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TMI Blog2017 (7) TMI 953X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable to its parent company - Held that:- Referring to assessees's submission that this amount was allowed as business expenditure in the earlier year and therefore the business profit of the assessee for the purpose of deduction u/s. 10A was reduced by this amount in the earlier year also as during the year under consideration the assessee has reversed the provision which has resulted increase in the business income of the assessee and therefore it is eligible for deduction u/s. 10A this fact of provision being allowed as business expenditure in the earlier year has not been verified by the authorities below and therefore in the absence of any finding on this issue by the authorities below it is not possible to give a concluding finding at this stage. Thus in the facts and circumstances of the case we set aside this issue to the record of the AO for verification - IT (TP) A Nos. 1041 & 1379/Bang/2011 And IT (TP) A No. 1106/Bang/2011 - - - Dated:- 28-4-2017 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER For The Appellant : Shri G. Kamaladhar, Standing counsel For The Respondent : Shri K.R. Vasudevan, Advocate ORDER Per Vij ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exensys Software Solutions Limited 70.68% 68.84% 4 Sankhya Infotech Limited 27.39% 26.49% 5 Sasken Networks Systems Limited 16.64% 19.20% 6 R S Software (India) Limited 22.98% 11.84% 7 Four Soft Limited 66.09% 26.68% 8 Thirdware Solutions Limited 8.07% 70.01% 9 Geometric Software Solutions Limited 20.34% 22.97% 10 Tata Elxsi Limited (Seg.) 24.35% 28.14% 11 Visualsoft Technologies Limited(Seg.) 23.52% 25.36% 12 Sasken Communications Limited (Seg.) 14.42% 18.44% 13 Flextronics Software Systems Limited (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables. Thus both the assessee and revenue have filed the cross appeals against the impugned order of the CIT(A) and raised the following grounds: Grounds raised by the assessee:- I. Write back of Provision for management charges 1. During the financial year 2004-05, the appellant had reversed a provision for management charges payable to its parent company amounting to ₹ 801,775 and claimed 10A deduction on the same treating it as business income. The learned AO erred in holding that such reversal of management charge provision is not derived from export of computer software and hence, 10A deduction cannot be claimed on the same. The learned CIT(A), in his order passed under Section 250 (dated 13.09.2011) had missed adjudicating on this ground. We had filed a rectification application under Section 154 against the CIT(A)'s order. Later, the CIT(A) passed a rectification order on the same. 2. The learned CIT(A) erred in dismissing the appeal on the ground that the reversal of the provision is merely an accounting entry and does not result in business income. 3. The learned CIT(A) erred in stating that there is no separate addition in the computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the assesse for provision of adjustments for risks. II. Write back of Provision for management charges 1. During the financial year 2004-05, the appellant had reversed a provision for management charges payable to its parent company amounting to ₹ 801,775 and claimed 10A deduction on the same treating it as business income. The learned AO erred in holding that such reversal of management charge provision is not derived from export of computer software and hence, 10A deduction cannot be claimed on the same. The learned CIT(A), in his order passed under Section 250 (dated 13.09.2011) had missed adjudicating on this ground, which was later addressed in his rectification order passed under Section 154 (dated 27.10.2011). 2. The learned CIT(A) erred in dismissing the appeal on the ground that the reversal of the provision is merely an accounting entry and does not result in business income. 3. The learned CIT(A) erred in stating that there is no separate addition in the computation of income on the above account in the AO's order. However, it may be noted that the said reversal has been added back to the 10A profits by the AO for the purpose of computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 8. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 5. RPT filter of 0%:- We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The TPO applied the filter of 25% of RPT while selecting the comparables. Whereas the CIT(A) has applied a filter of 0% RPT. We find that 0% related party transaction is a impossible situation and therefore if the said filter is applied then the comparable companies will not be available for determining the arms length price. Thus to avoid this practical difficulty of selecting the comparable companies this Tribunal in a series of decisions have taken a view that a tolerance range of related party transaction can be considered from 5% to 25% depending upon the facts and circumstances of each case particularly the availability of the comparable companies. In ordinary circumstances when there is no difficulty of selecting the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies the ld. AR of the assessee has submitted that an identical set of comparable was considered by the coordinate bench of this Tribunal in case of ITO Vs. M/s. Net Devices India Pvt. Ltd. in IT(TP)A No. 1099/Bang/2011 vide order dated 25.05.2016 and further vide order dated 23.11.2016 in MP No. 100/Bang/2016. Thus the ld. AR has submitted that the functional comparability of these 10 companies have been examined by the coordinate bench and found to be not comparable with the software development service segment of captive service provider assessee. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that the TPO has duly examined the functional comparability of these companies and therefore when the arms length price has been determined by adopting TNMM as a most appropriate method then minor variations in the functions of the comparable companies are irrelevant. 10. Having considered the rival submissions as well as relevant material on record, we note that out of the 17 comparable companies selected by the TPO the assessee is now seeking exclusion of 10 companies. The details of which are as under. 