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TMI Blog2018 (5) TMI 1785X X X X Extracts X X X X X X X X Extracts X X X X ..... at:- In the case of Commissioner of Income Tax Vs. Thyssen Krupp Industries India (P.) Ltd. [2015 (12) TMI 1076 - BOMBAY HIGH COURT] affirming the view of Tribunal on this issue held that the adjustment which is mandated in terms of Chapter X is only in respect of international transaction and not transactions entered into by assessee with independent unrelated third parties. The adjustment in respect of international transactions should be restricted to international transactions and not to the transactions entered into with independent parties. AR has pointed that the CIT(Appeals) has accepted this proposition in assessment years 2002-03 and 2003-04 and the Department did not file any appeal against the order of Commissioner of Income Tax (Appeals) on this issue. This fact has not been rebutted by the DR. Thus, in view of the fact that this issue has been settled by the Jurisdictional High Court we find merit in the ground raised by the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee: 1.1] The assessee company is engaged in software development business. For this year, the assessee company had computed the book profit as per section 115JB at ₹ 1,00,54,626/-. In the asst. order, the learned A.O. has computed the book profit at ₹ 8,40,79,191/-. As per section 115JB, the amount of brought forward loss or an unabsorbed depreciation whichever is less can be reduced for computing the book profit. In the case of the assessee company, upto 31st March 2006, the total brought forward loss was ₹ 18,10,90,000/- and the unabsorbed depreciation was ₹ 7,32,38,000/-. For F.Y. 2006-07, there was positive income of ₹ 6,87,59,000/- and the assessee had set off the brought forward loss/depreciation against the said amount. After setting off the amount against the income for F.Y. 2006- 07, the assessee recomputed its brought forward loss and unabsorbed depreciation at ₹ 11,23,31,000/- and ₹ 7,32,38,000/- respectively. In this year, there was positive income of ₹ 97,588,084/- and the assessee company set off an amount of ₹ 7,32,38,0001- against the positive income. 1.2] According to the assessee, as per section 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sorbed depreciation and not from the figure of brought forward loss. It is submitted that the method adopted by the A.O. is also not supported by any provision and hence, the same has to be discarded. The learned A.O. has referred to the AAR decision in the case of Rastriya Ispat Nigam Ltd. With due respect, the said decision is not binding and hence, the A.O. has erred in placing reliance on the same. 1.5] The assessee submits that the method adopted by it has been accepted by the A.O. for the asst. years 2006-07 and 2007-08. Thus, when the Id. A.O. has accepted the claim of the assessee company for two years then in that event, there is no reason to change the stand for the subsequent year. The assessee places reliance on the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang [193 ITR 321] wherein it has been held that if a view has been taken by the A.O. for the earlier years, then the same should be followed for the subsequent years as also when there is no change in facts. Accordingly, the assessee submits that the method adopted by it for determining the book profit should be accepted. 1.6] The assessee also places reliance on the decisions of ITAT, Pun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be reduced by an amount of ₹ 52,65,565/-. 2.3] The assessee further submits that the amount of MAT credit entitlement is also deductible from the book profit in terms of clause (i) of Explanation l. It is submitted that clause (i) states that any amount withdrawn from reserve or provision and credited to Profit and Loss account should be reduced while computing the book profit. Now, the MAT credit entitlement is reversal of income tax provision. Further, the income tax provision is not claimed as a deduction while computing book profit and therefore, the reversal of the same should also be reduced while computing the book profit." 5. On the other hand Shri Rajeev Kumar representing the Department vehemently defended the assessment order. The ld. DR submitted that identical issue had come up before the Authority for Advance Ruling (AAR) in the case of Rastriya Ispat Nigam Ltd. (supra). Once, the amount of brought forward loss or unabsorbed depreciation, whichever is less is deducted in computing book profit of a company, the amount of such loss or depreciation, whichever is so deducted to be carried forward to the subsequent years get reduced to the extent of such set off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd loss or unabsorbed depreciation. Therefore, the Legislature envisaged that while computing book profits for 115JB, reduction be allowed for the lower of carried forward losses or unabsorbed depreciation of the past years. Therefore, the