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TMI Blog2020 (6) TMI 834X X X X Extracts X X X X X X X X Extracts X X X X ..... on disputed issue in Software Development Segment (SDS) in Para 7, above relying on the decision of Tecnotree Convergence Pvt. Ltd. Vs. DCIT [ 2018 (6) TMI 1688 - ITAT BANGALORE ] in the case of and dismissed the ground of appeal and the same decision shall equally apply. Accordingly, we dismiss this ground of appeal in ITES segment. TDS u/s 40(a)(ia) on software expenses - HELD THAT:- Prima facie, the assessee is engaged in software development services and ITES and incurred expenses for purchase of software and AMC charges. Ar emphasized on revenue expenditure but could not support with evidences. Further there is no clarity in respect of deduction of tax at source. Hence, considering the facts and circumstances, we are of the opinion that the assessee has to establish that recipient/payee has paid the tax on income and discharged tax obligation. Accordingly, we restore this issue to the file of Assessing officer for examination and verification of facts and allow the ground of appeal for statistical purpose. Computation of the book profits u/s 115JB on provision for loyalty bonus - Ar submitted that the loyalty bonus should not be considered for calculation of the book Profit u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um of Rs. 15,35,172/- u/s 40(a)(ia) being software expenses and AMC charges despite the fact that there is no requirement to deduct TDS on purchase of software; and b. Not appreciating that software expenses are revenue in nature and allowable as deduction. Computation of Book Profits 7. The lower authorities have erred in adding provision for loyalty bonus of Rs.45,13,498/- while computing book profits u/s 115JB." 3. The Brief facts of the case are that the assessee is engaged in the business of development and export of software services and is 100% EOU registered with STPI, Bangalore, and renders software development and related services, and also customer support services to Kodiak, USA .The assessee company filed the return of income for the Asst. Year 2012-13 on 21.11.2012 with total income of Rs.5,15,80,080/-.Subsequently, the case was selected for scrutiny and Notice issued under Section 143(2) of the Act. In compliance, the learned Authorized Representative of the assessee appeared from time to time and submitted the details. The Assessing Officer find that the assessee has international transactions of Rs.36,06,98,576/- and the case was referred to the Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef with specific directions under Section 144 C(5) of the Act dt.13.12.2016. The A O after the receipt of the DRP order, has made addition of software expenses of Rs.15, 35,172/- as the assessee has failed to deduct TDS on payments and also provision of loyalty bonus of Rs.45, 13,498/- for calculation of book profit under Section 115JB of the Act and passed final assessment order under Section143 (3) r.w.s. 144C(1) dt.26.12.2016. Aggrieved by the final assessment order, the assessee has filed an appeal with the Tribunal. 5. At the time of hearing, the learned Authorized Representative has restricted his arguments to the extent of grounds of appeal pressed and exclusion of comparables in the software development services segment, ITES segment, negative working capital adjustment and corporate tax issues. The LdAr submitted that in the software development services segment, four comparables are to be excluded i.e. (i) Genesys International Corporation Limited (ii) Infosys Limited (iii) L & T InfoTech Limited and (iv) Persistent Systems Limited which cannot be considered for ALP due to functional dissimilarity and the turnover criteria. Contra, the learned departmental representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP in software development services segment. 7. The learned Authorized Representative argued that the action of TPO on negative Working Capital Adjustment, which is not properly computed for determination of ALP. The assessee before the TPO and Drp could not demonstrate that the workings of TPO for working capital adjustment, which are based on OECD guidelines/ formula applied, is different and not applicable to the present financial facts of the assessee .We find that TPO in SDS segment computed arithmetic mean margin on cost at 22.63% and negative working capital adjustment of -1.31% and worked out adjusted margin for determination of ALP at23.84%. The LdAr even before the tribunal could not demonstrate on non applicability. We support our view relying on the decision of co-ordinate bench of the Tribunal in IT(TP)A No.1616/Bang/2017 Dt.27.06.2018 in the case of Tecnotree Convergence Pvt. Ltd. Vs. DCIT held in Para 14 to 16 as under : 14. From the above Paras reproduced from this Tribunal order, it is seen that in this case also, the decision is on the basis of Tribunal order rendered in the case of Adaptec (India) Pvt. Ltd. vs. ACIT (supra). As we have already seen that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as : • The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. • The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : "7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds without any borrowings at all. In our considered opinion, these factors are not relevant for working capital adjustment because in TP analysis, operating profit is considered which is profit before interest and therefore, the interest cost has no relevance for TP analysis and the working capital adjustment is for this reason that working capital position affects the pricing of any services or goods in the open market and not because the working capital cost increases or decreases the profit margin. Hence we find no merit in this claim of the assessee and accordingly this issue is decided against the assessee." Considering the Ratio of judicial decision and the facts of the assessee discussed, we found there is no necessity for granting the relief in respect of negative Working Capital Adjustment to the assessee and dismiss this ground of appeal of the assessee. 8. We shall take up the exclusion of comparables in ITES Segment. The learned Authorized Representative submitted that the 5 comparables are to be excluded. (i) Infosys BPO Limited - where the turnover is Rs.1,312 Crores and has a global brand value with a different functional profile and fails the RPT filter. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exclude Infosys BPO Ltd. from the list of comparables for the purpose of computing the average margin." 6. It was also brought to our notice that the Hon'ble Delhi High Court in ITA No.260/2018 in the appeal filed by the Revenue against the aforesaid order dismissed the appeal at the admission stage observing that rationale given by the ITAT for exclusion was correct. In view of the aforesaid decision, we direct exclusion of Infosys BPO from the list of comparable companies chosen by the TPO." (ii) TCS e-serve Ltd. - The company's turnover is Rs.1578Crores and is engaged in BPO services. Segmental profit and loss account is not available and has high brand value and also functionally different. The co-ordinate Bench of the Tribunal in the case of Zyme Solutions Pvt. Ltd. Vs. ACIT (IT(TP)A No.1661/Bang/2016 Dt.16.11.2018) has dealt at page 12 Para 12 to 12.4 which is read as under : (iii) Universal Print Systems Ltd. - The Company's turnover is Rs.6.17 Crores and is functionally different, and is engaged in providing services related to printing industry and fails the employees cost filter and has different profile. The co-ordinate Bench of the Tribunal in the case of Zyme So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e MA that this company was sought to be excluded by the assessee on functional comparability and that the tribunal's order in the case of CGI Information Systems (supra) did not consider functional comparability or application of RPT filter of this company is correct. Therefore there is error in the order of the Tribunal in as much as functional comparability of this company with ITeS company has not been considered by the Tribunal. We, therefore recall the order of the Tribunal for the limited purpose of examining the functional comparability of this company with the assessee company." 8. We have heard the rival submissions on the comparability of the aforesaid company. The Delhi ITAT in the case of BT e-Service (India) Ltd. Vs. ITO ITA No.6690/Del/2016 for AY 2012-13 order dated 19.6.2018 considered the comparability of this company and came to the conclusion that this company was carrying out medical transcription, medical billing and coding whereas the Assessee was a captive service provider. The Tribunal followed its own ruling in the same Assessee's case in AY 2011- 12 in ITA No.99/Del/2016 reported in (2017) 87 taxmann.com 251 (Del) in BT e-Serve (India) Pvt.Ltd. Vs. ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there has been omission to adjudicated exclusion of this company on account of extraordinary events. We therefore recall the order of the Tribunal to the limited extent of examining of the employee cost filter and the presence of extraordinary events on warranty exclusion of this company." 11. We have heard the rival submissions on the exclusion of this company on the basis of extraordinary events that occurred during the relevant previous year which had impact on the profit margin of this company and therefore rendering this company from being chosen as a comparable company. The Delhi ITAT in the case of BT e-Serve (India) Ltd. Vs. ITO ITA No.6690/Del/2016 for AY 2012-13 order dated 19.6.2018 considered the comparability of this company and came to the conclusion in paragraph 5.4 of its order that there was abnormal volatility of revenue of this company from 2009-10 to 2014-15 and therefore this company should not be regarded as comparable company. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO." Following the judicial precedence of the co-ordinate Bench decisions, we direct t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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