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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 ..... n other ground of objection but there were no speaking directions in this regard. DR also could not point out that the DRP has taken into account this additional ground. The depreciation adjustment on account of comparable companies has to be taken into account as the assessee depreciates its fixed assets at a rate higher than the rate prescribed under Schedule-XIV of the Companies Act, 1956. Thus, this needs verification and, therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer/TPO for proper verification and adjudication. Needless to say the assessee be given opportunity of hearing by following the principles of natural justice. Comparable selection - E-lnfochips 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 hardw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangibles which makes it dissimilar from the assessee s portfolio. Therefore, we direct the TPO/AO to exclude this comparable from the final list of comparables. Wipro Technology Services Limited 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. 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 is not a valid comparable. Thus, we direct the TPO/AO to exclude this comparable. Maveric Systems Limited - 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of treasury operation and managing such investments which was incurred for earning the exempt income - HELD THAT:- Though the assessee has stated that the long term investment was in subsidiary and the correct investment related to non-trade is in respect of mutual funds. The aspect of exempt income has not been properly demonstrated by the assessee and, therefore, suo moto disallowance was not justifiable at this juncture. This aspect needs to be verified and, therefore, it is remanded back to the file of the AO for substantial verification though the contention of the assessee that the expenditure incurred on two employees handling treasury functions was the only expenditure in relation to earning of dividend income or any other substantial expenditure was incurred. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Therefore, ground is partly allowed for statistical purpose. X X X X Extracts X X X X X X X X Extracts X X X X ..... Length Price (ALP) determined by the appellant in respect of the international transactions in connection with provision of software development services undertaken by the appellant with its Associated Enterprises (AE). In doing so, the ld. AO/DRP/TPO has erred in law and in facts as follows :- 4.1 Disregarding the functions, assets and risks analysis undertaken by the appellant. 4.2 Rejecting the economic analysis undertaken by the appellant and not computing the ALP in respect of the international transactions as determined by the appellant without providing any cogent reasons. 4.3 Ignoring the provisions of the Rule 10B(4) of the Income Tax Rules, 1962 ('the Rules') which authoress abusage of multiple year data of comparable companies for the purpose of determination of the ALP under section 92F of the Act. 4.4 Rejecting the comparable companies identified by the appellant in its transfer pricing study. 4.5 conducting fresh search by rejecting the objections raised by the appellant in relation to selection/rejection/modification of filters or inconsistency in application of filter/s. 4.6 using information obtained under section 133(6) of the Act. 4.7 Conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs.6,48,60,628/- did not appreciate that: (i) administrative expenses debited to the profit and loss account had no bearing to the earning of dividend and non current investment. (ii) non-current investment of Rs.825.90 Crores was strategic 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." ITA No.319/Ind/2018 for A.Y. 2013-14 "1. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals)-I, Indore ['the CIT(A)'] has erred in upholding the disallowance of Rs.6,54,95,133/- made under Section 14A of the Income Tax Act, 1961 ('the Act') read with Rule 8D of Income Tax Rules, 1962 ('the Rules') 2. That on the facts and circumstances of the case and in law, satisfaction recorded under section 14A(2) of the Act was improper and otherwise bad in law and as such, no disallowance under section 14A was ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessment Order as per the directions given under Section 144C(5) of the Act. In the directions, the AO observed that the DRP had upheld the disallowance of Rs.6,07,00,658/- made under Section 14A as per rule 8D. Also for upward adjustment of Rs.212,56,79,027/- on account of software services. The DRP confirmed the same. The Assessing Officer vide Assessment Order dated 05.02.2016 made addition of Rs.220,97,90,410/- towards upward adjustment on account of provision of Software Services and addition of Rs.6,07,00,658/- which is disallowed under Section 14A read with Rule 8D. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before us. 5. The Ld. AR submitted that the assessee company was incorporated in India on 13.09.1996. The assessee provides software development and maintenance services from STPI and SEZ registered units. The primary activities of the assessee relate to provision of software development services. For the services rendered, the assessee is compensated with a mark-up of 11% on cost. The Ld. AR further submitted that during the previous year the assessee entered into international transactions with its Associated Enterprise and maintained pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4 & 4.1 are general in nature. 7. Ground nos.1, 4 & 4.1 are general in nature and hence dismissed. 8. As relates to the Ground nos.2 & 3, the same are not pressed by the assessee and hence dismissed. 9. As regards to Ground no.4.2 related to rejecting economic analysis undertaken by the assessee, most specifically that of depreciation adjustment, the Ld. AR submitted that the assessee before the DRP by way of an additional ground claimed adjustment on account of depreciation vis-à-vis comparable companies. The assessee depreciates its fixed assets at a rate higher than the rates prescribed under Schedule-XIV of the Companies Act, 1956. However, most of the comparable companies considered by the TPO follow rates as prescribed under Companies Act, following straight-line method. Thus, the comparable companies were charging depreciation at a rate lower than the assessee. The assessee sought adjustment because of the difference in the rates of depreciation charged by the assessee vis-àvis the comparable companies. The Ld. AR submitted that the detailed workings of depreciation adjustment was submitted before the DRP but the DRP denied depreciation adjustment stating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regards to ground no.4.3, the same is not pressed and hence dismissed. 13. Now coming to the ground of appeal no.4.4 to 4.7, the same are related to exclusion of comparable companies that of seven companies and inclusion of four comparables. 14. Firstly we will take up exclusion of comparable companies sought by the assessee. 14.1. E-lnfochips Limited: The Ld. AR submitted that E-lnfochips is a product engineering and software R&D services company. It is engaged in manufacturing and designing of chips, owns IP, developed through dedicated R&D expenditure incurred for product and hardware designing. In fact, there was disclosure to significant accounting policies in the said comparable as the Company is engaged in the development and maintenance of computer software and software development consulting and also manufacturing EVM and VDB Electronic Board (Hardware Division). The production and sales of software cannot be expressed in any generic unit. Hence it is not possible to give the quantitative details of sales and certain other information as required under paragraph 3, 4C and 4D of part-11 of Schedule VI to the Companies Act, 1956. The Ld. AR further submitted that this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. DDIT ITA Nos.161 & 269/PN/2013 - American Express India Pvt. Ltd. Vs. DCIT [2017] 83 taxmann.com 345 (Delhi - Trib.) - SAP Labs India Private Limited vs. ACIT: (ITA No 398 & 418/Bangalore/2010) - Adobe Systems Software India Private Limited vs. ACIT: (ITA No. 5043/Del/2010). - Teva India Limited vs DCIT (ITA No 6107/Mum/2009) - Sapient Corporation Private Limited vs. DCIT: (ITA No. 5263/Del/2010) - Quarks Systems Private Limited vs. DCIT: (ITA No. 100/Chd/2009) The Ld. AR further submitted that the TPO in assessee's TP assessment proceedings in AY 2010-11 rejected E-infochips as a comparable by treating income from hardware maintenance as income from sale of products. The Ld. AR relied upon the decision of Brintons Carpets Asia Private Limited: (ITA No.1296/Pune/2010) on consistency in approach of TPO. The Ld. AR further submitted that the TPO in the report dated January 16, 2019, at page 9, has merely reiterated the observations in the TPO order. In fact, the TPO himself 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%. However, he has stated that the contention of the assessee is not accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Therefore, the contention of the assessee is incorrect to say that E-zest Solutions Limited is a software product company. In this regard, the TPO has relied on the information received under section 133(6) that the company is not having any revenue from