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TMI Blog2017 (3) TMI 1787X X X X Extracts X X X X X X X X Extracts X X X X ..... on 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 3. The CIT (Appeals) erred in not appreciating the fact that the decision of the jurisdictional High Court in the case of' Tata Elxsi Limited in ITA No. 70 of 2009 has not reached its finality as the department's appeal before the Supreme Court is pending. 4. The CIT (Appeals) erred in holding that the AO had not brought anything on record to repudiate the assessee's contention that the expenses of Rs. 68,875 incurred on Club Membership Fee was wholly or exclusively for its own business without appreciating the fact that the Membership Fee is a onetime payment whose benefit endures for a period of years and therefore the expenditure is capital in nature. 5. The CIT(A) erred in rejecting the diminishing revenue or persistent losses filter as an inappropriate filer for the selection of' comparables without appreciating that the TPO was justified in excluding some cases as not comparable, as persistent loss cases / diminishing revenue cases are exceptional and not com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dd, alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 3. Ground No. 1 is general in nature, hence needs no independent adjudication. Ground Nos. 2 and 3 relate to the computation of deduction under section 10A of the Income Tax Act (hereinafter called the 'Act'). During the course of hearing, the learned counsel for the assessee invited our attention that this issue is squarely covered by the judgment of the Jurisdictional High Court in the case of Tata Elxsi 349 ITR 98 in which it has been held that once item is included in the export turnover, it should also be included in the total turnover. Following the judgment of the Jurisdictional High Court, we restore the issue to the file of the AO with the direction to readjudicate the deduction under section 10A of the Act in the light of judgment in the case of Tata Elxsi. 4. With regard to ground No. 4, our attention was invited that the assessee has made the payment for club membership fee of Rs. 68,875/- and claimed to be the revenue expenditure but the AO treated it to capital expenditure and disallowed the claim. When the appeal was preferred to the CIT(A), he treated it to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Price (ALP). The order under section 92CA was passed by the TPO which was received by the AO on 03.11.2008 and consequently, the adjustment at ALP to the extent of Rs. 3,48,72,821/- was made under section 92CA of the Act of which breakup is hereunder: Description Software Development services ITES Services Total Arms Length Price of operating cost Rs. 14,46,29,504 Rs. 16,22,61,474 Rs. 30,68,90,978 Price Received Rs. 12,88,92,858 Rs. 14,31,25,117 Rs. 27,20,17,975 Adjustment u/s 92CA Rs. 1,57,36,464 Rs. 1,91,36,357 Rs. 3,48,72,821 9. Against this adjustment to ALP, the assessee preferred an appeal before the CIT(A) and the CIT(A) partly accepted the contentions of the assessee and directed the AO/TPO to recompute the ALP in terms indicated in his order. 10. The assessee as well as the revenue are in appeal before the Tribunal. During the course of hearing, the learned counsel for the assessee invited our attention to the fact that the assessee Google India Pvt. Ltd., provides information technology services and IT enabled services to its Associated Enterprises ('AEs'). During the impugned assessment year, international transactions with its AEs underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d DCIT Vs. Kodiak Networks India Ltd., in IT(TP)A No. 532/Bang/2013 in which the Tribunal has held that these comparables are functionally different with the profile of the assessee company. The learned counsel for the assessee further contended that the profile of the assessee is almost similar to the McAfree Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., where the assessee is also engaged in providing software development services to its AE. 14. With regard to Bodhtree Consulting Limited, the learned counsel for the assessee has contended that besides functional dissimilarity, this comparable fails on RPT filter as related party transaction in this case is 35%. 15. The learned DR however contended that the rejection of this comparable is not proper and therefore can be included in the list of comparables. 16. Having carefully examined the functional profile of Bodhtree Consulting Limited and its related party transactions, in the light of judgment of ACIT Vs. McAfree Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., we find that the Tribunal has categorically held in the case of McAfree Software (India) Pvt. Ltd., whose profile is similar to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd these aspects were examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd. Similarly, the profile of Four Soft Ltd., Geometric Software Solutions Limited and Tata Elxsi Ltd., was also examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd. and Kodiak Networks India Ltd., in which the Tribunal has held that Four Soft Ltd., is functionally dissimilar and RPT is at 19%. With regard to Geometric Software Solutions Limited, it was also held that this comparable is functionally dissimilar. Similar is the position with regard to Tata Elxsi. The relevant observations of the Tribunal in the case of McAfee Software (India) Pvt. Ltd. are extracted hereunder: "Sankhya Infotech Ltd., Thirdware Solution Ltd., & Tata Elxsi Ltd., : 10.5. These three companies are rejected as comparables on functionality in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (paras 19- 20, 22-26, 27-30 restively) and in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) at Para No. 13. The analysis by the Co-ordinate Benches is as under: "Sankhya Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. The same is directed to be excluded from the list of comparable companies. 