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TMI Blog2020 (3) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... n claiming tax u/s 10B of the Act, thus companies functionally dissimilar with that of assessee need to be deselected from final list. - ITA No. 5870/DEL/2011 - - - Dated:- 17-3-2020 - Shri N.K. Billaiya, Accountant Member, And Ms Suchitra Kamble, Judicial Member For the Assessee : Ms. Ananya Kapoor, Adv, Shri Shivansh Pandya, Adv For the Revenue : Shri Surender Pal, CIT- DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, This appeal by the assessee is preferred against the order dated 31.10.2011 framed u/s 143(3) r.w.s 144C of the Income tax Act, 1961 [hereinafter referred to as 'The Act' for short] pertaining to assessment year 2007-08. 2. The grievance of the assessee is two fold :- 1. TP adjustment of ₹ 5,92,11,870/-, and 2. Corporate tax adjustment pursuant to denial of deduction u/s 10B of the Act amounting to ₹ 7,54,85,392/-. 3. We will first address to the Corporate Tax Adjustment on account of denial of deduction u/s 10B of the Act. 4. The under lying facts in this issue are that the assessee had been claiming deduction u/s 80HHE of the Act upto to Assessment Year 1998-99 i.e. upto the 7th year from the esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugned order, the Commissioner of Income Tax(A) has held that the Assessing Officer was completely in error in holding that since the assessee started its business in AY 1992-93, then the prescribed period of 10 years for the purpose of exemption u/s 10B of the Act had come to an end by AY 2001-02. We also observe that the said section 10B envisages setting up of export oriented undertaking which is altogether different and distinct from setting up of a normal commercial activity unit. The Assessing Officer has not controverted the fact that the assessee company established 100% EOU in FY 1997-98 for exporting of computer software and this fact has found place in the assessment order para 4.1 and 4.2. In view of above and in the light of decisions of Hon'ble High Court of Delhi in the case of Legato Systems India Pvt. Ltd. and decisions of Hon'ble Punjab Haryana High Court in the case of Excel Softech Ltd. (supra), we are of the firm opinion that the Commissioner of Income Tax(A) rightly granted relief to the assessee by directing the Assessing Officer to grant exemption u/s 10B of the Act for the assessee. We are unable to find any perversity, ambiguity, perversity or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which amendment became effective operative, the assessee will be entitled to the extended period of exemption because the period of five years had not exhausted up to assessment year 1999-2000. Since the right of the assessee was continuing in the year of amendment and was not lost on the date when the amendment came into existence, the view taken by the Ld. CIT(A) cannot be upheld. So far as the objections of the Ld. CIT(A) regarding conduct of the assessee firm in not claiming the exemption in earlier year is concerned, the approach of the Ld. CIT(A) raising this objection, cannot be legally justified because if the assessee is entitled to any benefit under any statutory provision then the past conduct cannot be relevant particularly when reference to such conduct is not made in the Act. The eligibility of the assessee has to be seen in the year in which the claim is preferred and if in earlier years the assessee waived his right then he cannot be stopped in claiming the benefit in the subsequent years. The Ld. CIT(A) has also observed that the assessee did not file declaration exercising option prior to the due date for filing of return but filed it along with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold that the findings of the Commissioner of Income Tax (A) in the impugned order. Accordingly, Ground No. 2 of the Revenue is dismissed. 4. Respectfully following the above judgment of ITAT C Bench, Delhi in Assessee s own case for the immediate preceding year to the year under consideration in this appeal, we hold that the issue is squarely covered in favour of the Assessee by this order. Hence, we hold that the authorities below were not justified in rejecting the claim of the Assessee for deduction u/s 10B of the Act. For the year under consideration i.e Assessment Year 2006-07. In view of above main Ground No. 1 to 1.6 of the Assessee are allowed. 12. We further find that the quarrel travelled upto the Hon'ble High Court of Delhi and the Hon'ble High Court in ITA No. 488/2014 and 487/2014 dismissed the appeal of the Revenue. The relevant findings of the Hon'ble High Court read as under: 3. It is not disputed that the above issue stands covered in favour of the Assessee and against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done by the tax payer. 18. The appellant used the search of the databases, which yielded a set of 44 comparables with an average profit margin @ 11.94% and since the margin shown by the appellant was 13.77%, the international transactions were reported to be at arm s length. 