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TMI Blog2024 (9) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... fluctuation account is only to monitor the exchange movement and settlement mechanism with the AE and it does not form or impact anyway in the operating revenue or operating expenditure of the assessee. The assessee will be compensated the contract price or invoice value by the AE. Therefore, it can have no place in the financial results of the assessee company. Hence, the operating income/expenses of the assessee is not impacted by the currency fluctuations. If there is upward movement, the AE will make suitable adjustment in the contract prices. It is relevant to note that the revenue/ cost model adopted by the AE by suitably taking care of the exchange risk of the subsidiary company, the relevant exchange risk is the cost/revenue to the AE, as and when they compensate the same. This can never a risk factor to the assessee leading to incurring any revenue income or loss to the assessee. This findings is based on the submissions that the transactions are only with the AE s and any other transaction not involving the AEs, may be claimed as operating expenditure, as the risk factor is mitigated only with the transactions with AE. Therefore, all the transactions are recorded by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re it is selected for comparison. In this case, it may be functionally comparable but this company has failed in the selection criteria of persistent loss. Therefore, we are inclined to reject the submissions of the assessee and accordingly dismissed the ground raised by the assessee. Exclusion of two comparables selected by the TPO relating to Whirlpool and Penguin Electronics - We observe that the assessee is exclusively engaged in the manufacturing, trading of mobile phones. The functions in manufacturing, pricing, branding etc are unique to the mobile phones and its accessories. It cannot be generalized with any of the home appliances or kitchen appliances. The comparables selected are Whirlpool and Penguin, which basically deals in various home as well as kitchen appliances, the products are many kind and distinct to the assessee company. These can never the proper comparables to the present assessee. Accordingly, we direct the AO/TPO to delete the above said comparables from the final comparables. Accordingly, the grounds raised by the assessee are allowed in this regard. Comparables selected for CSD segment - Infobeans Technologies - As quantum of export of the goods and exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Ld. Dispute Resolution Panel (DRP)/TPO vide order dated 05/10/2017 for Asst. Year 2014-15. 2. The assessee has raised the following grounds of appeal:- "1. General Grounds of Appeal 1.1. That, the final assessment order framed by the learned Joint Commissioner of Income-tax, Special Range -1, Delhi (hereinafter referred to as "the Ld. AO") pursuant to the directions of the Hon'ble Dispute Resolution Panel-1 (hereinafter referred to as "the Hon'ble DRP") under section 143(3) read with section 144C of the Income-tax Act, 1961 ("the Act"), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 1.2 That, in framing the impugned assessment order, the reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima- facie opinion, that it was 'necessary or expedient' to refer the matter to the learned Additional Commissioner of Income Tax, Transfer Pricing Officer - 2(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the Appellant at the time of undertaking transfer pricing study required to be maintained under Section 92D of the Act. 2.3 That on the facts of the case and in law, the Ld AO/Ld. TPO/Hon'ble DRP has erred by treating foreign exchange gain and miscellaneous income as non-operating item while computing adjustment for international transactions pertaining to NMP segment. 2.3.1. That on the facts of the case and in law, the Ld. AO/Ld TPO/ Hon'ble DRP grossly erred in law in relying on the provisions of the Section 92CB of the Act read with Rule 10TA of the Rules for excluding foreign exchange gain from the computation of operating revenue; 2.3.2. That on facts of the case and in law, the Ld. AO/Ld. TPO/ Hon'ble DRP completely failed to apply their minds while relying on Safe Harbor Rules ('SHR') since the SHR are applicable to 'eligible assessee' as defined in Rule 10TB of the Rules in relation to 'eligible international transactions' as defined in Rule 10TC and the Appellant, as part of NMP segment, did not qualify as an eligible assessee' and the international transactions pertaining to the NMP segment did not qualify as 'elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to any reasonable search methodology, thereby resorting to cheery picking of comparable companies. 2.4.1. The Ld. AO/ Ld. TPO, in particular, erred in rejecting Zenith Computers Limited as comparable to the NMP segment on the ground that the said company has incurred persistent losses without appreciating the fact that the said company had operating profits in one out of three financial years. 2.4.2. The Ld. AO/ Ld. TPO, in particular, erred in selecting Whirlpool of India Limited and Penguin Electronics Limited as comparable companies without appreciating that such companies are not functionally comparable to the NMP segment of the Appellant. 