9911796707
TMI Blog2016 (6) TMI 1361X X X X Extracts X X X X X X X X Extracts X X X X ..... business circumstances of the assessee company were not normal and said company indeed passed through unusual or abnormal business circumstances. Under these circumstances, we do not find this company as a safe and reliable to be used as a comparable company. Sonata Software Ltd. related party transactions to sales ratio is more than 40% during the A.Y. 2009-10, but keeping in view request of Ld. CIT-DR and to meet ends of justice, we find it appropriate to send it back to the file of the AO/TPO to compute the same properly and exclude it from the list of comparables if ratio of RPT to Sales is found to be more than 25%. The assessee shall be free to raise any legal or factual issue with respect to this comparable. The AO/TPO shall give adequate opportunity of hearing to the assessee to submit requisite details and evidences and case laws in support of its claim, which shall be taken into consideration on objective basis before deciding this issue afresh. Working Capital Adjustment - MERCER CONSULTING (INDIA) PVT. LTD. VERSUS DCIT, CIRCLE-2, GURGAON [ 2014 (7) TMI 715 - ITAT DELHI] held that the issue of working capital would be relevant only when there is a situation of inventory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee provided other prescribed conditions are fulfilled. But there has been some confusion with regard to appreciation of factual evidences. It has been shown to us that complete evidences including agreement and other various evidences were available. But AO has mentioned in the assessment order that the agreement filed with the AO was not eligible and it was not properly stamped. No proper discussion has been made by the DRP also in its order. Under these circumstances, we find it appropriate to send this issue back to the file of the AO to enable him to make proper verification of facts and evidences to analyze the other prescribed conditions. The deduction cannot be denied merely on the ground that the unit was acquired under slump sale. The AO shall give adequate opportunity of hearing to the assessee before deciding this issue afresh. Thus, with these directions this issue is sent back to the file of the AO with the directions given above. Reducing foreign currency expenses only from export turnover and not from total turnover while calculating the amount of deduction u/s 10A in respect of the other units - HELD THAT:- Respectfully following the decision of the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of submission dated 1 November, 2012 (referred to in the TP Order). Accordingly, the adjustment in relation to notional interest on overdue receivables amounted to ₹ 2,63,31,853 instead of ₹ 1,08,69,820. 3. Ground No.3 - On the facts and circumstances of the case, the Hon'ble DRP erred in not directing the Learned AO/ TPO to grant working capital adjustment by making an incorrect observation that the Appellant did not claim the working capital adjustment in its TP study. The Appellant prays that the Learned AO/ TPO be directed to grant the working capital adjustment. DT Grounds: 4. Ground No. 4 - Disallowance of project risk expenses 4.1 On the facts and in the circumstances of the case and in law, the Learned AO has erred in disallowing an amount of ₹ 1,08,17,012 in respect of project risk expenses incurred by the Appellant pertaining to contract entered with HPCL. 4.2 Without prejudice to ground no. 4.1 above, the Company requests your Honour to direct the Learned AO to grant a deduction of the aforesaid expenses in the year of actual - payment/ settlement. In doing so, the Appellant requests your Honour that the expenses claimed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and circumstances of the case and in law, the Learned AO erred in denying the set-off of brought forward losses and unabsorbed depreciation of entity taken over i.e. Sema Software India Private Limited. Ground No. 8- Short credit of TDS, advance taxes and self assessment tax 8.1 On the facts and in the circumstances of the case, the Learned AO has erred granting short credit of TDS, advance tax and self assessment tax to the extent of ₹ 99,05,886, ₹ 82,00,000 and 15,79,545 respectively. Ground No.9- Excess levy of interest under section 234B and 234C of the Act 9.1On the facts and in the circumstances of the case, the Learned AO has erred in levying excess interest under section 234B and 234C of the Act. 10. Ground No. 10- Initiation of penalty proceedings 10.1 On the facts and in the circumstances of the case, the Learned AO has erred in proposing to initiate penalty under Section 271(1)(c) of the Act for various proposed additions/disallowances." 2. During the course of hearing, arguments were made by Shri Shri Kanchan Kaushal, Shri Dhanesh Bafna & Shri Ali Asgar Rampurwala, Authorised Representative (AR) on behalf of the Assessee and by Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of Accept-Reject Matrix of the comparables. Consequently, an adjustment of ₹ 17,08,627/- was proposed by the TPO. Thus, aggregate adjustment of ₹ 25,13,81,559/- (i.e. ₹ 24,96,72,932 + 17,08,627) was proposed by the TPO in its order. 