TMI Blog2018 (11) TMI 1652X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of computing P L of comparable companies - HELD THAT:- Tribunal in KENEXA TECHNOLOGIES (P.) LTD. VERSUS Dy. CIT [ 2014 (11) TMI 587 - ITAT HYDERABAD] has held that bad debts and provision for bad and doubtful debts are part of the operating expenses and that the margins of the companies should be computed by including bad debts and provisions of bad debts as provisions of expenses for the purpose of computing P L of comparable companies. Tribunal has followed the decision of the Coordinate Bench of the Tribunal at Delhi in the case of Sony India (P) Ltd vs. DCIT [ 2008 (9) TMI 420 - ITAT DELHI-H] . Respectfully following the same, we remand the issue to the file of the AO with a direction to recompute the margins of the companies by including the bad debts/provision for bad and doubtful debts as operating income of those companies as well as the assessee. Thus, this ground is allowed for statistical purposes. Foreign exchange fluctuation as operating - HELD THAT:- We find that this issue is squarely covered by the decision of the coordinate bench in the case of M/s Open Text Corporation India Pvt. Ltd. [ 2018 (5) TMI 1381 - ITAT HYDERABAD] where in it was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute the adjustment u/s 92CA at ₹ 11,23,43,569 as against the original TP adjustment of ₹ 14,27,31,508/-. The TPO passed the order accordingly. 4. The AO passed the final assessment order determining the total income of the assessee at ₹ 12,72,06,397 by adding the adjustment of ₹ 11,23,43,569/- u/s 92CA as per the directions of the DRP. 5. Aggrieved with the order of DRP, both the revenue and assessee are in appeals before us. 6. First we will take up the appeal of the revenue wherein the it has raised the following grounds of appeal: 1. The DRP erred on facts and in law in granting relief to the assessee. 2. The DRP erred in law directing the AO/TPO to exclude the comparable companies on the basis of huge turn over. 3. Whether on facts and circumstances of the case of the DRP is correct in directing the TPO when the assessee failed to provide comparables either before the TPO/DRP in support of its claim on working capital. 4. In the facts and circumstances of the case the DRP failed to appreciate the fact that working capital adjustment is an attempt to adjust for the differences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 RS Software (India) Ltd. 9.88 14 Sasken Communication Technologies Ltd. 25.23 15 Tata Elxsi Ltd. (Seg.) 17.24 16 Thinksoft Global Services Ltd. 11.22 17 Zylog Systems Ltd. 18.62 18 Persistent Systems Ltd. 31.57 Total 40.84 Average 22.69 b) Final comparables selected for customer support transaction services (ITES) segment: S. No. Name of the company OP/OC 1. Accentia Technologies Ltd. 43.62 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development, the arm s length price of the assessee is ₹ 90,64,91,780/-0 and the shortfall of ₹ 10,43,21,352/- is treated as adjustment u/s 92CA of the Act. b) Customer support transaction services (ITES) Segment: Description Amount (in Rs.) Arm s Length Margin 27.90% Less: WCA (-)1.71% Adjusted Arm s Length Margin 29.61% Operating Cost (OC) 18,73,69,595 Adjusted Arm s length margin (%) (AALM) 29.61% Arm s Length Price = (100+AALM)*OC 24,28,49,732 Price Received (OR) 20,44,39,576 Adjustment u/s 92CA 3,84,10,156 The TPO noted that for customer support and transaction services, the arm s length price of the assessee is ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, the issue is squarely covered by various decisions of ITAT, Hyderabad including the decision in the case of Wissen Infotech Pvt. Ltd. in ITA No. 99/Hyd/2015 wherein the Bench has held as under: 27. As regards Revenue's appeal against the exclusion of Infosys Technologies Ltd L T Infotech Ltd, we find that in several cases, the Coordinate Benches of this Tribunal have directed exclusion of these companies as they are having super profit and very high turnover and we find that the order of the DRP is in accordance with the said decisions. Therefore, we see no reason to interfere with the order of the DRP on these 2 companies and the Revenue appeal is accordingly dismissed. 12.1 As regards comparability analysis relating to ITES, the issue is squarely covered by the following cases: 1. Scanafe Digital Solutions Pvt. Ltd., ITA no. 450/Bag/2015 2. Hyundai Motors India Engineering Pvt. Ltd., ITA No. 1743/Hyd/2014 3. Cognizant Technology Services Pvt. Ltd., ITA No. 1743/Hyd/2014. 4. C3i Support Services Pvt. Ltd., ITA No. 103/Hyd/2015. 12.2 In the case of Scanafe Digital Solutions Pvt. Ltd., the coor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions of DRP in directing to exclude the said companies in both SDS and ITES segments for computation of ALP. Accordingly, we dismiss ground No. 2 raised by the revenue in this regard. 13. As regards ground Nos. 3 4 regarding working capital adjustment, the TPO determined the ALP for the international transactions with AEs by making a negative working capital adjustment for the differences in the working capital between the assessee and the companies considered as comparables. 13.1 Before the DRP, the assessee contended that the company does not bear any working capital risk since it has been fully funded by its AE from its inception and has no working capital contingencies. The assessee further contended that the company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement. 13.2 After considering the submissions of the assessee, the DRP held that the TPO based on the year ending figures of receivables etc. made the negative working capital adjustment without bringing all the relevant facts of the comparable on record. DRP, therefore directed the TPO to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. Selection of comparables - Software segment 4. Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the software services of the Appellant: Comp-U-Learn Tech India Ltd; E Infochips Bangalore Ltd; Persistent Systems Ltd; Sasken Communication Technologies Ltd; KALS Info Systems Ltd; and Tata Elxsi Ltd (seg). Rejection of comparables - Software segment 5. Not undertaking an objective comparative analysis and interalia rejecting the following comparable companies: Akshay Software Technologies Ltd; CG V AK Software and Exports Ltd; and Satyarn Computers Services Ltd. Selection of comparables - ITES segment 6. Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the software services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. As regards ground No. 4 regarding selection of comparables towards software segment, the assessee objected to the selection of following companies as comparable to the software services of the assessee: 1. Comp-U-Learn Tech India Ltd. 2. E Infochipts Bangalore Ltd. 3. Persistent Systems Ltd. 4. Sasken Communcation Technologies Ltd. 5. Kals Info Systems Ltd. and 6. Tata Elxsi Ltd. (Seg). 18.1 As regards Comp-U-Learn Tech India Ltd., objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company has revenue from ITES and software, further segmental details are not available. He submitted that it has exceptional growth in the profits of 160% abnormal growth in profits on standalone basis and engaged in internet based solution, education and training, e-governance solutions. R D work in pharma sector and revenue from sale of software products and courseware materials. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 FY 2009-10 2. Wissen Infotech P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India P Ltd Hyderabad. Page 9 of 22 directed the exclusion of the said company. Facts and circumstances of the case before us being similar, respectfully following the above decisions, we direct the AO to exclude this company from the final list of comparables. Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables. 18.4 As regards E Infochips Bangalore Ltd, objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is engaged in both IT and ITES and segmental data is not available. It has fluctuations in margins and the company is having an amalgamation status. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 FY 2009-10 2. Pegasystems Worldwide India Pvt. Ld., ITA No. 1758/H/14 3. DE Shaw Software Pvt. Ld., ita No. 304/Hyd/2015 FY 2009-10 4. Oakton Global Technology Services Pvt. Ltd., ITA No. 434/Hyd/15 FY 2009-10 5. Sum Total Systems India Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned as revenue from software development. iv) Hence this company cannot be rejected as comparable. 1.3. Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: 8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies. With regard to DR submissions, he strongly submitted that in the case of M/s Virtusa India (supra), the matter was remitted back to the AO, in this case also, it should be remitted. We observe that the observations of the coordinate bench also that when the segmental data is not available, we cannot keep the company as comparable. In the present case also, there is no segmental data available on record. Hence we do not find merits in the submissions of the DR 14. Respectfully following the same, we direct the AO to exclude this company from the list of comparables. Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables. 18.7 As regards Persistent Systems Ltd., objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is engaged in product development design services and also engaged in offshore product development. Segmental data is not available. He submitted that the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Since both these companies are also engaged in the business of providing software development services to its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables. Similarly, in the case of assessee's group company, viz., Fiserv India Pvt. Ltd. for AY 2010-11, which company is also in the business of software development services, a co-ordinate Bench of the Delhi Tribunal in ITA No.6737/Del/2014 deleted Persistent from the list of comparables. 17. Further a perusal of page 484 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in development of software products. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 FY 2009-10 2. Sterling Commerce Solutions India Pvt. Ltd., IT(TP) No. 546/Bang/2015. 3. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014. 4. Sum Total Systems India Pvt. Ltd. Vs. DCIT, ITA No. 255/Hyd/2015 FY 2009-10 5. DE Shaw Software Pvt. Ld., ita No. 304/Hyd/2015 FY 2009-10 6. Target Corporation of India Pvt. Ltd., ITA No. 323/Bang/2015 7. Oakton Global Technology Services Pvt. Ltd., ITA No. 434/H/2015 18.14. The ld. DR, on the other hand, relied on the orders of revenue authorities. 18.15. Considered the rival submissions and perused the material on record. In the case of Open text Corporation India Pvt. Ltd. (supra), the coordinate bench of Hyderabad Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under: 18. As far as Kals Information Systems Ltd (Seg.) is concerned, it is the case of the assessee that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and its inventory also indicates that Assessee has been using its readymade libraries for sales. This company was rejected in earlier year on functional analysis by ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 where in it was held that company is engaged in development of software products. Since its annual report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee's objections are accepted and AO is directed to exclude the company. 