TMI Blog2017 (7) TMI 1335X X X X Extracts X X X X X X X X Extracts X X X X ..... nover is defined in clause (iv) of Expln. 2 inserted at the end of section 10A and provides that the expenditure on freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India are required to be excluded from the consideration in respect of export brought into India. The expenditure if any incurred in foreign exchange in providing technical services outside India is also to be excluded from the consideration in respect of export of the undertaking. Thus if the expenditure in question is not falling in the category of charges of freight, telecommunication charges or insurance and it has been incurred in the foreign exchange then only when this expenditure is incurred in providing the technical services outside India, the same has to be excluded as per the definition provided under Explanation 2(iv) inserted at the end of Section 10A. Accordingly, we set aside this issue to the record of Assessing Officer for limited purpose of verification of the nature of expenditure and in case it is not for freight, telecommunication charges or insurance then the same cannot be excluded except it is incurred for providing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Passing the Order disregarding the principles of natural justice. Grounds relating to Transfer Pricing:- 3. Making transfer pricing adjustment of ₹ 4,93,98,250/-. 4. Making a reference to Transfer Pricing Officer for determining arm's length price. 5. Not appreciating that there is no amendment to the definition of income and the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X and therefore addition under Chapter X is bad in law. 6. Passing the order without demonstrating that the Appellant had motive of tax evasion. 7. Passing the order contrary to the directions of the Honourable DRP; 8. Recomputing the TP adjustment at ₹ 4,93,98,250/- pursuant to directions of DRP, without giving the basis of computation in the final Assessment Order passed. Since the computation of TP adjustment pursuant to DRP Order is not given in the Final Assessment Order, the Appellant is raising all the following grounds: Computation of Arm's Length Price for software dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis; d. Selecting inappropriate comparables and selecting companies as comparables despite which are not functionally comparable. e. The Honourable DRP has erred in rejecting ICRA Management Consulting Services Limited as an additional comparable proposed before DRP on the ground that additional evidence petition is not filed. f. Not appropriately computing the operating margin of the comparables and the Appellant; g. Treating provision of bad debt as non-operating in nature; h. Not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies; and i. Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account. Other TP Grounds 11. Not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justify the price paid/charged on the basis of any one comparable only. 12. The order is passed without allowing the benefit of 5% range as provided u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the comparable as functionally dissimilar based on the grounds that there is lack of clarity in the segment report without analysing the facts in depth. Ground of appeal: The Hon. DRP has erred in holding that the foreign exchange transaction is to be considered as operating in nature, ignoring provision of the Rule 10B(2)(d) that the net profit margin realized by the taxpayer in the international transaction shall done be computed under the TNMM method. 3. First we take up the comparability of the companies selected by the TPO in software development services segment wherein the TPO has selected 13 companies as under: Comparables selected by the TPO Sl. No. Name of the Company Operating Margin on Cost Adjusted Margin on Cost 1 Acropetal Technologies Ltd. (seg) 31.98% 30.19% 2 e Zest Solutions 21.03% 20.43% 3 E-Infochips Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese three companies are as under - (i) Evoke Technologies Pvt. Ltd. (ii) Mindtree Limited (Seg.) (iii) R S Software (India) Limited. We note that the assessee did not raise any objection against two companies viz. Evoke Technologies Pvt. Ltd. and R.S. Software (India) Limited before the DRP. However, the DRP rejected these two companies on its own. Now the assessee has no objection if these two companies are restored to the set of comparables. Further the assessee is also not raising any objection in respect of the company Mindtree Limited if the same is restored to the set of comparables. Hence in view of the submission of ld. AR these three companies namely Evoke Technologies Pvt. Ltd., Mindtree Limited (Seg) R S Software (India) Limited are restored to the set of comparables and to that extent the grounds of the revenue's appeal are allowed. 