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TMI Blog2019 (8) TMI 1775X X X X Extracts X X X X X X X X Extracts X X X X ..... ion as operating revenue for computing its margin.We therefore do not find any infirmity in the view taken by Ld. CIT (A) and the same is upheld. Computation of deduction under section 10 A - HELD THAT:- As relying on HCL TECHNOLOGIES LTD. [ 2018 (5) TMI 357 - SUPREME COURT] deduction of right, telecommunication and insurance attributable to the delivery of computer software under section 10 A of the act are allowed only into export turnover but not from the total turnover then, it would give rise to an inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the respondent which could have never been the intention of the legislature. Even in common parlance, when the object of the formalised to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and apps erred. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. Comparable selection - functional dissimilarity - HELD THAT:- Companies functionally dissimilar with that of assessee as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 4. the learned CIT(A) has erred in law and facts in upholding the action of AO/TPO in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters: a) by rejecting certain comparable companies identified by the Appellant where consolidated results had been used for analysis. The Appellant had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide/ segmental revenues; b) by applying the turnover ₹ 1 Crore as a comparability criterion; c) by rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months); d) by rejecting certain comparable companies identified by the Appellant' earnings greater than 75% of the sales as a comparability criterion. 4. the learned CIT(A) has erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law. ITA No.190/Bang/2014(Assessment year : 2009-10) 1. The order of the CIT (Appeals) is opposed to law and the facts and circumstances of the case. 2. The CIT (A) erred in directing the AO to compute the margin of both the assessee as well as the comparable companies by including the foreign exchange gains or loss without appreciating the fact that the foreign exchange loss or gain though attributable to operating activity is not derived by the operating activity. 3. The CIT(A) erred in directing the AO to compute the margin of both the assessee as well as the comparable companies by including the foreign exchange gains or loss without appreciating the fact that operational expenses are those expenses which are incurred to earn that income and that foreign exchange loss or gain cannot be said to be one realized from international transaction though they form part of the gain/loss of the enterpriseand therefore they should-be excluded while determining the operating cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds is independent and without prejudice to ne another. The respondent craves leave to add, alter, vary, omit, amend or delete one or ore of the above grounds of cross objection at any time before or at the time of hearing of the appeal, so as to enable the Appellate Tribunal to decide this response according to law. 2. Brief facts of the case are as under: Assessee filed its return of income for year under consideration on 25/09/09 declaring total income of ₹ 1,65,88,001/-. The return was processed under section 143 (1) of the Act and case was selected for scrutiny. Notice under section 143 (2) of the Act was issued to assessee along with notice under section 142 (1) and questionnaire. In response to statutory notices, representatives of assessee appeared before Ld.AO and filed requisite details as called for. Ld.AO observed that assessee entered into international transaction with its AE s, and accordingly reference was made to transfer pricing officer for determining arms length price of transactions as per provisions of section 92C of the Act. Upon receipt of reference, Ld.TPO issued notice to assessee for filing economic details of international transactions i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passes all filters applied by the TPO 11 LGS Global Ltd Rejected: Export sales 75% 12 Maars Software International Ltd. Rejected by TPO: Employee cost 25% 13 Mindtree Ltd.(Seg.) The company is into software development services and qualifies all the filters applied by TPO. The IT services segment is taken as comparable. Thus the company is considered as a comparable. 14 Persistent Systems Pvt.Ltd. The company passes all filters applied by the TPO 15 Quintegra Solutions Ltd. Rejected: Export sales 75% of total sales (38%). 16 R S Software (India) Ltd. The company is into software development services and qualifies all the filters applied by the TPO. Thus the company is considered as a comparable. 17 Sasken CommunicationTechnologies Ltd. The company qualifies all filters applied by the TPO. 18 SIP Technologies Export Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Margin 1 Kals Information Systems Ltd. 13.89% 2 Akshay Software Technologies Ltd 8.11% 3 Bodhtree Consulting Ltd. 62.27% 4 R S Software (India)Ltd. 9.97% 5 Tata Elxsi Ltd (Seg.) 20.28% 6 Sasken Communication Technologies Ltd. 27.91% 7 Persistent Systems Ltd. 41.40% 8 Zylog Systems Ltd. 7.81% 9 Mindtree Ltd.(Seg.) 5.52% 10 Larsen Toubro Infotech Ltd. 24.72% 11 Infosys Ltd. 45.61% Comparables selected by Ld.TPO for IT enabled Service Segment Sl.No. ITES Final comparables Margin 1 Infoys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing foreign exchange gain/loss as operating revenue for computing margins of comparables under both segments. It has been submitted by the Ld.AR that issue stands settled in favour of assessee by decision of this Tribunal in case of SAP Labs India Pvt. Ltd. vs ACIT reported in (2010) 8 Taxmann.com 207 and Triology E-business software India Pvt Ltd. vs DCIT reported in (2011) 12 Taxmann.com 464. It has been submitted that consistently the view has been followed to consider foreign exchange gain or loss has to be treated as operating revenue instead of income from other sources as held by Ld. TPO. 9. On the contrary, Ld. CIT DR submitted that, she does not have any objection in considering foreign exchange gain/loss as operating revenue provided, foreign exchange fluctuation relates to income earned during year under consideration from international transaction under consideration. 