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TMI Blog2019 (12) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... he same in the computation of margins of the Company for the FY 2009-10. 2 Erroneous data used by the TPO * The learned TPO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of alleged comparable companies as such data had an influence in determining the transfer pricing policy of the Assessee. 3 Determination of arm's length price by the TPO in relation to the 'Software Development Services' segment * The TPO erred in law in not rejecting certain companies originally selected as comparables in the TP study even though the underlying functional/ business profile of those companies squarely disqualified them being comparables. The TPO erred in law in applying arbitrary filters to arrive at a fresh set of 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 not considering the upper turnover filter of INR 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proval from Inter Ministerial Standing Committee ("IMSC") constituted under section 14 of Industries (Development and Regulation) Act, 1951 ["IDRA"] is not valid for the purpose of section 10B of the Act, disregarding the fact that IMSC is constituted under section 14 of the IDRA, as stipulated for the purpose of section 10B of the Act. On the facts and in the circumstances of the case and in law, the learned JCIT and DRP has erred in disregarding the fact that once STPI approves the unit as a 100% export oriented undertaking, the Company should be allowed the bonafide claims of related income tax benefits under the Act as the doctrine of indoor management is equally applicable to public law. On the facts and in the circumstances of the case and in law, the learned JCIT and DRP has violated the settled position of law that tax holiday contemplated for a block period, which was consistently allowed in earlier years, cannot be disallowed in subsequent years in the absence of change in the related facts. Without prejudice to the above, the impugned order is bad in law in so far as learned JCIT and DRP vide the said order has not specifically refuted the submissions made by the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the prior period income (which are of the nature of income from services, excess gratuity accounted in the previous year rectified and rent expenses) amounting to Rs. 55,451,678/- was not considered while computing the margin of F.Y. 2009-10. The TPO was of the view that the prior period adjustment was a result of material error discovered in Financial Statement of a prior period that had already been published and this was a below the line item which had no effect on the current period net income. 5.2 On appeal, the DRP confirmed the findings of the TPO that the TP study was undertaken of a particular year, in order to compare Arm's Length Margin based on independent comparables considering the fact that the operating cost of the income pertaining to prior period was debited in the preceding year and there is no rationale to treat the prior period income as part of the operating revenue of subsequent year. As regards granting of benefit in the preceding assessment year, the DRP observed that their jurisdiction was to decide the variation of the income relating to the relevant assessment year. 5.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Margin based on independent comparables considering the fact that the operating cost of the income pertaining to prior period was debited in the preceding year and the prior period income cannot be treated as part of the operating revenue of subsequent year. We have also gone through the case laws relied upon by the Ld. AR which were delivered in different context and have no application to the facts of the present case. Hence, this ground of appeal of the assessee is rejected. 6. The next ground is with regard to determination of arm's length by the TPO in relation to the software development services segment. 6.1 The facts of the issue are that assessee has challenged the inclusion of the following companies from the list of comparables: 6.2 Larsen & Turbo Infotech Ltd. The facts of the issue are that from the Annual Report of the Financial Year, the DRP noticed that during the year the assessee did not carry out assessment year engineering service business which was carried out till last Financial Year. The entire revenue during the year was from IT services. The annual report does not indicate that it had rendered any other services other than the software development ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ground of appeal of the assessee is allowed. 7. iGATE Global Solutions Ltd. The Ld. AR submitted that the turnover of this company is more than 22 times the turnover of the assessee. It was submitted that the turnover of the assessee was only INR 39.61 crores as against that of this company at Rs. 893.4 crores which is more than 10 times of the assessee and hence, it should be excluded. 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 relied on the decision of the Tribunal in the case of Zafin Software Centre of Excellence vs. ACIT in IT(TP)A No. 331/Coch/2017 dated 16/05/2018 for the assessment year 2013-14. The Ld. AR relied on the decision of the Tribunal in the case of M/s. Rampgreen Solutions Ltd. since iGATE Solutions Ltd. loses the tag of comparability due to amalgamation merges etc. The ld. AR also relied on the decision of the Tribunal in the case of ACIT vs. M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A No. 04/Bang/2012 dated 18/03/2016 (Bang). 