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TMI Blog2019 (3) TMI 1633X X X X Extracts X X X X X X X X Extracts X X X X ..... the order. Before us also Ld AR has submitted that the issue is covered against the assessee by various decisions. We find no reason to interfere with the order of DRP and thus these grounds are dismissed. Applying turnover filter of ₹ 25 crores to ₹ 200 crores as against turnover filter of ₹ 25 crores to ₹ 125 crores applied by assessee - HELD THAT:- The issue in the present ground is the application of turnover filters for selection of comparable companies for benchmarking the international transactions. We find that for A.Y 2006-07, the turnover of the assessee from software services was ₹ 82 crores and it had applied the turnover filter of ₹ 25 crore to ₹ 100 crores as against which the TPO had applied the turnover filter of ₹ 25 to ₹ 150 crores and the action of the TPO was upheld by the co-ordinate Bench of Tribunal. For the year under consideration, the turnover of the assessee from software services is ₹ 104 crores and assessee has adopted the turnover filter criteria of ₹ 25 crore to ₹ 125 crores as against which the TPO has adopted the turnover filter criteria of ₹ 25 crores to ₹ 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al business trend and therefore was excluded from being a comparable. In view of the aforesaid facts, we direct the exclusion of IOL as a comparable company and thus direct the TPO to exclude it from comparables. Computation of relief for working capital adjustment in relation to provision for software development services, provision for IT enabled services and Sales Support Services - HELD THAT:- As it is assessee's contention that pursuant to the directions of DRP, AO/TPO had worked out the working capital adjustment for Software Development Services, IT enabled services and Sales Support Services but AO/TPO has erred in working out the margins and has furnished the working made by AO/TPO and the correct working as per the Assessee. In view of the aforesaid submissions of Ld AR, we direct the AO/TPO to peruse the working furnished by the Assessee and consider the correct working capital adjusted operating margins of identified comparable companies for Software Development Services, IT enabled Services and Sales Support Service C omputation of Sec.10A deduction by reducing telecommunication expenses and foreign currency expenses from export turnover - HELD THAT:- We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (TPO) u/s 92CA(1) of the Act by the AO for computing the Arms Length Price (ALP) of the international transactions. In response to the reference, the TPO vide order dt.28.10.2010 passed u/s 92CA(3) of the Act made an upward adjustment of ALP transactions aggregating to ₹ 14,73,41,167/- on account of international transactions relating to provision of Software Development Services rendering of ITEs to A.E. and rendering of sales support services of the assessee. Thereafter, AO passed draft assessment order u/s 143(3) r.w.s 144C(1) of the Act wherein he determined total income of ₹ 15,20,17,900/- by proposing addition of ₹ 14,73,41,367/- on account of transfer pricing and denying excess deduction of ₹ 29,08,298/- u/s 10A of the Act. Assessee filed objections before the Dispute Resolution Panel (DRP) against the proposed additions in the draft assessment order. After considering the objections of assessee to the draft assessment order, DRP vide order dt.26.09.2011 gave certain directions u/s 144C(5) of the Act wherein it at para 22 had upheld the additions proposed in the draft assessment order and gave other directions. Pursuant to the directions of DRP, AO pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy report. Erred in rejecting certain companies from the comparable set identified by the appellant in respect of international transactions pertaining to provision of software development services, IT enabled services and sales support services. 7. Accepting certain companies as comparable for FY 2006-07 in relation to provision of software development services, IT enabled services and sales support services Erred in accepting certain additional companies as comparable to the Appellant in relation to provision of software development services, IT enabled services and sales support services. 8. Following inconsistent approach for rejecting / accepting companies as comparable in relation to sales support activity of the appellant. Erred in adopting inconsistent approach of applying the functional comparability criteria while rejecting /accepting companies as comparable for the purpose of the appellant's sales support activity. 9. Erred in computing relief for working capital adjustment in relation to provisions of software development services. Erred in computing relief for working capital adjustment in relation to provisions of software devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest rate. III Other grounds of appeal 15. Initiation of penalty proceedings under sec 271(1)(c) of the Act Without prejudice to the above grounds, even if the adjustments are sustained, the learned AO erred in initiating penalty proceedings under section 271(1)(c) without appreciating the facts that, proposed transfer pricing adjustment to the international transactions of the appellant as well as other addition are on account of difference of opinion as to application of selection criterion for selection of comparable companies, incoherent approach, interpretation of the provisions, etc. 16. Erroneous levy of interest under section 234B of the Act. Without prejudice to the above grounds, even if the adjustments are sustained, the learned AO erred in levying interest under section 234B of the Act, as applicable, on account of unanticipated additions made to the total income of the appellant on account of transfer pricing adjustment and corporate tax related additions. 