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TMI Blog2017 (1) TMI 1574X X X X Extracts X X X X X X X X Extracts X X X X ..... objections relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. First, we shall take up the appeal filed by the assessee, under which, the assessee has raised the following grounds of appeal:- A. Transfer Pricing matters Ground No. 1: Transfer Pricing adjustment The Learned Assessing Officer ('Ld. AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted by the Appellant and thereby making a transfer pricing adjustment of ₹ 84,85,743 to the income of the Appellant by holding that the international transaction of provision of marketing and sales support services does not comply with the arm's length principle as envisaged under Chapter X of the Income-tax Act, 1961 ('the Act'). Ground No. 2: Erroneous rejection of the fresh search analysis conducted by the assessee The Hon'ble DRP / Ld. AO/ Ld. TPO erred in disregarding the fresh search analysis conducted by the assessee using the data for Financial Year ('FY') 2009-10, whereas the Ld. AO/TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s but not at the time when the Appellant conducted its analysis to comply with the provisions of Rules 10B(4) and 10D(4) of the Rules. Ground No. 5: Ignoring the fact that the Appellant is entitled to tax holiday under Section 10A of the Act Hon'ble DRP / Ld. AO erred in ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits derived from the software development services and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions. B. Corporate Tax matters Ground No. 6: Disallowance of interest income while computing deduction under section 10A of the Act The Hon'ble DRP / Ld. AO erred in not considering the interest income of INR 2,844,646 of the STP Unit as profits and gains derived from the export of articles or things or computer software of the STP Unit as required by the specific provisions of section 10A(4) of the Act in computing the deduction available to the STP Unit under section 10A of the Act. Ground No. 7: In any view of the matter and in any case disallowance of deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith associate enterprises at ₹ 52,01,06,661/-. Therefore, reference under section 92CA(1) of the Act was made to the Transfer Pricing Officer , Pune (in short the TPO ), for verification of arm's length price of the said international transactions. The TPO noted that the assessee was a subsidiary of TIBCO, US and was registered as 100% Export Oriented Unit (EOU) under the Software Technology Park of India (STPI) Scheme and had claimed tax holiday under section 10A of the Act. The assessee had entered into Software Research Development Services Agreement with TIBCO, US wherein the assessee was providing software research development services to TIBCO, US in accordance with design, production orders, plans, process specifications and production schedules provided to the assessee i.e. TIBCO, India by TIBCO, US. The TPO has noted that during the year under consideration, the assessee had entered into three kinds of services to its associate enterprises i.e. (i) provision of software research, development and support services of ₹ 45.02 crores, (ii) provision of marketing services to the extent of ₹ 6,77,76,671/- and (iii) external commercial borrowing was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that without prejudice to the above, the assessee in the fresh search also had not applied filters properly. He further noted that the assessee had preferred to select the comparables having lower operating margin rather than its functional similarity. The TPO noted that none of the companies selected in the fresh search were to be included in finalizing the list of comparables. The TPO thus, referred to the comments of assessee in respect of inclusion of 8 companies under para 16 and thereafter, dealt with each of them and held that the said companies were functionally different and hence, have to be excluded from the list of comparables. The TPO also noted the inconsistent approach of the assessee in selecting the comparables, wherein in the TP documentation, the assessee had submitted that it was captive service provider, however, it was consistently selecting comparables in product segment. In this regard, several companies were referred to and some more comparables were rejected by the TPO. The assessee also objected to the companies selected by the TPO in the show cause notice which have also been elaborately considered by the TPO. In the final analysis, the TPO selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces company i.e. the assessee. The DRP on examination of facts of the said concern found that the said company had worked not as the software product company but also as software service company. Referring to the Notes to Accounts and the segmental information available in this regard, KALS Information Systems Ltd. was held to be functionally comparable. The DRP admitted the plea of assessee in respect of certain concerns and rejected the plea of assessee in other concerns. 