Income Tax Appellate Tribunal - Hyderabad
Ito, Ward-2(1), Hyderabaad, Hyderabad vs Intoto Software India Private Limited, ... on 31 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
ITA No. Asst. Year Appellant Respondent
The Income Tax M/s. Intoto
1921/Hyd/14 2010-11 Officer, Software (India)
Ward-2(1) Private Limited
HYDERABAD HYDERABAD
[PAN: AAACI7205G]
M/s. Intoto The Income Tax
25/Hyd/15 2010-11 Software (India) Officer,
Private Limited Ward-2(1)
HYDERABAD HYDERABAD
[PAN: AAACI7205G]
For Revenue : Smt. G. Aparna Rao, CIT-DR
For Assessee : Shri Abhishek Murali, AR
Date of Hearing : 19-12-2016
Date of Pronouncement : 31-01-2017
ORDER
PER B. RAMAKOTAIAH, A.M. :
These are cross-appeals by Assessee and Revenue against the order of the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C of the Income Tax Act [Act] consequent to the directions given by the Dispute Resolution Panel [DRP], Hyderabad, dated 29-09-2014. Assessee is aggrieved on the transfer pricing adjustments made and Revenue is also aggrieved on some of the exclusions of comparables by the DRP and working of deduction u/s. 10A of the Act.
:- 2 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
2. Briefly stated, assessee provides software development services to its Associated Enterprise [AE], Intoto LLC in the areas of network security and embedded systems. It is a captive risk free service provider and only undertakes development (coding of embedded software). Intoto LLC, USA holds 99.82% of shares in M/s. Intoto Software India Pvt. Ltd. This unit is also registered with the Software Technology Parks of India. During the year, it has received operating receipts to the extent of Rs. 29.13 Crores and returned income of Rs. 67,34,480/- after claiming deduction u/s. 10A amounting to Rs. 3,92,54,019/-. As assessee's transactions are with its AE alone, the Transfer Pricing Officer [TPO] referred the case u/s. 92CA(1) of the Act for determination of Arm's Length Price [ALP] for the year. The TPO after considering assessee's TP study rejected the same stating that assessee has used inappropriate filters and also multiple year data and undertook the exercise afresh. TPO has selected 18 companies as comparable companies having an adjusted margin of 23.30% after providing negative working capital adjustment. Based on the above on an operating cost of Rs.25,83,03,352/-, the ALP was arrived at Rs. 31,84,88,033/-. As the price received was less than that, TPO proposed an adjustment u/s. 92CA at Rs. 2,71,82,139/-. Consequent to the above order dt. 24-09-2013, the AO issued draft assessment order on 30-12-2013. Assessee preferred objections before the DRP which after considering various objections, accepted that two comparable companies i.e., Infosys Technology Ltd., and Kals Information Systems Ltd (Seg) are not comparable to assessee functionally. Therefore, out of the 18 companies selected by the TPO as comparables, the final list after the DRP directions, has only 16 companies whose adjusted margin was arrived at :- 3 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., 21.91%. The DRP also directed that communication expenses to an extent of Rs. 22,28,977/- reduced from export turnover while calculating deduction u/s. 10A should also be reduced from the total turnover and directed the AO to re-compute the deduction u/s. 10A. Revenue is aggrieved on the above two directions of the DRP in favour of assessee, whereas assessee is aggrieved on the adjustments so made u/s. 92CA rejecting various objections raised by it before authorities.
3. The final list of comparables after the DRP order is as under:
Sl. Company Name Adjusted
No. Margin
(in %)
1. Avani Cimcon Technologies Ltd 5.00
2. CAT Technologies Ltd 8.80
3. Comp-U-Learn Tech India Ltd 16.83
4. E-Infochips Bangalore Ltd 69.08
5. Evok Tech 21.76
6. E-Zest Solutions Ltd 23.80
7. Kuliza Tech 27.15
8. L&T Infotech Ltd 23.53
9. Mindtree Ltd (Seg) 21.32
10. Persistent Systems & Solutions Ltd 11.74
11. R S Software (India) Ltd 13.18
12. Sasken Communication Technologies Ltd 27.68
13. Tata Elxsi Ltd (Seg) 18.36
14. Thinksoft Global Services Ltd 11.59
15. Zylog Systems Ltd 17.61
16. Persistent Systems Ltd 33.07
4. Assessee in its appeal has raised 13 grounds and one additional ground on the negative working capital adjustment made by the TPO. Ground Nos. 1, 2, 3 & 13 are general in nature which does not require any specific adjudication.
