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TMI Blog2020 (3) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. Sub-section 1B of the Act was introduced by the Finance Act, 2000 to section 80HHE of the Act w.e.f 1.4.2001 and simultaneously, provisions of section 10A of the Act were amended to the effect that deduction would be available for 10 Assessment Years. The new undertakings had an option not to claim deduction u/s 10A of the Act. Since the deduction was optional, the assessee claimed deduction u/s 80HHE of the Act and opted for not claiming deduction u/s 10A of the assessee Act. In view of the introduction of section (1B) to section 80HHE of the Act, the assessee switched over to deduction u/s 10B/10A of the Act. 5. The Assessing Officer was of the firm belief that the switch over of the assessee has been done with a specific motive to claim excess deduction and avoid payment of taxes. The Assessing Officer formed a belief that the claim of the assessee was not bonafide or genuine but had been made merely with an intention to defraud the revenue. The Assessing Officer found that for similar reasons, deduction had been disallowed in A.Ys 2005-06 and 2006-07 and taking a leaf out of the said A.Ys, the Assessing Officer disallowed the claim of deduction u/s 10B of the Act 6. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the findings of the Commissioner of Income Tax(A). Per contra, we clearly observe that the Assessing Officer ignored this fact that the assessee's 100% EOU was established in AY 1997- 98 related to AY 1998-99. The Assessing Officer denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold the findings of the Commissioner of Income Tax(A) in the impugned order. Accordingly, ground no.2 of the revenue is dismissed." 11. Similar issue was considered by the Tribunal in Assessment Year 2006-07 in ITA No. 5720/DEL/2010. The relevant findings of the Tribunal read as under: "3. We have heard rival argument of both the parties and careful perused the record placed before us. At the outset Ld. Counsel of the Assessee filed a copy of decision of ITAT Delhi 'C' Bench in ITA No. 2339/Del/2010 for the Assessment Year 2005-06 dated 29/11/2013 and submitted that the issue of allowability of deduction u/s 10B of the Act has been decided in favour of the Assessee in Assessee's own case for immediately preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from claiming exemption on this ground also. We do not find any force in such objection because this objection is merely of super technical nature. In view of the above, we are liable to concur with the fining of the Ld. CIT(A) and set aside the same. Consequently, we allow the ground of appeal taken by the assessee and direct that the assessee shall be entitled to claim exemption u/s 10B in the assessment year under consideration." 8. On careful consideration of rival contentions and careful perusal of record and citations submitted before us, we observe that the revenue has not disputed this point that the assesssee got approval as 100% EOU as per approval dated 27/1/1997. We further observe that in the impugned order, the Commissioner of Income Tax (A) has held that the Assessing Officer was completely in error in holding that since the assessee started its business in A.Y 1992-93 then the prescribed period of 10 years for the purpose of exemption u/s 10B of the Act had come to an end by A.Y 2001-02. We also observe that the said Section 10B of the Act had come to an end by A.Y 2001-02. We also observe that the said Section 10B envisages setting up of export oriented undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax v. Infra Soft Technologies Limited (decision dated 21st October 2010 in ITA No. 708 of 2008) and Commissioner of Income Tax v. Interra Software India Limited (2011) 238 CTR (Del) 23. In both decisions the deduction claimed was under Section 10A of the Act which is in pari materia Section 10B of the Act. 4. These appeals are accordingly dismissed." 13. As no distinguishing decision has been brought to our notice by the Revenue, respectfully following the findings of the co-ordinate bench and Hon'ble High Court, we direct the Assessing Officer to allow the claim of deduction u/s 10B of the Act. Addition of Rs. 7,54,85,392/- is directed to be deleted. Ground No. 2 with all its sub grounds is allowed. 14. We will now address to the Transfer Pricing adjustments. 15. The underlying facts in issue are that the appellant company was established as a back-end software services company and works mainly for its parent Infogain, USA. The appellant company is also registered under the STP Scheme and has been claiming tax u/s 10B of the Act. 16. During the year under consideration, international transactions, as mentioned in the 92CE Report are as under: Particulars Amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R S Software (India) Ltd 16 R Systems International Ltd 17 SIP Technologies & Exports Ltd 18 Sasken Communication Technologies 19 LTtVdS Infotech Ltd 20 Tata Elxsi Ltd 21 Wipro Ltd 22. The Assessing Officer finally computed the ALP and made adjustments as under: "19. Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmctic, mean PLI : 25.00% Less: Working capital adjustment (Annexure-C) : (-1.49%) Adj. Arithmetic mean PLI : 26.49% Arm's Length Price: Operating Cost Rs. 461, 781,432/- Arms Length 26.49% of the Operating Cost Arms Length Price (ALP) Rs. 584,107,333 /- 20. Price Received vis-a-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 126.49% of operating cost Rs. 584,107,333 Price charged in the international transactions Rs. 524,895,463 Shortfall being adjustment u/s 92CA Rs. 59,211,870 23. Objections be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a'eg by associated enterprises Adds.\v,ia!!y. Infogain India may at times equip recruited personnel witli additional skill sets at the instance of associated enterprises. RG also handles the internal/ local requirements of lnfogain India. Even though the recruitment services provided by lnfogain India have increased during the financial year 2006-07, they still constitute less than 1 percent of the entire revenue and almost the entire revenue has been earned from software services. 