7.1 W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 10. The next ground is with regard to determination of ALP in relation to the ITeS segment. The assessee was in appeal against the inclusion of the following comparables: 10.1 Informed Technologies India Ltd. The facts of the issue are that after perusing the Annual Report, the DRP noticed that the company was functionally comparable with the assessee and therefore, rejected the contention of the assessee 10.2 Against this, the assessee is in appeal before us. The Ld. AR submitted that the turnover of the assessee was only 0.07 times that of this company. 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. It was submitted that the company was engaged in KPO services (financial research content, executive compensation data, book publications and data process. It was submitted that forex expenditure was 13.21% of operating cost and empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the judgment of Karnataka High Court in the case of 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 submitted that this company was functionally dissimilar as it was engaged in medical transcription and it has significant related party transactions which is 739.62% of operating revenue and hence, it should be excluded from the list of comparables. The Ld. AR relied on the following case laws: 1. M/s. Arctern Consulting Pvt. Ltd. vs. DCIT IT(TP)A No. 352/Bang/2017 which is engaged in medical transcription. 2. Teradata India Private Limited vs. DCIT ITA No.1833/Del/2914 (Delhi Trib.) which is engaged in medical transcription. 3. DCIT vs. PTC Software (India) Private Limited ITA No. 352/PUN/2015 which fails RPT. 4. GTS e-Services Private Limited vs. ITO ITA No.1231/Mum/2017 which is engaged in medical transcription. 11.2 We have heard the rival submissions and perused the material on record. The turnover of BNR Udyog Ltd. was only INR 1.45 crores which is less than 10 times of the assessee's turnover of INR 29.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S e-Services Private Limited vs. ITO ITA No.1231/Mum/2017 which is engaged in medical transcription. 12.2 We have heard the rival submissions and perused the material on record. As seen from the paper book pg. nos. 1184, 1193 to 1201, 1225, 1227 and 1233, the company is engaged in medical transcription, medical coding and billing and receivable management services as against the assessee's business of software development and providing information enabled services. No segmental data is available and the company has considerable intangible assets coupled with onsite activity which is 13.79% of the total operating cost. Further, the company had undergone business restructuring during the F.Y. 2009-10 and amalgamation with Asscent Infoserve Private Limited and figures for FY 2009-10 are inclusive of figures of amalgating company. By placing reliance on the decision of the Tribunal in the case of Aptara Technologies Pvt. Ltd. ITA No. 259/PUN/2015 dated 31/05/2016, we are of the opinion that this company cannot be compared with the assessee company and accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (ITA No. 105/Coch/2014 dated 06/06/2014) 4. ITO vs. Device Driven (India) Pvt. Ltd (ITA No. 282/Coch/2013 dated 29/11/2013). 13.4 Further, the Ld. AR relied on the judgment of the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. in ITA Nos. 47 & 77 of 2015 wherein the alternate claim for exemption u/s. 10A of the Act granted by the Tribunal was upheld. 13.4 We have heard the rival submissions and perused the record. A similar issue was considered by the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. 87 taxmann.com 77 where it was held as follows: "6. We have considered the submissions made. Admittedly, the assessee initially claimed the benefit of Section 10B which was allowed by the Assessing Officer. Only when the Commissioner was seized of the proceedings under Section 263, the assessee raised an alternative claim for the benefit of Section 10A. The Commissioner did not examine that plea and on the other hand, directed the Assessing Officer to withdraw the exemption under Section 10B. It was this order which was challenged by the assessees in the appeals filed by them before the Tribunal. Such an appeal filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are dismissed." 13.5 In view of the above judgment of the Jurisdictional High Court in the case of CIT vs. Flytxt Technology (P) Ltd. supra, this ground of appeal of the assessee is allowed. 