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2018 (10) TMI 1797 - AT - Income TaxTP Adjustment - Comparable selection - Software development services - HELD THAT - Larsen Toubro Infotech Ltd - There is no discussion on these two aspects that this company is having significant amount of cost of bought-out items for resale and it is engaged in sale of services and products to its related parties and hence, in our considered opinion, this Tribunal order cannot be considered as a binding precedence because this Tribunal order is silent on these two important aspects as to this aspect that this company is having sizeable amount of bought out items for resale and have related party transactions in respect of sales of services and products - this issue should go back to the file of TPO for fresh decision after providing adequate opportunity of being heard to the assessee and while deciding the issue afresh, all the available Tribunal orders on this issue should be considered by the TPO in proper perspective. Persistent Systems Ltd. - This is the claim of the assessee before us that VAT is leviable only on sale of goods and therefore, it has to be seen that what is the quantum of sale of goods by that company and whether segmental information in that regard is available or not - in the facts of present case, we feel that this issue should also be restored back to the file of TPO for fresh decision in the light of all these four Tribunal orders after providing adequate opportunity of being heard to the assessee. We order accordingly. ITES segment - Hartron Communications Ltd. - We find that as per Annual Report paper book, this has been stated that processing charges (Export income) was accounted for on cash basis but as perpaper book, this company is having revenue from operations on account of rent income, Export earning from BPO, Domestic earning from BPO and sale of land out of total revenue from operations of ₹ 33,12,01,272/- and there is no other income in the present year. Hence it is seen that in the present year, there is no income reported by that company on account of processing charges (Export income) - Accounting of some income/expenses on cash basis is not shown to have any material effect on the profitability of that company. There is no other objection raised before us in respect of inclusion/exclusion of this company and therefore, we find no merit in this request for exclusion of Hartron Communications Ltd. (seg). Capgemini Business Services (India) Ltd. - it is not clear why this company has reported the related party transaction in its Annual Report for 2013-14 and the DRP directed the TPO to cross verify this information with the said company and if assessee's claim is found to be correct, then this company may be excluded as a comparable. In this view of the direction of DRP on page no. 18 of the directions of DRP, we are of the considered opinion that there is no infirmity in the directions of DRP on this issue and therefore, ground no. 14 has no merit Infosys BPO Ltd - DRP has examined all the aspects of the matter including this aspect that Infosys BPO Ltd. acquired 100% of the voting interests in McCamish Systems LLC and a categorical finding is given by DRP that the said acquisition has not increased the profitability of that company. We also find that regarding this comparable company also, the DRP has directed the TPO/AO to verify the factual position in respect of Export Revenue Filter because it has been noted by the DRP that the TPO has taken ₹ 1675 Crores as export earnings but as per page no. 26 of the Annual Report of that company, the foreign currency earnings from BPO services was given at ₹ 1356 Crores. It is noted by DRP that if the export earnings is to be taken at ₹ 1356 Crores, it may fail the Export Revenue filter and therefore, the matter was restored back to the file of AO/TPO for fresh decision after verifying the factual position in this regard. Hence, regarding the assessee's claim for exclusion of this comparable also, we find no infirmity in the directions of DRP particularly in view of this fact that the DRP has restored back the matter to AO/TPO for fresh decision after verifying the factual position in respect of Export Revenue Filter. Deduction u/s 10A - HELD THAT - Issue is covered in favour of the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein it was held by Hon'ble Karnataka High Court that total turnover is sum total of export turnover and domestic turnover and therefore, if any amount is reduced from export turnover then total turnover also goes down by the same amount automatically.
Issues Involved:
1. Transfer Pricing Adjustments 2. Comparable Companies for Software Development Segment 3. Comparable Companies for IT Enabled Services (ITES) Segment 4. Deduction under Section 10AA of the Income Tax Act 5. Penalty Proceedings under Section 271(1)(c) Detailed Analysis: 1. Transfer Pricing Adjustments: The appellant challenged the assessment order dated 25.09.2017, specifically the adjustments made by the Assessing Officer (AO) and Dispute Resolution Panel (DRP) based on the Transfer Pricing Officer's (TPO) analysis. The appellant contended that the AO and DRP erred in rejecting the appellant's Transfer Pricing (TP) documentation, disregarding the use of multiple year/prior year data, and using non-contemporaneous data not available in the public domain. The appellant also argued against the use of secret comparables and the inappropriate filters and criteria applied by the TPO. 2. Comparable Companies for Software Development Segment: The appellant selected 7 comparables with an arithmetic mean of 13.78%, while the TPO selected 7 comparables with an arithmetic mean of 20.90%. The appellant contested the inclusion of Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. as comparables. - Larsen & Toubro Infotech Ltd.: The Tribunal referred to the case of Pitney Bowes Software India (P.) Ltd. and noted that the Tribunal order in the case of Advice America Software Development Center (P.) Ltd. was not binding due to unconsidered facts. The Tribunal remanded the issue back to the TPO for fresh decision after considering all available Tribunal orders. - Persistent Systems Ltd.: The Tribunal noted that the relevant facts were not considered in the case of Advice America Software Development Center (P.) Ltd. and remanded the issue back to the TPO for fresh decision. 3. Comparable Companies for IT Enabled Services (ITES) Segment: The appellant selected 9 comparables with an arithmetic mean of 13.52%, while the TPO selected 9 comparables with an arithmetic mean of 22.27%. The appellant contested the inclusion of Capgemini Business Services (India) Ltd., Infosys BPO Ltd., and Hartron Communications Ltd. as comparables. - Capgemini Business Services (India) Ltd.: The appellant argued that Capgemini had substantial related party transactions (RPT) amounting to 82.32%. The DRP directed the TPO to verify this information, and the Tribunal found no infirmity in the DRP's directions, rejecting the appellant's ground. - Infosys BPO Ltd.: The appellant argued that Infosys BPO was functionally dissimilar due to its brand value and diversified operations. The DRP restored the matter to the TPO for fresh decision after verifying the factual position regarding the Export Revenue Filter. The Tribunal found no infirmity in the DRP's directions and rejected the appellant's ground. - Hartron Communications Ltd.: The appellant argued that Hartron had wide fluctuations in profit and followed cash basis accounting for certain revenues and expenses. The Tribunal found that these factors did not materially affect profitability and rejected the appellant's ground. 4. Deduction under Section 10AA of the Income Tax Act: The appellant contested the reduction of communication and traveling expenses from the export turnover for calculating deduction under Section 10AA. The Tribunal noted that this issue was covered in favor of the appellant by the judgment of the Karnataka High Court in the case of Tata Elxsi Ltd., which was confirmed by the Supreme Court in the case of HCL Technologies Ltd. The Tribunal directed the AO to recompute the deduction accordingly. 5. Penalty Proceedings under Section 271(1)(c): The appellant contended that penalty proceedings initiated under Section 271(1)(c) were unjustified as the appellant had acted in good faith and provided all necessary details. The Tribunal did not specifically address this issue in the detailed analysis provided. Conclusion: The Tribunal partially allowed the appeal, remanding certain issues back to the TPO for fresh decision and directing the AO to recompute the deduction under Section 10AA in light of the Karnataka High Court's judgment. The Tribunal rejected the appellant's grounds regarding the inclusion of certain comparables in both the software development and ITES segments.
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