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TMI Blog2017 (1) TMI 1491X X X X Extracts X X X X X X X X Extracts X X X X ..... ALORE] wherein this Tribunal directed the TPO to allow actual adjustment towards the differences in the of working capital position between the assessee and the entrepreneurial companies selected as comparable. We direct the TPO to follow this decision. To this extent, the assessee’s appeal ground is allowed. Computation of deductions u/s 10A & 10AA - data communication, voice communication and cell phone expenses incurred in foreign currency should be excluded from the export turn over as well from total turnover on the basis of the Jurisdictional High Court decision in CIT v Tata Elxsi [2011 (8) TMI 782 - KARNATAKA HIGH COURT]. Thus the Revenue’s appeal grounds are dismissed. - I.T(TP) A No. 44/Bang/2015, I.T (TP) A No. 69/Bang/2015 - - - Dated:- 16-1-2017 - Sunil Kumar Yadav (Judicial Member) And S. Jayaraman (Accountant Member) For the Assessee : Chavali S. Narayan, CA For the Revenue : Kamaladhar, Standing Counsel ORDER S. Jayaraman (Accountant Member) These are cross appeals filed by the assessee and the Revenue against the order dt.12.11.2014 of the CIT (A)-IV, Bengaluru, for the assessment year 2010-11. 2. Cerner Healthcare Solutions Private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22.71% Less: Working capital adjustment 1.98% Adjusted arithmetic mean 20.73% 03. On the corporate tax front, the AO found that the assessee paid ₹ 3,47,42,280/-towards reimbursement of salaries, communication expenses, purchase of fixed assets and other miscellaneous expenses to Cerner Corporation, USA . The AO required the assessee to show cause as to why such payments be not treated as fee for technical services and why TDS was not made on such payments. After considering assessee s reply, relevant documents and other materials, the AO held that the assessee is a subsidiary of Cerner Corporation, USA and is engaged in software development. It required technical knowledge, experience skill in order to carry on its business which was met by Cerner Corporation, USA by deputing its employees who possessed the necessary technical knowledge, experience skill. They have imparted the knowledge skill to the members of assessee which falls within the meaning of technical training as contemplated in the MOU DTAA and hence the AO held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter, which was never the subject matter of appeal before him, the CIT(A) order has to be quashed. Further, it was submitted that the AO has held that the reimbursement of expenses (other than salaries) is subject to withholding of taxes under Section 195. The CIT (A) has not adjudicated on the reimbursement of expenses though there was a specific ground of appeal raised before him . Further, the CIT (A) has not adjudicated on the following grounds raised in the appeal filed before him : -The AO has erred in law and in facts by holding that there is no obligation to reimburse to Cerner Corporation expenses (in the nature of communication and other miscellaneous expenses) that had been incurred on behalf of the Assessee. -The AO has erred by concluding that the above expenses are subject to withholding taxes and hence disallowed under Section 40(a)(i) of the Act. -The AO has erred by treating the expenses as FTS without analysing the taxability of each expense individually -The AO has erred in computing the deduction allowed under Section 10A and 10AA by not considering the increased amount of profit after disallowance under 40(a)(i). 08. The A R further submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s functionally different, it owns significant intangibles assets and also has huge brand value. Offers business analytics and system integration services, software products and its segmental breakup not available. Case laws : Pegasystems Worldwide India P Ltd ay 2010-11 ITA No 1758/Hyd/2014 1936/Hyd/2014 etc 11. Further, the AR submitted that the following comparables are to be rejected as they are functionally different based on the judicial precedents. The gist of his arguments and the cases relied on, are as under : 1. ICRA Techno Analytics Ltd (seg) is functionally different, engaged in host of other services such as engineering, web development, hosting, business process outsourcing services as well as business analytics. Segmental information not available Case laws : Electronics for Imaging India P Ltd, Ikanos Communications etc. 2. KALS Information Systems Ltd is functionally different, its revenue consists of revenue from sale of software products . Its segmental break up is not available. Case laws : M/s. M/s. Mercedes Benz Research Development India P Ltd, Electronics for Imaging India P Ltd, Ikanos Communications etc. 3. Persistent Systems Ltd is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables. 5. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 6. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. (2) Infosys Ltd. 2. The assessee objected against the selection of this company on the ground that this company has a big name a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re development service providing company. 7. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, ITA No.1054/Bang/2011 dated 23.11.2012, this company was found to be not comparable with that of the assessee. 8. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of ₹ 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended Year ended March 31, 2010 March 31, 2019 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 14. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. (6) Tata Elxsi Ltd. 15. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP. 12. The relevant portion of the order from the case of Pegasystems Worldwide India P Ltd ay 2010-11 ITA No 1758/Hyd/2014 1936/Hyd/2014 dt 16.10.2015 is extracted as under : L T Infotech Ltd: 14. Assessee has objected before TPO that the department in earlier years is rejecting this comparable as it has revenue from software services and products and segmental information was not available. Further, company did not respond to the notice issued u/s. 133(6) and challenged the said notice before the Hon'ble Bombay High Court. It was further objected to on the reason that company had less margin in earlier year and therefore, rejected by the department, however, margin is high in this year, the department proposed it as a comparable and there is no consistency. These objections were rejected by TPO vide his analysis in page 40 of the order and from the earnings in foreign exchange reported, TPO considered the company as involved in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software exports reported in earning in foreign currency as that of software development services, we are not sure whether the software exports reported therein exclusively pertain to services or products. As there are no segmental details, it is very difficult to analyse whether the incomes earned by the said company do really pertain to the similar services rendered by Assessee. As also seen from the income schedules, engineering services reported in earlier year were not there in this year, therefore, it is very difficult to analyse whether the company is functionally similar or not? Keeping in view of the above difficulties in analyzing the data and considering the reasons given by DRP in the case of M/s. Sumtotal Systems India Pvt. Ltd., (supra), we are of the opinion that L T Infotech Ltd., cannot be selected as a comparable company. AO/TPO is directed to exclude the same from the list of comparables. Ground No.4 is allowed for statistical purposes. .. .. 22. Ground No.2 pertains to rejection of Infosys Technologies Ltd., from the list of comparables by DRP. We have alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses out of current year s transactions, then, it should be treated as operating in nature. To that extent Revenue s claim is allowed. 15. The next issue is that the AR submitted that the TPO has restricted the working Capital adjustment to 1.98% and relied on the decision of this Tribunal in Moong Controls India P Ltd ITA 551/Bang/2015 ay 2010 dt 27.11.2015, wherein this Tribunal directed the TPO to allow actual adjustment towards the differences in the of working capital position between the assessee and the entrepreneurial companies selected as comparable. We direct the TPO to follow this decision. To this extent, the assessee s appeal ground is allowed. 16. The next issue is Revenue s appeal against the decision of the CIT(A), who held that while computing deductions u/s 10A 10AA, respectively, data communication, voice communication and cell phone expenses incurred in foreign currency should be excluded from the export turn over as well from total turnover on the basis of the Jurisdictional High Court decision in CIT v Tata Elxsi 349 ITR 98. We heard rival contentions. We do not find any infirmity in the decision of the CIT(A) and hence uphold it. To that extent, the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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