TMI Blog2017 (7) TMI 1345X X X X Extracts X X X X X X X X Extracts X X X X ..... to bring in more comparables for determining the ALP on the basis of the directions given herein above, subject to fulfilment of other parameters mentioned herein above. Accordingly, the TP grounds of the revenue as well assessee are allowed for statistical purpose. Working capital adjustment - TPO has restricted the working capital adjustment from 2.3% to 1.91% on the ground that the same represents optimum working capital adjustment - HELD THAT:- The issue of working capital adjustment is no more a res integra and the assessee is required to be given working capital adjustment based on actual basis. This has been so held by the Tribunal following ARM Embedded Technologies (P.) Ltd. v. Dy. CIT [ 2015 (8) TMI 1437 - ITAT BANGALORE] AND Mercedes-Benz Research Development India P. Ltd v. Asstt. CIT [ 2016 (6) TMI 1322 - ITAT BANGALORE] - Following the above decisions of the coordinate bench of the Tribunal, we dismiss the ground raised by the Revenue in respect of working capital adjustment. Disallowance u/s 40(A) - HELD THAT:- Deduction has not been claimed on the basis of any provision made in the books of account of the assessee. The deduction had been claimed on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue and the Cross Objection by the assessee are directed against the order dated 14.01.2015 passed by the Assessing Officer u/s. 143(3) r.;w.s.-144C of the Income-tax Act, 1961 [ the Act. ] in pursuance of the directions of the DRP dated 18.12.2014 for the assessment year 2010-11. 2. The Revenue has raised the following grounds in its appeal : 1. The order of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case. 2. The DRP erred in directing the AO to exclude M/s, ICRA Techno Analytics Ltd from the list of comparable in Software development segment as the company has multiple segments without appreciating the fact that these companies qualify all the qualitative and quantitative filters applied by the TPO. 3. The DRP erred in directing the AO to exclude M/s, ICRA Techno Analytics Ltd., M/s. KALS- Information Systems Ltd., M/s, Tata Elxsi Ltd., M/s, Mindtree Ltd from the list of comparable in Software development segment as being functionally different without appreciating the fact that these companies qualify all the qualitative and quantitative filters applied by the TPO, 4. The DRP erred in ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and do not require adjudication. 4. Ground Nos. 2, 3, 4, 5, 6 7 are regarding exclusion of certain comparables by the DRP for the purpose of determining the ALP in respect of international transactions in software segment. 5. The assessee M/s. ACT Worldwide Solutions P. Ltd, is a subsidiary of ACI Worldwide BV, Netherlands. The company is engaged in the business of developing and exporting software products and services. During the F.Y. 2009-10 the assessee company had international transactions as per Section 92 B of the Act. According to section 92CA of the Act., the case was referred to the TPO in order to determine the ALP. The assessee has reported segmental financial results in respect of AE transactions for the year ended 31.03.2010, which is reproduced by the TPO in para 2 page 2 as under:- Particulars Sales to AE Total Revenue SWD Market support Revenue from operations 33,10,23,928/ 1,32,85,437/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the TPO for software development segment and seven for market support segment, after carrying out a search under the database of prowess and capitaline. The filters used by the TPO were as under : Companies whose software development service income of less than ₹ 1 crore Companies whose software development service is less than 75% of the total operating revenues; Companies having more' than 25% RPT of the sales; Companies having export sales of less than 75% of the sales; Companies with employee cost of less than 25% of turnover; Companies having persistent losses for the last three years up to and including FY 2009-10; Companies having different financial year-ending; Companies that are functionally different from the assessee Companies having peculiar economic circumstances; and Companies for which current year data was available; 8. The TPO finally selected eleven comparables as under : 1. ICRA Techno Analytics Ltd (seg) 2. Infosys Ltd 3. Kals Information Systems Ltd (seg) 4. Larsen Toubro Infotech Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 Tata Elxsi (seg) 3,36,94,00,000 2,78,62,43,000 20.93% 11 Thinksoft Global Services. Ltd 74,56,94,965 63,70,04,595 17.05% AVERAGE MARGIN 22.71% 10. However, after giving working capital adjustment, the ALP determined was restricted to 1.98% with an adjusted margin of 20.73%. Thus the TPO has proposed an adjustment of 30,92,45,735/- being 120.73%) of operating cost and shortfall being adjustment u/s.92CA is Rs.l,81,06,396/-. 11. The assessee challenged the action of the TPO before the DRP and raised objections against some of the comparables selected by the TPO. 12. The DRP in its directions rejected eight comparables out of the eleven comparables selected by the TPO. Thus the Revenue is aggrieved against the directions of the DRP insofar as the companies directed to be excluded, which are as follows : 1. ICRA T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables. 15. We find that the facts recorded by the DRP in respect of business activity of this company are not 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. 16. 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 17. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. 22. 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 account 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 (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540 (Bang, - Trib.), this company was found to be not comparable with that of the assessee. 23. We have heard the ld. DR as well as Id. 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 in a series of decisions including in the case of Trilogy e-business Software India (P.) Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of ₹ 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persistent Systems L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year ended March 31, 2010 Software Services 37,736.22 Software products 2,041.00 Other services 372.77 Total revenues 40,150.89 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. (6) Tata Elxsi Ltd. 30. 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 activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Telcordia Technologies India (P.) Ltd. (supra), we do not find any reason to interfere with the finding of the DRP. 34. Ground Nos. .6 7 are regarding foreign exchange loss/gain treated as operating revenue for the purpose of determining the ALP. The TPO has accepted foreign exchange gain/loss while computing operating margin of comparable companies. However, in the case, of assesses, foreign exchange loss has been considered as non-operating in. nature. Thus, the assessee raised an objection-before the DRP that exchange gain/loss arises on account of factors like realization of sales, payment to suppliers and' restatement of value of assets .liability, are operating in nature. The assessee placed reliance on the decision of coordinate Bench of this Tribunal in the case of SAP Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156 wherein it has been held that foreign exchange gain need to be considered as operating in nature, if it arises on realization of sale proceeds or on payment against supplies. The DRP has accepted the contention of the assessee by following the decision in the case of SAP Labs India (P.) Ltd (supra) and accordingly directed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Ltd, has been examined by the coordinate bench in the matter of Electronics Imaging for India Ltd. (supra), we do not deem it appropriate to include it in the list of comparables as elaborate reasoning has been given by the coordinate bench. 19. After dealing with above comparables we are left with two companies to be dealt with, namely, Mindtree Ltd and R. S. Software (India) Ltd, which we are deal in the following paragraphs. Mindtree Ltd : In respect of Mindtree Ltd, the ld. AR of the assessee has submitted that the ld. AR is not pressing the exclusion of Mindtree Ltd, He has made a statement that the assessee has no objection for retaining of Mindtree Ltd, as one of the comparables. Accordingly, we direct the TPO to retain Mindtree Ltd, as one of the comparable. R.S. Software (India) Ltd : The TPO has selected this comparable on the ground that it is functionally comparable to the assessee company. However, the DRP has suo motu rejected this company on the ground that it is earning from onsite services . The assessee as well as the Revenue are seeking inclusion of this company as comparable. In our view, the DRP has applied a ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RPT/Sales 18.79% The ld. AR relied upon the decision of the Tribunal in the matter of Electronic for Imaging India Ltd (supra), to the following effect: Larsen Toubro Infotech Ltd: 62. The assessee has raised objection against this company on, the basis of high turnover in comparison, to the assessee, .It was also . contended that related party transaction (RPT) of this company is 18.66%. The DRIP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable. 63. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the ld. AR submitted this company is also in the software products and therefore cannot be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the show cause notice, in support of the contention. It is also submitted that the learned TPO grossly erred in not providing any evidence in support of his contention that LST Infotech is engaged in software services only. It is further submitted that L T Infotech has onsite revenue of as much as 51% of total revenue as against this, the Assessee earns its entire revenue from India. It is submitted that the above company has incurred expenditure amounting to Rs, 548.85 crores out of total salary cost of ₹ 879,64 crores on account of overseas staff cost (around 62%), which would be mainly engaged in providing onsite services. It is reiterated that L. T Infotech has sales turnover of its. 1777 crore for the March 2010. On the basis of the jurisdictional .ITAT. rulings in case of Trilogy E- Business Software India Private Limited and 24/7 Customer Private Limited, the Assessee pleads that L T Infotech should he rejected as per the sales turnover criteria adopted by the Assessee for rejecting companies having sales turnover greater than 200 crores. Further, the assets employed by L T infotech in carrying out: its operation amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related party transaction is a impossible situation and therefore if the said, filter is applied then the comparable companies will not be available for determining the arm's length price. Thus to avoid this practical difficulty of selecting the comparable companies this Tribunal in a series of decisions have taken a view that a tolerance range of related party transaction can be considered from 5% to 25% depending upon the facts and circumstances of each case particularly the availability of the comparable companies. In ordinary circumstances when there is no difficulty of selecting the comparable companies the tolerance range of 15% of related party is considered to be proper. Only in extreme and exceptional circumstances when the comparable companies are not easily available or found then this tolerance range is relaxed up to 25%. Therefore in the case of the assessee where neither the TPO nor the assessee has made out a case of exceptional difficulty in searching the comparable companies then the normal tolerance range of 15% shall be taken as proper. Hence we set aside the order of the CIT(A) qua this issue of related party transaction filter and also modify