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TMI Blog2015 (12) TMI 1759X X X X Extracts X X X X X X X X Extracts X X X X ..... . Deduction u/s.10A - adjustment of losses - Held that:- Losses of section 10A units have to be adjusted against taxable profits of other units after deduction under section 10A has been allowed in respect of each of the profitable unit under section 10A. Reducing the telecommunication expenditure from the export turnover of the eligible units, the while computing deduction under section 10A - Held that:- As decided in assessee's own case these expenses have been incurred for the purposes of the business of software development at the software units in India. It is that finding which the Assessing Officer was unable to controvert or unable to bring any contrary material to disprove the same. It is in that light that the Tribunal found that the Assessing Officer could not have insisted on the deduction. It is that exercise undertaken by the Assessing Officer which has not been upheld but rather disapproved by the Tribunal. This is a finding purely on the facts and pertaining to the business of the assessee. The facts pertaining to the assessee's business of software development, the charges and which are claimed to have incurred, are in relation to the business of software developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her corporate heads. 2. At the outset, the Ld. Counsel Shri M P Lohia submitted that, so far as ground no. 1 is concerned, the same is general in nature and ground no. 2, 3, 4 and 9 are not pressed accordingly, these grounds are treated as dismissed being not pressed. Effective issue raised vide ground no. 5 to 8 is on account of transfer pricing adjustment ₹ 149,22,84,130/-, which are being taken up first. 3. The brief facts qua the issue of transfer pricing adjustment are that assessee, Capgemini India Pvt. Ltd. is an Indian Company owned substantially by Capgemini US LLC, a company incorporated in USA. The assessee company is engaged in the business of providing software development & export services mainly to its Associated Enterprises (AEs) i.e. Capgemini Group Companies and third parties. The main service line of the assessee company includes, software technology services; IT outsourcing services; and customizes service software development services. During the relevant assessment year, the assessee has reported following international transactions with its AEs in the Form 3CEB:- Nature of International Transaction Amount(Rs) Method Applied Software Programming Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 6 Infosys Technologies Limited NC 7 K P I T Cummins Infosystems Limited (Consolidated) 12.36% 8 Lanco Global Systems Limited 26.26% 9 Larsen & Toubro Infotech Limited 17.54% 10 Maars Software International Limited (Segmental) 7.93% 11 Meistar Information Technologies Limited NC 12 Mindtree Limited (Segmental) 17.51% 13 Quintegra Solutions Limited 21.48% 14 R S Software (India) Limited 6.71% 15 S I P Technologies and Exports Limited -33.20% 16 Satyam Computers Services Limited NC 17 T V S Infotech Limited NC 18 V J I L Consulting Limited -6.06% 19 V M F Softech Limited 2.51% 20 Visualsoft Technologies Limited (Segmental) NA 21 Zylog Systems Limited 17.00% Arithmetic mean 10.39% Less : Marketing Adjustment 0.90% Less: Risk Adjustment 5.50% Adjustment Arithmetic Mean 2.99% However, the TPO rejected the assessee's transfer pricing documentation and the whole exercise of ALP determination by the assessee and carried out a fresh search of the comparables to determine the arm's length price (ALP) of the provision of software programming services to AE after detailed discussion. In the search process carried out by the TPO, he id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's contention that the companies having turnover of less than ₹ 100 crores should be removed and if such an exercise is done, then the set of 16 comparables as confirmed by the DRP would get reduced to 7 comparable companies, out of which 2 companies are common, that is, they were selected by the assessee, hence there is no dispute. These 7 companies with the operating margin are as under:- Sr. No. Name of the Company Operating margins on costs 1 Infosys Technologies Ltd 41.20% 2 Wipro Ltd (Wipro Technologies Segment) 30.56% 3 Ancient Technology (Holdings) Ltd (Earlier known as Flextronics Software Systems Ltd.) 7.03% 4 Mindtree Ltd. (Earlier Mindtree Consulting Ltd) 15.89% 5 Persistent Systems Ltd 28.87% 6 Sasken Communication Technologies Ltd (Software Services Segment) 13.15% 7 LGS Global Ltd (Formerly Lanco Global Systems Ltd) 26.53% Arithmetic Mean 23.32% 6. Mr. Lohia, submitted that if the lower turnover filter of ₹ 100 crores is accepted in view of Tribunal order, then, the assessee is only challenging the inclusion 2 comparables companies by the TPO, i.e., to exclude Infosys Technologies Ltd and Wipro Ltd. from comparable list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because Infosys is full risk bearing entrepreneurial entity and cannot be compared with interest mitigated captive unit. Thus, the Infosys should be removed from being comparable company. Catena of various Tribunal decision were also filed wherein the Infosys have not been held to be comparable with the captive software service provider companies. 