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TMI Blog2024 (11) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... exclude Infosys Technology Ltd., as comparable and then compute the ALP. Bodh Tree Consulting Ltd. - The assessee s revenue are from software development services whereas the comparable has revenue from software services, products and from diversified services. This being covered issue by case of Kumaran Systems P. Ltd. [ 2016 (1) TMI 1273 - ITAT CHENNAI ] Respectfully following the same, we direct the TPO to exclude this as comparable for the purpose of computing PLI of the assessee. Sonata Software Ltd. - As aggregate related party transactions are roughly around 95 crores which is approximately about 40% of the total service income of Rs. 243.57 crores. As such, the said comparable is not a valid comparable and hence is directed to be excluded as it fails the RTP filter of 25% applied by the TPO. Grant of economic adjustments - We have gone through the data submitted in assessee s paper book and noted that neither the AO nor the DRP has considered granting of economic adjustment or working capital adjustment but principally assessee is entitled for working capital adjustment. Hence, respectfully following Co-ordinate Bench decision in the case of Foxteq Services India Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -exclusion of foreign onward remittance, not received within the prescribed period from the total turnover. Assessee stated that this issue stood covered in favour of assessee by the Tribunal s decision in assessee s own case for the assessment year 2010-11 and also in regard to erroneous deduction of section 10A of the Act claimed due to exclusion of foreign currency expenditure from export turnover. On principle, we agree with the contention of the assessee but facts need to be verified. Hence, we restored this issue back to the file of the AO/DRP, who after verification of facts. Granting refund of levying interest u/s. 234D - AO has purposely added a sum by considering it as refund already paid to assessee and has also charged interest u/s. 234D - assessee made statement at bar that no refund whatsoever has been issued to the assessee or received by assessee as on date. When this fact was pointed out to ld.CIT-DR, he stated that issuance of refund can be sent back to AO and assessee could contact the AO who will consider this issue. In case, refund is issued, the AO will show evidence that the refund is issued or will rectify accordingly. This issue needs to be settled by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Hon ble High Court, the assessee filed appeal within 60 days i.e., within the limitation. Hence, there is no delay in term of the judgment of Hon ble High Court of Madras. 3. At the outset, the ld.counsel for the assessee, as regards the grounds on transfer pricing stated that the assessee want exclusion of following four comparables:- 2.1 Kals Information Systems Ltd. 2.2 Infosys Technologies Ltd. 2.3 Bodhtree Consulting Ltd. 2.4 Sonata Software Ltd. For this, assessee has raised grounds of appeal in Part I, Transfer Pricing Grounds in Part A, 1 to 8 but he finally stated that apart from the above four comparables, he is not interested in prosecuting any other ground or issue. Hence, we proceed to adjudicate these four comparables. 4. Brief facts leading to the above issue are that the assessee is a computer software development services provider and has earned revenue from provision of software development services to both related and third parties. The assessee namely Virtusa Consulting Services Pvt. Ltd., earlier known as Polaris Consulting Services Ltd., is a software solution provider, specializing in providing quality and customized IT solutions to several mult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies and finally settled for final set of comparables for benchmarking the international transactions by taking the PLI at 21.20% as against PLI computed by the assessee by taking its comparable at 12.91%. Based on the above final set of comparables, the TPO finally suggested the PLI to be taken at 21.18% of arithmetic mean. Accordingly, the operating profit on total cost of the assessee has to be added at differential figure of 9.38%. Accordingly, the TPO worked out the adjustment at Rs. 73,58,03,699/-. Aggrieved, assessee raised objection before DRP. 5. The assessee before DRP raised objection on adoption of CUP method to determine the ALP of international transactions entered with the Citi group entities on the ground of non-furnishing of datas, against rejecting the methodology adopted by assessee in computing the ALP, economic analysis undertaken by assessee rejected by TPO, applying arbitrary quantitative and qualitative filters and selecting additional companies as comparable which do not satisfy various comparability criteria and also rejecting certain companies identified by the assessee as incorrect companies. The assessee before DRP also raised objection raising addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion to para 8.6, wherein the Tribunal in detail has discussed the Kals Information Systems Ltd., and held that aforesaid concern is engaged in development and sale of software products, which was quite distinct from the activity undertaken by the assessee company in the IT services segment. The Tribunal finally held as under:- 8.6 With regard to KALS Information Systems Ltd. (Seg.), when the TPO has proposed this company for inclusion as comparable, on review of the annual report of the company for the year ended 31st march, 2007, the assessee has observed that the company is into provision of software development services as well as ale of software products. Before the TPO, the assessee has pointed out that Inventories under the Schedules to the financial statements on page 16 of the Annual Report discloses Software development as inventory and work-in-progress. It is to be noted that a pure software services provider would not be able to disclose such details as it does not carry any such inventory or work-in-progress. Further, it was also pointed before the TPO that the company is engaged in development of software and software products since its inception and earn revenues fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there was no cost of purchases debited in the Profit Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee s segment of IT-Services. Before us, apart from reiterating the points raised before the TPO and the DRP, by relying on the decision in the case of Novell Software Development (India) P. Ltd. v. DCIT in ITA No. 1287/Bang/2011 dated 31.03.2016 for the assessment year 2007-08, the Bangalore Bench of the Tribunal has observed that in the immediately preceding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable and the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. In our cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group company, Infosys BPO is also having a large turnover i.e., 10 times than the assessee. The ld.counsel relied on various decisions of ITAT and particularly the Karnataka High Court in Acusis Software (I) (P) Ltd., vs. ITO reported in [2018] 98 taxmann.com 183, held that comparable to be excluded if the turnover is more than 10 times. He relied on the decision of Hon ble Karnataka High Court in the case of Acusis Software (I) (P) Ltd., supra. The ld.counsel also relied on the decision Co-ordinate Bench of this Tribunal in the case of Visual Graphics Computing Services (India) Pvt. Ltd., vs. DCIT, in ITA No.2340/CHNY/2012. 