9911796707
TMI Blog2018 (9) TMI 1978X X X X Extracts X X X X X X X X Extracts X X X X ..... s from 3 divisions of the Assessee - this company was held to be functionally not comparable as it is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles and intellectual property rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, as the company is a product company having significant intangibles and is thus not comparable to captive software service providers such as the Assessee. E-Infochips Ltd. company - It is functionally different from the profile of the assessee-company as it is engaged in development of maintenance of computer software and software development consulting and also manufacturing EVM and VDB electronic board. As per the website of the company, it provides silicon engineering evolving ASIC and FVGA design, verification and validation, physical design and DFD. Further, the company is engaged in manufacturing activities as evident from income statement. It has items pertaining to consumption of materials, changes in inventory and manufacturing service cost. It also fails service revenue filter as its software development filter is 73.78 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of disallowance of expenses incurred in relation to exempt income in the light of the fact that the assessee has not earned any dividend income for the year under consideration and by following the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd. v. CIT [ 2015 (9) TMI 238 - DELHI HIGH COURT ] held that disallowances contemplated u/s 14A has no application, if no exempt income is received or receivable in the relevant previous year. Thus we direct the A.O to delete the additions made towards disallowance of expenses incurred in relation to exempt income u/s 14A. X X X X Extracts X X X X X X X X Extracts X X X X ..... logies Ltd cannot be taken as comparable, when it satisfies all the qualitative and quantitative filters adopted by the TPO. (x) Whether the Hon'ble DRP in correct in excluding M/s Acropetal Technologies on the ground that it has significant onsite revenue without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins? (xi) Whether the Hon'ble DRP erred in facts and law in excluding the company as a comparable, on the ground of failing the service income filter, when only the segmental results have been considered for comparability? (xii) Whether the Hon'ble DRP ought to have appreciated the fact that when segmental results are available and considered for comparability, the application of service income to total income filter does not arise? (xiii) Whether the Hon'ble DRP erred in fact and law in rejecting M/s Igate Global Solutions on the ground that segmental information is not available, when the company had classified itself to be operating in one segment i.e. provision of ITES? (xiv) Whether the order of the Hon'ble DRP in rejecting comparable cases by insistence on strict comparabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .6 The Honourable DRP/learned AO/TPO has erred in law and on facts in rejecting the additional comparable companies requested for inclusion by the respondent during the course of the transfer pricing proceedings, which satisfied all the filters of the TPO, as well as the Assessee; 4.7 The learned TPO have erred in law and on facts in making arithmetical errors and computing the net profit margin of the comparable companies at higher level. 5. Working capital and Risk adjustment:- 5.1 The Honourable DRP and the learned AO/TPO have erred in law and on facts by not correctly implementing the formula prescribed by the Organization for Economic Co-operation and Development ("OECD") and the United Nations Practice Manual for Developing Countries Model Convention to carry out working capital adjustment to the operating profit margins of the comparable companies. 5.2 The Honourable DRP/learned AO have erred in upholding the learned TPO's action of not making a further downward adjustment to the margin of the comparable companies considering the risk differentials between the Respondent and the comparable companies. 5.3 The Honourable DRP and the learned AO/TPO have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve erred in law in rejecting the following companies selected by the respondent in its TP study. Evoke Technologies Limited; 7.4 The Honourable DRP/Learned AO have erred in law in suo motu rejecting Mindtree Limited, selected by the TPO during the assessment proceedings, based on inappropriate reasons. 7.5 Without prejudice to the above, the learned AO/TPO has erred in law and on facts in rejecting the additional comparable companies, Thinksoft Global Services Limited, proposed by the respondent during the course of the transfer pricing proceedings, without appreciating that the said company passes all the filters as adopted by the learned TPO. 8. Specific grounds for Information Technologies Enabled Services Segment:- 8.1 Without prejudice to the above, the Honourable DRP and the learned AO/TPO have erred in law and on facts in rejecting the following comparable companies selected by the respondent in the TP study based on inappropriate reasons; Aditya Birla Minacs; Caliber Point Business Solutions Limited; In House Production Limited; Spanco Limited; Informed Technologies Limited. 