Income Tax Appellate Tribunal - Pune
Bmc Software India Pvt. Ltd.,, Pune vs Dy. Comm. Of Income-Tax,, Pune on 1 March, 2019
आयकर अपील य अ धकरण पण
ु े यायपीठ "बी" पण
ु े म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE MS. SUSHMA CHOWLA, JM AND
SHRI ANIL CHATURVEDI, AM
आयकर अपील सं
. / ITA No.1646/PUN/2011
नधा रण वष / Assessment year : 2007-08
BMC Software India Private Limited,
Tower A, ICC Tech Park, .......... अपीलाथ /
Senapati Bapat Road,
Appellant
Pune - 411 016.
PAN : AABCB6110E.
बनाम v/s
The Dy. Commissioner of Income Tax, .......... यथ /
Circle 1(1), Pune. Respondent
Assessee by : Shri Farooq Irani.
Revenue by : Shri Rajiv Kumar.
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 05.12.2018 Date of Pronouncement: 01.03.2019
आदे श / ORDER
PER ANIL CHATURVEDI, AM :
1. This appeal filed by assessee is emanating out of the order of Dy.Commisisoner of Income Tax, Circle 1(1), Pune dated 21.10.2011 for the assessment year 2007-08 passed u/s 143(3) r.w.s. 144C(13) of the Act.
2. The relevant facts as culled out from the material on record are as under :-
Assessee is a company stated to be engaged in the business of providing Software Development Services and sales support services to BMC group entities. Assessee filed its return of income for A.Y. 2007-08 on 2 ITA No.1646/PUN/2011 30.03.2009 disclosing total income of Rs.17,68,438/-. The case was selected for scrutiny and accordingly, notice u/s 143(2) of the Act was issued and served to the assessee on 08.12.2009. During the course of assessment proceedings, on perusing the Form 3CEB filed in respect of international transactions entered by the assessee with the related parties/Associated Enterprises (A.Es.), it was noticed that total international transactions by the assessee with A.Es. was more than Rs.15 crores. Accordingly, a reference was made to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act by the AO for computing the Arms Length Price (ALP) of the international transactions. In response to the reference, the TPO vide order dt.28.10.2010 passed u/s 92CA(3) of the Act made an upward adjustment of ALP transactions aggregating to Rs.14,73,41,167/-
on account of international transactions relating to provision of Software Development Services rendering of ITEs to A.E. and rendering of sales support services of the assessee. Thereafter, AO passed draft assessment order u/s 143(3) r.w.s 144C(1) of the Act wherein he determined total income of Rs.15,20,17,900/- by proposing addition of Rs.14,73,41,367/- on account of transfer pricing and denying excess deduction of Rs.29,08,298/- u/s 10A of the Act. Assessee filed objections before the Dispute Resolution Panel (DRP) against the proposed additions in the draft assessment order. After considering the objections of assessee to the draft assessment order, DRP vide order dt.26.09.2011 gave certain directions u/s 144C(5) of the Act wherein it at para 22 had upheld the additions proposed in the draft assessment order and gave other directions. Pursuant to the directions of DRP, AO passed order u/s 143(3) r.w.s. 144C(13) of the Act dt.21.10.2011 and determined the total income at Rs.14,59,87,740/-. Aggrieved by the order of AO, assessee is now in appeal before us and has raised the following grounds: 3 ITA No.1646/PUN/2011
"1. General ground challenging the transfer pricing adjustment of Rs.141,304,001 consequential to non consideration/acceptance of comparability analysis as documented in the transfer pricing study report Erred in making transfer pricing adjustment to its international transactions in the nature of provision of software development services and sales support services and not considering/ accepting the comparability analysis documented in the Transfer Pricing study report for benchmarking analysis.
2. Non applicability of transfer pricing provisions to software development unit of the Appellant which is enjoying tax holiday under section 10A of the Act.
Erred in applying transfer pricing provisions to software development unit (i.e. provision of software development services) of the Appellant which enjoys tax holiday under section 10A of the Act.
3. Non consideration of contemporaneous data Erred in conducting arm's length analysis based on information of comparable companies available at the time of transfer pricing assessment but not available at the time of compliance with the transfer pricing regulations by the Appellant.
4. Non consideration of multiple year data Erred in not considering multiple year data i.e. data for Financial Year (hereinafter referred to as 'FY') 2006-07 and two prior years, in respect of comparable companies for determining the arm's length price of international transactions pertaining to provision of software development services, IT enabled services and sales support services.
5. Use of different turnover filter for identification of comparable companies.
Erred in applying a turnover filter of Rs.25 crores to Rs 200 crores, as against turnover filter of Rs.25 crores to Rs.125 crores applied by the appellant, for identifying additional companies as comparable in relation to provision of software development service and accordingly, accepting companies having turnover greater than Rs.125 crores.
6. Rejection of certain comparable companies identified by the Appellant in the transfer pricing study report.
Erred in rejecting certain companies from the comparable set identified by the appellant in respect of international transactions pertaining to provision of software development services, IT enabled services and sales support services.
7. Accepting certain companies as comparable for FY 2006-07 in relation to provision of software development services, IT enabled services and sales support services Erred in accepting certain additional companies as comparable to the Appellant in relation to provision of software development services, IT enabled services and sales support services.4 ITA No.1646/PUN/2011
8. Following inconsistent approach for rejecting / accepting companies as comparable in relation to sales support activity of the appellant.
Erred in adopting inconsistent approach of applying the functional comparability criteria while rejecting /accepting companies as comparable for the purpose of the appellant's sales support activity.
9. Erred in computing relief for working capital adjustment in relation to provisions of software development services.
Erred in computing relief for working capital adjustment in relation to provisions of software development services.
10. Erred in computing relief for working capital adjustment in relation to provisions of IT enabled services.
Erred in computing relief for working capital adjustment in relation to provisions of IT enabled services.
11. Adjustment for differences on account of functional and risk profile of comparable companies vis-a-vis the Appellant Erred in comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies vis-a-vis the risk profile of the Appellant.
