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TMI Blog2019 (6) TMI 1705X X X X Extracts X X X X X X X X Extracts X X X X ..... P. The issue requires reexamination by the TPO. The parties therefore agreed that the issue requires to be examined afresh by the TPO in the light of the submissions made by the Assessee before DRP extracted of this order. Set off of losses prior to relief under section 10A of the Act - HELD THAT:- As decided in M/S YOKOGAWA INDIA LTD. [ 2016 (12) TMI 881 - SUPREME COURT] Provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought by seeking to rely on the provision of section 70(1) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained. We therefore hold that deduction u/s.10A of the Act has to be allowed without setting off losses of non-10A unit before allowing the deduction under section 10A of the Act. In view of the aforesaid decision of the Hon ble Supreme Court, the AO is directed not to set off the losses of non-10A units against profits of 10A units before allowing deduction u/s. 10A of the Act. Grant of lower deduction u/s 10A - As taking into consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no dispute that the Most Appropriate Method chosen for the purpose of comparison of the profit margin of the Assessee with that of the comparable companies was the Transaction Net Margin Method (TNMM) and the Profit Level Indicator (PLI) chosen for the purpose of such comparison was Operating Profit to Operating Cost (OP/OC). The OP/OC of the Assessee in the SWD services segment was as follows:- Description Amount Operating Revenue Rs.6,31,98,998/- Operating Cost Rs.5,86,25,045/- Operating Profit (PBIT) Rs. 45,73,953/- Operating Profit to Cost Rati 7.80 % 4.Comparable ultimately selected by TPO and their arithmetic mean :- Sl. No Name of company OP / TC (FY 2006-07) Sales (Rs.Cr.) 1 Aztec Software Limited 18.09 128.61 2 Geometric Software Limited (Seg.) 6.70 98.59 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mean was determined at 19.68%. The computation of the ALP by the TPO in this regard was as follows:- 19.6. Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B For details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as under: Arithmetic mean PLI 20.68% Less: Working capital Adjustment (Annexure-C) 1.00% Adj.Arithmetic mean PLI 19.68% Arm s Length Price : Operating Cost Rs.5,64,27,676 Arms Length Margin 19.68% of the operating cost Arms Length Price (ALP) At 119.68% of operating cost Rs.6,74,98,786/- 19.7. Price received vis- -vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under : Arms Length Price (ALP) At 119.68% of operating cost Rs.6,74,98,786/- Price charged in the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems Ltd. 209.18 crores (5)Sasken Communication Technologies Ltd. 240.03 crores (6)Infosys Technologies Ltd. 9028.00 crores. 9.As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT in IT(TP)A No.540 541/Bang/2013, order dated 06.07.2018. The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:- 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. 13.The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Triology E-Business Software India Pvt.Ltd. (supra). Respecfully following the decision of the Tribunal referred to above in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee. 15.The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Logica Private Ltd., (supra). Respecfully following the decision of the Tribunal referred to above in the case of Logica Pvt.Ltd. (supra), we direct that the company viz., Lucid Software be excluded from the list of 20 comparable arrived at by the TPO. 16.As far as comparable companies chosen by the TPO viz., Aztec Software Limited and Geometric Software Ltd. (Seg.) and Megasoft Ltd., are concerned, it is not in dispute before us that the related party transaction in the case of companies exceeds 15% and in view of the decision of the Tribunal in the case of 24 X 7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010, followed by this Tribunal in the case of Logica Private Ltd. (supra) wherein it was held that where the RPT exceeds 15%, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as held in the case of Support.Com India Pvt.Ltd. (TS 609-ITAT-2015 (Bang)TP) (copy at page 2104 of Paper Book-III filed by Assessee) which case also relates to a SWD service provider such as the Assessee. Respectfully, following the same, we hold that Bodhtree Consulting Ltd., should be excluded from the list of comparable companies chosen by the TPO. 20.We direct the TPO to compute ALP in SWD service segments, after excluding the aforesaid companies from the list of comparable companies after giving the benefit of the second proviso to Sec.92(2) of the Act. The relevant grounds of appeal of the Assessee are treated as allowed. TP ADJUSTMENT IN THE IT ENABLED SERVICES TRNSACTIONS WITH AE: 21.There is no dispute that the Most Appropriate Method chosen for the purpose of comparison of the profit margin of the Assessee with that of the comparable companies was the Transaction Net Margin Method (TNMM) and the Profit Level Indicator (PLI) chosen for the purpose of such comparison was Operating Profit to Operating Cost (OP/OC). The OP/OC of the Assessee in the SWD services