2.5 That on the fact of the case and in law, the Ld. TPO/Ld. AO/ Hon'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a limited risk bearing contract manufacturer for its AE and does not undertake market risk, product liability risk, credit and collection risk, inventory and capacity utilization risk as against comparable companies that are the full-fledged risk bearing entrepreneurs. TP adjustment in relation to international transactions pertaining to provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st Solutions Limited without appreciating that these companies are not functionally comparable to the Appellant in relation to the international transaction pertaining to provision of CSD services. 3.5.2. The Ld. AO/ Ld. TPO, in particular, erred in rejecting Lucid Software Limited and Cat Technologies Limited as comparable to the Appellant in relation to the international transaction pertaining to provision of CSD services on the ground that the said companies have incurred persistent losses without appreciating that the companies were functionally comparable to the CSD segment of the Appellant and that the said companies had operating profits in one out of three financial years. 3.6 That on the fact of the case and in law, the Ld. TPO/Ld. AO/ Hon'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost-plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full- fledged risk bearing entrepre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ground no.1 raised by the assessee are general in nature therefore, the same is no adjudicated as such. 5. Brief facts of the case are, the assessee has two profit centers a) Mobile Phone and Accessory segment (MPA) and b) Contract Software Development Segment (CSD). 6. The facts relating to MPA segment and ground nos. 2.1 and 2.2 raised by the assessee for treatment of foreign exchange gain as part of the operating income of the Assessee are, the AO/TPO has not treated the foreign exchange gain transactions as part of the operating income and determined the ALP adjustment accordingly. Even the Ld DRP has sustained the findings of AO/TPO. Aggrieved, the assessee is in appeal before us. 7. At the time of hearing, Ld AR submitted as under: 7.1. At the very outset, it is of seminal importance to highlight that the AO as well as Dispute Resolution Panel ("DRP") committed a blatant mistake by treating the foreign exchange gain as non-operating item, thereby, excluded the same from the operating revenue while computing profit level indicator being Operating Profit/ Operating Cost. Whilst doing so, the reasons provided by the DRP/Transfer Pricing Officer ("TPO& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text, the attention of the Hon'ble Tribunal is drawn to the decision of the Hon'ble High Court of Delhi rendered in the case of Ameriprise India (P.) Ltd. v. ACIT, [2017] 78 taxmann.com 373 (Delhi High Court), wherein the High Court whilst affirming the reasoning of the ITAT categorically held that since the foreign exchange fluctuation loss suffered by the Assessee directly resulted from the trading activity, the same ought to be considered as operating item as opposed to non-operating item. Reliance in this regard is also placed on PCIT v. B.C. Management Services (P.) Ltd., (2018) 403 ITR 45 (Delhi High Court); PCIT v. Rolls Royce India Pvt. Ltd., [Order dated 23.10.2017 in ITA 419/2016 & 747/2016] (Delhi High Court). 7.5. Further, the coordinate bench of the Tribunal in the case of Convergys India Services (P.) Ltd. v. ACIT. [2022] 134 taxmann.com 15 (Delhi Tribunal), while dealing with the identical argument of foreign exchange fluctuation risk being borne by the foreign AE, specifically opined that foreign exchange fluctuation is an integral part of the sale and purchase transactions and in essence, an integral part of the international transaction entered by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assuming the loss to be INR 1000 and other operating cost as INR 9000, the Appellant will again receive INR 10,163/- (mark-up being 1.63% on other cost foreign exchange loss). This would ensure that the Appellant is not assuming the foreign exchange risk as the Appellant is recovering the foreign exchange loss along with a mark up. c. Conversely, in case of foreign exchange gain, the same should be considered as part of operating revenue and should form part of the transfer pricing. This is because in case where the AE assumes the loss arising from the foreign exchange loss, the gain, if any should also be assumed by the AE only. Thus, in case of a foreign exchange gain of say INR 63 and cost base being INR 10,000/- the Appellant will receive only INR 10,100/- as the Appellant has already received part of such remuneration being INR 63, in the form of foreign exchange gain. Thus, in case such foreign exchange gain is not considered as an operating income for the purpose of benchmarking. same will result in foreign exchange risk being assumed by the Appellant which is clearly not the case. 7.9. Hence, on this count as well, the actions of the DRP and AO are untenable in the ey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the final set of comparables since it is also involved in manufacturing and sale of laptop and desktop computers, in this regard placed reliance on the decision of jurisdictional high court in the case of PIT v. Nokia Sremene Network India (P) Ltd.. [2019] 111 taxmann.com 445 (Delhi High Court), wherein it was that a comparable cannot be excluded only on the grounds of persistent losses or declining revenue in is functionally comparable to the Assessee. Therefore, on this count as well, Zenith is liable to be included in the final set of comparables whilst determining arm's length price under chapter of the Act. Copy of the said decisions is being enclosed for the sake of ready reference. 