12. Applicability of +/-5% range Erred in computing the transfer pricing adjustment from the arm's length price without giving benefit of the option available to the Appellant under proviso to section 92C(2) of the Act of adopting as arm's length price, a price which varies by not more than 5 per cent from the arm's length price.
II Grounds of appeal in respect of disallowance / additions other than transfer pricing adjustment.
13. Computation of Section 10A deduction by reducing telecommunication expenses and foreign currency expenses from export turnover (without excluding the same from total turnover of the STP unit).
Erred in holding that telecommunication expenses of Rs.7,514,407 and foreign currency expenses of Rs.12,288,308 should be reduced from the export turnover of the undertaking of the Appellant eligible for claiming the deduction under Section 10A of the Act, and without having any material to the contrary on record, in concluding that the Appellant has rendered technical services outside India without appreciating the facts of the case.
Without prejudice to the above, in case, it is held that above expenses incurred by the appellant for the subject Assessment Year should be excluded from the 'export turnover' of the undertaking eligible for deduction under Section 10A of the Act, such amount should also be excluded from the 'total turnover' of the undertaking for computing the deduction under Section 10A of the Act on the principle of parity.
14. Computation of interest under Section 234D of the Act.5 ITA No.1646/PUN/2011
Erred in computing interest payable under Section 234D of the Act on the amount of refund granted (in September 2009) by taking wrong interest rate.
III Other grounds of appeal
15. Initiation of penalty proceedings under sec 271(1)(c) of the Act Without prejudice to the above grounds, even if the adjustments are sustained, the learned AO erred in initiating penalty proceedings under section 271(1)(c) without appreciating the facts that, proposed transfer pricing adjustment to the international transactions of the appellant as well as other addition are on account of difference of opinion as to application of selection criterion for selection of comparable companies, incoherent approach, interpretation of the provisions, etc.
16. Erroneous levy of interest under section 234B of the Act.
Without prejudice to the above grounds, even if the adjustments are sustained, the learned AO erred in levying interest under section 234B of the Act, as applicable, on account of unanticipated additions made to the total income of the appellant on account of transfer pricing adjustment and corporate tax related additions."
3. Assessee thereafter vide letter dt.11.12.2012 raised an additional ground which reads as under:
"On the facts and in the circumstances of the case, the learned TPO and consequentially the learned AO have erred in computing relief for working capital adjustment in relation to provision of sales support services by the appellant."
4. At the outset, Ld.A.R. submitted that most of the grounds raised in the present appeal are similar to the grounds raised in assessee's appeal in A.Y. 2006-07 and which has been decided by the Hon'ble Tribunal. He further submitted that ground No.15 is with respect to initiation of penalty proceedings u/s 271(1)(c) of the Act in the present appeal which is premature. In view of the aforesaid submission of the Ld.A.R., the ground is dismissed.
5. Ground No.1 being general in nature, requires no adjudication. 6 ITA No.1646/PUN/2011
6. Ground No.2 is with respect to the applying the transfer pricing provisions to software development unit which enjoys tax holiday u/s 10A of the Act.
6.1. Ld.A.R. fairly submitted that identical issue arose in assessee's own case in A.Y. 2006-07 and the issue was decided against the assessee by the Tribunal vide para No.52 of the order dated 16.03.2016. He placed on record the copy of the aforesaid decision. He thereafter submitted that the issue being identical to that of A.Y. 2006-07 the same may be decided accordingly. Ld. D.R. did not object to the aforesaid submission of Ld.A.R.
7. We have heard the rival submissions and perused the material on record. It is assessee's contention that when companies are entitled to deduction u/s 10A of the Act, no adjustment on account of transfer pricing may be made. We find that identical issue arose in assessee's own case in A.Y. 2006-07 wherein the Co-ordinate Bench of the Tribunal decided the issue against the assessee by observing as under :
"50. Another proposition raised by the learned Authorized Representative for the assessee was that where the companies are entitled to deduction under section 10A of the Act, no adjustment on account of transfer pricing is to be made. Reliance in this regard was placed upon the ratio laid down by Mumbai Bench of Tribunal in DCIT Vs. M/s. Tata Consultancy Services Ltd. in ITA No.7513/Mum/2010 and CO No.216/Mum/2010, relating to assessment year 2005-06, order dated 04.11.2015.
51. The learned Departmental Representative for the Revenue on the other hand, pointed out that if there is no question of any TP adjustment, then why the section 10A of the Act itself provides that no such deduction is to be allowed on TP adjustment. The learned Departmental Representative for the Revenue pointed out that the Special Bench in Aztec Software and Technology Services Ltd. Vs. ACIT reported in 294 ITR AT 32 followed by Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. in ITA No.393/PN/2007 , relating to assessment year 2003-04, order dated 19.05.2009 has taken a view that the ratio is squarely applicable.
52. After considering contentions of both the learned Authorized Representatives, we find that the issue in the present appeal is decided by Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. (supra). A contrary 7 ITA No.1646/PUN/2011 view has been taken by Mumbai Bench of Tribunal in DCIT Vs. M/s. Tata Consultancy Services Ltd. (supra). In view of the ratio laid down by the coordinate Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. (supra), we find no merit in the claim of assessee. Further, in any case, the provisions of the Act are clear in not allowing any deduction on any TP adjustment made under sections 10A and 10B of the Act. Where the section itself provides that no deduction under section 10A of the Act is to be allowed on any transfer pricing adjustment, then corollary to the same is that transfer pricing adjustment can be made in the case of concerns which are claiming deduction under sections 10A and 10B of the Act. Accordingly, we find no merit in the claim of assessee and the same is rejected."
Since the facts for the year under consideration are identical to that of earlier years, as admitted by both the parties before us, we therefore following the same reasoning as given by the Co-ordinate Bench of the Tribunal while deciding assessee's appeal in A.Y. 2006-07 and for similar reasons dismiss the ground of assessee. Thus, ground No.2 is dismissed.
8. Ground Nos.3 and 4 are considered together. It is with respect to non-consideration of contemporaneous nature of data and non- consideration of multiple year's data.
