Income Tax Appellate Tribunal - Hyderabad
Sumtotal Systems India Private ... vs Assessee on 23 September, 2016
ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' B ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S. Rifaur Rahman, Accountant Member
ITA No.255/Hyd/2015
(Assessment Year: 2010-11)
M/s. SumTotal Systems Vs Dy. Commissioner of Income
India Private Limited Tax, Circle 3(2)
Hyderabad Hyderabad
PAN: AABCC 9379 C
For Assessee: Shri Ajit Tolani and
Shri Darpan Kirpalani
For Revenue: Smt. S. Narasamma, CIT(DR)
Date of Hearing: 28 .07.2016
Date of Pronouncement: 23.09.2016
ORDER
Per Smt. P. Madhavi Devi, J.M.
This is assessee's appeal for the A.Y 2010-11. In this appeal, the assessee is aggrieved by the assessment order passed u/s 143(3) r.w.s. 144C(13) of the I.T. act in accordance with the directions of the DRP.
2. Brief facts of the case are that the assessee company, which is in the business of software development and support services, filed its original return of income for the A.Y 2010-11 on 1.10.2007 by declaring an income of Rs.27,72,181 and a book profit of Rs.6,10,62,281. The return was subsequently revised on 10.09.2011 claiming Rs.11,24,77,537 as a deduction u/s 10A of the Act and in arriving at the taxable income of Rs.1,17,45,161. During the assessment proceedings u/s 143(3) of the Act, the AO Page 1 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad observed that the assessee has entered into international transactions with its AE for providing software development services to its AEs. Since the assessee's turnover with the AEs during the financial year 2009-10 was more than Rs.15.00 crores, the AO referred the matter to the TPO for determination of the Arm's Length Price (ALP) of its international transactions. The TPO, vide order u/s 92CA(3) of the Act dated 31.12.2013, determined the ALP of the transaction at Rs.66,01,06,695 as against the price of Rs.60,22,99,470 received by the assessee from the AEs and determined the adjustment u/s 92CA of the Act at Rs.5,78,67,225. The AO made the adjustment of the shortfall at Rs.92,24,926. AO accordingly passed the draft assessment order, aggrieved by which, the assessee preferred its objections before the DRP. The DRP, vide order dated 13.11.2014, directed the AO to exclude two companies i.e. Infosys Technologies Ltd and L&T InfoTech Ltd, from the list of 18 comparables and directed the AO to re-work out the ALP. Consequent to the directions of the DRP, the AO re-computed the ALP at Rs.65,21,84,748 and taking into consideration the fact the assessee has offered an amount of Rs.4,84,42,265 as voluntary TP addition in the revised return, the AO determined the shortfall at Rs.14,43,013. Thereafter, while computing the taxable income of the assessee, the AO excluded Telecommunication charges attributing to delivery of software outside India and also the TP adjustment made u/s 92CA of the Act for the purpose of the deduction u/s 10A of the Act included. He accordingly determined the taxable income of the assessee at Rs.5,32,01,336.
3. Aggrieved, the assessee is in appeal before us by raising the following grounds of appeal:
Page 2 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad "TRANSFER PRICING MATTERS - Relating to determination of Arm's Length Price ("ALP") in respect of provision of software services provided to the Associated Enterprises ("AEs") under Transactional Net Margin Method ("TNMM") Based on the facts and circumstances of the case and in law, the learned Assessing Officer (" AO") / learned Transfer Pricing Officer ("TPO") and the Hon'ble Dispute Resolution Panel ('ORP') erred in:
Rejection of transfer pricing documentation maintained
1. Rejecting the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('Rules') and making adjustment of Rs 14,43,013.
Rejection of use of contemporaneous data and multiple year data
2. Using single year data of companies to determine the arm's length price of the international transactions without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price.