determination of such losses or depreciation in the past years be also made on similar proposition, in the absence of any specific provision in the Statute. Even in the past years, the losses and depreciation to be carried forward be determined on the similar principles, i.e. after setting off of the lower of depreciation or losses. Apart from the fact that there is no specific provision in the Statute, we are also guided by the spirit of section 205(1)(b) of the Companies Act, 1956. In terms of section 205(1)(b) also, the surplus is to be determined after reducing lower of the loss or depreciation. Though strictly speaking the rule of section 205(1)(b) of the Companies Act is not applicable, inasmuch as for the purposes of the said section the expression ―loss" includes depreciation, whereas for the purposes of section 115JB it is specifically provided that for clause (iii) of Explanation 1 the expression ―loss" shall not include dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he next year has to be done after reducing from the current year's profit either the loss or depreciation, whichever is lower." 8. We find that the decision rendered by AAR in the case of Rastriya Ispat Nigam Ltd. (supra) and the order of Tribunal in the case of Kirloskar Ferrous Industries Ltd. (supra) are unanimous in the manner of computation of book profits, as provided in clause (iii) to Explanation 1 of section 115JB of the Act. We are of considered view that the issue raised in ground No. 1.1 of the appeal needs revisit to the file of Assessing Officer for fresh computation of book profits in line with the manner explained by the Co-ordinate Bench in the case of Kirloskar Ferrous Industries Ltd. (supra). 9. As regards MAT credit entitlement of ₹ 52,65,565/- is concerned, the contention of the assessee is that the same is arising on account of prepayment of Income Tax. The Hon‟ble Supreme Court of India in the case of Tulsyan NEC Ltd. (supra) has held as under : ―9. We have discussed hereinabove the scheme of s. 115JA(1) and s. 115JAA. The entire scheme of ss. 115JA(1) and 115JAA shows that if an assessee is entitled to a tax credit as a consequence of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dice to provisions of sub-s. (2), an intimation will be sent to the assessee specifying the amount so payable and such intimation shall be deemed to be a notice of demand under s. 156 and all the provisions of the Act shall apply thereto. This section itself makes it clear that whilst the AO determines the tax payable he has to give credit for all taxes paid either by way of deduction at source, advance tax, self-assessment tax or tax paid otherwise which would include or which cannot exclude tax credit under s. 115JAA(1). However, the question before us is of priority of adjustment for the MAT credit. In this connection, it is important to bear in mind that the credit allowed is the excess of the normal tax liability over MAT liability in the subsequent years. In this connection the following illustration on MAT credit be seen : Particulars Amount (Rs.) Year 1 115JB liability 1,600 Normal tax liability 400 Credit which can be carried forward-I 1200 Year 2 115JB liability (A) 600 Normal tax liability (B) 1400 Tax liability = (B) (since B is higher than A) 1400 MAT credit available for set off in year 2 [(A)-(B)]-II 800 Net tax liability for year 2 (B-II) 600 MAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es. 2.1] The learned DRP/A.O. erred in rejecting the CUP method as the most appropriate method in respect of software services provided to Dimension Data Management Services (Pty) Ltd., Data Craft Asia and Dimension Data Advanced Infrastructure Ltd. without appreciating that the said method was the most appropriate method for determining the ALP. 2.2] The learned DRP / A.O. erred in rejecting the various companies considered as comparable entities by the assessee company while determining the ALP in respect of the provision of software development services without appreciating that the companies selected by the assessee were comparable as per the FAR analysis and hence, there was no reason to reject them. 2.3] The learned DRP / A.O. erred in including various companies as comparable with the appellant without appreciating that the said companies were not comparable with the appellant company and hence, the same ought to be excluded while determining the final set of comparables. 