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TMI Blog2016 (3) TMI 1300X X X X Extracts X X X X X X X X Extracts X X X X ..... ticulars Amount in Rs. Outcome of TP order Provision of SWD 323,49,75,252 Adjustment of Rs. 24,63,25,395/- Provision of ITeS 63,03,93,353 Adjustment of Rs. 4,03,38,142/- Reimbursement of expenses 7,70,20,731 Accepted to be at arm's length Management fee written back 5,50,16,833 Accepted to be at arm's length Interest on unsecured loan 16,78,381 Accepted to be at arm's length 3. In the TP study by the company in SWD division it reported 15.27% of OP/OC and reported income of Rs. 323.49 Crores was considered arm's length by selecting TNMM as most appropriate method, 17 comparable companies whose OP/OC was arrived at 13%. 4. In the study for ITES division, assessee reported 17.69% of OP/OC and reported income of Rs. 63.03 Crores was considered as Arm's Length in the TNMM method by selecting 14 comparables with a mean of 11%. 5. TPO rejected the study as assessee has used multiply year data and for other reasons. He adopted a different filters, selected databases and finally selected 11 companies with an arithmetic mean of 24.05% after working capital adjustment and proposed an adjustment of Rs. 24,63,25,398/- in SWD. Likewise, in ITES division, the TPO sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the above. CIT(A) direction that whatever is excluded from the export turnover should also be excluded from the total turnover is upheld. Revenue's grounds on this issue are accordingly dismissed. 9. Ground No. 4 and Ground No. 5 in Revenue's appeal are on the issue of adopting turnover filter by CIT(A). 9.1. After considering the rival contentions, we see no reason to interfere from the findings of Ld.CIT(A). The CIT(A) rightly held that the turnover of comparable companies ought to be within a range of Rs. 1 Crore to Rs. 2000 Crore in relation to the SWD segment of assessee as its turnover for the SWD segment for FY. 2008-09 was Rs. 323 Crores, and that, in relation to its ITeS segment, as its turnover was Rs. 63 Crores, only those companies whose turnovers fell within a range of Rs. 1 Crore to Rs. 200 Crores ought to be retained, by following this Tribunal's decision in the case of Genisys Integrating Systems India (P) Ltd., Vs. DCIT [15 ITR (Trib) 475], apart from other decision in Kodiak Networks Vs. ACIT [15 ITR (Trib) 610] and Trilogy E-Business Software India Pvt. Ltd., [23 ITR (Trib) 464], which are all binding on the CIT(A). There is no error in the order of the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O Systems (India) Private Ltd., in IT(TPA) No 271/Bang/2014 (3) 24/7 Customer Care Pvt. Ltd., in IT(TPA) No 227/Bang/2011. 11.2. The above three comparables were already considered and rejected in M/s. CISCO Systems (India) Private Ltd., in IT(TP)A No. 271/Bang/2014 dt. 14-08-2014 by the Co-ordinate Bench and the decision is as under: "26. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- "(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.1076/Bang/2011, order dated 29.3.2013". 11.3. Since the objections of assessee are similar and facts being same AO/TPO is directed to exclude the above three companies. 11.4. Assessee seeks to include two companies Thinksoft Global Services Private Limited ('Thinksoft' for short) and FCS Software Solutions Private Limited ('FCS Software' for short). The said two companies were initially proposed as comparables by the TPO in her show cause notice dt. 14-11- 2012 (page 789 of the Paper Book), but were subsequently not included as comparables by the TPO despite assessee having accepted the said companies as comparables. The TPO having accepted that the said companies are functionally similar to assessee, excluded them on the sole ground that when their respective working capital adjustment is coming to more than 4%. It is submitted that the ad hoc rejection of the said companies on the ground of working capital impact of more than 4% on profit has no basis in law and is, therefore, liable to be set aside as the said companies satisfied all the filters applied by the TPO and there having been no filter applied by the TPO to the above effect, their exclusion is unsustainable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded. 21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and Loss account of M/s. Thinksoft Global Solutions for the relevant previous year is placed at paper book page.247. Software service revenues of the said company came to Rs. 920921452/-. Other income of the said company came to Rs. 35,738,801/-. Break-up of the other income as given at schedule 10 placed at paper book page. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of decisions of Capital IQ in ITA No. 170/Hyd/2014 and other decisions. 12.2. Co-ordinate Bench at Hyderabad has already considered (one of us, AM is the author) the same comparables in the case of Capital IQ Information Systems (India) P. Ltd., in ITA No. 124/Hyd/2014 dt. 31-07- 2014 as under: i. Accentia Technologies Limited: 21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies & Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumstances and brand value. The same in these circumstances cannot be selected. It was submitted that assessee was in medical transcription services. 21.1. The Departmental Representative however, objected to the pleas of assessee stating that the extraordinary events occurred in earlier year and therefore, the same cannot be considered as having any impact in the year under consideration. 21.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses. The reason for which we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs. 3.00 crore, which is strictly inthe realm of the Translation segment, revenues from which are to the tune of Rs. 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incomparable on the alternative argument advanced by the ld. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27.76 lacs. We have discussed this aspect above in the context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company. 12.3. Respectfully following the above, we direct the TPO to exclude the above comparables and arrive at the addition, if any, on the basis of provisions of Section 92C. Ordered accordingly. Corporate Tax issues: 13. Assessee is aggrieved on treating the expenditure on software licenses as 'capital in nature' and not giving credit of TDS by the AO. Software Licenses : 14. Assessee had claimed a deduction of Rs. 3,02,80,510/- as expenses incurred towards purchase of licenses for computer software used primarily as application software for various projects undertaken by it. Assessee has treated the said expenses as revenue in nature and claimed deduction of the entire amount but the AO took the position that the expenses are capital in nature and therefore disallowed the entire expenses as capital expenditure. The assessee's arguments are that the software licenses procured by it are renewable year after year and the software itself is applied in projects undertaken by assessee and once the project is concluded there is no further use of the software. Assessee also submits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7/-. In this regard, the Ld Counsel placed reliance on the decision of Allahabad High Court in the case of Rakesh Kumar Gupta [TS-321-HC-2014 (ALL)], wherein it was held that the mismatch of Tax Deducted at Source (TDS), with the details shown in Form 26AS, is not attributable to the taxpayer, and the fault solely lies with the deductor. Further, the Allahabad High Court referred to the Delhi HC ruling in a PIL in the 'Court on its own motion' Vs. CIT [2013 (352 ITR 273)] gave directions. Pursuant to the Delhi High Court decision, the CDBT issued Instruction No. 5 of 2013, dated July 8, 2013, directing that where assessee approaches AO with requisite details and particulars in the form of TDS certificate as an evidence against any mismatch amount, AO sould verify whether or not the deductor had made TDS payment in the government account and, in the event, the payment had been made, credit of the same would be given to assessee. It is therefore prayed that the AO be directed to verify and allow the entire claim of TDS amounting to Rs. 2,61,44,238/- as claimed by the company in its return of income. 15.1. Since the issue is one of verification, we direct the AO to undertake the exer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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