sale of products during the subject year. In relation to the above allegations of the TPO, the Ld. AR submitted that from pages 767 to 770 of the paper-book, it is quite apparent that E-zest Solutions Limited is not just providing software development services but is also doing end to end product engineering and product development services, SAAS and other host of services, which are completely different from the assessee. Even assuming that during the year under consideration that there is no software product sale, even then the services rendered are functionally not comparable (as stated supra) to the assessee. Thus, is not functionally comparable to the functions performed by the assessee. Further, even if during the year the company has not reported any revenue from software sales, it is still maintaining software product inventory, which clearly shows that it is a product company as well. The Ld. AR relied upon the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for A.Y. 2010-11. In view of the same, all the above contentions of the TPO that the said company is functionally comparable does not hold good. The Ld. AR relied upon the following decisions, wherein in the absence of segmental the company has been rejected: - Dialogic Networks (India) (P) Ltd. vs. DCIT: [2017] 78 taxmann.com 349 (Mumbai -Trib.). - Evalueserve SEZ (Gurgaon) (P) Ltd. vs. ACIT: [2017] 58 ITR(T) 234 (Delhi - Trib.) 14.8. The Ld. DR relied upon the directions of the DRP and order of the TPO/AO. 14.9. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that iGate Global Solutions Limited is in the nature of engineering design services which are completely different from software development services. There are no segmental information available for the particular year before us. In fact, in assessee's own case for A.Y. 2010-11 this comparable was excluded and hence this is not a valid comparable. We direct the TPO/AO to exclude iGate Global Solutions Limited from the comparable list. 14.10 Lucid Software Limited: Lucid software is engaged in development of software products and rendition of software s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h and development on yearly basis. Thus, Lucid is functionally not comparable as it owns intangibles, does research and development for developing new software products and is selling software products. The Ld. AR relied upon the following decisions relating to the comparable regarding fluctuating margin: - FCG Software Services (India) Private Limited: IT(TP)A No.1242/ Bangalore/2012) - CIT vs. Allscripts India (P) Ltd: [2016] 241 Taxman 545 (Gujarat) - Cummins Turbo Technologies Ltd., UK vs. DDIT: ITANos.161 & 269/PN/2013. - American Express India Pvt. Ltd. vs DCIT: [2017] 83 taxmann.com 345 (Delhi Trib ) - SAP Labs India Private Limited vs ACIT: (ITA No. 398 & 418/Bangalore/2010) - Adobe Systems Software India Pvt Ltd vs ACIT: (ITA No. 5043/ Del/2010) - Teva India Limited vs. DCIT: (ITA No. 6107/Mum/2009) - Sapient Corporation Pvt. Ltd. vs. DCIT: (ITA No.5263/Del/2010) - Quarks Systems Pvt. Ltd. vs. DCIT: (ITA No.100/Chd/2009) 14.11. The Ld. DR relied upon the directions of the DRP and order of the TPO/AO. 14.12. We have heard both the parties and perused all the relevant material available on record. This comparable Lucid Software Limited is engaged in devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/Bang / 2012 - Trianz Holdings Private Limited vs. DCIT: IT(TP)A No.1568/Bang/2012 Income from sale of software: - Alcatel-Lucent India Ltd. vs. DCIT: [ITA No.6856/Del/2015] - Intoto Software India Private Limited (ITA No.1196 & 1197/Hyd) - FCG Software Services (India) Private Limited (IT(TP)A No.1242/ Bangalore/2012) Extra-ordinary events: The Ld. AR relied upon the following decisions wherein it has been held that in case of an extraordinary event like merger/amalgamation during the relevant year; the company should not be selected as comparable: - Symphony Market Solutions Private Limited vs. ITO: (IT(TP)A No. 1316/Bang/2012) - NTT Data India Enterprise Application Services Pvt. Ltd. vs. ACIT: (ITA No. 1612/Hyd/2010) - Petro Araldite Private Limited vs. DCIT (ITA No.6217/Mum/2012 14.14. The Ld. DR relied upon the direction of the DRP and the order of the TPO/AO. 14.15. We have heard both the parties and perused all the relevant material available on record. Persistent System Limited is engaged in rendering outsourced product development services and product design services but the assessee company is primarily relates to provision of software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creation of niche solutions. For doing the work it owns significant intangibles. At page 1174 of the Paper book of the Directors report it has been