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TMI Blog2013 (9) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... t cost. Therefore, the DRP has erred in including the reimbursements received for the purpose of calculating the adjustment under section 92CA. - Decided in favor of assessee. Software produce is an enduring benefit to the assessee in the sense that it would accelerate to enhance the income due to its usage in its usage in software programme which was ultimately developed and sold by the assessee - Software produce is a part of profit making apparatus of the assessee which had, subsequently, helped the assessee in conducting its business more proficiently - The assessee had not brought any evidence to controvert the findings of the Revenue that software produce expense is a capital in nature - AO was justified in treating the expenditure on purchase of computer software as capital in nature – Depreciation on it will be provided. - Decided against the assessee. Disallowance of rental deposits written off - Since the assessee had difficulty in recovering the deposit from the landlord, it had filed a suit before the Hon'ble High Court of Karnataka, which was dismissed on the ground that the lease deed was not duly registered. Hence, the assessee wrote off the rental deposit in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also having provided an opportunity to the assessee to put-forth its views, the DRP had issued directions u/s 144C(5) r.w.s. 144C (8) of the Act dated 22.8.2011, wherein it had upheld the adjustment to the ALP as suggested by the TPO and also rejected the assessee's contentions with regard to (i) write off of the rental deposits; and (ii) the expenditure incurred on purchase of computer software. Thereafter, the AO passed the final order dated 19.9.2011 in line with her draft assessment order. 2.4 Aggrieved, the assessee company has come up before us with the present appeal. The assessee has raised elaborate grounds with reference to the transfer pricing adjustment, and disallowances of expenses claimed under the heads (i) purchase of computer software; (ii) rental deposit written off. I. Transfer pricing adjustment: (A) Software Development 3. During the financial year 2006-07 relevant to the assessment year 2007-08, the assessee had entered into the following international transaction with its AE: Receipts Rs. Provision of Software Development Services 85,85,15,316 Payments Rs. Purchase of fixed ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... temlogic Solutions Ltd 26.52 3.94 NA 28.73 13 Tutis Technologies Limited 07.28 10.85 NA 09.07 14 V K Softech Limited 16.33 1.49 NA 08.91 15 VJIL Consulting Limited 8.26 9.86 NA 09.06 16 Visualsoft Technologies Limited 16.10 13.29 NA 14.70 17 Bodhtree Consulting Limited 26.47 17.18 NA 21.83 Arithmetic Mean 11.03 10.46 13.55 10.86 3.2 When the matter was referred to the TPO, the TPO undertook his own study and accepted certain filters adopted by the assessee. The methodology adopted by the TPO was the same as that of the assessee, namely, TNMM. Twenty-six companies were selected as comparables by the TPO and the arithmetical mean of the comparables was fixed at 25.14%. After providing for the working capital adjustment, the adjusted arithmetical mean arrived at by the TPO for the comparables was at 23.79%. By adopting 23.79% of ALP of the operating cost, the adjustment was made under section 92CA of the Act amounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating cost Arms Length Price (ALP) 123.79% of operating cost Rs.102,92,23,489 Price charged in international transactions (INR 858515316 + reimbursement of expenses received of INR 59987648) Rs. 91,84,72,964 Shortfall being adjustment u/s 92CA Rs. 11,07,50,525 The computation made by the TPO which was affirmed by the DRP was incorporated by the AO in her final assessment order. 3.3 Aggrieved by the assessment order dated 19.9.2011, the assessee in its written submissions, has raised broadly the following issues before us:- that the TPO's action in applying the filter of related party transactions 25% is against the reasonable limit of 15% fixed by the Hon'ble Tribunal in the case of 24/7 Customer.com (P.) Ltd. v. Dy. CIT [2012] 28 taxmann.com 258/[2013] 140 ITD 344 (Bang.); the TPO's action in not applying an upper limit to the sales turnover is against the law; o relies on in the case of Genisys Integrating Systems India (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715/53 SOT 159 (Bang.) and Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 29 taxmann.com 310/140 ITD 540 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Datamatics Ltd 54,50,88,027 1.38% -0.08% 2 Geometric Ltd. (Segment) 158,37,97,773 10.71% 10.19% 3 LGS Global Ltd. 45,38,93,898 15.75% 15.76% 4 MediaSoft Solutions Pvt. Ltd 1,85,08,785 3.66% 2.12% 5 Megasoft Ltd 63,71,32,545 23.11% 17.06% 6 Quintegra Solutions Ltd 62,72,16,924 12.56% 9.80% 7 R S Software (India) Ltd 101,04,49,441 13.47% 13.72% 8 S I P Technologies Exports Ltd 3,79,80,955 13.90% 11.29% ARITHMETIC MEAN 11.82% 9.98% + / - 5% of the Net Margin of the assessee: Particulars Margin Margin of the Appellant 11.29% Adjusted arithmetic Mean of Comparable Companies (arm's length margin) 9.98% - 5% of the ALP post working capital adjustment 4.48% [0.95*(1+9.98%)]-1 + 5% of the ALP post working capital adjustment 15.48% [1.05*(1+9.98%)]-1 3.5 The learned DR on the other hand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over filter, which would be merely 2.2 times higher turnover cap. Even if 20 times higher cap filter is applied to the assessee's case the upper turnover limit should be about Rs. 1700 crores. Assessee in its earlier submission (Page12) has accepted Rs. 500 crores to be acceptable upper limit. 