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TMI Blog2023 (4) TMI 1263X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- ITA No.179/Ind/2016 for A.Y,. 2011-12 "Based on the facts and circumstances of the case, the appellant respectfully submits that the learned Assessing Officer ('ld AO') erred in determining the total income of the appellant at Rs.383,49,26,920/- as against the returned income of Rs.156,44,35,848/- filed by the appellant. The grounds of the appellant against the action of the ld. AO are as follows : 1. on the facts and circumstances of the case and in law the assessment order passed by the ld AO under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 ('he Act') dated February 5, 2016 is without jurisdiction and is bad in law. 2. on the facts and circumstances of the case and in law the directions issued by the Dispute Resolution Panel (DRP) dated December 22, 2015 is without jurisdiction and is bad in law. The directions passed by the DRP are in violation of section 144C(8) of the Act. 3. on the facts and circumstances of the case and in law the assessment order passed by the ld AO dated February 5, 2016 is based in law and is in violation of Section 144C(13) of the Act. Transfer Pricing related grounds: (The appellant in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of the Act. Corporate Tax related grounds 5. On the facts and in the circumstances of the case and in law, the ld AO/DRP has erred in disallowing an expense of Rs.6,07,00,658/- under Section 14A of the act read with Rule 8D of the Rules. 6. On the reacts and circumstances of the case and in law, the ld AO has erred in withdrawing the interest under section 234B of the Act. 7. on the facts and circumstances or the case and in law, the ld. AO has erred in levying interest under section 234D of the Act. 8. on the facts and circumstances of the case and in law, the ld. AO has erred in withdrawing the interest under section 244A of the act. It is prayed and the appellant claims relief that it be held that the aforesaid adjustments are bad in law and the ld. AO be directed to delete the adjustments. Each of the above grounds is independent and without prejudice to the other grounds preferred by the appellant." ITA No.292/Ind/2017 for A.Y. 2012-13 "1. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals)-III, Indore ['the CIT(A)'] has erred in upholding the disallowance of Rs.6,48,60,628/- made under Section 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trategic investment in subsidiary companies and was not for earning any dividend. Subsidiary companies were merged with CSC India w.e.f. 01.04.2015 and during financial years 2009-10 to 2014-15, no dividend was earned from subsidiaries. Accordingly, noncurrent investment was not required to be taken into account in computing the disallowance under section 14A read with Rule 8D of the Rules." 3. Firstly we are taking ITA No.179/Ind/2016 for Assessment Year 2011-12. The assessee company is engaged in the business of software development and exports. The assessee is an Indian entity of Computer Science Corporation which is a group of Multinational Companies. The original return of income was filed on 30.11.2011 declaring total income at Rs.155,73,24,897/-. The case was selected for scrutiny and notice under Section 143(2) of the Income Tax Act, 1961 was issued to the assessee on 01.08.2012 which was duly served to the assessee. The case was referred to the Transfer Pricing Officer (TPO) as the Assessing Officer noticed that the assessee has entered into international transactions with it's associated concerns. The TPO vide order dated 01.01.2015 under Section 92CA(3) made an upward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-11 was 10.59% after risk and working capital adjustment as against 11.91% (which was revised to 14.85%, after depreciation adjustment) margin of the assessee. Since OP/TC margin of the assessee was greater than mean margin of the comparable companies, it was concluded that international transactions of the assessee were at arm's length. The Ld. AR further submitted that vide notice dated 31.10.2014 rejected some of the comparable companies and introduced some new comparable companies after conducting fresh search. The final tally of the comparable companies selected by the TPO for computing ALP is that 22 companies are comparable companies selected by the assessee company in TP study, 10 comparable companies accepted by the TPO from the TP study, and 11 fresh comparable companies introduced by the TPO. Thus, total comparable companies selected for determination of ALP was 21. The TPO on the basis of the selected comp[arable companies determined the OP/TC of the comparable companies at 21.49% and recomputed assessee's margin by excluding foreign exchange at 11.68% (and without granting depreciation adjustment). The TPO made an adjustment of Rs.212,56,79,027/- and incorporated by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Egain Communication (P) Limited (2009) 118 ITD 243 (Pune). Thus, the Ld. AR submitted that it is an established jurisprudence that the margins of the comparable companies should be adjusted on account of difference in depreciation between the assessee and the comparable companies. 10. The Ld. DR submitted that the Assessing Officer as well as the Transfer Pricing Officer has followed the well searched formula and the data that simple year should have been taken into account. The Ld. DR submitted that the TPO has taken cognisance of the depreciation adjustment and relied upon the order of the TPO and the Assessing Officer. 11. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has taken additional ground before the DRP while filing the objection to the draft Assessment Order thereby making adjustment on account of depreciation vis-a-vis the comparable companies. This aspect was not taken into account by the DRP and the DRP simplicitor stated that this aspect is discussed in other ground of objection but there were no speaking directions in this regard. The Ld. DR also could not point out tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the company is also carrying manufacturing operations. The Ld. AR relied upon the decision of the Hon'ble Delhi High Court in the case of Ramgreen Solutions (P.) Ltd vs. CIT: [2015] 377 ITR 533 (Delhi), wherein the Court has held that functional similarity is of utmost importance while accepting or rejecting a comparable company. The Ld. AR further submitted that there is no segmental details available for this comparable. The Ld. AR pointed out that Annual Report of the company for FY 2010- 11 does not disclose segment wise profitability data for the purpose of comparability of the relevant segment with assessee. In view of the above a company with diversified functions cannot be compared to the assessee especially in the absence of segmental data. The Ld. AR relied upon the following decisions: - Pr. CIT vs. Saxo India (P) Ltd. [2017] 397 ITR 160 (Delhi) - Saxo India (P) Ltd vs. ACIT [2016] 176 TTJ 540 (Delhi - Trib.) - Alcatel-Lucent India Ltd vs DCIT [ITA No 6856/Del/2015] - Evonik Degussa India P Limited vs. ACIT (ITA No 7653/Mum/2011) The Ld. AR further pointed out that there is abnormally fluctuating margin related to this comparable. The company has a volatile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertinent to note that the E-Infochips Limited is a product engineering and software research & development service company. The portfolio of the EInfochips Limited is totally different as the product based company cannot be the criteria for including the same as it is not the proper comparable with the assessee company. There are no segmental details available for this comparable. There are abnormally fluctuating margin related to this comparable. Besides this, the TPO has accepted in the remand report that the hardware sales during the year is 15.07% and whereas in the last year it was 18% and therefore, rejected this comparable in A.Y. 2010-11. Thus, all these aspect held this company as noncomparable to the assessee company. Hence, the TPO/AO directed to exclude EInfochips Limited from the comparable companies list. 14.4. E-zest Solutions Limited: The Ld. AR submitted that E-zest Solutions Ltd. is engaged in providing product engineering services. It also undertakes ITeS - BPO/KPO services, thus functionally not comparable. This company is functionally not comparable with the assessee as it has a broad portfolio of services and is engaged in the diversified activities. The var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are Development (India) Private Limited vs. DCIT: IT(TP)A No.1287/Bang/2011 - Symphony Services Pune Private Limited vs. ITO: [2014] 65 SOT 30 (Pune Tribunal) - DCIT vs. Amber Point Technology India Private Limited: ITA No. 756/Pune/2014 (Pune Trib) 14.5. The Ld. DR relied upon the directions of the DRP and the order of TPO/AO. 14.6. We have heard both the parties and perused all the relevant material available on record. E-zest Solutions Limited is engaged in the diversified activities and providing product engineering services and, therefore, it cannot be treated as comparable to assessee company. Besides this, it also undertakes ITes-BPO/KPO services. There were no segmental details available for this company. Therefore, we direct the TPO/AO to exclude this company from the list of comparables. 14.7. iGate Global Solutions Limited: Services provided by the Company are in the nature of Engineering Design services which are completely different from software development services and are not functionally comparable. There is no segmental information available as the company is engaged in different functions, thus, the said company cannot be taken as a comparable. The TPO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has developed its own software product for rendition of software services and has also incurred expenditure of Rs.83,80,045/- on research development on yearly basis. Thus, the Ld. AR submitted that it is clearly evident that the said company is functionally not comparable to the assessee. The Ld. AR relied upon the following decisions relating to the comparable regarding software product company: - 3DPLM Software Solutions Limited: (TS-359-ITAT-2013 (Bang)- TP) - Citrix R&D India Pvt. Ltd vs. ITO: TS-242-ITAT-2017(Bang)-TP - ACIT vs. Curam Software International P Ltd IT(TP)A 499 & CO.136/Bang/2015 The Ld. AR submitted that no segmental result is available and company is engaged in dissimilar functions, the said company cannot be used as a comparable. The company has fluctuating margins for a period of three years. Company Name F.Y. 2009-10 F.Y. 2010-11 F.Y. 2011-12 OP/TC Lucid Software Ltd. -25.78% 41.85% 12.04% Since FAR profile of the Company is different from FAR profile of assessee the same cannot be considered for the purpose of comparability, especially, when the margins are also fluctuating and the assessee earns a consistent steady ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s