TMI Blog2021 (3) TMI 928X X X X Extracts X X X X X X X X Extracts X X X X ..... of functional dissimilarity. Fortune Infotech Ltd has been excluded as a comparable by the coordinate Bench of the Tribunal in the case of Outsource Partners International P. Ltd [ 2017 (2) TMI 1410 - ITAT BENGALURU] . Jeevan Scientific Technology Ltd is to be excluded from final list. Disallowance under section 40(a)(i) for software expenses - HELD THAT:- We find that that this issue came up for consideration before in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, . [ 2021 (3) TMI 138 - SUPREME COURT] wherein it was held that transaction relating to software are in the nature of sale and not license, no copyright or part of any copyright is licensed to the assessee. The non-resident owner continues to have proprietary rights in the software and use of software by the Indian company is limited to making back-up copy and redistribution. So payment received for sale of computer software is business income. As such, software purchased is in the nature of purchase and sale of product and no TDS is deductible. Being so, it is allowable as expenditure and there is no question of deduction of any TDS. Short credit or Tax Deducted at Source (' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the AO dated 30.12.2014 passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [the Act] in consequence of the directions of the DRP u/s. 144C(5) of the Act dated 28.11.2014 for the assessment year 2010-11. Assessee s appeal 2. Ground Nos.1 2 are general in nature and does not require any adjudication. 3. Ground No.3 by the assessee reads as follows:- 3. The Learned AO/Learned TPO, while conducting the comparability analysis, erred in rejecting companies like Nittany Outsourcing Services Private Limited, Datamatics Financial Services Limited, R Systems International Limited, Caliber Point Business Solutions Limited, Ultramarine Pigments Limited. and Jindal Intellicom Private Limited, which are functionally comparable to the Appellant. 4. In this ground, the assessee pressed only inclusion of the comparable, R Systems International Ltd. in the above ground. The ld. AR submitted that this company was considered as a comparable in the case of Indecomm Global Services India Pvt. Ltd. in IT(TP)A Nos. 404 AND 553/BANG/2015 C.O. NO. 123/BANG/2015 for the AY 2010-11 and vide Order dated 13.02.2019 the Tribunal remanded the matter of comparability of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- 10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into . 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, it the financial year followed is differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany should be excluded for the following reasons:- (i) The company has significant income from software products and services. (ii) Segment data in relation to software services and product and ITeS are not available in the annual report. (iii) The company owns intangibles. (iv) The company has extra-ordinary events of amalgamation/ acquisition during the year. 9. However, the lower authorities observed that Accentia Technologies Ltd. is engaged in medical transcription, medical coding, billing receivable management which are all individual part of healthcare BPO services termed as HRCM Services. In regard to the revenue recognition, the objection of the assessee was not accepted by the DRP in view of financial reporting in which it is clearly mentioned that the company shall prepare and maintain its accounts fairly and accurately in accordance with the Accounting Financial Reporting. The question of segmental information does not arise, as the company has only one segment. Hence it shall be considered as a comparable with the assessee. 10. We have heard both the parties and perused the material on record. This comparable has been excluded by the Tribunal as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the list of comparable companies on grounds of functional dissimilarity. 11. In view of the above order of the co-ordinate Bench of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 12. Fortune Infotech Ltd. : The ld. AR submitted that this company uses web based software unique technology and technical know-how imparted from its business partners for providing BPO services. 13. The ld. DR submitted that this company has developed its own software called Finetran and Impact Index for performing services in medical transcription and patent record management. Further it was submitted that on examination of annual accounts of the said company, it was found that there was no mention in the annual report about the import of the unique technology and technical know-how from the business partners. Even otherwise, every company is required to use the software and technology for providing ITeS services and therefore on the basis of annual report it cannot be compared with the assessee. 14. We have heard both the parties and perused the material on record. As rightly pointed out by the ld. AR, Fortune Infotech Ltd. has been exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otu, by the DRP has been discussed earlier in this order, while dealing with the comparability of 'Acropetal Technologies Ltd.,' at paras 10 to 10.5.2 of this order (supra). From the record, it is seen that neither the assessee nor the TPO have applied the employee cost filter while determining the ALP. As such, the DRP has applied this filter suo motu. When new filters are applied, it is necessary to examine whether such an application of a new filter has any impact on the inclusion or exclusion of other companies. In view of the above, we deem it appropriate to remand the issue of comparability of this company back to the file of the TPO with the direction that the new filters applied suo motu may be applied on the other comparable companies as well and then the inclusion/exclusion of this company as a comparable be decided. 19. In view of the above order of the coordinate Bench of this Tribunal, we direct the AO/TPO to exclude Jeevan Scientific Technologies Ltd. from the list of comparables. 20. Ground No.13 by the assessee reads as follows:- 13. Disallowance under section 40(a)(i) for software expenses - INR 1,21,37,277 13.1 The learned Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order. 