9911796707
TMI Blog2016 (6) TMI 1333X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is eligible for foreign tax credit and if the amount claimed by the assessee is correct, AO shall give such credit. Ground. is allowed for statistical purpose. X X X X Extracts X X X X X X X X Extracts X X X X ..... ces sector and providing captive service to its AE abroad. As per the Ld. AR, out of the very many comparables considered by the TPO, Megasoft Ltd (seg), Accel Transmatics Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, Flextronics Software Systems Ltd (seg), Helios & Matheson Information Technology Ltd, Infosys Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd, and Wipro Ltd, were to be excluded since these companies were found to be functionally different from a software development service provider, by a coordinate bench of this Tribunal in the case of assessee's own sister concern, viz., M/s. SAP Labs India P. Ltd v. DCIT [ITA No.1118/Bang/2011, dt.23.09.2015. As per the Ld. AR, the very same set of comparables were considered by the TPO in that case also, which was for the very same assessment year. Hence, the same exclusions sought by the assessee and given by the Tribunal in the said case could be considered here as well. 10. Continuing his arguments, Ld. AR submitted that M/s. Megasoft Ltd, one among the comparables was remitted back by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where also the profile of the concerned assessee was similar to the assessee here. At para 8 of the Tribunal order in the case of M/s. Hewlett- Packard (India) Globalsoft P. Ltd (supra), profile of the said assessee has been reproduced and such profile clearly shows that the said company was also rendering software development services to them. This decision relied was also for the very same assessment year. Hence, we are of the opinion that these decisions could be considered as a good precedence for adjudicating the exclusions sought by the assessee. What has been held by the coordinate bench at para 23 of its order dt.23.09.2015, in the case of M/s. Hewlett- Packard (India) Globalsoft P. Ltd (supra) is reproduced hereunder : 23. We have perused the orders and heard the rival contentions. In so far as Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd,, Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd (seg) and Wipro Ltd (seg) are concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 20. Respectfully following the decision of the Tribunal in similar set of facts, these companies are directed to be excluded from the list of comparables." ii) Avani Cimcon Technologies Ltd. 39. As far as this company is conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. iii) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- • In the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act." • As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard.' " 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. iv) E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q InformationSystems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the coordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. /TPO is accordingly directed. v) Helios & Matheson Information Technology Ltd & Kals Information Systems Ltd (seg) : 16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately ₹ 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions:- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly." 25. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. xiii) Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO's own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in ITA No. 5637/D/2011 149 agreement with ld. counsel for the assessee that this company cannot be included as a comparable in the set of comparables selected by ld. TPO on account of clear contradiction between contents of annual report and information obtained u/s 133(6). 27. Rule 10D(3) specifies the information and documents that are to be maintained by a person who is entering into international transactions. These are official publications, published accounts or those which are in public domain except for agreements and contracts to which assessee is privy. Once the annual report of a company is for a year different from the financial year ending 31st March, then without doubt, it will cease to be a good comparable, unless the information received in pursuance to a notice u/s.133(6) of the Act from such company, is reconciled with the figures available in such annual report. 28. In the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information Systems Ltd(seg), Lucid Software Ltd, Persistent Systems Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd and Wipro Ltd (seg) from the list of cmparables considered by the TPO. We also direct that Megasoft Ltd, shall be considered as a comparable only after effecting proper segmentation of its results as mentioned at para 15 above. TPO/AO is directed to rework the ALP of international transactions of the assessee accordingly. Needless to say that working capital adjustment has to be given to the assessee based on the work- out of such working capital, relating to the final set of comparables left in the list. 17. In the result grounds 3 to 5 and additional ground raised by the assessee are treated as partly allowed. 18. Vide its ground.6, grievance of the assessee is that its claim for deduction u/s.80JJAA of the Act, was not allowed by the lower authorities. 19. Facts apropos are that assessee had claimed deduction of ₹ 9,26,66,731/- u/s.80JJAA of the Act. Claim was supported with audit report in form 10DA. As per assessee, software engineers employed by them were workmen under Industrial Disputes Act, 1947. Claim was in respect of additional wages paid to 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2012]. According to him, it was unjust to deny the deduction for additional wages considering the engineers employed by assessee to be working in supervisory cadre. 23. Per contra, Ld. DR supported the orders of authorities below. 24. We have perused the orders and considered the rival contentions. The claim of assessee with regard to additional wages paid to new workman was denied for a reason that engineers who were newly employed by the assessee were not considered as workers by the lower authorities. However, in a similar situation in the case of Texas Instruments India P. Ltd, (supra), it was held by the coordinate bench at para 6 and 7 of its order, as under : 6. We have heard the rival submissions and carefully perused the records. Considering the factual position after referring to the various documents filed by the assessee, the learned CIT(A) held as under : "According to the AO if an employee or workman is getting a salary of more than ₹ 1,600 per month he is not covered by the definition of workman. However as per cl. (iv) of s. 2(s) of the Industrial. Disputes Act a worker, employed in supervisory capacity and getting a salary of more than ₹ 1,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who joined in the previous year relevant to the asst. yr. 2001-02 onwards only may be considered and in respect of the employees who joined in earlier years the appellant is not pressing for relief under s. 80JJAA. In the circumstances, the AO is directed to allow the relief under s. 80JJAA of ₹ 1,09,52,012 and ₹ 3,46,44,722 for asst. yrs. 2001-02 and 2002-03 respectively." 