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TMI Blog2015 (3) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... . Non-consideration of provision for bad and doubtful debts as part of operating cost while computing margins of comparables - Held that:- In principle we agree with the contention of ld. AR that provision for bad and doubtful debts and bad debts should form part of the operating expenditure. As relying on Kenexa Technologies (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle -2(1), Hyderabad [2014 (11) TMI 587 - ITAT HYDERABAD] we remit this issue to the file of AO/TPO for considering afresh in the light of the said decision of the coordinate bench. - Decided in favour of assessee for statistical purposes. Excluding communication expenses from the export turnover while computing deduction u/s 10B - Held that:- As relying on CIT Vs. Gemplus Jewellery [2010 (6) TMI 65 - BOMBAY HIGH COURT] and ITO Vs Saksoft Ltd [2009 (3) TMI 243 - ITAT MADRAS-D] we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10B of the Act. - ITA No. 58/Hyd/2014 - - - Dated:- 20-3-2015 - Shri P.M. Jagtap And Shri Saktijit Dey JJ. For the Appellant : Shri Utpal Sen/Abhiroop Bhargav For the Respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, which yielded 16 comparable companies with average arithmetic mean of 12.05%. As margin shown by assessee was 13.13%, price charged to AEs for international transaction was found to be within arm s length. Though TPO accepted TNMM as most appropriate method with OP/TC as PLI, however, he rejected assessee s TP study, inter-alia, on the following reasonings: i) inappropriate filters have been applied while selecting comparables. ii) veriticals/horizontals within software industries were not gone into while undertaking comparability study. iii) instead of confining to current year data, multiple year data have been considered while selecting comparables. 3. After rejecting the TP report, TPO undertook a search himself by applying some of the filters applied by assessee as well as some additional filters which yielded 17 comparables with arithmetic mean PLI of 22.03%. After allowance of 0.32% towards working capital adjustment, the adjusted arithmetic mean PLI was worked out to 21.71% and the ALP of international transaction was determined at ₹ 47,29,94,465 as against price charged by assessee of ₹ 45,01,77,236. The resultant shortfall of ₹ 2,28,17,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds. Ground Nos. 1 to 9 are on transfer pricing issues, whereas, ground Nos. 10 to 12 are on corporate tax issues. As far as transfer pricing issues are concerned, ld. AR confined his argument to selection of certain companies as comparables as raised in ground Nos. 4 and 6 and issue of non-consideration of bad debt as part of the operating cost as raised in ground No. 9. In view of the above, rest of the grounds raised on TP issues are dismissed as not pressed. At the outset, we will take up the issues relating to selection of comparables as raised in ground No. 4 6. Out of the seventeen comparables selected by TPO, assessee has objections in respect of four comparables as under: i) Infosys BPO Ltd. ii) Bodhtree Consulting Ltd. iii) KALS Inf. Systems Ltd. (Seg.) iv) Tata Elxsi Ltd. (seg.) 7. Brief submissions of the ld. AR against the selection of the aforesaid comparables are as under: S.No. Name of the comparable Reasons for rejections 1. Infosys Ltd. i)Incomparable scale of operations: Revenue of Infosys is 453 times more than the revenue of assesse and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant observations of the ITAT Bangalore Bench in respect to each of the aforesaid companies are reproduced hereunder for the sake of clarity: 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open end to end web solutions software consultancy and design development of soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d services. However, on going through the segmental details of services provided by Tata Elxsi Ltd. as contained in annual report, a copy of which is at page 707 of the assessee s paper book vis- -vis, the functions of the assessee as enumerated in TP study, a copy of which forms part of assessee s paper book, we are of the view that unless proper analysis is made with regard to the functions of both the companies it cannot be said that services performed/provided by Tata Elxsi Ltd. is high end services whereas services provided by assessee are low end services. As the issue requires thorough examination in so far as it relates to exact nature of services rendered by both the companies, we remit the comparability of the aforesaid company to the file of AO/TPO for considering afresh after affording due opportunity of being heard to assessee. It is worth mentioning, ld. AR while seeking removal of the aforesaid company has relied upon a decision of ITAT Bangalore bench in case of CISCO Systems (India) Pvt. Ltd. Vs. DCIT, Bangalore in IT(TP) No. 130/Bang/14 dated 14/08/14. However, on perusal of the said decision, it is noticed that Tata Elxsi Ltd. was excluded as a comparable basical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly. 42. We are of the view that in the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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