26. The AO is directed to give MAT credit in accordance with law. 27. In the result, the appeal by the assessee is partly allowed. Revenue s appeal 28. Ground No.2 by the revenue reads as follows:- 2. The DRP erred in directing the TPO to apply 25% employees cost filter and to exclude M/S. Accropetal Technologies Ltd. as the employee cost filter is less than 25% and this company predominantly engaged in providing services onsite without appreciating that the directions to the AO amounts to setting aside the issue which is outside the purview of the DRP under the provision of Section laac the DRP is not empowered tn set aside the issue in terms Of Section of the Act. 29. The DRP observed that it was noticed from the Profit Loss account that out of total expenses of ₹ 87.26 crores, expenses of RS.55.85 crores incurred onsite development of software which works out to 64% of the total expenses which makes it clear that the company is predominantly in providing onsite services and therefore not comparable with assessee. It was also observed that employee cost filter needs to be applied in ITS segment also, on that count also employee cost is les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Tribunal, we are inclined to remit this issue to the file of AO/TPO with similar directions. 32. Ground No.3 by the revenue is as follows:- 3. The DRP erred in directing the TPO to apply 75% Export Earning filter consistently for ITES segment and to exclude M/S. ICRA onlins Ltd., M/S. Sundaram Business Services Ltd from comparables on that basis without appreciating that the directions to the AO amounts to setting aside the issue which is outside the purview of the DRP under the provision of Section 144C as the DRP is not empowered to set aside the issue in terms of Section 144C(8) of the Act. 33. ICRA Online Ltd. : The DRP observed that the total foreign currency earnings during the year is 11.14 crores as against the total service revenue of 18.35 crores which indicates that only 60% revenue is coming from export as against the 100% export of the assessee company. In view of this, 75% export earning filter needs to be applied as against the 25% applied by the TPO. Hence the DRP observed that it cannot be retained as a comparable. Against this, the revenue is in appeal before us. 34. After hearing both the parties, we find that this company was considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue is in appeal before us. 37. We have heard both the parties. This comparable was considered by the Tribunal in the case of Indecomm Global Services India Pvt. Ltd. (supra) and remitted back to AO/TPO for fresh consideration, wherein it was observed as under:- 11.4.3 We have considered the rival contentions and carefully perused the material on record. This company, 'Sundaram', was selected as a comparable by the TPO and the assessee had accepted the same without any objection. We find that the DRP suo motu examined the comparability of this company and directed its exclusion from the set of comparables on the ground that it fails the 75% export earning filter, a new filter introduced by the DRP, which was not applied either by the TPO or the assessee. The DRP order, in this regard, states that It has already been held in the preceding paras that 75% export earning filter has to be consistently applied for ITES segment also . We, however, find that there is no such discussion or decision rendered by DRP, as claimed. In the absence of any such discussion or decision, as claimed, applying the 75% export earning filter suo motu is not tenable. Also, if any new filt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t portion of the order at para 14.1 and 14.2 thereof is extracted hereunder: E-clerx Services Limited. 14.1 We have considered the rival submissions and relevant record. At the out set, we note that the ..31- pparability of M/s. Eclerx Services Ltd. has been examined by the Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT [2014] 43 taxmann.com 100/147 ITD 83 (Mum.) (SB) in paras 82 and 83 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 for financial year 2007-08 placed at pages 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of high end services. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the ITES. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables.' 13.4.2 In view of the above, we find no infirmity in the order of the DRP and the direction of the DRP to exclude 'Eclerx Services Ltd.,' from the set of comparables is upheld, since this company 'Eclerx' is excluded on grounds of functional dissimilarity, the application of new filters by the DRP will have no bearing on its exclusion or inclusion as it would continue to remain excluded on grounds of functional comparability. Therefore, there is no need to remand the matter to the TPO, as sought for by the learned DR. Consequently ground No.9 of Revenue's appeal is dismissed. 42. Following the order of the coordinate Bench of this Tribunal, we find no infirmity in the order of the DRP. This ground of the revenue is dismissed. 43. Ground No.5 of the revenue reads as follows:- 5. The DRP erred in holding that M/s. Infosys Ltd. Cannot be taken as comparable, being functionally different, big bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP and consequently the DRP's direction to exclude this company, 'Infosys' is upheld. Since this company, 'Infosys' is excluded on grounds of functional dissimilarity, the application of new filters by the DRP will have no bearing on its exclusion or inclusion as it would continue to remain excluded on grounds of functional comparability. Therefore, we find there is no need to remand the comparability of this company to the file of the TPO, as sought for by the learned DR. Consequently, ground No. 8 of Revenue's appeal is dismissed. 46. We have gone through the findings of the Tribunal in the aforesaid order. On similar reasoning, the exclusion of this company by the DRP is confirmed. This ground of revenue is dismissed. 47. Ground no. 6 by the revenue reads as follows:- 6. The DRP erred in directing the AO to carry out the working capital adjustment as per the actual figures worked out by the assessee without putting any cap on the ground that there is time value of money without appreciating the fact that the TPO had put a cap on the basis of the average cost of working capital of the comparables selected by the TPO and that the accurate details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794, dated 9-8-2000. If the specific provisions of the Act provide [first proviso to sections 10A(1); 10A(1A) and 10A(4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 9-8-2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression 't ..... X X X X Extracts X X X X X X X X Extracts X X X X
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