Selection of comparables
3. Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the software services of the Appellant:
• Comp-U-Learn Tech India Ltd;
• E Infochips Bangalore Ltd • KALS Info Systems Ltd; and • Tata Elxsi Ltd (Seg.) Rejection of comparables Page 3 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad
4. Not undertaking an objective comparative analysis and interalia rejecting the following comparable companies.
* Akshay Software Technologies Ltd * CG VAK Software and Exports Ltd and * Satyam Computers Services Ltd Error in margin computation
5. Computation of net margins of the following companies selected as comparables by excluding provision for bad and doubtful debts:
i) CAT Technologies Ltd;
ii) E-Infochips Bangalore Ltd;
iii)E-Zest Solutions Ltd;
iv) Kuliza Technologies Pvt Ltd
v) Kals Information Systems Ltd (Seg); and
vi) Tata Elxsi Ltd (Seg) A Skillsoft Company Adjustment for risk differences
6. Not adjusting the net margins of the comparable companies taking into account the functional and risk differences between the international transaction of the Appellant and the comparable companies in accordance with the provisions of Rule 10B(1)(e);
Corporate Tax Issues
7. Not allowing deduction u/ s lOA of the Act on voluntary TP adjustment of Rs. 4,84,42,265 offered by the Appellant.
8. Not considering the revised return of income filed by the Appellant while computing deduction u/ s lOA of the Act.
9. (a) Reducing the internet connection charges of Rs. 44,28,798 from the export turnover, by considering the same as expenditure not forming part of export turnover for arriving at the deduction u/ s lOA of the Act.
(b) Not following the directions of the DRP for reducing communication charges from both export Page 4 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad turnover and total turnover for the purpose of computing deduction u/ s 10A of the Act.
10. Not granting the Appellant an opportunity to provide explanation/clarification on the proposed adjustments in draft assessment order and thus violated the principles of natural justice.
11. Imposition of interest u/ s 234B and 234C of the Act.
12. Initiating penalty proceedings u/s 271(1)( c) of the Act.
The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal".
4. At the time of hearing, the learned Counsel for the assessee placed reliance upon the averments made by the assessee before the authorities below and also on the case law submitted in the form of paper book before us. The learned DR, on the other hand, supported the orders of the authorities below.
5. Having regard to the rival contentions and the material on record, we proceed to dispose of the appeal as under:
6. Ground No.1 being general in nature, needs no adjudication.
7. Ground No.2 is against the rejection of use of contemporarious data and multiple year data. This ground is rejected as it has been held in a number of cases by the Coordinate Benches of this Tribunal that it is only the data pertaining to the relevant financial year that has to be considered Page 5 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad for determination of the ALP and multiple data is not to be considered.
8. As regards Ground No.3, we find that the assessee's grievance is against the inclusion of the following companies as comparable to the assessee:
a) Comp - U-Learn Tech India Ltd
b) E Infochips Bangalore Ltd
c) KALS Info Systems Ltd and
d) Tata Elxsi Ltd (Seg.)
9. At the time of hearing, the learned Counsel for the assessee has drawn our attention to the assessee's objections before the TPO and the DRP against these companies and submitted that on the very same grounds, the Coordinate Bench of this Tribunal in the case of Pega Systems World Wide (P) Ltd in ITA No.1758/Hyd/2014 vide orders dated 16.10.2015 for the A.Y 2010-11, has considered and held these companies not to be comparable to a software development services company like the assessee. We find that Pega Systems World Wide (P) Ltd and the assessee are both engaged in similar activities and the A.Y involved is also the same i.e. A.Y 2010-11. Further, we also find that the TPO also has taken the very same companies are comparables in the case of both the assessees. Therefore, we are satisfied that the decision of the Tribunal in the case of Pega Systems Worldwide (P) Ltd applies to the case before us as well. Let us therefore, now consider each of the companies in the light of the above decision.
10. As far as Comp-U-Learn Tech India Ltd is concerned, we find that the assessee had objected to taking this company as comparable before the TPO as recorded at Page 37 of the T.P. Page 6 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad order on the ground that the said company is into software product development services. The objections of the assessee are also recorded at Page 7 of the DRP's order. In the case of Pega System, the Tribunal at Para 9 to 9.2 of its order has considered and has held that the said company is not comparable to the assessee therein which is also providing similar services as the assessee herein. For the sake of ready reference, the relevant Paras are reproduced hereunder:
Comp-U-Learn Tech India Ltd., : 9. This company was selected by TPO as one of the comparable companies. Assessee objected stating that this company is engaged in two segments i.e. IT enabled services and software products solutions as per the annual report and it has exceptionally abnormal growth of profits of 160% as against industrial norm of 13 to 15%. It was also objected stating that the growth is more than 10 times the industrial growth and company in its standard financial performance has mentioned that it has spent sizeable amount towards R&D in pharmaceutical sector for the purpose of coming out with unique products and solutions for facilitating operational efficiency, effective inventory management and complete financial control for the sector. TPO however, considered the exceptional growth was only 1.6 times compared to last year and not an exceptional increase. Further, he extracted schedule 12, to come to a conclusion that as per annual report income from software development was about Rs. 14.11 Crores as against total income of Rs. 14.31 Crores. The Soft ware services worked out to 98% of total revenue. He concluded that the company is predominantly software development services and accordingly comparable for software development services provider for the year. He also stated that company categorically stated that it was pure software development services provider. He also rejected objection on strategic acquisitions stating that the same does not have any impact on standalone financials of Assessee company. With regard to objection on R&D, he considered that it was a general note as no expenditure appears to have been booked in P&L A/c. He was of the opinion that in most of the cases, R&D will actually be activities aimed at cost cutting and improving organizational set up etc. In view of the above, the contentions of Assessee are rejected and company is retained as comparable.
