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TMI Blog2019 (8) TMI 350X X X X Extracts X X X X X X X X Extracts X X X X ..... interfere in the order of ld. CIT(A) on this issue. KALS information systems - comparability of this company has been examined by the Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. The Tribunal has also noted that in the balance sheet of this company as on 31.03.2010, there are inventories of 60,47,977/- and on the basis of these facts, this finding is given that this company is in the business of software products and therefore, it is held that the same cannot be compared with a pure software development services provider company. Hence, in the present case, we hold that because of this functional dissimilarity as held by the Tribunal in the case of DCIT vs. Electronics for Imaging India (P.) Ltd. (supra), no interference is called for in the order of ld. CIT(A) regarding this direction to exclude KALS information systems Ltd. Infosys Ltd. - Tribunal in that case has reproduced the relevant portion of the Tribunal order rendered in the case of DCIT vs. Electronics for Imaging India (P.) Ltd. [ 2016 (2) TMI 1123 - ITAT BANGALORE] as per which it was held that Infosys Ltd. is having a huge brand value and intangibles as well as hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n / loss is not in respect of current year s turnover, then the same should be ignored in case of both i.e. the tested party and of the comparable companies. In case the data in this regard regarding comparable company is not made available by the assessee, then it should be presumed that such foreign exchange gain / loss for comparable company is not in respect of current year s turnover because generally, the accounting of foreign exchange gain / loss is considered in the sales only if such gain / loss has been received in the year of sale itself and only when such gain / loss is received and accounted for in a later year then only the same is accounted for separately as exchange fluctuation gain / loss. Accordingly, ground no. 11 is allowed for statistical purposes. The AO/TPO should decide this issue as per above discussion after providing adequate opportunity of being heard to assessee. Working capital adjustment - Tribunal has given a direction to the AO to carry out the working capital adjustment as per the actual figures and not to apply any cap. In the present case also, we restore the matter back to the file of AO/TPO to work out the working capital adjustment on actual f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 250 of the Act on the following grounds: That on facts and circumstances of the case and in law: 1. The learned CIT(A) has erred in law and facts, by upholding adjustment made by the learned Assessing Officer ("AO") / Transfer Pricing Officer ("TPO") to the arm's length price of the international transactions of software development services rendered by the Appellant to its Associated Enterprise ("AE"); 2. The learned CIT(A) has erred in law and facts by not accepting the Appellant's plea in entirety and upholding the action of the learned AO/TPO of rejection of Transfer Pricing Documentation ['TP Documentation'] including economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("the Rules") by erroneously invoking provision of section 92C(3)(a) and (c) of the Act without providing cogent reasons; 3. The learned CIT(A) has erred in law and facts, by upholding the action of learned AP/TPO of disregarding certain comparable companies selected by the appellant in the TP Documentation and instead conducted fresh search and thereby erroneously s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilter. 7. The learned CIT(A) has erred, in law and in facts, by upholding the action of the learned AO/TPO of rejection of advertisement. marketing and distribution expenses less than or equal to 3 percent of sales as a comparability criterion for the purpose of selection of comparable companies: 8. The learned CIT(A) has erred, in law and facts, by upholding the action of the learned AO/TPO of selecting companies such as Infosys Limited, Persistent Systems Limited and retaining companies such as Larsen & Toubro Infotech Limited and Sasken Communications Limited as comparables which are functionally dissimilar; 9. The learned CIT(A) has erred, in law and facts, by upholding the action of the learned AO/TPO of rejecting Akshay Software Technologies Limited as a comparable company on the ground that the company is earning 90 per cent of revenue by conducting operations from Dubai instead of from India which is factually incorrect; 10. The learned CIT(A) has erred, in law and facts, by upholding the action of the learned AO/TPO of rejecting Teledata Marine solutions limited as a comparable company on the ground of failing the RPT filter of 25 percent, which is factually incorr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in fact and law in holding the company M/s Kals Information Systems Ltd as a software product company when there is no inventory as either part of the stock in trade or work in progress accounted in the profit & loss account. iii) Whether the Hon'ble CIT(A) erred in fact and law in holding the company M/s Kals Information Systems Ltd as a software product company without appreciation the fact that the company in its annual report in point no 06 page no 22 disclosed that the revenue earned is from the business of development of computer software and other related services. The production and sale of such software is not capable of being expressed in any generic unit. iv) Whether the Hon'ble CIT(A) was right in fact and in law seeking exact comparability, which searching for comparable companies of the assessee under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparable companies? v) Whether while seeking the exact comparability as mentioned above the Hon'ble CIT(A) was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as mentioned above whether the Ld. CIT (A) was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. iii) Further, whether the Ld.CIT(A) is correct in fact and law in disregarding the position of law that there could be differences between the enterprise compared under TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises?" 5. Regarding assessee's appeal for Assessment Year 2010-11, it was submitted that ground nos. 1 to 14 are in respect of TP issues and the same can be decided on the basis of chart submitted by ld. AR of assessee which contains the assessee's submissions regarding these issues. Regarding ground no. 15, it was submitted that the issue involved in this ground is regarding interest u/s. 234B, 234C and 234D and hence, this issue is consequential. Regarding ground no. 16, he submitted that the issue involved in this ground is about initiation of penalty proceedings u//s. 271(1)(c) of IT Act and he submitted that this ground is premature. The ld. DR of revenue supported the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the total turnover also goes down by the same amount automatically. Since the direction of ld. CIT(A) is in line with this judgment of Hon'ble Karnataka High Court, we find no reason to interfere in the order of ld. CIT(A) on this issue. Accordingly, this ground of the revenue's appeal is rejected. 7. On TP issues, the revenue has two grievances i.e. regarding direction of ld. CIT(A) to exclude two comparables i.e. KALS information systems Ltd. and Tata Elxsi Ltd. As per the chart submitted by ld. AR of assessee, this is the submission of ld. AR of assessee that the issue regarding exclusion of KALS information systems Ltd. (seg) is covered in favour of the assessee by the Tribunal order rendered in the case of Cerner Healthcare Solutions P. Ltd. Vs. ITO in IT(TP)A Nos. 44 & 69/Bang/2015, copy available on pages 1 to 12 of case law paper book and our attention was drawn to para nos. 12 to 14 of this Tribunal order and it was pointed out that as per these paras, this comparable i.e. KALS information systems Ltd. was excluded by the Tribunal. He submitted that regarding exclusion of KALS information systems Ltd., the Tribunal has considered another Tribunal order rendered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. ACIT, 137 ITD 1 (Mum). 16. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra). 17. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies Pvt. Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:- "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is treated as allowed." 11. Respectfully following this Tribunal order rendered in the case of Cerner Healthcare Solutions P. Ltd. Vs. ITO (supra) which is for the same Assessment Year i.e. Assessment Year 2010-11 and we have noted that in para 2 of this Tribunal order, this is noted by the Tribunal in this case that Cerner Healthcare Solutions P. Ltd. Vs. ITO (supra) that Cerner Healthcare Solutions Pvt. Ltd. is a captive service provider engaged in the business of rendering software development services to its AE. Hence the functional profile of the present assessee and Cerner Healthcare Solutions Pvt. Ltd. is same and therefore, in our considered opinion, this Tribunal order is applicable in the present case. Respectfully following this Tribunal order, we hold that no interference is called for in the order of CIT (A) regarding exclusion of Tata Elxsi Ltd. We decline to interfere in the order of ld. CIT(A) on this issue. 12. Now we examine the issue in respect of KALS information systems Ltd. (seg). Reliance has been placed before us on the Tribunal order rendered in the case of Cerner Healthcare Solutions P. Ltd. Vs. ITO (supra). In the chart it has been submitted that pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the balance sheet of this company as on 31.3.2010, there are inventories of ₹ 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP." 14. The issue regarding exclusion of KALS information systems Ltd. (seg) was ultimately decided by the Tribunal as per para no. 14. This is also reproduced hereinbelow for ready reference. "14. We find that the CIT (A) accepted the assessee's plea by following the decisions of this Tribunal in Genisys Integrating System v DCIT 15 ITR Trib 475, Kodiak Networks v ACIT 15 ITR Trib 610, Trilogy e-Business Software India v DCIT 23 ITR Trib 464 and held that those companies which are within the turnover range of Rs one crore to Rs two hundred crore only should be taken into consideration for the TP study and hence directed the TPO to exclude Infosys Ltd, Larsen & Toubro Infotech Ltd, Mindtree Ltd (seg) , Persistent System Ltd, Sasken communication Technologies and Tata Elxsi Ltd(seg) against which the Revenue filed appeals. However, from the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le companies, reliance has been placed on the Tribunal order rendered in the case of Cerner Healthcare Solutions P. Ltd. Vs. ITO (supra), copy available on pages 1 to 12 of the case law paper book. Regarding exclusion of Infosys Ltd., para 12 of this Tribunal order is reproduced hereinbelow. "12. We have considered the rival submissions and gone through relevant materials. The relevant portion of the order from the case of Electronics for India Imaging India P Ltd ay 2010-11in IT (TP)A no. 212/Bang/2015 & CO No 94/ Bang/2015 dt 24.02.2016 is extracted as under: " 2. The assessee challenged the action of the TPO before the DRP and raised objections against some of the comparables selected by the TPO. The DRP in its directions rejected 8 out of 11 comparables selected by the TPO. Thus, the Revenue is aggrieved by the directions of the DRP insofar as the comparables are directed to be excluded from the set of comparables. 3. We shall deal with each comparable which has been disputed by the Revenue one by one as under:- (1) ICRA Techno Analytics Ltd. (seg) 4. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry. 5. In view of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE." 19. In this para, the Tribunal in that case has reproduced the relevant portion of the Tribunal order ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed it as a comparable and there is no consistency. These objections were rejected by TPO vide his analysis in page 40 of the order and from the earnings in foreign exchange reported, TPO considered the company as involved in software development services. The same objections were reiterated before DRP, but DRP rejected." 14.1. It was the submission of the Ld. Counsel that DRP at Hyderabad in the case of M/s. SumTotal Systems India Pvt. Ltd., [PAN: AABCC9379C] for the same assessment year has excluded the same by stating as under: "We have gone through the submissions of the assessee, International Transactions involved, TP documentation of the Assessee, the most appropriate method adopted by TPO after rejecting the T P documentation of the Assessee, the filters used by TPO and also verified the financials of the comparables with reference to the notes on accounts & website notes. We noticed that certain notes on accounts made in certain cases do not do not match with that of the financials reported. We also noticed that meaning of the words used in the notes on accounts are not defined. Based on certain ITAT decisions, the earlier directions of this panel and other panels, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hellip;……………………………………………. 22. Ground No.2 pertains to rejection of Infosys Technologies Ltd., from the list of comparables by DRP. We have already considered the opinion of DRP which is consistent not only in Assessee's case but also in the case of M/s. SumTotal Systems India Pvt. Ltd., (supra), extracted above while considering the exclusion of L&T Infotech Ltd. Since DRP's decision is consistent with the stand taken by the Revenue in other cases and also by the ITAT in a number of cases on reason of turnover, brand equity, functional dissimilarity, we are of the opinion that DRP is correct in excluding the above company from the list of comparables. Therefore, there is no merit in the Revenue's ground and the same is rejected." 22. In this para, the Tribunal has reproduced the relevant portion of another Tribunal order rendered in the case of Pegasystems Worldwide India (P.) Ltd. in ITA Nos. 1758 & 1936/Hyd/2014. Thereafter in that case also, the tribunal considered another Tribunal order rendered in the case of M/s. SumTotal Systems India Pvt. Ltd. and held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange fluctuation gain / loss of the tested party i.e. of the assessee or of the comparable companies is in respect of the current year's turnover then the same should be considered for TP analysis but if such gain / loss is not in respect of current year's turnover, then the same should be ignored in case of both i.e. the tested party and of the comparable companies. In case the data in this regard regarding comparable company is not made available by the assessee, then it should be presumed that such foreign exchange gain / loss for comparable company is not in respect of current year's turnover because generally, the accounting of foreign exchange gain / loss is considered in the sales only if such gain / loss has been received in the year of sale itself and only when such gain / loss is received and accounted for in a later year then only the same is accounted for separately as exchange fluctuation gain / loss. Accordingly, ground no. 11 is allowed for statistical purposes. The AO/TPO should decide this issue as per above discussion after providing adequate opportunity of being heard to assessee. 25. Regarding ground no. 13 of assessee's appeal in respect of working capital adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This would mean that the TPO is forcing the assessee to fund its working capital requirements in a specific way which is not the domain of the TPO, Another argument of the TPO is that since the debtors and inventory are zero, no adjustment should be carried out by considering only the position of creditors. In this regard we find ourselves in agreement with the contention of the assessee that the rationale of time value of money will equally apply to the creditors and consequently wherein any entity making payment in advance towards future services would expect compensatory returns towards the timing effect. Therefore, the action of keeping a cap on the working capital adjustment by the TPO is not approved. The Assessing officer is directed to carryout the working capital adjustment as per the actual figures and not apply any cap. We issue the directions accordingly. As regards the request for risk adjustment it is noted that it involves two vital preconditions, they are that difference in the risk level exists between the tested party and the uncontrolled comparables and that it is possible to calculate in terms of numbers the differential risk so that adjustment can be made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was submitted that the relevant finding of the Tribunal on this issue is available on page nos. 25 and 32 of this Tribunal order which is for the same Assessment Year i.e. Assessment Year 2011-12. The ld. DR of revenue supported the order of TPO. 30. We have considered the rival submissions. We find that the Tribunal has reproduced the relevant portion of earlier Tribunal order rendered in the case of DCIT vs. Electronics for Imaging India (P.) Ltd. in IT(TP)A No. 212/Bang/2015. Regarding ICRA Techno Analytics Ltd., it was held by Tribunal in that case that this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, and therefore, this cannot be regarded as functionally comparable with that of assessee who is rendering software development services to its AE and on this basis, it was held that ICRA Techno Analytics Ltd. is not a good comparable. Regarding Tata Elxsi Ltd., the Tribunal has followed the decision of Bombay Bench of the Tribunal rendered in the case of Telcordia Technologies Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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