TMI Blog2021 (12) TMI 1422X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground of appeal no.5 and 6. Accordingly, the ground of appeal no.5 and 6 stands dismissed. Denying grant of risk adjustments - HELD THAT:- The assessee has not demonstrated as to how the difference in risk undertaken by a bank in advancing a loan to a borrower as compared to the risk involved in a loan advanced by RBI to a bank or by a bank to another bank is similar to the difference between the risk undertaken by the comparable company and the risk undertaken by the assessee. Hence, the difference between the Prime Lending Rate and the Bank Rate cannot be considered as a reliable and accurate measure of the Risk adjustment required to be made. In the absence of a reliable and accurate measure of the risk difference between the assessee and the comparables, no risk adjustment can be granted. Deduction of education cess from computation of taxable income - HELD THAT:- we note that the assessee paid Education Cess while computing the taxable income under normal provision of the I.T. Act. The Hon ble High Court of Bombay in the case of Sesa Goa Ltd. [ 2020 (3) TMI 347 - BOMBAY HIGH COURT] was pleased to hold that the Education Cess is an allowable expenditure as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the comparable set which are comparable to the provision of Software Development Service segment s functions, asset base and risk profile. i. Kals Information Systems. ii. Akshay Software Technologies Limited iii. Sagarsoft (India) Limited iv. Accel Frontline Ltd. (Segmental) v. Maveric Systems Limited vi. Mudunuru Limited vii. CG-VAK Software Exports Limited viii. Infomile Technologies Limited ix. Cigniti Technologies Limited x. R Systems International Limited ( Segmental) xi. SQS India BFSI Limited (formerly Thinksoft Global Services Ltd.(Consolidated) and xii. Kellton Tech Solution Ltd. The Appellant prays that the TP Analysis conducted by the Appellant ought to be accepted and aforementioned comparable companies ought to be selected; consequently the TP adjustment in relation to the Provision of Software Development Service segment ought to be deleted. 2.2.On the facts and in the circumstances of the case and in law, NeAC erred in including the following companies from the comparable set which are not comparable to the provision of Software Development Service segment s functions, asset base and risk profile. i. Exilant Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts and circumstances of the case and in law, NeAC erred in excluding the following companies in the comparable set which are comparable to the Provision of Sales and Marketing Support Service segment s functions, asset base and risk profile: i. MCI Management (India) Limited; ii. India Tourism Development Corporation Limited and iii. EDCIL (India) Limited (Segmental) The appellant prays that the TP analysis conducted by the Appellant ought to be accepted and consequently the TP adjustment in relation to the Provision of Sales and Marketing Support services segment ought to be deleted. 5. Ground No. 5- Treatment of goodwill amortization cost On the facts and in the circumstances of the case and in law, NeAC erred in considering amortization of goodwill, arising on account of acquisition as operating in nature while computing the operating profit margin of Provision of Sales and Marketing Support Service segment of the Appellant. The Appellant prays that the Learned Assessing Officer ( Ld. AO) NeAC be directed to treat the amortization of goodwill as a nonoperating cost. 6. Ground No. 6- Double disallowance due to treatment of goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international transactions. The assessee company reported the following international transactions in Form 3CEB: No. Nature of Transaction Amount as per 3CEB Method 1. Provision of software development services and consultancy services 2,47,69,11,000 TNMM 2. Provision of technical support services 52,17,39,000 TNMM 3. Provision of sales and marketing support services 41,94,99,000 TNMM 4. Payment of interest on convertible debentures 17,06,10,000 CUP 5. Reimbursement of expenses to AEs 7,57,78,034 OM 6. Recovery of expenses from AEs 18,04,039 OM Total 366,63,41,073 4. The assessee company sought to justify the consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in was computed at 8.73%. According to the assessee company, its PLI is within range and hence, it was claimed that transactions with its AEs are at arm s length price. However, the TPO had rejected the TP study report submitted by the assessee company and had proceeded with identifying different set of comparable entities for the purpose of determining arm s length price. 6. Now, we shall take segment-wise comparables for adjudication. A. Software Development Services Segment :- 7. In the TP study report, the assessee company had adopted the following comparable entities: Sr. No. Assessee s set of comparable Companies in the TPSR PLI (OP/TC) 1. Akshay Software Technologies Limited 1.08% 2. Sagar Soft India Limited 1.52% 3. Accel Frontline Ltd. (SS Segmental) 6.03% 4. Sasken Communication Technologies Limited 8.00% 5. Kals Information Systems 8.11% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith gross intangibles greater than 50% of operating revenue are rejected (xi) Companies with forex spending greater than 75% of operating cost are rejected. (xii) Companies for which data for 2015-16 and 2014-15 is not available are rejected. 9. Applying the above filters, the TPO rejected 13 comparables selected by the assessee company by accepting 3 companies viz. (a) Sasken Technologies Ltd.( formerly known as Sasken Communication Technologies Limited); (b) Infobeans Technologies Ltd. and (c) R.S. Software (India) Ltd. and finally selected the following list of comparables with respect to PLI: Sr. No. TPO s Set of the comparable companies PLI (OP/TC) 1. Sasken Technologies Ltd.