3. Assessee thereafter vide letter dt.11.12.2012 raised an additional ground which reads as under: On the facts and in the circumstances of the case, the learned TPO and conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 10A of the Act itself provides that no such deduction is to be allowed on TP adjustment. The learned Departmental Representative for the Revenue pointed out that the Special Bench in Aztec Software and Technology Services Ltd. Vs. ACIT reported in 294 ITR AT 32 followed by Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. in ITA No.393/PN/2007 , relating to assessment year 2003-04, order dated 19.05.2009 has taken a view that the ratio is squarely applicable. 52. After considering contentions of both the learned Authorized Representatives, we find that the issue in the present appeal is decided by Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. (supra). A contrary view has been taken by Mumbai Bench of Tribunal in DCIT Vs. M/s. Tata Consultancy Services Ltd. (supra). In view of the ratio laid down by the coordinate Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. (supra), we find no merit in the claim of assessee. Further, in any case, the provisions of the Act are clear in not allowing any deduction on any TP adjustment made under sections 10A and 10B of the Act. Where the section itself provides that no deduction under section 10A of the Act is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us also Ld AR has submitted that the issue is covered against the assessee by various decisions. In view of the foregoing, we find no reason to interfere with the order of DRP and thus these grounds are dismissed. 11. Ground No 5 is with respect to applying turnover filter of ₹ 25 crores to ₹ 200 crores as against turnover filter of ₹ 25 crores to ₹ 125 crores applied by assessee. 11.1. TPO noticed that the assessee while selecting the comparables for the purpose of benchmarking had led down criteria with turnover of ₹ 25 crores to ₹ 125 crores though the turnover of the assessee from rendering of software services was ₹ 109.11 crores. TPO did not agree with the assessee's reasoning for selecting the comparables on the basis of turnover filter laid down by the assessee. He considered the companies with the turnover between ₹ 25 crores to ₹ 200 crores to be more appropriate and based on the aforesaid filters, proceeded to select the comparable companies. Aggrieved by the aforesaid action of TPO, assessee carried the matter before DRP who vide para 11.1 of the order upheld the action of TPO in enhancing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Rendering of Software Development Services 109,11,51,865 TNMM 2 Rendering of ITES 3,96,74,749 TNMM 3 Rendering of Sales Support Services 1,30,24,261 TNMM 114,38,50,875 15. Rendering of Software Development Services : With respect to Software Development Services, TPO noticed that during the year under consideration assessee had rendered Software Development Services worth ₹ 109,11,51,865/- to its Associate Enterprises (AE's) and assessee had selected TNMM method as the most appropriate method to benchmark international transactions with operating profits (OP)/operating cost (OC) as Profit Level Indicator (PLI). For benchmarking the international transactions, assessee had identified 9 companies as being comparable to the assessee. Based on the weighted average margins of the 9 comparables, the arit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtune Infotech Ltd, Genesys International Corporation Ltd Tricom India P Ltd., He thereafter considered Informed Technologies India Ltd and Maple E Solutions Ltd to be comparable to the assessee and included it. He thus out of the 9 companies originally selected by the assessee to be comparable, rejected 5 companies and included 2 companies as comparable to assessee and held the 6 companies to be comparable. He noticed that the arithmetic mean of the operating profits of the final set of 6 comparable companies comes to 22.20% as against the operating margin of the assessee of 11.76%. He accordingly, on the basis of adjusted mean of the operating margin of the comparables, worked out the upward adjustment to the international transactions relating to ITES segment at ₹ 37.07,022/- and made its addition. 