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TMI Blog2015 (10) TMI 1085X X X X Extracts X X X X X X X X Extracts X X X X ..... sset base and risk assumed by both the companies. Satyam Computers Services Ltd.- we are in agreement with ld. counsel for the assessee that due to unreliable financial data of Satyam Computers Services Ltd., which is in public domain now, the company cannot be considered as a comparable to the assessee Xansa India Ltd.- no plea was taken before ld. CIT(A) on the basis of RPT, but now this objection has been taken as annual report is available and, therefore, the matter may be restored back to the file of ld. CIT(A) in order to arrive at proper conclusion. Geodesic Information Systems Ltd. - assessee has pointed out that this company as engaged in development of software products and operated as full fledged risk taking entrepreneur having IPR and trade mark. These aspects were not considered by ld. TPO, thus the issues raised before us needs to be examined by ld. TPO because assessee itself had taken into consideration this comparable. Ecosoft Technologies Ltd. - this company was rejected since data for current year was not available. As now the current year’s data is available, so matter may be restored back to the file of ld. CIT(A). Compudyne Winfosystems Ltd -CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tipulates effect of changes in exchange rate vis-avis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period. See CIT Vs. Woodward Governor India (P) Ltd. [2009 (4) TMI 4 - SUPREME COURT] - Decided in favour of assessee. - ITA no. 2297 & 2298/Del/2008, ITA no. 2244 & 2245/Del/2008 - - - Dated:- 9-9-2015 - SHRI S.V. MEHROTRA: ACCOUNTANT MEMBER AND SHRI C.M. GARG: JUDICIAL MEMBER For The Assessee : Shri Himanshu Shekar Sinha Adv. For The Revenue : Shri Parvinder Kaur Sr. DR ORDER PER S.V. MEHROTRA , A.M: These are cross appeals, preferred by the assessee as well as the revenue against separate orders, both dated 31-3-2008, passed by the ld. CIT(Appeals)- XX, New Delhi in appeal nos. 98/2007-08 152/2007-08, relating to assessment years 2003-04 2004-05, respectively. All these a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racterized by presence of related party transactions; (e) failing to appreciate that the appellant (being a captive service provider) operates in a near risk-free environment and consequently the operating profit margins earned by comparable companies (which, being entrepreneurs in their own right are exposed to all the risks associated with their business) need to be subjected to a downward adjustment so as to make them comparable with the operating profit margin earned by the appellant (which, in the absence of any significant risks, would typically be much lower); and (f) failing to appreciate that since the operating profit margin earned by the appellant (8.80 percent) is more than the operating profit margin earned by several com parables (forming part of the final set derived by the Ld. CIT(A) himself vide Annexure V of his impugned order), the appellant's 'international transactions' with its 'associated enterprises' are at arm's length. 5. That the Ld. CIT(A) grossly erred in law and on facts by confirming the action of the Ld. AO of not providing any reasons for not accepting the appellant's objections to the order of the Ld. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational Inc., USA with 0.33% share being held by Lucent Technologies Asia Pacific (HK) Ltd. The assessee was engaged, inter alia, in the business of development of software, sub-contracting and export system engineering services, technical engineering services, technical services including systems installation maintenance (both hardware and software development and training). The assessee was primarily undertaking contract software designing and development for Lucent Group and, thus, functioning as a captive software development centre for its AEs. Brief facts as regards the addition of ₹ 11,26,75,000/- were like this: 3.1. The major international transactions reported in form 3CEB were as under: S. No. International transactions Method Value (in thousand rupees) 1 Purchase of fixed assets TNMM 146.45 2 Sale of software services and other services rendered TNMM 12,21,686 3.1.1. It was pointed out by assessee that the purchases of fixed assets were clu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment, testing maintenance activities etc. There are other activities related to knowledge management, CRM etc. The variety of functions may get unacceptable for comparison. 4 Sundaram Telematics Ltd. The company is a leading manufacturer of computer peripherals like keyboards, printers etc. The company also deals in embedded software. Accordingly, this cannot be compared with the assessee company. 5 Thermax Systems Software Limited The assessee could not provide any details regarding the activities except a general comment about the business of software development. 6 Zenith Global Consultants Limited The company provides customized training software and is focused in the area of Elearning. The function of software development is not similar to that of LTI. 7 Zensar Technologies Limited The company has expertise in areas of Ebusiness, knowledge management, HRM etc. and is not comparable to the functions of LTI. 3.5. Ld. TPO also introduced follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to TP issues. 4. The assessee has raised TP issues from ground no. 1 to 6 out of which ground no. 1 is general and, therefore, does not require any adjudication. Ground nos. 2,3 and 5 were not pressed at the time of hearing. Accordingly, the same are rejected. The assessee has, therefore, primarily assailed the finding of ld. CIT(A) in regard to sustaining one comparable included by ld. TPO in the list of comparable viz. Aftek Infosys Ltd. and exclusion of 7 comparables selected by assessee. 5. Aftek Infosys Ltd.: As regards Aftek Infosys Ltd., ld. counsel pointed out that this company earns a major portion of its revenue from software products. He pointed out that as per the annual report for the year ending June 2002, it earned ₹ 26.63 crores from the export of software products. 