9. CONTRACT SOFTWARE DEVELOPMENT SEGMENT With regard to Exclusion of Infobeans Technologies Ltd., Persistent Systems Ltd., Larsen and Toubro Infortech Ltd. and Mindtree Ltd. (Concise Grounds of Appeal-Ground No. 3-3.2) 9.1 Ld AR submitted that he relies on the Chart submitted during the course of hearing on 20.06.2024 and further submitted as under: a. Infobeans Technologies Ltd.: Functionally dissimilar (pg. 14-15 of the AR Compl), No segmental data available: Engaged in hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, could not be rejected by applying the filter of persistent loss making company. 9.3 Moreover, the reliance placed by the Revenue Department on the decisions of the Tribunal rendered in the case of TPG Software Pvt. Ltd. v. DCIT, (Order dated 11.09.2023 in ITA No. 6468/Del/2018) (Delhi Tribunal): Steria India Ltd. v. ACIT, [Order dated 28.09.2020 in ITA No. 741/Del/2017) (Delhi Tribunal); Velocity Tech-Sol India Pvt. Ltd. v. ACIT, [Order dated 30.05.2022 in ITA No. 1694/Pun/2018] (Pune Tribunal), is grossly misplaced since all these Assessee/s were performing different high-end functions in the software industry and could not be compared with the Appellant being a captive service provider. The difference being that in the case relied upon by the Revenue Department, the tested parties were engaged in provision of software development services on behalf of its foreign AE's for customers of the foreign AEs, while the Appellant herein is engaged in captive software development services i.e., coding and testing for mobile phone software installed in the mobile phones manufactured and sold by foreign AEs. Further, none of the judgments relied upon by the Revenue Department deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchanges should be passed to the AE only. Further it has been submitted that if the foreign exchange gain/loss is not considered as part of operating income/expense, the same would not be considered for the purpose of computing the assured return for the assessee and thus the assessee would bear the risk of such losses. (2) The assessee has claimed that the foreign exchange gain/loss arising from business operations and thus should be treated as operating in nature. Also, the assessee has relied on ICAI guidance note and stated that appropriate adjustment should be made for accounting practice including the adjustment on account of foreign exchange fluctuation to make the accounting treatment consistent and improve comparability. Further the assessee has also relied on some decisions of Hon'ble Tribunal. Department arguments: 11.4. The assessee company is a contract manufacturer of mobile phone and contract software developer to its AE's. Further in the TP study report, it has been clearly mentioned that the entire exchange risk is borne by the AE only and assessee's company is fully insulated for the foreign exchange risk i.e. gain or loss related to foreign exchange. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic query by the Hon'ble Bench, the assessee counsel could not explain how and on what account, the company suffers the foreign exchange gain or loss because that is fully borne by the AE only. Thus as the assessee does not have any bearing with regard to foreign exchange risk accordingly the assessee does not have any case that foreign exchange gain and loss should be treated as operating in nature. 11.6. In Transfer Pricing, benchmarking is done on transaction by transaction basis. For benchmarking the price/cost incurred/received by assessee company is compared with comparable companies which undertake the similar transaction independently. The foreign exchange gain/risk is usually undertaken at the end of the year and in a way it is not directly related to the transaction price. Also the foreign exchange gain/loss is based on the hedging policy of the foreign companies. For comparing two transactions with regard to foreign exchange risk undertaken by two different companies, there should be the same hedging policy adopted by the two companies. In the case of assessee, first of all, it is not exposed to any foreign exchange risk, secondly it is not demonstrated that even th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP has given directions, that similar treatment i.e. foreign exchange fluctuation i.e. gain/loss should be treated as non operating in the comparables companies. Thus, it is crystal clear that the DRP has given directions for benchmarking, the assessee transactions with the comparable companies by treating foreign exchange gain/loss as non operating in both the cases and brought parity with regard to comparable criteria. Thus there is no ground for assessee to complain and allege that before the Hon'ble Tribunal i.e. its cases are dealt differently from comparable companies because after the DRP directions, the TPO/AO has taken only the transactions price and not the associated foreign exchange risk gain/loss for comparing. When this fact was brought before the Hon'ble Tribunal, the assessee counsel could not explain the allegations that different comparison criteria was adopted in case of assessee and other with comparable companies or the prejudice caused with regard to comparison of transaction by transactions when the components of foreign exchange gain/loss in both the cases as well in comparable companies are considered non operating in nature. 