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TMI Blog2015 (10) TMI 2431X X X X Extracts X X X X X X X X Extracts X X X X ..... logies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. Tata Elxsi company is also engaged in sale of software products/solutions and has its own intangibles. The revenues under ‘Systems integration and support’ segment of this company stand at ₹ 4008.75 crore, out of its total revenue of ₹ 41851.60. For comparison, the TPO has taken the figures of this company at entity level, starting with a revenue at ₹ 41851.60 crore. Since the overall profit of this company includes the effect of profit from sale/licensing of software products/solutions and there is no measure to isolate such profit from the overall profit of software development segment, we hold that this company at an entity level cannot be considered as comparable with the assessee’s ‘Software development and maintenance’ segment. This company is, therefore, directed to be excluded. TCS Ltd. - once acquisition and merger etc. has taken place, it is always likely to affect the profitability of such a company in the year of acquisition etc. There cannot be any standard yardstick to measure the impact of such a factor on the ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software development and maintenance service segment’ of the assessee, it was fairly conceded that this company was not comparable. Under such circumstances, we approve the view taken by the TPO in excluding it from the list of comparables. Accentia Technologies Ltd. - It has been mentioned that this company: ‘Completed the acquisition of Oak Technologies Inc., USA and has rapidly increased its customer base from New Jersey and neighboring areas.’ This shows that extraordinary financial event happened during the year in this company by means of acquisition, thereby rendering it as unfit for comparison with the assessee’s profitability under this segment. Following the view taken hereinabove while discussing the exclusion of TCS Ltd. from the ‘Software Development and Maintenance’ segment of the assessee, we direct the elimination of this company also from the final list of comparables. Cosmic Global Ltd. - this company was subject matter of consideration by the Tribunal in its order for the immediately preceding assessment year as well. After making a detailed analysis, the Tribunal has approved the view taken by the TPO in considering this company as a fit comparable. Follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been brought to our notice that the Tribunal in assessee’s own case for the A.Ys. 2007-08 and 2008-09 has decided this issue in assessee’s favour. - ITA No.1489/Del/2014 - - - Dated:- 28-9-2015 - SHRI R.S. SYAL, AM SMT. BEENA A. PILLAI, JM For The Assessee : Shri G.C. Srivastava, Advocate, Shri Saurabh Srivastava, CA Shri Daksh S. Bhardwaj, Advocate. For The Department : Shri Amrendra Kumar, CIT, DR ORDER PER R.S. SYAL, AM: This appeal by the assessee arises out of the final order dated 27.2.2014 passed by the Assessing Officer (AO) u/s 144C(13) of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2009-10. 2. The first issue raised in this appeal is against the addition made by the AO on account of transfer pricing adjustment. 3. Briefly stated, the facts of the case are that the assessee is an Indian company, a part of Sun Life Group, which has diversified financial services organization providing savings, retirement and pension products and life and health insurance in Canada, US, UK and Asia. This group also operates mutual funds and investment management businesses. The assessee provided software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g adjustment under software development service segment to ₹ 4,82,48,394. The assessee is aggrieved against the sustenance of addition to this extent. 5. We have heard the rival submissions and perused the relevant material on record. It is observed that the TPO has changed composition of comparables by excluding some companies from the assessee s list and including fresh comparables in his final tally. The grievance of the assessee under this segment is confined against the inclusion of five companies and non-inclusion of two companies. We will take up these companies one by one for ascertaining whether or not they are comparables. 6. The comparability or otherwise of the disputed companies can be judged only after ascertaining the nature of services provided by the assessee under this segment which has two sub-classifications, namely, Software Development Services and Maintenance Support Services. Software Development Services refer to the development of modules by the assessee and also parts of modules for the software being used by its overseas group entities. Maintenance Support Services refer to the services including bug fixing, carrying out maintenance and suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is this total figure of ₹ 9.36 crore which has been taken by the TPO. It shows that the TPO has included CAT Technologies Ltd. as comparable on entity level. On a perusal of the above detail of income of this company, it is apparent that it not only includes revenues from Medical transcription and Training, but the major component of ₹ 8.49 crore is income from Software Development and Consulting Services. It is reiterated that the segment under consideration is Software development and maintenance support services and the assessee has a separate international transaction of Provision of advisory services with the transacted value at ₹ 1.75 crore, whose ALP has been disjointedly determined by the TPO. When we come back to the revenues of CAT Technologies Ltd., it is seen that the major component of ₹ 8.49 crore is on account of Software development and consulting services . Since the segment of the assessee under consideration is only Software development and maintenance support services independent of Advisory services , it becomes manifest that a company rendering both the software development and also advisory services, cannot be considered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable case as comparable in its TP study and then later on claims that it should be excluded, then, there should be nothing to forbid such an assessee from claiming so, provided the TPO is satisfied that the company so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has also held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. 9.3. Turning to the functional comparability, we find that the assessee is simply a captive unit rendering services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with the factors prevailing in the case of Agnity India Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... range of technical computing solutions spanning high end computing platforms, networking, mechanical design automation tools, enterprise storage solutions, digital media and life sciences solutions . This description of the Systems integration and support segment indicates the nature of revenues, being from sales/licensing of solutions catering to the requirements of different industries. Our finding is fortified by annexure to Director s report which also gives narration of Systems integration and support. It has been mentioned that: this segment offers turnkey solutions comprising of integration of hardware and software products sourced from global principals for domestic customers. The solutions are offered in the area of technical computing used in a wide range of industries such as automotive, pharmacy, defence, meteorology. Your company s technical solutions involve supply of different products sourced from different global principals based on a set of the customers engineering IT requirements. Further, when we peruse the Schedule of fixed assets of this company, it can be found that there is a mention of an asset Intangibles Software with its closing written down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates that this company made acquisition during the year in question which is an extraordinary financial event. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. The ld. DR contended that the mere fact of acquisition and merger should not be considered as a decisive test for exclusion of a company unless it has affected the profitability due to such merger etc. We are not inclined to accept this contention for the obvious reason that once acquisition and merger etc. has taken place, it is always likely to affect the profitability of such a company in the year of acquisition etc. There cannot be any standard yardstick to measure the impact of such a factor on the overall profitability of such a company. It is relevant to highlight that we are considering the exclusion of a company on this score. In our considered opinion, when other compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f fixed assets with the closing written down value at ₹ 2.17 crore. Apart from that, it is seen that this company is regularly incurring expenses on Research and development. This company is also earning revenue from sale of software products apart from rendering software services. Following the view taken for the exclusion of Thirdware Solutions Ltd. etc. above, we hold that this company has been rightly excluded from the list of comparables by the TPO because of the joining of its income from sale of products with the income from rendering of software development services. The TPO s action is, therefore, approved. ii) Zylog Systems Ltd. 15. This company was considered by the assessee as comparable. The TPO refused to accept it as comparable on the ground that its revenues were segmented into onshore and offshore services. Certain other reasons for exclusion have also been given by the TPO. Though the ld. AR initially argued for recognizing this company as comparable, but after noting the differences in the functional profile of this company with the Software development and maintenance service segment of the assessee, it was fairly conceded that this company was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reinafter. i) Accentia Technologies Ltd. 20.1. The TPO considered this company as comparable. The assessee s objections about its functional incomparability were repelled. That is how, this company came to be included in the final set of comparables. 20.2. After considering the rival submissions and going through the Annual report of this company, we find that during the year in question certain acquisitions and mergers were undertaken by this company, which is apparent from page 29 of the Annual report. It has been mentioned that this company: Completed the acquisition of Oak Technologies Inc., USA and has rapidly increased its customer base from New Jersey and neighboring areas. This shows that extraordinary financial event happened during the year in this company by means of acquisition, thereby rendering it as unfit for comparison with the assessee s profitability under this segment. Following the view taken hereinabove while discussing the exclusion of TCS Ltd. from the Software Development and Maintenance segment of the assessee, we direct the elimination of this company also from the final list of comparables. ii. Cosmic Global Ltd . 21.1. This company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company as comparable. The assessee s objection that e-Clerx Services Ltd., is a Knowledge Process Outsourcing (KPO) company and was engaged in rendering high end services, was rejected. The assessee is assailing the inclusion of this company in the list of comparables. 23.2. We have heard the rival submissions and perused the relevant material on record. Without going into the further details, it is observed that the Hon ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT vide its judgment dated 10.8.2015 has observed that e-Clerx is engaged in KPO services which cannot be compared with a company providing low-end BPO services. Turning to the facts of the instant case, we find that the segment of the assessee under consideration is Back office support plus F A services . By no standard, a KPO company like e-Clerx can be considered as comparable with the Back office support plus F A services segment of the assessee. We, therefore, order for the removal of this company from the list of comparables. ii) Genesis International Corporation Ltd. 24.1. The TPO included this company in the list of comparables. The assessee s objections about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of working capital would be relevant only when there is a situation of inventory remaining tied up or receivables being held up, which can t be relevant in a service industry, as is the assessee engaged in. He, therefore, refused to allow any working capital adjustment. No relief was allowed by the DRP. 27. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee lodged a claim for grant of working capital adjustment in respect of all the three segments, namely, Provision of software development and maintenance services; Merged segment of provision of back office support and F A services; and Advisory services. The TPO refused to allow such adjustment, inter alia, by opining that the financials of the company showed consolidated income from all the three segments and, hence, it was not possible to ascertain creditors and debtors pertaining to each segment. The DRP strengthened the case of the TPO by adding one more reason, being the necessity and non-availability of daily average of working capital deployed as against the use by the assessee of the average of such figures of working capital on the first and the last day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation of working capital adjustment, one needs to look only at the figures of inventory, trade receivables and trade payables. These figures can be culled out from balance sheet without any reference to the segregated income statement of each segment. On a pointed query from the Bench, the ld. AR conceded that there may be some trade receivables or payables common to the Software development segment , Merged segment and Advisory services segment . In such a situation, it becomes relevant to see as to how the figures of such trade receivables or payables have been placed in the computation of working capital adjustment under each segment. The ld. AR argued that the calculation of the working capital adjustment has not been challenged by the TPO and, hence, the same should be accepted as such. We are not convinced with this proposition for the obvious reason that when the TPO rejected the assessee s claim for the grant of any working capital adjustment at the threshold itself, there was no occasion for him to examine the veracity of the computation of working capital adjustment as put forth on behalf of the assessee. Under such circumstances, we direct the AO/TPO to comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of invoice value from the foreign currency to the Indian rupees. The Special bench held that the exchange rate gain or loss cannot have a different character from the transaction to which it pertains. The Bench found fallacy in the submission made on behalf of the Revenue that the exchange rate difference should be detached from the exports and be considered as an independent transaction. Eventually, the Special Bench held that such an exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from the sale proceeds. 34. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss aris ..... X X X X Extracts X X X X X X X X Extracts X X X X
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