TMI Blog2018 (10) TMI 1797X X X X Extracts X X X X X X X X Extracts X X X X ..... is leviable only on sale of goods and therefore, it has to be seen that what is the quantum of sale of goods by that company and whether segmental information in that regard is available or not - in the facts of present case, we feel that this issue should also be restored back to the file of TPO for fresh decision in the light of all these four Tribunal orders after providing adequate opportunity of being heard to the assessee. We order accordingly. ITES segment - Hartron Communications Ltd. - We find that as per Annual Report paper book, this has been stated that processing charges (Export income) was accounted for on cash basis but as perpaper book, this company is having revenue from operations on account of rent income, Export earning from BPO, Domestic earning from BPO and sale of land out of total revenue from operations of ₹ 33,12,01,272/- and there is no other income in the present year. Hence it is seen that in the present year, there is no income reported by that company on account of processing charges (Export income) - Accounting of some income/expenses on cash basis is not shown to have any material effect on the profitability of that company. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom export turnover then total turnover also goes down by the same amount automatically. - IT (TP) APPEAL NO. 2460 (BANG.) OF 2017 - - - Dated:- 26-10-2018 - Arun Kumar Garodia, Accountant Member And Laliet Kumar, Judicial Member T. Suryanarayana, Advocate for the Appellant. Ms. Neera Malhotra, CIT (DR) for the Respondent. ORDER Arun Kumar Garodia, This appeal is filed by the assessee and the same is directed against the assessment order dated 25.09.2017 passed by the AO for Assessment Year 2013-14 u/s. 143(3) r.w.s. 144C(13) of IT Act, 1961 as per the directions of DRP. 2. The grounds raised by the assessee are as under. The grounds mentioned herein are without prejudice to one another. 1. That the order of the Deputy Commissioner of Income-tax, Circle -2(1)(1), Bangalore (the learned Assessing Officer or the learned AO ) pursuant to the direction of the learned Dispute Resolution Panel (`the learned Panel' or 'the learned DRP'), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. Transfer Pricing Related 2. That the learned AO and the learned DRP erred in upholding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinary events during the referred financial year. 8. The learned AO and the learned DRP have erred in law and on facts in upholding the actions of the TPO by including ICRA Techno Analytics Ltd. as a comparable to the Appellant on the ground that it is functionally comparable, whereas this company should have been excluded on the grounds that it is functionally dissimilar to the Appellant, fails the Related Party Transaction (`RPT') to Sales filter [to exclude companies having RPT/Sales 25%] applied by the TPO, has diversified operations and no segmental data available in the public domain. 9. The learned AO and the learned DRP have erred in law and on facts in upholding the actions of the TPO by including Larsen Toubro Infotech Ltd. as a comparable to the Appellant on the ground that it is functionally comparable, whereas this company should have been excluded on the grounds that it is functionally dissimilar to the Appellant and has significant intangible assets and brand value. 10. The learned AO has erred in law and on facts by upholding the actions of the learned DRP which has not adjudicated/commented on the specific ground taken by the Appellant and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the TPO by including Infosys BPO Ltd. as a comparable to the Appellant on the ground that it is functionally comparable and passes all filters applied by the learned TPO, whereas this company should have been excluded on the grounds that it is functionally dissimilar to the Appellant and operates under different business model where it carries out subcontracting activity. 16. The learned AO and the learned DRP have erred in law and on facts in upholding the actions of the TPO by including Hartron Communications Ltd. as a comparable to the Appellant on the ground that it is functionally comparable, whereas this company should have been excluded on the grounds that it is functionally dissimilar to the Appellant, has diversified operations and has extraordinary activities during the referred financial year, without considering the submission made by the Appellant. Consequently, a rectification petition has been filed before the learned DRP for not considering the submission made and the Appellant awaits an opportunity for a hearing. 17. The learned AO and the learned DRP have erred in law and on facts in upholding the actions of the TPO by excluding Ace BPO Services Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 23. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act despite the fact that the Appellant has acted in a bona fide manner and provided all necessary details called for by the Assessing Officer. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal. 3. At the time of hearing of this appeal, it was submitted by ld. AR of assessee that only ground nos. 9,10,14,15,16 and 21 are to be decided and the remaining grounds are not pressed and accordingly the remaining grounds are rejected as not pressed. 