TMI Blog2019 (12) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware development services segment - Comparable selection - HELD THAT:- Larsen Toubro Infotech Ltd. is functionally different from the assessee company and also there is significant onsite services. It was observed that there is no segmental data available coupled with L T Infotech Ltd. is having huge brand value. Hence, it cannot be compared with the assessee company. iGATE Global Solutions Ltd exclusion - Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected. Aftec Limited exclusion - As this issue does not arise from the direction of the DRP or the order of the TPO. Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected. Determination of ALP in relation to the ITeS segment - Inclusion of comparable - HELD THAT:- Informed Technologies India Ltd. is not functionally comparable with the assessee company which is engaged in KPO services. As seen from paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest of the revenue, that restriction of power cannot affect the powers of the Tribunal which is bound to exercise under Section 254 of the Act. No reason to think that the Tribunal has committed an illegality by directing the Assessing Officer to decide the matter afresh duly adverting to the claim of the assessee for the benefit of Section 10A. - Decided in favour of the assessee. Treatment of foreign exchange fluctuation gain or loss - As submitted that foreign exchange gain or loss must be considered as operating - HELD THAT:- As relying on M/S INFAC INDIA PRIVATE LIMITED [ 2018 (10) TMI 1814 - ITAT CHENNAI ] we direct the Assessing Officer to exclude the gain or loss on account of foreign fluctuation from the operating expenses for computing the profit and loss. This ground of appeal of the assessee is partly allowed. Allowance of working capital adjustment - DR submitted that working capital adjustment should not have been allowed for the reason that the assessee has negative working capital - HELD THAT:- As decided in Zafin Software Centre of Excellence Pvt. Ltd [ 2018 (5) TMI 1776 - ITAT COCHIN ] the capital employed by the assessee, including the working c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the company had inventories amounting to ₹ 1.66 crores which indicated that the company is not a purely software development company. Further, the company had undergone restructuring during the year and it was engaged in R D and technology absorption and had significant intangibles. Thus we direct the Assessing Officer/TPO to exclude this company from the list of comparables. Eclerx Services Ltd s engaged in IT enabled services which is nothing but KPO services. Being so, it is not functionally comparable with the assessee company when compared to the services rendered by the assessee company. Even otherwise it fails on account of turnover filter and on account of related party transactions which is at 14.77% and incurred onsite expenses of 16.60%. Being so, the DRP is justified in excluding this company from the list of comparables. Accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the revenue is dismissed. - ITA No. 191/Coch/2015, ITA No. 185/Coch/2015 - - - Dated:- 20-12-2019 - S/SHRI CHANDRA POOJARI, AM GEORGE GEORGE K., JM For the Appellant : Shri Raghunathan S., Adv. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctional/ business profile of those companies squarely disqualified them being comparables The TPO erred in law in arriving at new companies as comparable to the Assessee, without establishing functional comparability The TPO also erred on facts in arbitrarily accepting companies without considering companies having varied turnovers, difference in the size and scale of operations which have a direct impact on their profitability considering the upper turnover filter. The TPO erred in accepting abnormal profit making companies as comparables. The TPO also erred on facts in wrongly computing the margins of certain companies. 5. Non allowance of Foreign Exchange gain or loss as Operating item DRP directed AO to consider foreign exchange fluctuation in respect of reinstatement of the receivables and payables as operating in nature. AO has rejected the same on the grounds of non-availability of data and considered the whole of foreign exchange gain or loss as non-operating in nature. 6. Non allowance of appropriate adjustments to the comparable companies by the TPO The TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs. Without prejudice to the above, the learned JCIT and DRP has erred in rejecting the alternate claim made under section 10A of the Act on the ground that the same is contingent in nature and should have been made through filing return and not in the course of assessment. Without prejudice to the above, the learned JCIT's and DRP's action in not granting the alternate claim of deduction under section 10A of the Act is in violation of CBDT Circular 14 (XL-35) dated 11 April 1955. 