10. We have perused submissions advanced by both sides in the light of records placed before us. It is undisputed fact that, income earned by assessee/comparable is from international transaction with its AE s, and is received in foreign exchange currency. Further gain or loss due to foreign e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware under section 10 A of the act are allowed only into export turnover but not from the total turnover then, it would give rise to an inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the respondent which could have never been the intention of the legislature. 20. Even in common parlance, when the object of the formalised to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and apps erred. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. 21. On the issue of expenses of technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of right, telecommunication etc, otherwise the formula of calculation would be futile. Hence, in the same be, expenses incurred in foreign exchange for providing technical services outside India shall be allowed to exclude from the total turnover. Respectfully following view expressed by Hon ble Supreme Court, we do not find an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Australia, Hong Kong, Malaysia wherein it performs following functions: Transaction with First Advantage U.S. assessee carries out software development of business applications developed by 1st advantage U.S. and includes development and maintenance of application system, prototyping and testing and that the conversion and maintenance of database. Payment is received by assessee upon invoices raised on a quarterly basis in advance. Transaction with First Advantage Australia, Hong Kong and Malaysia: Assessee provide design, programming and testing of hardware and software, production services, reporting and documentation of services and such other services as may be a great from time to time between the parties. Assessee is remunerated on cost plus basis Payment is received by assessee upon invoices raised on a monthly basis within 15 days of receipt of invoice by the AE. Assets owned: Assessee is employed with assets like computers, software is, furniture fixtures, leasehold improvements office equipment etc. It is also been submitted that assessee do not own any interest in intangibles. The trademark the processes, know-how, technical Tata software, quality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 20. KALS Information Systems Ltd. This company was proposed by Ld.TPO to which assessee objects to be included for computation of ALP. It has been submitted that is into software development and software products. It is also been pointed out that this company has inventory is which clearly indicates that it is a product company. Further it is also submitted that there are series of decisions wherein this company has been excluded. Reliance has been placed on decision of this Tribunal in case of Triology E-business software India Pvt.Ltd vs DCIT reported in (2013) 140 ITD 540 where this company has been found not comparable due to presence of inventories. 22. On the contrary, Ld.CIT DR placed reliance upon view expressed by Ld.TPO for inclusion. She placed reliance upon decision of this Tribunal in case of DCIT vs AOL Online India (P) Ltd reported in (2017) 84 Taxmann.com 70. She submitted that there is a categorical finding by this tribunal in DCIT vs AOL Online India (P) Ltd (supra) that for the year under consideration there is no software product developed by this comparable. 23. We have perused submissions advanced by both sides in the light of the records placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axonic Inc and has been involved in mergers/D-mergers activities during financial year 2009-10. Ld.CIT DR on contrary, supported view of authorities below and opposed exclusion. 25. We have perused submissions advanced by both sides in light of records placed before us. It is observed that annual report of this company is placed at one 1260 -1410 of paper book and at page 1347 breakup of income forming part of profit and loss account has been given in schedule 11. It is observed that this company earns its income from sale of software services and products however there is no separate segmental information in respect of these 2 segments. Thus it is clear that this company is earning revenue from activities which includes licensing of products, royalty on sale of products as well as income from maintenance contracts etc which could not be considered functionally similar with that of assessee holders only carrying out software development service at the behest of its AE s on a captive basis. Similar view has been taken by this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd (supra). Respectfully following the same we direct Ld.AO/TPO to exclude this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inclusion in the set of comparables in the case on hand. It is ordered accordingly. Respectfully following decision of coordinate bench of this Tribunal, we direct Ld.AO/TPO to exclude this comparable from final list. 28. Larsen and Toubro Infotech Ltd This comparable was selected by Ld.TPO and has been objected by assessee for reason that it is into software development company and has a high turnover of more than 562 crores, whereas assessee has turnover of 23.09 Lacs during the year under consideration. It is also been submitted that this company owns more than 33.33% of intangible software is with itself makes this company to be not comparable with that of assessee who provides Ltd services to its AE s. 28.1 On the contrary, Ld.CIT DR submitted that this company is held to be comparable by Delhi Tribunal in case of Agnity India Technologies Pvt. Ltd vs ITO reported in (2015) 58 Taxmann.com 167. 