TMI Blog2021 (9) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... -Zest Solution Ltd. is concerned, this company was directed to be excluded by this Tribunal in the case of a SWD service provider such as the Assessee as functionally not comparable and absence of segmental information of its products and software development segments and also in the light of presence of inventory showing that this company is a product company. As far as exclusion of Persistent Systems and Solutions Ltd., is concerned, we find that this company was again excluded in the decision in the case of Autodesk India Pvt. Ltd. [ 2018 (12) TMI 1742 - ITAT BANGALORE] for the very same reasons for exclusion of e-Zest solutions Ltd. We therefore direct exclusion of this company from the list of comparable companies. Computation of deduction u/s 10A - exclusion of telecommunication expenses and expenses incurred in foreign currency for rending technical services outside India, both from the export turnover and total turnover - HELD THAT:- It is not in dispute before us that the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] has held that charges/expenses relating to telecommunication, and expenses in conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be made to balance the effect. This company is therefore excluded as comparable company. Accentia Technologies Ltd is engaged in rendering routine low end information technology enabled services. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivables cycle management and high end consultancy to start-ups requiring field experts. As can be seen from the annual report, coding income is contributing 15% of the total income which activities are akin to software development activity while the assessee is a mere provider of IT enabled services. The company has invested huge sums in the development of EMR software. Segmental details of its various activities are unavailable, therefore, not comparable to the Assessee and rejected as a comparable. ICRA Online Ltd is functionally dissimilar for the reason that the outsourced services segment of the company is engaged in the provision of high end consultancy services which cannot be compared to the assessee who is into provision of low end IT enabled services which are routine in nature. Further, the company fails the TPO s own filter of export turnover in excess of 75% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O and the learned DRP have erred, in law and in facts, by accepting / rejecting the companies based on unreasonable comparability criteria The learned AO/DRP/TPO has failed to appreciate the fact that the following companies are not functionally comparable to the software development segment of Appellant, therefore has erred in law and in facts in considering them as comparable companies: a. Acropetal Technologies Limited b. E-Infochips Limited c. ICRA Techno Analytics Limited d. Persistent Systems and Solutions Limited i) The learned AO/ TPO and the learned DRP have erred, in law and in facts, by accepting / rejecting companies based on unreasonable comparability criteria; i. The learned AO/DRP/TPO has failed to appreciate the fact that the following companies are not functionally comparable to the IT enabled service segment of Appellant, therefore has erred in law and in facts in considering them as comparable companies: a. Accentia Technologies Limited b. Acropetal Technologies Limited(seg) c. ICRA Online Limited d. Jeevan Scientific Technologies Limited 4. We shall first identify the issues to be decided in these cross appeals. The issues tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the Any income arising from an international transaction shall be computed having regard to the arm s length price. SOFTWARE DEVELOPMENT SERVICES SEGMENT : 7. It is not in dispute between the Assessee and the Revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee s profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 14%. The Assessee in it s TP study selected comparable companies whose arithmetic mean profit margin was comparable with the profit margins of the Assessee. Since the profit margin of the Assessee was comparable with the arithmetic mean of OP/TC of the comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm s Length. The Transfer Pricing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Price Received 152,140,773 Shortfall being adjustment u/s. 92CA 14,213,151 8. The AO incorporated the addition to the total income by way of shortfall being adjustment u/s.92CA of the Act, in his draft order of Assessment. Against the said addition in the draft assessment order, the Assessee filed objections u/s.144C of the Act before the DRP. The DRP accepted some of the contentions of the Assessee. 9. Aggrieved by the order of DRP not accepting some of the contentions raised by the Assessee for exclusion of 5 comparable companies, the Assessee has raised Grd.No.1(e) (i) before the Tribunal. 10. As far as exclusion of Acropetal Technologies Ltd. from the list of comparable companies is concerned, after hearing the rival submission for exclusion of Acropetal from the list of comparable companies, we find that plea for exclusion of this company from the list of comparable companies should be upheld because this company fails the employee cost filter of employee cost being equal to atleast 25% of the total operating revenue. From the annual report of the company it can be seen that the employee costs in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2016] 67 taxmann.com 155 (Delhi - Trib.) (paras 10.1 and 10.2 at pages 1656-1657)] (which came to be upheld by the Hon ble Delhi High Court); Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 at page 1744]; Cypress Semi-conductor Technology India Pvt. Ltd. v. DCIT [IT(TP)A No.356/Bang/2016 at paras 19-20 at pages 1773-1775]; and Commscope Networks (I) Pvt. Ltd. v. ITO [TS-161-ITAT-2017(Bang)-TP at para 9 on pages 1639-1640] held that this company ought to be excluded from list of comparable companies in the case of companies rendering SWD services similar to that of the Assessee. Consequently, for the above reasons, we direct exclusion of E-Infochips Ltd. is upheld and the ground is dismissed. 12. As far as ICRA Techno Analytics Ltd., this company ought to have been rejected by the DRP for the reason that the entire revenue of the company has been reported under one segment, and in the absence of segmental information regarding the same, the company could not be held as a comparable to the Assessee. We find that this company is engaged in diversified activities of software development and consultancy, licensing and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Tata Elxsi Ltd [2012] 349 ITR 98 (Karn) has held that charges/expenses relating to telecommunication, and expenses in connection with rendering technical services outside India, should be excluded both from export turnover and total turnover while computing deduction u/s.10A of the Act i.e., whatever is removed from the numerator should also be excluded from the denominator while working total turnover and export turnover for allowing deduction u/s.10A of the Act. The aforesaid decision of the jurisdictional High Court has been upheld by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 Ors. dated 24.04.2018. In view of the above, we are of the view that the telecommunication charges should be excluded both from the export turnover as well as total turnover while computing deduction u/s.10A of the Act. The order of the DRP is therefore upheld. 16. As far as Gr.No.3 to 5 raised by the Revenue is concerned, the Revenue has challenged the action of the DRP in directing the AO to consider the gains/loss arising from fluctuation of foreign currency as being operating in nature. In this regard it was submitted that the gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 Cosmic Global Ltd. 9.81 4 e4e Healthcare Business Services Pvt. Ltd. 12.38 5 ICRA Online Ltd. (seg.) 34.21 6 Jeevan Scientific Technology Ltd. 70.66 7 Infosys BPO Ltd. 17.89 8 Jindal Intellicom Pvt. Ltd. 11.13 9 Mindtree Ltd. (seg.) 10.76 10 iGate Global Solutions Ltd. 25.07 AVERAGE MARK-UP 24.77 Computation of arm s length price by the TPO and the adjustment made: Arm s Length Mean Mark-up 24.77% Less: Working Capital Adjustment -0.21% Adjusted mean mark-up of the comparables 24.98% Operating Cost ( OC ) 86,899,463 Arm s Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In any event, the ERP segment of the company is not comparable to the assessee, the BPO segment of the company fails the filter of service income being greater than 75% of total revenue, and the company suffers from huge fluctuations which indicate that certain peculiar circumstances influencing the profit margin of the company exist, for which appropriate adjustments cannot be made to balance the effect. This company is therefore excluded as comparable company. As far as exclusion of Accentia Technologies Ltd., is concerned, we find that details regarding its diverse functions were reported under one segment, without segmental details regarding the same being made available. In the absence of segmental details being made available, the comparability of the company with that of the assessee cannot be determined. In any event, Accentia is engaged in providing high end services in the nature of Knowledge Process Outsourcing ( KPO ) which is evident from its annual report, whereas, the assessee is engaged in rendering routine low end information technology enabled services. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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