segment was as follows: Description Amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as under: Arithmetic mean PLI 24.00% Less: Working capital Adjustment(Annexure-F) 1.00% Adj.Arithmetic mean PLI 23.00% Am s Length Price: Operating Cost Rs.4,82,74,952 Arms Length Margin 23.00% of the operating Cost Arms Length Price (ALP) At 123% of operating cost Rs.6,51,61,645/- 38.7 Price received vis- -vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) At 123% of operating cost Rs.6,51,61,645/- Price charged in the international transactions Rs.5,34,34,568/- Shortfall being adjustment u/s.92CA Rs.1,17,27,077/- The above shortfall of Rs.1,17,27,077/- is treated as transfer pricing adjustment u/s 92CA. 23.Against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee s case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the out-sourcing cost was at 88.64% of the operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Maersk Global Services Centre (India) Pvt. Ltd. (14 ITR(Trib) 541) the Mumbai Bench of the Tribunal has analysed and rejected this company as comparable for the reason that it has outsourced a considerable portion of it s business and is functionally different. Moreover, it was also submitted that the DRP in the later year of 2008-09 vide its order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of Companies with export revenues more than 25% of the revenues . Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at Rs. 30.89 crore from three segments, viz., Telecommunication at Rs. 13.63 crore, BPO at Rs. 5.02 crore and Insulator at Rs. 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 of the paper book. Schedule forming part of the annual accounts of Goldstone Teleservices Limited divulges earnings in foreign currency at Rs. 4.24 lakh. Such detail is available at page 239 of the paper book. When we compare earning in foreign currency at Rs. 4.24 lakh with the earnings of BPO at Rs. 5.02 crore or for that purpose of the entity as a whole at Rs. 30.89 crore, it becomes manifest that this case does not pass through the filter adopted by the TPO, being, the companies whose export revenues are more than 25% of the revenues . Therefore, we are of the opinion, that this company cannot be considered as a comparable for the purpose of determining the ALP in this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto by Datamatics Financial Services Ltd. with its AEs. Section 92F(v) defines transaction in the context of transfer pricing provisions to include an arrangement, understanding or action in concert whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceeding. There is no reference to any transaction having necessarily including profit element or mark-up so as to fall within the definition of transaction under Chapter X of the Income-tax Act. Since the TPO applied filter of having companies with less than 25% related party transactions, it is not open to argue that the transactions of reimbursement of expenses duly reported by Datamatics Financial Services Limited as an international transaction within the meaning of section 92B should be ignored simply because they represent reimbursement of expenses. If the contention of the Id. DR that the reimbursement of expenses not involving profit element should not be construed as a transaction, is taken to a logical conclusion, it would mean that all such dealings will cease to be transactions for the purposes of Chapter-X of the Act. Once these dealings are not considered as tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Limited from the list of comparables, we are unable to accept the contention of the Id. DR in this regard. It is more so because no contrary view has been brought by the Ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from the final list of comparables. Since the DRP in assessee s own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee s objection in this regard and direct the Assessing Officer to exclude this company from the comparables adopted. Nucleus Netsoft GIS(India) Ltd. 13.The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discussed above. It was submitted that this company is functionally different and fails under the employee cost filter. It was further submitted that there is a scheme of amalgamation of earlier company by the orders of the Hon ble High Court of Judicature of Bombay, on 22.2.2006 and in view of amalgamation, the financials have changed and the business model also changed. Referring to the annual report placed on record, it was submitted that as against Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in its ITES segment. The OP/OC computed by the Assessee in the ITES segment was as follows:- Description Amount Operating Revenue Rs.4,87,32,573/- Operating Cost Rs.4,10,87,673/- Operating Profit (PBIT) Rs. 76,44,900/- Operating Profit to Cost Ratio 1 8.61 % The TPO computed the OP/OC in all the three business segment of the Assessee i.e., SWD services, ITES and Distribution Segment, by disregarding the figures given in the financial statements and working out the operating profits in the following manner:- MARGIN COMPUTATION OF THE APPELLANT -MODIFIED BY THE TPO Particulars Software services IT enabled services Distribution segment Unallocable