1. Bodhtree Consulting Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement, etc. (refer page 117 of the paper book) Contract SoftwareDevelopment Services. Revenue Rs.9, 028 Crores Rs.16.09 Crores Ownership of branded/proprietary products Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite 'Finacle') Onsite Vs. Offshore -As much as half of the software development services rendered by Infosys are onsite (i.e., services performed at the customer's location overseas). And offshore (50.20 percent) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore services (i.e., remotely from India) Expenditure on Advertising/Sales promotion and brand building Rs.61 Crores Rs. Nil (as the 100 percent services are provide to AEs) Expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the margin of 17 percent shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order. Following the decision of the Hon'ble Delhi High Court (supra), we do not find any reason to interfere with the impugned order of the CIT (Appeals) on this issue. C.O. No.19/Bang/2012 12. The assessee has raised the following grounds in the cross objections : 1. That the order of the learned CIT (Appeals) resulting in income of the Respondent being subject to tax, is bad in law, without application of mind and liable to be quashed. 2. That the learned CIT (Appeals) erred in not entirely deleting the adjustment to the arm s length price made by the ld. Assessing Officer / TPO amounting to INR 12,882,925 in respect of the software development services. 3. That in making an adjustment to the Respondent s transfer price, on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in : a) Upholding the comparability analysis performed by the ld. TPO in the TP order. b) Arbitarily rejecting the filters applied by the Respondent while undertaking the TP Study. c) Modifying some of the filters appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the assessee did not raise any objection before the authorities below in respect of the comparability of these two companies however in view of the various decisions of the Tribunal, these two companies are found to be not cocmparable with the software development services provider. Thus the learned Authorised Representative has submitted that the assessee has raised objection by filing the additional grounds which may be admitted for deciding the comparability of these two companies on merits. 15.2 On the other hand, the learned Departmental Representative has objected to the admission of the additional grounds raised by the assessee when the assessee has not raised any objection before the authorities below and the objections proposed to raise by the assessee now was not available with the authorities below for their consideration. 15.3 We have heard the rival submissions as well as considered the relevant material on record on the admissibility of the additional grounds raised by the assessee. We find that there are some decisions of this Tribunal wherein the comparability of these two companies have been considered and decided by this Tribunal. Therefore, once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra), we find that the Tribunal has recorded the submissions of the counsel of the assessee in para 7 as under : 7. Bodhtree Consulting Ltd. The learned counsel submitted that this company should be rejected under the following TPO s filters : - Related party transactions filter : As per Schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response under Section 133(6); the company has export sales to Perigon LIC, USA of ₹ 133.90 lakhs being 34.68% of the total turnover. - Functionally different filter : The company in its response to notice under Section 133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services. However, the Tribunal did not propose to give any finding on this issue as the assessee did not press the exclusion of the said company as evident from the finding of the Tribunal in para 9 as under : 9. Even though detailed submissions were made with reference to the above 7 companies, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.1 The learned Authorised Representative of the assessee has submitted that this company is having hybrid model of supplying both products and services. It offers new product design and development to enhancing and testing their current products. These services are provided for fixed networks, mobile networks, voice over packet and data network. Thus the learned Authorised Representative of the assessee has submitted that this company is functionally different from the assessee. He has contended that this company is engaged in the R D activity as it is evident from the Annual Report of this company. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 1388/Bang/2011. ii) M/s. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 92/Bang/2012. iii) M/s. Intoto Software India Pvt. Ltd. (ITA No.1196/Hyd/2010) iv) M/s. CNO IT Services (India) Pvt. Ltd. (ITA No.1280/Hyd/2010) 17.2 On the other hand, the learned Departmental Representative has submitted that the TPO has examined the functional comparability of this company and it had qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provider. By following the earlier order of the Tribunal, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 18. The assessee has raised objections against the inclusion of the following companies by the TPO : ( i) Sankya Infotech Ltd. ( ii) Foursoft Ltd. ( iii) Geometric Software Solutions Ltd. ( iv) Tata Elxsi Ltd. (Seg.) and ( v) Satyam Computer Services Ltd. ( i) Sankya Infotech Ltd. 18.1.1 The learned Authorised Representative of the assessee has submitted that this company is functionally dis-similar as this company is product based company and also engaged in R D activity and development of niche product for the transportation and aviation fields. This company also owns intangibles. Thus this company cannot be considered as a good comparable when it is engaged in software products for transportation and aviation industry and incurred selling and marketing expenses. In support of his contention, he has relied upon the following decisions :- i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 1388/Bang/2011. ii) M/s. Sunquest Information Systems (India) Pv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956. The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 609I/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the assessee therein which was also in the business of software development. 