Income Tax Appellate Tribunal - Bangalore
Asst.C.I.T., Bangalore vs M/S At & T Global Business Services India ... on 31 August, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH "C"
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER
AND
SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER
I.T. (T. P.) A. No.171/Bang/2016
(Assessment Year:2011 - 12)
ACIT, Circle - 1 (1) (1), Appellant
Bengaluru.
Vs.
M/s.AT & T Global Business Services India Pvt. Ltd.,
Salarpuria Softzone, Block - A,
Ground Floor, Bellandur Junction,
Bengaluru- 560103.
PAN AACCA9362N Respondent
&
I.T. (T. P.) A. No. 190/Bang/2016
(Assessment Year: 2011 - 12)
M/s. AT & T Global Business Services India Pvt. Ltd.,
Salarpuria Softzone, Block - A,
Ground Floor, Bellandur Junction,
Bengaluru - 560103. Appellant
Vs.
ACIT, Circle - 1 (1) (1),
Bengaluru. Respondent
Assessee By : Shri Uma Shankar Gautam, Advocate
RevenueBy : Shri C. H. Sundar Rao, CIT(DR)
Date of Hearing : 26.06.2018
Date of Pronouncement : 31.08.2018
O RD E R
Per Shri A. K. Garodia, A.M. :
These are cross appeals filed by the revenue and the assessee and these are directed against the assessment order passed by the A. O. on 16.12.2015 for A. Y. 2011-12 u/s 143 (3) r.w.s. 144C as per the directions of DRP.
2. The grounds raised by the revenue are as under:-
"1. The orders of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case.2
IT(TP)A Nos.171 & 190/Bang/2016
2. The DRP erred in directing the AP/TPO to exclude M/s. Acropetal Technologies Ltd., M/s. Mindtree Ltd., M/s. R.S. Software (India) Ltd., M/s. Larsen and Toubro Infotech Ltd., from the list of comparables, holding them to be functionally dissimilar as they are having significant onsite revenues, thereby seeking exact comparability while searching for comparable companies of the assessee under TNMM method, whereas requirement of law and international jurisprudence require seeking similar comparable companies. Also, the nature of activity, i.e., software development remains the same, irrespective of the company engaged in providing onsite or offshore services.
3. The DRP erred in directing the AO to exclude M/s. Acropetal Technologies Ltd., from the list of final comparables also for the reason that clear segmental information of the employee cost and export earning filter was not available without appreciating that proper segmental information is available on Prowess database as well as audited financials.
4. The DRP erred in directing the AO to exclude M/s. Mindtree Ltd., from the list of comparables holding it to be functionally dissimilar also for the reason that there were extraordinary event of merger when it has not been proved that such merger has any material effect on profit margin.
5. The DRP erred in directing to exclude E-infochips Ltd., from the list of comparables holding that no segmental information is available and that it fails 75% service revenue filter, by not acknowledging the fact that the determination of ALP by carrying out comparability analysis of the comparable companies is an art and not exact science as no two companies are exactly same and also the DRP erred in applying the service revenue income filter by taking 'software service income' to turnover ratio rather than 'service income' to turnover ratio.
6. The DRP erred in directing to exclude M/s. E-Zest Solutions Ltd., M/s. Infosys Ltd., M/s. ICRA Techno Analytics Ltd., from the list of comparables holding them to be functionally uncomparable, thereby seeking exact comparability by imposing condition beyond law whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin. The DRP ought to have appreciated that all the comparables qualified all the qualitative and quantitative filters applied by the TPO and as long as the vertical is the same, insisting on strict comparability under TNMM defeats the very purpose of the law relating to determination of ALP under I.T. Act.
7. The DRP erred in directing the AO to exclude M/s. Tata Elxsi Ltd., from the list of comparables, holding it to be functionally uncomparable, without appreciating the fact that the comparable qualified all the qualitative and quantitative filters applied by the TPO 3 IT(TP)A Nos.171 & 190/Bang/2016 and it is a similar comparable company and moreover, the requirement of law and international jurisprudence require seeking similar comparable companies while searching for comparable companies under TNMM. The DRP has also not appreciated that there have been no projects in visual computing labs during the relevant previous year.
8. The DRP erred in directing the AO/TPO to exclude M/s. Evoke Technologies Ltd., from the list of comparables, holding it to be functionally uncomparable due to the peculiar economic circumstances without appreciating that the expenditure incurred is a normal phenomena and a company cannot be excluded merely on abnormal profit margins.