10. Other Grounds Without prejudice to the above, the learned JCIT has erred in considering the refund made to the assesse as amounting to ₹ 29,02,771, whereas the actual refund received for the subject AY amounts to ₹ 26,87,117. Without prejudice to the above, the learned JCIT has erred in computing interest under section 234D on the refund made as erroneously considered in the assessment order whereas the same needs to be computed on the actual refund received. Without prejudice to the above, the learned JCIT has erred in recovering interest under section 244A to the extent of ₹ 1,88,676 from the petitioner when the same had not been granted for the subject A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing purposes are computed based on the books and not based on tax books and the prior period income was accounted in the books only in FY 2009-10 and hence, must be considered in this year. According to the Ld. AR, the Company had disclosed the said prior period income in the Form 3CEB for FY 2009-10 and this income had not yet been tested for arm s length compliance neither in FY 200910 nor in FY 2008-09. Hence, it was submitted that the same be considered in computation of margins for the current year. For this purpose, the Ld. AR relied on the following case laws wherein it was held that in the context of MAT, prior period income should be considered in the year in which the same is recorded in the books. Since TP margins are also based on books, the same is relevant. 1) Khaitan Chemicals and Fertilizers Limited (175 taxman 195 (Delhi) 2) Tamil Nadu Cements Corporation Limited TC(A) No. 1123 of 2005. The Ld. AR also relied on the decision of Tribunal in the case of Sony India Private Limited vs. DCIT in ITA No. 1181/Del/2005 dated 23/08/2008. The Ld. AR also relied on the decision of Tribunal in the case of Nalco Water India Limited vs. ACIT in ITA No. 742/Pun/2017 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company was only INR 39.61 crores as against that of this company whose turnover was ₹ 1787.2 crores which is more than 10 times and hence, should be excluded from the list of comparables. It was submitted that there was functional dissimilarity as cost of bought out items for resale and segmental details were not available for this comparable. Moreover, this company had significant presence of onsite services and development of in-house intangibles. The comparable had also huge brand value and predominant presence in the market. The Ld. AR relied on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in ITA No. 223/2017 wherein it was held that a tolerance range of 10 times on both sides of the assesses turnover should be applied. The Ld. AR also relied on the decision of the Tribunal in the case of M/s. Electronic Arts Games India Pvt. Ltd. vs. CIT in ITA No. 380/Hyd/2015 dated 30/09/2016 (Hyd) wherein it was held that segmental data was not available. The Ld. AR also relied on the decision of the Tribunal in the case of Cerner Healthcare Solutions (P) Ltd. in IT(TP)A No.44/Bang/2015 dated 16/01/2017 wherein it was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8. Aftec Limited. The Ld. AR submitted that this company s financials were unreliable and functionally not comparable. It was submitted that segmental accounts of this company were not available and it had huge intangible assets and incurred huge expenses on R D and hence, it should be excluded. The Ld. AR relied on the order of the Tribunal in the case of Mentor Graphics vs. DCIT dated 18/02/2015 wherein it was held that the company deals in software products having its own IPR and segmental information was not available. The Ld. AR relied on the decision of the Tribunal in the case of Qualcomm India Pvt. Ltd. vs. ACIT (6) TMI 746 (DEL) and the decision of the Tribunal in the case of M/s. Philips India Ltd. vs. DCIT 2017 (2) TMI 1337 (Kol). 8.1 We have heard the rival submissions. We find this issue does not arise from the direction of the DRP or the order of the TPO. Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected. 9. Thirdware Solutions Ltd. The Ld. AR submitted that this company had different functional pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s model. The Ld. AR also relied on the decision of the Tribunal in the case of XM Software Private Limited vs. ACIT in ITA No. 524/Coch/2016 wherein it was held that interest free loan to AE which is now irrecoverable, granting of loan to the related party directly affects the assessee s profitability. Granting of the said loan to the related party is definitely prejudicial to the interest of the assessee. 