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TMI Blog2021 (11) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... the law on the issue as laid down in judicial decision. Levy of education cess - HELD THAT:- education cess and secondary and higher education cess is not in the nature of tax which is not deductible expenditure. Following the decisions APTEAN INDIA PVT. LTD. [ 2020 (11) TMI 958 - ITAT BANGALORE] , SESA GOA LIMITED, [ 2020 (3) TMI 347 - BOMBAY HIGH COURT] , RECKITT BENCKISER (I) PVT. LTD. [ 2020 (6) TMI 474 - ITAT KOLKATA] we allow the additional ground of appeal. - IT(TP)A No.2638/Bang/2017 - - - Dated:- 9-11-2021 - Shri N.V. Vasudevan, Vice President And Shri Chandra Poojari, Accountant Member For the Appellant : Shri. G. S. Prashanth, CA For the Respondent : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru ORDER PER N. V. VASUDEVAN, VICE PRESIDENT: This is an appeal by the assessee against the final assessment order dated 11.10.2017 of DCIT, Circle 1(1)(2), Bengaluru, passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called the Act ) relating to Assessment Year 2013-14. 2. The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harged in the international transaction should be considered as at Arm s Length. 4. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/OC. He also selected comparable companies from database. The TPO accepted some companies chosen by the Assessee as comparable companies. The TPO on his own identified some other companies as comparable with the Assessee company and arrived at a set of 7 comparable companies. The PLI was reworked by the TPO at 20.90%. The TPO worked out the average arithmetic mean of their profit margins of the 7 comparable companies as follows: Sl. No. Name of the taxpayer OP/OC 1 CG-VAK Software Exports Ltd 20.54% 2 I C R A Techno Analytics Ltd. 17.10% 3 Larsen Toubro Infotech Ltd. 26.06% 4 Mindtree Ltd. (Seg) 18,19% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or admission for the following additional ground: Ground relating to other than transfer pricing matters 1. That on the facts and in the circumstances of the case and in law, the Learned Assessing Officer (AO) and Learned Commissioner of Income-tax Appeals (CIT(A)) ought to grant deduction under section 37(1) of the Income Tax Act, 1961 for Education Cess and Secondary and Higher Education Cess (collectively referred to as 'Gess') paid by the Appellant on the assessed income along with income-tax and surcharge for the year under appeal. It is prayed that the deduction of Education Cess and Secondary and Higher Education Cess should be allowed to the Appellant as business expenditure under the provisions of the Act. 7. The additional ground is purely a legal ground and can be adjudicated on facts available on record and is therefore admitted for adjudication. 8. We shall first deal with ground Nos.7a and 7b which is a ground seeking exclusion of 5 comparable companies on the ground that the turnover of this company is more than 200 crores and cannot be compared with the assessee whose turnover is only a sum of ₹ 29.13 Crores. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n realised by the enterprise and referred to in sub-clause ( i ) is established to be the same as the net profit margin referred to in sub-clause ( iii ); ( v ) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [ or the specified domestic transaction ] ; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [ or a specified domestic transaction ] with an uncontrolled transaction shall be judged with reference to the following, namely:- ( a ) the specific characteristics of the property transferred or services provided in either transaction; ( b ) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; ( c ) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; ( d ) conditions prevailing in the markets in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 12. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than ₹ 1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of ₹ 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. 42. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal. On the plea for inclusion of this company, the Tribunal remanded the issue to the TPO for fresh consideration with the following observations: 35. It has been submitted that Ld.TPO rejected this comparable on the ground it is functionally different from the activities of the assessee. Ld.TPO from response octane and on issuance of notice under section 133(6) of observed that this company is engaged in providing professional services, procurement, installation, implementation and support maintenance of ERP products and services. Ld.TPO thus was of the opinion that this comparable is functionally not similar with assessee. Ld.AR submitted that coordinate bench of this Tribunal in case of Autodesk India Pvt. Ltd. vs DCIT reported in (2020) 119 taxmann.com 265 has considered a similar objection by Ld.TPO for assessment year 2013-14. It is also submitted that the functions performed by present assessee and Autodesk India Pvt.Ltd.,(supra) are that of captive software development service provider. 36. On the contrary, Ld.CIT.DR placed reliance on observations of Ld.TPO/DRP. He submitted that DRP has observed that this company is into product development though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO/TPO, so that the assessee would get an opportunity to show that the functions performed by this company and the assessee are similar. Accordingly, we restore this company also to the file of the AO/TPO. 39. As there are no functional differences brought out by revenue between assessee and Autodesk India Pvt Ltd., and that, both these companies have been categorised to be a captive service provider to its respective AEs, we do not find any reason to deviate from the above mentioned view taken by coordinate bench of this Tribunal. 