TMI Blog2018 (3) TMI 1932X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the DRP, for the assessment year 2013-14, on various grounds mentioned in the grounds of appeal and additional grounds of appeal. 02. The Ld. AR for the assessee during the course of argument has submitted that the assessee is not pressing ground nos.1, 2, 5, 7, 9, 10 of the grounds of appeal and grounds 5.1 and 5.1.2 of the additional grounds. Therefore after excluding these grounds, the effective grounds Ground no.3, 4, 6, 8, Additional ground no.3.1, 4.1 (a), (c), (g), (j) and ground no.6.1 raised by the assessee are reproduced hereunder : Additional grounds : a) Akshay Software Technologies Ltd, c) Evoke Technologies Ltd, g) Sankhya Infotech Ltd, j) R System International Ltd 03. Assessee is engaged in the provision of software development services to its associated enterprises. It is the case of the assessee that it acts as a captive service provider and is remunerated by its AEs on a cost plus basis. 04. As per TP order during the Financial Year ( FY ) 2012-13, Assessee has entered into the following international transactions with its Associated Enterprises ( AEs ): International Transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filter and examining the TP study, the TPO has suggested the selection of the following comparable companies which are comparable with the profile of the assessee. Sl. No. Company Name Unadjusted OP/OC 1 CG-VAK Software Exports Ltd. 20.54% 2 ICRA Techno Analytics Ltd. 17.10% 3 Larsen Toubro Infotech Ltd. 26.06% 4 Mindtree Ltd. (Seg.) 18.19% 5 Persistent Systems Ltd. 28.27% 6 R S Software (India) Ltd. 17.41% 7 Tech Mahindra Ltd. (Seg.) 18.72% AVERAGE 20.90% The TPO further allowed working capital adjustment and accordingly computed arm s length OP/OC at 18.15%. 08. Finally the TPO has computed the ALP of the assessee and has suggested the following adjustment u/s.92C of the Act : D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal grounds. In this regard, we observe that the additional grounds raised before us are having the factual basis and foundation before the lower authorities and no additional document is required to be considered. The order passed by the DRP / TPO had considered the inclusion / exclusion of various comparables sought in the additional ground and further the other grounds were also considered by the lower authorities at the time of passing of the orders. In view of the above and also in view of the decision in the matter of DCIT v. Quark Systems of the Hon ble Punjab and Haryana High Court, we allow the additional grounds raised before us. Further at the outset, the Ld. AR has restricted his argument in respect of the additional ground no.3.1, 4.1 (4 comparables only) and 6.1 12. The assessee has sought exclusion of Larsen Toubro Infotech Limited (L T Infotech) on the ground that this company is functionally dissimilar to the assessee and is having presence of intangible. Further it has its own brand value and the segmental information is not available. In Notes to argument, the Ld. AR for the assessee has submitted as under : a) Functionally dissimilar - L T Infotech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... INR 0.00Cr Intangibles INR 63.72 Cr INR 0.00 Cr. Other L T also involved in resale of software products and during FY 2012-13 cost of bought out goods were INR 27.10 Cr No resale of products, only operates as a captive service provider b) Scale of operations - The total operating income of L T Infotech is 3613.42 crores. It is 68 times more than the turnover of the Assessee which clearly indicates that L T Infotech has larger scale of operations. c) Presence of intangibles - L T Infotech has intangibles worth INR 637,290,322 during FY 2012-13. The segmental breakup of revenue attributable to software product segment and software services segment is not available. The Company has reorganised its business into 3 segments. Services Cluster includes Banking, Financial services, Insurance, Media Entertainment, Travel Logistics and Healthcare. Industrials Cluster includes Hi Tech and Consumer Electronics, Consumer, Retail Pharma, Energy Process, Automobile Aerospace, Plant Equipment Industrial Machinery, Utilities and E C. Tel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Departmental Representative for Revenue supported the orders of the authorities below in retaining this company L T in the final list of comparables; which was in fact the original choice of the assessee itself in its TP Study. 6.4.1 We have heard the rival contentions and perused and carefuUy considered the material on record. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on the following grounds, as mentioned in page 17 of the TPO's order under Section 92CA of the Act :- (i) 'L T' functionally different; (ii) insufficient segmental information (iii) it owns significant intangibles; (iv) it has large scale of operations. 6.4.2 From a perusal of the TPO's order under Section 92CA has countered the arguments of the assessee in respect of some of the above contentions; like functional dissimilarity, intangibles, brand, on-site operations, RPT and scale of operations. However, we find that the TPO has not rebutted the assessee's objections on other grounds like insufficient segmental information. 6.4.3 The DRP has also rendered detailed reasoning on the objections raised by the assessee against i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Report of' L T' under the head Income / Expenditure in foreign currency , we find that this company has shown substantial sub-contracting expenses . It is not clear whether these expenses are related to the services rendered by the company, indicating a different business model to that of the assessee in the case on hand. This issue also appears to have been raised for the first time before us and has not been raised before the authorities below. Therefore, it is evident this issue has neither been examined by either the TPO or the DRP. 6.4.7 The above three highlighted issues of; 'different segments'. 