Income Tax Appellate Tribunal - Hyderabad
Intelligroup Asia Pvt. Limited, ... vs Assessee on 2 January, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B" : HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA.No.1613/Hyd/2010
Assessment Year 2006-2007
M/s. NTT DATA India Enterprise
Application Services P. Ltd., vs.
(Formerly known as Intelligroup ACIT, Circle 2(1)
Asia P. Ltd., now merged with Hyderabad.
NTT Data Global Delivery
Services Ltd) Hyderabad - 560
061.
PAN AAACI7064D
(Appellant) (Respondent)
For Assessee : Smt. Nida Zia & Suvibha
For Revenue : Mr. Rajeev Benjwal
Date of Hearing : 20.11.2014
Date of Pronouncement : 02.01.2015
ORDER
PER B. RAMAKOTAIAH, A.M.
This appeal by assessee is directed against the Order of the A.O. passed under section 143(3) read with section 144C consequent to the directions of the Disputes Resolution Panel under section 144C(5) of the Income Tax Act, 1961 dt. 30.09.2010.
1.1. Assessee raised as many as 8 grounds having sub- grounds in the appeal.
2. Briefly stated, assessee company is engaged in the business of software development and related software services 2 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
and is registered with the Software Park of India (STPI). The assessee company filed its return of income declaring total income of Rs.1,02,00,647 after claiming a deduction of Rs.21,48,92,417 u/s.10A of the Act. A.O. examined the return of income and found that it is necessary to invoke T.P. proceedings under section 92CA. Proceedings, under section 92CA(3) of the Act have been invoked and the order was prepared and sent to the A.O. Based on the above order, A.O. prepared a draft assessment order and served on the assessee on 24.12.2009. Assessee filed its objections before DRP on 2.2.2010 in Form No.35A. Assessee's objections were classified by the DRP into two categories viz., (i) Transfer Pricing issues and (ii) other than T.P. issues. Since, assessee could not succeed before the DRP, it filed the present appeal before the Tribunal raising grounds.
3. Ground No.2 is not pressed.
Corporate tax issues.
4. Ground Nos. 3 to 5.2 is on the issue of definition of export turnover and total turnover. It was the contention that A.O. erred in excluding the foreign exchange gain of Rs.10,36,754 from the 'export turnover' for the purpose of computing the deduction u/s.10A of the Act or alternatively A.O. erred in not excluding the foreign exchange gain of Rs.10,36,754 from the 'total turnover' for the purpose of computing the deduction u/s.10A of the Act. Similarly, communication expenses of Rs.1,70,07,809 also, be deducted both total turnover and export turnover.
4.1. Assessee relied on the decision of ITO vs. Sak Soft Ltd., 313 ITR 353 of the Hon'ble Special Bench of the Chennai 3 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
Tribunal, wherein, the Tribunal discussed the above arithmetical calculation in detail and upheld the parity concept i.e., if anything is reduced from 'export turnover', the same also needs to be reduced from the 'total turnover' for the purpose of computing the deduction u/s.10A of the Act. The ITAT, Hyderabad following the decision of Sak Soft Ltd., (supra), in the case of ITO vs. DE Block India Software (P) Ltd., in ITA.Nos. 983 & 984/H/2006 dt. 31.01.2007, ITO vs. Virtusa (India) Ltd., in ITA.No.757/Hyd/2006 dt.29.02.2008 and DCIT vs. Mentor Graphics (I) P. Ltd., in ITA.No.696/H/2009 dated 18th August, 2009 also upheld the said parity concept for computation of deduction u/s.10A of the Act. The assessee also relied on the following case laws before DRP :
(i) Hon'ble Gujarat High Court in the case of Amba Impex (2006) 282 ITR 144.
(ii) Smt. Sujata Grover (2002) 74 TTJ (Del.) 347
(iii) Renaissance Jewellery P. Ltd., (2007) 289 ITR (AT) 65 (Mum.)