( formerly known as Sasken Communication Technologies Limited) 0.46% 2. Evoke Technologies Pvt.Ltd. 4.79% 3. Sasken Technologies Ltd.-Seg. 6.12% 4. E-Zest Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies with gross intangibles greater than 50% of operating revenue are rejected. (xi) Companies with forex spending greater than 75% of operating cost are rejected. (xii) Companies for which data for 2015-16 and 2014-15 is not available are rejected. 11. In respect of the technical support services, applying the above filters, the TPO rejected the comparables selected by the assessee company by accepting the three companies. The TPO vide order passed u/s 92CA(3) of the Act dated 30.10.2019 suggested transfer pricing adjustments of Rs.24,39,53,671/- in respect of software development services. The assessee is not challenging the inclusion of the comparables selected by the assessee company. However, the assessee company is only seeking the exclusion of the following set of comparables chosen by the TPO :- (i) Nihilent Technologies Pvt. Ltd. (ii) Persistent Systems Ltd. (iii) Aspire Systems (India) Pvt. Ltd. (iv) Thirdware Solutions Ltd. (v) Cybage Software Private Ltd. (vi) Dun and Bradstreet Technologies Data Services Pvt. Ltd. (vii) E-Infochip Ltd. (viii) Exil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea of enterprise transformation, change and performance management and providing related IT services. The company is considered as comparable and the objection of the assessee is hereby rejected. (C). Even before DRP, the same contentions were reiterated and the DRP held that this company is purely software company, accordingly, upheld the inclusion of this company in the list of the comparables. (D). Before us, it is contended that this company is engaged into IT consultancy, software development and related services. It is further contended that the software development services are different from the provisions of software consultancy services placing reliance on the decision of the Hon ble Delhi High Court in the case of Avenue Asia Advisors (P.) Ltd. vs. DCIT, 398 ITR 120 (Delhi). (E). On the other hand, ld. CIT-DR contended that the contentions of the assessee company are based on the website information of the company which cannot be relied upon. He further submitted that page 111 of the annual report clearly states that the company derives its revenue primarily from rendering software service activities. The ld. CIT-DR contended that the IT consultancy services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenue from sale of software services for the financial year 2013-14 whereas in the financial years 2014-15 and 2015-16 revenue from software services worked out to 99.42% and 98.35% respectively. Thus, it is submitted that revenue derived from software services constitutes very high. Further, it is submitted that the company had not earned any revenue from project engineering services as claimed by the appellant. It is submitted that the assessee company had not discharged the onus on establishing because of this acquisition there is a positive impact on the financials of the company for the year. Hence, it is submitted that this company cannot rejected only on the ground of acquisition of other companies. (E). We heard the rival submissions and perused the material on record. From the annual report in the notes forming part of the financial statements, it is stated as under :- The company is a global company specializing in software products, services and technology innovation. The company offers complete product life cycle services. From the director s report placed at page no.1627 of the paper book states as under :- The company provides product engineering se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income for sale of software products, ITES, in-fact the annual report revealed that the entire revenue operation only from onsite of software services, software development and the information contained in the website cannot be relied upon. As regards to the amalgamation to the company applied Development Software (India) Pvt. Ltd. and Pure Apps Consulting Services Private Limited, it is submitted that the assessee has not demonstrated as to how the amalgamation of this two companies has impacted the profitability of the assessee company and in any event both the companies are engaged in the business of development of software and provisions of software services. (D). We heard the rival submissions and perused the material on record. The company considered its business segment as its primary segment. The company is engaged in the business of providing outsourced technology services. The company focused on helping software companies creates innovating products through its onsite and offshore model. The company activities are not distinguishable on the basis of risk and method of operations. Accordingly, the company views the entire business as once segment. In notes forming part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant is in the present appeal before us reiterating the same submissions as made before the lower authorities. Our attention is drawn to explanatory note given on revenue recognition at page 2144 stated that : Revenue is primarily derived from software development, implementation services, application management services and other related services and from the sale of license and subscription for software application. It is further submitted that revenue from subscription for software application and sale of license indicates that there is income from development of software products. (D). On the other hand, ld. CIT-DR referring to the annual report of