10.3 We have heard the rival submissions and perused the material on record. The turnover of Informed Technologies India Ltd. is 2.14 crores as against the turnover of ₹ 29.78 crores of the assessee company. By placing reliance on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in ITA No. 223/2017, this company cannot be comparable with the assessee company. Further, as seen from the paper book pg. no. 1073, Informed Technologies India Ltd. is not functionally comparable with the assessee company which is engaged in KPO services. As seen from paper book pg. no.1085, the employee cost ratio was low at 29.93% of total operating income as compared to 59% and onsite expenses was at 13.21% of operating cost. By placing rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . is engaged in medical transcription, construction and financial activities as against the assessee s activity which is software development and information technology enabled services. Being so, it is not functionally comparable with the assessee s company. Further, related parties transactions carried on by BNR Udyog Ltd. is very significant. Hence, by placing reliance on the above decisions of the Tribunal cited by the Ld. AR, we are inclined to direct the Assessing Officer to exclude this company from the list of comparables. This ground of appeal of the assessee is allowed. 12. Accentia Technologies Ltd. The facts of the issue are that from the annual report the DRP noticed that medical transcription, medical coding, billing and receivable management (collection) all are integral part of the health care BPO services termed as HRCM services. It was found that the company prepared and maintained its accounts fairly and accurately in accordance with the accounting system and the question of segmental information does not arise and it has only one segment. Therefore, the DRP rejected the contention of the assessee to exclude this company from the list of comparables. 12.1 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A of the I.T. Act by relying on the judgment of the Supreme Court in the case of Goetze (India) Limited (284 ITR 323). The Assessing Officer further held that the alternate claim is only possible through filing of return and not in the course of assessment proceedings. The Assessing Officer rejected the alternate claim on the ground that the assessee was claiming exemption under a different section of the Act. 13.2 On appeal, the DRP relied on the judgment of the Delhi High Court in the case of Regency Creations Ltd. (255 CTR 63) wherein it was held that for the purpose of section 10B of the I.T. Act, 100% EOU is only the undertaking which is so approved by the Board appointed by the Central Government in exercise of powers conferred u/s. 40 of Industries (Development Regulation) Act, 1951 and not the undertaking having approved by Director STPI. The DRP stated that the issue was considered by it for the assessment year 2009-10 and the disallowance of deduction u/s. 10B was upheld. Regarding alternate claim of deduction u/s. 10A, the DRP confirmed the findings of the Assessing Officer. 13.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Power Co. Ltd.'s case (supra) which held that the Tribunal is only required to consider the questions of law arising from the facts which are on record, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. Even if the contention raised by the learned Senior Counsel for the revenue that the power conferred on the appellants under Section 263 only authorised him to examine whether the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue, that restriction of power cannot affect the powers of the Tribunal which is bound to exercise under Section 254 of the Act. In such a situation, having regard to the language of Section 254 and as interpreted by the Apex Court in National Thermal Power Co. Ltd.'s case (supra), we do not see any reason to think that the Tribunal has committed an illegality by directing the Assessing Officer to decide the matter afresh duly adverting to the claim of the assessee for the benefit of Section 10A. 7. Though the learned Senior Counsel for the revenue relied on the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the operating margin of the assessee company. Thus, the DRP directed the Assessing Officer to compute the margin of the assessee company as well as the companies in accordance with above findings. 14.2 In the TPO order giving effect to DRP direction, the TPO observed that as the assessee had entered into lot of derivative contracts and from the break up of forex from receivables ad payables, it was not possible to ascertain profit and loss. 14.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee had not entered into any derivative contracts during the year which is evident from Notes to Accounts of the assessee for FY 2009-10. It was specifically mentioned that there were no outstanding derivative instruments as on balance sheet date. Further, it was submitted that the only foreign currency exposure the assessee had was with regard to reinstatement of receivables and payables which the DRP had clearly held as operating in nature. The Ld. AR submitted that the TPO s argument that the details with regard to break up of foreign exchange gain for comparable companies cannot be determined and hence, the same should not be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntical issue was considered by the co-ordinate Bench of this Tribunal in Hanil Tube India Pvt. Ltd. (supra). This Tribunal after referring to safe Harbor Rules, found that the loss incurred by the assessee in foreign exchange fluctuation due to international transaction does not give any extra benefit to the Associated Enterprise who supplies the material. The loss arose due to exchange difference between the foreign currency and Indian currency. Therefore, the co-ordinate Bench of this Tribunal found that the foreign exchange loss or gain has to be excluded from operating income. In view of the decision of co-ordinate Bench of this Tribunal in Hanil Tube India Pvt. Ltd. (supra), this Tribunal is of the considered opinion that the profit or loss due to foreign exchange fluctuation has to be excluded from the operating income for the purpose of PLI. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to exclude the loss or gain in foreign exchange fluctuation from the operating income for computing PLI. 14.6 In view of the above decisions of the Tribunal, we direct the Assessing Officer to exclude the gain or loss on account of for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its total revenue from software services. Revenue from non-software sector in this company comprises only 6% of the total revenue. 6. The direction of the ld Dispute resolution Panel to exclude Eclerx Services Ltd in ITEs segment on the ground that it is engaged in providing KPO Services is against the facts of the case. The ld DRP ought to have observed that the TPO has clearly brought out the functional profile in the order and established that the assessee provides both low and high end services and therefore a mix of comparables form both BPO and KPO segment should have been considered appropriate. Hence exclusion of this company is not in order. 7. For these and other grounds that may be advanced at the time of hearing the order of the learned Dispute Resolution Panel-1, Bangalore may be set aside and that of the Assessing Officer restored. 16. The first ground is with regard to erroneous allowance of working capital adjustment. 17. The facts of the case are that the TPO rejected the assessee s request for working capital adjustment by relying on the decision of the ITAT, Chennai in the case of Mobis India Ltd. vs. DCIT (TS-235-ITAT-2013(CHNY)-TP wherein the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Just because assessee relied on OECD guidelines, would not mean that the adjustment made by it were required, unless the impact could be demonstrated. Such a demonstration was never done by the assessee. Here it will be relevant to have a look at the narration given by the assessee with regard to the adjustment carried out for working capital, as appearing in its transfer pricing documentation. This reads as follows :- To elaborate, the adjustment is made by adding the debtor adjustment to sales and by adding creditor adjustment and subtracting inventory adjustment from Cost of Goods Sold for each comparable company. Here, the prime-lending rate was used as the appropriate cost of capital because it can be determined with reasonable accuracy and is the best available estimate of the cost of capital. For this purpose, the prime-lending rate of 12.50% for the year 2007, 10,80% for the year 2006 and 10.89% for the year 2005 published in CMIE and Reserve Bank of India publications were considered. What were the debtor adjustment and creditor adjustment and how these were relevant have not been demonstrated by the assessee. We are thus of the opinion that the assessee has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filter in ITes segment. 21.1 The facts of the case are that the DRP had directed to exclude certain companies in the IT segment as they have substantial onsite revenues. However, the DRP had not fixed an upper filter for onsite revenue. The filter for onsite revenue is generally taken at 75%. 21.2 Against this, the Revenue is in appeal before us. Regarding exclusion of some companies, the Ld. DR submitted that the DRP had not fixed an upper filter for onsite revenue. According to the Ld. DR, the filter for onsite revenue is generally taken at 75%. The Ld. DR submitted that though there are certain functional differences between onsite development and offshore developments of software, the same is not significant to completely exclude comparables generating onsite revenue. The Ld. DR relied on the decision of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. vs. DCIT 140 ITD 540 (Bang.) wherein it was held as under: 67. The companies who generate more than 75 percent of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... og Systems Ltd., Akshay Software Technologies Ltd., and LGS Global Ltd. 21.4 The Ld. AR relied on the order of the DRP. 21.5 We have heard the rival submissions and perused the record. We find force in the argument of the Ld. DR that the DRP ought to have fixed the upper filter for onsite revenue so as to exclude certain companies in ITeS segment. In our opinion, it is appropriate to fix the upper filter of 75% for onsite revenue so as to exclude certain companies. On this basis, we will examine each comparable as follows: 22. Mindtree Ltd. On this issue, the DRP observed from the annual report that 50% of the revenue was from software development, 21.2% from software maintenance, 17.6% from independent testing, 4.4% for package