7. As stated earlier the assessee had filed the details of the software engineers employed during the years under consideration containing the names of the employees, designation and date of joining. Further, in the same list the details of total number of employees joined during both the assessment years, number of employees without supervisory roles, workmen joined, number of supervisors joined and workmen joined and relieved during the years under consideration. A cursory perusal of this list shows that the assessee had claimed deduction in respect of employees, who had joined as engineers in their respective field such as systems engineer, test engineer, software design engineer, IC design engineer, lead engineer etc. A cursory perusal of those lists establishes that the assessee had claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned, a look at subsection (1) of the said section is required, which is reproduced below : 80JJAA(1) : Where the gross total income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture of production of article or thing, there shall, subject to the conditions specified in sub-section (2)m be allowed a deduction of an amount equal to thirty per cent of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided. 27. A reading of the above sub-section would clearly show that the deduction is given on profits and gains derived from industrial undertaking engaged in manufacture of production of article or thing. It is only for quantification of the amount that 30% is applied. In our opinion the deduction is very much linked to the profits of the undertaking. We are therefore unable to accept this line of argument taken by the counsel. In the result, we hold that assessee is not eligible for deduction u/s.80JJAA of the Act, in respect of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as other business needs. AO also noted that funds acquired for purchase of plant and machinery could not be bifurcated between unit-1 and unit-2. As per the AO, common facilities were also housed in the corporate office. Thus according to him, apportionment of interest of ₹ 5,97,06,922/- entirely to unit-1 was incorrect. He therefore reallocated such interest in the proportion of the turnover of unit-1 and unit-2. Result was that from the profit of unit-2, where assessee was claiming deduction 10A of the Act, went down by ₹ 2,74,32,938/- whereas profit of unit-1 on which assessee was not claiming any deduction went up by a corresponding amount. Deduction u/s.10A of the Act was recomputed based on the above figures. 30. When a proposal on the above line was put before the assessee, it chose to move the DRP. Argument of the assessee before the DRP was that it had raised the loan facility of ₹ 69 crores on 31.07.2006 and this loan was entirely utilised for rolling over an earlier loan taken for construction of the campus where unit-1 was functioning. According to the assessee, reallocation made by the AO was not justified. Assessee also argued that its unit-2 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In such a situation, we do not find any reason to interfere with the orders of lower authorities in this regard. Ground 7 is dismissed. 36. Vide its grounds 8 and 9 assessee is aggrieved on deduction of its travelling expenditure, support expenses, telecommunication expenditure and other expenditure of ₹ 126,238,582/-, ₹ 27,71,10,751/-, 27,04,556/-, ₹ 29,000,627/- from export turnover while computing the deduction available to it u/s.10A of the Act. Alternative pleading taken by the assessee is that if these amounts are deducted from export turnover, it needs to be reduced from the total turnover also while computing the deduction u/s.10A of the Act. 37. We have heard the rival contentions on the above two grounds. As regards pleading of the assessee that the above expenditures ought not be deducted from the export turnover, we are unable to accede. This is because the definition of the term 'export turnover' in Explanation (iv) to Section 10A of the Act, does not give room for such an interpretation as sought by the assessee. However, in so far as its alternate ground that items which are deducted from export turnover have to be reduced from total turnover also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT v. LG Soft India India P. Ltd [ITA.623 & 847/Bang/2010, dt. 19.05.2010] was on different set of facts and not acceptable. They upheld the order of AO denying the deduction claimed u/s.10A of the Act, in respect of the Chandigarh unit. 41. Ld. AR strongly assailing the orders of lower authorities submitted that deduction u/s.10A of the Act was undertaking specific and not owner specific. According to him, Chandigarh unit came to the assessee through a slump sale was not disputed by any of the lower authorities. Ld. AR submitted that a slump sale could not be considered as a reconstruction of business, where there was transfer of plant and machinery. In this regard reliance was placed on the judgment of Hon'ble Bombay High Court in the case of CIT v. Sonata Software Ltd, [343 ITR 397]. Per contra Ld. DR supported the orders of the authorities below. 42. We have perused the orders and heard the rival contentions. It is not disputed that the Chandigarh unit came to the assessee through a slump sale. M/s. Virsa had given this undertaking to the assessee as a going concern. That such transaction was a slump sale has not been disputed by any of the lower authorities. It is also no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must be-and this is brought out by the section itself-of a 'business already in exist ence'. There must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. Thus, for instance, if the ownership of a business or an undertaking changes hands not ostensibly but in reality and effectively, that would not be reconstruction or if the very nature of the business is changed, that again would not be reconstruction. On the other hand, reorganization of the business on sounder lines or alter ations in the mode or method or scope of the activities of the business or in its personnel or infusion of new blood in the management or control of the business which may even be by some changes in the constitution of persons interested in the undertaking would certainly be no more than rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of new capital is imperative. 11. The Tribunal, in the present case, has come to the conclusion that where a running business is transferred lock, stock and barrel by one assessee to another assessee the principle of reconstruction, splitting up and transfer of plant and machinery cannot be applied. According to the Tribunal, the benefit of section 10A attaches to the undertaking and not to the assessee which owns the undertaking. The benefit of section 10A was held to have attached itself to the STP unit of the software division which was owned by IOCL till October 19, 1994, and it was owned by the assessee subsequent to that date. What is material, according to the Tribunal, is not who owns the undertaking but whether the undertaking is entitled to the benefit available under section 10A. As regards the issue of transfer by IOCL to the assessee, the Tribunal noted that section 10A(9) was substituted by the Finance Act, 2000, with effect from April 1, 2002. Section 10A(9) provided that where during any previous year the ownership or beneficial interest in an undertaking of the business is transferred by any means, the deduction under sub-section (1) shall not be allowed to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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