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TMI Blog2016 (7) TMI 660X X X X Extracts X X X X X X X X Extracts X X X X ..... at:- Even on the principles of law, the issue was decided in favaour of assessee in the case of CIT Vs. Yokogawa India Ltd., by the Hon'ble High Court of Karnataka reported in [2011 (8) TMI 845 - Karnataka High Court ], wherein it was held that exemption u/s. 10A has to be allowed without setting of brought forward unabsorbed losses and depreciation from earlier assessment year, in the case of non-STP units. Applying the principles therein, the un-absorbed losses and depreciation in the case of non-STP units are to be separately considered and AO is directed to allow the same with reference to income of non-STPI units. - I.T.A. No. 1711/HYD/2011 - - - Dated:- 23-12-2015 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Assessee : Ms. Suvibha Nolkha, AR For The Revenue : Mr. Valluri Srinivas, CIT-DR ORDER PER B. RAMAKOTAIAH, A.M. : This is an assessee s appeal against the orders of Assessing Officer (AO) u/s. 143(3) r.w.s. 92CA of the Income Tax Act [Act] consequent to the directions issued by Dispute Resolution Panel [DRP], Hyderabad U/s 144C of the Act. Assessee has raised as many as 17 grounds in the concise/mod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to work out the Arm s Length Price/Arm s Length Margin and give effect to the order. Assessee is aggrieved. 4. It was submitted that assessee is mainly contesting exclusion of certain comparables and inclusion of certain other companies rejected by the TPO and all other grounds raised becomes academic. In the modified/concise Grounds of Appeal, Ground Nos. 1 to 6, 9, 10 and 11 have accordingly became academic in nature. Ground No. 7 is with reference to inclusion of Eleven comparable companies whereas Ground No. 8 pertains to Seven companies which assessee want to include them, which were not accepted by the TPO. 5. The companies which are not objected to by assessee are as under: Sl. No. Name of the Company TPO/DRP Order (WC adjusted) 1. Datamatics Ltd -1.00% 2. E-Zest Solutions Ltd 35.77% 3. Geometric Ltd (Seg) 9.26% 4. Igate Global Solutions Ltd 5.25% 5. Lanco Global Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Functionally different 29. Larsen Toubro Infotech Ltd Response to notice u/s. 133(6) not received 30. PSI Data Systems Ltd (Seg) Fails RPT filter 31. VMF Softech Ltd Fails Employee cost filter 7. At the outset, Ld. Counsel as well as the DR fairly admitted that most of these companies are already considered and rejected in the Co-ordinate Bench decision in the case of M/s. United Online Software Development (India) Pvt. Ltd., in ITA No. 1658/Hyd/2011 dt. 24-09-2015 and also other decisions of the Co-ordinate Benches in the case of Sumtotal Systems India P. Ltd., Invensys Development Centre India Private Limited etc. 8. The DRP itself vide para-II in page 2 of the order stated that the case of assessee was heard along with Invensys Development Centre India Private Limited, Adaptec India Pvt. Ltd., Sumtotal Systems India Pvt. Ltd., and United Online Software Development India Pvt. Ltd. Since the facts are similar and common issues are involved, the DRP has bunched them and heard togethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It is very much evident from the TP order that Assessee has been categorised as a software development service provider. Coordinate Bench of this Tribunal in the case of Virtusa (India) Pvt. Ltd. (ITA No. 1962/Hyd/2011 dated 30/08/2013) after following some other decisions of the Tribunal has held this company cannot be treated as comparable as this company is also into product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with Assessee. As the aforesaid decision of the Coordinate Bench pertained to the same assessment year i.e. A.Y. 2007-08, following the same, we hold that this company cannot be treated as comparable to Assessee. Other cases considered the same comparable and rejected are as under: a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.1978/H2011 c) Intoto Software India P. Ltd. ITA.2102/H/2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as TPO has considered only current year data. The learned AR further submitted that if Assessee has mistakenly selected a comparable, it cannot be estopped from objecting to the selection of that comparable in proceedings before higher forum. In this context, the learned AR relied upon the Income-tax Appellate Tribunal Special Bench decision in case of Quark Systems, 4 ITR (Trib) 606. 7.2.3. We have considered the submissions of the parties and perused the materials on record. On considering the same, we are of the view that this company cannot be considered as comparable to Assessee due to various factors such as its size, turnover, brand value, scale of operation, diversified activities and owning of intangibles. As can be seen from the TP order, the turnovers of Infosys Technologies Limited during the year under consideration are ₹ 13,149 crores as against ₹ 42 crores of Assessee. Though it is a fact that Assessee in the TP documentation, has selected Infosys Technologies Ltd. as comparable but that cannot prevent Assessee from objecting to the aforesaid company being selected as comparable, if there are valid reasons for doing so. In this context, the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... answitch India P. Ltd. ITA.948/Bang/2011 f) Mercedes Benz Research Development ITA.No.1222/Bang/2011 g) CSR India P. Ltd. ITA.No.1119/Bang/2011 h) First Advantage ITA.No.1086/Bang/2012 i) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Respectfully following