9. The DRP erred in directing the AO/TPO to exclude M/s. R.S. Software (India) Ltd., and M/s. Evoke Technologies Ltd., from the list of comparables merely to maintain consistency, even in the absence of objection with respect to inclusion of the said comparables in the list.
Corporate Issue:
10. The DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude communication expenses (dataline charges) from the total turnover also, while computing the deduction u/s 10A of the I.T. Act, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover.
11. The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court.
12. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored.
13. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal."
3. The revised grounds raised by the assessee are as under:-
"In conformity with Rule 8 of Income-tax Appellate Tribunal Rules, 1963 The grounds of appeal raised by the Appellant are without prejudice to one another.4
IT(TP)A Nos.171 & 190/Bang/2016
1. That the order passed by the learned (`Ld.') Assistant Commissioner of Income-tax, Circle 1(1)(1), ('Ld. Assessing Officer' or `Ld. AO') and Hon'ble Dispute Resolution Panel, ['DRP' or `Ld. Panel], to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. [corresponding to ground no. 1]
2. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law in making a transfer pricing adjustment of Rs.6,13,68,769 to the Appellant's international transactions. [corresponding to ground no. 2]
3. On the facts and circumstances of the case, the Ld. Panel erred in upholding the decision of the Ld. AO/Ld. TPO of re-characterising the Appellant as a software development service provider as against the software support services being carried by the Appellant. [corresponding to ground no. 3]
4. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law by rejecting the transfer pricing study which was maintained in good faith and due diligence [corresponding to ground no. 4 (i)]
5. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law by incorrectly applying the filters. [corresponding to ground no. 4 (ii)]
6. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law by not applying the filter on upper turnover adopted by Appellant. [corresponding to ground no. 4 (iii)]
7. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law by rejecting the search process followed by the Appellant. [corresponding to ground no. 4 (iv)]
8. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law by rejecting the use of multiple year data. [corresponding to ground no. 4 (v)]
9. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law while including Persistent Systems and Solutions Limited as a comparable whereas the same should have been excluded for the reasons of functional dissimilarity. [corresponding to ground no. 4 (vi)]
10. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law while including Persistent Systems Limited as a comparable whereas the same should 5 IT(TP)A Nos.171 & 190/Bang/2016 have been excluded for the reasons of functional dissimilarity. [corresponding to ground no. 4 (vi)]
11. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law while including Sasken Communication Technologies Limited as a comparable whereas the same should have been excluded for the reasons of functional dissimilarity. [corresponding to ground no. 4 (vi)]
12. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law while excluding Intertec Communications Ltd as a comparable by applying employee cost greater than 25% of total revenue as a comparability criterion. [corresponding to ground no. 4 (vii)]
13. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law while excluding MYM Technologies Ltd as a comparable for having different financial year end (i.e. companies having financial year other than March 31). [corresponding to ground no. 4 (vii)]
14. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law while excluding FCS Software Solutions Limited as a comparable due to profit margin distortion after considering the working capital adjustment, whereas the same should have been included for the reasons of functional comparability. [corresponding to ground no. 4 (vii) & 4(ix)]
15. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law in the exclusion of 'provision for doubtful debts' and 'provision no longer required written back' from computation of operating cost and operating revenue respectively and the inclusion of 'other income'/'miscellaneous income' for the computation of operating income. [corresponding to ground no. 4 (viii)]
16. The Ld. AO in pursuance of the order of the Ld. TPO and the directions of the Ld. DRP erred on facts and law providing any adjustment towards the difference in risk profile between the Appellant and the entrepreneur companies selected as comparable while determining the arm's length price. [corresponding to ground no. 4 (x)]
17. On the facts and in circumstances of the case and law, the Ld. AO erred in not allowing the set off of the brought forward unabsorbed depreciation of Rs. 9,84,026 while computing the income of the company. [corresponding to ground no. 5] 6 IT(TP)A Nos.171 & 190/Bang/2016
18. On the facts and in circumstances of the case, the Ld. AO erred in computation of interest under section 244A of the Income-tax Act, 1961. [corresponding to ground no. 6]
19. The Ld. AO erred in facts and law in initiating proceedings under section 271(1)(c) of the Income-tax Act, 1961. [corresponding to ground no. 7] That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal."