4.2. Being aggrieved, the assessee had filed an objection before the DRP where no relief was given and order of the TPO was upheld. 4.3. Being aggrieved, the assessee filed an appeal before the Tribunal. 4.4. During the course of hearing before us, Ld. Counsel of the assessee submitted that with a view to reduce and narrow down the controversy, the assessee wishes to contest now only three comparables as were selected by the TPO and requests for exclusion of same, as per details given below: 1. Infosys Ltd.(40.49%) 2. Bodhtree Consulting Ltd. (61.38%) 3. Sonata Software Ltd. (29.77%) 4.5. It was submitted by the assessee that these three comparables cannot be included for benchmarking transactions of the assessee, in view of the detailed submissions made hereinafter and if these three comparables are excluded, then the assessee's case comes within the acceptable range of +/- 5% and that would obviate the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT 376 ITR 183. 5.2. We have gone through the orders of the lower authorities and submissions made by both the sides before us. The undisputed facts before us are that during the year under consideration turnover of the assessee of software development segment was ₹ 423.71 crores and SIPL segment was ₹ 2.10 crores as against turnover of ₹ 20,264 crores of the Infosys Ltd., which is more than 45 times of the turnover of the assessee company. Further, expenditure incurred on brand building, advertising/sales promotion etc. was to the tune of ₹ 0.46 crores by the assessee company as against ₹ 933 crores by Infosys Ltd. Further, it is noted that the assessee company is operating at minimal risk basis. On the other hand, Infosys is a market leader and there is huge brand value associated with it. It has been further brought to our notice that the assessee company is merely captive software development service provider, whereas Infosys is running its business as full-fledged entrepreneur company. It is noted by us on the basis of annual report of Infosys that it provides end to end business solution that span entire software like cycle encompassing techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd. Agnity India Risk Profile Operate as fullfledged risk taking entrepreneurs Operate at minimal risks as the 100% services are provided to AEs Nature of Services Diversified-consulting, application Contract Software design, development, re-engineering Development Services and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book) Revenue ₹ 9, 028 Crores ₹ 16.09 Crores Ownership of Develops/owns proprietary products branded/proprietary like Finacle, Infosys Actice Desk, products Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite "Finacle‟) Onsite Vs. Offshore -As much as half of the software The appellant provides only development services rendered by offshore services (i.e., Infosys are onsite (i.e., services remotely from India) performed at the customer‟s location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. Expenditure on ₹ 61 Crores Rs. Nil (as the 100% Advertisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are mentioned in para 5 of the impugned order. 9. In view of the aforesaid position, we do not think that any substantial question of law arises for consideration. The appeal is dismissed." 5.4. Similarly, in the case of OSI Systems Pvt. Ltd. (supra), the Hyderabad Bench had taken a similar view and relevant observations of the Bench are reproduced hereunder: "26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presentative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee as brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy EBusiness Software India Pvt. Ltd. (supra) for Assessment Year 2007- 08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the breakup of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agnity India Technologies Private Limited' (ITA No.3856/Delhi/2010), wherein it was held that Infosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, we hold that the Infosys cannot be taken as a comparable for determining the arms length price in the case of the assessee. 5.6. It is further noted by us that similar view has been taken in plethora of other judgments and therefore, keeping in view facts of this case and respectfully following these judgments, we find that Infosys Ltd. should not be considered as part of comparables. It is further noted by us that case laws relied upon by the Ld. CIT-DR are not applicable on the facts of the case before us. Thus, taking into account all the facts and circumstances of the case, we direct the TPO to exclude Infosys Ltd. form the list of comparables. 