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TMI Blog2015 (11) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... td. [2011 (8) TMI 845 - Karnataka High Court] - Decided in favour of assessee. Transfer pricing adjustment - Held that:- Bodhtree Consulting Ltd cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. See Nethawk Networks case [2013 (11) TMI 967 - ITAT MUMBAI] Infosys Ltd be excluded from the list of comparable companies as it is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. KALS Information Systems Ltd. has been considered as not comparable to a pure software development services company, thus we hold that KALS Information Systems Ltd. should not be regarded as a comparable. Tata Elxsi Ltd. - in assessee’s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate to direct the AO to verify the claim of assessee for credit of TDS and foreign tax paid in light of the CBDT Instruction referred to above. The AO will afford opportunity of being heard to the assessee in this regard. - IT(TP)A No.67/Bang/2015, IT(TP)A No.70/Bang/2015 - - - Dated:- 30-9-2015 - SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER For The Revenue : Shri G.R.Reddy, CIT(DR) For The Assessee : Shri Kanchan Kaushal, CA ORDER Per N.V. Vasudevan, Judicial Member These are cross appeals by the Revenue and assessee against the order dated 14.11.2014 of the CIT(Appeals)-IV, Bangalore relating to assessment year 2009-10. ITA 70/B/15 (Revenue s appeal) 2. First we shall take up for consideration appeal by the Revenue. Ground Nos. 1 5 are general in nature and calls for no specific adjudication. 3. Ground No. 2 raised by the Revenue is with regard to relate to computation of deduction u/s.10A of the Income Tax Act, 1961 (Act). The assessee is a company engaged in the business of design and development of computer software. The assessee was entitled to claim deduction u/s. 10A of the Act in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company engaged in the business of software development. It is not in dispute that the assessee had STPI units which was entitled to claim deduction in respect of its profits u/s. 10A of the Act. The assessee also had non-STPI units, the income of which was taxable. One of the non-STPI units of the assessee had carry forward losses. The STPI unit had positive income on which deduction u/s.10A of the Act was claimed. The Assessing Officer on the reasoning that the exemption u/s. 10A is in the nature of a deduction, was of the view that the carry forward losses of the non-STPI unit should be set off against the profits of the STPI unit eligible for deduction u/s. 10A. The CIT(A) reversed the order of the AO and held that the losses of non STPI units should not be set off against the eligible profits of the STPI unit while allowing deduction u/s.10A of the Act. In doing so the CIT(A) followed the decision of the Hon ble Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd., 341 ITR 385 (Karn.) wherein it was held that provisions of Sec.10A of the Act are in the nature of exemption provisions and not in the nature of deductions under Chapter VIA of the Act and therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction; Sub-section 2 prescribes certain conditions to be fulfilled by the undertaking for being eligible to the benefits of section IOA; Under sub-section 4, it is profits of the business of the undertaking that qualify for deduction. Similarly, the definition of export turnover refers to the sale proceeds of the exports made by the undertaking; Under sub-section 5, an audit report is to be furnished in support of claim of deduction. Such an audit report is to be submitted for each eligible undertaking. 9.2 The decision relied on by the learned DR mainly in the case of Himatsingike Seide Ltd. (supra) is distinguishable since in that case, the assessee owned only one 100 per cent export oriented unit. The unabsorbed depreciation allowance was in relation to the same unit. However, in the present case, as stated earlier, the respondent operates through three units. Out of the three units, one unit was registered under STPI scheme and was eligible for exemption under section 10A. The other two units were non 10A units. It was in the non 10A units, that the losses were incurred. The facts of the present case and the facts before the Karnataka High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. The Hon ble Court thereafter held that though the expression used in Sec.10A was Deduction but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon ble Court s judgment. 12. The situation with which we are concerned in the present case is a situation where there is positive income of the eligible unit then the same should be allowed deduction u/s.10B of the Act without setting of the loss of non-eligible unit. The Hon ble Karnataka High Court in the case of Yokogawa (supra) was concerned with similar situation as set out above. In view of the aforesaid decision of the Hon ble Karnataka High Court, we are of the view that the claim as made by the Assessee for carry forward of loss of the non-eligible unit had to be allowed without set off of profits of the 10A/10B unit. We hold accordingly and dismiss the relevant ground of appeal of the revenue. 13. We may also observe that the Hon ble Karnataka High Court s decision in the case of Himatasingike Seide ( supra ) has held that unabsorbed deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted by the TPO by way of adjustment of arm s length price (ALP) in respect of international transaction of rendering software development services by the assessee to its AE. In ground No.4 raised by the revenue in its appeal, it has urged that the CIT(A) erred in holding that the size and turnover of a company are deciding factors for treating a company as a comparable company and on that reasoning excluding Infosys Ltd., as a comparable company in the Software Development Segment of the Assessee. 