20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies. A similar view has been taken by the Tribunal in the other decisions as relied upon by the ld. A.R. Following the earlier order of the Tribunal where it was found that this company is engaged in the business of development of software products and services as well as training, it cannot be considered as a goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that this company is functionally different from the assessee as this company is engaged in the diversified activity of software development segment as well as in product design, this company also incurred deferred and promotional expenses and engaged in the activity such as hardware design, industrial design and engineering and visual computing. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (I) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 1388/Bang/2011. ii) M/s. Citrix R D India Pvt. Ltd. in IT(TP)A Nos.841/Bang/2013 172/Bang/2013. iii) M/s. Symbol Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. iv) M/s. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. He has further submitted that for the Assessment Year 2006-07, the Tribunal in the assessee's own case has decided an identical issue by holding that this company cannot be compared with the assessee. 18.4.2 On the other hand, the learned Departmental Representative has relied upon the order of the TPO and submitted that the predominant activity of this company is software development and therefore it is consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paring the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties. 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable. 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. Respectfully following the same, we direct the AO to exclude these companies from the final list of comparables. We find that there is no change in the business activity of this company in the year under consideration in comparison to the Assessment Year 2006-07. We further note that a similar view has been taken by this Tribunal in the other cases as relied upon by the assessee pertaining to the Assessment Year 2005-06. Accordingly, by following the earlier decisions of this Tribunal, we are of the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olutions Ltd., Infosys Technologies Ltd., and Satyam Computers Ltd., from the list of comparable companies. It is clear from the record that this issue was also involved in the case of Agnity India Technologies Pvt Ltd Vs. ITO (supra) wherein Delhi Bench of ITAT has excluded this company on the ground of unreliable data and information. The order of the Delhi Bench of Tribunal has been confirmed by the Hon'ble Delhi High Court. In view of the finding of the co-ordinate bench of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables. 11. We further note that the comparability of two companies namely Geometric Software Solutions Limited and Exensys Software Solutions Limited were further dealt with in the Miscellaneous Petition no. 100/Bang/2016 vide order dated 23.11.2016 in para 5 to 8 as under. 5. Having considered the rival submissions and relevant material on record, we find that the Tribunal has ordered the exclusion of three companies on the ground of having more than 15% RPT at page 15 as under : Sl. No. Comparable Company Name % of RPT Over sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Therefore there is an apparent mistake in the paras 8.1 to 8.3 of the order which requires to be rectified. Accordingly, the name mentioned in paras 8.1 to 8.3 as Accentia Software Solutions Ltd. be read as Exensys Software Solutions Ltd. We further note that in para 8.3 there is a mistake in reproduction of the earlier order in the case of Textron Global Technology Centre Pvt. Ltd. and instead of the relevant finding in para 14, the wrong part of the order in para 19 20 was reproduced. Thus there is a mistake in the order which requires to be rectified. In view of the above facts and circumstances, mistake in paras 8.1 to 8.3 are hereby rectified and the same may be read as under : 8.1 Ground No.4 is regarding exclusion of the companies having more than 50% of profit margin. The learned Departmental Representative has submitted that the CIT (Appeals) has excluded two companies viz. Exensys Software Solutions Ltd. and Thirdware Solutions Ltd. on the ground that these companies are having abnormal profits of more than 50%. Thus the learned Departmental Representative contended that high profits or high loss cannot be a reason for exclusion of a company in the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of this company. Further we find that the co-ordinate bench of this Tribunal in case of M/s. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012 has considered the comparability of this company in paras 14 as under : 14. Ground No.3 raised by the Revenue is misconceived and the issue does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd. Infosys Technologies Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore the grievance as projected b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition in the computation of income on the above account in the AO's order. However, it may be noted that the said reversal has been added back to the 10A profits by the AO for the purpose of computing 10A deduction. 4. The learned CIT(A) erred in not appreciating the fact that being a captive service provider, the provision made for management charges payable to its holding company is towards the conduct of its business and hence, should not be treated as not derived from export. 5. The learned CIT(A) ought to have appreciated that as the provision was allowed in the financial year 2003-04 (when the same was created) as a business expenditure pertaining to 10A unit, the reversal of the same ought to be considered as an income from business of the 10A unit only. The Appellant craves leave to add, to alter or amend all or any of the aforestated grounds of appeal. For the above and any other grounds which may be revised at the time of hearing, it is prayed that the order of the learned CIT (A) be set aside. 14. The only issue arises in this appeal of the assessee is regarding the eligibility of deduction u/s. 10A in respect of the amount of provision for managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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