(iv) Priyanka Gems vs. ACIT (2005) 94 TTJ (Ahd.) 557
(v) Shah Originals vs. ACIT (2007) 112 TTJ (Mum.) 754
(vi) ITO vs. Banyan Chemicals P. Ltd., (2009) 310 ITR 384. 4.2. After hearing, the DRP passed the following order :
"15.2. Even though we would tend to agree with the above decisions, we are constrained by the fact that the DRP order is final as far as the department is concerned and the department has not accepted the above decisions. We would like to give an opportunity to the department to pursue the same. Hence, on the above points i.e., forex gain and communication expenses, we uphold the decision of the A.O. so that the issue will be kept alive."
5. Since the issue is covered by various decisions as accepted by DRP, respectfully following the decisions on the 4 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
above issue, we direct the A.O. to exclude the same amounts from total turnover also. Ground Nos. 3 to 5.2 are accordingly allowed.
Transfer Pricing Issues.
6. Assessee was started as off-shore development centre wholly under the Intelli group USA. Subsequently, it started rendering services to other group companies and third party customers. Assessee has provided services to A.E. which are reported by assessee at Rs.102.74 crores out of total revenue of Rs.132.17 crores. Its operating profit to cost ratio was reported at 14.21%. Assessee has filed its own T.P. report prepared by Delloitte, Haskins & Sells. However, TPO rejected the same on the reason that assessee did not use relevant data for the year and used multiple year data and also found out certain deficiencies in the report. While accepting the TNMM is the most appropriate method, TPO using certain filters made a fresh search of data and short listed about 20 companies as comparables which are as under:
Sl. Comparables selected by TPO Unadjusted TPO Assessee's No. margins - order submissions DRP/TPO WC order. adjusted
1. Aztec Software & Technology 18.09% 24.31% 18.09% Services Ltd.,
2. Bodhtree Consulting Ltd., 15.99% 20.53% 15.99%
3. Geometric Ltd., (seg.) 6.70% 11.22% 6.70%
4. iGate Global Solutions Ltd., 15.61% 19.17% 15.61% (seg.)
5. Lanco Global Systems Ltd., 5.27% 10.40% 5.27%
6. Lucid Software Ltd., 8.92% 10.99% 8.92%
7. Media Soft Soilutions P. Ltd., 6.29% 9.68% 6.29%
8. Mindtree Ltd., (seg.) 14.67% 18.94% 14.67%
9. Persistent Systems P. Ltd., 24.67% 29.41% 24.67%
10. R Systems International (seg.) 22.20% 25.87% 22.20% 5 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
11. RS Software (India) Ltd., 15.69% 19.07% 15.69%
12. SIP Technologies and Exports 3.06% 6.63% 3.06% Ltd.,
13. Sasken Communication 13.90% 18.77% 13.90% Technologies Ltd., (seg.)
14. Synfosys Business Solutions 10.61% 12.88% 10.61% Ltd.,
15. Accel Transmatic Ltd., (seg.) 44.07%
16. Flextronics Software Systems 27.24% Ltd., (seg.)
17. Infosys Technologies Ltd., 40.38%
18. Kals Information Systems Ltd., 39.75% (seg.)
19. Tata Elxsi Ltd., (seg.) 27.65%
20. Megasoft Ltd., 52.74% Assessee objected before DRP without much success on the issue of comparability.
7. Assessee has filed revised grounds 6.4.5 as under
and submitted that if these grounds are considered, assessee would not press for other grounds on the comparability issue. Grounds are as under :
"Ground No.6.4.5 :
a. The Ld. TPO/DRP erred in not undertaking an objective comparative analysis and inter alia selecting the following companies as comparable to the appellant for determination of ALP under TNMM :
i. Accel Transmatic Ltd. (Seg.)
ii. Flextronics Software Systems Ltd., (Seg.)