9.1. Relying on the objections raised before DRP who rejected the same, Ld. Counsel submitted that this year is an exceptional profit year for the company and referred to the report of the company for the year under consideration. Vide page 207 of the Paper Book, Ld. Counsel referred to the structural initiatives, wherein it was stated "your company was originally into business of software development and education training. During the past two years, our focus was Page 7 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad shifted to e-governance solutions to Government departments of State and Central Governments. Further, as explanatory statement to Section 173(2) of the Companies Act, at item No. 8, it was reported as under: 'As part of overall growth strategy, company had exceptionally its operations in its core activity, software development, e-governance solutions, IT Services, IT enabled services etc'. In Item No. 9, it was reported that 'the company presently carries on business of software development, E-Governance solutions, IT and IT enabled services'. Referring to page 213 of the Paper Book, it was stated that it has spent sizeable amount towards R&D in pharmaceutical sector for the purpose of coming out with unique products and solutions for facilitating operational efficiency, effective inventory management and complete financial control for the sector. He later referred to the 'strategic acquisitions, alliances and subsidiaries' reported in the annual report of the company. Referring to pg. 215, it was submitted that R&D Sector was established to enhance the quality of its products. Further, referring to revenue recognition in schedule 14 (page 219 of the Paper Book), it was submitted that 'revenue in respect of brand license fee is accounted on execution of agreement.
Revenue for software development is recognized on the basis of chargeable time or achievement of prescribed milestone as relevant to each contract. Revenue from sale of software products and courseware materials is recognized when the same has been completed with the passing of title or licenses or raising invoices as the case may be'. Referring to the above, it was submitted that, that company is in diversified activities and not exclusively as software development service provider in which Assessee is functioning. Therefore, the company is functionally different.
9.2. After considering the rival contentions, we are of the opinion that on the basis of information available, Comp-U-Learn Tech India Ltd., cannot be selected as a functionally comparable company as it has diversified activities. Only if there are segmental reports pertaining to software development services, then only the company can be taken as comparable company. In the absence of such information, it is very difficult to hold that the selected company is comparable to Assessee- company. There is no information about the segmental profits. What that company has reported in its annual report is 'Income from software development' which cannot be equated as 'Income from services'. The software development may include sale of products. In the absence of segmental information, this case cannot be selected as comparable. However, whether TPO could obtain any segmental information is not known to us. we are of the opinion that TPO should examine whether there are any segmental information which can be obtained from the company or available in the public domain so as to compare Assessee's software development services with that of software development services of Comp-U-Learn Tech India Ltd. Therefore, we are of the opinion that the issue of selection of this company is a comparable should be restored to the file of AO/TPO to examine the available data in public domain/or obtaining information U/s. 133(6) of the Act for segmental information Page 8 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad pertaining to software development services and then decide after giving due opportunity to Assessee whether the said company can be selected as comparable. For the time being, Assessee's objections are considered valid and issue is restored to the file of AO for undertaking analysis afresh as far as this company is concerned".
11. With similar directions, this issue is set aside to the file of the AO for undertaking fresh analysis and re-consideration in accordance with law.
12. As regards E-Infochips Bangalore is concerned, we find that the assessee's objections are recorded in the TPO's order at Page 39 and at Pages 7 & 8 of the DRP's order. We find that in the case of Pega Systems, this company was also considered at Para 8 to 8.3. The Tribunal has considered the issue at length and held as under:
"E infochips Bangalore Ltd., :
8. This company is selected by TPO even though Assessee objected to the same (vide page 34 and 35 of the order of TPO). Assessee objected that the information for FY. 2009-10 was not available in public domain. It was further contended that company is functionally different and is having two different segments i.e., software development services and ITES. Company offers broad portfolio of services comprising new products, product development, product sustenance and maintenance, Product Qualitative Analysis (QA) and independent testing hardware and software design etc. TPO did not accept Assessee's documents by referring to the schedules like research and development, inventories, sales and other incomes. He also reported that company in the notes to the accounts has stated that it is engaged in the development and maintenance of computer software. The production and sales of software cannot be expressed in any generic unit.