19. The TPO examined the TP report of the appellant and found that the assessee has not gone into the verticals/horizontals within the software industry in its comparability study. The TPO further excluded those companies whose data was not available for F.Y. 2006-07. The TPO further selected those companies whose revenues from software development and relates services are more than 75% of the operating revenues for F.Y. 2006-07. 20. The TPO analyzed the comparables chosen by the assessee in its TP report. The specific reasons for rejection of the appellant s comparables, as reported by the TPO are as under: 21. After rejecting the comparables of the assessee, as mentioned hereinabove, the following 21 companies have been proposed as comparables by the TPO: Si No Name of the company 1 Avani Cimcon Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength Price @ 126.49% of operating cost ₹ 584,107,333 Price charged in the international transactions ₹ 524,895,463 Shortfall being adjustment u/s 92CA ₹ 59,211,870 23. Objections before the DRP were of no avail. 24. Before us, the ld. counsel for the assessee vehemently stated that the TPO has used the comparables which are either giant companies having high brand value like Infosys Technologies Ltd. and WIPRO Ltd or are functionally dissimilar and many comparables have extra ordinary items during the year in the form of merger and acquisition. Hence they should not be taken as good comparables. 25. Per contra, the ld. DR strongly supported the findings of the TPO and read the relevant portion of the TP order and pointed out that the appellant is also a giant company and belongs to Chris Capital Group. It is the say of the ld. DR that Infogain is itself a big brand value and mergers and acquisitions is an ongoing process and the appellant itself has acquired Blue Star Infotech Ltd and Synetario Technology and therefore, the MBA cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangibles whereas the assessee does not have any intangibles. Infosys Technologies Ltd is functionally dissimilar as it offers software products to banking industry and there are no segmental details. Wipro Ltd is engaged in providing a variety of services, such as, IT services, product engineering services, technology infrastructure services, BPO services, consulting services, etc. Infosys has significant R D activities and is also engaged in CSR activities, knowledge management and research and knowledge absorption. WIPRO also has significant R activities. 30. For similar reasons, the Hon'ble High Court of Delhi in the case of M/s Oracle [OFSS] BPO Services Pvt Ltd ITA 124/2018 has excluded such giant companies. The relevant findings of the Hon'ble High Court read as under: As to the exclusion of M/s Wipro Limited, here too, the Court is of the opinion that the brand value of an entity has a significant role in its ability to garner profits and negotiate contracts. Thus, while considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that an entity is able to offer wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng light entities having similar if not identical functions. Therefore, if a particular entity predominantly has transactions with its associate enterprise - in excess of a certain threshold percentage, its profit making capacity may resulted in a distorted picture, either way. 21. A reference may next be made to the decision in The Principal Commissioner of Income Tax-3 v. Evalueserve Sez (Gurgaon) Pvt. Ltd. (supra) where a reference is made to the earlier decision to the BC Management Services Pvt. Ltd. (supra). This decision dealt with the exclusion of three specific comparables, which have also involved in the present case namely M/s.TCS E-Serve Ltd., M/s.TCS E-Serve International Ltd. and M/s. Infosys BPO Ltd. This Court upheld the exclusion of all three comparables and in particular since the entities had a high brand value and therefore were able to command greater profits; besides they operated on economic upscale. 33. In light of the aforementioned judicial decisions of the Hon'ble Supreme Court and Hon'ble High Courts, we direct the Assessing Officer/TPO to exclude Infosys Technologies Ltd and WIPRO Ltd. from the final set of comparables. TATA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of certain acquisitions done by this company during the year. 15.2. After considering the rival submissions and perusing the relevant material on record, we find from the Notes to Accounts in the Annual report of this company that there was, in fact, amalgamation of Visualsoft Technologies Ltd. Note no. 25 with the caption 'Amalgamation of Visualsoft Technologies Ltd. with the Company' reads that: The prior year comparatives include effect of amalgamation of Visualsoft Technologies Ltd. ('Visualsoft') with the company w.e.f. ITA No.5857/Del/2011 1st October, 2006. The assets, liabilities, rights and obligations of Visualsoft have been recorded at their respective fair values under the purchase method of accounting for amalgamation. 