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TMI Blog2019 (12) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... his ground of appeal of the assessee is rejected. Determination of arm s length by the TPO in relation to the software development services segment - Comparable selection - HELD THAT:- Larsen Toubro Infotech Ltd. is functionally different from the assessee company and also there is significant onsite services. It was observed that there is no segmental data available coupled with L T Infotech Ltd. is having huge brand value. Hence, it cannot be compared with the assessee company. iGATE Global Solutions Ltd exclusion - Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected. Aftec Limited exclusion - As this issue does not arise from the direction of the DRP or the order of the TPO. Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected. Determination of ALP in relation to the ITeS segment - Inclusion of comparable - HELD THAT:- Informed Technologies India Ltd. is not functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue, that restriction of power cannot affect the powers of the Tribunal which is bound to exercise under Section 254 of the Act. No reason to think that the Tribunal has committed an illegality by directing the Assessing Officer to decide the matter afresh duly adverting to the claim of the assessee for the benefit of Section 10A. - Decided in favour of the assessee. Treatment of foreign exchange fluctuation gain or loss - As submitted that foreign exchange gain or loss must be considered as operating - HELD THAT:- As relying on M/S INFAC INDIA PRIVATE LIMITED [ 2018 (10) TMI 1814 - ITAT CHENNAI ] we direct the Assessing Officer to exclude the gain or loss on account of foreign fluctuation from the operating expenses for computing the profit and loss. This ground of appeal of the assessee is partly allowed. Allowance of working capital adjustment - DR submitted that working capital adjustment should not have been allowed for the reason that the assessee has negative working capital - HELD THAT:- As decided in Zafin Software Centre of Excellence Pvt. Ltd[ 2018 (5) TMI 1776 - ITAT COCH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable since it was engaged in software products and the company had inventories amounting to ₹ 1.66 crores which indicated that the company is not a purely software development company. Further, the company had undergone restructuring during the year and it was engaged in R D and technology absorption and had significant intangibles. Thus we direct the Assessing Officer/TPO to exclude this company from the list of comparables. Eclerx Services Ltd s engaged in IT enabled services which is nothing but KPO services. Being so, it is not functionally comparable with the assessee company when compared to the services rendered by the assessee company. Even otherwise it fails on account of turnover filter and on account of related party transactions which is at 14.77% and incurred onsite expenses of 16.60%. Being so, the DRP is justified in excluding this company from the list of comparables. Accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the revenue is dismissed. - S/SHRI CHANDRA POOJARI, AM GEORGE GEORGE K., JM For the Appellant : Shri Raghunathan S., Adv. For the Respondent : Shri Shantam Bose, CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n arriving at new companies as comparable to the Assessee, without establishing functional comparability The TPO also erred on facts in arbitrarily accepting companies without considering companies having varied turnovers, difference in the size and scale of operations which have a direct impact on their profitability considering the upper turnover filter. The TPO erred in accepting abnormal profit making companies as comparables. The TPO also erred on facts in wrongly computing the margins of certain companies. 5. Non allowance of Foreign Exchange gain or loss as Operating item DRP directed AO to consider foreign exchange fluctuation in respect of reinstatement of the receivables and payables as operating in nature. AO has rejected the same on the grounds of non-availability of data and considered the whole of foreign exchange gain or loss as non-operating in nature. 6. Non allowance of appropriate adjustments to the comparable companies by the TPO The TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices (b) marketing expenditure adjustment risk profile between the Assessee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same is contingent in nature and should have been made through filing return and not in the course of assessment. Without prejudice to the above, the learned JCIT's and DRP's action in not granting the alternate claim of deduction under section 10A of the Act is in violation of CBDT Circular 14 (XL-35) dated 11 April 1955. 