8.2 Without prejudice to the above, the Honourable DRP and the Learned AO/TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection with the investment of funds in share capital of its group companies; 10.2 The Honourable DRP and the learned AO have erred in disallowing an amount of ₹ 75,730 under section 14A of the Act, read with Rule 8D of the Rules; 10.3 The Honourable DRP and the learned AO have erred in law and on facts in disallowing an amount of ₹ 75,730 under section 14A of the Act by mechanically applying Rule 8D when there is no basis to reject the Respondent's claim that no expenditure was incurred for earning exempt income; 10.4 The Honourable DRP and the learned AO have erred in law and on facts in not considering the contention of the Respondent that there was no exempt income earned in the first place and consequently no expenditure could have been incurred for earning exempt income during the relevant AY and hence the applicability of section 14A of the Act does not arise. The Respondent craves leave to add, alter, vary, omit, substitute or amend the above grounds of Cross Objections, before commencement of/during proceedings before the Honourable Income Tax Appellate Tribunal ("ITAT"), so as to enable the Hon'ble Income Tax Appellate Tribunal to dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucted by the assessee in respect of software development segment and IT enabled services segment, the A.O referred the matter to TPO u/s 92C of the IT Act, 1961. The TPO has taken up TP proceedings and vide letter dated 03.03.2014 asked the assessee to submit the documents maintained in terms of sec. 92D of the IT Act, 1961 along with financials, annual report, copies of agreements. In response to letter, the assessee vide its letter dated 02.04.2014 filed various details as called for by the TPO. The TPO, after considering relevant details issued a show-cause notice on 23.09.2014 and called upon the assessee to submit its explanations in respect of TPO remarks on the filters adopted by the taxpayer, filters applied by the TPO, the search process adopted by the TPO, accept/reject companies considered by the TPO. The assessee was also furnished computation of operating margins in respect of final comparables selected by the TPO. The assessee was also informed of the reasons for rejection of companies in each case. In response to notice, the assessee vide letter dated 10.10.2013, furnished its objections. The detailed submissions made by the assessee was reproduced by the TPO in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order u/s 143(3) r.w.s 144(c) of the Income-tax Act, 1961 dated 5.03.2015 and made transfer pricing adjustment to the extent of ₹ 65,5850,389/- as suggested by the TPO u/s 92C of the Income-tax Act, 1961. In the draft assessment order, the A.O also re-computed income eligible for exemption u/s 10A of the IT Act, 1961 by making adjustments towards communication expenses from export turnover, but not from total turnover. Similarly, the TPO has made disallowance of expenditure incurred in relation to exempt income u/s 14A of the IT Act, 1961, by invoking Rule 8D(2)(iii) of the Income-tax Rules, 1962, and worked out disallowance of ₹ 75,730/-. 7. The assessee has filed its objections before the DRP against the draft order passed by the AO u/s 143(3) r.w.s 144(c) of the Income-tax Act, 1961 and challenged TP adjustment made by the A.O u/s 92C of the Income-tax Act, 1961. The assessee has challenged rejection of TP documentation, filters and qualitative criteria applied by the TPO, rejection of companies, viz, software development services and related services is less than 75% of total operating revenue, rejection of companies with related party transactions is grea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Kolkata in the case of Asstt. CIT v. Champion Commercial Co. Ltd. [2012] 26 taxmann.com 342/139 ITD 108, and the decision of Hon'ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT [2011] 15 taxmann.com 390/203 Taxman 364/[2012] 347 ITR 272, therefore, there is no error in quantification of disallowances worked out by the A.O in respect of expenditure incurred in relation to exempt income and accordingly, upheld disallowances made by the A.O. Aggrieved by the DRP order, the Revenue as well as the assessee is in appeal before us. 9. The Revenue has challenged exclusion of certain comparables by the DRP. The ld. DR, referring to the grounds of appeal filed by the Revenue submitted that although, the Revenue has seeking inclusion of M/s RS Software (India) Ltd., Acropetal Technologies Ltd., L&T Infotech Ltd, E-infochips Ltd, as comparable companies to the profile of the assessee-company, but the larger issue has not been considered by the DPR in applying onsite revenue filter on pick and choose basis to select comparables, ignoring the fact that once a particular filter is applied in respect of comparables, it should be applied for all comparables on board. The D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicating that the company has high onsite revenue. The TPO has considered total revenue from its three segments which includes financial, manufacturing, telecom. It is predominantly engaged in onsite development of software. The ld. AR for the assessee further submitted that although the DRP has applied onsite revenue filter to exclude these companies, but facts remains these companies goes out of comparability on grounds like which are functionally not comparable to the assessee-company. Therefore, the DRP has considered relevant facts to direct the A.O to exclude these companies and accordingly requested to uphold the directions issued by the DRP. 11. We have heard both the parties and perused the material available on record and gone through the orders of the authorities below. The Revenue has challenged exclusion of Acropetal Technologies Ltd, L&T Infotech Ltd., and E-infochips Ltd, on the ground that the DRP has suo motu excluded above three companies by applying fresh filter in respect of onsite revenue filter, without applying such filter to all comparable selected by the TPO. We find that although the DRP has taken one of the reasons for excluding these companies on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the employees cost, the company cannot be retained as comparables. We find that the ITAT, Bangalore, in the case of CGI Information Systems and Management Consultation (P.) Ltd. (supra), has considered Acropetal Technologies Ltd., and held that this company is not comparable to the profile of the company which are engaged in captive service provider in respect of software development services. The relevant portion of order is extracted below: 19. Acropetal Technologies Limited - As far as exclusion of this company as a comparable company is concerned, it is seen from the Directions of the DRP at paragraph 2.7 at page-9, that this company was excluded on the grounds that: (i) IT(TP)A No.502/B/16 CO No.01/B/17 the segmental information containing the break-up of its export sales and employee costs, was not available and it was not possible to