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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 ..... ated 24.02.2014 and the same was challenged by the assessee before the Hon'ble High Court of Madras and the Hon'ble High Court in its judgment in Writ Petition No.W.P. No.1784 of 2014 and W.M.P. Nos.1 and 2 of 2014 vide order dated 14.10.2020, while discussing the writ petition of assessee has stated that the assessee is at liberty to file appeal before the appropriate authority and it was made clear that limitation will apply only from the date on which certified copy of this order is made ready by the Registry of Hon'ble High Court. The Hon'ble High Court finally observed in para 3 & 4 as under:- "3. It is submitted by the Learned Counsel for the Petitioner that in order to have an effectual adjudication in a comprehensive manner, the Petitioner may be permitted to withdraw the Writ Petition with liberty to file statutory Appeal before the concerned authority, so that all the contentions raised this Writ Petition could be canvassed in that forum. 4. Having regard to the aforesaid submissions made, this Writ Petition is dismissed as withdrawn granting such liberty. It is made clear for the purpose of reckoning limitation for availing the aforesaid remedy, the period from the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted transaction-wise comparison with respect of service rendered with Citi Groups and non AEs. The TPO detailed out the transaction of the assessee with the Citi group entities and the details of transactions with the assessee with Non-AEs which are part of the TPO's order at pages 7 to 12. The TPO noted that the assessee has not provided information sought by the TPO and accordingly, he noted that the benchmarking done by the assessee of its international transactions was not found to be acceptable and accordingly, a show-cause notice dated 11.01.2013 was issued. The TPO noted the offshore software services and onsite software development services in its show-cause. The AO also noted that the assessee in its TP study has submitted the comparables in number 20 and the weighted average of operating profit on operating costs declared was at 12.91%. The TPO adopted modified filters and criteria for selecting appropriate comparables functionally similar to that of the assessee and for that, he noted that use of financial year data and multiple year data is required. The TPO has gone into each of the comparables and finally noted that the 10 companies do not appear to be comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted in exclusion of above stated four comparables. Let us take one by one comparables. 7. The first comparable, the ld.counsel for the assessee requested for exclusion of Kals Information Systems Ltd., included by the TPO. The ld.counsel for the assessee stated that the assessee has revenue only from software development services whereas the comparable Kals Information Systems Ltd., has revenue from software services, products and trading software professionals on online projects. The ld.counsel for the assessee drew our attention to assessee's paper-book at pages 290 to 293 and stated that the Notes to Financial Statement categorically state the following: "(i) Note 1 to financial statements of Kals shows it is engaged in development of Software and Software products and Training Software professionals on online projects. (ii) Kals discloses "Software development" as inventory and work-in-progress. 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. (iii) Segmental data is not available." The ld.counsel for the assessee further stated that Kals Information Systems Ltd., cannot be include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid company from the list of comparables is that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the ld. AR is that the aforesaid concern is engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT services segment. As per the discussion in para 13 at page 43 of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concerns application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services and accordingly, we direct to exclude the same for the list of comparables." 7.1 When this was point out to ld. CIT-DR, he could not controvert the above fact situation that the issue is not covered by the Tribunal's order in earlier year. 7.2 We have gone through the facts of the case and arguments of both the sides and noted that this comparable has already been considered by the Tribunal in ITA No.477/MDS/2016 vide order dated 02.01.2017 and considered in detail the functional difference and segmental data difference and hence, respectfully following the same we direct the AO to exclude this comparable and then compute the ALP. 8. The next comparable for exclusion the ld.counsel pointed out is as regards to Infosys Technology Ltd. The ld.counsel for the assessee stated that Infosys Technology Ltd., to be excluded due to its huge and incomparable size and scale. The ld.counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs only relate to goods and not 85comparable with assessee's business of software development services. The ld.counsel also relied on the decision of Co-ordinate Bench of ITAT, Bangalore in the case of Toshiba India in IT(TP)A No.268/Bang/2014, wherein following the decision for assessment year 2009-10, the Tribunal has excluded Bodh Tree Consulting Ltd., from being a software product company being incomparable to service company. The ld.counsel also relied on the decision of Coordinate Bench decision in the case of Kumaran Systems P. Ltd., vs. DCIT in ITA No.906/Mds/2015. 