5. As regards the comparability of the remaining 10 companies, the learned Authorised Representative of the assessee has submitted that the comparability of all these companies except the companies E-Infochips Limited and Sasken Communication Technologies Limited have been considered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO while selecting the comparables therefore except on-site expenditure, this company is otherwise functionally comparable. He has relied upon the order of the TPO/AO. 8. Having considered the rival submissions as well as the relevant material on record, first we will deal with the functional comparability of the six companies namely Acropetal Technologies Limited (Seg.), E-Zest Solutions Ltd., L T Infotech Ltd., Persistent System Solution Ltd., Persistent Systems Ltd. and Tata Elxsi Limited. The business activities of these six companies have been examined on the point of functional comparability in the software development services provider by the co-ordinate bench of this Tribunal vide decision dt. 21.9.2016 in the case of Applied Materials India (P.) Ltd. (supra) in paras 9.1.1 to 9.2.4; 16.1 to 16.4 and 19 to 20 as under: ' (i) E-Jest Solutions Ltd. 9.1.1 The learned Authorised Representative has submitted that the assessee raised the objection before the DRP for exclusion of this company from the set of comparables but the DRP has not adjudicated the objections of the assessee. He has referred the objections raised before the DRP at page No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever the assessee raised objections against these companies before the TPO as well as DRP. 9.2.2 Before us, the learned Authorised Representative of the assessee has submitted that these companies are functionally not comparable to the assessee as these are engaged in diversified activity i.e. rendering of software development services and licensing, royalty of software products. Thus without having the separate segmental details and data these diversified activities cannot be compared with the assessee. He has further pointed out that the company Persistent Systems Ltd. also engaged in developing products and therefore the activities are not comparable with that of the assessee. In support of his contention, he has relied upon the decision of this Tribunal dt. 24.2.2016 in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra) and submitted that this company was found to be not comparable with the software development services provider. He has further pointed out that in assessee's own case for the Assessment Year 2010-11, the DRP vide its order dt. 24.11.2014 has excluded Persistent Systems and Solutions Ltd. from the list of comparables by holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding this company from the list of comparables. This ground of CO is dismissed. (4) Persistent Systems Ltd. 24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development The segmental information for services and product is not available. Further, the assessee has also, pointed out that there was an acquisition and restructuring during the year under consideration. 25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note l of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequently this company does not satisfy the filter of information technology revenue applied by the TPO itself. Accordingly, we do not find any reason to interfere with the order of the DRP for this issue. (iv) L T Infotech Ltd. 19. We have heard the learned DR as well as learned DR and considered the relevant material on record. The DRP rejected this company by recording the facts at page 15 as under: On perusal of schedule to the notes of the accounts, it is noticed by us that expenses incurred in foreign currency are 938.94 crore (48.84%), out of the total expenses of ₹ 1920.46 crore debited in profit and loss account, these expenses include the sub-contracting expenses to the extent of ₹ 118.01 crore, which indicates that the company has the on-site revenue of about 50%, it is also noticed by us that in the profit and loss account, the revenue has been shown from software development services and products, in the segmenting account it is mentioned that the segment revenue include sales directly identifiable with/allocable to the segment, in Schedule 18, the revenue have been shown from 3 segments, i.e. financial services, manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables. In view of the facts recorded by the DRP as well as the decision of the co-ordinate bench, we do not find any reason to interfere with the directions of the DRP. (v) Tata Elxsi Ltd. (Seg.) : 20. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. The DRP has rejected this company by discussing the fact at page 16 as under: Directed to exclude as per paragraph 2.7 of the order, further, on perusal of annual report, it is noticed by us from page 14 that software development and services consist of embedded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions made by the learned AR, it is seen that the 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 AR 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 parties. 33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP. In view of the facts recorded by the DRP as well as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables. (vi) Sasken Communications Technologies Ltd. 15.1 The TPO included this company in the set of comparables despite the assessee's objection that it was functionally different and also had Product portfolio. 