40. Accordingly, respectfully following the same, we remand this comparable to Ld.AO/TPO to analyse the functions performed by this company with that of assessee. In the event it is found to be carrying out SWD services as that of assessee and segmental details may be considered for computing margin of the international transaction. 17. Respectfully following the aforesaid decision rendered on identical facts and circumstances, we remand the question of determination of comparability of this company to the TPO / AO for fresh consideration after affording opportunity of being heard to the assessee. 18. The next issue raised in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gree of R D expenditure and to demonstrate the same, he drew our attention to the paper book page Nos.1018 and 1034 and submitted that the nature of the business of software development involves inbuilt, constant Research and Development as a part of its process of manufacturing (development). The company is developing applications engines, re-usable codes and libraries as a part of its R D activities. Further, it has intangible assets as shown in the financial statement as on 31-3-2013 at ₹ 3,03,83,536 and it is also engaged in outsource product development, as is evident from the attached notes forming part of the accounts. The learned AR also submitted that C G VAK Software Exports Limited was not considered as a comparable in the case of M/s. EPAM Systems India Private Limited (ITA No. 2122/Hyd/2017 for assessment year 20132014). Vide order dated 20-11-2018, the Tribunal held as under:-- 16. Having regard to the rival contentions and the material on record, we find that the assessee has raised its objections before the TPO but he held that it is functionally similar. We have gone through the annual reports of CGVAK Software Exports Ltd and find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company is concerned, this Tribunal in assessee s own case in Assessment Year 2010-11 in the decision reported in (2016) 72 taxmann.com 187 (Bang.-Trib.) remanded the question of comparability of this company to the TPO for fresh consideration with the following observations: 5. Before us, the learned Authorised Representative of the assessee has submitted that out of these 2 companies retained by the DRP, the assessee is seeking exclusion of ICRA Techno Analytics Limited. The learned Authorised Representative has submitted that the comparability of this company with that of software development services provider has been examined by this Tribunal in the case of Dy. CIT v Ikanos Communication India (P.) Ltd. [2015] 64 taxmann.com 436 (Bang. - Trib.). The learned Authorised Representative has submitted that the Tribunal after considering the Annual Report, accounting policy and notes from accounts reported in the Annual Report of this company has held that this company is dealing with in the software development, consultancy, engineering services, web development hoisting and subsequently diversified itself into the domain of business analytics and business process outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web development and hosting. Thus ICRA Techno Analytics had more than one segment. There is no case for the Revenue that the segmental results were separately available in public domain or was not obtained by the TPO from the said company, invoking the powers vested on him. In such a situation the DRP, in our opinion, was justified in directing exclusion of ICRA Techno Analytics Ltd from the list of comparables. Thus it is clear that the co-ordinate bench of this Tribunal vide order dt. 10.11.2015 (supra), one of us Judicial Member is party has held that this company is earning its revenue from diversified activities of software development consultancy, engineering services, development and housing and in the absence of segmental results of software development services activity, it cannot be considered as a good comparable. Though the assessee has not raised the objection against this company before the authorities below however, we are of the view that merely because the assessee has wrongly added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal reported in (2020) 120 com 122 and Lam Research India (P.) Ltd. v. Dy. CIT in [IT Appeal Nos. 1473 1385 (Beng.) of 2014, dated 30-4-2015], Tivo Tech (P.) Ltd. v. Dy. CIT [2020] 117 taxmann.com 259, and Dy. CIT v. Software AG Bangalore Technologies (P.) Ltd. [IT Appeal No. 1628 of 2014, dated 31-3-2016] , where it has been held that negative working capital adjustment shall not be made. 27. We have considered the rival submissions. We find that in the case of Lam Research India (P.) Ltd . ( supra ) and Software AG Bangalore Technologies (P.) Ltd . ( supra ) passed by this 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. Since the issue has not been dealt with by the TPO in proper perspective and since the issue has not been raised before the DRP, we deem it fit and proper to remand this issue to the TPO/AO for fresh consideration in the light of the law on the issue as laid down in judicial decision. 28. We direct Ld.TPO/AO to compute the ALP in accordance with the directions contained in this order after afford ..... X X X X Extracts X X X X X X X X Extracts X X X X
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