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TMI Blog2020 (3) TMI 414X X X X Extracts X X X X X X X X Extracts X X X X ..... Services (SWD Services). These grounds reads as follows: Revenue's appeal: 1. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel was not justified in giving direction to the TPO to exclude M/s ICRA Techno Analytics Ltd as a comparable, without considering the discussion made by the TPO in respect of the comparable company in the TP order 2. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel was not justified in giving direction to the TPO to exclude M/s Infosys Ltd and M/s Tata Elxsi Ltd as a comparable without considering the facts discussed in the case of the taxpayer by the TPO in respect of the comparable company in the TP Order. 3. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel was not justified in excluding INFOSYS Ltd and Tata Elxsi Ltd as a comparable on the basis of decision in a different case when in TP rejection or acceptance of a comparable in a case on the basis of its appropriateness / inappropriateness in some other is not possible. 4. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding the TPO's approach of not providing Risk Adjustment and thus ignored the limited risk nature of the services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential. even when full-fledged entrepreneurial companies are selected as comparables. 3. The Assessee is a company registered under the provisions of the Companies Act, 1956 and is a subsidiary of Emulex International Ltd. (which holds 99.998% shares) and Emulex Corporate Services Corpn. (which holds 0.002% shares). The Assessee company is engaged in providing SWD services to its affiliates, for which it received a consideration of Rs. 29,54,66,768/- during the previous year relevant to the assessment year 2010-11.Since the transaction of provision of Software service by the Assessee was an international transaction, income from such international transaction has to be determined having regard to Arm's Length Price (ALP) as laid down in the provisions of Sec.92 of the Act. Net margin on cost earned by the Assessee (as reflected in the TP order): Operating Income Rs. 29,54,66,768/- Operating Expenses Rs. 26,79,44,050/- Operating Profit/Loss(Op. Income Expenses) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,66,7686/- Short fall being adjustment u/s. 92CA Rs. 4,77,69, 560/- The aforesaid shortfall, consequent to determination of ALP, was added to the total income of the Assessee in the draft order of assessment passed by the AO. 6. Against the proposal to make addition as above in the draft assessment order, the Assessee filed objections before the Dispute Resolution Panel (DRP). Briefly the directions issued by the DRP are as follows- (i) The DRP directed exclusion of ICRA Techno Analytics Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd. and Persistent Systems Limited. (ii) The DRP did not accept the contention that KALS Information System Ltd. ought to be excluded; (iii) The DRP directed exclusion of Persistent Systems and Solutions Ltd., and Thinksoft Global Services Ltd. on the erroneous basis that the Assessee had sought exclusion of the same. (iv) The DRP suo motto directed exclusion of R S Software (India) Ltd. on the ground that it is predominantly engaged in onsite software development. (v) The DRP accepted the Assessee's contention that certain expenses which had been disallowed whilst computing the total income for the purposes of income-tax, ought not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as comparable companies. The following are the relevant observations of the Tribunal on the comparability of the aforesaid four companies: "(1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- "Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables." 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as products for banking industry. 20. 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. (5) Sasken Communication Technologies Ltd. 21. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables." 22. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. lakhs Year ended March 31, 2010 Year ended March 31, 2009 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 23. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties." 33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra), we do not find any reason to interfere with the finding of the DRP." 11. Respectfully following the aforesaid decision, we hold that the aforesaid four companies were rightly regarded as not comparable companies with the Assessee by the DRP and hence, we find no merits in the relevant grounds of appeal of the revenue. 12. In Ground No.7 of its appeal, the revenue has challenged the exclusion of Persistent Systems Ltd. [Persistent Systems' for short], Persi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables." 14. Respectfully following the aforesaid decision, we hold that the aforesaid company was rightly regarded as not comparable company with the Assessee by the DRP and hence, we find no merits in the relevant grounds of appeal of the revenue. 15. The Assessee in its appeal in Gr.No.4(b) sought exclusion of KALS Information Systems Ltd. our attention was drawn to an order passed by ITAT Bangalore in the case of a SWD services provider such as the Assessee for the very same AY 2011-12 in the case of [2016] 70 taxmann.com 299 (Bangalore - Trib.) Deputy Commissioner of Income-tax, Circle-3(1)(2), Bangalore v. Electronics for Imaging India (P.) Ltd. For (AY 2010-11). In the aforesaid order, the Tribunal has upheld exclusion of the aforesaid company with the following observations: "(3) KALS Information Systems Ltd. 21. The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The learned DR, in his submission, pointed out that this company should also be tested on the basis of functional comparability, if the comparability of this company is restored to the TPO for fresh consideration. Similarly, the learned Counsel pointed out that CAT Technologies Ltd., was rejected by the TPO for the reason that the details of related party transactions were not available. The plea of the assessee was that in the Annual Report, there was a column for reporting related party transaction, but no transactions had been reported. It is a plea of the assessee that there were no related party transaction and that is the reason why the Annual Report did not give details of any related party transaction. The submissions made before the TPO were reiterated before the DRP. But the DRP did not adjudicate on the basis of the comparability of this company. The learned DR pointed out that this company should also be compared on the basis of functional comparability. The learned Counsel for the assessee submitted that the comparability of the aforesaid two companies can be remanded to the TPO for fresh consideration and that the functional comparability of these two compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hence non-operating in nature. The other income, if not related to business operations, but interest on FDs etc, has rightly been excluded by the TPO from operating revenue. IT is directed accordingly." 21. In the order giving effect to the directions of the DRP, the TPO did not exclude the aforesaid two items of expenses while computing the operating margin of the assessee. Ground No.3 is raised by the assessee against such action of the TPO. 22. We have heard the rival submissions and we find that the assessee has worked out the operating profit margin in its TP study at 10.27% and considered a sum of Rs. 26,79,44,050/- as operating expenses. As to whether this operating expenses so considered by the assessee includes the employee's stock compensation and provision for service tax or not is not clear from the financials. The DRP, in its directions has observed that the TPO has considered employee's stock compensation and provision for service tax as non-operating cost. At the same time, the DRP has also given a direction that these items of expenditure are non-operating in nature. In the given facts and circumstances of the case, we are of the view that it would be just ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dismissed. 26. The other grounds which require consideration in assessee's appeal are ground Nos.5 and 6 which are grounds relating to non granting MAT credit u/s.115JAA of the Act brought forward from AY 2008-09 and the ground relating incorrect credit for advance tax paid for AY 2010-11 taken into consideration by the AO, respectively. 27. As far as Gr.No.5 is concerned, the facts are that for assessment year 2010- 11, the Assessee was entitled to credit of brought forward MAT from the year 2008-09 amounting to Rs. 16,42,956/-. Out of the same, MAT credit of Rs. 11,44,678/- was set-off in assessment year 2009-10. Accordingly, the assessee had brought forward MAT credit of Rs. 4,98,278/- for AY 2010-11. However, in the final assessment order, the AO did not grant the same. We are of the view that it would be just and appropriate to direct the AO to grant the MAT credit to the extent available. 28. As far as Gr.No.6 is concerned, the facts are that the AO in his final assessment order has considered the amount of advance tax paid by the Asseseee as Rs. 33,74,001, as against Rs. 73,35,001/-, without providing any reason whatsoever. It is pertinent to note that the AO in his dra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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