10. Other Grounds Without prejudice to the above, the learned JCIT has erred in considering the refund made to the assesse as amounting to ₹ 29,02,771, whereas the actual refund received for the subject AY amounts to ₹ 26,87,117. Without prejudice to the above, the learned JCIT has erred in computing interest under section 234D on the refund made as erroneously considered in the assessment order whereas the same needs to be computed on the actual refund received. Without prejudice to the above, the learned JCIT has erred in recovering interest under section 244A to the extent of ₹ 1,88,676 from the petitioner when the same had not been granted for the subject AY. 11. Penalty Proceeding under section 271(1) The learned JCIT has erred in initiating penalty proceedings u/s. 271(1) of the Act. Relief 12. The Assessee prays that the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R, the Company had disclosed the said prior period income in the Form 3CEB for FY 2009-10 and this income had not yet been tested for arm s length compliance neither in FY 200910 nor in FY 2008-09. Hence, it was submitted that the same be considered in computation of margins for the current year. For this purpose, the Ld. AR relied on the following case laws wherein it was held that in the context of MAT, prior period income should be considered in the year in which the same is recorded in the books. Since TP margins are also based on books, the same is relevant. 1) Khaitan Chemicals and Fertilizers Limited (175 taxman 195 (Delhi) 2) Tamil Nadu Cements Corporation Limited TC(A) No. 1123 of 2005. The Ld. AR also relied on the decision of Tribunal in the case of Sony India Private Limited vs. DCIT in ITA No. 1181/Del/2005 dated 23/08/2008. The Ld. AR also relied on the decision of Tribunal in the case of Nalco Water India Limited vs. ACIT in ITA No. 742/Pun/2017 dated 06/09/2019 wherein it was held that wherein it was held that subvention income given by parent Company to subsidiary has to be treated as operating in nature and has to be included as operating revenue while computing P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al dissimilarity as cost of bought out items for resale and segmental details were not available for this comparable. Moreover, this company had significant presence of onsite services and development of in-house intangibles. The comparable had also huge brand value and predominant presence in the market. The Ld. AR relied on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in ITA No. 223/2017 wherein it was held that a tolerance range of 10 times on both sides of the assesses turnover should be applied. The Ld. AR also relied on the decision of the Tribunal in the case of M/s. Electronic Arts Games India Pvt. Ltd. vs. CIT in ITA No. 380/Hyd/2015 dated 30/09/2016 (Hyd) wherein it was held that segmental data was not available. The Ld. AR also relied on the decision of the Tribunal in the case of Cerner Healthcare Solutions (P) Ltd. in IT(TP)A No.44/Bang/2015 dated 16/01/2017 wherein it was held that Larsen Toubro Infotech Ltd. was held to be functionally different and owned huge brand value along with significant intangibles. 6.4 We have heard the rival submissions and perused the material on record. We find this issue is covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n R D and hence, it should be excluded. The Ld. AR relied on the order of the Tribunal in the case of Mentor Graphics vs. DCIT dated 18/02/2015 wherein it was held that the company deals in software products having its own IPR and segmental information was not available. The Ld. AR relied on the decision of the Tribunal in the case of Qualcomm India Pvt. Ltd. vs. ACIT (6) TMI 746 (DEL) and the decision of the Tribunal in the case of M/s. Philips India Ltd. vs. DCIT 2017 (2) TMI 1337 (Kol). 8.1 We have heard the rival submissions. We find this issue does not arise from the direction of the DRP or the order of the TPO. Against this comparable, the assessee has not raised any objection before the DRP. Hence, this issue does not arise out of the direction of the DRP. Accordingly, this ground of appeal of the assessee is rejected. 9. Thirdware Solutions Ltd. The Ld. AR submitted that this company had different functional profile. It was engaged in product development and trading in software and segmental profit and loss was not provided and hence, it should be excluded. The Ld. AR relied on the decision of the Tribunal in the case of Open Solutions Software Services (TS-305-ITAT-2017 (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s profitability. Granting of the said loan to the related party is definitely prejudicial to the interest of the assessee. 10.3 We have heard the rival submissions and perused the material on record. The turnover of Informed Technologies India Ltd. is 2.14 crores as against the turnover of ₹ 29.78 crores of the assessee company. By placing reliance on the judgment of the Karnataka High Court in the case of Acusis Software India Private Limited vs. ITO in ITA No. 223/2017, this company cannot be comparable with the assessee company. Further, as seen from the paper book pg. no. 1073, Informed Technologies India Ltd. is not functionally comparable with the assessee company which is engaged in KPO services. As seen from paper book pg. no.1085, the employee cost ratio was low at 29.93% of total operating income as compared to 59% and onsite expenses was at 13.21% of operating cost. By placing reliance on the on the decision of the Tribunal in the case of Aptara Technologies Pvt. Ltd. ITA No. 259/PUN/2015 dated 31/05/2016 (Pune) we direct the A.O./TPO to exclude this company from the list of comparables. This ground of appeal of the assessee is allowed. 