TMI Blog2021 (9) TMI 383X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware products and (iii) other services. The segmental operating margins are however not available. Therefore the operating margin for the SWD service segment of this company cannot be compared with that of the assessee. As relying on ELECTRONICS FOR IMAGING INDIA PVT. LTD. [ 2016 (2) TMI 1123 - ITAT BANGALORE] we direct at exclusion of this company from the list of comparable companies. Persistent Systems Ltd - DRP in its order accepted that the Annual Report of this company and says that this company is both into SWD services and products. No segmental details are available so that the margins of the SWD segment can be compared with that of the assessee. Hence this company cannot be regarded as comparable. For the very same reason this company was regarded as not comparable with a SWD service provider in the case of Electronics for Imaging (supra). DRP suo moto directing the exclusion of Thinksoft Global Services Ltd., R.S. Software (India) Limited and Mindtree Limited from the list of comparables - The said companies were selected by the Assessee and subsequently included by the TPO in the final list of comparables. These companies pass all the filters applied by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation and are dismissed. Grievance in the action of the TPO in not giving opportunity to assessee before making adjustment on account of negative working capita l - We are of the view that this issue was not raised by the assessee before DRP and hence, we deem it appropriate to direct the TPO/AO to consider the same in the proceedings for giving effect to this order in the set aside proceedings. Set off of brought forward loss - HELD THAT:- The assessee had filed its return of income claiming setting off of business loss based on the actual loss incurred and brought forward as per the Return of Income. Although the DRP directed to AO to verify and allow set off of the same, it was not done by the AO in the final Assessment Order. The assessee has therefore prayed that the same be allowed to be set off against income. We deem it proper to direct the AO to consider the claim of the assessee in accordance with law. Computing deduction under section 10A - export turnover inclusion/Exclusion - HELD THAT:- Whatever is excluded from export turnover should also be excluded from the total turnover following the decision of the Hon'ble Karnataka High Court in the case of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.03.2015. Aggrieved, the assessee filed its objections before the DRP, which, vide its directions dated 15.12.2015 granted partial relief to the assessee. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 29.01.2016 in which the TP adjustment was reworked to ₹ 1,11,82,20,792/-. Aggrieved by the final assessment order to the extent it did not grant relief to the assessee, the assessee has preferred the appeal before this Hon'ble Tribunal. To the extent that the DRP's directions granted relief to the assessee, the Revenue has filed the above appeal before this Hon'ble Tribunal. 4. During the pendency of the present appeals, the Assessee filed an application under Article 27 of the India-US Double Taxation Avoidance Agreement ('DTAA' for short) for initiation of Mutual Agreement Procedure ('MAP' for short) before the Indian and the US Competent Authorities with respect to ITES provided to the AEs based in the United States of America ('US' for short). As the Assessee has accepted the terms of MAP, the grounds pertaining to the TP adjustment with respect to ITES transactions with the AEs based in the US a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Global Services Ltd. and Mindtree Ltd. and rejected the remaining 10 comparables. 8. The TPO selected the following comparables and their arithmetic mean was as follows: Sl. No. Name of the company Margin Unadj (%) Margin WC adjusted (%) 1. ICRA Techno Analytics Ltd. (seg) 24.94 28.46 2. Infosys Ltd 44.98 48.53 3. Kals Information Systems Ltd. (seg) 34.41 34.22 4. Larsen Toubro Infotech Ltd. 19.33 23.25 5. Mindtree Ltd. (seg) 14.83 16.55 6. Persistent Systems Solutions Ltd. 15.38 18.95 7. Persistent Systems Ltd 30.35 31.87 8. R S Software (India) Ltd. 10.29 14.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies IT(TP)A Nos.637 and 639/Bang/2016 12. Pursuant to the directions of the DRP, the TP adjustment was reworked to ₹ 40,62,17,470/- in the final Assessment Order dated 29.01.2016. Aggrieved by the order of the AO, the assessee has raised the following issues, viz., (i) that the DRP erred in suo moto excluding R.S. Software (India) Limited Mindtree Limited and Thinksoft Global Services Ltd. from the list of comparable companies. (Ground No. 1.4) and (ii) that the DRP ought to have directed exclusion of Larsen Toubro Infotech Ltd., Sasken Communication Technologies Ltd. and Persistent Systems Ltd. as the said companies are not comparable to the assessee. (Ground No. 2.10) Revenue in its appeal has projected the following grievances against the order of the AO. The grounds primarily urged by the Revenue are as under: i. That the DRP erred in excluding Mindtree Ltd., Rs. Software Pvt. Ltd. and Thinksoft Ltd. from the list of comparable companies by applying the onsite revenue filter. (Ground No. 1) ii. That the DRP erred in excluding ICRA Techno Analytics Ltd. and Tata Elxsi Ltd. from the list of comparables. (Ground Nos. 2 and 4) iii. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as regards its revenues from software development and product development were available, and to thereafter exclude it if the details were not available. The learned DR relied on the order of the TPO whereas the assessee accepted this company as a comparable company. 16. We have carefully considered the rival submissions. The assessee did not object to inclusion of this company before the TPO but objected to inclusion of this company before DRP. The DRP did not adjudicate the objection. In these circumstances, we are of the view that exclusion of this company from the list of comparable companies has to be examined by the TPO/AO and we remand the issue to the TPO/AO. The law is well settled that the assessee is entitled to object to inclusion/exclusion of companies at the stage of appellate proceedings and there is no estoppel. The AO/TPO will afford opportunity of being heard to the assessee in the set aside proceedings. 