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TMI Blog2020 (9) TMI 1093X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of deduction under Section 10A by reducing travel expenses incurred in foreign currency and communication charges only from export turnover - HELD THAT:- Although the DRP rejected the primary contention of the Assessee that neither the telecommunication charges nor the travel expenses ought to be reduced from its export turnover, it accepted its alternate contention that they should also be reduced from its total turnover by following the decision of Tata Elxsi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] upheld by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. [2018 (5) TMI 357 - SUPREME COURT] . Accordingly, it directed the AO to exclude the above expenses from both its export and total turnovers while computing the deduction allowable under Section 10A. Thus, on the basis of the DRP s above directions, the disallowance under Section 10A came to be deleted in toto in the final assessment order. - Decided against revenue. - IT(TP)A No.187/Bang/2016, IT(TP)A No.175/Bang/2016 - - - Dated:- 30-7-2020 - Shri N.V. Vasudevan, Vice President And Shri B R Baskaran, Accountant Member For the Appellant : Ms. Tanmayee Rajkumar, Advocate For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onally not comparable as no segmental information is available and for the reason that it fails 75% service revenue filter, by not acknowledging the fact that entire revenue of the company comes from provision of services, and service income being 100% of its sales, the company qualifies the filter. 7. The DRP erred in directing exclusion of M/s. M/s.ICRA Techno Analytics Ltd., from the list of comparables on the ground that it is into diversified activity and no segmental data is available, without appreciating that the basic function of the company is developing software solutions in those and other verticals. The DRP also failed to appreciate that the company's business of analysis of statistical data of its clients before providing software solutions does not render the services to be functionally uncomparable. 8. The DRP erred in directing to exclude M/s.E-Zest Solutions Ltd., from the list of comparables holding it to be functionally uncomparable, thereby seeking exact comparability by imposing condition beyond law whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin. The DRP ought to have appreciated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered by the TPO. The DRP also erred in seeking exact comparability as requirement of law and international jurisprudence require seeking just similar comparable companies. 15. The DRP erred in directing to exclude M/s. Cosmic Global Ltd., holding it to be functionally uncomparable as it is having a different working model that may have significant effect on the margin by looking only at the ratio of sub-contracting expenses without looking into the entire functional profile of the company, when the comparable satisfied all the filters applied by the TPO. Also, insisting on strict comparability under TNMM method defeats the very purpose of the law relating to determination of ALP under the I.T.Act. Corporate Issue : 16. The DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude telecommunication expenses and travelling expenses incurred in foreign currency from the total turnover also, while computing the deduction u/s 10A of the I.T. Act, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport turnovers in excess of 75% of their total turnovers. The DRP further erred in confirming the same. (d) That, without prejudice to the Appellant's contention that the AO/TPO ought not to have arbitrarily rejected those companies having employee costs less than 25% of their total revenues, the AO/TPO erred in rejecting CG Vak Software Export Ltd. on that ground despite the said company having an employee cost in excess of 25% of its total revenue. The DRP further erred in confirming the same. (e) That the DRP grossly erred in rejecting companies selected by the Appellant in its TP Study as well as companies selected by the TPO in the TP order by arbitrarily applying an onsite development of software filter without the TPO having applied such a filter and without affording the Appellant an opportunity of hearing prior to applying such a filter. .. .. (i) That the DRP has erroneously directed exclusion of Evoke Technologies India Private Limited and RS Software (India) Private Limited from the list of comparable companies while benchmarking the Appellant's transaction of provision of SWD services, despite them being functionally comparable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded from the Export Turnover while computing deduction u/s.10A of the Act. 6. As far as the appeal of the Assessee is concerned, Gr.No.4(a) (b) (d)(e)(i) (j) relate to exclusion of comparable companies and inclusion of comparable companies in the SWD services and ITeS segments and correctness of application of certain filters in excluding and including comparable companies. Gr.No.7(i) relates to the action of the TPO in determining negative working capital adjustment while computing ALP in both the SWD services segment and ITeS segments. We shall deal with each of the segments separately. 7. The Assessee is a direct subsidiary of Concerto Software Cayman Holdings Limited. The Assessee is a captive development centre for Aspect US and renders software development and solutions and ITES to support the global contracts negotiated by Aspect US and other affiliates. It is a registered 100% software export oriented unit under the Software Technology Parks of India(STPI) Scheme. 