5.1. Ld. counsel submitted that a comparison of the functional and risk profile of the assessee vis a vis Aftek Infosys Ltd., as given in the synopsis, was as under: Basis/ Particular Aftec Infosys Ltd. Appellant Risk Profile Operate as full fledged risk taking entrepreneurs Operates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Basis/ Particular Infosys Technologies Ltd. Appellant Risk Profile Operate as full fledged risk taking entrepreneurs Operates at minimal risks as all the software development services are rendered to the AEs only. Nature of Services Diversified- consulting, application design, development, re-engineering and maintenance, system integration, package evaluation and implementation and business process management etc. Software Development Services. Revenue from products ₹ 3,623 crores ₹ 112.17 crores Ownership of branded /proprietary products Develops/ owns propriety products like Finacle. Also, the company derives substantial portion of its revenue from sale of its proprietary products (including its flagship banking product suite Finacle ). As per the annual report of the company, it ahs intangibles assets worth approx. ₹ 30,75 Crores for the period ended March 31,2003. No Intellectual property Rights ( IPR or IPRs ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tored back to the file of ld. CIT(A) in order to arrive at proper conclusion. 8.2. Having heard both the parties, we restore this issue to the file of ld. CIT(A) for decision afresh in accordance with law. We order accordingly. 9. Geodesic Information Systems Ltd.: Ld. counsel for the assessee submitted that this company has been included in the final set of comparables by ld. CIT(A) observing that there was agreement between the TPO and the assessee. He submitted that this company is a software product development company, offering products such as its interoperable instant messaging platform known as Mundu to various customers across the world. In this regard he referred to the annual report for F.Y. 2002-03. He further pointed out that this company owns intellectual property rights for its products, which is also evident from the annual report. 9.1. Ld. counsel pointed out that apart from owning software products it also owns various trademarks. He has given comparison of the functional and risk profile of the assessee vis a vis Geodesic Information Systems Ltd. in the synopsis, as under: Basis/ Particular Aftec Infosys Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Mauritius and Singapore. RPT information was not available. Accordingly, this was rejected on account of non-availability of financial data. 10.3. As far as observation of ld. CIT(A) confirming the TPO s action on the basis of functional profile are concerned, we find that the comparable Ecosoft Technologies Ltd. had expertise in application development, facilities management, ERP, EMS, e-Business and IT Outsourcing. The assessee was also engaged in the business of development of software, subcontracting and exports system engineering services, technical services including systems installation maintenance. Therefore, this comparable could not be excluded on the ground that the functions of the comparable were different as compared to assessee because essentially both were in the business of development of software. 10.4. In view of above discussion, we restore this issue to the file of ld. CIT(A) for decision afresh, because now the current year s data is available. 11. As regards Compudyne Win, ld. counsel for the assessee submitted that segmental accounts are available in annual report and the findings of ld. CIT(A) were not factually correct. 11.1. Having heard bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of results transform the risk profile of the company. In the absence of segmental results and due to the possibility of related party transaction, this company is rejected as a comparable. 12.1. Ld. counsel pointed out that all the three reasons given for rejection are not correct as is evident from the annual report of this company filed from pages 74 to 135 of the PB. He pointed out that this company earned revenue from software services as is evident from P L A/c. Further, the necessary details relating to RPT were also given in the annual report and, therefore, the matter should be restored to the file of CIT(A) for decision afresh in respect of this comparison. 12.2. Having heard both the parties, we find that the financial details as mentioned in the TPO s order are available in the annual report filed by assessee and, therefore, the matter needs to be examined afresh by ld. CIT(A). Accordingly, we set aside this issue to the file of CIT(A) for decision afresh. 13. Apropos ground no. 4(e), regarding adjustment on account of risk environment in which the assessee operates as compared to its comparables, brief facts are that before TPO, the assessee had pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce was that the service receipts aggregating to ₹ 9,99,34,000/- were not included in the total turnover. 17.1. After considering the assessee s submissions he concluded that service receipts would form part of the total turnover of the business as such income had been generated by carrying out the main business activity of the assessee company, even if it was not eligible for tax holiday. He, accordingly, recomputed allowable deduction u/s 10A at ₹ 11,63,73,564/-. 17.2. Ld. CIT(A) examined the details of service provided by the assessee and categorized them in two parts (a) I.T. support services; HR support services; accounting and financials, IT network and software support services = ₹ 9,44,16,872/-. (b) PR, supply chain, CT head and SMG = ₹ 55,17,672/-. 17.3. He observed that as far as the service clubbed under (a) category were concerned, they were eligible for and qualified for export turnover as they were covered by the Notification dated 26-9-2000 issued by the CBDT for allowing deduction for certain IT enabled services. However, as far as services covered under category (b) were concerned, he observed that none of these services wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Pijush Kanti Chowdhury v. State of West Bengal Others dated 14-5-2007. 