15.3. The Mumbai Bench of the Tribunal in Petro-Aroldite (P) Ltd Vs. DCIT, (2013) 154 TTJ (Mum.) 176 has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. Similar view has been taken by the Delhi Benches of the Tribunal in several cases including Toluna India Pvt. Ltd. Vs. ACIT (ITA No. 564/D/2013). It is patent that the mergers/demergers largely inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sken Communication Technologies Ltd 42. The Annual report of this company shows that this company is engaged in the sale of software products and technology licensing and business of software services with no segmental results which make this company functionally dissimilar. For similar reasons, the co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd [supra] has directed for exclusion of this company. The relevant findings read as under: 17.1. Here again, we find that the financial results of this company stand distorted due to certain acquisitions made by it during the relevant year. It is evident from the Annual report of this company, which is available on page 868 and 924 of the paper book. It has been categorically mentioned in its Annual report that during the year this company acquired Botnia Hitech Oy, Finland and its two wholly owned subsidiaries. It has also been stated in the same para that during the year the company also successfully completed three mergers, namely, Sasken Network Systems Ltd., and Integrated Softtech Solutions Pvt. Ltd., the two Indian based wholly owned subsidiaries which merged with the assessee. It also transpires from this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a denovo drug design tool 'Celsuite', which is a revenue generating activity. When we examine the turnover of this company with the narration given on page 24 of the Annual report, it can be seen that the same comprises: Bio-informatics services, data warehousing and manning, software development, products and services. It is manifest from the Annual report of this company that the same cannot be considered as comparable on entity level when it has dealt not only with software products, but has also engaged itself into software development and also rendering services. In comparison with that, the assessee company is simply providing software non- development services to its AEs. As such, this company cannot be considered as comparable. We, therefore, direct to remove the name of this company from the list of comparables. 45. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Flextronics Software Systems Ltd 46. The Annual Report of this company shows that this company is an end-to-end provider of communication products, services and solutions to network equipment providers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company. The relevant findings read as under: Ld. AR contended that this company cannot be compared with the assessee company because the company is functionally dissimilar and derives revenue from various sources such as sale of license, software services, export from SEZ unit, revenue from subscription etc. Further, ld. AR submitted that this company is engaged in diversified business including software products and no standalone financial data is available for FY 2006-07. Therefore, the ld. AR submitted that this comparable may be excluded. On the other hand, the ld. DR could not controvert the fact that the said comparable is not engaged in sale of license of software products as pointed out by the ld. AR. We have heard both the parties and perused the material available on record. A perusal of the annual report of Thirdware Solutions Ltd. reveals that the said company has made income from sale of licence to the tune of more than ₹ 1 crore, which means the company is into production of software products which apparently cannot be a comparable to assessee dealing with contract software development and not into sale of any product. Therefore, we direct TPO/AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited to 3%. On the contrary, it has been mentioned in the Notes to the financial statement that: the company is engaged in development of software and software products since its inception. The company consisting of STPI unit engaged software products and in development of software is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. When we consider the assessee's functional profile, the only irresistible conclusion which can be drawn is that it is not a ITA No.5857/Del/2011 comparable company. Accordingly, this company is ordered to be expunged from the set of comparables. 