8. During the previous year relevant to the AY 2011-12, two of the international transactions that took place between the Assessee and its AEs were the provision of software development ( SWD ) servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee s profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 14.69%. The Assessee in its TP study selected 22 comparable companies whose arithmetic mean of OP/TC was arrived at 13.60%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 22 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm s Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 6 out of the 22 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 7 other companies as comparable companies with the Assessee. Thus a final set of 13 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows:- Net mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.54 21. Thirdware Solutions Ltd. 21.75 22. Zylog Systems Ltd. 20.23 Arithmetical Mean 13.60 NOTE: Out of the 22 comparables selected by the Assessee, the TPO accepted the 6 highlighted above, viz. Larsen and Toubro Infotech Ltd., Evoke Technologies Pvt. Ltd., Persistent Systems Ltd., RS Software (India) Ltd., Mindtree Ltd. (at segment level) and Sasken Communication Technologies Ltd., and rejected the other 16. Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the Company Mark-up on Total Costs (WC unadj) (in %) Mark-up on Total Costs (WC adj) (in %) 1 Acropetal Technologies Ltd. (seg) 31.98 31.71 2 e-Zest Solutions Ltd. 21.03 21.96 3 E-Infochips Ltd. 56.44 59.21 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing companies were directed to be excluded by accepting the contentions of the Assessee: (i) Acropetal Technologies Ltd. (ii) E-Infochips Limited (iii) ICRA Techno Analytics Ltd. (iv) Infosys Ltd. The DRP, however, rejected the contention of the Assessee that Sasken Communication Technologies Ltd. was not functionally comparable to it and consequently upheld its inclusion in the final list of comparables. The DRP also suo moto directed the exclusion of R S Software (India) Ltd., Mindtree Ltd. and Evoke Technologies Pvt. Ltd. As regards the Assessee s contentions for inclusion of its TP study comparables, the DRP rejected the same and thereby upheld their exclusion by the TPO. (ii) Onsite Software Development activities: In addition to the above, the DRP rejected the following companies selected by the TPO on the basis that they were predominantly engaged in onsite activities, although no onsite revenues filter had been applied by the TPO: (a) Acropetal Technologies Ltd. (rejected by DRP on other grounds also) (b) RS Software (India) Ltd. (rejected by DRP suo moto only on this ground) (c) Mindtree Ltd. (rejected by DRP suo moto on other grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. in the absence of objection with respect to its inclusion ( Ground No. 12 ) 19. As far as the appeal of the Assessee is concerned, the grounds in the Assessee s appeal which are being pressed are as follows: (i) That the TPO erred and the DRP further erred in including Sasken Communications Ltd. in the list of comparables although it fails the test of comparability. ( Ground No.4(a) and 4(j)-[ additional ground ] ) (ii) That the DRP erred in rejecting RS Software Pvt. Ltd., and Evoke Technologies Pvt. Ltd. from the list of comparables ( Ground Nos. 4(e) and (i) ). (iii) That the AO/TPO erred in rejecting CG Vak Software and Export Ltd. for the reason that it failed the filter of employee cost in excess of 25% of its total revenue. ( Ground No. 4(d) ) (iv) That e-Zest Solutions Ltd., Larsen and Toubro Ltd., Persistent Systems Solutions Ltd., Persistent Systems Ltd. and Sasken Communication Technologies Ltd. ought to be excluded from the final list of comparables ( Ground No. 4(j)-[ additional ground ]) (v) That Tata Elxsi Ltd. ought to be excluded from the final list of comparables ( Ground No. 4(b) ) (vi) That the AO/ TPO erred in law and on facts in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s directed to be excluded by the DRP not only on the ground that it was held to be predominantly engaged in onsite development of software in view of its expenses in foreign currency, but also on the following grounds (i) that, in the absence of segmental information containing the break-up of its export sales, it was not possible to ascertain if it passed the export earnings filter; and (ii) that, in the absence of segmental information containing the break-up of its employee costs, it was not possible to ascertain if it passed the employee costs filter (Pages 18-20 of the DRP s directions). Revenue vide ground Nos. 2 to 4 is seeking the inclusion of the company in the final list of comparables. After hearing the rival submission on exclusion of Acropetal from the list of comparable companies, we find that exclusion of this company from the list of comparable companies should be upheld because this company fails the employee cost filter of employee cost being equal to at least 25% of the total operating revenue. From the annual report of the company it can be seen that the employee costs incurred by the company is 11.51% of the total operating revenue. Apart from the above, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of IT enabled services for which no separate segmental information is available in its Annual Report. On the contrary, the diverse activities of software development and the IT enabled services are considered and reported together in one segment. Thus, in the absence of such segmental details, the company was rightly held to be functionally not comparable to the Assessee which is a captive software development service provider (relevant submissions at internal page 73 of the objections filed before the DRP and pages 237-239 of the paperbook). Further, as was noted by the DRP, the company also has presence of inventory and is, therefore, incomparable to the Assessee. We also find that this Tribunal in Electronic Imaging India P. Ltd v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib) para 9 at pages 1726-1727]; Saxo India Pvt. Ltd. v. ACIT [2016] 67 taxmann.com 155 (Delhi - Trib.) (paras 10.1 and 10.2 at pages 1656-1657)] (which came to be upheld by the Hon ble Delhi High Court); Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 at page 1744]; Cypress Semi-conductor Technology India Pvt. Ltd. v. DCIT [IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue is misconceived as the company was not directed to be excluded by the Tribunal and features in the final list of comparables. Therefore, Grd.No.8 is dismissed. 