2.4 Unless the assessee is able to demonstrate that after crossing the turnover of Rs. 200 crores, let us say, Rs. 262.58 crores (Tata Elxi) with margin of 26.51%, or Rs. 293.75 crores (Persistent Systems) with margin of 24.52%, such comparables necessarily undergo any structural change resulting in higher/lower margin, such argument cannot be accepted as reasonable or just, or based on any principles of economics. More so when the comparables accepted by the assessee (Megasoft with TO of Rs.139.33 crores) show much higher margin (60.23%). 2.5 It is humbly submitted that the decision of the Hon'ble Tribunal in Honeywell would have a direct and significant implication for the case in hand, and the order in Honeywell be considered. . 5. On the issue (Ground No. 15) of comparables with functional dissimilarities, Ld. AR has relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilogy E-business Software India (P.) Ltd. (supra), Telecordia Technologies India (P.) Ltd. (supra) and CSR India (P.) Ltd. (supra) are similar, namely, development of software and the size/turnover range was also similar to that of the assessee's in the instant case. Further, the assessment year 2007-08 was subject matter of consideration in the case of Trilogy E-Business Software India (P.) Ltd. (supra), Telecordia Technologies India (P.) Ltd. (supra) and CSR India (P.) Ltd. (supra) and the comparables selected by the TPO in those cases are identical to that of the present case. Therefore, the finding recorded in the case of Trilogy E-Business Software India (P.) Ltd. (supra), Telecordia Technologies India (P.) Ltd. (supra) and CSR India (P.) Ltd. (supra) will hold good in this case also. We shall now proceed to dispose off of the issues raised by the assessee as under: (i) Turnover filter: 3.6.1 The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of Rs.1 crore, but, preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP Guidance Note has observed that the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.1 crore to Rs.200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200 crores only should be taken into consideration for the purpose of making TP study." 3.6.3 The above view has been followed in the case of Trilogy E Business Software India (P.) Ltd. (supra) and the relevant portion of the finding is extracted as under: "20. In this regard, we find that the provisions of law pointed out by the learned counsel for the assessee as well as the decisions referred to by the ld. Counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs.47,46,66,638/-. It would, therefore, fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd v. DCIT in ITA No.1231/Bang/2010). Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. Counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Limited: The selection of this company as comparable by the TPO was rejected by the earlier order of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) for the reasons that: "41. We have given a careful consideration to the submissions made on behalf of the assessee and are of the view that the same deserves to be accepted. The reasons given by the assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telecordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We, therefore, accept the plea of the assessee to reject this company as a comparable." (c) Celestial Labs Limited: This company was also selected by the TPO as comparable. However, on due consideration of the issue, the earlier Bench in Trilogy E-Business Software India (P.) Ltd. (supra) had opined that this company cannot be as comparable on the ground that - "45 .. We are of the view that in the light of the submissions made by the assessee and the fact that this company was basically/admittedly in clinical research an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as 'muulam' which is used for civil engineering structures and the product development expenditure itself is substantial vis- -vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and TP analysis / study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of 24/7 Customer Com (P.) Ltd. (supra) had held that if the related party transaction exceeded 15% of the total sales/revenue, the same cannot be taken as a comparable. The relevant contention that was raised and the finding of the Tribunal read as