iii. Infosys Technologies Ltd.,
iv. Kals Infosystems Ltd.,
v. Tata Elxsi Ltd., ; and
vi. Megasoft Ltd.,
6
ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
b. Further, the Ld. TPO/DRP erred in not undertaking an objective comparative analysis and inter alia rejecting the following companies as comparable to the appellant for determination of ALP under TNMM :
i. Goldstone Technologies Ltd.,
ii. Larsen & Toubro Infotech Ltd.,
iii. Quintegra Solutions Ltd.,
iv. PSI Data Systems Ltd.,
v. TVS Infotech Ltd.,; and
vi. VMF Softech Ltd.,
8. Out of the comparables, assessee has objected to Sl. No. 15 to 20 comparables referred above. Among the six companies, five companies are already considered by Coordinate Bench decision of the Hyderabad Tribunal in the case of United Online Software Development (India) P. Ltd., Hyderabad vs. ITO, Ward 3 (2), Hyderabad ITA.No.1500/ Hyd/ 2010 dated 20.06.2014 and the findings are as under :
I. Accel Transmatic Ltd.
II. KALS Info. Systems Ltd
i. Objecting to selection of this company, the learned
AR submitted that this company is functionally different. It was submitted that during the year the company had sold IP rights in the software developed by it, which has impacted its profitability of the year. Hence, the company not only does not satisfy the 75% service revenue filter applied by the TPO, but, has an exceptional year of operations. It was submitted that the performance of the software segments clearly indicate that the company has income from sale of products. The learned AR further submitted that the company has a negative operating margin of 18.73% for FY 2004-05. Further, the learned AR submitted that as per the annual report submitted by the company in response to 133(6) related party transaction (RPT) also fails threshold limit applied by the TPO himself. In this regard, the learned AR submitted the following computation:7
ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
Particulars AE
Rendering of services 56,274,970
Receiving of services 10,011,622
Interest paid 1,513,025
Lease payments 1,830,084
Total RPT 69,629,701
RPT/Sales 60.60%
ii. It was therefore submitted that this company under
no circumstances can be considered as a comparable to the assessee, which is a purely software development service provider. The learned AR submitted that ITAT, Bangalore Bench in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010 dated 30/04/2013 has held the aforesaid company not to be a comparable in respect of a purely software development service provider. For the same reason Ld. AR sought exclusion of KALS Infosystems Ltd. He also relied upon the following other decisions:
1. Trilogy E Business Services Software Ld. Vs. DCIT (ITA No. 1054/Bang/2001.
2. CSR India Pvt. Ltd. (TS-68-ITAT-2013(Bang.-TP)
3. Intoto Software India Pvt. Ltd., (ITA No. 1196/Hyd/2010)
4. Transwhich India Pvt. Ltd. Vs. DCIT (ITA No. 948/Bang/2011) iii. The learned DR, on the other hand, supporting reasoning of the TPO and DRP submitted that there is no need to exclude the above said company.
iv. We have considered the submissions of the parties and perused the materials on record. As can be seen, the TPO at page 53 of his order has categorized the assessee as a pure software development service provider. The comments of the TPO in this regard are extracted hereunder for the sake of convenience:
"Software Product Company A company who develops a software product by following all the steps involved in creating software as explained above from Domain Analysis to Testing. In this case, 8 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
intellectual property belongs to the company. The products are sold generally on license basis wherein the right to use the software is transferred without giving the source code. These types of companies are not similar to the taxpayer, who is a pure service provider.
Pure Software Development Service Provider A pure software development service provider does a portion of the described software development life cycle. It does not generate any intellectual property for its own. The intellectual property generated belongs to the customer and not to the service provider. The taxpayer falls in this category. Thus comparables are also to be chosen from companies whose significant activities (> 75% of the operating revenues) are in the nature of or relate to software development services."