functionally dissimilar. The company is engaged in rendering outsourced product development services and product design services as against software development services Further the Company maintains its own intellectual property which has created a significant non-linear revenue stream for the company. The company has been involved in merger/ demerger activities during the F.Y. 2010-11. This unusual event is helping the Company in its operations and has an impact on the profitability of the Company. The IP Led business of the company is growing steadily and providing the non-linear growth. In the financial year 2009-10, 7 2% of the revenues came from IP, which grew to 8.8% in the financial year 20'0-11 (subject AY). Company's strategy for IP business is to proactively identify and develop solutions that augment customers' product roadmap, thereby extending solution in a way that is strategic and monetarily significant for both organization. The IP developed is also aligned to strategic growth areas - Cloud. Mobility Bl & Analytics Collaboration, Telecom and Life Sciences. Some of the IPs developed are also aligned directly to the customer. Around five percent of Persiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llation and maintenance of simulators and systems for varied customers such as defence, aerospace, automobile and security etc. The company is engaged in the field of simulation operations, which are functionally different from software development services rendered by the assessee. The Ld. AR relied upon the following judicial precedents wherein the company has been held to be functionally dissimilar to software development company: - Alcatel-Lucent India Ltd. vs. DCIT: [ITA No. 6856/Del/2015] - ITO vs. Sunquest information Systems (India) P Ltd. IT(TP)A No.1032/ Bang/ 2011 - ITO vs. Colt Technology Services India P. Ltd: ITA No.6091/Del/2011 The Ld. AR further submitted that there is no segmental available regarding software development service. The TPO in the report dated January 16, 2019 has stated that the assessee is wrongly contesting functional comparability of the comparable. The assessee has based its objections based on end user of the software without appreciating that the company is not developing any software products. It has been further stated that the segmental revenue from product training is Rs.9.6 crores and the same has not been taken into consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude this comparable from the final list of comparables. 14.19. Wipro Technology Services Limited: The Ld. AR submitted that this comparable company is functionally different. The company is engaged in providing software related support services primarily, information technology software solutions/maintenance and technology infrastructure support services to Citigroup entities. The services provided include: * Software application development, integration, maintenance & support - It develops software depending on the needs of the clients such as an upgrade or patch. It also tests the software and assists in installation per the requirements of the clients. * Technology infrastructure operations - It renders support services towards system engineering, network and firewall management, log reviews, information security administrators etc. The Ld. AR submitted that the company before change of management and name was part of the Citigroup and was known as Citi Technology Pvt. Ltd. Wipro Technology Ltd. acquired the above mentioned company from Citigroup Inc with a master service agreement that Citigroup will provide business of $600 million to the Wipro Technology Services. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciate that the company cannot be compared, not just because of super normal profits, but also bees use of (a) brand presence, (b) high related party transaction and (c) fluctuating margins as demonstrated hereinabove. 14.20. The Ld. DR relied upon the directions of the DRP and the order of the TPO/AO. 14.21. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that Wipro Technology Services Limited is engaged in providing software related support services, software application development, integration, maintenance & support as well as technology infrastructure operations. These services are totally different than the provisions of software development services. In the relevant A.Y., Wipro Technology Services Limited, related party transaction was conducted and there was change of management. There was fluctuating margins for a period of over three years and, therefore, the FAR analysis was not justifiable for comparing the assessee's company. The brand Wipro Technology Services Limited has substantial presence and, therefore, it is earning super normal profit compare to that of assessee company. Therefore, this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the functional comparability of this company and the TPO has accepted this comparable in A.Y. 2012-13 and 2013-14. The contention of the Ld. DR that this company includes testing services, but that will not impact the main function of the said comparable company. From the annual report of this comparable, it is pertinent to note that this comparable company is in the same field to that of assessee company and merely excluding the said comparable in A.Y. 2010-11 for persistent loss was not applicable in the present A.Y. as loss was not in the Indian entity but related to government policies in U.K. Therefore, we direct the