8.1 When these pointed out, the ld.CIT-DR, could not controvert the above fact or could not argue that turnover pointed out by assessee, there is any differential fact. 8.2 After hearing rival contentions and going through the facts of the case, we noted that the Infosys is to be excluded due to its huge incomparable size and scale. Admittedly, the Hon ble Karnataka High Court has also laid down a ceiling wherein it is held that comparable is to be excluded if the turnover is more than 10 times. This is the fact. Hence, we direct the TPO and AO to exclude Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO in ITA No.1822/Del/2014, order dated 26.06.2015 for the assessment year 2009-10, wherein the Co-ordinate Bench of Delhi Tribunal has considered Sonata Software Ltd., and held as under:- 13.1 The assessee s challenge before the DRP was dealt as under the DRP: The annual report is verified and it is observed that as per P L of annual report: Income service 2,43,57,68,787/- Other Income 1,05,30,957 It can be seen from the above, main income is from software development. Therefore the company is includible so far as its functionality is concerned However, as per annual report of the company RPT of this company is 14.65% and is within the overall limit of 25%. As per the taxpayer s argument of taking the receivable into the calculation of RPT, it is seen that it is balance sheet item. The sonata Software limited has 4 related parties it is seen that the service charge credited in the P L account of Sonata Software Ltd. is Rs. 243.57 crores. The only related party with which this comparable is having transaction in services is Sonata Information Technology Limited (SITL) amounting to Rs. 16.11 crores which is around 6.61% of the total service income. Similarly, the other debit items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ltd., while computing PLI of the assessee. 11. Accordingly, the ld.counsel for the assessee stated that in case these four exclusions are made, as the case falls within the range of +/- 0.5% and hence, he will not argue other issues. 12. The next issue argued by ld.counsel for the assessee for grant of economic adjustment. For this, he relied on the ground Part B (9), which reads as under:- B. For grant of economic adjustments 9. The Ld.AO/TPO as well as the Ld.DRP ought to have granted suitable adjustments to account for various differences between the Appellant vis- -vis comparables including working capital adjustment and, in the process, neglected the Indian Transfer Pricing laws, the OECD Guidelines on Transfer Pricing and various judicial precedents. 13. The ld.counsel for the assessee stated that the Tribunal is consistently taking a view that economic adjustment is to be allowed to the assessee in case effectual data is available. The ld.counsel for the assessee drew our attention to the numerical data filed in assessee s paper book and the relevant data was explained before us and stated that these data can be verified by the AO / TPO and accordingly, on principle suitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erify the availability of interest free funds. 15.1 When this was pointed out to ld. CIT-DR, he fairly agreed that for verification purpose matter can be restored to the file of AO. 16. After hearing both the sides in regard to disallowance under Rule 8D(2)(ii), we noted that assessee could make a prima facie case that it has interest free funds available with it, but it is subject to verification by AO. The AO will verify the availability of interest free funds invested in instruments giving raise to exempt income. In case, the AO finds that investment is out of interest free funds available, he will not make any disallowance otherwise, he will decide as per law. 17. Coming to disallowance of expenses relatable to exempt income under Rule 8D(2)(iii), the AO has taken 0.5% of average value of investment and disallowed expenses at Rs. 78,23,607/-. The ld.counsel for the assessee stated that the interest free funds available will apply even to applicability of Rule 8D(2)(iii) i.e., 0.5% of average value of investment while computing disallowance. The ld.counsel drew our attention to the decision of Hon ble Gujarat High Court in the case of PCIT vs. Sintex Industries Ltd., reported in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. As the assessee could not prove any nexus or any relation, we have no hesitation in confirming this disallowance. But, we set aside this disallowance of 0.5% of average value of investment to the extent the AO will verify that disallowance should be restricted only on the investments giving raise to exempt income and not others in view of the decision of Special Bench of Delhi Tribunal in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi- Trib.)(SB). 19. The next two interconnected issues i.e., exclusion of expenditure incurred in foreign currency from export turnover and non-exclusion of foreign onward remittance not received within the prescribed period from the total turnover, the DRP and AO while passing final assessment order has erred in uploading the exclusion. For this, assessee relieved on the following ground s G H: G. Regarding exclusion of expenditure incurred in foreign currency from export turnover 22. Ld. DRP erred in upholding the exclusion, by the Ld. AO, of expenditure amounting to INR 179,15,36,358/- incurred in foreign currency from the purview of 'Export Turnover' for the purpose of computation of deduction under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion of foreign currency expenditure from export turnover. On principle, we agree with the contention of the assessee but facts need to be verified. Hence, we restored this issue back to the file of the AO/DRP, who after verification of facts will follow the principle laid down in Tribunal s decision in assessee s own case for assessment year 2010-11 in ITA No.2315/CHNY/2016 dated 29.10.2018. In term of the above, we restore this issue back to the file of the AO. 22. The next issue in this appeal of assessee is as regards to the order of AO/TPO in granting refund of levying interest u/s. 234D of the Act. 23. The ld.counsel for the assessee drew our attention to assessee s paper-book at and stated that the AO has purposely added a sum of Rs. 5,40,37,340/- by considering it as refund already paid to assessee and has also charged interest u/s. 234D amounting to Rs. 75,65,227/-. The ld.counsel for the assessee made statement at bar that no refund whatsoever has been issued to the assessee or received by assessee as on date. When this fact was pointed out to ld.CIT-DR, he stated that issuance of refund can be sent back to AO and assessee could contact the AO who will consider this is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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