4. It was submitted by ld. AR of assessee that there are two segments in the present case i.e. (1) Software development services and (2) ITES. He submitted that for the first segment i.e. software development services segment, the assessee selected 7 comparables having arithmetic mean of 13.78% and the TPO also selected 7 comparables but only two comparables are common i.e. RS Software (India) Ltd. and Mindtree Ltd. He further submitted that the average arithmetic mean of these 7 comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. Acropetal Technologies Ltd. and Tech Mahindra Ltd. (seg.). Now the assessee is requesting for exclusion of Capgemini Business Services (India) Ltd. as per ground no. 14 and exclusion of Infosys BPO Ltd. as per ground no. 15 and exclusion of Hartron Communications Ltd. as per ground no. 16. In respect of these three exclusions, the arguments of the ld. AR of assessee are contained in para no. D(i) to (iii) of synopsis of arguments and the same are reproduced hereinbelow. 'D. APPELLANT'S SUBMISSIONS ON THE ITS APPEAL: (i) Ground No.14: In this ground, the Assessee is seeking the exclusion of Capgemini Business Services (India) Ltd. ('Capgemini' for short) from the final list of comparables to the Appellant's ITE service segment as it fails the RPT filter applied by the TPO. In this regard, it is submitted that Capgemini has substantial RPT amounting to 82.32% of its total sales for the financial year 2012-13. The Appellant submits that although its RPT details are not disclosed in its annual report for FY 2012-13, the same are disclosed in its annual report for FY 2013-14. When this fact was brought to the notice of the DRP during the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts customers which is different from the functional profile of the Appellant. In addition, Infosys also enjoys significant brand value and owns several intellectual properties which place it in different from that Appellant. In view of its substantial brand value, the company enjoys an advantage in the market and has high bargaining power. As a result of the brand value, the company receives a premium in the market. Relevant submissions in this regard are made at pages 148-150 of the appeal set. The DRP, however, failed to properly appreciate the Appellant's submissions and accordingly rejected its submissions in this regard. While doing so, the DRP nevertheless directed the TPO to verify if it fails the export revenue filter. However, despite the above direction, the company was retained in the list of comparables. In support of its contentions for exclusion of Infosys BPO, reliance is placed on the common order dated 11.04.2018 of this Hon'ble Tribunal in the Assessee's own case for AYs 2010-11 and 2012-13 wherein this Hon'ble Tribunal held that Infosys BPO is not functionally comparable to the Assessee and, accordingly, directed its exclusion (page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, listing fee and leave encashment which are accounted for on cash basis. The above note suggests that cash basis of accounting is followed for export income (office back-up operations segment) as against accrual system of accounting followed for recording expenses, which is contrary to the matching principles of accounting. Further, Hartron is also liable to be excluded as the services provided in the segment selected by the TPO for the purposes of comparability are dissimilar to the routine ITE services provided by the Appellant to its AEs, and thus ought to stand excluded on this ground as well. Relevant submissions in this regard are made at pages 150-154 of the appeal set. The DRP, however, failed to properly appreciate the Appellant's submissions and accordingly rejected its submissions in this regard. In view of the above, the company ought to be excluded from the final list of comparables.' 6. As against this, the ld. DR of revenue supported the orders of authorities below. She also submitted that in respect of exclusion of Persistent Systems Ltd., there are various Tribunal orders i.e. Tribunal order rendered in the case of Microsoft Research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 ITR 98. He also submitted that this judgment of Hon'ble Karnataka High Court has been confirmed by Hon'ble Apex Court also as per its recent judgment dated 24.04.2018 in CIT v. HCL Technologies Ltd. [2012] 93 taxmann.com 33/255 Taxman 313/404 ITR 719. 8. We have considered the rival submissions. First of all, we decide ground nos. 9 and 10 of the appeal of the assessee. Regarding the assessee's request for exclusion of Larsen Toubro Infotech Ltd. for software development services segment, it is the submission of the learned AR of the assessee that this issue is covered in favour of the assessee by the Tribunal order rendered in the case of Pitney Bowes Software India (P.) Ltd. (supra) for the same Assessment Year. As per Para No. 3 of this Tribunal order, the TP adjustment was made in respect of provision of software development services to the AE. In the present case also, the issue in dispute is regarding exclusion or inclusion of this comparable i.e. Larsen Toubro Infotech Ltd. in respect of the software development services segment of the assessee company. Hence it is seen that this Tribunal order is relevant in the present case. We also find that in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use by a customer in particular industry. For e.g., the product UNITRAX is a Software that enables recording keeping enabling fund and insurance companies to manage the administration of their wealth management. Based on this software the Assessee designs Software for specific needs of a customer. No product is sold off the shelf by the company. Hence the objection of the Assessee that this company is a Software Product company was rightly held by the TPO/DRP to be not valid. 