TMI Blog2019 (8) TMI 350X X X X Extracts X X X X X X X X Extracts X X X X ..... eries of decisions including in the case of Trilogy e-business Software India Ltd. The Tribunal has also noted that in the balance sheet of this company as on 31.03.2010, there are inventories of ₹ 60,47,977/- and on the basis of these facts, this finding is given that this company is in the business of software products and therefore, it is held that the same cannot be compared with a pure software development services provider company. Hence, in the present case, we hold that because of this functional dissimilarity as held by the Tribunal in the case of DCIT vs. Electronics for Imaging India (P.) Ltd. (supra), no interference is called for in the order of ld. CIT(A) regarding this direction to exclude KALS information systems Ltd. Infosys Ltd. - Tribunal in that case has reproduced the relevant portion of the Tribunal order rendered in the case of DCIT vs. Electronics for Imaging India (P.) Ltd. [ 2016 (2) TMI 1123 - ITAT BANGALORE] as per which it was held that Infosys Ltd. is having a huge brand value and intangibles as well as having bargaining power and the same cannot be compared with the assessee who is providing only software development services to its AE. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tested party and of the comparable companies. In case the data in this regard regarding comparable company is not made available by the assessee, then it should be presumed that such foreign exchange gain / loss for comparable company is not in respect of current year s turnover because generally, the accounting of foreign exchange gain / loss is considered in the sales only if such gain / loss has been received in the year of sale itself and only when such gain / loss is received and accounted for in a later year then only the same is accounted for separately as exchange fluctuation gain / loss. Accordingly, ground no. 11 is allowed for statistical purposes. The AO/TPO should decide this issue as per above discussion after providing adequate opportunity of being heard to assessee. Working capital adjustment - Tribunal has given a direction to the AO to carry out the working capital adjustment as per the actual figures and not to apply any cap. In the present case also, we restore the matter back to the file of AO/TPO to work out the working capital adjustment on actual figure without applying any cap. ICRA Techno Analytics Ltd - this company is engaged in diversified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 2017 passed by the Commissioner of Income-tax (Appeals), Circle - 3 [ CIT(A) ], Bangalore under section 250 of the Act on the following grounds: That on facts and circumstances of the case and in law: 1. The learned CIT(A) has erred in law and facts, by upholding adjustment made by the learned Assessing Officer ( AO ) / Transfer Pricing Officer ( TPO ) to the arm's length price of the international transactions of software development services rendered by the Appellant to its Associated Enterprise ( AE ); 2. The learned CIT(A) has erred in law and facts by not accepting the Appellant's plea in entirety and upholding the action of the learned AO/TPO of rejection of Transfer Pricing Documentation ['TP Documentation'] including economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ( the Rules ) by erroneously invoking provision of section 92C(3)(a) and (c) of the Act without providing cogent reasons; 3. The learned CIT(A) has erred in law and facts, by upholding the action of learned AP/TPO of disregarding certain comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company which do not fall within 12 month period (i.e. April 1. 2009 to March 31, 2010) should not be rejected. f) The learned CIT (A) has erred, in law and in facts, by upholding the action of the learned AO/TPO of not applying upper limit to the turnover filter. 7. The learned CIT(A) has erred, in law and in facts, by upholding the action of the learned AO/TPO of rejection of advertisement. marketing and distribution expenses less than or equal to 3 percent of sales as a comparability criterion for the purpose of selection of comparable companies: 8. The learned CIT(A) has erred, in law and facts, by upholding the action of the learned AO/TPO of selecting companies such as Infosys Limited, Persistent Systems Limited and retaining companies such as Larsen Toubro Infotech Limited and Sasken Communications Limited as comparables which are functionally dissimilar; 9. The learned CIT(A) has erred, in law and facts, by upholding the action of the learned AO/TPO of rejecting Akshay Software Technologies Limited as a comparable company on the ground that the company is earning 90 per cent of revenue by condu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 10A . TP issues: Hon'ble CIT(A) has rejected the following comparables for TP issues. The grounds of appeal against the rejection are as follows: 1. KALS information systems Ltd: i) Whether the Hon'ble CIT(A) erred in fact and law in holding the company M/s Kals information Systems Ltd as a software product company when there is no revenue reported from sale of products in the annual report of the company and rejecting the company as a comparable. ii) Whether the Hon'ble CIT(A) erred in fact and law in holding the company M/s Kals Information Systems Ltd as a software product company when there is no inventory as either part of the stock in trade or work in progress accounted in the profit loss account. iii) Whether the Hon'ble CIT(A) erred in fact and law in holding the company M/s Kals Information Systems Ltd as a software product company without appreciation the fact that the company in its annual report in point no 06 page no 22 disclosed that the revenue earned is from the business of development of computer software and other related services. The production and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Corporate issue: Whether CIT(A) was correct in directing the AO to reduce the impugned expenses from both the export turnover as well as the total turnover while calculating deduction U/s 10A . TP issues: Hon'ble CIT(A) has rejected the following