8.1. The TPO while selecting the final set of comparable companies for determination of the ALP of international transactions of the assessee had considered the data of the comparables only for F.Y 2006-07. it was assessee's contention that TPO was not justified in using the financial information of the comparables for F.Y 2006-07 only and which were not available with the assessee while preparing the documentation report. It was assessee's contention that data should be contemporaneous and data of multiple year should be used as it would capture the market cycle and would also reduce the distortion of financial results of an anomalous year. The submissions of the assessee was not acceptable to TPO as according to him using of multiple year's data was not visualized in Rule 10B(4) of the 8 ITA No.1646/PUN/2011 Income Tax Act. The DRP also upheld the action of TPO. Aggrieved by the order of AO who had followed the directions of DRP, assessee is now before us.
9. Before us, at the outset, Ld AR submitted that the issue in the present grounds is covered against the assessee by the various decisions of Tribunals. He therefore submitted that the issue be decided accordingly. Ld DR did not controvert the submissions of Ld AR and supported the order of lower authorities.
10. We have heard the rival submissions and perused the material on record. We find that the TPO while deciding the issue against the assessee has relied on the various decisions of Tribunal cited under para 10.10 of the DRP of the order. Before us also Ld AR has submitted that the issue is covered against the assessee by various decisions. In view of the foregoing, we find no reason to interfere with the order of DRP and thus these grounds are dismissed.
11. Ground No 5 is with respect to applying turnover filter of Rs 25 crores to Rs 200 crores as against turnover filter of Rs 25 crores to Rs 125 crores applied by assessee.
11.1. TPO noticed that the assessee while selecting the comparables for the purpose of benchmarking had led down criteria with turnover of Rs.25 crores to Rs.125 crores though the turnover of the assessee from rendering of software services was Rs. 109.11 crores. TPO did not agree with the assessee's reasoning for selecting the comparables on the basis of turnover filter laid down by the assessee. He considered the companies with the turnover between Rs.25 crores to Rs.200 crores to be more appropriate and 9 ITA No.1646/PUN/2011 based on the aforesaid filters, proceeded to select the comparable companies. Aggrieved by the aforesaid action of TPO, assessee carried the matter before DRP who vide para 11.1 of the order upheld the action of TPO in enhancing the upper filter limit for selecting comparables at Rs 200 crores. Aggrieved by the order of AO/DRP, assessee is now before us.
12. Before us, Ld AR reiterated the submissions made before lower authorities and further submitted that in AY -2006-07 when the Turnover of the assessee from software services was Rs.82 crore, assessee had applied the turnover filters of Rs.25 crores to Rs.100 crores for selection of comparables. Following the same reasoning and logic for the year under consideration when the turnover of the assessee from software services is Rs 109 crores, assessee had applied the turnover filters of Rs.25 to Rs.125 crores. He therefore submitted that there was no error in the action of assessee in applying the turnover filters. Ld DR on the other hand supported the order of lower authorities.
13. We have heard the rival submissions and perused the material on record. The issue in the present ground is the application of turnover filters for selection of comparable companies for benchmarking the international transactions. We find that for A.Y 2006-07, the turnover of the assessee from software services was Rs 82 crores and it had applied the turnover filter of Rs.25 crore to Rs.100 crores as against which the TPO had applied the turnover filter of Rs.25 to Rs.150 crores and the action of the TPO was upheld by the co-ordinate Bench of Tribunal. For the year under consideration, the turnover of the assessee from software services is Rs.104 crores and assessee has adopted the turnover filter criteria of Rs.25 crore to Rs.125 crores as against which the TPO has adopted the turnover filter 10 ITA No.1646/PUN/2011 criteria of Rs.25 crores to Rs.200 crores. For the reasoning as followed by the coordinate bench of tribunal in assessee's own case for A.Y 2006-07 and for similar reasons we find no infirmity in the action of TPO in applying the turnover criteria filters. We thus uphold the order of TPO and thus this ground of assessee is dismissed.
14. Ground Nos.6 to 8 and 12 are with respect to TP adjustments:
14.1 It was noticed that assessee has entered into following international transactions with related parties :
Sr. No Nature of Transactions Amt (Rs) Method
1 Rendering of Software Development Services 109,11,51,865 TNMM
2 Rendering of ITES 3,96,74,749 TNMM
3 Rendering of Sales Support Services 1,30,24,261 TNMM
114,38,50,875
15. Rendering of Software Development Services :
With respect to Software Development Services, TPO noticed that during the year under consideration assessee had rendered Software Development Services worth Rs.109,11,51,865/- to its Associate Enterprises (AE's) and assessee had selected TNMM method as the most appropriate method to benchmark international transactions with operating profits (OP)/operating cost (OC) as Profit Level Indicator (PLI). For benchmarking the international transactions, assessee had identified 9 companies as being comparable to the assessee. Based on the weighted average margins of the 9 comparables, the arithmetic mean profit margin was determined at 15.04% as against the profit margin of the assessee at 10.15% and thus the assessee stated that its transactions with its AE's were at arm's length. TPO for the reasons given in the order found the 11 ITA No.1646/PUN/2011 following 7 companies selected by the assessee to be not comparable with the assessee and he thus excluded the following 7 companies.
• Aztecsoft Ltd,
• Lanco Global Systems Ltd,
• Goldstone Technologies Ltd,
• Maars Software International Ltd,
• Melstar Information Technologies Ltd,
• Orient Information Technology Ltd,
• Quintegra Solutions Ltd
He thereafter concluded that only 2 companies out the original 9 companies selected by the Assessee, namely Helios and Matheson Information Technology Ltd and R.S.Software (India) Ltd, to be comparable with the assessee. He noticed that the arithmetic mean of the operating profits of the final set of comparable comes to 24.48% as against the margin of the assessee of 10.15%. He accordingly on the basis of adjusted mean of the operating margin of the comparables worked out the upward adjustment to the international transactions relating to software development services at Rs. 14,19,99,342/- and made its addition.