the company i.e. Thirdware Solutions Ltd. submits that 99% of income is derived from the provisions of software services. He further submits that the contention of the appellant that this company is engaged in diversified activities is not supported by the information contained in the annual report of the company and, therefore, the contention of the appellant company cannot be accepted. (E). We heard the rival submissions and perused the material on record. We find at page no.2139 of the paper book the breakup of the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derived from the activities of software development services. We find no merit in the submissions of the appellant that a super normal profit-making company cannot be included in the list of the comparables for the reasons that firstly, this contention was not raised before the lower authorities and secondly, a super profit-making company, ipso facto, leads to exclusion from the comparables. Therefore, we do not find any merit in the contention made by the appellant seeking exclusion of this company from the list of comparables. Therefore, we uphold the inclusion of this company in the list of the comparables with that of the appellant company. 17. DUN AND BRADSTREET TECHNOLOGIES DATA SERVICES PVT. LTD. : The appellant sought the exclusion of this company from the list of comparables selected by the TPO on the ground that (i) Functional dissimilarity, as the company is engaged into diversified activities and no segmental information is available. However, the TPO rejected the contention of the appellant by holding that entire revenue of the company is derived from the activities of the provisions of software services. (B) Even the DRP confirmed the inclusion of this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the TPO/AO. 18. E-INFOCHIP LIMITED : The appellant company is seeking the exclusion of this company from the list of comparables selected by the TPO as confirmed by the DRP. The appellant has objected inclusion of this company in the list of comparables before the TPO on the ground that (i) It is engaged in sale of products, product engineering and semiconductor, service computer programming , consultancy and IT enabled services. The appellant submitted that in the absence of any segmental data, this company cannot be compared with that of the appellant company. (ii) Two subsidiary companies were merged with the appellant company. The impact of merger of these two companies has not been evaluated. (iii) However, the TPO upheld the inclusion by holding that 97% of the revenue is generated from the operations of Software Development activity and the acquisition had insignificant impact on the profitability of this company. (B) The TPO further held that the company cannot be excluded based on the website information. Even the DRP also upheld the inclusion. (C) Being aggrieved, the appellant is before us in the present appeal. (D). The ld. AR submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of profitability from provisions of technical know-how and sale of products on the profitability of software developer segment is not known. Hence, we are of the considered opinion that this company cannot be considered as comparable. Hence, we direct the AO/TPO to exclude this company from the list of comparables. 19. EXILANT TECHNOLOGIES PVT. LTD. : The appellant company objected to the inclusion of this company in the list of comparables before the TPO on the ground that (i) It is engaged in provision of information technology consulting and implementation, provides business process management and product engineering services, develops and owns intangible properties. Segmental information is not available. (B). However, the TPO rejected the above contentions by holding that 98.39% of the total revenue is from the activities of Software Development and therefore, held that the company is comparable with that of the appellant company. (C). Apart from the contention raised before the TPO, it is urged before the DRP that the company is also into Research and Development work and possess intangibles in the form of patents. However, the DRP also upheld the inclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that this company is in possession of intangibles worth Rs.1,67,46,061/-. It is settled position of law that a company which is engaged in the diversified activities such as Development of Software and sale of products cannot be compared with another company which is purely a Software Development company. We have noted in the above discussion that the company is into Software Development and sale of products. Further, there is no segmental data available. In the light of the above factual matrix, this company cannot be compared with that of the appellant company which is purely a Software Company in view of the law laid down by the Hon ble Delhi High Court in the case of Open Solutions Software Services (P) Ltd. (supra). In the light of these findings given by us, we direct the AO/TPO to exclude this company from the list of comparables. 