TMI Blog2019 (8) TMI 1479X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as intangible assets cannot be compared with an ordinary entity who provide captive services. Disallowance on account of leave encashment - HELD THAT:- As decided in Global e-business operations (P.) Ltd. [2017 (1) TMI 1618 - ITAT BANGALORE] When a challenge was made before the Hon'ble Calcutta High Court in Exide Industries Ltd and another v. UOI others [2007 (6) TMI 175 - CALCUTTA HIGH COURT] it struck down section 43B(f) being arbitrary, unconscionable and dehors the Apex Court decision in the case of Bharath Earth Movers Ltd (2000 (8) TMI 4 - SUPREME COURT) as the amendment did not disclose the reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the apex Court decision. On SLP the SC held that Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case civil appeal of the Department is allowed - issue is remitted back t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies. (v) Whether the Hon'ble DRP has erred on fact in deleting M/s E-infochips as a comparable on the ground that it fails the filter of service income less than 75% of the sales, when the said company has service income being 100% of the sales. (vi)Whether Hon'ble DRP erred in fact in rejecting the company/s Infosys Technologies Ltd., as a comparable on the ground that it is functionally different when the primary source of income of the comparable is from provision of software development services. (vii) Whether while seeking the exact comparability as mentioned above the DRP 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. (vii) Whether the Hon'ble DRP is correct in fact and law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come being 100% of the sales. (vi)Whether Hon'ble DRP erred in fact in rejecting the company/s Infosys Technologies Ltd. as a comparable on the ground that it is functionally different when the primary source of income of the comparable is from provision of software development services. (vii) Whether while seeking the exact comparability as mentioned above the DRP 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. (vii) Whether the Hon'ble DRP is correct in fact and law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises? (viii) Whether the Hon'ble DRP was right in following the ratio laid down by the Hon'ble Supreme Court in the case of CIT Vs M/s Exide Industries Ltd. (ix)Whether the Hon'ble DRP was correct in holding that the liability towards leave encashment was a business liability. (x) Whether the Hon'ble DRP was right in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Bells Softch Ltd. 2 CG Vak Software Exports Ltd. 3 Goldstone Technologies Ltd 4 KLG Systel Ltd. 5 Intertech Communications Ltd 6 Larsen Toubro Infotech Ltd 7 LGS Global Ltd. 8 Mascon Global Ltd 9 Mindtree Ltd. 10 Ontrack Systms Ltd 11 Onward Technologies Ltd. 12 Powersoft Global Solution Ltd 13 R S Software (India) Ltd., 14 R Systems International Ltd. 15 Sonata Software 16 Tata Elxsi Ltd. 17 Techprocess Solutions Ltd. 2.4. Ld.TPO subsequently applied various filters and selected following 13 comparables which included 9 new com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... takes in computation of working capital of comparable companies. 4. On receipt of DRP directions, Ld.AO while passed final assessment order made addition of ₹ 1,03,10,10,532/-on account of transfer pricing adjustment. 4.1. As regards corporate tax additions, Ld.AO disallowed software expenses claimed by assessee, amounting to ₹ 59,51,640/-, disallowed write off of provision of electricity deposits amounting to ₹ 63,33,294/- and disallowed provision for leave encashment amounting to ₹ 5,62,13,302/-. 5. Aggrieved by additions made by Ld.AO, revenue as well as assessee is in appeal before us now. 5.1 In revenue's appeal, grounds raised pertains to application of on-site revenue filter selectively to few comparables for rejecting excluding E-Infochips Ltd., on the ground of having service income less than 75% of the sales which is alleged to be contrary to observations of Ld. TPO. 5.2. Revenue also challenged disallowance made by Ld.AO on account of software expenditure, provision for leave encashment and write off of provision for electricity deposits being deleted by Ld. CIT (A) 5.3. In cross appeal filed by assessee, it is observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee has also alleged correction of arithmetical errors in computing margins of M/s Tata Elxi Ltd and M/s L T Infotech Ltd. which has been not pressed by the Ld.AR. Accordingly these grounds stands dismissed. 7. Effective Grounds argued by Ld.AR Thus, effective grounds in assessee's appeal are, Ground No. 3.1, LGS global Ltd in Ground No.3.2, Ground No.3.3 partly Ground No. 5.1, Ground No.6.1-6.6 and Ground No.7, and in Additional Ground raised on 6/12/2017 inclusion alleged by assessee in respect of FCS Software Solutions Ltd We shall first take up revenue's appeal in ITA No. 583/Bang/2016 8. Ground no. (i) (v) She submitted that DRP applied on-site revenue filter selectively, instead of applying in respect of all comparables. It has been argued by her that application of a filter determines what set of comparables would be displayed on database, on which search is carried out. Application of filter to shortlist companies under a particular segment is 1st step to conduct transfer pricing analysis. She vehemently argued that, once comparables are shortlisted by Ld.TPO, DRP cannot suo moto apply on-site revenue filter subsequently and exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in case of Vertex customer services (supra) and Aircom International India (P.) Ltd., (supra) does not deal with on-site revenue filter as has been submitted by Ld.CIT DR. 8.6. On merits, Ld.CIT DR relied upon decision of coordinate bench of this Tribunal in case of Mercedes Benz Research Development India (P.) Ltd., v. Asstt. CIT [2018] 90 taxmann.com 300 (Bang. - Trib.) and submitted that these comparables were sent back to Ld.TPO for re-examination. She thus submitted that, view taken by coordinate bench of this Tribunal in Mercedes Benz Research Development India (P.) Ltd., (supra) may be followed. 