reported that it h as secured contract for supply o: simulation and virtual training suite and it has successfully execute Silicon suite products for the Indian Army. The Ld. AR relied upon the following decisions wherein it has been held that companies owning intangibles cannot be accepted as comparable: - Omniglobe Information Technologies (India) (P ) Ltd. vs. ITO: ITA No. 1003/Del/2016 for AY 2010-11 - 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/2 011 - Clear 2 Pay India (P.) Ltd vs. ITO [IT Appeal Nos.594, 2744 & 2788 (DELHI) of 2017] - Colt Technology Services India (P ) Ltd [IT Appeal No. 609 (Delhi) of 2011] - Bechtel India (P.) Ltd. vs. DCIT: [ITA No 6779/Del/2019] - Saxo India (P) Ltd. vs. ACIT: [2016] 176 TTJ 540 (Delhi - Trib.) - Shipnet Software Solutions India (P) Ltd. [IT Appeal No.3404/MDS/2016 14.17. The Ld. DR relied upon the directions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng margins for a period of over three years. Since FAR profile of company is different from FAR profile of assessee the same cannot be considered for the purposes of comparability, especially, when the margins are also fluctuating and the assessee earns a consistent steady returns for its activities. The Ld. AR relied upon the following case laws: - FCG Software Services (India) Pvt Ltd: (IT(TP) A No.1242/ Bangalore/2012) - PCIT vs. Allscripts India (P) Ltd: [2016] 241 Taxman 545 (Gujarat) - Cummins Turbo Technologies Ltd. Vs. DDIT: ITA Nos.161 & 269 PN/2013 - American Express India Pvt. Ltd. Vs. DCIT: [2017] 83 taxmann.com 345 (Delhi - Trib) The Ld. AR submitted that there is presence of Brand in this comparable company. The Ld. AR relied upon the following decisions wherein companies which are having substantial brand presence (in the present case Wipro) are not comparable to the company which are not enjoying such brand presence: - Pr. CIT vs. Oracle (OFSS) BPO Services (P) Ltd. [2018] 303 CT 284 (Del). The SLP filed by the Revenue against the order of the Hon'ble High Court has also been dismissed vide order dated 30.11.2018 in SLP Civil Diary No. 32469/2018. - Pr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said comparable both in AY 2012-13 as well as AY 2013-14 and has made no TP adjustment. The Ld. AR submitted that the performance due to government policy is not an unusual event. The Ld. AR submitted that the company in the Director's report has stated about company's business performance in various geographies. While the company did not perform well in the European market as the business was adversely affected by government policies, it has performed well in Middle East region and in Asia Pacific region. The Ld. AR further pointed out that the assesse also provides services to several Associated Enterprises situated in the European region. In fact, it has rendered services specifically to its UK based Associated Enterprises. Under the circumstances, business of the assessee will also be affected the same way as the business of the comparable. In view of the above since the market in which the assessee as well the comparable operate is similar and any adverse effects of government policies affects business for tie comparable as well as the assesseet alike, it cannot be said that any fall in business due to government policies is an extraordinary event peculiar to the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a related party transaction. The Ld. AR further submitted that aII the companies pay director's remuneration and the Companies Act regulates it. The rationale to exclude companies with high RPT is that high-related party transactions may affect the financials However, Director's remuneration cannot be held to be in the same league as other related party transactions with Associated Enterprises as it is already regulated by statute and in fact, it is not even reported as related party transaction by most enterprises. The Ld. AR submitted that the TPO has not disputed the functional profile of the company, it has only been rejected on the ground that it has high RPT, which, in view of the above submissions has been shown to be incorrect. 15.5. The Ld. DR submitted that this comparable company should not be included as it is primarily delivering software validation and software services. 15.6. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the TPO has not disputed final portfolio and only rejected on the basis of high RPT but from the perusal of annual report the observation of the TPO appears to be factuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... System International Limited has two segments, the segmental quarter-wise audited financial details are available wherein these two segments have been bifurcated. It appears that the Software development and customization services are identical to the assessee's functions relating to this company. Therefore, we direct the TPO/AO to verify the said aspect and if all the criteria are applicable, then include the same in the final list of comparable. 