13. The assessee ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0) Para No. 7 2) Hanil Tube India (P.) Ltd v/s DCIT, ITAT Chennai Bench 'D' [2017] (81 Taxmann.com 69) Para No. 10.2. For ready reference relevant extract is reproduced below- 10.2 We heard the rival submissions and perused the material placed before us. The assessee claimed foreign exchange loss amounting to Rs. 3.06 Cr. which was considered by the TPO as operating income for computing PLI. He did not exclude the same. Out of foreign exchange loss of Rs. 3.06 Cr. an amount of Rs. 1.41 Cr. was on account of reinstatement of balances outstanding at the end of the year. According to the Ld. DR, the foreign exchange loss represents operating income and according to the Ld.AR foreign exchange loss would not give any benefit to the AE and it is the loss on account of foreign exchange fluctuation which is unforeseen expenses by the assessee. Therefore, the foreign exchange loss or gain are to be excluded from the operating income. Foreign exchange loss or gain due to reinstatement of balance outstanding at the end of the year cannot be held as operating profit/loss since the same is an account of notional loss to comply with the accounting standards. With regard to the fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d desktops as compared to the assessee company which is in the manufacturing of telephones. Also this company fails the persistence loss filter and on the specific query of the bench the assessee has also conceded that it is making losses for three years including the financial year in question. (ii). Also the assessee stand that if blue star is considered functionally comparable then zenith computers should also be considered functionally comparable does not hold much water as the blue star has been rejected by assessee only by citing the reason that insufficient revenue from comparable product. Thus, as blue star is in cooling product segment the assessee cannot again claim that zenith computers Ltd. should also be treated on the same line as blue star Ltd. Also, with regard to Penguine Electronic Ltd., it is stated that it is the assessee own comparable and the same has not been discussed at DRP level. Even for Whirlpool India Ltd., it is respectfully submitted the assessee has not objected before TPO and DRP. Thus, for both these comparables it is respectfully submitted that first of all these comparables have to be adjudicated upon by lower authorities only then, the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the physical hearings. Further the functional profile of the assessee's company is common and almost identically worded in functional profile as mentioned in TPSR of various other companies including the comparable companies. 3. Reliance was also placed, on the decision of Hon'ble Delhi ITAT in the case of Headstrong Services (India) Pvt. Ltd. Vs. DCIT circle 11(1), 68 Taxmann.com 363(2016), wherein the identical issue or limited role in software development v/s the complete software development services provided by comparable is discussed. For ready reference, the relevant extract reproduced below: 13.2 After considering the rival submissions and perusing the relevant material on record, we find that the total sales of this company for the corresponding year ending is Rs. 38.31 crore. Para 17.2.13 of the Annual Report of this company provides that: 'The company is primarily a services company engaged in technical consulting, design & development of software, maintenance, systems integration, implementation, testing and infrastructure management services'. Next para 17.2.14 dealing with "Segment Reporting" provides that: 'The Company's operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s mentioned the following reasons for exclusion/rejection- 1. Functionally dissimilar:- 2. Further in absence of segmental data the comparable margin cannot be determined. 3. Information memorandum issued by the Company dated March 3, 2015 which contains financial information and business description about the company for FY 2013-14 shows that company has diverse business and is engaged in Custom Application Development ('CAD'), Content management systems, Enterprise mobility and Big Data Analytics. Further the assessee company has stated that the above services significantly differ from the functions performed by the Appellant in the CSD segment. (ii) Persistent Systems Limited The assessee has mention the following reasons for exclusion/rejection- 1. Functionally Dissimilar: Engaged in software products, services and technology innovation including research, engineering Services such as deployment, testing, quality assurance, performance tuning, usability engineering, porting, documentation services, deployment services. 2. R& D activities: The company incurs significant R&D expenditure which has resulted in significant intangibles. 3. Segmental informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has applied for several patents. During GY 2013-14, the company filed patent application for Integrated Radio Frequency From End Circuit. 