9911796707
TMI Blog2017 (1) TMI 1571X X X X Extracts X X X X X X X X Extracts X X X X ..... mber And Shri B. Ramakotaiah, Accountant Member For Revenue : Smt. G. Aparna Rao, CIT-DR For Assessee : Shri Abhishek Murali, AR ORDER B. Ramakotaiah, A.M. : These are cross-appeals by Assessee and Revenue against the order of the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C of the Income Tax Act [Act] consequent to the directions given by the Dispute Resolution Panel [DRP], Hyderabad, dated 29-09-2014. Assessee is aggrieved on the transfer pricing adjustments made and Revenue is also aggrieved on some of the exclusions of comparables by the DRP and working of deduction u/s. 10A of the Act. 2. Briefly stated, assessee provides software development services to its Associated Enterprise [AE], Intoto LLC in the areas of network security and embedded systems. It is a captive risk free service provider and only undertakes development (coding of embedded software). Intoto LLC, USA holds 99.82% of shares in M/s. Intoto Software India Pvt. Ltd. This unit is also registered with the Software Technology Parks of India. During the year, it has received operating receipts to the extent of ₹ 29.13 Crores and returned income of ₹ 67,34,480/- after claiming deduction u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.61 16. Persistent Systems Ltd 33.07 4. Assessee in its appeal has raised 13 grounds and one additional ground on the negative working capital adjustment made by the TPO. Ground Nos. 1, 2, 3 & 13 are general in nature which does not require any specific adjudication. 5. Ground No. 4 is pertaining to adjustment of foreign exchange loss as operating in nature while computing net margin of assessee under Transactional Net Margin Method [TNMM]. However, this ground is not pressed as the foreign exchange loss/gain arising out of assessee's operating transactions foreign exchange loss/gains are considered as part of operating margins in various other cases. Accordingly, this ground is rejected. 6. Ground No. 5 pertains to selection of comparable companies. Out of the 16 companies which finally selected by the AO/TPO as comparable companies, three companies i.e., Sr. No. 9. Mindtree Ltd (Seg); Sr. No. 11. R S Software (India) Ltd; Sr. No. 14 Thinksoft Global Services Ltd., are assessee's own selections in its TP study and accordingly has no objection for inclusion of the above companies. In addition, assessee is also not objecting to companies listed at : 1. Avani Cimcon Technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les like research and development, inventories, sales and other incomes. He also reported that company in the notes to the accounts has stated that it is engaged in the development and maintenance of computer software. The production and sales of software cannot be expressed in any generic unit. Thus, TPO rejected Assessee's objections and retained it as a comparable. DRP also agreed with TPO. 8.1. It was contended that AO relied on the annual report of FY. 2010-11 and used the information applicable to FY. 2009-10 from that report, as the information for FY. 2009-10 was not available in public domain. It is also submitted that this company was never selected either by TPO in earlier year or in later year. It was also submitted that profitability varies from year to year and in this year, there was arbnormally very high margin, the reasons of which could not be analysed in the absence of annual report. It was further contended that segmental information was not available. On the argument that the said company is providing both software development and IT enabled services Ld. Counsel placed the disclosures in annual report of FY. 2008-09 and annual report of FY. 2009-10 to submit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee's case in this assessment year. We are also aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally different from Assessee's activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard". 8.1.3. Respectfully following the same, AO/TPO is directed to exclude the said company from the list of comparables as it was not functionally similar. 8.2.1. Sasken Communication Technologies Ltd: The objection of assessee is that it is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Paper Book, segmental details are not available. It also has high turnover to an extent of ₹ 509 Crores (considered by TPO in Annexure 1(ii) at sl. No 17), as against ₹ 29.53 Crores of assessee. It was excluded by the Co-ordinate Bench in the following cases: a) Intoto Software India Pvt. Ltd., (AY.2008-09) in ITA No. 1810/Hyd/2010; b) Trident Microsystems India Private Limited (AY.2010-11) in ITA No.192/Bang/2015; c) Tory Harris Business Solutions Private Ltd (AY.2009-10) in ITA No.113/Bang/2014; 8.3.2. Apart from High turnover, this company is also into software products and is functionally different. As considered by the Co-ordinate Bench in the case of Trident Microsystems India Private Limited (AY.2010-11) in ITA No.192/Bang/2015 (supra), wherein it was held as under: "18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:- "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :-- (a)....... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction if-- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts is clearly stated. The foreign exchange earnings on sale of products is clearly stated at 4686.19 Rs. Million in Notes to accounts at item 15. Thus the company is functionally different. In view of that, we direct the AO/TPO to exclude the above company. This ground is considered partly allowed. 8.4.1. Comp-U-Learn Tech India Ltd: Assessee is objecting to this company stating that it is functionally different, there are extraordinary events during the year and fluctuating revenues. Ld. Counsel relied on the decisions of Kenexa Technologies Private Limited (ITA No. 243/Hyd/2014) (AY.2009-10) and Invensys Development Centre India Private Limited (ITA No. 383/Hyd/2014). The decision of Kenexa Technologies Private Limited (supra) is for AY. 2009-10 which does not apply to the facts for this assessment year AY. 2009-10. Likewise, the other decision also. We have perused the annual reports placed in the Paper Book from Pg. Nos. 407 to 506. As seen from the annual report, the receipts are from software development services only and there are no sale of products. The extraordinary events referred to pertain to investment in other companies which has no bearing on the P&L A/c. Fluctuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly." 42. We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expenses and we direct the TPO to re-compute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies". 9.1. In view of the Co-ordinate Bench decision, we direct the AO/TPO to examine the objections of assessee and re-compute the margins considering the provision for bad and doubtful debts as operating expenses. This ground is considered allowed. 10. Ground No. 7 pertains to rejection of certain comparable companies selected by assessee. a) Akshay Software Technologies Ltd., b) LGS Global Ltd., c) R Systems International Ltd., d) Quinegra Solutions Ltd., e) Allgo Embedded Systems Private Ltd., and f) Lucid Software Ltd., 10.1. Even though Ld. Counsel argued that these companies are to be included, it was fairly admitted that the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as : • The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. • The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : "7.7. 4 Thus, working capital adjustment is made for the time value of money lost when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "The Assessee had submitted in response to the show cause notices issued by the Learned TPO, that Infosys has sales turnover of Rs..21,206 Crore (ref Page 39 AR 2010) for the FY 2009-10 and hence should be rejected as it is having a turnover of more than 720 times of the Assessee. The Assessee has submitted to the Learned TPO that Infosys has identified the presence of brand in its services/ products and has performed a brand valuation exercise to determine the value of profits earned by Infosys that can be attributed to the "Infosys" brand, The Assessee being a captive service provider cannot be compared to companies which hold significant brand value as such companies will be receiving a premium in the market because of the existence of the brand. Without prejudice the above argument that Infosys has to be rejected, the Assessee submitted that if the Learned TPO wishes to consider Infosys as a comparable, the brand related profits as disclosed in the annual report should be excluded in determining the profitability of the company for transfer pricing purposes. Please refer to Section 6 of Annexure A of the submission to the Learned TPO dated August 7, 2013. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds raised before us were the same grounds raised before the TPO. Before this Panel the assessee submitted that in its own ease for AY 2005- 06 and 2007-08, the Hon'ble ITAT vide order in ITA No. 1196/Hyd/2010 and ITA No.2102/Hyd/2011, dated 24.05.2013 excluded this comparable stating as under: "36. We find that both M/s. HCL EAI Services Ltd. as well as M/s. Trilogy E-Business software India Private Limited are into software development services to its parent companies. The assessee is also into similar type of activity. Therefore, the decision taken in M/s. Trilogy E- Business software India Private Limited as well as M/s. HCL EAI Services Ltd. to exclude Lucid software and Kals Information Systems Ltd. applies to the facts of the case before us also. Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude these two companies also from the list of comparables". Respectfully following the decision of the Hon'ble ITAT referred above we direct the TPO/AO to exclude KALS Information System Ltd., as a comparable". 17.1. We do not find any reason to interfere with the order of the DRP which has ri ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