:- 4 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
5. Ground No. 4 is pertaining to adjustment of foreign exchange loss as operating in nature while computing net margin of assessee under Transactional Net Margin Method [TNMM]. However, this ground is not pressed as the foreign exchange loss/gain arising out of assessee's operating transactions foreign exchange loss/gains are considered as part of operating margins in various other cases. Accordingly, this ground is rejected.
6. Ground No. 5 pertains to selection of comparable companies. Out of the 16 companies which finally selected by the AO/TPO as comparable companies, three companies i.e., Sr. No. 9. Mindtree Ltd (Seg); Sr. No. 11. R S Software (India) Ltd; Sr. No. 14 Thinksoft Global Services Ltd., are assessee's own selections in its TP study and accordingly has no objection for inclusion of the above companies. In addition, assessee is also not objecting to companies listed at :
1. Avani Cimcon Technologies Ltd.,
2. CAT Technologies Ltd.,
5. Evok Tech
6. E-Zest Solutions Ltd.,
7. Kuliza Tech
10.Persistent Systems & Solutions Ltd.,
13.Tata Elxsi Ltd (Seg)
15.Zylog Systems Ltd.,
7. Assessee has objected to the following comparables in Ground No. 5:
i. Sr.No. 3. Comp-U-Learn Tech India Ltd., ii. Sr.No. 4. E-Infochips Bangalore Ltd., :- 5 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., iii. Sr.No. 12. Sasken Communication Technologies Ltd., iv. Sr.No. 16. Persistent Systems Ltd., 7.1. During the course of arguments even though assessee has objected to Mindtree Ltd (Seg), L&T Infotech Ltd. in the ground, Assessee's Counsel has not pressed these companies, accordingly, the ground raised to that extent objecting to the above two companies are considered as withdrawn. Assessee is mainly objecting to four companies E-Infochips Bangalore Ltd., Sasken Communication Technologies Ltd., Persistent Systems & Solutions Ltd. and Comp-U-learn Tech india ltd.,
8. We have considered the objections from the Ld. Counsel and also from the Ld.DR and analysed the following companies:
8.1.1. E-Infochips Bangalore Ltd:
Assessee's objection is that segmental data is not available and there is shift of focus from software development to consultancy. It was stated that this company was excluded in the following decisions of the ITAT:
a) D.E. India Software Pvt. Ltd., (AY.2010-11) in ITA No. 304/Hyd/2015;
b) Pegasystems Worldwide India Pvt. Ltd., (AY.2010-11) in ITA No.1758/Hyd/2014 & ITA No. 1936/Hyd/2014 (AY.2010-11);
c) Allscripts (India) Pvt. Ltd in ITA No. 771/Ahd/2014 (AY.2009-
10);
:- 6 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
8.1.2. The Co-ordinate Bench in the case of D.E. India Software Pvt. Ltd., (AY.2010-11) in ITA No. 304/Hyd/2015 (supra) has excluded the said company by stating 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 analysed 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 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:
:- 7 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
"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 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".
8.1.3. Respectfully following the same, AO/TPO is directed to exclude the said company from the list of comparables as it was not functionally similar.