4. Learned DR of the revenue supported the Draft Assessment order passed by the A.O. Learned AR of the assessee supported the order of DRP in respect of the appeal filed by the revenue. Regarding the appeal filed by the assessee, he submitted that only Ground Nos. 9, 10, 11 & 14 are to be decided and the remaining grounds are not pressed. He also submitted a chart regarding all 13 comparables selected by the TPO and submitted that out of the same, DRP has excluded 10 comparables and the revenue in its appeal is challenging all these 10 exclusions. He submitted that the assessee agrees for inclusion of 3 comparables out of 10 exclusions ordered by DRP and these three comparables are 1) Evoke Technologies Pvt. Ltd., 2) Mindtree Limited (Seg.) and 3) R S Software (India) Ltd. He submitted that the issue regarding exclusion of remaining seven comparables excluded by DRP ad 3 comparables not excluded by DRP but exclusion being requested by the assessee i.e. total 10 exclusions is covered in favour of the assessee by the tribunal order rendered in the case of Commscope Networks India Pvt. Ltd. in IT (TP) A No. 166/Bang/2016 dated 22.02.2017 available on pages 2349 to 2367 of the Case law paper book. He drawn our attention to Para 9 of this tribunal order and pointed out that as per this Para, exclusion of 1) Accropetal Technologies Ltd. (Seg.), 2) E - Zest Solutions Ltd., 3) E - Infochips Ltd., 4) ICRA Techno Analytics Ltd., 5) Infosys Ltd., 6) Larsen & Toubro Infotech Ltd., 7) Persistent System & Solutions Ltd., 8) Persistent Systems Ltd., 9) Sasken Communication Technologies Ltd. and 10) Tata Elxsi Ltd. had been approved by the tribunal. He also pointed out that this tribunal order is for the same assessment year i.e. A. Y. 2011 - 12. Thereafter he submitted that the assessee is requesting for inclusion of three comparables i.e. 1) Intertec Communications Technologies Ltd., 2) MYM Technologies Ltd. and 3) FCS Software Solutions Ltd. Regarding 7 IT(TP)A Nos.171 & 190/Bang/2016 the request of first and 2nd inclusion, it was submitted that pages 2212 and 2244 of the Annual Report Compendium (ARC) respectively are relevant. Regarding the request for 3rd inclusion, he placed reliance on the tribunal order rendered in the case of Marvell India Pvt. Ltd. in IT (TP) A Nos. 384 & 471/Bang/2016 dated 28.06.2017 copy available on pages 2443 to 2470 of Case law Compendium and in particular, our attention was drawn to page 2466.
5. We have considered the rival submissions, gone through the orders of the lower authorities and the judgments cited by the learned AR of the assessee. Various grounds not pressed by the learned AR of the assessee are rejected as not pressed. As per the appeal of the revenue, the revenue has challenged the exclusion of 10 comparables as per the directions of DRP. Out of this, the assessee has conceded that 3 comparables may be included i.e. 1) Evoke Technologies Pvt. Ltd., 2) Mindtree Limited (Seg.) and 3) R S Software (India) Ltd. To this extent, the order of DRP is reversed and the AO/TPO are directed to include these three comparables in the final list of comparables. Regarding the request of the revenue to include remaining seven comparables excluded by DRP and 3 more comparables which are not excluded by DRP but being requested by the assessee for exclusion i.e. for total 10 exclusions, Para 9 of the tribunal order rendered in the case of Commscope Networks India Pvt. Ltd. (Supra) is relevant and therefore, the same is reproduced here in below from pages 2364 & 2365 of the Case law Compendium for ready reference. This Para reads as under:-
"9. Now we decide about the remaining 6 comparables excluded by DRP and 4 comparables retained by DRP but for which the assessee is seeking exclusion. Out of these 6 comparables excluded by DRP, one comparable ICRA Techno Analytics Ltd. is having RPT in excess of 15% and therefore, for this reason alone, this comparable has to be excluded although DRP has excluded it for a different reason that it is having various activities and segmental data are not available. We uphold its exclusion on account of RPT filter. Exclusion of Acropetal Technologies Ltd. (Seg) is covered in favour of the assessee by the same tribunal order rendered in the case of Applied materials India Pvt. Ltd. vs. ACIT (Supra). Respectfully following the same, we uphold its exclusion. Exclusion of 1) e - Zest Solutions Ltd., 2) Infosys Ltd., 3) Larsen & Toubro Infotech Ltd., 4) Persistent Systems & Solutions Ltd., 5) Persistent Systems Ltd., 6) Sasken Communication 8 IT(TP)A Nos.171 & 190/Bang/2016 Technologies Ltd. and 7) Tata Elxsi Ltd. are also covered in favour of the assessee by the same tribunal order rendered in the case of Applied materials India Pvt. Ltd. vs. ACIT (Supra). Respectfully following the same, we uphold the exclusion of these Seven comparables also. Exclusion of E - Infochips Ltd. is covered in favour of the assessee by the tribunal order rendered in the case of Saxo India Pvt. Ltd. vs. ACIT in ITA No. 6148/Del/2015 dated 05.02.2016 Para 10.1 & 10.2 available at pages 221 to 223. Respectfully following the same, we uphold its exclusion. In this manner, we uphold the exclusion of six comparables excluded by DRP out of 9 comparables excluded by DRP and exclude 4 comparables retained by DRP and we have already held that out of 9 comparables excluded by DRP, 3 have to come back being 1) Evoke Technologies Pvt. Ltd.,
2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. Now, we decide about LGS Global Ltd. As per the tribunal order rendered in the case of Applied materials India Pvt. Ltd. vs. ACIT (Supra), this is a good comparable and therefore, we direct the A.O. and TPO to include this comparable. So, there should be 4 comparables in the final list of comparable and on the basis of that, the AO/TPO should work out the ALP."