9. Regarding Wipro Ltd also, he submitted that the said company should not be considered as a comparable mainly on the ground that : Firstly, the company is engaged in various services, other than software development services like BPO services, consumer products, software products etc. Secondly, segmental information is also not available in the public domain and whatever information which was made available by the Department that does not match with the revenue details of each stream of the income as provided in the Product Description Schedule of the Annual Report of the company. Further, the annual report of the company shows that, 68% of the revenue comprises of sale of products. Thus, this company cannot be compared with the assessee company. Lastly, this company like Infosys Technologies Ltd has significant intangibles and has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which the Tribunal has rejected the contentions of CG India Relevant extracts of Tribunal order 1 · Infosys and Wipro were selected as comparables by CG India in its own TP study · CG India has not raised any objections before the lower authorities (i.e. TPO/DRP) "We also note that Infosys and Wipro were the comparables selected by the assessee itself on the basis of its own transfer pricing study. The assessee was fully aware of its work profile, while selecting Infosys and Wipro as comparables. The assessee raised no plea either before the TPO or DRP for excluding these comparables though it had added some more comparables" (Refer para 5.3.8) • In this regard, it is submitted that Wipro Limited was not part of the comparables set considered by the Appellant in its transfer pricing report for AY 2008-09. • Further, while the Appellant has considered Infosys Technologies Limited as part of the comparables set in its transfer pricing report for assessment proceedings (refer para 5.3 on page 6 of the TPO order) 2 Infosys and Wipro were selected as comparables by CG India in its own TP study. "The assessee, therefore, cannot be permit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Assessee which has the role of a captive delivery centre and hence does not bear any risks. He, further submitted that, now there are umpteen number of decisions wherein it has been held that, Infosys and Wipro cannot be accepted as comparable companies with those of captive service provider company and finally, there is a decision of Delhi High Court in the case of Agnity India Technologies Private Limited (supra), wherein Delhi High Court has rejected the inclusion of Infosys with that of service provider unit. Thus, the Tribunal decision for AY 2007-08 should not be followed as far as inclusion of these two companies is concerned. 11. On the other hand, Ld. CIT DR, Mr. Chand, after explaining the entire facts submitted that, so far as inclusion of Aztecsoft Limited, there is no finding given by the DRP on assessee's objection and also there is no analysis of annual accounts by the authorities below, therefore, this matter should be restored back to the file/stage of DRP to analyse the contention of the assessee and in case it is found that its export turnover is more than 25%, then same can be included in the comparability list. 12. As regards the inclusion of Infosys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es i.e. Capgemini Group companies and very minor portion of sales is also made to third parties. The assessee's PLI has been worked out by using operating profit/ operating cost which has been worked out at 12.79%. The TPO had rejected the entire transfer pricing documentation and comparability analysis carried on by the assessee and also the most of the comparables selected by the assessee. He had finally chosen 17 comparables which also happens to include 4 comparables selected by the assessee. The average arithmetic means of these comparables were worked out to 23.79% and accordingly, an adjustment on account of PLI difference of 11% was made which had led to transfer pricing adjustment of ₹ 152 crores. From the stage of the DRP, one comparable was removed and accordingly, the average arithmetic mean of 16 comparables was arrived at 23.59% and consequently adjustment has been reduced to approximately ₹ 149.25 crores. 