As can be seen from the above extracted portion, the TPO has himself mentioned that a pure software development service provider does not generate any intellectual property for its own. He has further stated that, the companies which sell their products generally on license basis wherein the right to use the software is transferred without giving source code cannot be comparable to pure software development service provider like assessee. It is the specific contention of the learned AR that Accel Transmatic Ltd., has sold IP rights for the software developed by it. Further, it is also the contention of the assessee that this company fails the RPT filter of more than 25% applied by the TPO himself. In case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), the ITAT Bangalore Bench while examining the issue of comparability of the aforesaid company to a purely software development service provider has held as under:
"In so far Kals Info Systems Ltd., and Accel Transmatics Ltd., chosen by the TPO as comparables, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are functionally different. The following are the relevant observations of the Tribunal in this regard:-
46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the 9 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs.45, 93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the. Pune Bench Tribunal's decision of the ITA T in the case of Bind view India Private Limited Vs. DC/, ITA No. ITA No 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:
"16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, ete. All these aspects have not been factually rebutted and, in our view the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. "
Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.
47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the 10 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
Assessee in its letter dated 21.06.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.
(e) Accel Transmatic Ltd.
48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. c/T 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows:
"In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under.
(i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system
(ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development
(iii) Accel lT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/8PO
(iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development 11 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as It was engaged in the services in the form of ACCEL IT and ACC EL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final/ist of comparables for the purpose of determining TNMM margin. "
49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken tor comparability purposes. The submission of the Id. counsel for the assessee was that If the above company should not be considered as comparable. The Id. DR, on the other hand relied on the order of the TPO.
50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the Id. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the Id. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. "
13. In view of the aforesaid decision of the Tribunal, Kals Info Systems Ltd., and Accel Transmatics Ltd. are to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal. It is ordered accordingly."
Facts being materially same and since it pertains to the same assessment year, following the view adopted by the ITAT, Bangalore Bench in the aforesaid case, we are also of the view that this company cannot be comparable to the assessee.
12ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
For the very same reasons, II. KALS Info. Systems Ltd. also cannot be a comparable to the assessee. We, therefore, direct the AO/TPO to exclude the aforesaid companies from the list of comparability analysis.
III. Megasoft Ltd.
i. Objecting to the aforesaid company being treated as comparable, the learned AR submitted that as per the information obtained from the said company u/s 133(6) of the Act, the annual report of the company clearly indicates that it is also engaged in selling of products, namely, XIUS suit of packaged products. It was submitted that since segmental financial results in respect of product and services are available in respect of this company, if at all this company is to be treated as comparable, the TPO may be directed to consider the profit margin of software development services segment alone which is 16.97%, In respect of such contention, the learned AR relied upon the following decisions:
1. Trilogy E Business Software India Pvt. Ltd. (ITA No. 1054/Bang/2011)
2. LG Soft India P. Ltd. (TS-64-ITAT-2013(Bang.-TP)
3. Bearing Point Business Consulting Pvt. Ltd. (ITA No. 1124/Bang/2011)
4. Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010)
5. Transwhich India Pvt. Ltd. VS. DCIT (ITA No. 948/Bang/2011)
6. Mercedez Benz research & development India Pvt. Ltd., (ITA. No. 1222/Bang/2011).
7. Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010) ii. The learned DR, on the other hand, submitted that the TPO having correctly considered the profit margin of the company by examining the annual report there is no need to modify the order of the TPO in this regard.13
ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
iii. We have heard the parties and perused the materials on record. On a consideration of the contentions raised by the assessee vis-à-vis materials on record as well as decisions of different benches of the Tribunal placed before us, it is quite evident that this company has two separate segments i.e. product and services. Therefore, if at all, the AO/TPO considers the aforesaid company to be a comparable, then, he is directed to consider software development services segment alone for comparability analysis.