24. As far as Gr.No.9 raised by the revenue is concerned, the revenue in this ground has questioned the correctness of exclusion of Infosys Technologies Ltd. from the list of comparable companies. The grounds on which DRP excluded this company was that it is functionally incomparable to the Assessee. We find that this company is functionally dissimilar to the Assessee on numerous counts such as the fact that it is engaged in the development of software products, that it has inventories, has ownership of marketing intangibles and intellectual property rights, high brand value, high expenditure on R D, and so on, for which no adjustments can be made to eliminate the said differences between it and the Assessee. This company has been consistently rejected by this Hon ble Tribunal as being functionally dissimilar to captive software development service providers such as the Assessee for every assessment year which has been heard and disposed of so far. In the case of Applied Materials India Pvt. Ltd. v. ACIT [IT(T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A Nos. 17 39/Bang/2016] at paras 14-14.1 and 21-21.2 at pages 1605, 1614-1615]; Cypress Semiconductor Technology India Pvt. Ltd. v. DCIT [IT(TP)A No.356/Bang/2016 at paras 11,12 at pages 1764-1765]; and Commscope Networks (India) Pvt. Ltd. v. ITO [IT(TP)A Nos. 166 and 181/Bang/2016] at para 8 at page 1639 included this company in the list of comparable companies in the case of Assessees providing SWD services such as the Assessee. We therefore allow Gr.No.11 raised by the revenue and also Gr.No.4(i) raised by the Assessee in its appeal. 27. In Gr.No.13, the revenue has contended that the DRP erred in directing the AO/TPO to consider the foreign exchange fluctuation to be operating in nature. The Assessee, in its objections before the DRP, had submitted that the foreign exchange earnings ought to be treated as non-operating in nature (page No. 102 of the objections filed before the DRP). However, the DRP directed the same to be treated as being operating in nature (page Nos. 24-25 of the DRP s directions). The Revenue, vide the above ground is challenging the action of the DRP in directing the foreign exchange gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functions and segmental details are not given separately for the varied activities it is engaged in. The Assessee therefore submits that Sasken ought to stand excluded from the final list of comparables. We also find that this Tribunal in Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 at page 1744]; Electronic Imaging India P. Ltd v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib) para 9 at pages 1726 and 1727]; Cypress Semi-conductor Technology India Pvt. Ltd. v. DCIT [IT(TP)A No.- 356/Bang/2016 para 8 at page 1763]; and Commscope Networks (India) Pvt. Ltd. v. ITO [IT(TP)A Nos. 166 and 181/Bang/2016] at para 9 at pages 1639-1640] has directed inclusion of this company in the list of comparable companies. 30. As far as Ground Nos. 4(e) and 4(i) of the appeal of the assessee is concerned, in these grounds, the Assessee seeks the inclusion of Evoke Technologies Pvt. Ltd. and RS Software Ltd. in the list of comparables. These companies have already been directed to be included in the list of comparables while deciding similar grievance of the revenue in its appeal and that decision will hold for these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., from the list of comparable companies. 33. As far as e-Zest Solutions Ltd., and Persistent Systems Solutions Ltd., is concerned, these were Comparable companies chosen by the TPO. The Assessee did not object to inclusion of these two companies before the TPO nor were objections filed against inclusion of these two companies before the DRP. The Assessee now wants to content that these two companies are functionally different and based on judicial decisions in which these two companies were excluded as functionally not comparable with a company rendering SWD services such as the Assessee. The Assessee seeks to rely on the decision of the Special Bench ITAT Chandigarh in the case of DCIT Vs. Quarks Systems Pvt. Ltd., 42 DTR 414 (Chandigarh-SB) wherein it was held that there cannot be estoppel against law and that non-comparable companies even if selected by the assessee in TP study can be sought to be excluded by the assessee based on functional comparability or other valid reasons. We therefore admit the relevant ground of appeal seeking exclusion of these two companies. Since the TPO/AO did not have opportunity to decide the issue, we are of the view that it would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Bench ITAT Chandigarh in the case of DCIT Vs. Quarks Systems Pvt. Ltd., 42 DTR 414 (Chandigarh-SB) wherein it was held that there cannot be estoppel against law and that non-comparable companies even if selected by the assessee in TP study can be sought to be excluded by the assessee based on functional comparability or other valid reasons. We therefore admit the relevant ground of appeal seeking exclusion of these two companies. Since the TPO/AO did not have opportunity to decide the issue, we are of the view that it would be just and appropriate to remand the issue to the TPO for deciding the correctness of choosing this company as a comparable company. The TPO/AO shall afford opportunity of being heard to the Assessee. 