15. Before us, one of the main contentions raised by the Ld. Counsel is that, in the earlier year (AY 2007-08) as well as in the subsequent year (AY 2009-10), the Tribunal has held that lower turnover filter for selecting the comparables companies shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e. Infosys Technologies Ltd. and Wipro Ltd. (segment). However, we shall deal first with the one comparable company which has been contended for inclusion by the assessee, namely Aztecsoft Limited which was a comparable selected by the assessee and rejected by the TPO. The TPO has rejected the said comparable on the ground that it fails on the export earning filter of 25%. The assessee's objection before the DRP has been that, it has export earnings at 89% and, therefore, it could not have been rejected on the basis of export earning filter of 25% applied by the TPO. However, the DRP has not given its finding on this objection/submission of the assessee. As pointed out by the Ld. Counsel, the annual report of the company which has been placed in the paper book at page 422, categorically mentions that during the financial year 2007-08, the company's revenue derived from the exports were at 89%. Otherwise there is no other point of dispute between the assessee and the revenue on this comparable. In view of this fact, the reason for rejecting the comparable by the TPO gets vitiated and has no legs to stand. Accordingly, we hold that such a comparable cannot be rejected on the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing documentation maintained by the assessee and, therefore, now it cannot be held that assessee is precluded from raising the objection when TPO has selected these comparables for comparability analysis. Another main reason given by the Tribunal was that assessee had strongly contended that these companies have a very high turnover as compared to the assessee, to which Tribunal held that high turnover cannot be the criteria for rejecting the said comparables. 19. As regards the first reason that assessee itself has included these comparables in the TP study report and, therefore, assessee is precluded from objecting the same, we have already observed above that these facts are not applicable in this year because, in case of Wipro, the assessee has not included this comparable in its TP Study report and in case of Infosys, assessee at very first instance has raised the objection for excluding the said comparable, more so, when assessee's entire TP documentation have been rejected by the TPO, which assessee had not raised the objection till the stage of Tribunal in the earlier year. In the case of TATA Solar Power Systems Pvt. Ltd., reported in (2014) 62 SOT 63(Mum), this Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept the same. There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee. The TPO is required under law to analyze every comparables and then only determine the correct ALP based on proper comparability analysis. Hence, we hold that assessee is not precluded from raising objections for exclusion of these two comparables on the ground that they were in the earlier year or in this year have been chosen by the assessee in TP study, more so in the circumstances when the assessee's TP study documentation has been rejected and assessee has duly objected at the initial stage. 20. Now, coming to the second reason of the Tribunal that the higher turnover will not make a difference and cannot be the criteria for rejecting the comparable on a higher turnover basis. So far as in principle this reason is concerned we do not wish to take a contrary stand and we agree with the observation of the Tribunal, however, the high turnover filter alone is not the guiding factor in most of the cases, the qualitative criteria approach for analyzing the comparables has to be seen. Such a qualitative approach has to be examined o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's profit margin. Though we are not applying any upper turnover filter but on qualitative level, we are of the opinion that these companies having huge presence of brand value and intangible R&D activities etc which cannot be chosen for comparability analysis with a captive service provider company like the assessee. Thus, on these reasons, we are deviating from the conclusion reached by the Tribunal, because the material facts as highlighted by the Tribunal is absent in the present year. In view of our above discussion, we hold that, these two companies are to be removed from the final list of comparables. Thus, in all, there would be 6 comparable companies in the final stage of comparables which are as under:- Sr. No. Name of the company Operating margins on costs 1 Aztecsoft Limited 5.66% 2 Aricent Technology (Holdings) Ltd. (Earlier know as Flextronics Software Systems Ltd) 7.03% 3 Mindtree Ltd. (Earlier Mindtree Consulting Ltd.) 15.89% 4 Persistent Systems Ltd 28.87% 5 Sasken Communication Technologies Ltd (Software Services Segment) 13.15% 6 LGS Global Ltd. (Formerly Lanco Global Systems Ltd) 26.53% Arithmetic Mean 16.19% The adjustment will be th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computer software