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TMI Blog2018 (11) TMI 1652X X X X Extracts X X X X X X X X Extracts X X X X ..... CASS. 2.1 In the year under consideration, the international transactions and services rendered to AE falls within the ambit of Arm's length price transactions. The assessee filed an audit report in form 3CEGB containing the details of transactions with the AE. As the value of international transactions with AE exceeded Rs. 15 cores, the cases were referred to the TPO for the purpose of determining Arm's Length Price. 2.2 The TPO passed an order u/s 92CA(3) of the Act on 30/12/2013 in which, he arrived ALP of the assessee at Rs. 24,28,49,732/- and the short fall of Rs. 14,27,31,508/- was held as adjustment u/s 92CA of the act. 2.3 In conformity with the order of the TPO, the AO passed the draft assessment order adding the shortfall adjustment of Rs. 14,27,312,508/- to the taxable income of the assessee. 3. Aggrieved with the above order, the assessee filed objections before the DRP, who directed the TPO vide its order dated 28/11/2014 to recompute the adjustment u/s 92CA at Rs. 11,23,43,569 as against the original TP adjustment of Rs. 14,27,31,508/-. The TPO passed the order accordingly. 4. The AO passed the final assessment order determining the total income of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices Ltd. 11.22 17 Zylog Systems Ltd. 18.62 18 Persistent Systems Ltd. 31.57 Total 40.84 Average 22.69 b) Final comparables selected for customer support & transaction services (ITES) segment: S. No. Name of the company OP/OC 1. Accentia Technologies Ltd. 43.62 2. Acropetal Technologies Ltd. (Seg.) 10.12 3. Axis IT & T Ltd. 11.89 4. Cosmic Global Ltd. 16.59 5. Eclerx Services Ltd. 42.17 6. Infosys BPO Ltd. 31.63 7. TCS e-Serve International Ltd. 51.51 8. TCS e-Serve Ltd. 67.58 9. Jeevan Softech Ltd. (Seg.) 8.04 10. Microgenetics Systems Ltd. 6.60 11 Crossdomain Solutions Pvt. Ltd. 17.13 Total 306.88 Average 27.90 8.1 After applying the average margins of the comparables to the financials of the assessee, the TPO determined the arm's length price of the assessee as under: a) Software Development & Management Services (SDS) Segment: Description Amount (in Rs.) Arm's Length Margin 22.69% Less: WCA (-)0.61% Adjusted Arm's Length Margin 23.30% Operating Cost (OC) 73,51,92,036 Adjusted Arm's length margin (%) (AALM) 23.30% Arm's Length Price = (100+AALM)*OC 90,64,91,780 Price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recting to exclude the above companies, the revenue is in appeal before us. 12. Considered the rival submissions and perused the material on record. With regard to exclusion of Infosys Technologies Ltd and L&T Infotech in the SDS segment, the issue is squarely covered by various decisions of ITAT, Hyderabad including the decision in the case of Wissen Infotech Pvt. Ltd. in ITA No. 99/Hyd/2015 wherein the Bench has held as under: "27. As regards Revenue's appeal against the exclusion of Infosys Technologies Ltd & L&T Infotech Ltd, we find that in several cases, the Coordinate Benches of this Tribunal have directed exclusion of these companies as they are having super profit and very high turnover and we find that the order of the DRP is in accordance with the said decisions. Therefore, we see no reason to interfere with the order of the DRP on these 2 companies and the Revenue appeal is accordingly dismissed." 12.1 As regards comparability analysis relating to ITES, the issue is squarely covered by the following cases: 1. Scanafe Digital Solutions Pvt. Ltd., ITA no. 450/Bag/2015 2. Hyundai Motors India Engineering Pvt. Ltd., ITA No. 1743/Hyd/2014 3. Cognizant Technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to interfere with the order of the DRP. Ground No.2 is accordingly rejected." Following the said decisions of ITAT, we uphold the directions of DRP in directing to exclude the said companies in both SDS and ITES segments for computation of ALP. Accordingly, we dismiss ground No. 2 raised by the revenue in this regard. 13. As regards ground Nos. 3 & 4 regarding working capital adjustment, the TPO determined the ALP for the international transactions with AEs by making a negative working capital adjustment for the differences in the working capital between the assessee and the companies considered as comparables. 13.1 Before the DRP, the assessee contended that the company does not bear any working capital risk since it has been fully funded by its AE from its inception and has no working capital contingencies. The assessee further contended that the company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement. 13.2 After considering the submissions of the assessee, the DRP held that the TPO based on the year ending figures of receivables etc. made the negative working capital adjustment wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. Selection of comparables - Software segment 4. Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the software services of the Appellant: * Comp-U-Learn Tech India Ltd; * E Infochips Bangalore Ltd; * Persistent Systems Ltd; * Sasken Communication Technologies Ltd; * KALS Info Systems Ltd; and * Tata Elxsi Ltd (seg). Rejection of comparables - Software segment 5. Not undertaking an objective comparative analysis and interalia rejecting the following comparable companies: * Akshay Software Technologies Ltd; CG V AK Software and Exports Ltd; and * Satyarn Computers Services Ltd. Selection of comparables - ITES segment 6. Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the software services of the Appellant: * Accentia Technologies Ltd; and * TCS e-Serve International Ltd. Rejection of comparables - ITES segment 7. Not undertaking an objective comparative an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid company as comparable, the AR of the assessee submitted that the said company has revenue from ITES and software, further segmental details are not available. He submitted that it has exceptional growth in the profits of 160% abnormal growth in profits on standalone basis and engaged in internet based solution, education and training, e-governance solutions. R&D work in pharma sector and revenue from sale of software products and courseware materials. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 - FY 2009-10 2. Wissen Infotech Pvt. Ltd., ITA No. 99/Hyd/2015 - FY 2009-10 3. DE Shaw Software Pvt. Ld., ita No. 304/Hyd/2015 - FY 2009-10 4. Sum Total Systems India Pvt. Ltd. Vs. DCIT, ITA No. 255/Hyd/2015 - FY 2009-10 5. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014. 18.2 The ld. DR, on the other hand, relied on the orders of revenue authorities. 18.3 Considered the rival submissions and perused the material on record. In the case of Open Text Corporation of India Pvt. Ltd. (supra), the coordinate bench of Hyderabad Tribunal, directed the AO to exclude th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and segmental data is not available. It has fluctuations in margins and the company is having an amalgamation status. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015- FY 2009-10 2. Pegasystems Worldwide India Pvt. Ld., ITA No. 1758/H/14 3. DE Shaw Software Pvt. Ld., ita No. 304/Hyd/2015 - FY 2009-10 4. Oakton Global Technology Services Pvt. Ltd., ITA No. 434/Hyd/15 - FY 2009-10 5. Sum Total Systems India Pvt. Ltd. Vs. DCIT, ITA No. 255/Hyd/2015 - FY 2009-10 18.5 The ld. DR, on the other hand, relied on the orders of revenue authorities. 18.6 Considered the rival submissions and perused the material on record. In the case of Open Text Corporation of India Pvt. Ltd. (supra), the coordinate bench of Hyderabad Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under: "13. Having regard to the rival contentions and the material on record, we find that E-Infochips Bangalore Ltd is receiving income from software services as well as consultancy charges and it is also reported that the company is engaged in the development a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee's case in this assessment year. We are also aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally different from Assessee's activities and in the absence of segmen al information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the ple of Assessee in this regard." 1.4 In the case of Allscripts (india) Pvt. Ltd. (supra), the coordinate bench of ITAT, Ahmedabad held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid company from the final list of comparables. 18.7 As regards Persistent Systems Ltd., objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is engaged in product development design services and also engaged in offshore product development. Segmental data is not available. He submitted that the ITAT has rejected this company in the following cases: 1. Cash Edge India Pvt. Ltgd., ITA No. 64/Del/2015 2. Target Corporation of India Pvt. Ltd., ITA No. 343/Bang/2015 3. Intoto Software (India) Pvt. Ltd., ITA No. 25/Hyd/2015. 18.8 The ld. DR, on the other hand, relied on the orders of revenue authorities. 18.9 Considered the rival submissions and perused the material on record. In the case of Cash Edge India Pvt. Ltd (supra), the coordinate bench of Delhi Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under: "16. We have considered the rival submission and perused the material on record. A co-ordinate Bench of the Delhi Tribunal in the case of Ciena India Pvt. Ltd. v. DCIT in ITA Nos. 2948, 3324/Del/2013, has held as under: "9.2. We have heard the rival submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erv India Pvt. Ltd. for AY 2010-11, which company is also in the business of software development services, a co-ordinate Bench of the Delhi Tribunal in ITA No.6737/Del/2014 deleted Persistent from the list of comparables. 17. Further a perusal of page 484 (PB-2) Annual Report of Persistent reveals that it is not only engaged in the business of software development services but also manufacture and sale of software products and owns significant intangibles and that segmental data for services and ITA No.64/Del./2015 products is not available and the ld DR, could not controvert this fact, so we concur with the order of co-ordinate bench of the Tribunal, and we direct exclusion of Persistent Systems Ltd. from the list of comparables" Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables. 18.10 As regards Sasken Communication Technolgies Ltd., objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company earns revenue from 3 segments but segmental margins as well as segmental data are not available. He submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems Ltd (Seg.) is concerned, it is the case of the assessee that the company has revenue from software products and software development services and that the company has inventory which is 26% of the total revenue. It is also argued that the Companies Website extracts state that it is into ITES as well. We find that this company has been directed to be excluded from the final list of comparables in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd (Supra) by observing as under: "2. Kals Information Systems Ltd 2.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is functionally different and dealing with software products. He submitted that the ITAT has rejected this company in the following cases: 1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014 AY 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10. 2.2 Ld. DR relied on the orders of revenue authorities and submitted as under: I) As per Pg. 22 of annual report, the company is engaged in the business of computer software. Hence, it is not fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCIT, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software developmen s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex nature. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 - FY 2009-10 2. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014. 3. Target Corporation of India Pvt. Ltd., ITA No. 323/Bang/2015 4. Oakton Global Technology Services Pvt. Ltd., ITA No. 434/H/2015 5. Sum Total Systems India Pvt. Ltd. Vs. DCIT, ITA No. 255/Hyd/2015 - FY 2009-10 18.17. The ld. DR, on the other hand, relied on the orders of revenue authorities. 