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TMI Blog2018 (9) TMI 1978X X X X Extracts X X X X X X X X Extracts X X X X ..... ies all the qualitative and quantitative filters adopted by the TPO. (ii) Whether the Hon'ble DRP is right in applying "onsite revenue filter" without appreciating the fact that the function carried out is "Software Development" irrespective of whether onsite or offshore? (iii) Whether the Hon'ble DRP in correct in excluding M/s RS Software Pvt. Ltd. and M/s Acropetal Technologies and M/s L&T Infotech Ltd on the ground that they have significant onsite revenue without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins? (iv) Whether the Hon'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 per cent of the sales, when the said company has service income being 100 per cent of the sales? (vi) Whether Hon'ble DRP erred in fact in rejecting the company as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances of the case the Dispute Resolution Panel was right in holding that expenses reduced from Export Turnover has to be reduced from Total turnover also, since no provision u/s 10A provides for exclusion of such expenses. (xvii) For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel insofar as it relates to the above grounds may be reversed. (xviii) The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 3. The assessee, in its cross objection has taken up the following grounds of cross objections. 4. Filters and qualitative criteria applied by the Respondent:- 4.1 The Honourable DRP/Learned AO have erred in upholding the TPO's use of new/modified filters for conducting TP analysis, without appreciating the Transfer Pricing documentation prepared by the Respondent; 4.2 The Honourable DRP and the learned AO/TPO have erred in law and on facts by rejecting the respondent's submission that the use of consolidated financial statements eliminates the impact of related party transactions and therefore the use of the margins of comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that there exists a single customer risk and that such a risk nullifies any risk adjustment that could be provided. 6. Other transfer pricing related grounds:- 6.1 The Honourable DRP and the learned AO/TPO have erred in law and on facts by failing to appreciate the fact that transfer pricing is an anti-avoidance mechanism. In the instant case the Respondent is registered as under the STPI and has claimed tax benefits under section 10A of the Act and has no reason to suppress its profit from its operations to manipulate the transfer prices. 6.2 The Honourable DRP and the Learned AO/TPO have failed to appreciate the Respondent's commercial judgment about the application of arm's length principle which is tied to the business realities. 6.3 The Honourable DRP and the learned AO/TPO have erred in law and on facts, in making several observations and findings which are based on incorrect interpretation of law and contrary to facts of the case. 6.4 The Honourable DRP and the learned AO/TPO have erred by not carrying out the determination of arm's length price as required under section 92C of the Act, read with rule 10D of the Rules. 7. Specific grounds for softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motu based on non-contemporaneous data. 8.4 The Honourable DRP/Learned AO have erred in law in suo motu rejecting the following companies, selected by the TPO during the assessment proceedings. Mindtree Limited; Cosmic Global Limited. 8.5 Without prejudice to the above, the Honourable DRP, the learned AO/TPO has erred in law and on facts in rejecting the additional comparable companies as mentioned below, proposed by the respondent during the course of the transfer pricing proceedings, without appreciating that the companies passes all the filters adopted by the learned TPO:- Microland Limited; Datamatics Financial Services Limited; Microgenetic Systems Limited. 9. Relief under section 10A of the Act. 9.1 The Honourable DRP and the learned AO have erred in law in failing to appreciate that the term used in the definition of 'export turnover' is 'but does not include' and not 'reduce'. In this connection, the Honourable DRP and the learned AO have erred in law and on facts in rejecting the claim of the Respondent that the communication expenses were not included in the export turnover in the first place or billed separately; 9.2 Without p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. It also provides software development services to Goldman Sachs Group companies. GS India has entered into a service agreement with Goldman Sachs Group companies on 09.03.2006 for provision of back-end support services (IT enabled services and software development services). The assessee-company has filed its return of income for the A.Y 20011-12 on 30.09.2011 and later filed revised return on 22.03.2013 declaring a total income of Rs. 10,46,76,667/-. The case was selected for scrutiny and notice u/ss 143(2) and 142(1) of the IT Act, 1961 were issued. In response to the notices, the authorised representative of the assessee appeared and filed the books of account and other details as called for. During the year under consideration the assessee-company had international transactions with its associated enterprises in respect of IT enabled services and software development services the assessee also incurred international transactions for purchase of fixed assets and reimbursement of expenses. The assessee has conducted TP study to benchmark its international transactions entered into with its associated enterprises and adopted TNMM method as the most appropriate method to dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24.77%. The TPO also allowed working capital adjustments of 1.63% in respect of software development services segment and 1.47% in respect of ITES services. Thus, the TPO has rejected TP study conducted by the assessee and made a fresh TP study by inclusion and exclusion of certain comparable and after taking final set of comparables in respect of both segments made adjustment of shortfall in respect of software development segment of Rs. 23,64,87,475/- and Rs. 41,93,62,940/- in respect of ITES segment u/s 92C of the Income-tax Act, 1961. The details of computation of arm's length price by the TPO is extracted below: 12.4. Computation of Arm's Length Price: The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure B for details of computation of PLI of the comparables. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: SOFTWARE DEVELOPMENT SERVICES Arm's Length Mean Margin on cost 24.82% Less: Working Capital Adjustment 1.63% (As per Annex. C) Adjusted margin 23.19% Operating Cost 3,315,421,064 Arm's Length Price (ALP) 4,084,267,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the A.O to exclude certain companies for the detailed reasons recorded in its order and accordingly, rejected Acropetal Technologies Ltd, E-zest Solutions Ltd, E-infochips Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., L&T InfoTech Ltd., as not comparable to the profile of the assessee-company in respect of software solutions development service segment, however, upheld inclusion of Persistent Systems Solutions Ltd., and Persistent System Ltd. by holding that there is no reason to exclude these companies from the list of comparables to the profile of assessee-company. Similarly, the DRP has directed the A.O to exclude Accentia Technologies Ltd., Acropetal Technologies Ltd., Jeevan Scientific Technology Ltd., IGate Global Solutions Ltd., and Infosys BPO Ltd., from the list of comparables selected under ITES segment. But, upheld inclusion of ICRA online Limited by holding that the company is functionally comparable to the assessee company. As regards re-computation of income eligible for deduction u/s 10A of the Income-tax Act, 1961 by adjusting telecommunication expenses from export turnover as well as total turnover, the DRP by following the decision of Hon'ble High Court o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter for other comparables. The DP further submitted that all these companies have satisfied quantitative filters adopted by the TPO. Once, a company is functionally similar to the profile of the assesee-company in respect of segmental business, it is immaterial whether it generates revenue from onsite or offshore services. The DR further submitted that onsite development of software services is more cost and thereby results in lower profit margin therefore, merely for the reason that its revenue for onsite services is more, the companies cannot be excluded from the list comparables, when the functions carried out by comparables are similar to the assessee-company. 10. The AR for the assessee, on the other hand submitted that the DRP has excluded M/s Acropetal Technologies Ltd., M/s L&T Infotech Ltd., not only on the basis of onsite revenue filters, but also on the basis of other reasons including absence of segmental information containing the break-up of employees cost, export sales. The AR further submitted that the assessee is captive service provider and its entire operations are taking place i.e. in India therefore, it is unnatural to compare the companies which are predomina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opetal Technologies Ltd on the ground that on examination of annual report of the company the following facts are noticed:- (i) Acropetal Technologies Ltd Having considered the submissions, we examined the Annual Report from which the following facts are noticed :- ♦ The foreign currency expenses are Rs. 64.94 crore (55 per cent) of the total expenses of Rs. 118.68 crores debited in profit and loss account which makes it clear that the company is pre-dominantly engaged in on site activities which is farther evident from the fact that Rs. 55.57 crores have been debited on account of on site development expenses - technical subcontracts. ♦ No break-up of export sales of Rs. 140.55 crores is available in respect of different segments as per the profit and loss account. ♦ According to Schedule-IX, Rs. 13.51 crores includes salary and consultancy charges, there is no separate information is available in regard to the employees cost related to the software development and therefore, it cannot be ascertained as to whether the employee cost is more than 25 per cent in respect of software development segments and passes the employees cost filter applied by the TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as comparable. In the absence of segmental information, it was not possible to ascertain as to whether this company passes the test adopted by the TPO himself for comparison. The learned DR submitted that the required data can be culled out from the information available in the public domain or by resorting to a process of calling for information from this company u/s.133(6) of the Act. The learned counsel for the Assessee in this regard pointed out that the Hon'ble Delhi High Court rejected a similar argument by the Revenue in the case of Pr. CIT v. Saxo India Pvt. Ltd. ITA 682/16 order dated 28.9.2016. In the circumstances, this company was rightly held by the DRP to be not comparable. We are of the view that once a company becomes not comparable for the reason that segmental information to apply filters, we need not consider any other aspect of comparability. The learned counsel for the Assessee made submissions before us that this company was rightly directed to be excluded by the DRP on the above basis and further contended that even otherwise, this company is not functionally comparable to the Assessee. As already stated, we do not wish to go into this aspect as this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ownership of marketing intangibles and intellectual property rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, the Assessee submits that the company is a product company having significant intangibles and is thus not comparable to captive software service providers such as the Assessee. In this regard the learned counsel for the Assessee has placed reliance on the decisions of this Hon'ble Tribunal in Applied Materials India Pvt. Ltd. v. ACIT [TS-815-ITAT-2016 (Bang)-TP at para 19 on pages 35-36] and Commscope Networks (I) Pvt. Ltd. v. ITO [TS-161-ITAT-2017 (Bang)-TP at para IT(TP)A No.502/B/16 CO No.01/B/17 9 on pages 16-17] where the exclusion of the said company from the list of comparables in similar circumstances was upheld by this Hon'ble Tribunal. We therefore do not find any grounds to interfere with the directions of the DRP on exclusion of this company. 