51. We, accordingly, direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. E-zest Solutions Ltd 52. The Annual Report of this company shows that it is rendering product development services and high end technical services which come under the category of KPO services. For similar reasons, the co-ordinate bench in the case of Meritor LVS India [P] Ltd ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.4 We have heard the rival submissions and perused and carefullyconsidered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I- Q InformationSystems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not IT(TP)A.1231/Bang/2011 Page - 14 comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Z ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is any measure provided for segregating profit on sale of software products from the overall profit of this company for finding out a comparable segment similar with that of the assessee company. As the profits of the software development portion cannot be ascertained, we hold that it cannot be considered as comparable on entity level. We, therefore, order for the exclusion of this company from the final set of comparables. 55. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Helios Matheson Information Technology Ltd 56. The Annual Report of this company shows that revenue is from software sales and services. This company is engaged in ITES BPO services, offshore delivery, project management services, public sector services, maritime practices and executive education information systems. No segmental details are available. There being revenue from software sales and services, makes this company functionally dissimilar from that of the assessee. For similar reasons, the coordinate bench in the case of Global Logic India Pvt Ltd [supra] has excluded this company from the final set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d entity. 59. In light of the above, we direct the Assessing Officer/TPO to exclude this company from the final set of comparables. 60. It would not be out of place to mention here that the claim of revenue that broad functionality is sufficient to find the comparable entity though the TNMM method allows broad flexibility tolerance in the selection of comparables does not hold any water in the light of the observations of the Hon'ble High Court of Delhi in the case of Avenue Asia Advisors Pvt Ltd 398 ITR 120 wherein the Hon'ble High Court has held as under: 19. The first and the foremost issue that arises in this case is with respect to the applicability of tests laid down in Rampgreen Solutions (supra), which was rendered on 10th August, 2015. This decision has clearly laid down the various principles on the basis of which determination of comparables needs to be undertaken while fixing the ALP and the margin that needs to be assigned. This Court had specifically rejected the proposition that broad functionality is sufficient to find the comparable entity though the TNMM method allows broad flexibility tolerance in the selection of comparables. This propositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ('PLI') would require further investigation/analysis. Even while adopting the TNMM method, the standard for selection of the comparable transactions/entitles cannot be diluted. For comparison of transactions, factors such as the nature of capital, resources used, the risks assumed, etc. ought to be considered. Broadly, therefore, the dictum by this Court was that though in the TNMM method there is sufficient tolerance, mere broad functionality is by itself insufficient. Question (i) 21. In the backdrop of the principles laid down in Rampgreen Solutions (supra) and the analysis of the ITAT's order with respect to each of the comparables disputed by the Assessee, is as follows: (i) Sumedha Fiscal Services Limited - In the case of Sumedha, the ITAT clearly acknowledged that if it had handled management of rights issues and the revenue from such service was substantial, then the services provided by Sumedha would be dissimilar to that of the Assessee. However, having held so, the ITAT restored the matter to the TPO to again examine whether the revenue of Sumedha was substantial from handling the said services of rights issues and with a direction to exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while the Assessee was merely advising on these issues and providing advisory services to its AE, these three comparables appear to be actually involved in the providing of services relating to debt restructuring, debt financing, issuance of IPOs, mergers and demergers, etc. There is a difference between giving advice on these matters and actually undertaking the said services. A similar illustration, in the context of litigation, would be the difference between giving advice on what to argue in Court and actually arguing the matter in the Court. This difference needs to be borne in mind and the mere appearance of similar sounding words does not by itself constitute similar functions. Further, as laid down in Rampgreen Solutions (supra), all these three companies demonstrated a wide deviation in the percentage of margins. Thus, it requires a deeper analysis to determine as to whether they were in fact comparables to be retained for the purpose of fixing the ALP. 24. Insofar as the argument of Mr. Chaudhary regarding the trend of Assessees to challenge the inclusion of comparables which show a higher percentage margin, is concerned, the same cannot be faulted with in as much as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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