income Total Operating Revenue as per the Appellant 6,31,98,998 4,87,32,573 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Profit / (Loss) 67,71,321 4,57,620 (1,09,33,804) 4,53,435 (32,51,427) Operating Profit/Operating Cost 12.00% 0.86% 30.In its submission before the DRP, the Assessee pointed out the following mistakes in the computation of profit margins in the ITES segment by the TPO:- The Assessee had submitted before the TPO, on 15 September 2009, the summary segmental P L account of the Company, split into inter-cilia IT and ITES segments, arriving at the NCP margins, computed at 7.80 % and 18.61 % from IT and ITES, respectively. The Assessee submits below, the segmental profit and loss account of the Company, as was submitted before the TPO: Particulars Software Services IT enabled services Distri-bution segment Unallocable income Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Net cost plus margin (%) 7.80 18.61 The Assessee reiterates that the computation of NCP margins worked out by the TPO is erroneous. The Assessee submits that the summary of segmental P L account of the Company, furnished to the TPO on 15 September 2009 was based on the workings done for the purpose of claiming deduction under section 10A of the Act. The Assessee provides below, a split of the ITES segment into `STPI' and `non-STPI' operations. The Assessee also submits that the summation of (i) the profit from the IT segment and, (ii) the profit from the STPI operations of the ITES segment is Rs. 8,712,868. This amount reconciles with the net profit on which the company has claimed deduction under section 10A of the Act. Particulars Software development services IT enabled services ' STPI STPI Non STPI Income Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd has decided the issue as follows:- 7. Ground no. 8 Erroneous computation of net cost plus margin of the assessee The ground of objection no.8 is as under The TPO has erred on facts in computing the operating cost of the assessee, at Rs.5,29,76,947 instead of Rs.4,10,87,673 in relation to the ITES segment. In this connection the assessee has submitted that all expenses were recovered by the assessee based on the agreement between the assessee and its AE. The assessee had also submitted that expenses were recovered on actual basis. The assessee has further submitted that in view of these facts, the addition of recovery of expenses to the operating revenue and cost of the assessee for the purpose of computing the transfer pricing adjustment u/s 92CA, by the TPO for the ITES segments was erroneous. We have considered the submissions made by the assessee. This issue has been discussed by the TPO in para 2.8 of his order. In this case the TPO had asked the assessee to submit the details and nature of recovery of expenses received. The TPO has specifically asked the assessee to provide as to how these were accounted for. The taxpayer had not furnished the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act, 1961 (Act). The assessee had claimed deduction u/s 10A of the Act before setting of losses of the non-10A unit. The AO was of the view that deduction u/s 10A of the Act was not in the nature of exemption provision and, therefore, the business loss and unabsorbed depreciation of the earlier years has to be first set off against the income of the eligible unit and only on the reminder deduction u/s 10A of the Act has to be allowed. The view of the AO was confirmed by the CIT(A), hence this ground of appeal by the Assessee before the Tribunal. 36.At the time of hearing it was agreed by the parties before us that this issue is no longer res integra and has been concluded by the Hon ble Supreme Court in the case of Yokogawa India Ltd., 391 ITR 274 by its order dated 16.12.2016 and in the aforesaid decision the Hon ble Supreme Court took the following view :- That from a reading of the relevant provisions of section 10A it is more than clear that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deduction under section 10A of the Act. In view of the aforesaid decision of the Hon ble Supreme Court, the AO is directed not to set off the losses of non-10A units against profits of 10A units before allowing deduction u/s. 10A of the Act. 38.Gr.No.10 raised by the Assessee reads as follows: 10Grant of lower deduction under section 10A of the Income-tax Act, 1961 The learned AO has erred and the Honorable DRP has further erred in confirming the computation of deduction under section 10A of the Act. Without prejudice to the generality of the above, the AO has erred, inter alia, in: a)Reducing foreign currency expenditure of Rs 3,245,683 from the export turnover; b)Reducing insurance charges of Rs 421,997 from the export turnover; c)Reducing communication charges of Rs 4,214,060 from the export turnover; and d)Not making any corresponding reduction in the total turnover after having reduced the items mentioned in (a), (b) and (c) above from the export turnover. 39. The Assessee in the grounds of appeal No.10 projected its grievance regarding the action of the learned Assessing Officer and Honorable Dispute Resolution Panel in excluding, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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