15. E-Infochips Ltd., The DRP has excluded e-Infochips Ltd., on three grounds i.e. (1) it has fluctuating revenue/profit margins; (2) It has failed in service revenue filter; (3) lack of segmental information. We find that the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that the DRP rightly arrived at the finding that the company's software development service revenue for FY 2010-11 was less than 75 per cent of its total operating revenue for that year. Thus, the above action of the DRP in rejecting the above company is correct. 16. In this view of the matter and consistent with the view taken by the Coordinate Bench of this Tribunal in the case of CJ Information Systems and Management Consultants Pvt Ltd. (supra), we are of the considered view that Acropetal Technologies Ltd, L&T Infotech Ltd and E-infochips Ltd cannot be comparable to the profile of assessee-company and hence the DRP was right in directing the A.O to exclude these companies from the list of comparables. We do not find any error in the findings of the DRP, hence we are inclined to uphold the findings of DRP and reject ground taken by the revenue. 17. RS Software (India) Ltd., The Revenue as well as assessee has taken grounds for inclusion of RS Software (India) Ltd. The DRP rejected RS Software (India) Ltd., on the ground that it has significant onsite activities which is 84 per cent of total expenses incurred by the assessee. The Revenue wants to include RS Software (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the DRP was right in exclusion of iGate Global Solutions Ltd. 21. We have heard the rival contentions and perused the material on record. The ld. DRP has excluded iGate Global Solutions Ltd., on the ground that though it is earning revenue from IT Services and IT enabled services, it is considered revenue received from both segment as one segment. In the absence of segmental information, the company cannot be retained as comparable. We find that though the company is deriving revenue from two different segments, it has failed to report segmental information in its annual reports. Therefore, we are of the considered view that the DRP was right in rejecting iGate Global Solutions Ltd., as comparable. We do not find any error in the findings of the DRP. Hence we are inclined to upheld findings of the DRP and reject the ground taken by the Revenue. 22. The next issue that came up for our consideration from ground No. 14 of Revenue appeal is exclusion of telecommunication expenses from export turnover as well as total turnover for the purpose of determination of income eligible for deduction u/s 10A of the Income-tax Act, 1961. 23. The Ld. AR for the assessee submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that whether dividend income is earned or not expenses incurred in relation to exempt income shall be disallowed u/s 14A of the Income-tax Act, 1961 by invoking Rule 8D(2) of the Income-tax Rules, 1962 and accordingly, disallowed admin and other expenses @ 0.5 per cent at average value of investments under Rule 8D(2)(iii) of Income-tax Rules, 1962. It is a claim of the assessee before the lower authorities that it does not earn any exempt income during the year under consideration, therefore question of disallowance of expenses incurred in relation to exempt income u/s 14A of the Income-tax Act, 1961 does not arise when there is not exempt income. The ld. AR for the assessee further submitted that this issues is covered in favour of the assessee by the decision of ITAT in assessee's own case for the A.Y 2010-11 in IT(TP) No. 267 & 222/Bang/2015, where under similar set of facts the ITAT held that sec. 14A of the Income-tax Act, will not apply if no exempt income is received or receivable during the relevant previous year. 29. We have heard both the parties and perused the material available on record. We find that the ITAT has considered the issue of disallowance of expenses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Lakhani Marketing Incl. (decision dated 2nd April 2014 of the High Court of Punjab and Haryana in ITA No. 970/2008) which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Limited [2010] 323 ITR 518 and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204. The second was of the Gujarat High Court in Commissioner of Income Tax-I v. Corrtech Energy (P) Ltd. [2014] 223 Taxmann 130 (Guj.) and the third of the Allahabad High Court in Commissioner of Income Tax, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5th May 2014 in ITA No. 88/2014). These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question "corresponding expenditure could not be worked out for disallowance." 30. In this view of the matter and consistent with view taken by the Coordinate Bench, in assessee's own case, we direct the A.O to delete the additions made towards disallowance of expenses incurred in relation to exempt income u/s 14A of the Income-tax Act, 1961. 31. The Revenue as well as the assessee has taken number of grounds in respect of various issues. The ld. DR, at the time of hearing submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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