10. Both the assessee and the Revenue are in appeal before us in respect of selection / rejection of comparables. 11. The limited issue which was argued before us in the cross appeals filed by the assessee and the Revenue was against the inclusion / exclusion of certain comparables while benchmarking the international transactions both in IT sector and also in marketing support services. Admittedly, both these services provided by the assessee to its associate enterprises were independent and had to be benchmarked separately in order to work out the arm's length price of international transactions. The learned Authorized Representative for the assessee before us also pointed out that the issue of selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the PLI of comparables. As per the TPO, it was most appropriate to adopt the financial data of comparable concerns for the contemporaneous period for the purpose of comparability analysis. Though the assessee has objected to the said exercise of TPO by way of ground of appeal No.4, but during the course of hearing, the said ground of appeal has not been pressed and accordingly, the same is dismissed as not pressed. The TPO after considering the financial data of the comparable cases for the year under consideration selected the final set of comparables, which are as under:- Sr. No. Name of Company PLI-Unadjusted PLI-Adjusted 1 F C S Software Solutions Ltd. 48.38 40.15 2 Goldstone Technologies Ltd. 20.17 14.01 3 L G S Global Ltd. 11.95 7.46 4 Larsen Toubro Infotech Ltd. Telecom Segment 19.24 19.24(*) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63.49 55.88 Average 29.23 28.37 17. The PLI of comparable companies worked out to 28.37% as against 7.98% of the assessee and an adjustment on account of international transactions was worked out at ₹ 1,27,97,865/-. The addition was made to the stated value of international transactions in order to benchmark the arm's length price. The DRP reduced the addition to ₹ 84,85,743/-, against which both the assessee and Revenue are in appeal. 18. Specific arguments put before us at the time of hearing are as manifested in ground of appeal No.3 i.e. against inclusion / exclusion of the companies while benchmarking international transactions of provision of marketing and sales support services. At the time of hearing, the assessee has furnished voluminous Paper Book and referred to the material relating to various concerns which has been considered while disposing of the present appeal. 19. The learned Departmental Representative for the Revenue on the other hand, relied upon the orders of lower authorities. 20. By way of ground of appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pointed out that where the assessee was engaged in marketing support services and claims that Asian Exhibition and Conferences Ltd. had shown higher profit and hence not comparable. He stressed that where there is marketing support services, the margins could be higher or lower. Reliance placed upon by the learned Authorized Representative for the assessee on the decisions of entities engaged in the software services were held to be mis-placed as the margins were cost plus mark-up. He further stressed that the plea of assessee was that there were entry fees charges of ₹ 1.27 crores charged by the said concern, but it was not clear under what nomenclature the same is charged and it cannot be said to be an abnormal charge. He stressed that where the assessee himself has selected the said concern to be comparable in both the original and revised search and now the said concern was said to be not suitable since it was harmful to the PLI of assessee and the said plea of the assessee could not be accepted. 22. We have heard the rival contentions and perused the record. The first issue raised by the assessee is against exclusion of Asian Business Exhibition and Conferences Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.115/Chd/2009, relating to assessment year 2004-05, order dated 22.10.2009 for the proposition that the tax payer was not estopped from pointing out that a concern was wrongly taken as comparable. 