:- 8 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
8.2.1. Sasken Communication Technologies Ltd:
The objection of assessee is that it is functionally different and it outsources its business and there is presence of intangible assets also, moreover, the said company also has very high turnover, one compared to assessee's turnover. It was submitted that this company was excluded by the Co-ordinate Benches in the following cases:
a) D.E. India Software Pvt. Ltd., (AY.2010-11) in ITA No. 304/Hyd/2015;
b) Trident Microsystems India Private Limited (AY.2010-11) in ITA No. 192/Bang/2015; 8.2.2. The Co-ordinate Bench in the case of D.E. India Software Pvt. Ltd., (AY.2010-11) in ITA No. 304/Hyd/2015 (supra) has excluded the said company by stating as under:
"Sasken Communication Technologies Ltd:
13. This comparable was not objected to either before TPO or before DRP. Objections were raised before us on the comparability of this company on the reason that this company is having product sales and also a provider of telecommunication software services. Since there is no break-up of cost available, Assessee submits that they have difficulty in comparing the said company on FAR analysis. Assessee also relies on the decision of ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein the ITAT remitted the issue to comparability of this company for fresh adjudication by AO/TPO in an earlier year. Considering the view taken earlier, since AO/TPO did not have the opportunity to analyse the objections of Assessee as they have not objected earlier, we are of the opinion that inclusion of this company as comparable company is to be analysed afresh by taking the objections from Assessee and then after due analysis, TPO should consider whether the same can be included as a comparable company. Therefore, without expressing any opinion or finding in this regard, we remit the issue relating comparability of this company for fresh adjudication by TPO".
:- 9 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
8.2.3. In the case of Trident (supra) the coordinate bench has upheld the exclusion of the said company by DRP on Turn Over Basis. Respectfully following the above, we direct the AO/TPO to re examine the above company keeping the above issues in mind and exclude if any of the issues ie. High turnover or Functional dissimilarity apply to the facts of the case of assessee.
8.3.1. Persistent Systems Ltd:
Assessee's objection is that this company is functionally different and also into software products. As can be seen from page No. 173 of the Paper Book, segmental details are not available. It also has high turnover to an extent of Rs. 509 Crores (considered by TPO in Annexure 1(ii) at sl. No 17), as against Rs. 29.53 Crores of assessee. It was excluded by the Co-ordinate Bench in the following cases:
a) Intoto Software India Pvt. Ltd., (AY.2008-09) in ITA No. 1810/Hyd/2010;
b) Trident Microsystems India Private Limited (AY.2010-11) in ITA No.192/Bang/2015;
c) Tory Harris Business Solutions Private Ltd (AY.2009-10) in ITA No.113/Bang/2014; 8.3.2. Apart from High turnover, this company is also into software products and is functionally different. As considered by the Co-ordinate Bench in the case of Trident Microsystems India Private Limited (AY.2010-11) in ITA No.192/Bang/2015 (supra), wherein it was held as under:
"18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:-
:- 10 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
"10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :--
(a).......
to
(d)........
(e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-
clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:--
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital :- 11 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
(3) An uncontrolled transaction shall be comparable to an international transaction if--
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into :
Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared."
19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO.
20. In this regard we find that the provisions of law pointed out by the ld.
counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is RS. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several IT(TP)A No.192/Bang/2015 decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs.
(1) Flextronics Software Systems Ltd. 848.66 crores
(2) iGate Global Solutions Ltd. 747.27 crores
(3) Mindtree Ltd. 590.39 crores
(4) Persistent Systems Ltd. 293.74 crores
(5) Sasken Communication Technologies Ltd. 343.57 crores
:- 12 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
(6) Tata Elxsi Ltd. 262.58 crores
(7) Wipro Ltd. 961.09 crores.
(8) Infosys Technologies Ltd. 13149 crores."
14. The aforesaid decision clearly sets out the reason with reference to Rule 10B(2) of the Rules which provides that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd. (supra), we uphold decision of the CIT(A), to exclude the aforesaid companies from the list of comparable companies on the basis of turnover and size. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Besides the above, the Bangalore Benches of the Tribunal have being taking a consistent view as laid down in the aforesaid decision. We are therefore of the view that there is no merit in this appeal by the Revenue. Accordingly the same is dismissed".
8.3.3. Apart from that, as seen from the Statements and accounts placed on record at pages 794-982, the sale of products is clearly stated. The foreign exchange earnings on sale of products is clearly stated at 4686.19 Rs. Million in Notes to accounts at item
15. Thus the company is functionally different. In view of that, we direct the AO/TPO to exclude the above company. This ground is considered partly allowed.