17.11. We have considered the submissions of both the parties. Admittedly, there is no decision of Hon ble Jurisdictional High Court on this issue. The decision of Hon ble Calcutta High Court having been stayed by Hon ble Supreme Court, cannot be followed keeping in view the specific mandate of section 43B. As far as the decision of Hon ble Calcutta High Court in the case of Pijush Kanti Chowdhury (supra) is concerned, the said decision was rendered with reference to the proceedings which took place in West Bengal. Once the decision of Hon ble Calcutta High Court has been stayed, the specific mandate of section has to be followed. In view of above discussion, this ground is dismissed. 18. In the result, assessee s appeal for AY 2003-04 is partly allowed. ITA no. 2244/Del/2008 (Revenue s appeal) : 19. Following grounds have been taken: 1. The order of the Ld. CIT (A) is erroneous contrary to facts law. 2. On the facts and in the circumstances of the case, the learned CIT (A) has erred in reducing addition on account of upward adjustment of arm's length price by ₹ 25,82 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only when the outstanding contracts are settled. The possibility that there may be a favourable fluctuation cannot be ruled out and perhaps when the liability is actually discharged assessee may actually earn a profit. Assessee has simply debited the P L a/c based on a notional loss without actually incurring any loss owing to foreign exchange fluctuation. Provisions of Sec 37(1) are categorical in stating that any expense actually incurred during the year, alone, can be allowed as deduction. Therefore claim of deduction on account of foreign exchange loss, amounting to ₹ 1,25,85,932 is hereby disallowed . 21.2. Ld. CIT(A) allowed the assessee s claim following the decision of the ITAT Special Bench in the case of ONGC Ltd. Vs. DCIT 83 ITD 51 (Delhi ITAT)(SB) and that of the Jurisdictional High Court of Delhi in the case of CIT Vs. Woodward Governor India (P) Ltd. (2007) 162 Taxman 60 (Delhi) which has been affirmed by the Hon ble Supreme Court in the case of CIT Vs. Woodward Governor India (P) Ltd. (2009) 179 Taxman 326 (SC), wherein it has been held as under: AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. In c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Commissioner of Income-tax ('Ld. AO') and the Ld. Commissioner of Income Tax (Appeals) [CIT(A)], are bad in law and void ab-initio. 2. That the Ld. CIT(A) grossly erred on facts and in law by concluding that the reference made by the l.d. AO to the ld. Transfer Pricing Officer (Ld. TPO), under section 92CA(3) of the Income Tax Act, 1961 ('Act') was validly made. The Ld. CIT(A) completely failed to appreciate that the Ld. AO had not recorded any reasons under section 92CA of the Act which made it expedient and necessary for him to make a reference under that provision. 3. That the ld. CIT(A) grossly erred on facts and in law in confirming an adjustment of ₹ 13,03,09,390 out of the total adjustment of ₹ 13,22,71,294 made by the Ld. Transfer Pricing Officer (TPO) to the arm's length price on providing of software services and other services declared by the appellant in respect of the international transactions entered into by it with overseas associated enterprises (AEs). 4. That the Ld. CIT(A) grossly erred on facts and in law in: (a) rejecting the 'TNMM' analysis undertaken by the appellant using multiple year data to substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the deduction by ₹ 34,90,407 on erroneous and untenable grounds. 8. That the Ld. CIT(A) erred in facts and in law in not appreciating that other incidental services are inextricably linked with IT-enabled services provided by the appellant to its customer, and are covered by notification SO/890(E) dated September 26, 2000, which is wide enough to include all such back-office operations and support services. 23. Ground no. 1: This ground has not been pressed, hence rejected. 24. Ground no. 2: This ground has not been pressed, hence rejected. 25. Ground no. 3: This ground has not been pressed, hence rejected. 26. Ground no. 4: The main dispute is in regard to following comparables selected by TPO: - Bangalore Softsell - Infosys Technologies Ltd. - Satyam Computer - Intertec Communications - Cherrysoft Technologies Ltd. - Future Software Ltd. - Mahindra Consulting Ltd. - Bristal.Com. India Ltd. ? - XcelVision Technologies Ltd. - Bangalore Softsl 27. We have considered the submissions of both the parties. 28. Bangalore Softsell: The assessee has objected to the inclusion of this comparable on the ground that company has a sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are Ltd., Mahindra Consulting Ltd., and Xcel Version Technologies Ltd. All these four comparables have been excluded because the financial data was not available at that particular time. Ld. counsel pointed out that now the functional data is available of all the four companies and, therefore, we restore all these four comparables to the file of ld. CIT(A) for verification of the details from the annual reports and then arrive at his conclusion. 33. Ground nos. 7 8: Following our order for AY 2003-04 we hold that the services provided by the assessee being part of back office operation and support services are eligible to be considered as part of export turnover, in view of Notification no. 890(E) dated 26-9-2000. Grounds are allowed. ITA 2245/Del/2008 (Revenue s appeal for AY 2004-05): 34. Sole effective ground raised is as under: 2. On the facts and in the circumstances of the case, the learned CIT (A) has erred in reducing addition on account of upward adjustment of arm's length price by ₹ 19,61,904/- ignoring the specific findings of AO/TPO. 35. In view of our findings in the assessee s appeal for AY 2003-04, the AO will have to carry out fresh comp ..... 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