2.4] The learned DRP / A.O. erred in rejecting the contention of the assessee to exclude the foreign exchange gain/loss while computing the operating margin of the assessee company and the comparable en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for this year was 12.90%. Accordingly, it was contended that the transactions entered into with the AEs were at ALP. 3.4] The learned TPO rejected the CUP Method for determining the ALP in respect of the transactions carried out with Dimension Data Management Services (PTY) Ltd., Data Craft Asia and Dimension Data Advanced Infrastructure Ltd. As regards, the applicability of TNMM, the TPO accepted that TNMM is the most appropriate method for determining the ALP. The TPO rejected various comparables selected by the assessee and introduced some new comparables and thereby arrived at a list of 10 companies for determining the ALP. 3.5] The assessee before the DRP objected to the action of the learned TPO in rejecting the comparables selected by the assessee and also inclusion of certain fresh comparables. The learned DRP in its order directed the A.O. to exclude FCS Software Solutions Ltd. as a comparable and to include PSI Data Systems Ltd. and Accel Transmatic Ltd. as comparable entities. Thus, after the order of the DRP, the A.O. has finally selected 11 companies which are as under- Sr. No. Name of the companies Operating margin Operating margin after working capital adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompilation. c. Similar view has also been taken in the case of John Deere India Pvt. Ltd. [ITA No. 2236/Pnl2012 for A.Y. 2008-09. The copy of the said decision is given on pages 143 - 189 of legal compilation. The issue regarding exclusion of E- Zest is discussed in para 20.2 [pages 164 - 165 of the legal compilation]. d. Similar view has been taken by Hon'ble ITAT, Pune in the case of Emptoris Technologies Pvt. Ltd. which was also engaged in software development. The asst. year involved was also A.Y. 2008 - 09. (Refer para 12 & 14 of the said order, refer pages 202 - 208 of the legal compilation) 3 Helios & Matheson Information Tech. a. In the case of John Deere India Pvt. Ltd. [ITA No. 2236/PN/2012 for A.Y. 2008-09 it has been held that Helios cannot be compared with a software development company and is functionally not comparable. The copy of the said decision is given on pages 143 - 189 of legal compilation. The issue regarding exclusion of Helios is discussed in para 20.3 [pages 165 - 166 of the legal compilation]. b. Similar view has been taken in the case of PTC Software India Pvt. Ltd. for A.Y. 2008- 09 wherein it has been held that Helios IS functionally not comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Further, DRP has held that the turnover of the said company exceeds ₹ 200 Crs. [refer page 43 of the DRP's order] c. The assessee submits that Aztec is not III restructuring phase. This point is clarified in the submissions to DRP on pages 14 - 15. d. The balance sheet 'of Azte is enclosed on pages 449 - 528 and the P&L account is on page 503. There is no extraordinary item and hence, the rejection of the said company on this ground is totally incorrect. e. As regards, RPT filter, the assessee submits that while computing the percentage of RPT, the TPO and DRP are considering the related party revenue and expenditure in correct. The correct working by considering the revenue and expenses in numerator and denominator is enclosed on page 529 of the paper book 2. f. Accordingly, the RPT of Aztec is less than 25% and hence, the rejection of the said company is not justified. g. The turnover of Aztec is ₹ 225 Crs. while that of the assessee is ₹ 108 Crs. Hence, both the companies can be compared on turnover filter. h. ITAT, Pune in the case of John Deere India Pvt. Ltd. has held that Aztec Soft Ltd. is to be included as a comparable entity. Refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paras 30 - 33, pages 18 - 21 of the legal compilation. d. It has been held by Hon'ble ITAT that Thinksoft is functionally comparable and therefore, the rejection of the said company by the TPO is not correct. e. It is also to be noted that for A.Y. 2010 - 11, the learned TPO has considered Thinksoft as a comparable entity. The order passed by the TPO is given on pages 809 - 831 of the Paper Book. 3.9] Without prejudice, the assessee submits that the total software receipts from the AEs are to the tune of ₹ 32.56 Crs. The addition has been made by applying the operating margin to the entire turnover of the assessee. It is submitted that, if at all, any addition is to be made, it should be restricted to the turnover of AEs and not to the entire turnover. For this proposition, the assessee places reliance on the decision of Hon'ble Bombay H.C. in the case of Thyssen Krupp Industries India Pvt. Ltd. [381 ITR 4l3]. In this case, it has been held by Hon'ble H.C. that the adjustment if at all, is required to be made, the same should be restricted to International Transactions and not to the transactions entered into with independent parties. The also submits that simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e being outside the tolerance of turnover filter. The filters applied for selecting the comparables has to be followed strictly otherwise there would be no sanctity of the filters for selecting the comparables. Accordingly, Aztec Soft Ltd. has to be rejected from the list of comparables. (ii). SIP Technologies and Exports Ltd. - We find that the said company has been rejected on the ground that the company has incurred loss during the Financial Year 