17. Sasken Communication Technologies Ltd.: As far as exclusion of this company is concerned, the assessee sought exclusion of this company on the ground that this company is functionally dissimilar, which the DRP rejected. The DRP held that this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As per the annual report of the company, income is shown as sale of software services and products and no break-up is available between sale of software services and sale of products. The company is thus functionally dissimilar. In any event, during FY 2009-10, the company acquired assets in Paxonic Inc and has been involved in merger/demerger activities and on account of this peculiar economic circumstance too, the company ought to be rejected. Reliance was also placed on the decision of this Tribunal in the case of DCIT v. Electronics for Imaging India P. Ltd. [(2016) 70 taxmann.com 299 (Bang - Trib.)], ACIT v. Broad com. India Research (P.) Ltd. [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bangalore - Trib.), where the said company was directed to be excluded/exclusion upheld in the case of assessees similar to the assessee herein. The learned DR relied on the order of DRP which rejected similar contention. 20. We have considered the rival submissions. We find the DRP in its order at page 8 has accepted that the Annual Report of this company and says that this company is both into SWD ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company to be excluded as a comparable in the case of assessees similar to the assessee herein. We therefore find no merit in ground No. 2 raised by the Revenue. 25. Infosys Technologies Ltd. ( Infosys ): In ground No. 3, the Revenue has projected its grievance in the action of the DRP in escalating this company as a comparable company. This company was excluded by the DRP on the grounds that the company has significant onsite revenue at 48.7% and has incurred significant selling and marketing expenses and presence of intangibles for which no accurate adjustment can be made. The turnover of this company was ₹ 21,140 crores which is far higher than the turnover of the assessee. This company is a giant in the software development space while the assessee is a captive unit. The company also has high brand value and focusses on brand-building which occasions the high profits. Infosys owns products and leverages on its premium banking solution Finacle @ as evidenced from its annual report. The company also focusses heavily on R D and thus the company is thus not comparable to the assessee. 26. The plea of the Revenue in ground No. 3 is that functional comparability has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore find no merit in Ground No. 4 raised by the Revenue. 29. KALS Information Systems Ltd: As far as exclusion of this company is concerned, the DRP excluded this company on the ground that this company is functionally dissimilar and that the segmental information are not reliable. Further, it is submitted that Kals is engaged in the development of software products and providing related services. It also provides implementation and maintenance of software products. It has developed a range of products such as Shine ERP software, Docuflo, Dac-Cast, CMSS, La Vision, Virtual Insure and Aldon. Website extracts demonstrating this are available in the submissions at pages 45-48 and 869-872 of the paperbook. The annual report also confirms that the company is engaged in development of software and software products. The company holds significant inventories which account for 27% of the total current assets which demonstrates that it is a product development company as against a pure software service provider like the assessee. The functions carried out by the two companies being substantially different, the company has been rightly rejected as a comparable. 30. The grievance pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.38 5. Datamatics Financial Services Ltd -3.03 6. Omega Healthcare Management Services Pvt Ltd 9.34 7. Jeevan Softech Ltd 13.44 8. R Systems International Limited 10.43 9. Caliber Point Business Solutions Ltd. 21.16 10. Ultramarine Pigments Ltd 13.28 Arithmetical Mean 13.60 Out of the 10 comparables selected by the assessee, the TPO selected 1 comparable viz., Informed Technologies India Ltd. and rejected the remaining 9 comparables. 34. Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the company Margin Unadj (%) Margin WC adjusted (%) 1. Accentia Technologies Ltd. (seg) 43.06 43.35 2. Acro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any 1. Fortune Infotech Ltd. 2. ICRA Online Ltd. (seg) 3. Cosmic Global 4. Informed Technologies India Ltd. Pursuant to the directions of the DRP, the TP adjustment was reworked to ₹ 71,20,03,322/- in the final assessment order dated 29.01.2016. Against the said order both the assessee and the Revenue have preferred appeals before the Tribunal. 37. In its appeal, the assessee has raised the following issues with regard to the determination of ALP in the ITES segment. That the arm's length mark-up on cost arrived under the Mutual Agreement Procedure Resolution to be applied for transactions with Non-US based entities for the ITES segment. (Additional Ground). The DRP erred in suo moto excluding Sundaram Business Services Ltd. from the list of comparable companies. (Ground No. 1.4). The DRP erred in including Fortune Infotech Limited, ICRA Online Limited and Informed Technologies India Limited from the list of comparable companies. (Ground No. 2.14). 38. In its appeal, the Revenue has challenged the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. DCIT ([2017] 81 taxmann.com 169 (Bangalore - Trib.)) and the Hon'ble Tribunal - Mumbai Bench in J.P. Morgan Services (P.) Ltd. v. DCIT ([2016] 70 taxmann.com 228 (Mumbai - Trib.)) wherein, the same margin as the US transactions was directed to be applied for the Non-US transactions. The learned Counsel for the assessee also pointed out that the Commissioner of Income-tax (Appeals) in its own case for the AYs 2005-06, 2007-08 and 2008-09, adopted the arm's length price determined in the MAP resolution for the international transactions entered into with the Non-US AEs. The learned DR could not point out any infirmity in the submissions on the additional ground of appeal made by the learned Counsel for assessee. 43. We have considered the rival submissions and find merit in the same. As pointed out by the learned Counsel for assessee, the assessee or TPO have not made any distinction between US and Non-US AE transactions. In such circumstances, the margin accepted in MAP in respect of US AE transaction has to be regarded as Arm's Length mark-up cost for the Non-US AE transaction in the ITES segment. We hold and direct accordingly. In view of the above conclusion, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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