6. Respectfully following this tribunal order, we exclude these 10 comparables i.e.
1) Accropetal Technologies Ltd. (Seg.), 2) E - Zest Solutions Ltd., 3) E - Infochips Ltd., 4) ICRA Techno Analytics Ltd., 5) Infosys Ltd., 6) Larsen & Toubro Infotech Ltd., 7) Persistent System & Solutions Ltd., 8) Persistent Systems Ltd., 9) Sasken Communication Technologies Ltd. and 10) Tata Elxsi Ltd.
7. Now, we examine and decide about three inclusions being requested by the assessee. Regarding Intertec Communications Technologies Ltd., DRP has followed a tribunal order rendered in the case of Navisite India Pvt. Ltd. in ITA No. 5329/D/2012 and a judgment of Hon'ble Delhi high Court rendered in the case of Rampgreen Solutions Pvt. Ltd. in ITA 102/2015. Learned AR of the assessee could not point out any difference in facts and therefore, exclusion of this company by TPO and DRP is approved.
8. Regarding MYM Technologies Ltd., we find that this comparable was excluded on this basis that data for current financial year are not available. Before us, it was submitted that page 2244 of (ARC) is relevant. We find that on this page, Directors Report is available containing brief Financial result for 12 months 9 IT(TP)A Nos.171 & 190/Bang/2016 ending on 30.06.2010 and 9 months ending on 31.03.2011 but in this ARC, the corresponding audited Balance Sheet and P & L Account are not available. Hence, we find no merit in the assessee's request for inclusion of this comparable.
9. Regarding FCS Software Solutions Ltd., it is seen that it is noted by DRP on page 8 of its directions that revenue of Rs. 115.99 Crores has been shown from Software Development and other services and there is no segmental information available in respect of Software Development. It is also noted by DRP that it is not possible to ascertain as to whether this company passes employees cost filter or not. It is also noted that this company is predominantly engaged in onsite development of software. Learned AR of the assessee has placed reliance on the tribunal order rendered in the case of Marvell India Pvt. Ltd. (Supra) and our attention was drawn to page 2466 of case Law Compendium. In this tribunal order, only this aspect was considered and decided that only for this reason that working capital adjustment is high, a comparable cannot be excluded but there is no discussion or decision on this aspect that there is no segmental information available and regarding employees cost filter and onsite revenue filter etc. In the present case, TPO and DRP's objections include these aspects also in addition to high working capital adjustment. On these other aspects, this tribunal order does not render any help to the assessee. There is no other argument raised in respect of these other aspects. Hence, we decline to interfere in the direction of DRP in respect of this comparable. The request of the assessee for inclusion of all three comparables is rejected.
10. In the appeal of the revenue, there is one issue in respect of corporate tax regarding reduction of some expenses from total turnover also while computing deduction u/s 10A by following the judgment of Hon'ble Karnataka High Court rendered in the case of Tata Elxsi Ltd., 349 ITR 98. This judgment is now approved by Hon'ble apex court also. Hence, we find no infirmity in the directions of DRP on this issue.
10IT(TP)A Nos.171 & 190/Bang/2016
11. In the result, both the appeals of the assessee and revenue are partly allowed in the terms indicated above.
Order pronounced in the open court onthe date mentioned on the caption page.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (ARUN KUMAR GARODIA)
Judicial Member Accountant Member
Bangalore,
Dated, the 31st August, 2018.
/MS/
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Senior Private Secretary,
Income Tax Appellate Tribunal,
Bangalore.