2007-08. The company has to be rejected as comparable if it is persistent loss making company. We find that there is no such observation by the authorities below that the said company is persistent loss making company. If a company has suffered loss only in one year it cannot be termed as persistent loss making company, hence, should not be rejected on such ground. The SIP Technologies and Exports Ltd. was rejected as a comparable in the case of John Deere India Pvt. Ltd. for the assessment year 2008-09 for similar reasons. The matter travelled to the Tribunal. The Tribunal in ITA No. 2236/PN/2012 decided on 18-11- 2015 directed the TPO/Assessing Officer to include the company as comparable by observing as under : ―21.2 SIP Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income Tax in ITA No. 2536/PN/2012 for assessment year 2008-09 decided on 11-02-2015 has held CG-VAK Software Exports Ltd. (Segmental) as good comparable as the company had suffered loss in only one financial year. The relevant extract of the findings of Tribunal on the issue of inclusion of CG-VAK Software Exports Ltd. (Segmental) are as under : ―29. We have carefully considered the rival submissions. In our considered opinion, the point sought to be made out by the TPO is quite misplaced having regard to the purpose and import of the comparability analysis of the international transaction being undertaken for determining its arm's length price. Ostensibly, the whole objective of the transfer pricing proceeding is that the contours of an un-controlled transaction shall reflect a measure of arm's length price of the tested international transaction. The uncontrolled transaction, if it reflects a loss, would not normally be excludible unless any peculiarity in such un-controlled transaction is brought out. For instance, the un-controlled transaction is of an entity which is consistently loss making or that the loss has arisen in the un-controlled transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's activities and that of Thinksfot Global Services Limited, that both are engaged in carrying out activities which are parts of the process of software development activities. It is quite justifiable to comprehend that the activity of verification of software and validation of software are activities which are part and parcel of the process of software development. In fact, before the DRP, assessee referred to the Wikipedia meaning of the expression 'Verification' and 'Validation' in the context of software. The expression 'Verification' was explained to be referring to the process of evaluating the software to determine whether the products of a given development phase specified the conditions imposed at the start of that phase. Similarly, the expression 'Validation' was explained to be the process of evaluating software during or at the end of the development process to determine whether it satisfies specified requirements. In our considered opinion, where it is admitted that the activity being performed by the assessee is also a part of process of software development for its associated enterprise, then the captioned activities being undertaken by Thinksoft Global Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny is not exclusively engaged in software development services. The TPO again included the company in the list of comparable entity. The Ld. Counsel in support of his submissions that, Bodhtree Consulting Ltd. is not a good comparable placed reliance on the decision in the case of Barclays Technology Centre India (P) Ltd. Vs. ACIT (supra). The Co-ordinate Bench of the Tribunal in the case of Barclays Technology Centre India (P) Ltd. Vs. ACIT (supra) rejected Bodhtree Consulting Ltd. as comparable by placing reliance on the decision of Bangalore Bench of the Tribunal in the case of M/s. Mindteck (India) Ltd. in I.T.(TP).A.No.70/Bang/2014 decided on 21-08-2014 in the case of NetHawk Networks India Pvt. Ltd. in ITA No. 7633/M/2012 decided on 06-11-2013 for the assessment year 2008-09. The relevant extract of the order of Tribunal is as under: ―20. The next point raised by the assessee is for exclusion of Bodhtree Consulting Ltd., from the final set of comparables. The main plea of the assessee is that the said concern is engaged in development and sale of software products and therefore it is not functionally comparable to the assessee. It is also pointed out that the said con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in rendering software development services. The relevant discussion in the case of NetHawk Networks India Pvt. Ltd. (supra) is as under : ―C. Bodhtree Consulting Limited 21. On this comparable, case of the assessee is that the company is not a good comparable in view of the Software Products produced by the company. As such, no segmental data is adequately available too. Accordingly, we dismiss the argument of the Ld. DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean. 22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed before us