16. Rendering of IT Enabled Services (ITES) :
With respect to IT Enabled Services (ITES), TPO noticed that during the year under consideration assessee had rendered ITES worth Rs.3,96,74,749/- to its Associate Enterprises (AE's) and assessee had selected TNMM method as the most appropriate method to benchmark international transactions with operating profits (OP)/operating cost (OC) as Profit Level Indicator (PLI). For benchmarking the international transactions, assessee had identified 9 companies as being comparable to the assessee. Based on the weighted average margins of the 9 comparable companies, the arithmetic mean margin of those comparable companies 12 ITA No.1646/PUN/2011 was determined at 11.53% as against the profit margin of the assessee at 11.76% and thus the assessee stated that its transactions with its AE's were at arm's length. TPO for the reasons given in the order found the following companies 5 selected by the assessee to be not comparable with the assessee and thus excluded the following 5 companies.
• Ace Software Ltd, • BNR Udyog Ltd, • Fortune Infotech Ltd, • Genesys International Corporation Ltd & • Tricom India P Ltd., He thereafter considered Informed Technologies India Ltd and Maple E Solutions Ltd to be comparable to the assessee and included it. He thus out of the 9 companies originally selected by the assessee to be comparable, rejected 5 companies and included 2 companies as comparable to assessee and held the 6 companies to be comparable. He noticed that the arithmetic mean of the operating profits of the final set of 6 comparable companies comes to 22.20% as against the operating margin of the assessee of 11.76%. He accordingly, on the basis of adjusted mean of the operating margin of the comparables, worked out the upward adjustment to the international transactions relating to ITES segment at Rs.37.07,022/- and made its addition.
17. Rendering of Sales Support Services :
With respect to Sales Support Services, TPO noticed that during the year under consideration, assessee had rendered Sales Support Services worth Rs.1,30,24,261/- to its Associate Enterprises (AE's) and assessee had selected TNMM method as the most appropriate method to benchmark 13 ITA No.1646/PUN/2011 international transactions with operating profits (OP)/operating cost (OC) as Profit Level Indicator (PLI). For benchmarking the international transactions, assessee had identified 11 companies as being comparable to the assessee. Based on the weighted average margins of the 11 comparables, the arithmetic mean profit was determined at 18.05% as against the profit margin of the assessee at 10.34%. and thus the assessee stated that its transactions with its AE's were at arm's length. TPO for the reasons given in the order found the following 5 companies selected by the assessee to be not comparable with the assessee and thus excluded them:
• Cyber Media Events Ltd, • Educational Consultants Ltd, • Electronica Machine Tools Ltd, • NTPC Electric Supply Company Ltd, • Times Infotainment Media Ltd He thereafter concluded that only 6 companies to be comparable with the assessee. He noticed that the arithmetic mean of the operating profits of the final set of 6 comparable companies comes to 24.19% as against the margin of the assessee of 10.34%. He, accordingly on the basis of adjusted mean of the operating margin of the comparables, worked out the upward adjustment to the international transactions relating to Sales Support Services at Rs.16,34,803/- and made its addition.
18. Aggrieved by the order of TPO whereby certain companies were included / excluded by him while determining the upward adjustment, assessee carried the matter before DRP. DRP upheld the order of TPO. Aggrieved by the order of AO/DRP, assessee is now before us.
19. Before us, Ld AR reiterated the submissions made before lower authorities.
14ITA No.1646/PUN/2011
20. With respect to Software Development Services, assessee seeks inclusion of Lanco Global Systems Ltd, Maars Software International Ltd, Quintegra Solutions Ltd as comparable company and exclusion of Helios and Matheson Informational Technology Ltd.
a) With respect to Lanco Global Systems Ltd., (Lanco), Ld AR submitted that for excluding Lanco, TPO had relied upon the extract from the "Outlook and Opportunities" section of Management Discussion and Analysis for F.Y 2006-07. He submitted that the section which has been relied upon by TPO relates to the future goals of the Company and opportunities that the company is looking for and based on the future outlook and possibilities, the company cannot be said to be not comparable with the Assessee. On the contrary, Ld AR pointing to the notes to accounts for F.Y 2006-07 submitted that the Company is engaged in development of computer software and services and as per Part IV of Schedule VI of the Companies Act which forms part of the annual account of the company, "Software Services" is its principal business. He further submitted that Lanco Global Systems was considered to be comparable by CIT(A) for AY 2005-
06 by noting that there was nothing in the Annual Report to indicate that the company carried out business other than development of computer software and rendering of services and that against the order of CIT(A), Revenue is not in appeal. He further submitted that Lanco was considered as comparable by TPO for AY 2008-09. He therefore submitted that Lanco Global 15 ITA No.1646/PUN/2011 should be considered to be a comparable company of the assessee.
b) With respect to inclusion of Maars Software International Ltd as a comparable, Ld AR pointing to its Annual Accounts placed in the paper book submitted that its Auditors Report states that the Company is engaged in the activities of software development and training and does not carry any inventory. He further submitted that under Part IV of Schedule VI attached to the annual accounts, "Software Development" has been identified as the principal business activity of the Company. He further submitted that in the Profit and loss Account for F.Y 2006-07, the expenditure side includes "Software Development Expenses" as one of the heads. He further placed reliance on the decision of Pune Tribunal in the case of John Deere India Ltd Vs ACIT (ITA no 1319/PN/2011) the copy of which is placed in the paper book. He therefore submitted that Maars Software International Ltd be considered to be a comparable company.
c) With respect to inclusion of Quintegra Solutions Ltd as a comparable, Ld AR pointing to its Annual Accounts placed in the paper book submitted that the Company is into provision of Software Development services as is evident from the Management Discussion and Analysis. He further pointing to Schedule 15 of the Profit and Loss account which is placed in the paper book pointed out that "Software services" is the heading shown for breakup of revenue earned by it. He further submitted that under Part IV of Schedule VI attached to the annual accounts, "Software 16 ITA No.1646/PUN/2011 Development" has been identified as the principal business activity of the Company. He further placed reliance on the decision of Pune Tribunal in the case of John Deere India Ltd Vs ACIT (ITA no 1319/PN/2011) the copy of which is placed in the paper book. He further submitted that it was considered as comparable by DRP for AY 2008-09 vide order dated 5th Sept 2010. He therefore submitted that Quintegra Solutions Ltd be considered to be a comparable company.
d) With respect to exclusion of Helios and Matheson, Ld AR submitted that its turnover in FY 2006-07 is Rs 183 crores as compared to the turnover of the Assessee. He further submitted that Helios was rejected as a comparable by the Tribunal in Assessee's own case in AY 2006-07 on the ground of functional dissimilarity (onsite filter), In support of his contention he relied on the decision of John Derre India P Ltd Vs ACIT (ITA No 1319/Pn/2011) and PTC Software (India) P Ltd Vs ACIT (ITA No 1605/Pn/2011).