while computing the total income. Further, it was clarified by the amended provisions of section 10A w.e.f. 1.4.2001 that the section 10A provides for a "deduction" of profits derived by the eligible undertaking and no longer provide for an "exemption". It was also clarified by the CBDT circular no.794 dated 9.8.2000 that the deduction under section 10A is in respect of a particular undertaking and not from the total income. There is no provision in section 10A for setting off the loss of other eligible undertakings before arriving at the deduction under section 10A. Prior to Assessment Year 2001-2002, when section 10A was an exemption provision, section 10A(6) provided restriction on set-off and carry forward of business loss and unabsorbed depreciation. However, subsequently, section 10A(6) was amended by Finance Act, 2003, with effect from Assessment Year 2001-2002 and such restriction was withdrawn, which amendment was consistent with the new scheme of section 10A which is a deduction provision and not an exemption provision for Assessment Year 2001-2002. In view of the above amendment, losses of section 10A units have to be adjusted agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in respect of each eligible unit. Same view has been taken by the Hon'ble High Court of Bombay in case of Hindustan Unilever Ltd. vs. Dy. CIT (supra) in which it has held that deduction has to be allowed in respect of three eligible units and loss of the fourth s. 10A unit has to be set off against the normal business income. The Tribunal in case of Honeywell International (India) (P) ltd. vs Dy. CIT (supra) has also followed the same view. Therefore respectfully following the above judgments, the order of the Addl. CIT cannot be sustained. We accordingly set aside the order of the Addl. CIT and allow the claim of the assessee". 25. This finding has been affirmed by the Hon'ble Bombay High Court judgment and order dated 30th April, 2014. Wherein, the High Court has held that, this issue is covered by the decision of Hon'ble Bombay High Court in the case of Hindustan Unilever Ltd. wherein it was held as under :- " ... the first ground relates to the adjustment contemplated by section 10A of the Income Tax Acts 1961. The Tribunal has directed that loss of one unit can he adjusted against the profit of another unit but after allowance of deduction under section 10A of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's case for AY 2006-07 which for the sake of ready reference is reproduced herein below :- "These expenses have been incurred for the purposes of the business of software development at the software units in India. It is that finding which the Assessing Officer was unable to controvert or unable to bring any contrary material to disprove the same. It is in that light that the Tribunal found that the Assessing Officer could not have insisted on the deduction. It is that exercise undertaken by the Assessing Officer which has not been upheld but rather disapproved by the Tribunal. This is a finding purely on the facts and pertaining to the business of the assessee. The facts pertaining to the assessee's business of software development, the charges and which are claimed to have incurred, are in relation to the business of software development within India. They could not be said to be costs deductible from export turnover for the purposes of Section 10A of the Act. In such circumstances, we are of the opinion that any wider controversy or larger question does not require any answer. We can leave that aspect open for the decision in an appropriate case. In the facts and circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance of interest amounting to ₹ 1,86,089/- and expenses amounting to ₹ 8,62,370/- u/s 14A of the Act, as expenditure incurred for earning dividend income. 33. The relevant facts are that, the assessee has earned dividend income of ₹ 2,83,000/- from units of mutual fund, which were claimed as exempt. The assessee's case had been that, it had made investment out of its surplus funds which was at ₹ 244 crores in the beginning of the year against which it has invested only ₹ 17 crores, therefore, no interest expenses can be attributed to the earning of exempt income. For the purpose of indirect expenses, the assessee submitted that has calculated the time taken by one of its employee who was an Accountant Manager and attributed the same for managing the investments, accordingly, the assessee offered sum of ₹ 50,000/- as disallowance u/s 14A. 34. Before us, the Ld. Counsel submitted that Firstly, disallowance u/s 14A will not be applicable on shares held for strategic investments or investment made in subsidiaries, as the assessee has made the investment in shares of subsidiaries; Secondly, only investment from which exempt income has been earned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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