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TMI Blog2016 (6) TMI 1361X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction of provision of software development services. 2. Ground No. 2 - On the facts and circumstances of the case, the Hon'ble DRP erred in directing the Learned AO/ TPO to make an adjustment of Rs. 2,63,31,853 on account of notional interest on the alleged overdue receivables from AEs. 2.1. Without prejudice to above, the Learned TPO erred in inadvertently considering the interest on overdue receivables as per the submission dated 22 October, 2012 instead 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 Rs. 2,63,31,853 instead of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of remaining units 6.1 On the facts and circumstances of the case and in law, the Learned AO erred in reducing foreign currency expenses only from export turnover and not from total turnover thereby reducing the benefit of deduction under section 10A by Rs. 6,89,82,112 in respect of the remaining units. 7. Ground No.7. Denial of set-off of brought forward losses and unabsorbed depreciation of Sema Software India Private Limited 7.1 On the 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 Rs. 99,05,886, Rs. 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. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in para 10 at the page 29 of TPO's order, according to which the margin of the assessee taking OP/TC as its PLI (Profit Level Indicator) came out to be 21.52% as against 14.76% as shown by the assessee for its software segment. Consequently, an adjustment for Rs. 24,96,72,932/- was proposed by the TPO. Further, for the SSIPL software development segment, the assessee had shown OP/TC of 14.16% as against 21.52% as determined by the TPO on the basis of Accept-Reject Matrix of the comparables. Consequently, an adjustment of Rs. 17,08,627/- was proposed by the TPO. Thus, aggregate adjustment of Rs. 25,13,81,559/- (i.e. Rs. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was no justification of removing comparables like Infosys Ltd, merely because it has a large scale of operations. He relied upon the judgment of Mumbai Bench of ITAT in the case of Willis Processing dated 01.03.2013 in support of his proposition that Infosys Ltd. should not be excluded. He also relied upon the judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) P. Ltd. v. 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 Rs. 423.71 crores and SIPL segment was Rs. 2.10 crores as against turnover of Rs. 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 Rs. 0.46 crores by the assessee company as against Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent- assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondentassessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:- " Basic Particular Infosys Technologies 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 Rs. 9, 028 Crores Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies 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 Softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative 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. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vel indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of Infosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of '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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: (i) OSI Systems P. Ltd. v. DCIT (ITA No.542 & 683/hyd/2014 (ii) Mindteck India Ltd. vs. DCIT- ITA No.70/Bang/2014 (iii) Q Logic India P. Ltd. vs. DCIT- ITA No.227/Pun/2014 (iv) Lionbridge Technologies P. Ltd. vs. ITO (ITANo. 668/Mum/2014 6.3. Per contra, Ld. CIT-DR vehemently opposed the submissions of the assessee. It was submitted by him that this company was selected by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e final list of comparables chosen by the assessee. We hold and direct accordingly." 6.8. Similar view has been taken by the Hon'ble Pune Bench in the case of Q Logic India P. Ltd. (supra) and by Hon'ble Mumbai Bench of the Tribunal in the case of Lionbridge Technologies P. Ltd. (supra). Thus, keeping in view facts and circumstances of this case and position of law as discussed above, we find this company 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 Rs. 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 demo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had given proper working in the Transfer Pricing Report as well as subsequent proceedings before the lower authorities. Our attention was drawn on various pages of the paper book showing that requisite details were supplied to the lower authorities but no specific query or doubt was raised by any of the authorities. It is noted by us that Hon'ble Delhi Bench of the Tribunal in the case of Mercer 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 inven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the material before us. We find that while recommending upward adjustment for charging interest for the delayed receipts the TPO had considered the terms and conditions of the agreement entered in to by the assessee with its AE.s., that the agreement stipulates that for delayed payment(beyond a period of one month)the AEs. had to pay interest @2%,that the AO had called for details in that regard 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 sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was totally disallowed by the AO and confirmed by the DRP. 11.2. During the course of hearing before us, Ld. Counsel of the assessee has contested the issue by way of ground no.4.1 & 4.2 pertaining to the expenses of HPCL project only. The expenses with regard to P & G and others projects were not contested and Ground No. 4.3 to 4.6 were not pressed by the Ld. Counsel and nothing was argued 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. Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that merely because of change in ownership benefit of deduction should not be denied, but in this case facts and evidences were not clearly brought by the assessee on record to show compliance of various other conditions and therefore, this issue should be sent back to the file of the AO for examining allowbility of deduction as per law and facts. 12.3. We have gone through the orders 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. Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere to be effected after 1 April 2001, that would result in the undertaking being disentitled to the benefit under Section 10A. This was a pointer to the fact that prior to the substitution a transfer of ownership or beneficial interest in the undertaking would not disentitle an assessee to the benefit of Section 10A. (As a matter of fact it may also be noted that the provisions of Section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue has been decided by the Tribunal in its order with the following observations: "5. The effective Ground of appeal, filed by the AO, is about direction given by the FAA for reducing expenditure incurred in foreign currency for providing technical services from total turnover, while computing deduction u/s.10A of the Act. During the assessment proceedings, the AO asked the assessee 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 Rs. 6.65cr f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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