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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 ..... t of computer software. While computing the export turnover for the purpose of allowing deduction u/s. 10A of the Act, the AO excluded telecommunication expenses and travelling expenses incurred in foreign currency. 4. The Assessee submitted that Explanation 2 to section 10A defines 'export turnover' to mean consideration in respect of export of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India. The Assessee submitted that none of the items of aforesaid items fell within the definition of Export Turnover. Alternatively, it was submitted that if the aforesaid amounts are excluded from the Export Turnover, the same should also be excluded from the Total Turnover. The AO did not accept the claim of the Assessee and excluded the aforesaid items from the Export turnover while computing deduction u/s.10A of the Act. 5. The CIT(A) al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computation of total income of the Assessee at all. 8. Aggrieved by the order of the CIT(A), the revenue has raised ground No.3 before the Tribunal. The learned DR relied on the order of the AO and relied on the decision of the Hon'ble Karnataka High Court in the case of CIT V. Himatsingike Seide Ltd., 286 ITR 265 (Karn.) wherein it was held that losses of non STPI units should be set off against profits eligible for deduction u/s.10A of the Act. 9. The ld. counsel for the assessee submitted that exemption u/s. 10A is in the nature of exemption and not a deduction and therefore profits of 10A unit will be outside the computation of total income and therefore there is no question of setting off of losses of non-STPI unit. In other words, it was the submission that exemption u/s. 10A of the Act is not in the nature of a deduction under Chapter VI of the Act and therefore set off as done by the revenue authorities should not be made. On the reliance placed by the ld. DRP on the decision of Hon'ble High Court of Karnataka in the case of Himatsingike Seide Ltd.(supra), the ld. counsel placed reliance on the decision of the ITAT Bangalore Bench in the case of DCIT v. Yokogawa India L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sofar as the order of the Tribunal in Intellinet Technologies India (P.) Ltd. case (supra)." 10. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. This issue has already been settled by the Hon'ble Karnataka High Court in the case of Yokogawa India Ltd. (supra). The Hon'ble Karnataka High Court in the case of Yokogawa (supra) had to deal with two substantial question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eligible unit on which deduction u/s.10B was to be allowed. The Hon'ble Court in para 10 to 20 of its judgment dealt with the issue. The Hon'ble Court noticed that Sec.10- A(1) of the Act (which is in pari materia with Sec.10-B of the Act) read as follows: "10B. Special provisions in respect of newly e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts before computing exempt profits. The assessee in that case set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred "exemption" for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a "commercial" basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the order of the CIT. On appeal by the department, the High Court in CIT Vs. Himatasingike Seide Ltd. 286 ITR 255 (Kar) reversed the order of the Tribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. In Civil Appeal No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to this appeal were as follows:- 1. Software Developments services (IT segment) Rs. 85,14,82,906 2. BPO Services (ITES segment) Rs.129,56,97,209 21. The details of segmental financials are as follows:- Description Software services Rs. ITES Rs. Operating Revenue 85,16,22,269 129,55,58,033 Operating Cost 77,29,72,192 114,37,06,621 Operating Profit 7,86,50,077 15,18,51,412 OP/TC 10.18% 13.28% 22. The issue raised by the Assessee in Grounds No.2 to 7 relates to the determination of Arm's Length Price (ALP) in respect of receipts by the Assessee from it's AE in respect of transaction of rendering software development services (IT) and ITES. Software Development Services (IT Segment) 23. In support of the claim of the Assessee that the price paid as above was at Arm's Length, the Assessee filed a Transfer Pricing analysis. The Assessee adopted TNMM as the most appropriate method. The Profit Level Indicator (PLI) chosen was Operating profit to operating cost. The TPO arrived at a final set of 11 comparables and their operating margins as follows:- Sl. No. Name of the Comparable Sales (in Rs.) Cost (in Rs.) Margin 1 Kals Informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier part of this order. One of the comparable companies so chosen by the TPO was Persistent Systems Ltd., which was also a comparable proposed by the Assessee in its TP study. The Assessee however objected to this company being chosen as a comparable company before the TPO (at page 13 of the TPO's order) that this company is functionally different, but did not raise a specific objection before the DRP An additional ground was filed before the Tribunal raising a specific ground that Persistent Systems Ltd., should be excluded from the list of comparable companies on the ground that the said company 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 where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... propriate for both taxpayers and tax administrations to take special care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm's length principle even where the burden of proof is on 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in which he has questioned the action of the TPO in including/retaining some of the comparable chosen by the TPO in the final list of comparables chosen by him. The assessee has also submitted that some of the comparable chosen by the Assessee ought not to have been rejected by the TPO. We will deal with each of such comparable companies in the following paras. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 31. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 33. KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product 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 where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed at 1.71% in the case of the uncontrolled comparables selected by the TPO. Hence, the working capital adjustment in the case of the taxpayer is allowed as per the calculation in annexure-C or the average cost of capital to the comparables whichever is the least. The detailed discussion on this is given in the Annexure-D to the order. The computation of the working capital adustment is annexed to this order as Annexure C. 40. The TPO had restricted the cost of capital to 1.71%. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 to exclude the following companies from the list of 8 comparable companies finally chosen by the TPO in the ITES segment. Infosys BPO Ltd : 47. The comparability of this company with an ITES company was considered by this Tribunal in the case of Symphony Marketing Solutions India P. Ltd v. ITO (IT (TP)a no.1316/Bang/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Tribunal upheld the order of the DRP observing as follows:- "I. Accentia Technologies Ltd. 10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 was transferred and vested in the company with effect from 1st Apr, 2008 and the scheme has been given effect to in the accounts of the year." 51. It appears to us that the decision rendered by the Tribunal in the case of Symphony Marketing Solutions would be applicable in the present assessment year also. Accordingly, Accentia Technology Ltd is directed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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