the aforesaid decisions of the co-ordinate bench, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. LUCID SOFTWARE LIMITED : 7.4. The main objection of assessee with regard to the aforesaid company is that it earns revenue both from product development as well as software services for which segmental data is not available. In support of such contention, the learned AR has relied upon the decision of co-ordinate bench in the case M/s Virtusa (India) Pvt. Ltd. (supra). On perusal of the order passed in case of M/s Virtusa (India) Pvt. Ltd. (supra), it is seen that the co-ordinate bench has excluded the aforesaid company accepting assessee s contention that segmental data in respect of sale of products and softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment ITA.No.1222/Bang/2011 j) CSR India P. Ltd. ITA.No.1119/Bang/2011 k) First Advantage ITA.No.1086/Bang/2012 l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Respectfully following the aforesaid orders of co-ordinate benches, we direct the Assessing Officer /TPO to consider only the segmental margin of this company for the relevant assessment year for computing ALP. TATA ELXSI LIMITED : 7.6. Assessee has sought exclusion of the aforesaid company by placing reliance upon the information furnished by said company u/s 133(6) wherein the said company has admitted that it cannot be treated as comparable with any other software service provider due to complex nature of its business. However, while the TPO selected the aforesaid company by holding that the services provided are akin to software development services, the DRP, did not comment on the comparability of this company. The learned AR submitted that comparability of the aforesaid company was considered and analysed by different benches of the ITAT and the aforesaid company was rejected as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly on considering segmental details submitted by the said company for IT services, in response to notice issued u/s 133(6), has considered it as a comparable. It was submitted that the aforesaid company is a diversified company and discloses segmental information for IT services and products as one segment in its annual report. It was submitted that the TPO has not provided any other documents excepting segmental information obtained from TP report of Wipro, which is unaudited, manually corrected and unverified. It was submitted that Wipro is also considered to be a giant in its field assuming all the risks and cannot be compared to captive service provider like Assessee. To support his contentions with regard to non-comparability of the said company, he relied upon the following decisions : a) Telcordia Technologies India P. Ltd. ITA.No.7821/Mum/2011 b) Triniti Advances Software P. Ltd., ITA No. 1129/H/2005. c) M/s. Foursoft Limited (ITA.No.1903/H/2011) d) M/s. Virtusa (I) P. Ltd. ITA.No.1962/Hyd/2011 e) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd. Assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system. (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development. (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/ CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 7.8.1. On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with Assessee that the company was functionally different from Assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee s claim that this company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 and services and is not comparable to software development services provided by Assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer/TPO to exclude the company from the list of comparables. 18. Similarly, as contended by the learned counsel for Assessee comparable nature of Flextronics Software Systems Ltd.(Seg) and Helio Matheson Information Tech Ltd., has been rejected by coordinate bench of the Tribunal in the case of M/s. Axsys Heathcare Ltd. vide order dated 28.5.2014 in ITA No.2076/Hyd/2011 for the assessment year 2007-08, for the following reasons- 14. After hearing rival contentions, we agree that the following comparables were excluded by the Coordinate Benches considering the similar facts and arguments raised before us: ........................... 3. High Turnover- functionally dissimilar: 6. FLEXITRONICS SOFTWARE LIMITED : As far as Flexitronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between Assessee and these companies and without making adjustment for the dissimilarities brought out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. (ITA No.1121/Bang/2011) (h) Transwitch India Pvt. Ltd. (ITA No.948/Bang/2011) (i) Mercedes Benz Research Development (ITA No.1222/Bang- -/2011) (j) CSR India Pvt. Ltd. (ITA No.1119/Bang/2011) (k) First Advantage (ITA No.1086/Bang/2012) (l) HCL EAI Services Ltd. (ITA No.1348/Bang/2011) (m) Adaptec (India ) Pvt. Ltd.(ITA No.1801/Hyd/2011) 10. Respectfully following the consistent view taken by the Tribunal with regard to comparable nature of the above companies in similar matters and more particularly the decision of the Tribunal in the case of Sumtotal Systems India Pvt. Ltd., in ITA No. 1710/Hyd/2011 which was in turn relied on by the above said case by the Co-ordinate Bench, we allow Ground No. 7 of assessee and direct the AO to exclude 10 companies from the scope of comparable analysis. As far as Mega Soft Ltd., is concerned, the TPO is directed to consider only the segmental margin of this company for the relevant assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd with reference to Indium Software P. Ltd. and L T Infotech, they are functionally similar. It was the submission by the Ld. Counsel that they are not functionally different and TPO should have considered segmentals from the details furnished by Assessee. In the case of L T Infotech., even though information was not received under section 133(6), it was the submission that this company also should be considered as the comparable. As far as PSI Data Systems Ltd. are concerned, the TPO is rejected the comparison on the related party transactions filter. It was the submission that RPT was worked out by including reimbursement transactions. With reference to VMF Soft Tech, the TPO has rejected it as there are no foreign exchange earnings, whereas, it was the submission that assessee has 93% of foreign exchange revenues. It was the submission that above companies are to be selected as comparables. 