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TMI Blog2018 (7) TMI 2150X X X X Extracts X X X X X X X X Extracts X X X X ..... light of the above and considering the fact that assessee generally has some amount of unbilled revenue for every Assessment Year which is subsequently received, we allow this ground raised by assessee. - ITA No. 6283/Del/2015, ITA No. 312/Del/2016 - - - Dated:- 11-7-2018 - SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER For the Assessee : Sh. Neeraj Jain, Adv. and Sh. Ramit Katyal, Adv. For the Department : Sh. Sanjay Kumar Yadav, Sr.DR ORDER PER BEENA A PILLAI, JUDICIAL MEMBER The present appeals have been filed by assessee as well as revenue against order dated 27/10/15 passed by DCIT, Circle 18 (1), New Delhi under section 143 (3) read with 144C (13) of the Income Tax Act, 1961 (the Act), for assessment year 2011-12 on the following grounds of appeal: ITA No. 6283/Del/3015 (Assessee) General Grounds: 1. That the irnpugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ('Act'), is bad in law, violative of princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable companies even when they are passing the filters proposed by the TPO: (i) Blue Star Infotech Ltd (consolidated) (ii) CG-Vak Software Exports Ltd (seg) (iii) CAT Technologies Ltd (iv) Cigniti Technologies Ltd (formerly Chakkilam Infotech Ltd.) (v) Goldstone Technologies Ltd (vi) R Systems International Ltd (seg) (vii) Saven Technologies Ltd (consolidated Seg) (viii) Thinksoft Global Services Ltd 3.8 That the TPO erred on facts and in law in considering incorrect profit margin of the following companies despite a direction from the DRP for taking the correct margin for determining the arm 's length price: Name of the company Margin considered by TPO (Adjusted OP/OC) Actual margin Acropetal Technologies Ltd. 20.75% 17.99% Persistent Systems Ltd. [Merqed] Ltd. 22.21% 17.90% I Evoke Technologies Pvt Ltd 9.65% 5.59% Tata Elxsi Ltd. (Segment) 12.75% 8.03% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal. ITA No. 312/Del/2016 (Rev.) 1. Whether on the facts and circumstances of the case and in law, the DRP has erred in deleting the addition made u/s 40(a)(i) amounting to ₹ 5,64,57,819/- ignoring the fact that the case was not covered by exception carved out by s.9(1)(vii)(b) of the I.T.Act. 2. Whether on the facts and circumstances of the case and in law, the DRP has erred in excluding two comparables considered by the TPO and including a comparable which was rejected by TPO. 3. That the order of Ld.CIT(A) is erroneous and is not tenable on facts and in law. 2. Brief facts of the case are as under: Assessee filed its return of income declaring total income of ₹ 2,86,27,959/- for the year under consideration on 30/11/11. The case was selected for scrutiny and statutory notices were issued to assessee, in response to which representatives of assessee appeared before Ld.AO. 2.1. Ld.AO during assessment proceedings observed that asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 3.1 and 3.11 are related to transfer pricing issues with respect to adjustment of ₹ 3,87,23,769/-. Ld. Counsel submitted that assessee determined the arm s length price of international transaction by applying TNMM as the most appropriate method and selected 22 comparables by adopting OP/OC as PLI. The average margin in case of comparables was computed at 13.60% vis-a-vis the margin of assessee that was determined to be 13.14%. Therefore assessee concluded international transaction to be at arm s length. dDissatisfied with comparables selected byassessee, Ld.TPO conducted fresh search on Poweress detabse, selected 19 comparables whose margin was computed at 24.07%. Assessee raised objections before DRP against the inappropriate selection of comparables by Ld.TPO. DRP issued directions to Ld.TPO to exclude E-Infochips Ltd., and Infosys Technologies, from the set of final comparables and directed to include Calibre Point Business Solutions Ltd., to the final set of comparables. DRP also directed Ld.TPO to recompute margins of comparable, after taking into consideration the foreign exchange fluctuation, bank charges and provision for doubtful debts as operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as operating income/ expenses and held that this issue is no longer res integra and is in favour of the assessee by the decision of the Coordinate Bench of ITAT in Westfalia Seprator India Pvt. Ltd. Vs. ACIT (ITA No.4446/Del/2002). Accordingly, the AO/TPO was directed to treat the foreign exchange gain/ loss as an operating item. The AO/TPO was directed to compute the ALP of the international transactions entered into by FIPL with its AEs keeping in view the observation made in the order of the ITAT. 5.3. Therefore, respectfully following decision of Hon ble Delhi High Court and also for the reason that DRP in the subsequent year has decided the issue in favour of the assessee, we also hold that foreign exchange fluctuation gain earned by assessee is operating income and therefore Ld.TPO/AO is directed to adjust the margin of the assessee by treating foreign exchange gain as operating income of assessee for determining PLI for comparability analysis. 5.4. Issue B: The next issue is relating to exclusion/inclusion of comparables and considering wrong margins of comparables. At the outset Ld.Counsel submitted modified ground No. 3.6 which reads as under: Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cifications provided by the NEC group; coding and testing of limited functionality modules for existing products of NEC group and integration of various modules developed by NEC group with the NEC software products. Risk analysis some of the key risk faced by assessee while transacting with entities in relation to software development services are all the assessee renders services only to its AEs, it performs all the sales and marketing related functions as is required to competitively bid for contracts. It is a responsibility of AE for all the sales and marketing efforts and hence their maximum risk since they operate within the competitive software industry. Assessee is remunerated for the services on a lump-sum fee or hardly charge outreach basis. Therefore assessee also bears quite an amount of business risk. Assessee