Thus, TPO rejected Assessee's objections and retained it as a comparable. DRP also agreed with TPO.
8.1. It was contended that AO relied on the annual report of FY. 2010- 11 and used the information applicable to FY. 2009-10 from that report, as the information for FY. 2009-10 was not available in public domain. It is also submitted that this company was never selected either by TPO in earlier year or in later year. It was also submitted that profitability varies from year to year and in this year, there was arbnormally very high margin, the reasons of which could not be analyzed in the absence of annual report. It was further contended that segmental information was not available. On the argument that the said company is providing both software development and IT enabled services Ld. Counsel placed the Page 9 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad disclosures in annual report of FY. 2008-09 and annual report of FY. 2009- 10 to submit that the company is primarily engaged in software development and IT enabled services and has reported both of them as one segment. Therefore, company is not comparable with Assessees on functional analysis. It was further submitted that company has merged in 2012 with another company and it will be difficult to obtain further information/segmental information about the company now. In view of its fluctuating profits over the years, this company was not selected as a comparable earlier or in later years by Revenue. Since the disclosure in annual report is common, Assessee relied on the decision of Ahmadabad Bench of ITAT in the case of All Scrips (India) Private Ltd., in ITA No. 771/AHD/2014 for AY. 2009-10, wherein this comparable was rejected on the basis of lack of segmental information. Assessee relied on Para 10 of the Co-ordinate Bench order, which is as under:
"Para 10 - 'With respect to E-Infochip Bangalore Ltd., we find that in the annual accounts of the company, with respect to the segment information it is stated that the company is primarily engaged in software development and I.T enabled services which is considered the only reportable business segment as per Accounting Standard AS-17 "segment reporting" prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available .Considering the aforesaid facts, we are of the view that the aforesaid two companies needs to be excluded while working out the comparability analysis and therefore uphold the plea of the Assessee in excluding the margins of the aforesaid 2 companies".
8.2. Ld. DR, however, referred to the extracts made by TPO in the order to submit that Assessee is a comparable company with that of Assessee.
8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee's case in this assessment year. We are also aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally Page 10 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad different from Assessee's activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard"
Respectfully following the same, we direct the AO to exclude the said company from the final list of comparables while determining the ALP of the international transaction.
13. As far as KALS Information Systems Ltd is concerned, we find that the objections of the assessee are recorded in page 44 of the T.P order and at Pages 7 & 8 of the DRP's order. We find that for the very same reasons, the Tribunal had directed the said company to be excluded in the case of Pega Systems World Wide (P) Ltd cited (Supra). For the purpose of ready reference, the relevant Paras of the Tribunal's order are reproduced hereunder:
" Kals Information Systems Ltd :
10. Assessee objected to the above company before TPO stating that the above said company is functionally different as it is engaged in the development of software and software products. It has inventories equivalent to 27% of the revenue. TPO however rejected Assessee's contentions stating that company classified itself as pure software development service provider. Further, extracting page No. 22 of the annual report of the company, TPO opined that the segmental information indicates that revenue is shown to have been earned from application software and training. Accordingly, he rejected Assessee's objections and included as the comparable company. DRP confirmed the same.
10.1. Assessee's main objection before us is on functionality of the comparable company. As seen from the annual report of 2008-09 and 2009-10 and comparative statement placed by Assessee, the company classified itself as 'the company engaged in development of software and software products since its inception'. The company consisting of STPI unit engaged in development of software and software products and a training centre engaged in training of software professionals on on-line projects. This indicates that company is engaged in development of software and products and its inventory also indicates that Assessee has been using its readymade libraries for sales. This company was rejected in earlier year on functional analysis by ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 where in it was held that company is engaged in development of software products. Since its annual report states the same facts in this Page 11 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee's objections are accepted and AO is directed to exclude the company".