'cost of bought-out items for sale' and 'subcontracting expenses' ; are critical issues that would have a bearing on the determination of comparability of this company, ' L T' , with that of the assessee in the case on hand. It is an accepted principle that if there are different segments operating in different areas, then details related to the segment which is comparable to the assessee only should be considered. It is also settled principle that if any ground / objection is raised before the appellate authorities for the first time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of functional dissimilarity saying that the company is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas on the basis of reply to notice u/s 133(6) received by Ld. TPO from Akshay Software. The submitted that the services rendered by Akshay were forming part of the subset of software development services and all the functions mentioned in Annual Report such as installation, support and maintenance of ERP products and services are with regard to software services. Similarly it was submitted Enterprise resource planning or ERP systems are software systems that are used for operations planning, administration and for optimizing internal business processes. A typical ERP software helps in integrating all data and processes of an organization into a single unified system. ERP is a category of business-management software and the installation/maintenance/support would come under the purview of software development activities. The assessee, relied upon the report submitted by Rangachary Committee ( Rangachary Report ), Support for existing (software) systems , Adaptation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable u/s.133(6) of the Act and the assessee was given the opportunity. Further in our considered opinion, the financial of the comparable clearly shows that Akshay Software Technologies Ltd is primarily earning its revenue from onsite services as mentioned at page 86 of the DRP order and Note 28 of the P L account. Thus in the considered opinion of the Bench, Akshay Software Technologies Ltd is not comparable with the assessee. The reliance on the decision of the Tribunal in the matter of the assessee for AY 2007- 08 is unfounded as the decision was for the earlier year and no reasoning was given by the Tribunal while directing the TPO to include Akshay Software Technologies as comparable. Further in the matter of Arowana Consulting P. Ltd (supra), the Tribunal in para 9 has mentioned that the DRP has not given any independent finding for arriving at the conclusion that this company is not comparable with the assessee. In the light of the above, we restore the matter back to the file of TPO for examining afresh. EVOKE TECHNOLOGIES LTD ( EVOKE ) 20. Evoke is one of the comparable companies selected by the Assessee in the TP documentation. Evoke is engaged in software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all these aspects are required to be examined by the TPO at the first instance and the assessee should be given a chance to explain the same. In the light of the above, we remand the matter for a fresh examination to the file of the TPO with a direction to decide the inclusion of Evoke Technologies Ltd after giving due opportunity to the assessee. Sankhya Infotech Ltd. ( Sankhya ) : 23. Sankhya is one of the comparable companies selected by the Assessee in the fresh search given during TP Assessment proceedings. The Ld. TPO has rejected Sankhya on segmental not available . The relevant extract of the TP order is as below: Assessee s contentions: 23.1 As per the annual report of Sankhya Infotech Ltd for FY 2012- 13, Sankhya is engaged in provision of IT services to customers globally in transportation segment. (Page 32 of Annual report for FY 2012-13) As can be seen from above extract from annual report, the company provides software development services to its customers. As per the segment information, during FY 2012-13, the entire revenue was from software services and no revenue was earned from software products. (Page 33 of Annual report for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in contradiction to the submissions given with respect to segment reporting and segment information relating to the activities of the assessee, we deem it appropriate to remand the matter to the file of the TPO to examine afresh the profile of Sankhya Infotech Ltd, on the touchstone of FAR with the assessee. Accordingly, the inclusion of Sankhya Infotech Ltd is remanded back to the file of TPO for examining afresh. R Systems International Ltd. ( R Systems ) : 24. R Systems is one of the comparable companies selected by the Assessee in the fresh search given during TP Assessment proceedings. The Ld. TPO has rejected R Systems on the ground of different financial year no data available . The relevant extract of the TP order is as below: Assessee s contentions: 24.1 The Assessee s contentions against the different financial year no data available filter are set out in the section 5.3 (III) above. The Assessee submits that R Systems is engaged in two segments namely software development services and business process outsourcing services (BPO). The software development services segment is functionally comparable to the Assessee. Also, the Ld. TPO has not objected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are sought to be corrected 25.1 In this regard, the Assessee submitted that the foreign exchange losses/ gains should not be considered in Assessee s case as it has nothing to do with the main operations of the Company. Further it was submitted that foreign exchange losses/ gains are a direct manifestation of the underlying risk embedded in a business arising from uncertainties in the spot market price of the nominal exchange rate. Thus in a comparable analysis wherein, a set of companies are identified as comparable, it is imperative that the comparable companies will have different level of foreign currency exposure depending upon i) extent of transactions with overseas entities, ii) Geographical location of the transacting entities (The market and price dynamics differ for same services/ same products in different economies and geographies) and iii) the respective hedging policies adopted by respective companies. Further for the purposes of provision for bad and doubtful debts the Ld. AR relied upon Outsource Partners International (P.) Ltd. [2017] 79 taxmann.com 74 (Bengaluru Trib), wherein the coordinate bench held as under : 6. The next ground pertains to groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for doubtful debts are required to be treated as operating in nature in case the said provisions were there for the same assessment year under consideration. Further the said provision for doubtful debts should be closely linked with the business operation of the assessee. In the present case before the TPO the assessee has not furnished any documents or basis for both, i.e., whether the provision of doubtful debts are for the same year for the assessee as well as for the comparable. Moreover the assessee has not substantiated that the provision for doubtful debts are closely linked with the business operations of the assessee. In our view, the judgment relied upon by the assessee on Outsource Partners International (P.) Ltd. (supra), clearly lays down that if the provision for doubtful debts is closely linked with the business operations of the assessee then the same is required to be treated as operational in nature. As the needful has not been done therefore the bench did not agree with the contention of the assessee and accordingly the ground for treating the provision for doubtful debts as operational in nature is rejected. Further there is one more reason for rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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