TMI Blog2021 (1) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... are development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. See SAXO INDIA PVT. LTD VERSUS. ACIT, [ 2016 (2) TMI 604 - ITAT DELHI] ICRA Techno Analytics Ltd - When this company is engaged in diversified activities of software development and consultancy, engineering services, web development hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. M/s Persistent Systems and Solutions Ltd - No separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. ALP of the transactions relating to Software s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. u/s 143(3) r.w.s 144C of the Act for assessment year 2011-12 in pursuance of directions given by Ld. Dispute Resolution Panel (DRP). 2. The grounds and additional grounds urged by the assessee give rise to the following issues:- a) Addition relating to transfer pricing adjustment b) Disallowance of interest paid on ECB loans. c) Additional depreciation claimed on computers d) Deduction u/s 10A of the Income-tax Act,1961 ['the Act' for short] in respect of disallowance of interest on ECB loans and additional depreciation. 3. The assessee has filed a letter dated 9.11.2020, wherein it is stated that the ground No.7 relating to claim of additional depreciation is being withdrawn. Accordingly, the ground relating to the above said issue are dismissed as withdrawn. 4. The facts relating to the case are stated in brief. The assessee herein is a subsidiary of M/s. Maxim International Holdings Inc., USA. The assessee is registered as 100% export-oriented unit in India. Hence it was claiming deduction u/s 10A of the Act. It has got 3 distinct operating divisions, viz., Software development services, ITES services Marketing services. Since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 Persistent Systems Solutions Ltd 189,490,457 155,172,089 22.12% 10 Persistent Systems Ltd. 6,101,270,000 4,971,860,000 22.84% 11 R S Software (India) Ltd. 1,882,638,471 1,617,804,170 16.37% 12 Sasken Communication Technologies Ltd. 3,941,962,000 3,175,616,000 24.13% 13 Tata Elxsi Ltd. (seg)3,581,985,000 2,962,533,352 20.91% AVERAGE MARGIN 24.82% The average margin of the above said 13 comparable companies was 24.82%. After allowing working capital adjustment of 1.63%, the TPO arrived at adjusted margin of 23.19%. Accordingly, the A.O. proposed adjustment of ₹ 2,52,81,059/-. The AO passed draf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed employee cost filter, since its employee cost was 49.36%. The Ld D.R submitted that the Tribunal, in the case of Commscope Networks (India) Private Ltd (supra) has followed the decision rendered by the Tribunal in the case of M/s Applied Materials India P Ltd (IT(TP)A No.17 39/Bang/2016 dated 21.9.2016). In the case of Applied Materials India P Ltd (supra), the Tribunal has excluded Acropetal Technologies Ltd by applying the filter that revenue from Software development segment was less than 75%. Adverting our attention to page 863 of the paper book, wherein the Profit and Loss account of M/s Acropetal Technologies Ltd is placed, the Ld D.R submitted that the segmental revenue details are not available. Accordingly, the Ld D.R submitted that the decision rendered in the case of Applied Materials India P Ltd should not be followed. 11.2 The Ld A.R, on the contrary, submitted that the TPO has issued a show cause notice dated 10.09.2014 to the assessee during the course of proceedings before him. He submitted that the copy of said letter is placed at pages 251 to 265 of the paper book. The Ld A.R invited our attention to page 260 of the paper book and submitted that the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development services income filter as well as employee cost filter. 16.4 We have considered the rival submissions as well as the relevant material on record. As per the segmental reporting at page 53 of the Annual Report the income from Information Technology Services is ₹ 81.40 Crores out of the total income of ₹ 141 Crores. Therefore the revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy the filter of information technology revenue applied by the TPO itself. Accordingly, we do not find any reason to interfere with the order of the DRP for this issue. 11.4 We notice that the Tribunal chose to exclude this M/s Acropetal Technologies Ltd (seg.) applying revenue filter, even though the assessee has advanced arguments both on employee filter and revenue filter. We also notice that the TPO has considered segmental details only. Admittedly, this company fails on revenue filter. Accordingly, following the above said decision, we direct exclusion of M/s Acropetal Technologies Ltd. (B) E-Zest Solutions Ltd:- 11.5 The Ld A.R submitted that this company has been excluded in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Saxo India P Ltd (supra), this company was excluded with the following observations:- (i) E-Infochips Limited: 10.1. The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2. After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at ₹ 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view of the DRP in preceding year and accordingly direct the Assessing Officer to exclude this company from comparables. 17.2 We further note that the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in paras 14 to 16 as under : (1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of ₹ 6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd utilized for the purpose of purchasing an immovable property at Koramangala, in Bangalore during the year 2005-06 and this property was purchased with an intention to build its own office premises for the assessee company. It is also noted by the AO in same para of assessment order that the construction could not be taken up as there developed a dispute followed by litigation and because of this reason, the property remained in the form of vacant site and it was kept unused right from the date of purchase till the date of assessment order. He submitted that the AO has invoked the proviso to of section 36(iii) of the IT Act which is reproduced by the AO in para 7.2 of the assessment order and he pointed out that the proviso is applicable where the loan is borrowed for acquisition of asset for extension but in the present case, the loan is not borrowed for the extension of assessee company's business but it was for expansion and therefore, this proviso is not applicable in the present case. He placed reliance on the Tribunal order rendered in the case of ITVV Signode India Ltd. Vs. DCIT as reported in [2007] 110 TTJ 170 (Hyd.), copy available on pages 662 to 669 of paper book. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplementary etc. The assessee submitted that the assets have been acquired only in connection with its existing telecommunication business. In our view, there is a very thin line of demarcation between the term expansion and extension, which can be differentiated basis the facts and evidences brought on record. Neither the Ld AO or the Ld DRP has brought any evidence on facts to suggest that there was an e,xtension of business during the year under consideration and the Interest paid should he disallowed u/s 36(1)(iii) of the Act. Further, the .assessee also distinguished the decisions relied upon by the lower authorities on facts of the present case. While arriving at the above finding we also draw support from the decision of Hon'ble Supreme Court in the case of DCIT vs. Gujarat Alkalies Chemicals Ltd. [2008] 299 ITR 85 (SC) cited by the Ld. AR wherein it was held that extension' implies starting of a new business activity. Keeping in view the above said meaning we are of the view that the telecom equipment purchased by the Appellant using the ECB loans was for continuation of the existing business only and not for the extension of business. Hence, the said provis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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