14. For the above reasons, this company is directed to be excluded from the final list of comparables.
15. As regards Tata Elxsi Ltd, we find that the assessee's objections are recorded at Page 46 of the T.P. order and at page 7 of the DRP's order. We also find that this company is also directed to be excluded in the case of Pega Systems Worldwide (P) Ltd and relevant portion of the Tribunal's order at Paras 12 to 12.1 are reproduced hereunder:
"Tata Elxsi Ltd (Seg):
12. Before TPO, Assessee contended that the above said company is functionally different as it specialized in embedded software development technology. It was also objected before TPO that in earlier year this company has clearly stated that it cannot be compared to any other software services company due to complex nature of its business.
Assessee relied on the decisions of ITAT in the case of Conexant Systems India Pvt. Ltd. (ITA No.1429/Hyd/2010 and 1978/Hyd/2011) and other cases as stated by TPO in page 41 of his order. However, TPO did not agree with the objections stating that the company has two segments including software development services and revenue from software development services is Rs. 33,649 Crores out of total turnover of Rs. 37,637 Crores, which is at 89.52%. This signified the fact that company is predominantly into software development services. TPO rejected the objections of Assessee so as DRP.
12.1. It was the objection of Assessee that above company is predominantly into product design services, Innovation Design Engineering and visual computing labs division which are specialized services. He referred to the order of ITAT in AY. 2009-10 in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this company was rejected on the reason that it is engaged in multiple segments. There is no break-up in the annual report and data on which margin from software services activity only can be computed is also not available. Moreover, the company itself has indicated that it cannot be compared with any other software service company because of its complex nature. Similar view was taken by many of the Co-ordinate Benches in earlier years that Tata Elxsi Ltd., cannot be selected as comparable company. Consistent with the above view, we are of the opinion that a company like Tata Elxsi Ltd., which has complex activities Page 12 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad and segmental information of which is not available cannot be selected as comparable company to Assessee. Moreover, as seen from the turnover as reported by TPO itself, it was many times Assessee's turnover and therefore cannot be exactly considered as a similar company unless the nature of activity, the incomes are analyzed in detail. Since no segmental data is available, considering the software development services as a segment by TPO cannot be considered as segmental data, unless the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same".
16. For the above reasons, we direct the AO to exclude this Company also from the final list of comparables. Accordingly, Ground of appeal No.3 is allowed.
17. As regards Ground No.4 against the exclusion of three companies which have been selected by the assessee as comparable to the assessee, the learned Counsel for the assessee submitted that if Ground of appeal No.3 is allowed the assessee's case would fall within (+/_) 5% of the margin of the comparable companies and thereafter adjudication of this ground of appeal would become only academic. Since we have already allowed Ground No.3 and directed the exclusion of the companies mentioned therein, we do not see any reason to adjudicate this ground of appeal at this stage. This ground is accordingly rejected.
18. As far as Ground No.5 is concerned, it is the case of the assessee that the margins of the comparable companies have been computed erroneously by not considering the provision for bad and doubtful debts from their operating income. He submitted that the issue is covered by the decision of the Coordinate Bench of this Tribunal in the case of Kenexa Technologies Private Ltd vs. DCIT in ITA No.243/Hyd/2014 Page 13 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad wherein at Paras 40 to 42, the Tribunal has held that the bad debts and the provision for bad and doubtful debts are part of the operating expenses and are to be taken into consideration while computing the comparable companies. For the sake of convenience, the relevant Paras are reproduced hereunder:
"40. With respect to ground No. 2.6.3 and 2.6.4, it was argued by the learned counsel that the TPO erred in computing the margins of comparable companies by considering the provision for bad and doubtful debts and bad debts as non-operative expenditure.
41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below:
"106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period.
Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same.
We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted.
107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly."
42. We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expenses and we direct the TPO to re-compute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies"
Page 14 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad
19. Respectfully following the decision of the Coordinate Bench we direct the AO to treat the provisions for bad and doubtful debts of the comparable companies as part of their operating expenses and to re-compute the margins of the comparable companies accordingly. This ground of appeal is treated as allowed for statistical purposes.
20. As regards Ground No.6 against not adjusting the net margins of the companies by taking into account the functional and risk differences between the international taxation of the assessee and the comparable companies, we reject the same as adjudication of the same would only result in an academic exercises consequent to the allowing of Ground No.3 in the appeal.