28. Keeping in mind the aforementioned business profile of the assessee, we will now consider the exclusion of the comparables as contended by the ld. counsel for the assessee before us. 1. Infosys Technologies Ltd and WIPRO Ltd 29. The Annual Report of both these companies, which are available on record, show that these companies are high brand value having intangibles whereas the assessee does not have any intangibles. Infosys Technologies Ltd is functionally dissimilar as it offers software products to banking industry and there are no segmental details. Wipro Ltd is engaged in providing a variety of services, such as, IT services, product engineering services, technology infrastructure servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason for exclusion was the "unavailability of the segmental data" for the above comparable. 20. In M/s. Oracle (OFSS) BPO Services Pvt. Ltd. (decision dated 5th February 2018 in ITA 124 of 2018) while upholding the exclusion of M/s.Wipro Ltd. from the list of comparables it was noted that the ITAT took into account the Related Party Transactions ("RPT‟).The filter adopted was to exclude comparables with unrelated party transactions equal to or in excess of 75% of their business. The ITAT did that on the basis that Wipro Ltd. had a significant brand presence in the market and could, therefore, not be deemed to be a comparable entity. This Court explained the RPT filter as under: "The RPT filter, is relevant and fits in with the overall scheme of a transfer pricing study which is premised primarily on comparing light entities having similar if not identical functions. Therefore, if a particular entity predominantly has transactions with its associate enterprise - in excess of a certain threshold percentage, its profit making capacity may resulted in a distorted picture, either way." 21. A reference may next be made to the decision in The Principal Commissioner of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Megasoft Ltd 37. The Annual report of this company shows that this year was of extraordinary events as there have been acquisitions in this year. The Annual Report further shows that there was amalgamation of Visualsoft Technologies Ltd. Moreover, we find that 35% of the revenue is from sale of software products and there are no segmental details. 38. The co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd ITA No. 5857/DEL/2011, for similar reasons, has directed for exclusion of this company from the final set of comparables. The relevant findings read as under: "15.1. The TPO included this company in the list of comparables. The ld. AR argued for its removal on the basis of certain acquisitions done by this company during the year. 15.2. After considering the rival submissions and perusing the relevant material on record, we find from the Notes to Accounts in the Annual report of this company that there was, in fact, amalgamation of Visualsoft Technologies Ltd. Note no. 25 with the caption 'Amalgamation of Visualsoft Technologies Ltd. with the Company' reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. (ControlNet) effective from April 1, 2006. Pursuant to this, all assets, liabilities and losses of ControlNet are merged with the assets, liabilities and reserves of the Company with effect from April 1, 2006 by following "pooling of interest method" as prescribed in Accounting Standard 14 (AS-14) as issued by the Institute of Chartered Accountants of India.' Thus, the acquisition took place in this company during the relevant to the assessment year under consideration. Following the reasons given above while discussing the case of Megasoft Ltd., we order for the exclusion of this company from the list of comparables." 41. Respectfully following the same, we direct the Assessing Officer/TPO to exclude this company from the final set of comparables. Sasken Communication Technologies Ltd 42. The Annual report of this company shows that this company is engaged in the sale of software products and technology licensing and business of software services with no segmental results which make this company functionally dissimilar. For similar reasons, the co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd [supra] has directed for exclusion of this company. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He, therefore, included this company in the list of comparables. 9.2. Having heard the rival submissions and perused the relevant material on record, it is observed that this company is not only engaged in providing software development services, but also into the software products. It is noticeable from the TPO's order page 73 that the assessee ITA No.5857/Del/2011 objected to the inclusion of this company by stating that it developed a new drug design tool 'Çelsuite' to drug discovery in finding the lead molecules for drug discovery and protected the IPR by filing under the Copyright/Patent Act. It can be noticed from the Annual report of the company, which is available in the paper book, that there is a reference to the development of a denovo drug design tool 'Celsuite', which is a revenue generating activity. When we examine the turnover of this company with the narration given on page 24 of the Annual report, it can be seen that the same comprises: "Bio-informatics services, data warehousing and manning, software development, products and services." It is manifest from the Annual report of this company that the same cannot be considered as compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, order to exclude this company from the list of comparables." 47. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Thirdware Solutions Ltd 48. The Annual Report of this company shows that this company derives revenue from various sources such as sale of license, software services, export from SEZ unit, revenue from subscription, etc. which makes this company functionally dissimilar from the appellant company. Though this company is engaged in diversified business including software products but no segmental information is available in the Annual Report. The co-ordinate bench, for similar reasons mentioned hereinabove, has directed for exclusion of this company. The relevant findings read as under: "Ld. AR contended that this company cannot be compared with the assessee company because the company is functionally dissimilar and derives revenue from various sources such as sale of license, software services, export from SEZ unit, revenue from subscription etc. Further, ld. AR submitted that this company is engaged in diversified business including software products and no standalone financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitute only 3% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: "the use of readymade object laboratories is only to the tune of about (0.33 to 3) % in the year 2005-06 and 2006-07. " We fail to comprehend as to how the above line conveys that the software products' revenue stands at 3%. What has been written is that the company's use the readymade object laboratories is only to the tune of maximum 3%. By no imagination this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software product's revenue limited to 3%. On the contrary, it has been mentioned in the Notes to the financial statement that: "the company is engaged in development of software and software products since its inception." The company consisting of STPI unit engaged software products and in development of software is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefullyconsidered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion that the high operating margins of this company were on account of difference in its asset base. It is further relevant to note that this company, apart from rendering software development services, is also engaged into the sale of software products and the accounts maintained by it are on entity level without there being any segregation for software development segment. As the TPO has considered the entity level figures of this company for making a comparison with the assessee company, such a course of action cannot be permitted because of the inclusion of profit from sale of software products into the overall profitability of this company. Neither separate profits are available, nor there is any measure provided for segregating profit on sale of software products from the overall profit of this company for finding out a comparable segment similar with that of the assessee company. As the profits of the software development portion cannot be ascertained, we hold that it cannot be considered as comparable on entity level. We, therefore, order for the exclusion of this company from the final set of comparables." 55. Respectfully following the same, we direct the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity." 59. In light of the above, we direct the Assessing Officer/TPO to exclude this company from the final set of comparables. 60. It would not be out of place to mention here that the claim of revenue that broad functionality is sufficient to find the comparable entity though the TNMM method allows broad flexibility tolerance in the selection of comparables does not hold any water in the light of the observations of the Hon'ble High Court of Delhi in the case of Avenue Asia Advisors Pvt Ltd 398 ITR 120 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thmetical mean of the profit level indicator." The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.* 20. A perusal of the above decision reveals that the following steps ought to be undertaken in identification of comparable transactions/entities. Comparable transactions must be selected on the basis of a similarity with the controlled transaction/entity.* Rule 10B (2) of the Income Tax Rules, 1962 ought to be borne in mind while choosing the factors of comparability in respect of uncontrolled transactions.* Wide deviation in the Profit Level Indicator ('PLI') would require further investigation/analysis. Even while adopting the TNMM method, the standard for selection of the comparable transactions/entitles cannot be diluted. For comparison of transactions, factors such as the nature of capital, resources used, the risks assumed, etc. ought to be considered.* Broadly, therefore, the dictum by this Court was that though in the TNMM method there is sufficient tolerance, mere broad functionality is by itself insufficient. Question (i) 21. In the backdrop of the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T, thereafter, simply held that Ladderup had similar functions as that of the Assessee and was a comparable that deserved to be retained. 22. Broadly, it appears that the ITAT has gone on the usage of several terms such as debt syndication, debt financing, IPO advisory, corporate restructuring, mergers, acquisitions etc, appearing in the annual reports of the comparable to hold that the Assessee and the said comparables perform similar functions. The analysis at such a broad level, based upon the appearance of such similar terminologies, does not by itself make the functions similar in nature. 23. The argument of the Assessee appears to be that while the Assessee was merely advising on these issues and providing advisory services to its AE, these three comparables appear to be actually involved in the providing of services relating to debt restructuring, debt financing, issuance of IPOs, mergers and demergers, etc. There is a difference between giving advice on these matters and actually undertaking the said services. A similar illustration, in the context of litigation, would be the difference between giving advice on what to argue in Court and actually arguing the matter in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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