25. The TPO in order to benchmark the segment of marketing support services undertaken by the assessee had selected Asian Business Exhibition and Conferences Ltd. The assessee also in the TP study report had included the said concern as comparable on the basis of average margins of preceding years. However, during TP proceedings, the TPO directed the assessee to apply the margins of instant assessment year and the assessee in this regard, furnished current margins of selected companies. In respect of Asian Business Exhibition and Conferences Ltd., it was pointed out by the assessee before the TPO and the DRP that the said concern was functionally not similar in view of revenue earned by the said concern during the year. Another point which is raised by the assessee is that similar concern i.e. Sporting and Outdoor Ad Agency Pvt. Ltd. was rejected by the TPO himself that the activities of the said concern were not comparable to the assessee. While selecting the comparable companies, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern is also to be excluded. In view of the admission of the learned Authorized Representative for the assessee, we uphold the order of TPO in excluding Cyber Media (India) Ltd. from the final set of comparables. 27. Another concern which the assessee was agitating to be included in the final set of comparables was Asian Industry Information Services Pvt. Ltd. However, the learned Authorized Representative for the assessee fairly pointed out that in case Asian Business Exhibition and Conferences Ltd. is excluded, the margins of Asian Industry Information Services Pvt. Ltd. is also to be excluded from the final set of comparables. Accordingly, we hold so. 28. The next set of concerns which the assessee wanted to be included in the final set of comparables was Crystal Hues Ltd., Hansa Vision Pvt. Ltd., Denave India Pvt. Ltd. and Sadhna Media Pvt. Ltd. The learned Authorized Representative for the assessee pointed out that during the TP proceedings, the annual reports of the said concerns were not furnished which are now available. However, the TPO rejected the said concerns as the financial data was not available. The plea of the assessee before the DRP was that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Authorized Representative for the assessee in this regard pointed out that there was no dispute on the factual premise. However, while allowing the deduction under section 10A of the Act, it is the profits derived from business which are to be seen and not the profits from export of the business. Reliance in this regard was placed on the ratio laid down by the Hon ble High Court of Karnataka in CIT Anr Vs. Motorola India Electronics (P) Ltd. (2014) 265 CTR 94 (Kar) and Universal Precision Screws Vs. ACIT (2015) 168 TTJ 84 (Del), wherein the deduction under section 10B of the Act was allowed on FDRs interest. It was pointed out by the learned Authorized Representative for the assessee that the provisions of section 10B of the Act are parametria with section 10A of the Act. 32. The learned Departmental Representative for the Revenue hand, stressed that the issue is decided against the assessee by the ratio laid down by the Hon ble High Court of Delhi in Thomson Press (India) Ltd. Vs. CIT (2015) 63 taxmann.com 119 (Delhi), wherein the deduction under section 10A of the Act was denied. 33. The learned Authorized Representative for the assessee in rejoinder pointed out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the FDR with the bank are kept for margin money or for availing any other credit facilities from the banks. In case the surplus funds are parked in FDRs and had no connection business undertaken by the assessee, the assessee will not be entitled to the said claim of deduction. Accordingly, we direct the Assessing Officer to apply the principle laid down by the Hon ble High Court of Karnataka in CIT Anr Vs. Motorola India Electronics (P) Ltd. (supra) and the Delhi Bench of Tribunal in Universal Precision Screws Vs. ACIT (supra) to decide the said issue. Hence, the issue is remitted back to the file of Assessing Officer. The ground of appeal No.6 is thus, allowed for statistical purposes. The grounds of appeal raised by the assessee are partly allowed. 35. Now, coming to the appeal filed by the Revenue. 36. The first issue raised by the Revenue is against the directions of DRP to re-compute the operating margins of Mindtree Ltd. The appeal filed by the Revenue is in respect of software services segment provided by the assessee to its associate enterprises. The Assessing Officer / TPO had made an adjustment of ₹ 2,67,41,659/-, which was deleted by the DRP. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital adjustment is to be provided. The DRP in view thereof, directed the TPO to exclude Infosys Ltd. being product company. We find no error in the order of Assessing Officer / DRP that a product company is not functionally comparable to the segment of provision of software services by the assessee to its associate enterprises. The Pune Bench of Tribunal in assessee s own case in assessment year 2009-10 had directed exclusion of the companies which were product companies. Vide para 14 of the order relating to assessment year 2009-10, the Tribunal had directed exclusion of FCS Software Ltd. on the premise that the said concern was a product company. 