6. Bodhtree Consulting Ltd. Background of this comparable is that though the assessee had originally selected (included) it in the Transfer Pricing Study, but it was subsequently co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee himself and therefore, now at this stage the assessee cannot itself take a U-turn and make out a distinction between the assessee and said comparable. In response to the judgments quoted by the Ld. Counsel in his support, it was stated by Ld. CIT-DR that there cannot be an absolute and open ended law that assessee can include or exclude any comparable at any stage. 6.4. We have carefully gone through the submissions of the assessee as well as Ld. CIT-DR. It is noted that admittedly, this comparable was included by the assessee itself in it's list of comparables. But the assessee objected to for inclusion of the same before the Dispute Resolution Penal (DRP). It was shown to the DRP that the said company was a product company and there was huge fluctuation in the margin trend of the said company showing that the said company was under unusual business circumstances. It is noted by us that claim of the assessee was rejected by the DRP without verifying the substance in the arguments of the assessee. 6.5. We have gone through the margin trend of the said company and find the same to be highly fluctuating. For the sake of ready reference, the margin trend of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company." 6.7. It is thus noted from the above that Hon'ble Hyderabad Bench excluded this comparable on this ground also that it was a software prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany as not comparable with the assessee company and the same is directed to be excluded. 7. Sonata Software Ltd. It has been submitted by the Ld. Counsel that in the case of this company related party transactions are to the tune of ₹ 50.38% and to show this fact, our attention was drawn upon the financial statements of the said company. 7.1. Per contra Ld. CIT-DR submitted that requisite working in this regard is not available here, and thus without verifying the facts no proper decision can be taken. 7.2. We have gone through the orders of the lower authorities and facts made available before us. It is noted from the order of the DRP that this contention was made by the assessee before the DRP also, which was dismissed on the ground that the assessee was not able to demonstrate the basis of computing 50.38%. The DRP made its own computation and observed that RPT were to the tune of 16% only. It is stated by Ld Counsel that calculations done by the DRP were not confronted to the assessee and clarifications the assessee were not obtained by the DRP. Ld. Counsel has vehemently contended before us that the DRP has misunderstood the facts and made wrong computation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Consulting India Ltd. vs. DCIT (ITA No.966/Del/2014 for A.Y. 2009-10 order dated 06.09.2014 observed with regard to granting of working adjustment as under: "16.1. The next issue raised by the ld. AR is against nongranting of working capital adjustment claimed by the assessee for the first time before the TPO. The assessee requested the TPO to grant working capital adjustment. The assessee's claim was jettisoned on the ground that the assessee failed to demonstrate that there was a difference in the levels of working capital employed by it vis-a-vis the comparables. The TPO further observed that : "The claim of working capital adjustment is not a matter of right." He further went on to add that the issue of working capital can be relevant when there is a situation of inventory remaining tied up or receivables being held up and such situation will not be relevant to the service industry. That is how the assessee's contention on this issue was repelled. The DRP also followed the suit by noticing that the working capital adjustment is difficult to apply due to the lack of accurate and reliable data. It also held that the issue of working capital would be relevant only when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about the period of delay and as per the AO the assessee did not provide the necessary information, that as per the direction of the AO the assessee had calculated the interest amount for the delayed receipts from its AEs. In our opinion, the transaction in question is an international transaction and not a result of a transaction as argued by the AR. The assessee had provided specific services to its AE.s. therefore the series of events cannot be termed a result of international transaction. Once it has been decided that issue before us is a Transfer Pricing issue then the value of the transaction has to be determined. It is a case where the TPO has relied upon on the agreement entered into by the assessee with its AE and has treated it as a Benchmark. We find that no independent source was searched or relied upon by the him. It is a fact that the agreements with the third parties did not contain any clause for charging interest for delayed payment. Thus, the matter has its own peculiarities. The assessee has entered in to agreement with the AE.s. and value of the transaction will have to be decided. The arguments of factoring of delayed payment in the value of service cannot be b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gued with respect to these grounds and therefore, grounds Nos. 4.3 to 4.6 are dismissed. 