5. Engaged in significant R&D activities: Mindtree was engaged in significant R&D activities. 6. Insufficient segment information: Engaged in diversified business of provision of services and deals in product platforms. However, it has disclosed segmental information pertaining to market/industry segments only. 7. High turnover: Mindtree turnover is more than 25 times of Appellant's turnover from CSD services. (During FY 2013-14, turnover of the Appellant from the CSD segment was INR 115.9 crores and that of Mindtree was INR 3031 crores. 8. Earning Supernormal Profit: Mindtree is earning supernormal profit, which is not representative of industry. 23. Department contentions- 1. The issue of comparability of all four comparable has been discussed in detail before the Hon'ble Bench during the course of hearings. It has been stated that Hon'ble "I" Bench itself in some cases has decided on the comparability of the above noted comparables same A.Y. i.e., 2014-15. It is further stated that these comparables were co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons Pvt. LTd. vs. DCIT (2023) 154 taxmann.com 541 (Delhi Tribunal), wherein the functional similarity was considered as the prime most criteria for judging the comparability of two companies. 3. Reliance is also placed on the decision of Hon'ble I Bench only in the case of TPG Software private Limited Vs. DCIT for A.Y 2014-15 in ITA no. 6468 / DEL / 2018 only has done in depth analysis of financial statements of M/s Mindtree Limited and M/s Persistent Systems Limited for the same A.Y i.e 2014-15 only i.e F.Y 2013-14 and in that case also the assessee company has raised the similar grounds for claiming exclusions of these two comparables with regard to software development services to its AE. For ready reference, the relevant extract is reproduced below Mindtree Ltd. 17. The assessee has selected this comparable in the TPSR for the A.Y. 2012-13 and the company is generating revenue from software development and software services. 18. The assessee has sought its exclusion based on the following facts: (i) Functional dissimilar (ii) Different business model (iii) Research and development activity (iv) Segment data not available (v) High turnover. 19. The Id. AR submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software services. The Id. AR submitted that the company is mainly involved in software product development and development of end to end solutions. The assessee, on the other hand, is engaged in providing software development services and does not develop software products or end to end solutions. The Id. AR submitted that this company is engaged in sale of software products and not software services. The Ld. AR further argued that, 1. Segmental financials are not available, 2. The comparable is involved in R&D activities and has intangibles, 3. The comparable had an extraordinary event namely acquisition of Cloud Squads Inc. 4. High turnover 27 times as that of the assessee 25. The Id. DR submitted his arguments in writing which are as under: 2. Persistance systems Ltd. (PSL) (i) Functional profile: The assessee has requested for exclusion based on the fact that it is functionally different. The assessee has stated that this company is engaged in sale of software products and not software services. The assessee allegation has been duly answered by the TPO and DRP in page 40 and page 11 of respective orders. Also whether this company is a software product developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on basis as and when the services are rendered in accordance with the terms of the contracts with customers. In case of fixed price contracts, revenue is recognized based on the milestones achieved as specified in the contracts, on proportionate completion basis. Revenue from royalty is recognized in accordance with the terms of the relevant agreements. Revenue from maintenance contracts is re cognized on a pro-rata basis over the period of the contract. Unbilled revenue represents revenue recognized in relation to work done on time and material projects and fixed price projects until the balance sheet date for which billing has not taken place. Unearned revenue represents the billing in respect of contracts for which the revenue is not recognized. The Company collects service tax and value added taxes (VAT) on behalf of the government and, therefore, these are not economic benefits flowing to the Company. Hence, they are excluded from revenue. 18. At note no 21 Page No 181 of Standalone Financial statements it has only one stream of Revenue i.e. Sale of Software services as under: 21. Revenue from operations (net) (In Million) For the year ended March 31, 2014 March 31, 2013 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows M/s PSL. has only one stream of income (page 449) i.e. from sale of software services only. 28. The assessee has quoted certain case laws including the decision of the Hon'ble Delhi High Court in the case of Microsoft India Ltd. however the facts of that case were different i.e. M/s Microsoft was found engaged in rendering software development services and ITES. Further the assessment year involved in that case was A.Y. 2011-12 and A.Y. 2012-13 which are different from the present appeal. Also, the other decisions cited are distinguishable and they were rendered before the decision of Hon'ble ITAT in the case of case o f Steria India Ltd. vs. Addl.CIT in [2020) 122 taxmann.com 267 (Delhi - Trib.). 