11. BNR Udyog Ltd. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by BNR Udyog Ltd. is very significant. Hence, by placing reliance on the above decisions of the Tribunal cited by the Ld. AR, we are inclined to direct the Assessing Officer to exclude this company from the list of comparables. This ground of appeal of the assessee is allowed. 12. Accentia Technologies Ltd. The facts of the issue are that from the annual report the DRP noticed that medical transcription, medical coding, billing and receivable management (collection) all are integral part of the health care BPO services termed as HRCM services. It was found that the company prepared and maintained its accounts fairly and accurately in accordance with the accounting system and the question of segmental information does not arise and it has only one segment. Therefore, the DRP rejected the contention of the assessee to exclude this company from the list of comparables. 12.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that this company is engaged in providing software as a service as well as medical transcription. It was submitted that the company had undergone business restructuring during the F.Y. 2009-10 and amalgamation with Asscent Infoserve Private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the assessee was claiming exemption under a different section of the Act. 13.2 On appeal, the DRP relied on the judgment of the Delhi High Court in the case of Regency Creations Ltd. (255 CTR 63) wherein it was held that for the purpose of section 10B of the I.T. Act, 100% EOU is only the undertaking which is so approved by the Board appointed by the Central Government in exercise of powers conferred u/s. 40 of Industries (Development Regulation) Act, 1951 and not the undertaking having approved by Director STPI. The DRP stated that the issue was considered by it for the assessment year 2009-10 and the disallowance of deduction u/s. 10B was upheld. Regarding alternate claim of deduction u/s. 10A, the DRP confirmed the findings of the Assessing Officer. 13.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the DRP and the A.O. was bound to examine and grant the alternative claim u/s. 10A of the Act to the assessee as per the CBDT Circular No. 14(XL-35) dated 11 April 1955 and the judgment of the Bombay High Court in the case of Vodafone India Services Pvt. Ltd. WP 1877 of 2013. The Ld. AR relied on the judgment of the Apex Court in the case of Nati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the learned Senior Counsel for the revenue that the power conferred on the appellants under Section 263 only authorised him to examine whether the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue, that restriction of power cannot affect the powers of the Tribunal which is bound to exercise under Section 254 of the Act. In such a situation, having regard to the language of Section 254 and as interpreted by the Apex Court in National Thermal Power Co. Ltd.'s case (supra), we do not see any reason to think that the Tribunal has committed an illegality by directing the Assessing Officer to decide the matter afresh duly adverting to the claim of the assessee for the benefit of Section 10A. 7. Though the learned Senior Counsel for the revenue relied on the judgment of a Delhi High Court in Regency Creations Ltd. s case (supra), a reading of the judgment shows that the Delhi High Court set aside the order of the Tribunal granting the benefit of Section 10B to the assessee therein. However, the subsequent order passed by the Delhi High Court, a copy of which has been made available by the learned senior counsel appearing for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payables, it was not possible to ascertain profit and loss. 14.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee had not entered into any derivative contracts during the year which is evident from Notes to Accounts of the assessee for FY 2009-10. It was specifically mentioned that there were no outstanding derivative instruments as on balance sheet date. Further, it was submitted that the only foreign currency exposure the assessee had was with regard to reinstatement of receivables and payables which the DRP had clearly held as operating in nature. The Ld. AR submitted that the TPO s argument that the details with regard to break up of foreign exchange gain for comparable companies cannot be determined and hence, the same should not be considered in computing the operating margin of the company as well as the comparables is incorrect since the prudent approach would have been to consider foreign exchange gain as operating given that the entire foreign exchange gain or loss pertains to the operations. Thus, it was submitted that foreign exchange gain or loss must be considered as operating. The Ld. AR relied on the following case laws: i) I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Indian currency. Therefore, the co-ordinate Bench of this Tribunal found that the foreign exchange loss or gain has to be excluded from operating income. In view of the decision of co-ordinate Bench of this Tribunal in Hanil Tube India Pvt. Ltd. (supra), this Tribunal is of the considered opinion that the profit or loss due to foreign exchange fluctuation has to be excluded from the operating income for the purpose of PLI. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to exclude the loss or gain in foreign exchange fluctuation from the operating income for computing PLI. 14.6 In view of the above decisions of the Tribunal, we direct the Assessing Officer to exclude the gain or loss on account of foreign fluctuation from the operating expenses for computing the profit and loss. This ground of appeal of the assessee is partly allowed. ITA No. 185/Coch/2015 : Revenue s Appeal : AY 2010-11 15. The Revenue has raised the following grounds of appeal: 1. The order of the Dispute Resolution Panel-1, Bangalore is so far as on the points mentioned below are concerned is opposed to law on the facts and circumstances of the case. 2. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee provides both low and high end services and therefore a mix of comparables form both BPO and KPO segment should have been considered appropriate. Hence exclusion of this company is not in order. 7. For these and other grounds that may be advanced at the time of hearing the order of the learned Dispute Resolution Panel-1, Bangalore may be set aside and that of the Assessing Officer restored. 16. The first ground is with regard to erroneous allowance of working capital adjustment. 17. The facts of the case are that the TPO rejected the assessee s request for working capital adjustment by relying on the decision of the ITAT, Chennai in the case of Mobis India Ltd. vs. DCIT (TS-235-ITAT-2013(CHNY)-TP wherein the claim was rejected on the ground that the assessee was unable to justify the adjustment made on account of negative working capital as the assessee could not show the impact of the negative working capital on its margin. 18. On appeal, the DRP held that the working capital adjustment need to be allowed. Accordingly, the DRP directed the Assessing Officer to allow the working capital adjustment based on comparables retained after giving effect to the directions given i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor adjustment to sales and by adding creditor adjustment and subtracting inventory adjustment from Cost of Goods Sold for each comparable company. Here, the prime-lending rate was used as the appropriate cost of capital because it can be determined with reasonable accuracy and is the best available estimate of the cost of capital. For this purpose, the prime-lending rate of 12.50% for the year 2007, 10,80% for the year 2006 and 10.89% for the year 2005 published in CMIE and Reserve Bank of India publications were considered. What were the debtor adjustment and creditor adjustment and how these were relevant have not been demonstrated by the assessee. We are thus of the opinion that the assessee has not been able to justify the adjustments that were required to be made on account of negative working capital. 20. We have heard the rival submissions and perused the material on record. A similar issue was considered by this Tribunal in the case of Zafin Software Centre of Excellence Pvt. Ltd. vs. ACIT in IT(TP)A No. 331/Coch/2017 for the assessment year 2013-14 dated 16/05/2018 wherein it was held as follows: 5.3 We have heard the rival submissions and perused the record. The Ld. AR r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsite revenue is generally taken at 75%. The Ld. DR submitted that though there are certain functional differences between onsite development and offshore developments of software, the same is not significant to completely exclude comparables generating onsite revenue. The Ld. DR relied on the decision of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. vs. DCIT 140 ITD 540 (Bang.) wherein it was held as under: 67. The companies who generate more than 75 percent of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer 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 the economics and profitability of onsite operations are different from that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 22. Mindtree Ltd. On this issue, the DRP observed from the annual report that 50% of the revenue was from software development, 21.2% from software maintenance, 17.6% from independent testing, 4.4% for package implementation and 4% from infrastructure management and technical support. However, the segmental information in respect of all the segments was not available. Further, there remain huge unallocated expenses. The company was also engaged in on-site development of software which had influence on the margin of the above company. Accordingly, the DRP accepted the objection of the assessee and directed the Assessing Officer/TPO to exclude the above company from the comparables. 