21. As far as inclusion and exclusion of comparables with respect to Provision of IT enabled services (ITES) are concerned, Ld AR seeks inclusion of Ace Software Exports Ltd and Genesys International Corporation Ltd and exclusion of Informed Technologies Ltd and Maple E Solutions Ltd, being the companies included by the TPO, from the final list of the comparables.
a) In support of his argument for exclusion of Informed Technologies Ltd, Ld AR submitted that the exclusion is sought for the reason that FY 2006-07 was an exceptional year 17 ITA No.1646/PUN/2011 of its operation in view of the fact that the sales had increased from Rs 214.24 lacs to Rs 498.88 lacs showing a growth of 133%. The operating profits turned positive to Rs 207.41 lacs in 2007 as against loss of Rs 44.89 lacs in 2006 and further there is steep fluctuation in margins from -44.21% (in FY 2005-06) to 34.30% (in FY 2006-07). He therefore submitted that in view of the aforesaid factual position, Informed Technologies cannot be considered to be a comparable company and for this proposition he relied on the decisions in the case of Cummins Turbo Technologies Ltd vs DDIT (ITA No 161 & 269/Pn/2013), Quark Systems P Ltd (132 TTJ 1).
b) With respect to exclusion of Maple E solutions Ltd, Ld AR submitted that it cannot be considered to be a comparable to Assessee as it is functionally not comparable since it is engaged in providing voice based services (i.e. provision of call centre services) whereas the Assessee is engaged in provision of non voice based services. In support of his contention that Maple is engaged in call centre activities, he pointed to the Director's report which is placed in the paper book. He pointing to its Profit and loss account submitted that the Income is from Call centre Services". He also placed reliance on the decision of Pune Bench in the case of Cummins Turbo Technologies Ld Vs DDIT (ITA No 161 & 269/Pn/2013) and the decision in the case Lubrizol Advanced Materials India P Ltd Vs DCIT (ITA No 2811/Ahd/2011). The Ld AR submitted that if Informed Technologies and Maple E solutions are excluded from the comparables, then the margin of the Assessee will be within 18 ITA No.1646/PUN/2011 +/-5% and therefore in terms of s. 92C(2) of the Act no adjustment would be required.
22. As far as inclusion and exclusion of comparables with respect to Provision of Sales support Services are concerned, Ld AR seeks inclusion of Cyber Media Events Ltd, Educational Consultants India Ltd, NTPC Electric Supply Co Ltd and exclusion of ICRA Online Ltd (IOL) from the final list of comparables.
a) The Ld AR submitted that though Assessee had initially included ICRA Online Ltd. (IOL) as a comparable in the TP study report but now wants its exclusion. The exclusion of IOL is sought because the year was an exceptional year of operation in view of the fact that it had earned margins of around 8.5% and 25.28% respectively in FY 2004-05 and FY 2005-06 from the comparable segment as against the margin of 63.33% resulting into substantial increase. He further submitted that the foreign exchange earnings have also taken a phenomenal jump of 1161%. He therefore submitted that IOL should be excluded and also placed reliance on the decision in the case of Honeywell Turbo Technologies (India) P Ltd Vs DCIT (ITA No 3/Pn/2012) and John Derre India P Ltd Cs ACIT (ITA No 1319/Pn/2011).
b) With respect to inclusion of Cyber Media Events Ltd, Educational Consultants India Ltd and NTPC Electric Supply Co Ltd, he submitted that these companies should be considered as comparables based on broader comparable set. 19 ITA No.1646/PUN/2011
23. Ld DR on the other hand supported the order of AO/TPO and DRP.
24. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to inclusion/exclusion of certain companies as comparables in the various segments.
24.1 We first proceed with Software development Services. Assessee before us seeks inclusion of Lanco Global Systems Ltd, Maars Software International Ltd, Quintegra Solutions Ltd as comparable company and exclusion of Helios and Matheson Informational Technology Ltd.
i. With respect to Lanco Global Systems Ltd., assessee before us has demonstrated that its principal business is "Software Services", it has carried out the business of development of computer software and rendering of services. We further find that Lanco was considered to be a comparable by the TPO in Assessee's own case in AY 2008-09 and further CIT(A) in AY 2005-06 had considered it to be a comparable and Revenue is not in appeal against the order of CIT(A). We therefore agree with the contention of the Ld AR that Lanco should be considered as comparable and therefore direct the TPO to consider it as a comparable company.
ii. With respect to inclusion of Maars Software International Ltd as a comparable company, before us, Ld AR with the help of the annual accounts has pointed out its principal business activity is "Software Development", it is engaged in the 20 ITA No.1646/PUN/2011 activities of software development and training. We further find that the co-ordinate Bench of Tribunal in the case of John Derre (supra) has held Maars Software to be in the business of software Development. Before us, Ld DR has not controverted the submissions made by Ld AR. We therefore direct TPO for the inclusion of Maars Software to be a comparable company. iii. With respect to the inclusion of Quintegra Solutions as a comparable company, before us Ld AR with the help of its Annual accounts has demonstrated that it is in the business of providing Software Development Services, Software Development has been identified as its principal business activity. We further find that in the case of John Derre (supra) for AY 2007-08 the co-ordinate Bench of tribunal has held it to be engaged in software Development. Before us, Ld DR has not controverted the submissions made by Ld AR. We therefore direct TPO for the inclusion of Maars Software to be a comparable company and therefore its inclusion as a comparable.
iv. With respect to the exclusion of Helios and Matheson as a comparable, we find that in Assessee's own case in AY 2006-07 it was rejected as a comparable by the co-ordinate Bench of Tribunal on account of functional dissimilarity. We further find that in the case of John Derre (supra) for AY 2007-08 on identical facts and relying on the decision of PTC Software (India) supra had held it to be as not a comparable company. Before us, Ld DR has not controverted the submissions made 21 ITA No.1646/PUN/2011 by Ld AR. We therefore direct TPO for the exclusion of Helios and Matheson to be a comparable company.