9.1 When these facts were pointed out to ld.CIT-DR, he only relied on the order of TPO and DRP and apart from that could not controvert the above fact situation that 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 the decision of Co-ordinate Bench of Bangalore Tribunal in the case of Toshiba India, supra and Chennai Tribunal in the case of Kumaran Systems P. Ltd., supra. Respectfully following the same, we direct the TPO to exclude this as comparable for the purpose of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in research and development. It was submitted as under: "As per segmental results of Sonata Software, the company deals in software products (tab 6 of Vol 4) Extraordinary events: During the relevant previous year, it is also set up a new subsidiary in Dubai which acquired major business in Dubai (Tab 6 of Vol 4) Refer Capital IQ vs. DCIT: Capital IQ vs. DCIT wherein it is held that extraordinary events will have impact on profitability. Failure of RPT filter: Even otherwise, it can be seen that its related party transaction exceeds 25% of the revenues, which makes it an unviable comparable. It is seen from the annual report that the RPT to sales ratio is more than 40% during the relevant previous year. Therefore, it fails the 25% filter applied by the TPO." 13.3 Having considered the rival submissions, we find that in the instant case, 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." 10.1 When these facts were confronted to CIT-DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the above, we restore this issue of working capital adjustment to AO/TPO and direct him to consider the numerical data and accordingly, decide the issue as per law. 14. The next issue in this appeal of assessee is as regards to corporate grounds i.e., disallowance of expenses relatable to exempt income by invoking the provisions of section 14A r.w.rule 8D of the Income Tax Rules, 1962 (hereinafter the 'Rules'). For this, assessee has raised various grounds which are factual and argumentative and hence, need not be reproduced. 15. Brief facts relating to this issue are that the assessee earned exempt income i.e., dividend income of Rs. 9,56,31,907/- from investments in instruments giving raise to exempt income. It is noted from the assessment order, the assessee has not made disallowance of any expenditure relatable to earning of this exempt income. It is noted from the assessment order that the AO has invoked the provisions of section 14A r.w.s. rule 8D(2) and worked out expenses relatable to exempt income. The AO has computed nil disallowance under Rule 8D(2)(i). The AO made disallowance under Rule 8D(2)(ii) at Rs. 55,28,610/-. The ld.counsel for the assessee before us stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the learned Tribunal has committed any error in deleting the disallowance of expenditure of Rs. 54,39,916/- incurred in respect of interest and administrative expenses under section 14A of the Act. We are in complete agreement with the view taken by the learned Tribunal. AT this stage, decision of Division Bench of this Court in the case of Pr.CIT v. India Gelatine & Chemicals Ltd. [2015] 376 ITR 553/[2016] 66 taxmann.com 356 needs a reference. In the said decision, it is observed and held by the Division Bench of this Court that when the assessee had sufficient interest-free funds out of which concerned investments had been made, disallowance under Section 14A is not justified." When it was pointed out that it is not clear from the judgment of Hon'ble Gujarat High Court, whether disallowance was under Rule 8D(2)(ii) or 8D(2)(iii), rather Hon'ble High Court has discussed having its own surplus funds for the purpose of interest and administrative expenses. As per our understanding and the provisions of the Act, nowhere described anything wherein surplus funds are invested, the provision of Rule 8D(2)(iii) will not apply rather it applies to Rule 8D(2)(ii) only. Hence, this decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at para 8 of its directions, to exclude the amount of INR 2,65,37,264/- from the total turnover as well for the purpose of computation of deduction under Section 10A of the Act as the same was excluded by the Ld. AC from the export turnover of the Assessee for the purpose of computation of deduction under Section 10A of the Act. 20. The ld.counsel for the assessee stated that the assessee has filed complete details of the amount excluded from export turnover and also non-exclusion of foreign onward remittances but neither DRP nor AO has discussed anything about the exclusion and just excluded these amounts from the total export turnover. According to ld.counsel once this issue is not adjudicated properly this may be remitted back to the file of the AO for proper adjudication. When this was pointed out to ld. CIT-DR, he could not controvert the above fact and relied on the assessment order and DRP. 21. After hearing rival contentions and going through the facts of the case, we noted that none of the authorities below has dealt with the issue in proper perspective and not considered the facts. Now, the assessee has filed the details in its paper-book in regard to exclusion of expen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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