29. We have perused submissions advanced by both sides in light of the records placed before us. Assessee placed the annual accounts of this company at page 1543-1576 of paper book volume IV, revels that this company entered into sale of services as well as sale of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been submitted that in assessee s own case for assessment year 2005-06 this comparable has been excluded by holding that it is a pure Software Development company and therefore is functionally different with that of assessee. Ld.Counsel placed reliance on decision by this Tribunal in assessee s own case for assessment year 2005-06 in ITA (TP) a No. 877 and 888/bang/2013 dated 03/04/19 placed at page 3601-3620 of paper book volume 8. 31.1 On the contrary, Ld.CIT DR placed reliance upon decisions of this Tribunal in case of NMS Communications Pvt Ltd vs DCIT reported in (2017) 85 Taxmann.com 123 and decision of Delhi Tribunal in Agnity India Technologies Pvt. Ltd vs ITO (supra). 32. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that annual report of this company has been placed at page 1016-1091 of paper book volume III. Perusal of the same at page 1061 reveals that, revenue recognised by this company is from software development and are builled to clients directly. It is further observed in Profit and loss Account at page 1055 that income is only from export sales amounting to ₹ 17,61,57,405/-. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, higher check, automated searches, document management, occupational health services and other special projects. Assessee is remunerated on a cost plus basis for the same as per agreement dated 01/04/07. Services provided to AE in UK Assessee entered into agreement with UK AE as on 01/11/08 under which it provides business process outsourcing services and such other services as may be agreed from time to time between the parties. Remuneration received by assessee is on cost plus basis as and when the invoices raised on monthly basis. Assets employed: Assessee is employed with assets like computers, software is, furniture fixtures, leasehold improvements office equipment etc. It is also been submitted that assessee do not own any interest in intangibles. It is observed that turnover of assessee under this segment is ₹ 18,12,83,620/- with operating margin of 14.99%. With this background we shall analyse the comparables sought for exclusion under ITeS sgment. 34. Cosmic Global Ltd It has been submitted that Ld.TPO included this comparable in final list even though it has been alleged to be functionally different with assessee. Ld.Counsel submitted that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company is ₹ 3,00,25,326/- which means that they are also into outsourcing of transcription activity. However segment that has to be considered for comparability is Accounts BPO Services from which revenue earned is ₹ 27,76,090/- and assessee during year earned from BPO activities sum of ₹ 18,12,83,620/- which is much higher than income earned by this comparable. Hence on this count we direct Ld. TPO to exclude this company. 37.Eclerx Services Ltd Ld. TPO included this comparable which has been objected by assessee as this company is engaged in high-end activities providing KPO services, cannot be compared to assessee who is into BPO activities. Ld.AR placed reliance upon decision of this Tribunal in assessee s own case in ITA No. 1086/Bang/2011 for exclusion of this company. 38. Ld.CIT DR opposed exclusion of this comparable from the finalist and placed reliance upon the orders of authorities below. 39. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that annual report of this company has been placed at page 2444-2539 of paper book volume V. At page 2465 of paper book, Income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The scheme of amalgamation has been approved by the Hon'ble High Court on 6/4/2009 and 10/3/2009. Therefore, there is an extraordinary event of amalgamation during the year under consideration and hence this company cannot be considered as a good comparable for the purpose of determining the ALP. It has been submitted by Ld.Counsel that, this company is engaged in providing business process management services to organizations with outsourcing their business process. Therefore, this company is in a different kind of business activity in providing the management service of business processes and is not directly providing any business process outsource services. Apart from this, we further note that as per the segment reporting in para.16.2.21 this company is providing business process management services as under: Segment reporting The company's operations primarily relate to providing business process management services to organizations that outsource their business processes. Accordingly. revenues represented along industry classes comprise the primary basis of segmental information set out in these financial statements. Secondary segmental reporting is per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is placed at page 2337-2045 of paper book volume 5. At page 2390, income from operations earned by this company amounts to ₹ 80,14,40,931/-the details of which are at page 2397 in Schedule 8. Various segments under which revenue has been earned by this company is medical transcription, billing and collections, income from coding, interest on FD. Thus it is clear that this company is engaged in healthcare activity and providing BPO service in healthcare sector, that too by providing specific services of medical transcription, medical coding, medical billing etc. We note that these activities are quite different from service of contact provided by assessee to its AE s which are purely in nature of call centre. Accordingly we direct Ld. TPO to exclude this company on this count. 47. Informed Technologies India Ltd Ld.TPO included this company which has been objected by assessee for the reason that this company has several other sources of income for which there are no segmental details. It has been submitted by Ld.Counsel that this company does not passes through all filters applied by Ld.TPO. 48. Ld.CIT DR however placed reliance upon orders passed by au ..... X X X X Extracts X X X X X X X X Extracts X X X X
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