8.7. We have perused view of coordinate bench of this Tribunal in case of Mercedes Benz Research Development India (P.) Ltd., (supra) in respect of Accropatel Technologies Ltd and L T Infotech Ltd. It is observed that these comparables were sent back to Ld.TPO by observing as under: Acropetal Technologies Ltd. ('Acropetal') ** ** ** 13.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the DRP has observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal. 16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two companies i.e. (i) L T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of these companies on the issue of functional dissimilarity and other grounds. In our considered view, the assessee cannot be precluded from raising an objection against inclusion of a company even if the said company was selected by the assessee in its TP Study. This view was taken by the Special Bench of ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems (P.) Ltd . [2010] 38 SOT 307. As per the principles laid down in the aforesaid decision of the Special Bench (supra), we admit this additional ground raised by the assessee seeking exclusion of these two companies (i) L T Infotech Limited (ii) Sasken Communication Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced before us. It is observed that, this Tribunal in case of Autodesk India (P.) Ltd. (supra) excluded E- Infochips Ltd., by following view taken by this Tribunal in case of Comscop Network (India) (P.) Ltd. v. ITO [IT (TP) Appeal Nos. 166 181 (Bang.) 2016, dated 22-2-17 wherein, this company was excluded for reason that there is no segmental information regarding diverse functions performed by this company, and that there was major fluctuation in its profits, which influenced turnover of this company. Further it is observed that in case of Dy. CIT v. CGI Information Systems Management Consultations (P.) Ltd. [2018] 93 taxmann.com 9 (Bang. - Tri.) dated 06/04/18 dealt with identical objection raised by Ld. CIT DR before as under: 24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal is weak and any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the act and rules. As far as ground No. 5 in revenue's appeal is concerned, the revenue seeks to challenge the exclusion of AE Infotech Ltd. On the ground that it failed direct software service income fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provider, providing exclusive services only to its AE's. It is also been submitted by Ld.Counsel that this company has heavy R D expenses and thus has intangibles associated with it. 10.2. It is observed that this company provides solutions that span entire software run life-cycle encompassing technical consulting, design, developed meant, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. With such diversified activities carried on this company, it is not appropriate to compared it with a one-to-one service provider like assessee. 10.3. It is observed that in case of Agnity India Technologies (P.) Ltd. v. ITO [2015] 58 taxmann.com 167/154 ITD 293 (Delhi - Trib.) Delhi benches of this Tribunal after analysing various aspects took a view that this company is not a fit comparable for a captive service provider . The said view has been upheld by Hon'ble Delhi High Court wherein, Hon'ble Court upholding the view taken by the Tribunal, observed that company having brand value as well as intangible assets cannot be compared with an ordinary entity who provide captive services. Resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aside this issue back to Ld.AO, to dispose of this issue based on the outcome of Hon'ble Supreme Court's decision. Accordingly this ground raised by revenue stands allowed for statistical purposes. In the result appeal filed by revenue stands partly allowed. ITA No. 668/Bang/2016 14. It has been submitted that Ground No. 1-3 are general in nature and therefore do not require any adjudication. 15. Ground No. 3.1, 3.2, 3.3, 3.4 and additional ground filed on 06/12/17 contains certain comparables which has been alleged by assessee for exclusion and inclusion as under: Comparables alleged for Exclusion Persistent Systems and solutions Ltd Persistent Systems Ltd. Comparables alleged for Inclusion LGS Global Ltd Evoke Technologies Ltd Mindtree Ltd FCS Software Solutions Ltd 16. Before carrying out compatibility analysis, it is sine qua non to understand functions performed, assets owned and risk assumed by assessee under this segment. Functions: Assessee offers wide range of professional software development services through following services: 1. services in relation to error fixing or maintenance of specific features in so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar with that of assessee. Ld.CIT DR on the contrary supported view of authorities below and opposed exclusion. We have perused submissions advanced by both sides in light of the records placed before us. It is observed that annual report of this company is placed at 1280 -1471 of paper book wherein, Schedule 15 forming part of profit and loss account shows income from sale of software services and products, however there is no separate segmental information in respect of these 2 segments. Thus it is clear that this company is earning revenue from activities which includes licensing of products, royalty on sale of products as well as income from maintenance contracts etc which could not be considered functionally similar with that of assessee holders only carrying out software development service at the behest of its AE's on a captive basis. Similar view has been taken by this Tribunal in case of Dy. CIT v. Electronics for Imaging India (P.) Ltd. [2015] 64 taxmann.com 443 (Bang. - Trib). Respectfully following the same we direct Ld.AO/TPO to exclude this company from the final list. 18. Comparables alleged for Inclusion (a) Evoke Technologies Ltd and Mindt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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