8.2. After considering the submissions, we are of the opinion that proper case was not made out for inclusion of the above comparables. Once TPO and DRP forms that these comparables are not functionally similar to Assessee on the basis of various filters adopted by the TPO, it woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertains to inclusion of reimbursable cost as operating cost by the TPO. It was fairly submitted that this issue was also covered by the Co-ordinate Bench decision in assessee s own case for AY. 2005-06 in ITA No. 471/Hyd/2011 dt. 26-08-2015, wherein the issue was considered and decided as under: 23. The next issue which arises for consideration as raised in Ground No.12 is with regard to inclusion of reimbursement cost of ₹ 6,55,57,576 in the operating cost for the purpose of determining ALP of software development services segment. 24. Ld.AR submitted before us, the TPO while determining the ALP of the software development services segment has included the reimbursement cost of ₹ 6,55,57,576 being the cost of travel and stay of personnel to assessee. Ld.AR submitted, there being no profit element in such reimbursement cost, it should not have been included in the OC. In support of such contention, ld . AR relied upon the decision of the IT AT, Hyderabad bench in case of M/s. HSBC Electronic Data Process India Ltd. Vs. DCIT , IT A No. 1624/Hyd/2010, dt. 28/06/2013. 25. The ld. DR submitted before us, if the reimbursement cost according to the Tribunal c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin on the international transaction with the assessee's enterprise in respect of software development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in the paperbook, which have been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing officer had no occasion to verify the veracity of the segmental financials prepared by the assessee company, for limited purpose, we direct the assessing officer to verify the segmental financials prepared by the assessee company and adopt the same for arriving at the net margin on the international transaction with AEs in respect of software development services. We direct accordingly. Respectfully following the same, we direct the Assessing Officer/ TPO to exclude the reimbursement costs while working out the operating c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es have to be reduced from the export turnover as well as total turnover. In view of the ratio laid down as aforesaid, we direct the AO to re-compute deduction u/s. 10A after reducing communication charges both from the export turnover as well as total turnover. Accordingly, we allow the ground raised by the assessee . 17. In view of the ratio laid down as above, we direct the AO to re-compute the reduction u/s. 10A after reducing the communication charges both from the export turnover as well as total turnover. Accordingly, we allow Ground No. 13 raised by assessee. 18. Ground No. 14 pertains to reduction of foreign exchange gain of ₹ 21,41,915/- from business profits while computing deduction u/s. 10A. AO treated the above amount as part of other income and reduce the same from profits of the business of assessee. Before the DRP, assessee relied on various case law to contend that foreign exchange gain was on account of fluctuation qua export business; is eligible for exemption u/s. 10A. DRP however, without giving a finding whether the foreign exchange gain is out export business or not, however, rejected on the reason that the decision of the ITAT in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I unit cannot be set off against the income of STPI unit availing deduction u/s. 10A. Therefore, the direction of the CIT given in the order passed by him u/s. 263 of the Act for the assessment year 2005-06 to the effect that the deduction u/s. 10A for the STPI unit has to be computed after setting off of the losses of other divisions was reversed by the ITAT. In other words, the ITAT allowed the claim with regard to set off and carry forward of loss. It is the contention of the learned AR that if the direction of the ITAT is carried out then the assessee will get the benefit of carry forward of loss and assessee s claim of set off of brought forward losses for the impugned assessment year has to be allowed. Considering the totality of facts and circumstances of the case, who deem it just and proper to remit the matter to the file of the AO who shall take a decision on the issue after the consequential order is passed in pursuance to the directions of the ITAT in ITA No. 1646/Hyd/2010 pertaining to the assessment year 2005-06. The AO shall afford an opportunity of being heard to the assessee before taking a final decision on the issue. The ground raised is allowed for statistical p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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