19. The facts in this regard are as follows. The Assessee or M/S.Unisys India Private Limited ( Unisys India ) was incorporated in India on November 28, 1994. All shares of the Assessee are held by Unisys Mauritius Limited, which is ultimately held by Unisys Corpn., USA. During FY 2005-06, Unisys India was essentially engaged in providing IT enabled services(ITES) and software development (IT) to its overseas group companies. The Assessee is organized into two operating divisions one in Bangalore and one in Mumbai. The Bangalore division primarily provides Software and BPO Services while Mumbai division is primarily engaged in purchase and resale of Unisys Products and Provision of Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd. 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.81% 9 Mindtree Ltd. (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11 Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% 24.32% 24. The margins of the Assessee as computed by the TPO was 13.70%, which was not wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is functionally different and in this regard has also placed reliance on decisions of tribunals rendered on the issue of this company being functionally comparable with a software development service provider such as the Assessee. The decision so rendered are at a later point of time to the TP study carried out by the Assessee. 27. The learned counsel for the Assessee in support of the admission of additional ground placed reliance on the decision of the Hon ble Special Bench in the case of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207 wherein it was held that a taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. The learned counsel further submitted that the aforesaid two companies were held to be software product companies and therefore not comparable with software development service provider such as the Assessee in several decisions rendered by the Tribunal. The decisions rendered by the Tribunal are later in point of time to the Transfer Pricing Study undertaken by the Assessee. The Assessee is entitled to take note of the subsequent judicial p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm s length principle regardless of where the burden of proof lies. 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part. 38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles 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 software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07. 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 35. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable. 36. As far as Persistent Systems Ltd., a comparable by the Assessee in his TP study but was objected to by the Assessee before TPO as not comparable, this Tribunal in the case of IT(TP) A.No.108(Bang) 2014 order dated 12.12.2014 in the case of Yodlee Infotech Pvt.Ltd. Vs. ITO held as follows:- 5.12 This Tribunal in the case of 3DPLM Software Solutions Ltd. Vs DCIT [IT(TP)A 1303/Bang/2012 dated 28-11-2013] h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1%. Rationality for such an upper limit being placed on working capital adjustment was an issue which had come up before this Tribunal in the case of M/s. Rambus Chip Technologies (India) P. Ltd v. DCIT [IT(TP)A.23/Ban/2015, dt.22.07.2015. Coordinate bench had held as under at para 13 and 14 of its order : 13. As regards ground No.3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled comparables selected by the TPO. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He submitted that the CIT(A) also has not applied his mind to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside. 14. On going through the TPO s order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... metic mean of the Profit Level Indicators is taken as the arms length margin. Please see Annexure B1 for details of computation of PLI of the comparables. Based on this, the arms length price of the ITES services rendered by the taxpayer to its AE (s) is computed as under : Arm's Length Mean Margin on cost 25.04% Less : Working capital adjustment (Annex.C) 0.91% Adjusted margin 24.12% Operating Cost 3114,37,06,621 Arms Length Price (ALP) @ 124.12% of Operating Cost 141,95,68,658 Price received 129,55,58,033 Shortfall being adjustment u/s.92CA 12,40,10,625 45. The aforesaid addition made by the TPO was confirmed by the CIT(A). Aggrieved by the order of the CIT(A) the Assessee has preferred the present appeal before the Tribunal. 46. The Assessee has prayed before us for exclusion of certain companies from the list of comparables chosen by the TPO. The learned counsel for the assessee sought t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Tribunal as follows : (1) Accentia Technologies Ltd. (Seg.) 10. This was considered as a comparable by the TPO and listed at Sl.No.1 of the comparable companies chosen by the TPO. The ld. counsel for the assessee drew our attention to the fact that there are extra ordinary events that occurred during the previous year in this company. Our attention was draw to the annual report of this company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able has to be excluded. 50. The learned DR however put forth an argument that the case decided by the Tribunal was in relation to A.Y 2008-09 and there was an amalgamation during the previous year relevant to AY 2008-09 and therefore the aforesaid decision of the Tribunal cannot be applied blindly. In this regard, the learned counsel for the assessee brought to our notice that even during the previous year relevant to AY 2009-10 there was an amalgamation of Acentia Technologies Ltd with another company by name Asscent Infoserve Private Limited. The following Notes to accounts appear in the Annual Report :- (B) NOTES TO ACCOUNTS 1. Amalgamation of Asscent Infoserve Private Limited with the Company. Pursuant to the scheme of amalgamation of the erstwhile Asscent Infoserve Private Limited (subsidiary of the company) with the company as approved by the shareholder in the court convened meeting held on the 25th day of April, 2009 and subsequently sanctioned by the honorable high court of Judicature at Mumbai vide order dt 21st August 2009 and Honorable high court of Karnataka at Bangalore vide order dt 6th February 2010, the assets and liabilities of the erstwhile company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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