TPO/AO to include this company after due verification for the final comparable list. 15.4. Thinksoft Global Services Limited: The Ld. AR submitted that Thinksoft Global Services Ltd. is a software service provider primarily delivering software validation and verification services. These services are similar to assessee's software services and validation and verification is part of software development process. The TPO has alleged the said company has a high RPT/sales ratio, which is factually incorrect. The company in the annual report in the related party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f software development, maintenance and enhancement services (customization etc.). Segmental quarter wise audited financial details are available for the said company in the public domain and the correct margin for the financial year April 2010 to March 2011, can be computed the information available. The Ld. AR submitted that it is settled position by the courts with respect to R Systems International Ltd that if quarter-wise data is available to compute segmental margins of the financial year then the said comparable should be included in the list of comparable. The Ld. AR further submitted that the TPO has not disputed the functional profile of the company, it has only been rejected as a comparable on the ground that it reports financials for a different financial year, which in view of the courts cannot be held to be the reason for rejection of this company as a comparable. The Ld. AR relied upon the following decisions wherein inclusion of R Systems has been upheld: - Mercer Consulting (India) (P.) Ltd. vs DCIT: [2014] 150 ITD 1 (Delhi - Trib.) - affirmed by Punjab & Haryana High Court in [2017 390 ITR 615 - Business Process Outsourcing (India) Pvt. Ltd. vs ACIT: ITA No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been excluded on the basis of persistent loss making, if the comparable is making losses for the preceding three years: - Exxon Mobil Co India (P) Ltd. vs. DCIT [2011] 46 SOT 294 (Mum (URO) - TCL Holdings (P) Ltd. vs. ACIT [2013] 59 SOT 68 (Mum) - Qualcomm India (P) Ltd. vs. ACIT bearing ITA No.5239/Del/2010 - Cummins Turbo Technologies Ltd. vs. DDIT bearing ITA No.118/ Pune/2011 - Apotex Research P. Ltd. Vs. DCIT bearing ITA No. 918/Bang/2011 15.11. The Ld. DR submitted that this company has incurred abnormal costs and, therefore, one of the filters is not satisfied. 15.12. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that for A.Y. 2011-12 this comparable company has incurred losses and, therefore, there was abnormal profit pattern. Filters taken by the TPO has not been satisfied by this comparable and, therefore, rightly rejected by the TPO. This comparable, therefore, should not be included in final list of comparables. 16. As regards to ground nos.4.8 & 4.9 related to Foreign Exchange Gain which is considered non-operating in nature and working capital adjustment, the Ld. AR submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2016 as well as PCIT vs. Cashedge India Pvt. Ltd. (ITA No.279/2016). The Ld. AR also relied upon the decision of Hon'ble High Court in the case of CIT vs. Infosys Technologies Ltd., 349 ITR 606 ITR and CIT vs. Encore Software Limited (ITA No.1142/2006). 18. As regards working capital adjustment, the Ld. AR submitted that the TPO gave the working capital adjustment, however, the margins of the comparable companies were incorrectly computed. Pursuant to directions issued by the DRP, the assessee gave updated working capital computation alongwith submissions for giving effect to the DRP Directions. The TPO has not considered the assessee's computation and has retained the incorrectly computed margins after giving working capital adjustment. The Ld. AR submitted that directions may be issued to the TPO to verify the same and compute the ALP of the international transaction basis the corrected margins. 19. The Ld. DR relied upon the order of the TPO/AO and directions of the DRP. 20. We have heard both the parties and perused all the relevant material available on record. In respect of foreign exchange gain which is considered as non-operating in nature, it is justified by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of HT Media Limited vs. Pr. CIT, 399 ITR 596 and CIT vs. Taikisha Engineering India Limited, 370 ITR 338 as well as Joint Investments (P) Limited, 372 ITR 694. The Ld. AR further submitted that without prejudice to the above submissions, no disallowance was required to be made under Section 14A read with Rule 8D as the investment of Rs.18,65,61,000/- was held in subsidiary Fortune Infotech Limited and no new investment was made nor has any existing investment been disinvested in the relevant year. The assessee in A.Y. 2011-12 has earned no exempt income. The exempt dividend income has only been earned on current investments, which are held in mutual funds. The Ld. AR relied upon the decision of Hon'ble Apex Court in the case of PCIT vs. Oil Industry Development Board, 262 Taxman 102 and PCIT vs. Chettinad Logistics Private Limited, 257 Taxman 2. The Ld. AR also relied upon the decision of Hon'ble Delhi High Court in the case Cheminvest Limited vs. CIT, 378 ITR 33 and PCIT vs.IL & FS, 399 ITR 483. 23. The Ld. DR submitted that for earning investment of Rs.18,65,61,000/- the assessee has suo moto disallowed such amount of Rs.20,37,506/-. In fact, the current investme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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