IV, Infosys Technologies Ltd.
i. Objecting to this company, the learned AR submitted that under no circumstances, This company can be considered as comparable, to a small captive service provider like assessee. It was submitted that Infosys is engaged in diversified activities including products, consultancy & solutions. It commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further, due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. Finally, the learned AR submitted that the issue of comparability of Infosys to a captive service provider is no longer RES INTEGRA, due to following decisions of the different benches of the Tribunal:
1. Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011-Para 7.4)
2. Adaptee (India) Pvt. Ltd. Vs. DCIT (ITA No. 1801/Hyd/2009)
3. Patni Telecom Solutions Pvt. Ltd., Vs. ACIT (ITA No. 1846/Hyd/2012)
4. Trilogy E Business Services Software Ltd. Vs. DCIT (ITA No. 1054/Bang/2011 - Para 20)
5. Agnity India Technologies Vs. ITO (ITA No. 3856/Del/2010)
6. Agnity India Technologies Pvt. Ltd. Vs. ITO (High Court decision) ITA No. 1204/2011
7. Huawei Technologies India Pvt. Ltd. Vs. IT) (ITA No. 1338/Bang/2010) (AY 2006-07
8. Cincom Systems India P. Ltd., Vs. ACIT (ITA No. 761/Del/2012 (AY 2006-07)
9. Adobe Systems India Pvt. Ltd. (TS-320-ITAT-2011 (Del.) 14 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
10. Virtusa India Pvt. Ltd., Vs. DCIT (ITA No. 1962/H/2011)
11. Intoto Software India Pvt. Ltd. (ITA No. 1196/H/2010) ii. The learned DR, on the other hand, supported the orders of the DRP & TPO.
iii. We have heard the parties and perused the materials on record as accepted the fact that the assessee is purely a software development service provider to its AE whereas Infosys is not a captive service provider like assessee. It is a fact that Infosys is engaged in diversified activities and also engaged in development of products consultancy and solution. That apart, the size, reputation and brand value of Infosys, in no way makes it comparable to a small captive service provider like assessee. Therefore, following consistent view of different benches of Tribunal, we exclude this company from the list of comparables.
V. Tata Elxsi Ltd. (Seg.) i. Objecting to the aforesaid company being treated as comparable, the learned AR submitted that the said company shall be rejected as comparable since it is a specialized embedded software development company. Further, he submitted that as per the information obtained from the said company u/s 133(6) of the Act, it was stated that due to the complex segments in which they are operating, it is not comparable to any other software services company. The AR relied on the following precedents in support of his submissions:
1. Conexant Systems India Pt. Ltd., (ITA No. 1429/Hyd/2010 and 1978/Hyd/2011) 2 Telcordia Technologies India P. Ld., (ITA No. 7821/Mum/2011)
3. Logica Pvt. Ltd. (IT(TP)A No. 1129/Bang/2011)
4. Huawei Technologies India Pvt. Ltd. Vs. IT) (ITA No. 1338/Bang/2010) AY 2006-07 ii. The learned DR, on the other hand, supported the orders of the DRP & TPO.15
ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
iii. We have heard the parties and perused the materials on record as well as decisions relied upon by the learned AR. We find that in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), ITAT Bangalore Bench excluded this company relying upon the decision of ITAT, Mumbai Bench in case of Telcordia Technologies India Pvt. Ltd. (supra) pertaining to the same assessment year i.e. 2006-
07. iv. Following the view expressed by Bangalore and Mumbai Benches, of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Tata Elxsi Ltd. is also to be excluded from the list of comparables while determining the, ALP of the international transaction 8.1. Respectfully following the analysis made by various coordinate benches, we direct the AO/TPO to exclude the above five companies as they are not comparable to the functions of assessee.