18. The objection with regard to absence of segmental information has been met by the TPO by pointing out that the whole segment of SWD services was considered for comparability. The objection of the Assessee in this regard is not specific and is vague and is on an assumption that this company operates in three segments. The TPO has pointed out that there is only one segment and hence this objection in our view was rightly disregarded by the revenue authorities. 19. As far as the objections regarding presence of intangibles, it is seen from the order of the TPO that the intangibles are nothing but Operating systems, office tools, development tools, testing tools etc., that are used in the process of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions are rendered on their facts prevailing in the relevant AY. As far as the present AY 13-14 is concerned, the plea of the Assessee for exclusion of this company on the ground that it is a software product company is held to be without any basis and is rejected. No other arguments were advanced for exclusion of this company. Hence, we uphold the orders of the revenue authorities including this company in the list of comparable companies. 9. In respect of the applicability of this Tribunal order for exclusion of Larsen Toubro Infotech Ltd, this has been submitted by ld. AR of assessee in the chart submitted before us that on page no. 698 of Annual Report paper book, this company has debited an amount of ₹ 27,10,89,274/- as cost of bought-out items for resale. But this fact was not brought to the notice of the Tribunal in the case of Advice America Software Development Center (P.) Ltd. (supra). It has also been submitted that on page no. 706 of Annual Report paper book, this has been reported that this company is engaged in sale of services to its related parties and this fact was also not brought to the notice of Tribunal in case of Advice America Software Deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r segmental information in that regard is available or not. It has been submitted that as per the remaining three Tribunal orders rendered in the case of Microsoft Research Lab India (P.) Ltd. (supra), WM Global Technology Services (India) (P.) Ltd. (supra) and in the case of Tecnotree Convergence Pvt. Ltd. (supra), the matter was remanded back to the TPO for fresh decision and therefore, in our considered opinion and in the facts of present case, we feel that this issue should also be restored back to the file of TPO for fresh decision in the light of all these four Tribunal orders after providing adequate opportunity of being heard to the assessee. We order accordingly. 11. In respect of software development services segment, we restore the matter back to the AO/TPO for fresh decision regarding the assessee's claim for exclusion of Larsen Toubro Infotech Ltd. and Persistent Systems Ltd. after providing adequate opportunity of being heard to the assessee and the issue should be decided after considering all available Tribunal orders for Assessment Year 2013-14 in respect of exclusion of these two companies. Accordingly ground nos. 9 and 10 are allowed for statistical pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and it has not been shown to us that there may be any material effect on the profitability of this company if these two expenses are accounted for on accrual basis instead of cash basis. Hence in our considered opinion, this objection has no merit because such accounting of some income/expenses on cash basis is not shown to have any material effect on the profitability of that company. There is no other objection raised before us in respect of inclusion/exclusion of this company and therefore, we find no merit in this request for exclusion of Hartron Communications Ltd. (seg). Ground No. 16 is rejected. 13. Now we examine the assessee's request for exclusion of Capgemini Business Services (India) Ltd. Regarding this company, it has been stated that RPT% of this company is 82.32% and in this regard, our attention was drawn to page 140 of paper book. We find that on page no. 140 of the paper book is part of objections filed before DRP in form 35A against the draft assessment order. It has been submitted before DRP that Capgemini Business Services (India) Ltd. has substantial related party transactions to the extent of 82.32% for FY 2012-13 as emanating from the Annual Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013-14. But this aspect still remains that Infosys BPO Ltd is not a comparable because of this brand value as per the tribunal order in earlier year. But this aspect has also to be examined as to what is the comparability of brand value of the present assessee and Infosys BPO Ltd because if the comparable company and the tested party both have brand value without much difference then this cannot be said that the comparable company having brand value cannot be considered as a good comparable. In the present year as per the directions of DRP available on page nos. 19 and 20 of the DRP directions, we find that this is not claim of the assessee in the present case that Infosys BPO Ltd. is not comparable because that comparable company is having brand value. Considering all the arguments of ld. AR of assessee, we find no infirmity in the directions of DRP regarding his decision in respect of assessee's claim for exclusion of Infosys BPO Ltd. because we find that DRP has examined all the aspects of the matter including this aspect that Infosys BPO Ltd. acquired 100% of the voting interests in McCamish Systems LLC and a categorical finding is given by DRP that the said acquisition ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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