15.10. Kulzia Technologies Limited: Kuliza Technologies Ltd is engaged in the business of rendering software services. The company satisfies all the filters adopted by the TPO. The said comparable company has been included by the TPO in the previous A.Y. 2010-11 when it had earned a profit however, for the impugned year since the company has incurred losses the TPO has rejected company under the garb of having abnormal profit pattern. Both profit and losses are part of the business and if in one year a company has incurred losses does not mean it has an abnormal profit pattern. The Ld. AR submitted that it is not the case that the company has incurred any abnormal costs, neither is it a persistent loss making company. The Ld. AR further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ology TNMM Revenue (Turnover) 24,07,60,96,000 24,07,60,96,000 Other Income: Add: Miscellaneous income 1,09,30,000 1,09,30,000 Add: Exchange gain 3,31,37,000 X Add: Liabilities written back 1,58,20,000 X Operating Revenue 24,13,59,83,000 24,08,70,26,000 Expenses as per financials (As upheld by the DRP) 21,56,70,22,000 21,56,70,22,000 Less: excess depreciation 55,20,47,792 X Total expenses 21,01,49,74,208 21,56,70,22,000 Operating Profit 3,12,10,08,792 25,20,00,4000 Margin considered (OP/OC) 14.85% 11.68% 17. This approach of the TPO has been affirmed by the DRP. Consequently, the assessee's operating profit to operating cost ratio has been calculated at 11.68%, without considering foreign exchange gain of Rs.3,31,37,000/- which forms part of operating income and depreciation adjustment claimed by the assessee. The Ld. AR submitted that the entire foreign exchange gain has accrued to the assessee during the relevant financial year and the same was solely because of the export proceeds in convertible foreign exchange and had direct nexus with the exports of the assessee. Thus, the foreign exchange gain must be considered as operating income for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alongwith submissions given by the assessee to the TPO/AO for giving effect to the DRP Directions, the same may be taken into account and verify the same. Ground nos. 4.8 & 4.9 are partly allowed for statistical purposes. 21. Ground no.4.10 is consequential and hence not adjudicated at this juncture. 22. As regards to Ground no.5 related to disallowance under Section 14A of the Act, the Ld. AR submitted that the assessee has identified expenditure of Rs.20,37,506/-, representing salary cost of two employees, related to long term investment in subsidiary and current investments in non-trading in various mutual funds. The Ld. AR submitted that the expenditure was in respect of treasury operation and managing such investments which was incurred for earning the exempt income. The Ld. AR further submitted that as per tax audit report the amount was Rs.20,37,506/- only as the salary expenses of those employees. The Ld AR further submitted that the nexus of expenditure sought to be disallowed without earning of exempt income and, therefore, relied upon the CBDT Circular No.14 dated 11.11.2001, clarifying the provisions of Finance Bill 2001. The Ld. AR relied upon the decision of Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rified and, therefore, it is remanded back to the file of the Assessing Officer for substantial verification though the contention of the assessee that the expenditure incurred on two employees handling treasury functions was the only expenditure in relation to earning of dividend income or any other substantial expenditure was incurred. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Therefore, ground no.5 is partly allowed for statistical purpose. 25. Ground nos.6 to 8 are consequential, hence not adjudicated at this juncture. 26. Therefore, ITA No.179/Ind/2016 filed by the Assessee for A.Y. 2011-12 is partly allowed or statistical purpose. 27. As regards to Stay Application No.46/Ind/2021 in ITA No.179/Ind/2016, the same is also disposed of. 28. In respect of appeal being ITA No.292/Ind/2017 for A.Y. 2012-13 and appeal being ITA No.319/Ind/2018 for 2013-14, there are only one issue related to Section 14A disallowance and the same is identical to that of Ground no.5 of appeal being ITA No.179/Ind/2016 for A.Y. 2011-12. No distinguishing facts were pointed out by the Ld. DR except the amounts in each years. Therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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