the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly, shares carrying not less than twenty-six per cent, of the voting power in the other enterprise ; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent, of the voting power in each of such enterprises ; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent, of the book value of the total assets of the other enterprise ; or (d) one enterprise guarantees not less than ten per cent, of the total borrowings of the other enterprise ; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise ; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons ; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l; (vi) any body corporate whose board of directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager; (vii) any person on whose advice, directions or instructions a director or manager is accustomed to act : Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (viii) any company which is- (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary; (ix) such other person as may be prescribed; 16. The term relative referred in the definition of the term Related Party is defined in Section 2(77) of the Companies Act, 2013, as under: (77) relative , with reference to any person, means any one who is related to another, if- (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed; On a perusal of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the Tribunal would be less than 6, therefore We direct the TPO to apply RPT filter of 25% on all comparable instead of 15% and find out the fresh comparables, which are otherwise functionally comparable with that of the assessee. In fact, the coordinate bench in Electronics for Imaging India Ltd (supra) has examined the functional comparability of L T Ltd., with that of the assessee in that case and found that L T Ltd, is not functionally comparable to the software development service segment of the assessee. Following the coordinate bench decision in Electronics for Imaging India Ltd (supra), we direct the exclusion of L T Ltd as it is not functionally comparable with that of the assessee. 23. After exclusion of the above company i.e., L T Ltd, the only two comparables that remain are Persistent Systems Solutions Ltd and Tinksoft Global Services Ltd. As indicated hereinabove, as the' comparables remain are less than six, therefore, the TPO is required to apply RPT of 25% so as to bring in more comparable companies which are functionally similar to that of the assessee. In view thereof, we direct the AO/TPO to bring in more comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment proceedings, the AO had disallowed the claim u/s 40(A)7 of the Income-tax Act, 1961 on the ground that the assessee has not intimated about an alteration in the constitution of the fund/trust and the change in name to the CIT and the AO. The assessee filed objections to the DRP. The DRP held that provisions of section 40(A)7 of the Act is not applicable where the amounts have been actually paid by the assessee. The DRP held that where the expenses have been incurred for the purpose of the business, then the same shall be allowed as deduction u/s 3.7(1) of the Act. Accordingly, the AO was directed to delete the additions made u/s 40(A)7. The Department is in appeal against this direction. 27. In this regard, the assessee submits that disallowance u/s 40(A)7 will be trigger only when a provision is created in the books of account and not where actual payment is made to the gratuity fund. Accordingly, an actual payment for contribution made towards gratuity fund falls outside the ambit of section 40(A)7 of the Act. The assessee has made actual payment to LIC and claimed the deduction u/s 36(1)(v) r.w.s 40(A)7 of the Act. The deduction is therefore allowable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had been made, had not become payable during the previous year relevant to assessment year 1979-80. No such case has been made out by the Revenue. Thus, in our view, the Tribunal was right in holding that the grant of approval to the gratuity fund was not relevant for the purposes of this case as the deduction was not being claimed on account of any provision. The deduction was in respect of the amount actually deposited in the fund which had become payable during the previous year relevant to assessment year 1979-80. This factual position has not been disputed nor has the Counsel for the Revenue controverted the factual findings that in the earlier years, similar claims of the assessee had been allowed by the Assessing Officer or by the CIT (Appeals) and the orders stand accepted by the Revenue. Following the judgment of the Hon'ble Punjab Haryana High Court, we do not find any infirmity or irregularity in the order passed by the DRP. Accordingly, the appeal filed by the Revenue on this ground is dismissed. 31. Ground No.4 of the cross objection by the assessee, reads as under: The DRP has erred in confirming the action of the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. ACIT, Range- 5(50 SOT 31 (Delhi) (URO)}. It is also clear from the statute that 11.81) is clearly applicable in a case in which the assessee claims that no expenditure has been incurred to earn the tax exempt income. The extract as below: Expenditure incurred in relation to income not includible in total income 5.1 4A. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:] 5.7 Therefore, even going by the above the disallowance as per R.81) is applicable in this case.Further, vide Circular No. 5/2014 dt. 11.2.2014, the CBDT has made it clear that the disallowance u/s 14A r.w. rule 8D has to be made even where the taxpayer in a particular year has not earned any exempted income. Reliance is also placed on the judgment of Hon'ble ITAT, Kolkata in the case of M/s. Champion Commercial Company Ltd. ;vide\.ITA No.644/Kol/2012. Reliance is also,placed on the case of Maxopp. Investments Ltd. v. CIT.(TS-668- HC-2011(HC) wherein it was held that investments in subsidiary companies also ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