39. The Revenue is in appeal before us not only against exclusion of Infosys Ltd. but also against exclusion of FCS Software Ltd. We find no merit in the said plea of the Revenue as the product companies are functionally not comparable to the concerns engaged in providing software services to its associate enterprises. Accordingly, we uphold the order of DRP for excluding FCS Software Ltd. and Infosys Ltd. 40. Now, coming to second set of concerns i.e. E-Zest Solutions Ltd., Evoke Technologies Ltd. and E-Infochips Ltd. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le selecting the comparable companies. The DRP has given directions to the TPO to verify the claim made by the assessee vis- -vis RPT filter in respect of Crisil Ltd. and upholding the same, we dismiss the ground of appeal No.3 raised by the Revenue. Accordingly, the grounds of appeal raised by the Revenue are dismissed. 43. The assessee in CO No.04/PUN/2016 has raised the following grounds of objections: 1. On the facts and in the circumstances of the case and in law, the Learned Dispute Resolution Panel ('Ld. DRP') has erred in upholding the action of the Transfer Pricing Officer ('TPO') / Assessing Officer ('AO') in including the companies that are functionally dissimilar to that of the Respondent's Information Technology segment namely Acropetal Technologies Ltd. (IT segment), KALS Information Systems Ltd. (Application Software segment) and Thirdware Solutions Ltd. 2. On the facts and in the circumstances of the case and in law, the Ld. DRP has erred in stating that the Respondent's contentions, with respect to erroneous rejection of Persistent Systems Solutions Ltd. by the TPO / AO, are factually incorrect. In this connection, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem Ltd. and Thirdware Solution Ltd. as being comparable to the assessee. 11. We find that the Tribunal noted that the TPO had selected KALS Information System Ltd. and Thirdware Solution Ltd. as being comparable, whereas the case of assessee was that both the said concerns were functionally different. With regard to KALS Information System Ltd., it was pointed out that the said company was earning income from sale of application software and segmental information with respect to software services were available. In respect of Thirdware Solution Ltd., it was pointed out that the said concern was engaged in software development, trading of software licences and training implementation activities apart from software development. Another contention was raised that Thirdware Solution Ltd. was super profit earning company and was also engaged in the business of software licences and trading of implementation activities. The Tribunal taking note of the Special Bench decision in the case of Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT vide ITA No.7466/M/2012 in respect of super profits and inclusion of concern Thirdware Solution Ltd., held that the said concern was not compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is a software developer whereas Thirdware Solutions Ltd. is engaged in the business of sale-cum-licence of software which is available from the audited accounts, the details of which are as under : Schedule : Sales As on 31-03-2009 As on 31-03-2008 Sale of Licence 22,237,588 3,916,427 Software Services 89,177,023 76,724,371 Export from SEZ unit 478,572,420 263,971,033 Export from STPI unit 162,900,630 168,863,049 Revenue from Subscription 16,433,714 9,293,874 770,321,376 522,768,754 Apart from the above the company is also having dividend income, interest income and profit on sale of investment as well as premium of software contract totalling to ₹ 2,30,48,603/- which is as per Schedule- 13 other sources . From the various deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding company since KALS Information System Ltd. was engaged in selling of software products. Following the same parity of reasoning, we hold that KALS Information System Ltd. is not to be included in the final set of comparables in order to benchmark the international transactions. The Assessing Officer is accordingly, directed to re -compute the margins of final set of comparables. The grounds of appeal No.7 and 9 are thus, allowed. The grounds of appeal raised by the assessee are thus, partly allowed. 46. The assessee before us is also engaged in providing software development services to its associate enterprises as in the case of Approva Systems Pvt. Ltd. Vs. DCIT (supra) and following the same parity of reasoning, we hold that the said two concerns KALS Information Systems Ltd. and Thirdware Solutions Ltd. are to be excluded from the final list of comparables. Accordingly, we hold so. 47. Now, coming to the next concern i.e. Acropetal Technologies Ltd. Similar issue of exclusion of Acropetal Technologies Ltd. being engaged in design engineering activities, the learned Authorized Representative for the assessee pointed out that it was engaged in design engineering activi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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