follows:- "13.0 Related Party Transactions In respect of the ground raised at S. No. 1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO's setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales/revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International Ltd (Seg) 11. SIP Technologies Exports Ltd 12. Thirdware Solutions Ltd (Seg) 3.9.2 It was the contention of the assessee, that if the above companies are retained as comparables, and after adjusting the margin of Megasoft (segmental margin), the assessee's margin would be within the range of +/-5% of margin of the above mentioned comparables. Therefore, the assessee's contention to exclude the following companies as comparables:- (i) E Zest Solutions Limited (ii) Helios Matheson Information Technology Ltd (iii) R Systems International Ltd (Seg) (iv) Thirdware Solutions Ltd (Seg) are not adjudicated/considered. 3.9.3 In conclusion, the Assessing Officer/TPO is directed to work out the ALP of the assessee in accordance with the directions of this Bench (supra) and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment is required to be made to the reported value of the assessee's transaction with its AE. It is ordered accordingly. 3.9.4 It is to be noted that no submissions/arguments were raised in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived against any specific services rendered by the assessee to its AEs. These were pure cost reimbursements (travel expenses, hotel stay expenses and other related expenditures) which the assessee had incurred on behalf of its AE for administrative convenience and later got reimbursed at cost. Therefore, the DRP has erred in including the reimbursements received for the purpose of calculating the adjustment under section 92CA. The assessee also relied on the order of the Tribunal in the case of Dy. CIT v. Cheil Communications India (P.) Ltd. [2011] 46 SOT 60 (URO)/11 taxmann.com 205 (Delhi) wherein the ITAT held that it is appropriate to cross charge the "pass-through costs" without mark-up. 4.4 The learned DR present was duly heard. 4.5 We have heard the rival submissions and perused the materials on record. We have noticed that the details of reimbursement expenses are given at page 334 of the paper book filed by the assessee. The break-up of the said expenses are not given in detail and it is not clear whether it is the reimbursement of expenses incurred on behalf of the AE. Since the issue is not clear and there is no detailed discussion of the break-up of expenses, we de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes. As per the lease deed the Appellant had placed a refundable deposit of Rs.24,93,600/- with the landlord. Since the assessee had difficulty in recovering the deposit from the landlord, it had filed a suit before the Hon'ble High Court of Karnataka, which was dismissed on the ground that the lease deed was not duly registered. Hence, the assessee wrote off the rental deposit in its books and claimed as deduction while computing business profits of the assessee. The AO has disallowed the same with the contention that the same is not revenue in nature and, hence, not deductible under the Act. The view of the AO was affirmed by the DRP; hence, the assessee is in appeal before us on this issue. 6.1 The learned AR has filed written submissions. The summary of the same reads as follows: "The losses arising in course of the business, other than a capital loss, which is incidental to the trade would qualify for deduction under section 28 of the Act. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Badridas Daga v. CIT(34 ITR 10) (SC), wherein it was held that "When a claim is made for a deduction for which there is no specific provision in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is revenue or capital outlay". 6.2 The learned D R present supported the reasons recorded by the AO in rejecting the assessee's contentions. 6.3 We have carefully considered the submissions of the assessee as well as the Departmental Representative on the issue. The Hon'ble Mumbai Bench 'F', in the case of United Motors (India) Ltd. v. ITO[2010] 6 taxmann.com 32, wherein a similar issue to that of present issue under consideration had come up for consideration. After hearing the rival parties, the Hon'ble Bench had observed that 'Whether since by making interest-free deposits for purpose of obtaining permissive use or licence to use premises, assessee did not obtain any enduring advantage or interest in properties, loss of security deposit and write off of same against rental of properties was a loss incidental to business and, thus, assessing officer was right in allowing said amount as a deduction.' 6.4 In conformity with the findings of the Hon'ble Mumbai Bench of the Tribunal on a similar issue (supra), we are of the firm view that the write off of the interest free deposit made by the assessee to the licensor against rental properties was a loss incidental to the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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