21. As regards Grounds No. 7 & 8 are concerned, we find that they are against the non-allowing of deduction u/s 10A of the Act on voluntary TP adjustment of Rs.4,84,42,265 offered by the assessee by not considering the revised return filed by the assessee for computing the deduction u/s 10A of the Act. We find that this issue is covered in favour of the assessee by the judgment of the Hon'ble Karnataka High Court in the case of iGATE Global Solutions Ltd in ITA No.453/2008 dated 17.6.2014 wherein the decision of the Tribunal in ITA Nos. 248 & 249/Bang/2007 was confirmed. We find that in the said order the Tribunal has at Paras 21 to 23 held as under:
"21. The last grievance is in respect of not allowing deduction under section 10A on the adjustment made by the assessee to the arm's length price.
22. In the instant case, the assessee company entered into transaction with associated enterprise.Page 15 of 18
ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad The assessee company determined arm's length price and accordingly made adjustment to the income because arm's length price determined was more than the consideration, at which the transactions were shown in the books of account. The deduction under section 10A has not been allowed as per proviso to section 92C(4). As per this proviso, no deduction under section 10A or 10B or under Chapter VI·A is to be allowed in respect of amount of income, by which the total income of the assessee is enhanced after computation of income under the sub- section. The learned Authorized Representative during the course of proceedings has referred to the word 'enhanced'. In case the income is enhanced, then deduction is not permissible. However, in the instant case, income has not been enhanced because the same was already returned by the assessee. In the Memo Explaining the Provisions of Finance Bill, 2006, it has been mentioned as under :-
[2006) 201 CTR (St) 147: [2006) 281 ITR (St) 196 "Under sub-section (4), it has been provided that on the basis of arm's length price so determined, the Assessing Officer may compute the total income of an assessee. The first proviso to sub-section (4) provides that where the total income of the assessee as computed by Assessing Officer is higher than the income declared by the assessee, no deduction under section 10A or section 10B or under Chapter VI·A will be allowed in respect of the amount of income, by which the total income of the assessee is enhanced after computation of income under sub- section."
23. From the Memo Explaining the Provisions of Finance Bill, 2006 as well as from the literal meaning of the word 'enhanced', it is clear that if income increased, as a result of computation of arm's length price, then such increase is not to be considered for deduction under section 10A. In the instant case, the assessee himself has computed the arm's length prices and has disclosed the income on the basis of arm's length prices. It is not a case, where there is an enhancement of income due to Page 16 of 18 ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad determination of arm's length price. Hence, it is held that assessee was entitled to deduction under section 10A in respect of income declared in the return of income on the basis of computation of arm's length price".
22. Respectfully following the same, we direct the AO to allow the deduction u/s 10A of the Act on the ALP adjustment voluntarily offered by the assessee. Grounds No. 7 & 8 are accordingly allowed.
23. As regards Ground No.9 against the exclusion of the internet connection charges only from the export turnover while computing deduction u/s 10A of the Act, we direct the AO to exclude them from both the export turnover as well as total turnover for the purpose of computation u/s 10A of the Act as held by the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd, reported in 349 ITR 98 (Karn.) This ground of appeal is accordingly allowed.
24. As regards Ground No.10 against not providing opportunity to the assessee to explain on the proposed adjustments in the draft assessment order, the learned Counsel for the assessee did not advance any arguments on this ground of appeal. Therefore, this ground of appeal is rejected.
25. Ground No.11 is against the levy of interest u/s 234B and 234C of the Act and is consequential in nature. Therefore, the AO is directed to give consequential relief to the assessee, if any, while giving effect to this order.
Page 17 of 18ITA No 255 of 2015SumTotal Systems India P Ltd Hyderabad
26. As regards Ground No.12 is concerned, it is against the initiation of penalty proceedings u/s 271(1)(c) of the Act, we reject the same as it is premature.
27. In the result, assessee's appeal is partly allowed.
Order pronounced in the Open Court on 23rd September, 2016.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 23rd September, 2016.
Vinodan/sps
Copy to:
1 M/s.SumTotal Systems India (P) Ltd, 7th Floor, Building 2B, Maximus Towers, K.Raheja I.T. Park, Madhapur, Hyderabad 500081 2 Dy.CIT, Circle 3(2), 7th Floor, IT Towers, AC Guards, Hyderabad 3 DRP Hyderabad 4 CIT -International Taxation, IT Towers, 10-2-3 AC Guards, Hyderabad 5 CIT-3 Hyderabad 6 The DR, ITAT Hyderabad 7 Guard File By Order Page 18 of 18