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TMI Blog2016 (4) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... rt activity, to be eligible for a deduction u/s 10A(1) read with section 10A(4) of the Act. As considered the facts and circumstances of the case and find that the receipts on account of recruitment fees, interest and miscellaneous activity do not have any nexus, whatsoever with the activity of export of computer software. As such they cannot be treated as part of business profits in the computation of deduction u/s/10A - Decided against assessee - IT(TP)A No.1487/Bang/2013, IT(TP)A No.1496/Bang/2013 - - - Dated:- 6-4-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Assessee : Shri Chavali Narayan, CA. For The Revenue : Shri G.R.Reddy, CIT(DR). ORDER Per INTURI RAMA RAO, AM : These cross appeals by the revenue as well as the assessee and directed against the order of the ld.CIT(Appeals)-IV, Bangalore, dated 30th August 2013 for the assessment year 2005- 06. 2. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is a wholly owned subsidiary of M/s.CaritorInc., USA. It is engaged in the business of rendering software development ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ASM Technologies (consolidated result) -1.09% 2 Astro Bio System Ltd 11.35% 3 Blue Star (consolidated result) 21.29% 4 Computech International 4.20% 5 Cressanda Solutions Ltd (consolidated result) 1.59% 6 Geometric Software Solutions 32.53% 7 Goldstone Technolgies Ltd 7.23% 8 Helios Matheson information (consolidated result) 23.19% 9 ICSA (India) Ltd 6,71% 10 Maars Software International Ltd -2.36% 11 Megasoft Ltd (consolidated result) -0.17% 12 Melstar Information Technologies Ltd -1.86% 13 Orient Information Technology Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch Limited 27.39 5. Sasken Network Systems Limited 16.64 6. Four Soft Limited 22.98 7. Thirdware Solution Limited 66.09 8. R S Software (India) Limited TP Study 8.07 9. Geometric Software Solutions Co, Limited TP Study 20.34 10. Tata Elxsi Limited (seg) 24.35 11. Visualsoft Technologies Limited (seg) TP Study 23.52 12. Sasken Communication Technologies Limited (seg) 14.42 13. Igate Global Solutions Limited (seg) 4.32 14. Flextronics (seg) 32.19 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les, the ld.CIT(A) had excluded the following companies by applying the turnover filter of 1 crore to 500 crores: a) Infosys Technologies Ltd.(42.83%) b) Satyam Computer Services Ltd.(29.44%) c) L T Infotech Ltd.(10.33%). The ld.CIT(A) had restored the issue to the file of the TPO on the issue of functional dissimilarity. The ld.CIT(A) had upheld the inclusion of Thirdware Solutions Ltd., by holding that no company can be excluded on the ground of abnormal profits or losses unless the assessee demonstrates and establishes that abnormal profits were earned wholly on account of some extraordinary event taking place. In this connection, he placed reliance on the decision of Bangalore bench of Tribunal in the case of TrilogyEBusiness Services Pvt. Ltd. reported in 29 taxmann.com 310. The ld.CIT(A) however, upheld the action of the TPO in using multiple year data. The ld.CIT(A) further held that it was not necessary to establish the intention of the assessee not to shift profits out of India since availing tax holiday benefits u/s 10A for invoking the transfer pricing provisions. 6.1 The ld.CIT(A), vide para.2.1 of his order held that the assessee-company is entitled fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any earlier year cannot operate as res-judicata for any other assessment year; 5. the learned CIT(A) has erred in upholding the action of the learned AO/TPO in conducting a fresh economic analysis considering only FY 2004- 05 financial data at the time of assessment proceedings, the data pertaining to which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 6. the learned CIT(A) has erred in upholding the action of the learned AO/TPO in accepting/rejecting companies by applying different quantitative and qualitative filters, without considering the arguments put forth by the Appellant regarding inappropriateness of the following filters and without providing any cogent reasons: a) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying export revenues greater than 25% of total revenues filter as a comparability criterion in the search strategy to identify comparable companies; b) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying diminishing revenue filter as a comparability criterion in the search strategy to identify comparable companies, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 92C of the Act; 14.The learned CIT(A) has erred in law and on facts in not expunging the remarks of the Assessing Officer holding that deduction under section 10A of the Act should not be eligible for recruitment fees as such remarks were made without verifying the nature of services undertaken by the Appellant in this regard; 15.The learned CIT(A) has erred in law and on facts in not appreciating that the recruitment fees is eligible for deduction under section 10A of the Act since it is covered within the notified information technology enabled services constituting computer software; 16.The learned CIT(A) has erred in law and on facts in ignoring and not following the Honourable Tribunal's decisions in the Appellant's own case for the assessment year 2007- 08, being binding on the lower authorities, without appreciating the fact that the issues and facts covered under the present appeal are identical and similar with that of the Appellant's own case for the AY 2007-08; 17.The learned CIT(A) has erred in law and on facts in not granting deduction under section 10A of the Act in respect of interest income and miscellaneous income which form part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2009-10 and the decision was based on the reasoning that there were fluctuations in the margins of the company whereas in the present case we are concerned with the assessment year 2005-06. It is clear from the chart produced in para.33 of order in IT(TP)A No.532/Bang/2013 in the case of Kodiak Networks India Pvt. Ltd., that the financial data from the financial year 2004-05 was furnished. When compared to financial year 2004-05, there were no wide fluctuations in the financial results of the company in the financial year 2005-06. Therefore, in our considered opinion, this company cannot be excluded from the list of comparables on the ground of wide fluctuations in the margins of the company, without going into the issue whether wide fluctuation would have any impact on the comparability. 9.3 However, the assessee-company s contention before the TPO as well as before us is that this company is engaged in the sale of IT products as well as software development services and no segment details were available. It was further submitted that this company had related party transaction. 