29. The assessee has further raised following grounds which are mentioned below:- (ii) Segmental information not available:- the segmental information is available in para 27/page 407 o f PB, wherein it is clearly mentioned that company provides Software services only in 3 sectors namely Telecom + Wireless, Life sciences + Healthcare and in frastructure + Systems. As the software services are treated as a common and single segment only by the assessee company, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Rs. 16 crores however if we compare it with sales of Rs. 1184 crores then it is only 1.35% of the turnover which is negligible. It is also not only of place to mention that assessee company has intangible including goodwill of Rs. 6.03 crore against sales of Rs. 43.53 crore, which comes out to 13.85% of turnover. (vi) R & D activity: The assessee has also taken the ground that M/s PSL is involved in Research & Development activity. The details of Research and development expense s by M/s PSL is given on note 35 of notes forming part of financial statements (page 195 Annual report/page 463 of PB). The total research and development expenses are Rs. 3.61 crore for F.Y. 2013-14 which comes to 0.30% of total turnover, which is negligible. Thus based on the above analysis, this company i.e. M/s PSL is functionally similar and also comparable on all parameters/aspects to the assessee company. 30. The Id. AR rebutted the submissions of the Id. DR. The salient features of the arguments of the Id. AR are as under: While rejecting exclusion of Persistent Systems, the Hon'ble Tribunal in Steria's case has held that the said company is only into software development, howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submissions, we find that the turnover is within the acceptable range, the FAR matching, the segmental information is not required as there is single common segment of revenue and in the absence of financial implication on the occurrence of extraordinary events and having found intangibles being 1.35% as negligible and same with the R&D activities which is 0.3% of the turnover and hence, we hold that Persistent Systems Ltd. can be considered as a right comparable. 4. Infobeans Technologies Ltd: For infobeans Technologies Ltd., the department places reliance on the decision of Hon'ble Pune ITAT in the case of Velocity Tech-Sol India Pvt. Ltd. vs. ACIT, Circle-13, Pune in ITA NO. 1694/PUN/2018 for A.Y. 2014- 15. In this case, the Hon'ble Bench after relying on several decisions of Hon'ble ITAT and also after making in depth analysis of the financial of the M/s Infobeans Technologies Ltd. has upheld the inclusion of this company with M/s Velocity Tech- SOL India Ltd. with regard provisions of software development services to its AEs. Relying on the above noted decision and also considering several decisions of Hon'ble Tribunals, again the Hon'ble Delhi ITAT in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge fluctuation account is only to monitor the exchange movement and settlement mechanism with the AE and it does not form or impact anyway in the operating revenue or operating expenditure of the assessee. The assessee will be compensated the contract price or invoice value by the AE. Therefore, it can have no place in the financial results of the assessee company. Hence, the operating income/expenses of the assessee is not impacted by the currency fluctuations. If there is upward movement, the AE will make suitable adjustment in the contract prices. It is relevant to note that the revenue/ cost model adopted by the AE by suitably taking care of the exchange risk of the subsidiary company, the relevant exchange risk is the cost/revenue to the AE, as and when they compensate the same. This can never a risk factor to the assessee leading to incurring any revenue income or loss to the assessee. This findings is based on the submissions that the transactions are only with the AE's and any other transaction not involving the AEs, may be claimed as operating expenditure, as the risk factor is mitigated only with the transactions with AE. Therefore, all the transactions are recorded by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On careful verification of the facts on record, the TPO has applied filter to eliminate persistent loss making companies as one of the criteria and accordingly, it was observed that this company was making persistent loss in the last three years including current assessment year. The assessee has highlighted that the ZCL has incurred losses in FY 2012-13, 2013-14 and earned profit in FY 2011-12. Therefore, it does fit into the definition of persistent loss making company. On evaluation we observed that ZCL is incurring losses in FY 2012-13, 2013-14 and also 2014-15. Therefore, we have to see the pattern of the relevant health of the comparable companies before it is selected for comparison. In this case, it may be functionally comparable but this company has failed in the selection criteria of persistent loss. Therefore, we are inclined to reject the submissions of the assessee and accordingly dismissed the ground no. 2.4.1 raised by the assessee. 