17. Rendering of Sales Support Services : With respect to Sales Support Services, TPO noticed that during the year under consideration, assessee had rendered Sales Support Services worth ₹ 1,30,24,261/- to its Associate Enterprises (AE's) and assessee had selected TNMM method as the most appropriate method to benchmark international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the Assessee. On the contrary, Ld AR pointing to the notes to accounts for F.Y 2006-07 submitted that the Company is engaged in development of computer software and services and as per Part IV of Schedule VI of the Companies Act which forms part of the annual account of the company, Software Services is its principal business. He further submitted that Lanco Global Systems was considered to be comparable by CIT(A) for AY 2005- 06 by noting that there was nothing in the Annual Report to indicate that the company carried out business other than development of computer software and rendering of services and that against the order of CIT(A), Revenue is not in appeal. He further submitted that Lanco was considered as comparable by TPO for AY 2008-09. He therefore submitted that Lanco Global should be considered to be a comparable company of the assessee. b) With respect to inclusion of Maars Software International Ltd as a comparable, Ld AR pointing to its Annual Accounts placed in the paper book submitted that its Auditors Report states that the Company is engaged in the activities of software development and training and does not carry any inventory. He further submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Informed Technologies Ltd and Maple E Solutions Ltd, being the companies included by the TPO, from the final list of the comparables. a) In support of his argument for exclusion of Informed Technologies Ltd, Ld AR submitted that the exclusion is sought for the reason that FY 2006-07 was an exceptional year of its operation in view of the fact that the sales had increased from ₹ 214.24 lacs to ₹ 498.88 lacs showing a growth of 133%. The operating profits turned positive to ₹ 207.41 lacs in 2007 as against loss of ₹ 44.89 lacs in 2006 and further there is steep fluctuation in margins from -44.21% (in FY 2005-06) to 34.30% (in FY 2006-07). He therefore submitted that in view of the aforesaid factual position, Informed Technologies cannot be considered to be a comparable company and for this proposition he relied on the decisions in the case of Cummins Turbo Technologies Ltd vs DDIT (ITA No 161 269/Pn/2013), Quark Systems P Ltd (132 TTJ 1). b) With respect to exclusion of Maple E solutions Ltd, Ld AR submitted that it cannot be considered to be a comparable to Assessee as it is functionally not comparable since it is engaged in providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground is with respect to inclusion/exclusion of certain companies as comparables in the various segments. 24.1 We first proceed with Software development Services. Assessee before us seeks inclusion of Lanco Global Systems Ltd, Maars Software International Ltd, Quintegra Solutions Ltd as comparable company and exclusion of Helios and Matheson Informational Technology Ltd. i. With respect to Lanco Global Systems Ltd., assessee before us has demonstrated that its principal business is Software Services , it has carried out the business of development of computer software and rendering of services. We further find that Lanco was considered to be a comparable by the TPO in Assessee's own case in AY 2008-09 and further CIT(A) in AY 2005-06 had considered it to be a comparable and Revenue is not in appeal against the order of CIT(A). We therefore agree with the contention of the Ld AR that Lanco should be considered as comparable and therefore direct the TPO to consider it as a comparable company. ii. With respect to inclusion of Maars Software International Ltd as a comparable company, before us, Ld AR with the help of the annual accounts has pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuations in the margins earned by it. The aforesaid contentions of the Ld AR have not been controverted by Ld DR. We find that in the case of Cummins Turbo Technologies (supra) the co-ordinate Bench with respect to Informed Technologies had concluded that there were wide fluctuations in the margins earned by it over a period of time coupled with the fact that there was also wide fluctuation in the revenue generation during the year under consideration and past three years. It therefore held for its exclusion. In view of the aforesaid facts, we direct the exclusion of Informed Technologies as a comparable We therefore direct TPO for the exclusion of Informed Technologies as a comparable company. ii. With respect to Maple E Solutions, before us, Ld AR on the basis of Annual Accounts has demonstrated that it is engaged in call centre activities, its income is from call centre services whereas Assessee is engaged in providing non voice based services. In such a situation, we hold that Maple E solutions cannot be considered to be a comparable company in view of functional dissimilarity and therefore direct its exclusion. 25. Before us, Ld AR has submitted that if Infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in the case of Maersk Global Centres Vs ACIT (ITA No 7466/Mum/2012 order dtd 7.3.2014) has concluded that the profit margins in FY 2006-07 of 63.33% to be quite abnormal in relation to the profit margins of the preceding years and succeeding year, ratio of increase in employee cost to the increase in operating income to be fluctuating and the increase in sales to be disproportionate to the costs incurred. It therefore held that the operations for FY 2006-07 to be quite abnormal and therefore did not reflect a normal business trend and therefore was excluded from being a comparable. In view of the aforesaid facts, we direct the exclusion of IOL as a comparable company and thus direct the TPO to exclude it from comparables. Thus, ground Nos.6 to 8 and 12 are partly allowed. 