15.2 After considering the rival submissions, we find from page 58 of the TPO's order that he has recognized sale of software products to the tune of ₹ 37 crore and odd. Though the break-up of revenue from software services and software products is available, but, the break-up of operating costs and net operating revenues from these two segments have not been given. It is further observed that the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee is seeking exclusion of Asian Business Exhibition Conferences Limited which was retained by the DRP whereas the department is seeking inclusion of ICC International Agencies Limited. 13. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that the functional comparability of Asian Business Exhibition Conferences Limited has been examined by this Tribunal in assessee's own case for the Assessment Year 2010-11 vide order dt.24.2.2016 reported in Dy. CIT v. Electronics For Imaging India (P.) Ltd. [2016] 70 taxmann.com 299 (Bang. - Trib.) in paras 53 54 as under: 53. We have considered the rival submissions and considered the relevant material on record. As it is clear that the assessee is providing sales and marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and the like, the working also includes educating potential users of the benefit and features of the AEs range of products. However, products for which the assessee is providing sales and marketing services i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sian Business Exhibition and Conferences Limited as a comparable. As far as objection of learned departmental representative that assessee itself has selected this company as a comparable, we may observe, that cannot be the sole criteria to reject assessee's objection with regard to selection of a comparable. At the time of preparing T.P. Study report assessee had selected some comparables by considering multiple year data and information available at the relevant time. However, if subsequently on the basis of information available in public domain it is found on the basis of functionality or some other reason a company is not at all comparable, assessee cannot be precluded from objecting to selection of the company as a comparable. This legal proposition is fairly well settled by the decision in case of DCIT v. Quark Systems (P.) Ltd. (2010) 132 TTJ (Chd) (SB) 1 as well as decisions relied upon by the counsel for the assessee. In view of the aforesaid, we do not find any infirmity in the directions of DRP in excluding Asian Business Exhibition and Conferences Limited as a comparable. The ground raised is therefore dismissed. 54. In view of the above facts as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia) (P.) Ltd. [TS -723-ITAT -2016 -Bang-TP ay 2010-11. The relevant portion of the order from ITO v. Interwoven Software Services (India) (P.) Ltd. [IT(TP) A.No.451/Bang/2015 dt. 26.8.2016 for a.y. 2010-11 is extracted as under: 28. For this segment, the assessee is seeking exclusion of two comparables i.e. M/s Acentia Technologies Ltd., and M/s ICC International Agencies Ltd., The claim of assessee regarding exclusion of M/s Acentia Technologies Ltd. is also covered in favour of the assessee by the same Tribunal order rendered in the case of M/s Electronics for Imaging India (P.) Ltd., (Supra) and respectfully following the same Tribunal order, we direct the AO/TPO to exclude this company from the list of final comparable because the ld. DR of the revenue could not point out any difference in facts. 29. Regarding exclusion of second company, it was submitted by the learned AR of the assessee that i.e. M/s ICC International Agencies Ltd., (Supra) this is the claim of the assessee that annual report of this company available on pages 1100 1104 of the paper book. As per the same, we find that this company is deriving income from trading activity and also maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover is defined in clause (iv) of Expln. 2 inserted at the end of section 10A and provides that the expenditure on freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India are required to be excluded from the consideration in respect of export brought into India. Further the expenditure if any incurred in foreign exchange in providing technical services outside India is also to be excluded from the consideration in respect of export of the undertaking. Thus if the expenditure in question is not falling in the category of charges of freight, telecommunication charges or insurance and it has been incurred in the foreign exchange then only when this expenditure is incurred in providing the technical services outside India, the same has to be excluded as per the definition provided under Explanation 2(iv) inserted at the end of Section 10A of the Act. Accordingly, we set aside this issue to the record of Assessing Officer for limited purpose of verification of the nature of expenditure and in case it is not for freight, telecommunication charges or insurance then the same cannot be excluded except it is incu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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