24.2. With respect to inclusion and exclusion of comparables with respect to Provision of IT enabled services, before us learned AR has submitted that if Informed Technologies and Maple E solutions are excluded from the comparables, then the margin of the Assessee will be within +/-5%. In view of the aforesaid submission we proceed to decide about the exclusion of the aforesaid two companies.
i. With respect to Informed Technologies, before us, Ld AR has demonstrated that FY 2006-07 was an exceptional year due to the fact that there was increase in sales by 133%, it had earned operating profits in the current year as against the loss and there are steep fluctuations in the margins earned by it. The aforesaid contentions of the Ld AR have not been controverted by Ld DR. We find that in the case of Cummins Turbo Technologies (supra) the co-ordinate Bench with respect to Informed Technologies had concluded that there were wide fluctuations in the margins earned by it over a period of time coupled with the fact that there was also wide fluctuation in the revenue generation during the year under consideration and past three years. It therefore held for its exclusion. In view of the aforesaid facts, we direct the exclusion of Informed Technologies as a comparable We therefore direct TPO for the exclusion of Informed Technologies as a comparable company. 22 ITA No.1646/PUN/2011 ii. With respect to Maple E Solutions, before us, Ld AR on the basis of Annual Accounts has demonstrated that it is engaged in call centre activities, its income is from call centre services whereas Assessee is engaged in providing non voice based services. In such a situation, we hold that Maple E solutions cannot be considered to be a comparable company in view of functional dissimilarity and therefore direct its exclusion.
25. Before us, Ld AR has submitted that if Informed Technologies and Maple E solutions are excluded from the comparables, then the margin of the Assessee will be within +/-5% and therefore in terms of Sec.92C(2) of the Act no adjustment would be required. We have herein above held the aforesaid two companies to be not comparable and directed its exclusion. In such a situation we do not find any reason to decide with respect to the inclusion of other companies.
26. With respect to inclusion and exclusion of comparables with respect to Sales Support services, before us learned AR has inclusion of Cyber Media Events Ltd, Educational Consultants India Ltd, NTPC Electric Supply Co Ltd and exclusion of ICRA Online Ltd (IOL) from the final list of comparables.
i. With respect to inclusion of Cyber Media Events Ltd, Educational Consultants India Ltd, NTPC Electric Supply Co Ltd, the Ld AR has not demonstrated as to how the functions and activities can be compared with that of the Assessee. We find that with respect to Cyber Media TPO on the basis of Directors Report has noted that it is primarily 23 ITA No.1646/PUN/2011 engaged in event business and therefore not comparable to Assessee. With respect to Educational Consultants, TPO on the basis of Directors Report has noted that the company is engaged in technical assistance, HRD and institutional development projects and therefore not comparable. With respect NTPC Electric supply Ltd, TPO has noted that it is engaged in implementation of rural electrification projects in India and therefore functionally different from the Assessee. Before us, Ld AR has not controverted the findings of TPO on the functional dissimilarity found with the Assessee Company. In such a situation we do not find force in the argument of the Ld AR that these companies should be considered to be comparable based on broader comparable set. In such a situation, we find no reason to interfere with the order of TPO/DRP of excluding the aforesaid 3 companies as comparable with the Assessee.
ii. With respect to the exclusion of IOL from the list of comparables, the Ld AR has pointed to phenomenal jump in foreign exchange earnings of 1161% making it to be an extraordinary year, with wide fluctuation in the margins earned in different years. We further find that the coordinate Bench of Tribunal in the case of Honeywell Turbo Technologies (supra) in the light of the Special Bench Decision of Tribunal in the case of Maersk Global Centres Vs ACIT (ITA No 7466/Mum/2012 order dtd 7.3.2014) has concluded that the profit margins in FY 2006-07 of 63.33% to be quite abnormal in relation to the profit margins of the preceding years and 24 ITA No.1646/PUN/2011 succeeding year, ratio of increase in employee cost to the increase in operating income to be fluctuating and the increase in sales to be disproportionate to the costs incurred. It therefore held that the operations for FY 2006-07 to be quite abnormal and therefore did not reflect a normal business trend and therefore was excluded from being a comparable. In view of the aforesaid facts, we direct the exclusion of IOL as a comparable company and thus direct the TPO to exclude it from comparables. Thus, ground Nos.6 to 8 and 12 are partly allowed.
27. Ground Nos.9, 10 and the additional ground are considered together. It is with respect to computation of relief for working capital adjustment in relation to provision for software development services, provision for IT enabled services and Sales Support Services. 27.1. During the course of TP proceedings assessee had asked for working capital adjustment with respect to provision for software development services, provision for IT enabled services and Sales Support Services which was denied by the TPO mainly for the reason that the assessee had not asked for working capital adjustment in the TP study report even with respect to the comparables selected by the assessee itself. Aggrieved by the order of TPO, assessee carried the matter before DRP who directed the AO/TPO to grant working capital adjustment.
28. Before us, Ld AR submitted that pursuant to the directions of DRP, AO had granted working capital adjustment but there is calculation error in the working by the AO/TPO. He submitted that in relation to software 25 ITA No.1646/PUN/2011 development services, AO/TPO worked out the margins at 24.48% as against 20.92% being the margins of comparable companies worked out by the assessee. Similarly while working the working capital adjustment in relation to provision of IT enabled services, the AO/TPO worked out the margins at 22.20% as against 19.65% being the margins of the comparable companies worked out by assessee. With respect to the Sales Support Services, the AO/TPO worked out the margins at 24.19% as against 21.92% being the margins of the comparable companies worked out by assessee. Ld AR therefore submitted that the AO/TPO be directed to consider the correct working capital adjusted operating margins of identified comparable companies for Software Development Services, IT enabled services and Sales Support Services. Ld DR did not controvert the submissions made by the AR but however supported the order of TPO.
29. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to granting of working capital adjustment. It is assessee's contention that pursuant to the directions of DRP, AO/TPO had worked out the working capital adjustment for Software Development Services, IT enabled services and Sales Support Services but AO/TPO has erred in working out the margins and has furnished the working made by AO/TPO and the correct working as per the Assessee. In view of the aforesaid submissions of Ld AR, we direct the AO/TPO to peruse the working furnished by the Assessee and consider the correct working capital adjusted operating margins of identified comparable companies for Software Development Services, IT enabled Services and Sales Support Services. The assessee is also directed to promptly furnish the required details called for by the TPO/AO. Needless to state that 26 ITA No.1646/PUN/2011 AO/TPO shall grant adequate opportunity of hearing to the assessee. Thus, these grounds of the assessee are allowed for statistical purposes.
30. Ground No.11 is with respect to adjustment on account of functional and risk profile of comparables vis-a-vis the assessee. 30.1. During the TP proceedings, assessee had asked for marketing risk adjustments and other risk adjustments to the operating margins of the comparables vis-a-vis the assessee. It was further submitted by the Assessee that it is a risk mitigated entity whereas the comparable companies were operating in a high risk exposed environment as they were not cost protected. The TPO rejected the claim of risk adjustment for the reasons stated in his order. Aggrieved by the order of TPO, assessee carried the matter before DRP who vide para no 17.3 upheld the order of TPO. Aggrieved by the order of DRP, assessee is now before us.
32. Before us, LD AR reiterated the submissions made before TPO/DRP and further submitted that Hon'ble DRP had not considered the submissions of the assessee and had merely brushed it aside by relying on the order of TPO. He submitted that since the assessee was pricing its services at Cost plus mark-up and the services were to its associate enterprises, there was no risks taken by the assessee. On the other hand the comparable companies selected are normal risk bearing entities. He submitted that the risk adjustments are as per the methodology prescribed by the various Benches of the Tribunal. He further submitted that on identical facts in assessee's own case for A.Y 2006-07, the Co-ordinate Bench of Tribunal for A.Y 2006-07 has in principle granted the risk adjustment to the assessee but for quantification the matter was remitted 27 ITA No.1646/PUN/2011 back to AO/TPO. He pointed to the relevant para of the decision and submitted that since there no change in the facts in the year under consideration and for AY 2006-07 then following the order of tribunal for AY 2006-07, the assessee be granted risk adjustment. Ld DR on the other hand supported the order of TPO and DRP.
33. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to not granting the risk adjustment to the assessee. Before us, it is Ld AR's submission that for AY 2006-07, the assessee was in principle granted the benefit of risk adjustment and that there are no change in the facts of the case under consideration and that of AY 2006-07. Before us, Revenue has not controverted the aforesaid submissions of the assessee. We find that the co-ordinate Bench of the Tribunal in assessee's own case for AY 2006-07 had in principle granted the benefit of risk adjustment by observing as under :
"44. We have heard the rival contentions and perused the record. The plea raised vide this proposition is the allowance of risk adjustment to the assessee. The assessee claims that its business model was such, wherein it is being reimbursed the services at cost plus mark-up and there was no possibility of incurring any losses since it was providing the services to its associate enterprises totally. With regard to the comparables, the claim of the assessee before us is that they are normal risk bearing entities and the TPO at no place has given a finding that comparable concerns picked up were risk mitigated. In such circumstances, various Benches of Tribunal in the case of captive service provider, are of the view that since captive service provider does not assume any risk or takes lesser risk as compared to the concerns, which undertake higher risk, then the risk adjustment is to be allowed. The learned Authorized Representative for the assessee in this regard has placed on record the methodology prescribed by Bangalore Bench of Tribunal in Philips Software Centre India Pvt. Ltd. Vs. ACIT (2008) 119 TTJ (Bang) 721. Further, the assessee has also submitted the risk adjustment to be made as per the methodology prescribed by Delhi Bench of Tribunal in M/s. Sony India (P) Ltd. Vs. DCIT (2008) 114 ITD 448. In view of the provisions of section 10B of the Act, we restore this issue back to the file of Assessing Officer / TPO to compute risk adjustment after affording reasonable opportunity to the assessee to work out and justify to the satisfaction of Assessing Officer, the risk adjustment it would be entitled to. We hold so. The issue raised is thus, allowed for statistical purposes."28 ITA No.1646/PUN/2011
34. Before us, no distinguishing feature in the facts of the case under consideration and that of earlier years has been pointed out by Revenue. Further, Revenue has also not placed any material to demonstrate that the order of the Tribunal in Assessee's own case of AY 2006-07 has been set aside/ stayed/ overturned by higher judicial forum. In view of the aforesaid facts and following the same reasoning of the coordinate Bench of tribunal in Assessee's own case for AY 2006-07 and with similar directions, we restore the issue back to the file of AO/TPO to grant the risk adjustment in accordance with law. Needless to state that AO/TPO shall grant adequate opportunity of hearing to the assessee. Thus, the ground of the assessee is allowed for statistical purposes.
In line with our directions hereinabove with regard to each segment, the AO/TPO shall determine ALP of each of the segment of international transactions.
35. Ground No.13 is with respect to computation of Sec.10A deduction by reducing telecommunication expenses and foreign currency expenses from export turnover.
35.1. During the course of assessment proceedings, AO noticed that assessee had incurred expenditure of Rs.1,22,88,308/- in foreign exchange for providing Technical Services outside India and Rs.75,14,407/- as telecommunication charges. The aforesaid expenses were deducted from export turnover and also from total turnover for the purpose of computing the deduction u/s 10A of the Act. The assessee was asked to explain as to why the aforesaid expenditure should not be excluded from the "export turnover" for computing deduction u/s 10A of the Act. The assessee made a detailed submission and it was inter-alia submitted that the expenditure for telecommunication charges and expenses for providing technical 29 ITA No.1646/PUN/2011 services outside India were not separately charged to the customers and thus expenses do not form "export turnover". It was thus submitted that the telecommunication expenses incurred by assessee should not be reduced from export turnover while computing the deductions u/s 10A of the Act.