27. Ground Nos.9, 10 and the additional ground are considered together. It is with respect to computation of relief for working capital adjustment in relation to provision for software development services, provision for IT enabled services and Sales Support Services. 27.1. During the course of TP proceedings assessee had asked for working capital adjustment with respect to provision for software dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y furnish the required details called for by the TPO/AO. Needless to state that AO/TPO shall grant adequate opportunity of hearing to the assessee. Thus, these grounds of the assessee are allowed for statistical purposes. 30. Ground No.11 is with respect to adjustment on account of functional and risk profile of comparables vis-a-vis the assessee. 30.1. During the TP proceedings, assessee had asked for marketing risk adjustments and other risk adjustments to the operating margins of the comparables vis-a-vis the assessee. It was further submitted by the Assessee that it is a risk mitigated entity whereas the comparable companies were operating in a high risk exposed environment as they were not cost protected. The TPO rejected the claim of risk adjustment for the reasons stated in his order. Aggrieved by the order of TPO, assessee carried the matter before DRP who vide para no 17.3 upheld the order of TPO. Aggrieved by the order of DRP, assessee is now before us. 32. Before us, LD AR reiterated the submissions made before TPO/DRP and further submitted that Hon'ble DRP had not considered the submissions of the assessee and had merely brushed it aside by relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce provider does not assume any risk or takes lesser risk as compared to the concerns, which undertake higher risk, then the risk adjustment is to be allowed. The learned Authorized Representative for the assessee in this regard has placed on record the methodology prescribed by Bangalore Bench of Tribunal in Philips Software Centre India Pvt. Ltd. Vs. ACIT (2008) 119 TTJ (Bang) 721. Further, the assessee has also submitted the risk adjustment to be made as per the methodology prescribed by Delhi Bench of Tribunal in M/s. Sony India (P) Ltd. Vs. DCIT (2008) 114 ITD 448. In view of the provisions of section 10B of the Act, we restore this issue back to the file of Assessing Officer / TPO to compute risk adjustment after affording reasonable opportunity to the assessee to work out and justify to the satisfaction of Assessing Officer, the risk adjustment it would be entitled to. We hold so. The issue raised is thus, allowed for statistical purposes. 34. Before us, no distinguishing feature in the facts of the case under consideration and that of earlier years has been pointed out by Revenue. Further, Revenue has also not placed any material to demonstrate that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation charges which were embedded and factored in the bills raised against the services provided to the customers. AO therefore concluded that assessee is providing technical services outside India for which it is incurring expenditure in foreign currency. The alternate plea of assessee for excluding the expenses from export turnover and total turnover was also not found acceptable to AO. AO therefore excluded the telecommunication charges of ₹ 75,14,407/- and expenses incurred for providing technical services outside India in foreign currency of ₹ 1,22,88,308/- from 'export turnover' for working out the exemption and thereafter worked out the exemption u/s 10A of the Act at ₹ 16,31,68,953/- as against the assessee's claim of ₹ 16,60,77,251/- and thus disallowed the excess claim to the extent of ₹ 29,08,298/-. Aggrieved by the order of AO, assessee carried the matter before DRP, who vide order dt.29.09.2011 upheld the order of AO by observing as under : 19.3 Certain expenses such as freight, tele-communication charges etc. have been specifically excluded from Export Turnover under clause III of the Explanation (2) to section 10B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover' and 'total turnover' for working out the deduction u/s 10A of the Act. Ld.D.R. did not controvert the submissions made by Ld.A.R. but however supported the order of lower authorities. 38. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to computation of deduction u/s 10A of the Act. We find that AO while computing the deduction u/s 10A of the Act had reduced the telecommunication charges and expenditure in foreign currency from only 'export turnover' but the same was not excluded from 'total turnover'. We find that CBDT vide Circular No.4/2018 dated 14.08.2018 in para Nos.5 and 6 has clarified as under : 5. The issue has been examined by the Board and it is clarified that freight, telecommunication charges and insurance expenses are to be excluded both from export turnover and total turnover , while working out deduction admissible under section 10A of the Act to the extent they are attributable to the delivery of articles or things or computer software outside India. 6. Similarly, expenses incurred in foreign exchange for providing the technic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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