14. The next ground is with regard to treatment of foreign exchange fluctuation gain or loss. 14.1 The facts of the case are that the DRP observed that foreign exchange fluctuation in respect of reinstatement on account of receivables and payables should be considered as operating in nature. The DRP relied on the following judicial pronouncements: i) Curram Software International (P) Ltd. in ITA No. 1280/Bang./2012 in which it was held that foreign exchange gain is to be treated as operating income in view of the facts of the case and the margins are to be computed accordingly. ii) SAP Labs India (P) Ltd. vs. ACIT 44SOT 156 (Bang.) in which it was held that the foreign exchange fluctuation gain is nothing but an integral part of the sales proceeds of a assessee carrying on export business. iii) Shah Brothers vs. Cit (259 ITR 741) (Bom.) and CIT vs. Ambha Infex (284 ITR 144) (Guj.) and ACIT vs. Prakash L. Shah (306 ITR (AT) 01) (Mum. SB) wherein it was held that foreign exchange fluct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: "8. We have considered the rival submissions on either side and perused the relevant material available on record. An identical issue was considered by the co-ordinate Bench of this Tribunal after referring to safe Harbour 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." The Ld. AR also relied on the order of the ITAT, C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on the decision ITAT, Chennai In the case of Mobis India Pvt Ltd. 3. The ld Dispute Resolution Panel had directed to exclude certain companies in the IT segment as they have substantial onsite revenues. However the DRP has not fixed an upper filter for onsite revenue. The filter for onsite revenue is generally taken as 75%, The ld DRP ought to have noted that even though there are functional differences between onsite development and offshore development of software, the same is not significant to exclude comparables generating onsite revenue. In the decisions of various ITATs in the cases of Trilogy E-Business Software India Pvt Ltd Vs DCIT(2013) 29 taxmann.com 310 Bang): 2013) 140 ITD 540 (Bang) , United Online Software Development (India) Pvt Ltd (TS-22-ITAT2014)(Hyd-TP) and Hello Soft India Pvt Ltd (TS-59-ITAT-2013J(Hyd-TP), the application of the 75% onsite revenue filter was upheld. 4. The ld. DRP ought to have observed that suitability of FCS Software Solutions Ltd as a comparable was upheld in the case of Navisite India Ltd vs ITO (TS-193-ITAT-2013)(Del). 5. The finding of the ld DRP in the case of Sasken Communication Technologies Limited that no segmental inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred any interest expenditure. Thus, the assessee is not eligible for working capital adjustment. The Ld. DR relied on the decision of the Tribunal in the case of Mobis India Pvt. Ltd. vs. DCIT (61 SOT 40) (Chennai) wherein it was held as follows: "29. Coming to the aspect of adjustment pleaded by the assessee for negative working capital, no doubt, in the case of Demag Cranes & Components (India) (P) Ltd, (supra), it was held that adjustment had to be granted for eliminating material effects, if any, arising out of difference in working capital between tested party and comparables. Nevertheless, we find from the said decision that the plea regarding adjustment for working capital was first raised before DRP and the DRP had decided the issue without realizing that this was never adjudicated by the TPO. As per the assessee, it was having negative working capital as against substantial positive working capital enjoyed by the comparables. If the assessee is able to demonstrate that negative working capital had effected its margins, adjustment should have been made. Assessee has indeed filed before the DRP, margins of comparables adjusted for difference in working capital, but at no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and the comparable companies would materially affect the profit determined. Therefore, certain adjustment needs to be made to bring them on equal footing. The assessee also brought to the notice of the DRP that the working capital adjustment, which was to ensure the profit derived by the comparable companies, can be compared with the profit of the assessee. This Tribunal is of the considered opinion that the capital employed by the assessee, including the working capital, and that of comparable companies needs to be taken into consideration. Without comparing the working capital employed by the comparable companies and that of the assessee, this Tribunal is of the considered opinion that there cannot be any transfer pricing adjustment." 5.4 In view of the above order of the Tribunal, we are inclined to direct the Assessing Officer to consider the working capital adjustment as computed by him while determining the ALP of international transactions of the assessee with its AEs. Hence, this ground of appeal taken by the assessee is partly allowed." 20.1 In view of the above order of the Tribunal in the case of Zafin Software Centre of Excellence Pvt. Ltd. vs. ACIT cited supra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax payer. Hence, it is held that this filter is appropriately applied by the TPO." 21.3 According to the Ld. DR, in this case the taxpayer was engaged in the business of providing software development services to its AE and was captive unit operating on cost plus basis. The Ld. DR submitted that the TPO rejected the comparables selected by the taxpayer for the reason that they do not satisfy the onsite revenue filter i.e., if revenues of comparable companies from rendering onsite software exceed 75% of the total revenues of comparable companies from rendering onsite software exceed 75% of the total revenue or onsite expenses exceed 75% of expenses, then they should not be regarded as comparable to the taxpayer whose revenue is from rendering offshore software development services. According to the ld. DR, the ITAT