comparables for TP issues. The grounds of appeal against the rejection are as follows: 1) Tata Elxsi Ltd 2)ICRA Techno Analytics Ltd: Grounds of Appeal: i) On the fact circumstances of the case and in law Ld. CIT(A) erred in seeking exact comparability, while searching for comparable companies of the assessee under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparable companies? ii) Further, while seeking the exact comparability as mentioned above whether the Ld. CIT (A) was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. iii) Further, whether the Ld.CIT(A) is correct in fact and law in disregarding the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. We have considered the rival submissions. We find that in the appeal of the revenue, one ground involved is regarding computation of deduction allowable to the assessee u/s. 10A of the IT Act for which the AO has reduced the expenditure incurred in foreign currency of ₹ 1,68,00,443/- from export turnover whereas this was the claim of the assessee that even if it is reduced from export turnover, the same expenditure should be reduced from total turnover also. Ld. CIT(A) held that such expenditure should be reduced from export turnover as well as total turnover while calculating deduction u/s. 10A. Now this issue is squarely covered in favour of the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. (supra) in which it is held that total turnover is sum total of export turnover and domestic turnover and if an amount is reduced from export turnover then the total turnover also goes down by the same amount automatically. Since the direction of ld. CIT(A) is in line with this judgment of Hon'ble Karnataka High Court, we find no reason to interfere in the order of ld. CIT(A) on this issue. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. and decision is in para no. 14 but we first reproduce the relevant portion of that para no. 12 from page no. 9 of the Tribunal order. (6) Tata Elxsi Ltd. 15. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum). 16. The DRP found that this company is not functionally comparable with assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal in Genisys Integrating System v DCIT 15 ITR Trib 475, Kodiak Networks v ACIT 15 ITR Trib 610, Trilogy e-Business Software India v DCIT 23 ITR Trib 464 and held that those companies which are within the turnover range of Rs one crore to Rs two hundred crore only should be taken into consideration for the TP study and hence directed the TPO to exclude Infosys Ltd, Larsen Toubro Infotech Ltd, Mindtree Ltd (seg) , Persistent System Ltd, Sasken communication Technologies and Tata Elxsi Ltd(seg) against which the Revenue filed appeals. However, from the decisions extracted, supra, the assessee has made out a case for the exclusion of ICRA Techno Analytics Ltd. (seg), Infosys Technologies Ltd., KALS Information Systems Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd, Tata Elxsi Ltd and L T Infotech Ltd. Following them, we direct the TPO to exclude them from the list of comparables. To that extent, the assessee s appeal grounds are allowed and the Revenue s appeal grounds are dismissed. With regard to the comparable Mindtree Ltd (seg), since the assessee has not opposed the Revenue s appeal, the Revenue s appeal on that comparable is treated as allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists of STPI unit and also having a training centre engaged in training of software professionals on online products. Thus, when this company is having revenue from software services as well as software product, the same cannot be considered as comparable with software development service providing company. 7. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, ITA No.1054/Bang/2011 dated 23.11.2012, this company was found to be not comparable with that of the assessee. 8. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion of para 12 of this Tribunal order in which it is noted by the Tribunal regarding KALS information systems Ltd. (seg) that comparability of this company has been examined by the Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. The Tribunal has also noted that in the balance sheet of this company as on 31.03.2010, there are inventories of ₹ 60,47,977/- and on the basis of these facts, this finding is given that this company is in the business of software products and therefore, it is held that the same cannot be compared with a pure software development services provider company. Hence, in the present case, we hold that because of this functional dissimilarity as held by the Tribunal in the case of DCIT vs. Electronics for Imaging India (P.) Ltd. (supra), no interference is called for in the order of ld. CIT(A) regarding this direction to exclude KALS information systems Ltd. 16. In the result, this appeal of the revenuel is dismissed in the terms indicated above. 17. Now we take up the assessee s appeal. In assessee s appeal, as per ground no. 8 of assessee s appeal, the assessee is seekin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 6. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. (2) Infosys Ltd. 2. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is ₹ 21,140 crores, which is 442 times higher than the assessee. 3. The DRP accepted the objections of the assessee and by following the decision of the Delhi Benches of the Tribunal in the case of Agnity India Pvt. Ltd. v. ITO [2015] 58 taxmann.com 167 (Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., and therefore, this company cannot be considered as functionally comparable with the assessee. Regarding Sasken Communication Technologies Ltd., it was held that this company earns revenue from three segments but the segmental operating margins are not available and therefore, in the absence of relevant segmental data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Respectfully following this Tribunal order, we hold that these two comparables i.e. Persistent Systems Ltd. and Sasken Communication Technologies Ltd. should also be excluded. 