22.1 The Ld AR submitted that the company is engaged in Information Technology Consulting and Implementation and is structured in two units, i.e., product engineering services which comprises R D services and IT services which encompasses consulting, implementation and post production services. It was also submitted that the company had incurred the expenses o the extent of 34.49% of the total revenue in foreign currency which include 38.59 crores in the branch offices outside India. It was also submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies. Since we have observed that upper filter for onsite revenue must be applied at 75%, the Assessing Officer is directed to examine the financials of each company with regard to upper filter for onsite revenue and exclude the same if the upper filter of onsite revenue is more than 75%. With this observation, we remit this issue with reference to the four comparables, i.e., Mindtree Ltd., Zylog System Ltd., Akshay Software Technologies Ltd. and LGS Global Ltd. to the file of the Assessing Officer for fresh consideration. This ground of appeal of the Revenue is partly allowed for statistical purposes. 24. The next ground is with regard to suitability of FCS Software Solutions Ltd. e24.1 On this issue, the DRP observed that no segmental information was available with regard to the software development and other services. It was further observed by the DRP that the company had foreign branches. Hence, the DRP held that this company cannot be retained as comparable and directed the Assessing Officer to exclude the company from the list of comparables. 24.2 Against this, the Revenue is in appeal before us. The Ld. DR submitted that suitability of FCS Software Solutions Ltd., as a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was rejected for the reason that segmental information was not available. The Ld. DR submitted that software services comprises 94% of the total revenue of this company and the usual criterion adopted was to select companies which have atleast 50% of its total revenue from software services. Besides the non-software sector in this case contributes only 6% of the revenue. 25.2 The Ld. AR submitted that the company was engaged in software products. It was further submitted that the company had inventories amounting to ₹ 1.66 crores which indicated that the company is not a purely software development company. Further, the company had undergone restructuring during the year. It was engaged in R D and technology absorption and had significant intangibles. The Ld. AR relied on the decision of the Tribunal in the case of Cerner Healthcare Solutions P. Ltd. vs. ITO in IT(TP)A Nos.44 69/Bang/2015 dated 16/01/2017 and ITO vs. M/s. CSR India Pvt. Ltd. in IT(TP)A Nos.256 506/Bang/2015 dated 24/01/2018. 25.3 We have heard the rival submissions and perused the material on record. We do not find any infirmity in the order of the CIT(A) in holding that that this company cannot be retained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erns . 26.1 The DRP also relied on the decision of the Tribunal in the case of First Advantage Offshore Services Private Limited Vs. DCIT in ITA No.1086/Bang/2011 (Bang.) in which Eclerx was directed to be excluded as a comparable sighting the differences between a company engaged in the provision of BPO and KPO services: 40. We have to now consider whether a BPO and a KPO are functionally similar and are comparable to each other. BPO is a subset of outsourcing and involves the contracting of the operations and responsibilities of specific business functions or process to a third party service provider. Often business process outsourcing are information technology based and referred to as ITE5-BPO. KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise. The KPO services include all kinds of research and information gathering. Thus it can be seen that even though both BPO and KPO are offering information technology based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices and had abnormal profits and failed upper turnover filter. The company had related party transactions at 14.77% and incurred onsite expenses of 16.60%. the Ld. AR relied on the decision of the Tribunal in the case of Actis Global Services Pvt. Ltd. vs. ITO in ITA No. 30/Del/2015 dated10/12/2015 and Cummins Turbo Technologies Ltd., UK India Branch vs. EDCIT in ITA No. 438/PUN/2015. 26.6 We have heard the rival submissions and perused the record. In this case, Eclerx Services Ltd. is engaged in IT enabled services which is nothing but KPO services. Being so, it is not functionally comparable with the assessee company when compared to the services rendered by the assessee company. Even otherwise it fails on account of turnover filter and on account of related party transactions which is at 14.77% and incurred onsite expenses of 16.60%. Being so, the DRP is justified in excluding this company from the list of comparables. Accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. This ground of appeal of the revenue is dismissed. 27. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is partly allow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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