in ITA No.243/Hyd/2014 wherein at Paras 40 to 42, the Tribunal has held that the bad debts and the provision for bad and doubtful debts are part of the operating expenses and are to be taken into consideration while computing the comparable companies. For the sake of convenience, the relevant Paras are reproduced hereunder: 40. With respect to ground No. 2.6.3 and 2.6.4, it was argued by the learned counsel that the TPO erred in computing the margins of comparable companies by considering the provision for bad and doubtful debts and bad debts as non-operative expenditure. 41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the non-allowing of deduction u/s 10A of the Act on voluntary TP adjustment of ₹ 4,84,42,265 offered by the assessee by not considering the revised return filed by the assessee for computing the deduction u/s 10A of the Act. We find that this issue is covered in favour of the assessee by the judgment of the Hon'ble Karnataka High Court in the case of iGATE Global Solutions Ltd in ITA No.453/2008 dated 17.6.2014 wherein the decision of the Tribunal in ITA Nos. 248 249/Bang/2007 was confirmed. We find that in the said order the Tribunal has at Paras 21 to 23 held as under: 21. The last grievance is in respect of not allowing deduction under section 10A on the adjustment made by the assessee to the arm's length price. 22. In the instant case, the assessee company entered into transaction with associated enterprise. The assessee company determined arm's length price and accordingly made adjustment to the income because arm's length price determined was more than the consideration, at which the transactions were shown in the books of account. The deduction under section 10A has not been allowed as per proviso to section 92C(4). As per this proviso, ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