21. Regarding Larsen Toubro Infotech Ltd., the discussion and decision is contained in para no. 13 of this Tribunal order reproduced below:- 13. The relevant portion of the order from the case of Pegasystems Worldwide India P Ltd ay 2010-11 ITA No 1758/Hyd/2014 1936/Hyd/2014 dt 16.10.2015 is extracted as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.2. It was the submission that once DRP has accepted the objections of Assessee whereas in Assessee s case DRP did not exclude L T Infotech while excluding Infosys Technologies Ltd., it was the submission that similar facts exist for both the companies and DRP has excluded only Infosys Technologies and not L T Infotech Ltd., 14.3. After considering the objections of Assessee and perusing the order of DRP in the case of M/s. SumTotal Systems India Pvt. Ltd., (supra), as extracted above, we are of the opinion that this company cannot be selected as comparable by the same reasons which DRP in the above referred case accepted. Moreover, there are no segmental details and as seen from the annual report, revenues are reported from software development services and products, how much is from services and how much is from products could not be analysed. Even though TPO considered the software exports reported in earning in foreign currency as that of software development services, we are not sure whether the software exports reported therein exclusively pertain to services or products. As there are no segmental details, it is very difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., 2) Larsen Toubro Infotech Ltd., 3) Persistent Systems Ltd. and 4) Sasken Communication Technologies Ltd. and direct the AO/TPO to exclude these four comparables from the final list of comparables. 24. Now regarding the remaining the issue in respect of TP analysis i.e. consideration of foreign exchange fluctuation gain / loss as operating in nature for the purpose of computation of margin of the assessee as well as the comparable companies as per ground no. 11, we would like to observe that such foreign exchange fluctuation gain / loss of the tested party or of the comparables can be considered for TP analysis if such gain / loss is in respect of turnover of the present year because in TP analysis, we do not consider the absolute gain / loss only. We work out the profit percentage by dividing the operating profit by the turnover of such company and such profit percentage is compared between the tested party and of the comparable company. Hence if such foreign exchange fluctuation gain / loss of the tested party or of the comparable company is not in respect of the turnover of the present year, then such working of profit percentage will be incorrect because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in para 19 of the Tribunal order that the claim of the assessee for providing working capital adjustment is to be upheld and AO/TPO is directed to work out the same. In the case of DCIT Vs. Goldman Sachs Services (P.) Ltd. (supra), the issue regarding working capital adjustment is discussed by the Tribunal in para 4 of this Tribunal order which is available on page no. 99 of the case law paper book. The same is reproduced hereinbelow for ready reference. 4. We have heard the Id. DR as well as Id. AR and considered the relevant material on record. At the outset we note that an identical issue has been considered by this Tribunal in assessee's own case for the assessment year 2010-11 vide order dated 06.01.2017 in IT(TP) Nos. 267 222/Bang/2015 in para 10 as under: 10, The next issue is On the Working Capital Adjustment : The Revenue objected to the restriction of working capital adjustment to the 1.01% as against the actual working capital adjustment carried out by TPO at 2.23%, The TPO has in principle agreed to the claim of the assessee for granting the working capital adjustment and has consequently grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrols India (P.) Ltd. ITA 551/Bang/2015 AY 2010 dt 27.11.2015, wherein this Tribunal directed the TPO to allow actual adjustment towards the differences in the of working capital position between the assessee and the entrepreneurial companies selected as comparable. We direct the TPO to follow this decision. Thus, Revenue's appeal ground nos. 5 6 are dismissed 26. From the above para reproduced from this Tribunal order, it is seen that in this case, the Tribunal has given a direction to the AO to carry out the working capital adjustment as per the actual figures and not to apply any cap. In the present case also, we restore the matter back to the file of AO/TPO to work out the working capital adjustment on actual figure without applying any cap. This ground is allowed for statistical purposes. 27. In the result, the assessee s appeal stands disposed of in the terms indicated above. 28. Now we take up the revenue s appeal for Assessment Year 2011-12. As per this appeal of revenue, the revenue has one grievance regarding corporate tax issue and it was agreed by both sides that this issue is identical with s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in that case that this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs etc. and in the case of Telcordia Technologies Pvt. Ltd. Vs. ACIT (supra), it is noted by the Tribunal that this comparable i.e. Tata Elxsi Ltd. is engaged in development of niche product and development services which is entirely different from the assessee company, engaged in software development services and respectfully following this Tribunal order rendered in the case of DCIT vs. Electronics for Imaging India (P.) Ltd. (supra), it was held by the Tribunal that there is no error or illegality in the direction of DRP to exclude this company from the set of comparables. In the present case also, no difference in facts could be pointed out by ld. DR of revenue and therefore, respectfully following this Tribunal order, we hold that there is no error or illegality in the order of ld. CIT(A) on this issue. 31. In the result, the appeal of the revenue for Assessment Year 2011-12 is also dismissed. 32. In the combined result, both the appeals filed by the revenue are dismissed an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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