11.3. With regard to Ground No.4.1 and 4.2 wherein the assessee has contested this issue of expenses with regard to HPCL, it is noted that similar issue has arisen before the Tribunal in A.Y. 2007-08 wherein the Tribunal had partly deleted the addition and partly confirmed. We find it appropriate to send this issue back to the file of the AO to follow the order of Tribunal for A.Y. 2007-08 for deciding this issue afresh. The AO shall give adequate opportunity of hearing to the assessee to file requisite details and documentary evidences. Thus, grounds nos. 4.1 & 4.2 are allowed for statistical purposes in terms of our direction as given above and ground Nos. 4.3 to 4.6 are dismissed as not pressed. 12. Ground No.5: This ground deals with the issue of denial of deduction u/s 10A amounting to ₹ 1,97,92,908/- in respect of Bangalore unit acquired on slump sale. In the assessment order, the AO denied the benefit of deduction relying upon the assessment order for the preceding years i.e. A.Y. 2008-09 on the ground that the said unit was not a newly established undertaking and that it was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders of the lower authorities as well as submissions made by both the sides before us. In our view, the relationship between the undertaking and the deduction can be compared with the relationship between the mother and baby that is to say that 'wherever mother goesthe baby follows'. In other words, the benefit of deduction is available to the undertaking if the undertaking is taken over by another assessee with all the assets and liabilities and its business remains the same. The benefit of deduction allowable to the undertaking for the remaining period would be allowable to the person who has acquired the undertaking, provided other prescribed conditions are also fulfilled. In this regard, it has been clarified by the board in its circular dated 17.01.2013 which has been relied upon by the Ld. Counsel before us. The relevant portion of the said circular is reproduced herein for the sake of ready reference: "(iv)WHETHER TAX BENEFIT UNDER SECTION 10A, 10AA, AND 10B WOULD CONTINUE TO REMAIN AVAILABLE IN CASE OF SLUMP SALE OF A UNIT/UNDERTAKING. The vital factor in determining the above issue would be facts such as how a slump sale is made and what is its nature. It will also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 10A(9) were omitted by the Finance Act 2003 with effect from 1 April 2004). 12. The judgment of the Division Bench of this Court in Gaekwar Foam explains that the concept of a reconstruction of a business implies that the original business is not to cease functioning and its identity is not lost. Reconstruction is of a business already in existence and there must be a continuation of the activities and business of the same industrial undertaking. Where the ownership of a business or undertaking changes hands that would not be regarded as reconstruction. This judgment has specifically been approved by the Supreme Court in itxal-311-2004 Textile Machinery Corporation (Supra). As regards the splitting up of a business, the relevant test is whether an undertaking is formed by splitting up of a business already in existence. Unless the formation of the undertaking takes place by the splitting up of a business already in existence, the negative prohibition would not be attracted. In the present case, the entire business of the software undertaking was transferred to the Assessee. The undertaking of the Assessee was not formed by the splitting up of the business. 13. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee as to why the expenses incurred in foreign exchange in providing technical services in respect of Akriti Soft Tech unit should not be excluded for export turnover. The assessee relied upon certain cases and submitted that if expenses were to be reduced from export turn over then the same should be reduced from total turnover as well. However, the AO did not agree with the assessee and recomputed the exemption u/s.10A of the Act. 5.1. In the appellate proceedings the assessee brought to the attention of the FAA, the judgment delivered by the Tribunal for the AY.2002-03 and other cases. Referring to the judgment of the Tribunal for the AY 04-05 in assessee's own case, the FAA held that expenses incurred in foreign exchange towards technical services provided outside India amounting to ₹ 6.65cr from export turnover alone was not as per law, that same had also to be reduced from total turnover. 5.2. During the course of hearing before us,the DR left the issue to the discretion of the bench. The AR stated that the Hon'ble Bombay High Court in assessee's own case has decided the issue in íts favour for the AY.s. 2002-03-2005- 06. We have heard the rival submission a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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