9.4 We find that the above submissions are not supported by the annual financial resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al report. But it is not the case of the assessee-company that the amalgamating company is functionally dissimilar. In fact, the notes to accounts states that this amalgamated company i.e. Holool India Ltd. is also engaged in the same business as that of the assessee-company. Therefore, the event of merger itself cannot a factor for exclusion of this company from the list of comparables, as held by the Mumbai bench of the Tribunal in the case of Wills Processing Services (India) (P) Ltd. vs. DCIT (32 taxmann.com 18) (Mum). Hence, this company cannot be excluded from the list of comparables. 11. As regards Flextronics Software Systems Ltd ., this comparable was introduced by the TPO and the assesseecompany objected for inclusion of this company in the list of comparables as it has related party transactions, and derives revenue both from the product sales as well as service. The TPO rebutted the contention of the assessee-company by drawing attention to the financial results of the company wherein it is clearly stated that the related party transactions are less than 25% and the segmental details are made available. It is further noticed that the revenue from the services cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s objection was overruled by the TPO by citing that salary includes consultancy charges and overseas manpower cost and the two items are included in the personnel cost it comes to 26%. 13.1 Learned AR of the assessee-company again relied on the decision of the co-ordinate bench of the Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. ( cited supra). 13.2 We heard the rival submissions and perused material on record. Perusal of the decision of the co-ordinate bench of Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. ( cited supra) on this comparable reveals that the co-ordinate bench had followed the decision of Delhi Tribunal in the case of ITO vs. Colt Technology Services India Pvt.Ltd. ( in ITA No.609/Del/2011 dt.23/10/2012 and no reasons were given by the Tribunal as to why this company cannot be considered as a comparable. Therefore, we are unable to discern any ratio in the decision cited supra. Thus, the learned AR of the assesseecompany could not adduce any other evidence in support of exclusion of this company from the list of comparables. In the circumstances, we uphold the action of the TPO in including this company in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company s operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22: 22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO and the assesseecompany objected to the inclusion of this company in the list of comparables on the ground that the financial data was not available in the public domain at the time of transfer pricing audit. The TPO held that the data was available in capital line as well as prowess data base. The TPO further held that more than 50% of the revenue is from software development services; this can be considered as a comparable. 15.1 Before us, learned AR of the assessee-company submitted that this company cannot be considered as comparable in the light of the decisions of the co-ordinate bench in the case (i) the Sunquest Information Systems (India) Pvt. Ltd. (cited supra); (ii) Textron Global Technology Centre Pvt. Ltd (cited supra) and (iii) Colt Technology Services India Pvt.Ltd. (cited supra). 15.2 We heard the rival submissions and perused the material on record. The co-ordinate bench (Delhi) of Tribunal in the case Colt Technology Services India Pvt.Ltd. (cited supra) recorded the finding on the above company as follows: Thirdware Solutions Ltd, it was submitted that the said company has a diversified functional professional profile and is also engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 26. As far as Flextronics 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 the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent case in directing the TPO to exclude functionally dissimilar companies subject to the guidelines laid down by of the Mumbai Bench of the Hon'ble Tribunal without appreciating the fact that in transfer pricing selection of comparables in a case depends on assessee specific FAR analysis. 3) The Ld. CIT(A) erred in relying on the decisions of the ITAT including those of other benches of ITAT, without appreciating the specific facts brought on record by the TPO in the case of the assessee and the similar issue has been agitated before the Karnataka High Court in other cases. 4) The Learned CIT(A) erred in directing the TPO to exclude functionally dissimilar companies subject to the guidelines laid down by of the Mumbai Bench of the Hon'ble Tribunal without appreciating the fact that when any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee or the TPO and which do not find a place in the order under section 92 CA. 5) The learned CIT (Appeals) err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the turnover of the above companies is more than ₹ 200 crores relying on the decision in the case of Genesis Integrating Systems (India) Pvt. Ltd. vs. DCIT (20 taxmann.com 715(Bang.): i. Infosys ii. L T Infotech iii. Satyam Computer Systems These companies were selected by the TPO as comparables and the assessee-company objected to their inclusion in the list of comparables on the ground of turnover of the above companies is more than ₹ 200 crores and the companies had related party transactions. The TPO rejected the submission by holding that the turnover had no co-relation with the profit margin earned by the company and also rebutted that the companies had related party transactions by drawing the attention of the assesseecompany to the annual reports of those companies. 24. We now deal with each of these companies. Before adverting to the comparables, it is worth mentioning here that there are divergent decisions of the Tribunal whether high turnover is a relevant for accepting/rejecting a comparable in the case of a service company. For example, the Mumbai bench of the Tribunal in the case of Capgemini India Pvt Ltd. Vs. ACIT (TS 45 ITAT 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see-company or TPO is rejected or relaxed, the matter should go back to the TPO for fresh analysis is not tenable. The Special Bench of Tribunal, in eh case of Quartz systems has held that at any stage of proceedings, either before TPO or appellate proceedings, a new comparable can always be considered. 26. Ground No.5 challenges the direction of the ld.CIT(A) allowing the benefit of deduction u/s 10A of the Act to the assessee-company. The issue in appeal is squarely covered in favour of the assessee-company by the decision of the Hon ble High Court of Karnataka in the assessee s own case in ITA No.403 of 2008 dated 20/6/008 wherein it has been held as under: To be eligible for exemption under Section 10A, the conditions stipulated in Sub-Section(2) (i) of Section 10A has to be fulfilled i.e. the assessee has to begin manufacturing the products on or after the first day of April 1994 in any Electronic Hardware Technology Park. In order to start the unit in software technology park, the permission is required. Once permission is obtained and the unit is started in software technology park, after the aforesaid date, the assessee is entitled to the benefit under Section 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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