20. TECHNICAL SUPPORT SERVICE AGREEMENT : In this segment, the appellant company provides technical support which includes resolution of queries from the customers of AEs qua the calls. The appellant company is remunerated on cost plus model in consideration of providing these services. The appellant has selected 12 companies as comparable i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution is only 9.2% and 2.66%. (D) Even before us the same arguments were reiterated. The ld. AR pleaded that the activities of the company such as web development and ebook distribution can be classified as KPO services and therefore, cannot be compared with that of the appellant company which is purely an ITeS company. Reliance was placed on the judgment of Hon ble Delhi High Court in the case of Rampgreen Solutions (P) Ltd. Vs. CIT (2015) 60 taxmann.com 355 (Delhi) for the proposition that ITeS comprises of a wide range of services and classification between BPO/KPO services must be done to establish comparability. (E). On the other hand, the ld. CIT-DR submitted that 85.27% of the total revenue is derived from the operations of ITeS activity and therefore, the company should be treated accordingly. (F). We heard the rival submissions and perused the material on record. We have gone through the annual report of this company. On perusal of the same, it shows that the company is engaged in diversified activities such as web-development and e-book distribution, digital solutions, graphic solutions and packaging branch management which are value added services and ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused the material on record. The annual report of the company is placed at pages 2759 to 2864 of the paper book. On page 2797 of the paper book, it is seen that the principal business activities of the company is described as BPO/KPO. On page 2837, para No. 24 which is note to consolidated financial statements indicates that the operations of the company predominantly relates to provision of IT and IT enabled services. Schedule of the fixed deposits placed at page 2833 of the paper book also discloses intangible assets at Rs.45,996,313/-. Page 2847 of the paper book states method of revenue recognition which reads as under : 2.3 Revenue recognition : Income from software services and products. Revenue from professional services consist primarily of revenue earned from services performed on a time and material basis. The related revenue is recognized as and when the services are performed. The company also performs time bound fixed-price engagements, under which revenue is recognized using the percentage of completion method of accounting. The cumulative impact of any revision in estimates of the percentage of work completed is reflected in the year in which the change be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rival submissions and perused the material on record. Page No.2868 shows the business of the company. Which is reproduced as under : Content Creation and Development. The content creation and development teams at MPS North America partner with publishers to create and develop engaging content for print and digital delivery. Our subject matter experts bring their curriculum and classroom expertise to projects across disciplines for Education and Professional Publishers. Content Production, Transformation. The content production and transformation teams across the facilities in India provide end-to-end delivery across all print and digital formats through smart workflows powered by relevant platforms. (F). On perusal of the annual report of the company, it would show that the company is engaged in publishing tools like Digi Edit and Digi Comp, etd., and typesetting of data digitalization services. These services are undoubtedly can be classified as KPO services. There is no segmental data available. Considering the above facts, we direct the AO/TPO to exclude this company from the list of comparables. 24. DOMEX E-DATA PVT. LTD. : The appellant company objected for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad denied the risk adjustments by holding as under :- The assessee has not demonstrated as to how the difference in risk undertaken by a bank in advancing a loan to a borrower as compared to the risk involved in a loan advanced by RBI to a bank or by a bank to another bank is similar to the difference between the risk undertaken by the comparable company and the risk undertaken by the assessee. Hence, the difference between the Prime Lending Rate and the Bank Rate cannot be considered as a reliable and accurate measure of the Risk adjustment required to be made. In the absence of a reliable and accurate measure of the risk difference between the assessee and the comparables, no risk adjustment can be granted. 28. Nothing is demonstrated before us as to how the findings of the DRP are incorrect. Hence, we dismiss this ground of appeal no.7. 29. The additional ground of appeal no.1 challenges seeking deduction of education cess from computation of taxable income. The ld. AR submits that the above ground raised by the assessee is purely legal ground and raised for the first time before this Tribunal. Since, the Education Cess paid by the assessee available with the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even though, cess may be collected as a part of income tax, that does not render such cess either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii) of the Act. The mode of collection is really not determinative in such matter. Therefore, it was held that amount cess paid is deductable from total income of the assessee. 31. That therefore, from the legal perspective, the issue of education cess‟ is an allowable expenditure as per provisions of Section 40(a)(ii) of the Act and placing reliance on the decision of the Hon ble Bombay High Court (supra.), we direct the Assessing Officer to allow deduction in respect of Education Cess paid by the assessee. Accordingly, the additional ground of appeal no.1 raised by the assessee is allowed. 32. The additional ground of appeal no.2 challenges the levy of interest u/s 234C of the Act. This additional ground of appeal is consequential in nature. Once the default within the meaning of section 234C takes place, levy of interest is automatic and mandatory, is not open to challenge in the appeal proceedings. Hence, we do not find any merit in the said additional ground of appeal no.2 and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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