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TMI Blog2018 (9) TMI 1088X X X X Extracts X X X X X X X X Extracts X X X X ..... These business promotion expenses were incurred wholly and exclusively for the purpose of business and were necessitated in view of commercial expediency and are earned year after year. Hence, it is correctly prayed that the same may be allowed as business expenses u/s 37 of the Act - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration the TP study made by the assessee in its economical analysis and discussing the various filters applicable to the facts of the case finally selected 17 comparables with the PLI of OP/TC of 25.44 as against PLI of 19.32% in respect of software development, 8% in respect of competency center and 7% in respect IT support services, and suggested an adjustment to the tune of ₹ 22,02,13,656/-. While doing so, learned TPO regarded the foreign exchange loss or gains as non operating item. 6. Basing on the report of the learned TPO, by draft assessment order, learned AO proposed addition of ₹ 22,02,13,656/- on account of the transfer pricing adjustment, ₹ 3,61,30,820/- on account of the amount treated by the assessee as advance billing and showing the same as part of the current liabilities and provisions and ₹ 1,73,97,240/- by disallowing the part of the business promotion expenses. 7. Assessee filed objections with the learned DRP. Learned DRP by way of directions dated 27.12.2013 gave relief to the assessee in part to the extent of deleting one comparable, namely, M/s Bodhtree Ltd. From the final list of comparables selected by the TPO and thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d consulting and income from the training and medical transcription is minimal, as such, CAT Technologies is primarily a software developer and a good comparable. 11. On this aspect, learned DRP, while endorsing the view taken by the learned TPO, retained this company as a good comparable. 12. It is argued on behalf of the assessee before us that the CAT Technologies derives income from training, software development and medical transcription and no segmental information is available. Further, it is submitted that during the year under consideration, this company had entered into the field of job placement portal and also plants to expand such operations. It is also submitted that the management has accepted that this company is well placed in the market as a leading HR BPO service provider. 13. Learned AR brought to our notice that FAR analysis was considered by a coordinate bench of this Tribunal in the case of Sun Life India Service Centre P. Ltd. Vs DCIT (ITA No.1489/Del/2014) for the Assessment year 200910 and it was held that this company is not a good comparable with the company dealing with the only software development and maintenance support services. Inasmuch as CAT T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sacted value at ₹ 1.75 crore, whose ALP has been disjointedly determined by the TPO. When we come back to the revenues of CAT Technologies Ltd., it is seen that the major component of ₹ 8.49 crore is on account of `Software development and consulting services'. Since the segment of the assessee under consideration is only `Software development and maintenance support services' independent of `Advisory services', it becomes manifest that a company rendering both the software development and also advisory services, cannot be considered as comparable on entity level with the assessee's separate segment of software development maintenance support services. Be that as it may, CAT Technologies Ltd., has also earned Medical transcription receipts of ₹ 83.74 lac and Training income of ₹ 2.44 lac, both of which have been combined with the income from Software development and consulting services. One cannot ascertain with precision the ITA No.1489/Del/2014 contribution made by the income from Medical transcription and Training to the overall profitability of CAT Technologies Ltd., so that the other income may be segregated. As such, we fail to comprehe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and training software development and consulting services and this should be treated as the only reportable segment. For these reasons, we find it unsafe to continue this company in the final list of comparables. We, therefore, direct the learned TPO to exclude this company from the list of comparables for benchmarking the international transaction. Infosys Technologies Ltd.: 17. Assessee argued before the learned TPO for exclusion of this company on the ground of high turnover. However, learned TPO recorded that in several decisions, the Tribunal accepted the high margins companies are also good comparables and he has referred to the decisions in SAP Labs, Zylog Systems Ltd., M/s BP India Services P. Ltd. Etc. He went by the analogy that when assesses are arguing and the department is accepting that the loss making companies are also good comparables, in such an event, why not the super normal profit companies. According to the learned TPO, excluding the extreme result case, there should either a defect in comparability or exceptional conditions faces by the comparables and in the absence of either, the company continues to be a good comparable. 18. Learned DRP held that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith. 21. Vide paras 17 to 20 in ITA No.5922/Del/2012 for the Asstt. Year 200809 in assessee's own case, a coordinate bench of this Tribunal recorded the facts and figures and for the purpose of clarity, we deem it necessary to extract the same: "17. The taxpayer sought to exclude Infosys from the final set of comparables on the grounds inter alia that Infosys is functionally dissimilar; it has huge sales/turnover of ₹ 15648 crores having substantial intangible assets incurring huge amount on R&D for developing new area of functions; it owns products/leverages on its premium banking solution 'Finacle'; and relied upon the cases of CIT vs. M/s. Agnity India Technologies Private Ltd. - (2013) 36 taxmann.com 289 (Delhi), Systech Integrators India (P.) Ltd. vs. ITO - 44 taxmann.com 324 (BanglaoreTrib.), FCG Software Services (India) P. Ltd. vs. ITO - 51 taxmann.com 75 (Bangalore - Trib.) and CIT II vs. Intoto Software India Pvt. Ltd. in ITA No.233 of 2014 (Hon'ble High Court of Andhra Pradesh). 