implementation and 4% from infrastructure management and technical support. However, the segmental information in respect of all the segments was not available. Further, there remain huge unallocated expenses. The company was also engaged in on-site development of software which had influence on the margin of the above company. Accordingly, the DRP accepted the objection of the assessee and directed the Assessing Officer/TPO to exclude the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the material on record. The Ld. DR contended that in the case of Akshay Software Technologies Ltd., 75% onsite filter must be applied since the company had onsite expenses of 85.49%. In the case of LGS Global Ltd., since the company incurred onsite expenses of 57% on total operating expenses, therefore, 75% onsite filter must be applied. In the case of Zylog Systems Ltd., 75% onsite filter must be applied since the company had expenses of 87.96%. In our opinion, it is appropriate to fix the upper filter of 75% for onsite revenue so as to exclude certain companies. Since we have observed that upper filter for onsite revenue must be applied at 75%, the Assessing Officer is directed to examine the financials of each company with regard to upper filter for onsite revenue and exclude the same if the upper filter of onsite revenue is more than 75%. With this observation, we remit this issue with reference to the four comparables, i.e., Mindtree Ltd., Zylog System Ltd., Akshay Software Technologies Ltd. and LGS Global Ltd. to the file of the Assessing Officer for fresh consideration. This ground of appeal of the Revenue is partly allowed for statistical purposes. 24. The next ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the Revenue is dismissed. 25. Sasken Communications Technologies Ltd. On this issue, the DRP found that no segmental information was available in respect of the three segments. Hence, the DRP held that the TPO was not justified in retaining the above company and directed the Assessing Officer to exclude the company from the list of comparables. 25.1 Against this, the Revenue is in appeal before us. The Ld. DR submitted that Sasken Communication Technologies Limited was rejected for the reason that segmental information was not available. The Ld. DR submitted that software services comprises 94% of the total revenue of this company and the usual criterion adopted was to select companies which have atleast 50% of its total revenue from software services. Besides the non-software sector in this case contributes only 6% of the revenue. 25.2 The Ld. AR submitted that the company was engaged in software products. It was further submitted that the company had inventories amounting to ₹ 1.66 crores which indicated that the company is not a purely software develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d manufacturing........................................ These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of services rendered by M/s Eclerx Services Pvt Ltd and its functional profile, we are of the view that this company is also mainly engaged in providing highend services involving specialised knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns . 26.1 The DRP also relied on the decision of the Tribunal in the case of First Advantage Offshore Services Private Limited Vs. DCIT in ITA No.1086/Bang/2011 (Bang.) in which Eclerx was directed to be excluded as a comparable sighting the differences between a company engaged in the provision of BPO and KPO services: 40. We have to now consider whether a BPO and a KPO are functionally similar and are comparable to each other. BPO is a subset of outsourcing and involves the contracting of the operations and responsibilities of specific business functions or process to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Hyderabad Bench referred to above, this company cannot be regarded as a comparable for the reason that it was functionally different. 26.3 Following the above decisions of the Tribunal as the functional profile of the above company remains the same, the DRP directed the Assessing Officer to exclude the above company from the comparables. 26.4 Against this, the Revenue is in appeal before us. The Ld. DR submitted that Eclrex Services Ltd. should be included as a comparable although it provides KPO services. 26.5 The Ld. AR submitted that this company was not comparable with the assessee as it was engaged in providing KPO services and had abnormal profits and failed upper turnover filter. The company had related party transactions at 14.77% and incurred onsite expenses of 16.60%. the Ld. AR relied on the decision of the Tribunal in the case of Actis Global Services Pvt. Ltd. vs. ITO in ITA No. 30/Del/2015 dated10/12/2015 and Cummins Turbo Technologies Ltd., UK India Branch vs. EDCIT in ITA No. 438/PUN/2015. 26.6 We have heard the rival submissions and perused the record. In this case, Eclerx Services Ltd. is engaged in IT enabled services which is nothing but ..... X X X X Extracts X X X X X X X X Extracts X X X X
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