18.18. Considered the rival submissions and perused the material on record. In the case of Open text Corporation India Pvt. Ltd. (supra), the coordinate bench of Hyderabad Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under: "22. As regards Tata Elxsi is concerned, we find that the learned Counsel for the assessee is arguing that it is functionally different due to the diverse nature of its business and specialization. We find that the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd has directed the exclusion of this company on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y times Assessee's turnover and therefore cannot be exactly considered as a similar company unless the nature of activity, the incomes are analysed in detail. Since no segmental data is available, considering the software development services as a segment by TPO cannot be considered as segmental data, unless the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same." 3.4 In the case of Planet Online Pvt. Ltd. (supra), the coordinate bench held as follows: "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he material on record. The ld. AR of the assessee failed to establish the inclusion of the aforesaid as comparable by way of bringing any case law or cogent material in this regard. Hence, we uphold the action of the TPO/DRP for exclusion of this company as comparable. 21. As regards CG VAK Software Exports Ltd., the TPO rejected this company as comparable by observing that it fails the employee cost filter and the details of the employee cost are not available in the annual report. The assessee relied on the annual report of 2007-08, wherein it is mentioned that cost of services is incurred towards salaries of employees. The DRP confirmed the action of TPO. 21.1 The ld. AR of the assessee submitted that the company satisfies the employee cost filter applied as the employee cost of the company is 76.10% of its total revenue. He relied on the following cases: 1. Yodlee Infotech Pvt. Ltd., IT(TP)A No. 108/Bang/2014. 2. Lam Research (India) Pvt. Ltd., IT(TP)A No. 1437/Bang/2014. 21.2 The ld. DR relied on the orders of TPO/DRP. 21.3 Considered the rival submissions and perused the material on record. In the case of Lam Research (India) P. Ltd, (supra), the coordinate bench has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. 22. As regards Satyam Computers Services Ltd., the TPO rejected this company as comparable on the ground that the company is still being investigated by various authorities and court. Further, auditor's in their audit report on page 204-207 have certified the report with certain reservations. The DRP confirmed the action of TPO. 22.1 The AR of the assessee submitted that the company satisfied all the filters applied by the TPO, therefore, the same may be considered as comparable. 22.2 The ld. DR relied on the orders of TPO/DRP. 22.3 Considered the rival submissions and perused the material on record. As observed by the TRP/DRP, still the company is still being investigated by various authorities and court, we uphold the action of the revenue authorities for exclusion of this company as comparable. 23. As regards ground No. 6 regarding selection of comparables towards ITES segment, the assessee objected to the selection of following companies as comparable to the ITES Segment: 1. Accentia Technologies Ltd 2. TCS e-Serve International Ltd. 24. Considered the rival submissions and perused the material on record. This issue is squarely covered by various decisions of coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any Asscent Infoserve Pvt. Ltd. has been amalgamated with the company consequent to which, assets and liabilities of the erstwhile company were transferred and vested in the company w.e.f. 1st April, 2008 and the scheme has been given effect to in the accounts of the year. Therefore, it is clear that there is an extraordinary event in the case of Accentia Technologies Ltd.. during the relevant financial year particularly since the approval for amalgamation has been given by the Hon 'ble High Court of Mumbai vide orders dated 21st August, 2009 and by the Hon 'ble Karnataka High Court vide orders dated 6th February, 2010. This event would definitely have an effect on the profit margins of the said company and therefore, has to be excluded from the list of comparables as rightly done by DRP." Following the said decision, we direct the TPO/AO to exclude the said companies as comparables. Thus, this ground is allowed. 25. As regards ground No. 8, it consists of three components; (a) for considering the provision of bad debts as operating expenses in computing the margins of (i) E-Infochips Bangalore Ltd; (ii) E-Zest Solutions Ltd and (iii)Kuliza Technologies (P) Ltd; and (b) c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Honda Trading Corporation India Pvt. Ltd (Supra), the Coordinate Bench of the Tribunal at Delhi had considered the huge fluctuation in the foreign exchange in favour of Thai Bhat against the INR and it was in these circumstances, that the Tribunal had directed the AO to make necessary adjustments. The distinction of the currency in the international transaction of the assessee and the comparable companies and also the abnormal fluctuation in foreign currency in the case before us has not been brought out by the assessee. Therefore, we are not inclined to accept the assessee's contention and ground of appeal No.5 is rejected."
Following the said decision, we dismiss this ground of appeal of the assessee.
29. As regards corporate tax issues, i) with regard to imposition of interest u/s 234B and 234C of the Act, charging of interest is consequential in nature, therefore, the AO is directed accordingly.
30. As regards initiation of penalty proceedings, this ground is premature in nature, hence, need no adjudication.
31. In the result, revenue appeal is dismissed and the appeal of the assessee is partly allowed.
Pronounced in the open Court on 29th November, 2018. X X X X Extracts X X X X X X X X Extracts X X X X
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