37. No other grounds relating to Transfer Pricing adjustment in SWD services segment was pressed or argued. The TPO is directed to compute ALP in the SWD services segment, as per the directions contained in this order and after affording opportunity of being heard to the Assessee. INFORMATION TECHNOLOGY ENABLED SERVICES SEGMENT: 38. It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 Infosys BPO Ltd. 22.53 9 Jeevan Softech Ltd. 46.34 10 Jindal Intellicom Pvt. Ltd. 6.39 11 Microgenetics Systems Ltd. 0.87 12 R Systems International Ltd. 5.01 Arithmetical Mean 12.68 Note: Out of the 12 comparables selected by the Assessee, the TPO accepted the 4 highlighted above viz., Cosmic Global Ltd., Infosys BPO Ltd., Jeevan Softech Ltd. and Jindal Intellicom Ltd., and rejected the other 8. Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the Company Mark-up on Total Costs (WC unadj) (in %) Mark-up on Total Costs (WC adj) (in %) 1 Accentia Technologies Ltd. 28.89 29.47 2 Acropetal Technologies 26.86 26.12 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different working model which may have significant impact on its margin. As regards the Assessee s contentions for inclusion of its TP study comparables, the DRP rejected the same and thereby upheld their exclusion by the TPO. List of Comparables post the DRP s Directions As per the DRP s directions, the final list of comparables was as follows: SI. No. Name of the Company 1 e4e Healtchcare Business Services Pvt. Ltd. 2 Infosys BPO Ltd. 3 Mindtree Ltd. 4 Jindal Intellicom Pvt. Ltd. 40. Pursuant to the directions of the DRP, as the arithmetical mean of the working capital adjusted margins of the above comparables was within the +/-5% range of the Assessee s NCP mark-up for provision of ITE services, the TP adjustment made towards the said international transaction was deleted in the final assessment order. Aggrieved, the revenue is in appeal before the Tribunal. Briefly, the grounds in the Revenue s appeal are as follows:- ● That the DRP erred in holding that Acr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e being greater than 75% of total revenue, and the company suffers from huge fluctuations which indicate that certain peculiar circumstances influencing the profit margin of the company exist, for which appropriate adjustments cannot be made to balance the effect. It is submitted that the ERP implementation services are not in the nature of IT enabled services which were notified by CBDT vide Notification No. SO 890(E) dated 26.09.2000. If the BPO segment is considered, the company fails to satisfy the TPO s own filter of service revenue from the relevant segment having to be in excess of ₹ 1 crore as the revenue from the BPO segment of the said company is ₹ 79 lakhs only. The company is therefore not comparable to the Assessee. This Tribunal in the case of Swiss Re Shared services (India) Pvt. Ltd. v. ACIT (order dated 08.07.2016 in IT(TP)A No. 380/Bang/2016) directed the TPO to verify as to whether the TPO s filter of Sales 1 Crore is satisfied by this company. In the present case, as can be seen from the annual report of the company the sale of the company in respect of the BPO segment amounts to only 79 lakhs, and therefore it fails the TPO s filter. As far as exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter Systems Ltd. rendering it incomparable due to it failing the TPO s own filter of having peculiar economic circumstances. In addition, the company owns significant intangibles in its name, which is evident from the balance sheet of the company for the Financial Year 2010-11. For the reasons above, the company is not comparable to the Assessee and the DRP s findings on exclusion of iGate is right in law. As far as the company ICRA Online Ltd., is concerned, the DRP excluded this company for the reason that the details regarding its diverse functions are reported under one segment without segmental details regarding the same being made available. Therefore, the comparability of the company cannot be determined. In any event, this company is functionally dissimilar for the reason that the outsourced services segment of the company is engaged in the provision of high end consultancy services which cannot be compared to the assessee who is into provision of low end IT enabled services which are routine in nature. Further, the company fails the TPO s own filter of export turnover in excess of 75% of total sales as the export turnover of the company amount to only 61.88% of its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. Consequently, Gr.No.7.1. raised by the Assessee is allowed. 46. The other grounds that remain for adjudication in revenue s appeal is the corporate tax issue raised in Gr.No.16 17 regarding re-computation of deduction under Section 10A by reducing travel expenses incurred in foreign currency and communication charges only from export turnover. In its return of income for AY 2011-12, the Assessee claimed a deduction under Section 10A of the Act of ₹ 3,72,68,882/-, being the profits of business of its unit eligible for deduction under Section 10A of the Act. In computing the said deduction, the Assessee had not reduced telecommunication charges to the extent of ₹ 13,70,475/- from its export turnover as the said charges were not attributable to the delivery of computer software outside India. Further, the Assessee had also not reduced travel expenses to the extent of ₹ 8,35,695/- incurred in foreign currency from its export turnover as it was not engaged in the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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