8.2. With reference to VI. Flextronics Software Systems Ltd., (seg), it was submitted that this was not considered in the decision of United Online and it was excluded in A.Y. 2007-08 in the case of Intoto Software India P. ltd., in ITA.No.1196/H/2010, 1197/Hyd/2010 (A.Y. 2005-06) & 2102/Hyd/2011 dated 24.05.2013 (A.Y. 2007-08) on the reason of incurring expenditure on selling products and R & D and not a computer software development Company. The finding of the Coordinate Bench in A.Y. 2005-06 in Flextronics Software Systems Ltd., (supra) is as under :
"27. As far as Flextronics Software Limited is concerned, we find that at page 20 of his order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between 16 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the A.O./TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the A.O./TPO to exclude these three companies from the list of comparables."
9. Likewise, in A.Y. 2007-08 also the Coordinate Bench has considered this comparable company and stated that Flextronics Software is functionally different and A.O. could not have taken this company as comparable company without making suitable adjustments for the differences. Therefore, this comparable has to be excluded. However, since, this aspect was not examined by any Coordinate Bench in A.Y. 2006-07 and no order of Coordinate Bench was brought to our notice relevant to this year. We, in the interest of justice, restore this to the file of TPO to examine the functions of the above company and determine whether that is comparable or not, keeping in mind the decision of Coordinate Bench of earlier A.Y. and later A.Y. about the functional differences. The issue is restored to the file of TPO.
10. Coming to the claim of assessee to include companies, as stated in Ground 6.4.5(b), we are of the opinion that TPO has rejected them on valid reasons. No decision of any coordinate bench was also brought to our notice considering these six companies as comparables. In view of this we reject assessee contention to include them. This sub ground is rejected.
17ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
11. With reference to working capital adjustment, assessee made submissions that negative working capital adjustment is not correct and submitted that assessee has not paid any interest payments and the interest payment charged to P & L account is on lease of cars and not on working capital loans. Further, it earned interest income which was shown in 'other income' on which relief was granted by DRP. It was submitted that assessee is not bearing any working capital risk and DRP in many other cases has provided relief. Ld. Counsel also further brought to our notice that this issue was sent back to TPO by the Coordinate Bench decision in the case of Cordys Software India P. Ltd., Hyderabad vs. ACIT, Circle 1(2), Hyderabad in ITA.No.1972/Hyd/2011 dated 15.03.2013 wherein it was held as under :
"21. We have heard the rival submissions and perused the material on record. Admittedly, this ground was not raised before the DRP and has been raised for the first time before the Income-tax Appellate Tribunal. However, considering the submissions of the learned A.R. we are of the view that the issue raised in the additional ground merits consideration. As all the facts relating to the issue are on record and no new facts required to be gone into, following the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd., vs. CIT 229 ITR 383, we are inclined to admit the additional ground. However, since the ground is raised for the first time before us, we remit the issue back to the A.O. who shall take a decision on the same after considering all the aspects of the matter and also the submissions of the assessee to be made in this regard. Accordingly, this ground is allowed for statistical purpose."
12. Keeping in view the submissions, we notice that there is no reason why negative working capital adjustment was made. Moreover, we have already decided to exclude certain comparables which may result in varying working 18 ITA.No.1613/Hyd/2010 M/s. NTT DATA India Enterprise Application Services P. Ltd., Hyderabad.
capital adjustment. Therefore, the issue is restored to the file of TPO to rework out, keeping in mind the submissions of assessee and principles laid down by various Coordinate Bench decisions on the issue.
13. In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 02.01.2015.
Sd/- Sd/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 02nd January, 2015 VBP/- Copy to
1. M/s. NTT DATA India Enterprise Application Services P. Ltd., (Formerly known as Intelligroup Asia P. Ltd., merged with NTT Data Global Delivery Services Ltd), 5th Floor, I- Labs Center, Plot No.18, Software Units Layout, Madhapur, Hyderabad - 560 061.
2. Asst. Commissioner of Income Tax, Circle 2(1), Hyderabad
3. Disputes Resolution Panel, 4A, I.T. Towers, A.C. Guards, Hyderabad - 500 004.
4. CIT & Member, DRP, Hyderabad
5. D.R. ITAT "B" Bench, Hyderabad.