22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- "15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and Assessee have been investing continuously on product developments. Since Assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the Assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord, we find that the TPO at page 37of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005- 2006 order dated 12.2.2014. 28. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: "15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and Assessee's objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to Assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, Assessee is also objecting on the basis of intangible scale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Enterprise Application Services Pvt.Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee. 30. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies. "13. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like Assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not IT(TP)A Nos. 04/Bang/2012 & 1388/Bang/2011 discussing above comparables in detail, but, suffice to say that Assessee's submissions are valid. The AO is directed to exclude the above comparables and re- work out the arm's length margin accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables are not good comparables for determining the ALP in the case of McAfee Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., whose profile is similar to assessee's profile, we find no justification to re-examine the profile of these comparables again. We therefore hold that Sankhya Infotech Ltd., Four Soft Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd., are not good comparables. Therefore they have to be excluded from the final list of comparables. We accordingly confirm the order of the CIT(A) with respect to exclusion of Bodhtree Consulting Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd. Since the CIT(A) has taken Sankhya and Foursoft Ltd., in the list of comparables, we set aside the order of the CIT(A) and direct the AO to exclude these comparables from the final list of comparables. After the exclusion of these comparables, left out comparables, Lanco Global Systems Ltd., Sasken Networks, R. S. Software (India) Ltd., Visualsoft Technologies and Sasken Communications Ltd., be taken in the final list of comparables for determination of the ALP for the software development services provided by the assessee to its AE. 20. IT enabled service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d GIS (India) Limited is that there is no reasoning. This, however, is not even a ground taken in the appeal filed before us. In any event, we perused the 22nd annual Report for the year 2005-06 of Nucleus Netsoft and GIS (India) Ltd. Schedule 12 furnishes the operating & other expenses. The data processing charges are Rs. 1.04 crores out of the total operating & other expenses of about Rs. 2.41 crores. Thus, an amount of over 40% is outsourced. The finding of the Tribunal, therefore, cannot be held to be perverse." 21. These comparables were also examined by the Tribunal in the case of Genesis Integrating Systems India Pvt. Ltd. A copy of order is placed on record at page Nos. 65 to 79 of the compilation in which the Tribunal has examined the profile of Vishal Information Tech Ltd., and Nuclues Netsoft & GIS Ltd. The relevant observations of the Tribunal in this regard are extracted hereunder: "20. Ground no.3 & 4 challenges the directions of the learned CIT(A) deleting the comparable of M/s Vishal Information Tech. Ltd. selected by the TPO from the list of comparables. We find merit in the submission of the learned counsel that the company is functionally different as this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to a KPO while other services may not. In such cases, a classification of BP0 and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower- end ITEs such as call centres etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold". Furthermore, the company operating margin is 50.68% which is considered to be abnormal, in the line of business it is engaged. Therefore, it cannot be considered as a comparable in the light of the following decisions of the Co-ordinate Benches; 1. Genesis Integrating Systems (India) (P) Ltd., v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 2. Google India (P) Ltd., V. Dy. CIT [2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial difference between the assessee the aforesaid company, then this company cannot be treated as a comparable". Respectfully following the co-ordinate bench decision, we hold that the learned CIT(A) is justified in giving direction to delete M/s Nucleus Netsoft & GIS Ind. Ltd. as a comparable. Hence, this ground of appeal filed by the revenue is dismissed." 22. Since the Tribunal has examined the profile of these comparables and is of the view that these comparables are not good comparables for computing the ALP, we find no justification to readjudicate the profile of these comparables again. We therefore confirm the order of the CIT(A) who has rightly excluded these comparables. Accordingly, the order of the CIT(A) is confirmed with respect to IT enabled services segment. Accordingly, the AO/TPO is directed to recompute the ALP under software development services segment only. CO No. 13/Bang/2016: 23. The assessee has also filed C.O. assailing the order of the CIT(A) on the following grounds: 1. The Commissioner of Income-tax Appeals has erred in confirming the action of the Assessing Officer / the Transfer Pricing Officer of rejecting 'Quintegra Solution ..... X X X X Extracts X X X X X X X X Extracts X X X X
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