upheld the adoption of 75% filter. He placed reliance on the decision of United Online Software Development (India) Pvt. Ltd.,(TS-22-lTAT-2014) (Hyd-TP), wherein the application of the 75% onsite revenue filter was upheld, as well as Hello Soft India P. Ltd,(TS-59-lTAT-(2013-Hyd-TP). The Ld. DR contended that in the case of TPO's comparables the onsite revenue pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be retained as comparable. However, on the same rationale, the following companies also need to be excluded from the comparables:- (i) In the case of Akshay Software Technologies Ltd., on the perusal of the Annual Report, the DRP found that out of the total operating expenses of Rs. 11.33. crores incurred during the year, the expenses in foreign currency were incurred to the extent of Rs. 9.57 crores which established that the company was predominantly engaged in development of software on-site. (ii) In the case of LGS Global Limited, on the perusal of the annual report, the DRP noticed that out of operating expenses (excluding depreciation) of Rs. 220 crores, the expenses to the extent of Rs. 122 crores had been incurred in foreign currency (55%) which made it clear that the above company was predominantly engaged in the on site development of software. Further, earning from export Rs. 117 crores as against the turnover of Rs. 237 crores. 23.1 In view of the above, the DRP directed the Assessing Officer to also exclude Akshay Software Technologies Ltd and LGS Global Limited from the comparables of the TPO. 23.2 The Ld AR submitted that the company had earned more than 80% r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t intangibles. Further, the company had undergone restructuring during the year. The Ld. AR relied on the decision of the Tribunal in the case of DCIT vs. Barclays Technology Centre India Pvt. Ltd. in ITA No. 125/PUN/2015 dated 29/09/2017 on the reason that it was functionally different and no segmental information was available. He also relied on TIBCO Software India Pvt. Ltd. vs. DCIT. The DRP observed that no segmental information was available with regard to the software development and other services. Therefore, it was not appropriate to retain the above company as comparable. 24.4 We have heard the rival submissions and perused the record. We do not find any infirmity in the order of the DRP in holding that this company cannot be retained as comparable since the company was engaged in 3 segments, i.e., IT Consulting, Education and infrastructure, IT Consultancy Division provided application maintenance for which no segmental information was available. It was also submitted that the company was predominantly engaged in onsite development of software. It was also engaged in R&D and had significant intangibles. Further, the company had undergone restructuring during the year. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO in IT(TP)A Nos.44 & 69/Bang/2015 dated 16/01/2017 (Bang.) and ITO vs. M/s. CSR India Pvt. Ltd. in IT(TP)A Nos.256 & 506/Bang/2015 dated 24/01/2018 (Bang), we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the Revenue is dismissed. 26. Eclerx Services Ltd. On this issue, on perusal of the annual report, the DRP noticed that the company is engaged in the provision of IT enabled services which are in the nature of KPO. It was clearly mentioned in the annual report that the company was a knowledge process outsourcing company which cannot be compared with the routine IT enabled services provided by the assessee company. The DRP relied on the decision of the Tribunal in the case of Maersk Global Centres (India) Private Limited Vs. ACIT [ITA No. 7466/Mum/2012] (Mum.) (Spl. Bench) dated 07/03/2014 in which the above company was directed to be excluded by observing as under: "82. In so far as M/s Eclerx Services Limited is concerned, the relevant information is available in the form of annual report........................................A perusal of the same shows that the said company provides data analytics and data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO [1TA No. 1316/Bang/2012]: "(5) Eclerx Services Ltd. 20. This company is listed at Sl.No.11 in the list of comparable companies chosen by the TPO.....................This Tribunal in the case of Capital IQ Information Systems India Pvt. Ltd. (supra) had an occasion to deal with comparability of this company in the case of an ITES company such as the Assessee and the Tribunal held as follows:- "14. The assessee has objected for this company being taken as comparable mainly on the ground that it was having a supernormal profit of 89%, and as such it cannot be taken as a comparable in view of the decision of the Mumbai Bench of the tribunal in the case M/s. Teva India Ltd. (supra). That apart, relying upon the annual report of the company, the learned Authorised Representative for the assessee has contended that the concerned company is engaged in providing Knowledge Process Outsourcing (KPO) Services," "15. On considering the objections of the assessee in relation to this company, we accept the contention of the assessee that this company cannot be taken as a comparable both for the reasons that it was having supernormal profit and it is engaged in providing KPO services, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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