ascertain if it passed the export earnings and/or employee costs filters; and (ii) a substantial portion of its software development activities have been outsourced on sub contract and it could, therefore, not be retained as a comparable. The DRP in directing exclusion of this company followed decision of Hyderbad Bench of ITAT in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial expenses on sub contracting, indicating that the company has high onsite revenue; (ii) the TPO has considered the entire revenue from its 3 segments, viz. financial services, manufacturing and telecom as was disclosed in its Annual Report for FY 2010-11, for the purposes of comparability to the Assessee's software development services; and (iii) predominantly engaged in the onsite development of software in FY 2010-11. The learned DR submitted before us that the Assessee's profile also is similar to the profile of L & T Infotech Ltd. and therefore this company should be included as comparable company. He also submitted that what is the quantum of on site revenue has not been spelt out by the DRP. In this regard it was argued by him that on site revenue beyond 25 per cent of the total revenue of the company would be beyond the tolerance level and without a finding that on site revenue is more than 25 per cent of the total revenue, this company ought not to have been excluded from the list of comparable companies. We agree with the submission of the learned DR that for application of on site revenue filter, the DRP ought to have given a finding regarding the quantum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT Bangalore in the case of CGI Information Systems and Management Consultation Pvt Ltd. (supra) and held that this company is not comparable to the profile of companies which are engaged in captive service provides in respect of software development services. The relevant portion of the order is extracted below: 24. As far as Ground No.4 raised by the revenue is concerned, the said ground of appeal is vague and in any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the Act and Rules. As far as Ground No. 5 in Revenue's appeal is concerned, the Revenue seeks to challenge the exclusion of E-Infochips Ltd. on the ground that it failed the software service income filter at 75 per cent. At the outset, the Assessee submits that E-Infochips Ltd. was excluded by the DRP on the ground that: (i) no segmental information regarding its diverse functions is available; (ii) it failed the software service income filter at 75 per cent; (iii) there were major fluctuations in profit and turnover every year which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s like the taxpayers. Since, the entire operations of taxpayers are taking place offshore i.e in India, it is but natural that it should be compared with companies with major operations offshore, due to the reason that economics and profitability of onsite operations are different from that of offshore business model. We find that though the assessee as well as TPO has selected this company as comparable, the DRP on its own excluded this company by applying onsite revenue filter. Since, assessee as well as the revenue wants to include this company as comparable, we direct the A.O to include RS Software (India) Ltd as comparable company. ITeS Segment: 18. The Revenue vide ground Nos. 12 to 13 challenged the directions of the DRP, directing the A.O to exclude M/s iGate Global Solutions Ltd, from the list of comparables on the ground that segmental information is not available. 19. Ld. DR submitted that when the company had classified itself to be operating in one segment i.e provision of ITeS, then there is no reason to exclude this company from the list of comparables on the ground that segmental information is not available. 20. The Ld. AR for the assessee submitted that the DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat expenses excluded from export turnover have to be excluded from total turnover also, otherwise any other interpretation makes the formula unworkable and obsured and hence such deduction shall be allowed from the total turnover in same proportion as well. We find that the Hon'ble Supreme Court in the case of CIT v. HCL Technologies Ltd.[2018] 404 ITR 719/255 Taxman 313/93 taxmann.com 33 (SC) has considered similar issue and after considering the ration laid down by the Hon'ble Karnataka High Court, in the case of TATA Elexi Ltd. (supra), held that any expenses excluded from export turnover have to be excluded from total turnover also. 26. In this view of the matter and respectfully following the decision of Hon'ble Supreme Court in the case of HCL Technologies Ltd. (supra), we are of the considered view that the DRP is right in directing the A.O to exclude expenses deducted from export turnover from total turnover. We do not find any error in the findings of the DRP, hence we are inclined to upheld the DRP findings and reject the ground raised by the Revenue. 27. In the result, the appeal filed by the Revenue is dismissed. 28. The next issue that came up for our c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in CIT v. Chugandas & Co. [1964] 55 ITR 17 (SC) and CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC) which hold that where shares were held as business investment, the dividend income though assessable to tax under the head "income from other sources", would retain its character as business income for all intents and purposes. In the latter decision it was specifically held that the income from securities which forms part of the Assessee's trading assets or part of its income in business if loss incurs in business would be set off against that income in succeeding years. Mr. Vohra pointed out that even in the Assessee's case the business loss of previous year has been set off against the income of the subsequent years. 15. Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P) Ltd. (decision dated 5th September 2014 in ITA No. 486/2014). In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act when no dividend income had been earned by the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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