2.4 In the case of Planet Online Pvt. Ltd. (supra), the coordinate bench held as follows: 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- (d) KALS Information Systems Ltd. As far as this company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable. 2.5 In view of the above, in line with the decisions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies . 19. Respectfully following the same, we direct this company to be excluded. Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables. 18.16 As regards Tata Elxsi Ltd. (seg), objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company has revenue from product design services, innovation design engineering and visual computing labs division which are specialized services. Further, he submitted that as per section 133(6), the company itself has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2008- 09, which the DRP has upheld. iv) Hence, this company cannot be rejected as a comparable. 3.3 Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: 12.1. It was the objection of Assessee that above company is predominantly into product design services, Innovation Design Engineering and visual computing labs division which are specialized services. He referred to the order of ITAT in AY. 2009-10 in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this company was rejected on the reason that it is engaged in multiple segments. There is no break- up in the annual report and data on which margin from software services activity only can be computed is also not available. Moreover, the company itself has indicated that it cannot be compared with any other software service company because of its complex nature. Similar view was taken by many of the Co- ordinate Benches in earlier years that Tata Elxsi Ltd., cannot be selected as comparable company. Consistent with the above vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO to exclude this company as comparable . 23 Respectfully following the same, we direct the AO to exclude this company from the final list of comparables. Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables. 18.9 In view of the above findings, the TP)/AO is directed to recompute the ALP excluding the aforesaid companies from the list of final comparables. 20. Ground No. 5 is regarding rejection of following comparables by the TPO/DRP: 1. Akshay Software Technologies Ltd. 2. CG VAK Software and Exports Ltd. and 3. Satyam Computers Services Ltd. 20.1 As regards Akshay Software Technologies Ltd., the TPO rejected this company as comparable by observing that the company in its annual report states that its export revenue from Dubai accounted for 90% of total income and due to steep pricing pressure and huge discounts requested by the clients, its business severely got affected. The DRP confirmed the action of TPO 20.2 The ld. AR submitted the company satisfies all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn to page 818 to 824 of the assessee s paperbook wherein annual report of this company has been provided. Attention was drawn to the fact that in the profit loss account of the audited accounts, the cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Accounts, it has been elaborated as follows:- Cost of services: Cost of Services - Overseas 2,77,32,337 Cost of Services Domestic 2,58,40,435 Transcription charges 3,97,389 Web Designing Charges 1,64,602 Staff Welfare 11,43,144 Staff Training 3,63,496 Contribution to PF ESI 15,47,906 Gratuity 13,04,894 Ex Gratia 0 HRD Expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal including the decision in the case of Hyundai Motors India Engg. P. Ltd., in ITA No. 1743/Hyd/2014 wherein the bench with regard to Accentia Technologies Ltd. and TCS e-Serve International Ltd, held as under: TCS e-Serve International Ltd, 11.2. Having regard to the rival contentions and the material on record, we find that during the relevant financial year, the TCS e-Serve International Ltd., had acquired the Citi group India based Captive business processing outsourcing (BPO) arm for an all-cash consideration and in return, had acquired the business of an aggregate amount of $ 2.5 billion over a period of 9.5 years. This definitely is an exceptional circumstance which has been taken note of by the TPO in the case of M/s. IGS Imaging Services (India) P. Ltd., to exclude the same from the list of comparable. This exceptional circumstance was not taken note of by the TPO and the DRP failed to appreciate the objection of the assessee in proper perspective. Any circumstance which would influence or result in abnormal result in the financials of a company have to be adjusted or where no adjustment can be done to make it comparable to the tested party, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iza Technologies (P) Ltd; and (b) computing the net margin of the CAT Technologies Ltd by excluding the advertisement expenses written off, considering it as inoperative expenses; and (c) segmenting unallocable cost in the computation of income of Kals Information Systems Ltd and Tata Elxsi Ltd. In support of these contentions, the learned Counsel for the assessee has placed reliance upon the decision of the Coordinate Bench of the Tribunal in the case of Kenexa Technologies (P) Ltd in ITA No.243/Hyd/2014 for the financial year 2008-09 wherein it has been held that the provision for bad debts should be included in computing the net margins under the TNMM. 26. Having gone through the decision of the Coordinate Bench of the Tribunal, we find that the Tribunal has held that bad debts and provision for bad and doubtful debts are part of the operating expenses and that the margins of the companies should be computed by including bad debts and provisions of bad debts as provisions of expenses for the purpose of computing P L of comparable companies. 27. The learned DR has not been able to bring any other material, contrary to the above decision, to our knowledge. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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