which would require us to deviate from the conclusion drawn by the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. (supra) in the context of the exclusion of Bodhtree Consulting Ltd. from the final set of comparables." Thus, in view of the detailed discussion in the aforesaid order, we are of the view that Bodhtree Consulting Ltd. is not functionally comparable to the services rendered by the assessee. The Ld. DR has not placed on record any material to distinguish the aforesaid decision. Accordingly, Bodhtree Consulting Ltd. has to be excluded from the final set of comparables." In the light of facts of the case and the decision of Co-ordinate Bench we direct the TPO/Assessing Officer to exclude Bodhtree Consulting Ltd. from the final list of comparables. ii. E-Zest Solutions Ltd. - The assessee has assailed the inclusion of the company on the ground of functional difference. We find that the Coordinate Bench of the Tribunal in the case of John Deere India Pvt. Ltd. (supra) has excluded the company from the final list of comparables on similar submissions. The relevant extract of the findings of Tribunal are as under : ―20.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware Solutions Ltd. (supra) we hold that E-Zest Solutions Limited is liable to be excluded from the list of comparables for the period under consideration. We hold so. Thus, on this aspect assessee succeeds." Thus, in view of aforesaid findings of the Co-ordinate Bench in respect of functional difference between the activities of E-Zest Solutions Ltd. and the companies engaged in software development activities (assessee being one of such software development companies), we are of the considered view that the said company has to be excluded from the list of comparables in the present case. Thus, in view of the facts of the case and the decision of Co-ordinate Bench we direct the TPO/Assessing Officer to exclude E-Zest Solutions Ltd. from the final list of comparables. iii. Helios & Matheson Information Tech. - The assessee has prayed for exclusion of said company on the ground of functional difference. We find that the Co-ordinate Bench of the Tribunal in the case of John Deere India Pvt. Ltd. (supra) has excluded the company from the final list of comparables on similar submissions. The relevant extract of the findings of Tribunal are as under : ―20.3 Helios & Matheson I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd any reason to take a different view. Accordingly, we direct the TPO/Assessing Officer to exclude the same from the list of comparables. No material has been placed before us by the Department to force us to take a different view. Thus, in view of the facts of the case and the decision of Co-ordinate Bench we direct the TPO/Assessing Officer to exclude Helios & Matheson Information Tech. from the final list of comparables. iv. Kals Information System - In respect of the said company the assessee has prayed for exclusion of said company on the ground of functional difference. We find that the Co-ordinate Bench of the Tribunal in the case of John Deere India Pvt. Ltd. (supra) has excluded the company from the final list of comparables on similar submissions. The relevant extract of the findings of Tribunal are as under : ―20.5 Kals Information System : The assessee has objected to inclusion of the said company in the list of comparable on the ground of difference in functionality. The Tribunal in assessee's own case for the assessment year 2007-08 excluded the said company from the list of comparables on account of functional difference. The relevant extract of the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F. Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., and Compucom Software Ltd., from the list of comparables because of different functions, we find merit in the submission of the Ld. Counsel for the assessee that the above two companies cannot be included in the list of comparables. We accordingly direct the TPO/AO to exclude Kals Information System Ltd., and Compucom Software Ltd., from the list of comparables." In the assessment year under consideration, no material change has been pointed out by the Revenue in the facts or functions/activities of the assessee. Therefore, for the similar reasons, we direct the TPO/Assessing Officer to exclude Kals Information System Ltd. from the list of comparables. Thus, in view of the facts of the case and the decision of Co-ordinate Bench we direct the TPO/Assessing Officer to exclude Kals Information System from the final list of comparables. v. Goldstone Technologies Ltd. - In respect of the said company the assessee has prayed for exclusion of said company on the ground of functional difference. We find that the Co-ordinate Bench of the Tribunal in the case of Emptoris Technologies India Pvt. Ltd. Vs. Dy. Commissioner of Income Tax (supra) has excluded the company from the final list ..... X X X X Extracts X X X X X X X X Extracts X X X X
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