also has to bear utilisation risk since it is required to undertake competitive bidding and is responsible for ensuring optimal utilisation of its capacity, infrastructure and equipment. The service liability risk is also bone by assessee as an independent service provider though not liable to the end customer however it has to adhere to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software products to the total profits of the company due to non-availability of segmental information. We therefore exclude this company from the list of comparables. Sasken Communication Technologies Ltd. 7. Ld.TPO included this company in the set of comparables. Ld.Counsel submitted that this company is engaged in sale of software products and offers IP led products in multimedia, consumers and automotive electronics domain. He submitted that, it owns branded products and has its own IPR and therefore cannot be considered as a captive service provider. 7.1. Ld.Counsel submitted that this comparable has been excluded by Coordinate Bench of this Tribunal in the case of Saxo India Pvt.Ltd vs. ACIT in ITA No. 6148/Del/2015 for Assessment Year 2011-12. He also submitted that revenue had preferred appeal against the order of this Tribunal before Hon ble Delhi High Court, in ITA No. 682/2016, which has been dismissed. 7.2. Ld. DR submitted that segmental information is available and services rendered by this company is similar to assessee and therefore must be considered as a comparable. He submitted that the branded products amounts to only 10% of the total revenue an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts, sale of software products and maintenance contracts. It is also submitted that segmental data with respect to software development segment is not available in financials for the year under consideration. 9.1. On the contrary Ld.DR placed reliance upon orders of Ld. TPO/DRP. 9.2. We have perused the submissions advanced by both the sides on the basis of the records placed before us. 9.3. Admittedly this company generates revenue under various heads including income from software development services. From the financials placed at page 178/235 of the paper book with specific reference to page 219, 230 and 231, it is observed that this company generates software development revenue to the extent of ₹ 18,94,90,457/-. Therefore it is not correct that segmental information in respect of software development is not available. It is also observed that this company provides services to its holding company to a greater extent. In our considered opinion this company is functionally comparable with that of assessee and sufficient segmental information are also available to determine the correct margin. Accordingly we direct this company to be included in the final lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Group Inc., a third person. It is observed that the issues raised by Ld. CIT DR in respect of comparability of this comparable has been dealt with by coordinate bench of Delhi tribunal in Saxo India Pvt.Ltd vs. ACIT (supra) as under: We have noticed above from the language of Rule 10B(1)(e)(ii) that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The epitome of `comparable uncontrolled transaction is that the companies or transactions in order to fall within the ambit of subclause (ii) of rule 10B(1)(e), should be both comparable as well as uncontrolled. `Uncontrolled transaction has been defined in Rule 10A(a) to mean: a transaction between enterprises other than associated enterprises, whether resident or non-resident. This shows that in order to be called as an uncontrolled transaction, it is necessary that the same should be between enterprises, other than associated enterprises. Section 92B(2) provides that: A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct removal of this company from the list of comparables. 11. Corporate tax issue 11.1. Ground No. 4-5 are in respect of the disallowance of deduction under section 10 A of the Act. Ld.Counsel submitted that this ground stands squarely covered by the order of Coordinate Bench of this Tribunal for Assessment Year 2010-11 in ITA No. 1102/Del/2015. 11. 2.Ld.Counsel submitted that income pertaining to un billed revenue is derived from export of software services and the same is eligible for deduction under section 10 A (3) of the Act. He placed reliance upon the decision of Coordinate Bench of Mumbai Tribunal in the case of ACIT vs. Sonata Software Ltd reported in 55 SOT 533. 11.3. It has been submitted that assessee has provided invoices relating to such unbilled revenue before Ld.AO as well as the date of realisation of such invoices, which not in disputed by authorities below. 11.4. Ld. DR placed reliance upon the orders of authorities below. 11.5. We have perused the submissions advanced by both the sides in the light of the records placed before us. 11.6. It is observed from the assessment order that unbilled revenue of ₹ 1,12,52,314 (₹ 95 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. 12. In the result appeal filed by assessee stands partly allowed. 13. ITA No. 312/Del/2016 Revenue in its appeal is challenging exclusion of following comparables: a) E-Info Chips Ltd b) Infosys technologies Ltd and inclusion of a) Clibre Point Business Solution 14. E-Info Chips Ltd DRP directed exclusion of this comparable from the final list. Ld. CIT,DR submitted that segmental information is available in respect of software development and therefore is an acceptable comparable. On the other hand, Ld.Counsel submitted that this company is engaged in both IT and ITES segments, as is evident from annual report. The statement does not provide information relating to these 2 segments separately. He supported exclusion by DRP, because of non-availability of segmental information in respect of software development. Ld.Counsel placed reliance upon decision of Saxo India Ltd versus ACIT in ITA No. 6148/Del/2015 for assessment year 2011-12. 14.1. We have perused the submissions advanced in light of records placed before us. 14.2. We have perused annual report of this company which is placed at page 27 to 51 of paper book. The schedule of i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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