36. Before AO, an alternate submission was made that if the aforesaid expenses are excluded from "export turnover", the same should be excluded from the "total turnover" as well. The aforesaid submission of the assessee was not found acceptable to AO. AO noted that assessee was raising bills on the basis of cost plus method and therefore it is based on total cost incurred by the assessee. He was therefore of the view that the expenditure incurred including the telecommunication charges which were embedded and factored in the bills raised against the services provided to the customers. AO therefore concluded that assessee is providing technical services outside India for which it is incurring expenditure in foreign currency. The alternate plea of assessee for excluding the expenses from export turnover and total turnover was also not found acceptable to AO. AO therefore excluded the telecommunication charges of Rs.75,14,407/- and expenses incurred for providing technical services outside India in foreign currency of Rs.1,22,88,308/- from 'export turnover' for working out the exemption and thereafter worked out the exemption u/s 10A of the Act at Rs.16,31,68,953/- as against the assessee's claim of Rs.16,60,77,251/- and thus disallowed the excess claim to the extent of Rs.29,08,298/-. Aggrieved by the order of AO, assessee carried the matter before DRP, who vide order dt.29.09.2011 upheld the order of AO by observing as under :
"19.3 Certain expenses such as freight, tele-communication charges etc. have been specifically excluded from "Export Turnover" under clause III of the Explanation (2) to section 10B. If the Legislature intent where to effect exclusion of identical amounts from "Total Turnover", then the 30 ITA No.1646/PUN/2011 same would have been specifically provided for / mandated in this section. That is not the 'case. In the circumstances, doing so would amount to imputing and interpretation to the statutory provisions where such interpretations are not warranted' in the view of the provisions being unambiguous. No doubt, in certain cases courts have held for exclusion of certain items of receipts both from the numerator as well as the denominator. Exclusion from the sales tax and excise duty from export turnover for the purpose of section 80HHC of the I.T. Act, 1961 is a case in point. However, it is pertinent to mention that such issues had to be decided on interpretation as the statute did not specifically provide for the exclusion or inclusion of receipts. In the present case, exclusion of telecommunication charges from export turnover has been specifically provided whereas exclusion thereof from total turnover has not been specifically provided. Therefore, as already mentioned, the claim of the assessee in this matter cannot be routinely accepted. In view of above, no interference to the order of TPO/AO is called for on this ground.
Aggrieved by the order of AO pursuant to directions of DRP, assessee is now in appeal before us.
37. Before us, Ld.A.R. reiterated the submissions made before lower authorities and further submitted that CBDT vide Circular No.4 of 2008 dt.14.08.2018 after considering the decision of Hon'ble Apex Court in the case of CIT Vs. HCL Technologies Limited (Judgment dated 24.04.2018) had clarified the freight, telecommunication charges and insurance expenses are to be excluded both from 'total turnover' and 'export turnover' while working out the deduction u/s 10A of the Act. It has further clarified that the expenses incurred in foreign exchange for providing technical services outside India are to be excluded from both "export turnover" and "total turnover" while computing deduction admissible u/s 10A of the Act. He placed on record the copy of the aforesaid Circular. He therefore submitted that in view of the aforesaid CBDT Circular, which is binding on the Revenue authorities, the telecommunication charges and expense incurred for freight and insurance have to be excluded from both 'export turnover' and 'total turnover' for working out the deduction u/s 10A of the Act. Ld.D.R. did not controvert the submissions made by Ld.A.R. but however supported the order of lower authorities. 31 ITA No.1646/PUN/2011
38. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to computation of deduction u/s 10A of the Act. We find that AO while computing the deduction u/s 10A of the Act had reduced the telecommunication charges and expenditure in foreign currency from only 'export turnover' but the same was not excluded from 'total turnover'. We find that CBDT vide Circular No.4/2018 dated 14.08.2018 in para Nos.5 and 6 has clarified as under :
"5. The issue has been examined by the Board and it is clarified that freight, telecommunication charges and insurance expenses are to be excluded both from "export turnover" and "total turnover", while working out deduction admissible under section 10A of the Act to the extent they are attributable to the delivery of articles or things or computer software outside India.
6. Similarly, expenses incurred in foreign exchange for providing the technical services outside India are to be excluded from both "export turnover" and "total turnover" while computing deduction admissible under section 10A of the Act."
In view of the aforesaid CBDT's Circular, which is binding on Revenue authorities, we are of the view that the aforesaid expenses have to be excluded both from 'export turnover' and 'total turnover' while computing deduction u/s 10A of the Act. We thus, direct accordingly. Thus, the ground of the assessee is allowed.
39. With respect to ground No.14, which is with respect to interest u/s 234D of the Act, Ld AR submitted that AO has wrongly computed the interest and that while calculating interest u/s 234D of the Act, AO had charged interest @ 1% instead of correct rate of 0.5% as prescribed u/s 234D(1) of the Act. He further submitted that an application has been made u/s 154 of the Act before the AO which has not yet been disposed of. He therefore submitted that necessary directions may be given to the AO to 32 ITA No.1646/PUN/2011 compute the correct interest. Ld DR did not controvert the submissions made by Ld AR.
40. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to computation of interest u/s 234D. It is Ld AR's submission that there is error in the computation of interest u/s 234D and therefore an application u/s 154 of the Act has been made before the AO and the same is yet to be disposed. In view of the aforesaid submission of Ld AR, we direct the AO to compute the interest in accordance with law and pass the necessary orders. Thus, this ground of the assessee is allowed for statistical purposes.
41. In the result, the appeal of the assessee is partly allowed.
Order pronounced on 1st day of March, 2019.
Sd/- Sd/-
(SUSHMA CHOWLA) (ANIL CHATURVEDI)
या यक सद!य / JUDICIAL MEMBER लेखा सद!य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 1st March, 2019.
Yamini
आदे श क# $ त&ल'प अ(े'षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. CIT(A)-13, Pune.
4. Pr. CIT-5, Pune.
5 "वभागीय %त%न&ध, आयकर अपील य अ&धकरण, "बी" / DR, ITAT, "B" Pune;
6. गाड+ फाईल / Guard file.
आदे शानस ु ार/ BY ORDER // True Copy // व-र.ठ %नजी स&चव / Sr. Private Secretary आयकर अपील य अ&धकरण ,पण ु े / ITAT, Pune.