37. Coming to the next issue of exclusion of two comparables selected by the TPO relating to Whirlpool and Penguin Electronics, we observed that it was submitted that both the comparables are functionally dissimilar with the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are also plays major role in the determining the price and risk involved. The comparables selected by the TPO should also match the same profiles for comparison. In this case, the assessee is only a contract software developer and it does not have any risk factor and also conceptualization and ownership is always with its AE. The selection of comparables has to be on same page, if required certain adjustment can be made to bring them at par. It cannot be completely ignored on the main financial aspects which plays the crucial criteria of running or selection of business module. We observed that in the case of Avaya India P. Ltd (supra) held as under: "7.2 Before us, the learned counsel referred to page 275 (Note- 20) and 276 (Note-27) and submitted that no sufficient data to establish with certainty that assessee only was engaged in software development. He submitted that as per note 27, export of goods/services were calculated on FOB basis, thus the company was engaged in sale of products. The learned counsel referred to page 742, which is website details of the company and submitted that the company was engaged in providing diversified services. The learned counsel relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. On page 290 of the paper-book, in the notes forming part of the financial restatement of the company, under the head segmental information, it is mentioned that the company operates predominantly for providing software products, services and technology innovation covering full life-cycle of products to its customers. The segemental information, however, has been provided for the verticals in the field of 'telecom and wireless', 'life science' and 'healtchare and infrastructure and systems'. No segmental data of software products and services are available in the annual report of the company. In the circumstances, we are of the opinion that the company cannot be selected as comparable at entity level in absence of any segmental data of software product and software services. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of comparables." In Alcatel Lucent India Ltd, it is held as under: "11. The first objection which has been raised by the assessee is against the inclusion of the concern, Persistent Systems Ltd. The annual report of the said concern is placed at pages 183 to 260 of the Annual Report Compilation. The Revenue has been shown from ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No.1897/Del./2004), which has been approved the Hon'ble High Court in ITA No. 813/2015, the company is held to be not valid comparable on account of extraordinary events. Thus, In view of the extraordinary event in the year under consideration also, this company is liable to be excluded from the set of the comparable. 6.9 Accordingly, in view of the functional dissimilarity at entity level and extraordinary event during the year, this company is directed to be excluded from the financial set of the comparables." Respectfully, following the decision of Co-ordinate Bench decision, we are inclined to allow the ground raised by the assessee. d. Mindtree Ltd: It is submitted that it is functionally dissimilar, it is into Non-linear models, engaged in providing software delivery platforms, Owns significant intangibles and it is into R&D Activities, also there is no segmental data available and declared High Turnover. After considering the submissions of both the parties, we observe that the Coordinate Bench in the case of Avaya India P. Ltd (supra) and Alcatel Lucent India Ltd (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 274 ITR (Stat) 74; Indo Hungarian tax treaty, in short], it is specifically provided, In the protocol to the Indo Hungarian tax treaty it is specifically stated that "When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend". That is a provision in the protocol, which is essentially an integral part of the treaty, and the protocol to a treaty is as binding as the provisions in the main treaty itself. In the absence of such a provision in other tax treaties, it cannot be inferred as such because a protocol does not explain, but rather lays down, a treaty provision. No matter how desirable be such provisions in the other tax treaties, these provisions cannot be inferred on the basis of a rather aggressively creative process of interpretation of tax treaties. The tax treaties are agreements between the treaty partner jurisdictions, and agreements are to be interpreted as they exist and not on the basis of what ideally these agreements should have been. (g) A tax treaty protects taxation of income in the hands of resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with the same. Therefore, the DTAA does not get triggered at all when a domestic company pays DDT u/s. 115O of the Act. CONCLUSION: 83. For the reasons give above, we hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder (s), which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Sec.115-O of the Act, such additional income tax payable by the domestic company shall beat the rate mentioned in Section115O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to at axtreaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly." Respectfully, following the above decision, we dismiss the additional ..... X X X X Extracts X X X X X X X X Extracts X X X X
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