18. Undisputedly, the taxpayer is a captive service provider and providing services as desired by its AE. However, on the other hand, page 130 of the Annual Report, availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on a minimum risk and only having turnover of ₹ 109 crores as against turnover of Infosys of ₹ 15648 crores. So, we order to exclude Infosys from the final set of comparables. 3K TECHNOLOGIES LTD. (3K)." 22. The above findings of fact could not be controverted by the Revenue with reference to any material to say that the turnover of Infosys Technologies is around ₹ 15,648 crore whereas the turnover of the assessee is around ₹ 109 crore as recorded in the immediately preceding assessment year. No change of facts is brought to our notice to take a different view. On consideration of the facts and figures involved in this matter, we are inclined to believe that Infosys Technologies is no match to the assessee with its huge turnover, R&D and other factors. While respectfully following the finding of the coordinate bench in assessee's own case for the Asstt. Year 2008-09, we hold that Infosys Technologies is not a good comparable to the assessee and is liable to be excluded. We, therefore, direct the learned TPO/AO to exclude this company from the final list of comparables for benchmarking the international transactions. Tata Elxsi: 23. In so far as this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umentation with cost effective product engineering services. Under the head "Visual Computing Labs" they deliver 3D computer graphics, animation and special effects in the pre production, production and post production of content for the film, television, gaming and advertising industry. It is also further stated that during the year VLC successfully completed first fully animated commercial film. 27. At page 26 of the annual report it stated that the business of Tata Elxsi involved in designing technology products including hardware, software across the product lifecycle in industries such as Automotive, consumer electronics, networking, semiconductor, storage and telecom. In the profit and loss account of the assessee for the year ended March 31, 2009, the sales and services are shown at ₹ 41,851 lacs and sales and support at page no.399 is shown at ₹ 2352.41 lacs. Item No.7 of the schedules to the financial statements show that income from sales of goods is recognized upon passage of risk and rewards of ownership to the goods. No segmental information is forthcoming. 28. In view of the above, we are convinced that Tata Elxsi is not a mere software developer and ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asstt. Year 2009-10 providing information on revenue and expenditure from software services and hence, segmental margin cannot be computed for benchmarking the international transaction of providing software development services with attendant ITSS. 34. Per contra, it is the submission of the learned DR that the Thirdware Solutions ltd. Is also involved in software development and other services but of course, there is revenue from sales also. He also relied upon the observations and findings of the authorities below in respect of this company. 35. We have gone through the record including the annual report of this company and find from page 318 that this company derives income of ₹ 77,03,21,375/- from sales whereas the other income is ₹ 2,30,48,603/- Schedule XII relates to sales shows that this company is deriving income of ₹ 2,32,37,588/- from sales of licences, ₹ 8,91,77,023/- from software services, ₹ 47,85,72,420/- from export of SEZ unit, ₹ 16,29,00,630/- from export from STPUI unit and a sum of ₹ 1,64,33,744/- from subscriptions. No segmental information is available. 36. On a careful consideration of the diversified functions p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r income arising out of foreign currency fluctuations are excluded from the calculation of "operating expense" and "operating income respectively. On this term, learned DRP held that the learned TPO was correct in excluding the forex item from the calculation of operating profit. 40. It is argued by the learned AR before us that while working out operating margin, amount of foreign exchange gain/loss is required to be considered as an item of operating revenue/cost both in case of assessee as well as comparables. The Special bench of the Tribunal in ACIT vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to fluctuations in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior to realization. Further, goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the entire amount is relatable to the exports. In fact it is only the translation of invoice value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that a similar issue has arisen and disposed of in favour of assessee's in the case of UGS India (P) Ltd. Vs ACIT and relied upon in assessee's own case for Asstt. Year 2007-08 and 2008-09. 45. On a perusal of the record and the decision of a coordinate bench in assessee's own case for Asstt. Year 2008-09, we found that in para 55 to 58, this issue was dealt and the Tribunal while placing reliance on the decisions of the coordinate benches in assessee's own case for earlier years more particularly in ITA Nos.584 & 585/Del/2006 and 322/Del/2007 answered the issue in favour of the assessee. This fact is not controverted by the learned DR. We, therefore, while respectfully following the decision of the coordinate benches in respect of earlier years hold and answer this issue in favour of the assessee. 46. Now coming to the addition of ₹ 1,73,97,240/- by disallowing the same from out of the business promotion expenses, it is the submission of the assessee that the details of business promotion and conference expenses were duly submitted before the ld.AO vide submission dated 13th March, 2013 placed at page 110-119 of the paper book-2. The relevant details are placed at pag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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