8.4.1. Comp-U-Learn Tech India Ltd:
Assessee is objecting to this company stating that it is functionally different, there are extraordinary events during the year and fluctuating revenues. Ld. Counsel relied on the decisions of Kenexa Technologies Private Limited (ITA No. 243/Hyd/2014) (AY.2009-10) and Invensys Development Centre India Private Limited (ITA No. 383/Hyd/2014). The decision of Kenexa Technologies Private Limited (supra) is for AY. 2009-10 which does not apply to the facts for this assessment year AY. 2009-10. Like- wise, the other decision also. We have perused the annual reports :- 13 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., placed in the Paper Book from Pg. Nos. 407 to 506. As seen from the annual report, the receipts are from software development services only and there are no sale of products. The extraordinary events referred to pertain to investment in other companies which has no bearing on the P&L A/c. Fluctuating revenues cannot be a reason to exclude companies unless business profile is entirely different. As we do not see any reason to exclude the same and as the Ld. Counsel fairly admitted that this company was not excluded/not objected in other similarly placed companies in decided cases for this assessment year, we agree with the decision of the TPO/DRP. The ground to that extent is rejected.
8.5. The ground No. 5 is considered partly allowed.
9. Ground No.6 is pertaining to treating provision for bad and doubtful debts as non-operating expenses for the purpose of margin computation of comparable companies as selected by the TPO. Even though DRP rejected the objection of assessee on computation of margins, assessee is relying on the Co-ordinate Bench decision in the case of M/s. Kenexa Technologies Pvt. Ltd., Vs. DCIT in ITA No. 243/Hyd/2014 dt. 14-11-2014, wherein it was held as under:
"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:
:- 14 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
"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".
9.1. In view of the Co-ordinate Bench decision, we direct the AO/TPO to examine the objections of assessee and re-compute the margins considering the provision for bad and doubtful debts as operating expenses. This ground is considered allowed.
10. Ground No. 7 pertains to rejection of certain comparable companies selected by assessee.
a) Akshay Software Technologies Ltd.,
b) LGS Global Ltd.,
c) R Systems International Ltd.,
d) Quinegra Solutions Ltd.,
e) Allgo Embedded Systems Private Ltd., and
f) Lucid Software Ltd., :- 15 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., 10.1. Even though Ld. Counsel argued that these companies are to be included, it was fairly admitted that the above companies were rejected in various Co-ordinate Bench decisions for the same year and accordingly, he has not seriously contested the issue. Further, it was also pointed out that this ground becomes academic, if assessee's objections on the comparable companies in Ground No.5 are accepted. Considering the submissions on the above and also the fact that these companies are not selected in any of the other Co-ordinate Bench decisions, we reject this ground.
11. Ground No.8 pertaining to use of filters, Ground No.9 pertaining to multiple year data and Ground No.10 pertaining to the adjustment for risk differences are not pressed in the course of arguments.
12. Ground No.11 pertains to arm's length range of 5%. AO/TPO is directed to keep in mind the proviso to Section 92C(2) of the Act while making the adjustment if any, after re-working the profit margins on the comparable companies. This ground is considered allowed for statistical purposes.
13. Ground No.12 pertains to consequential effect to be given to MAT credit to assessee. AO/TPO is directed to keep the above in mind while giving effect to the consequential order. This ground is considered allowed for statistical purposes.
14. Ground No.14 is raised as an additional ground stating that TPO/DRP has erred in making a negative working capital :- 16 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., adjustment of (-)0.61% while computing the adjustment u/s. 92CA. It was the submission that negative working capital adjustment was not allowed in various decisions and relied on the decision of Adaptec (India) P. Ltd., Vs. ACIT in ITA No. 206/Hyd/2014, dt. 25-03-2015, in the above referred case.
"10. Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under :
"14. Ground No.11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under :
"The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as :
• The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies.
• The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement."
We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under :
"7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, :- 17 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to t his situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made."
In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made."
11. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the 21 ITA.No.206/Hyd/2014 Adaptec (India) P. Ltd., Hyderabad. assessee. In view of this, we direct the TPO not to make negative working capital adjustment".
14.1. Accordingly, we direct the TPO not to make any negative working capital adjustment.
15. In the result, appeal of assessee is considered partly allowed for statistical purposes.
Revenue's appeal in ITA No. 1921/Hyd/2014:
16. Revenue has raised four grounds, out of which Ground Nos. 1 & 4 are general in nature.
17. Ground No.2 pertains to exclusion of Infosys Technology Ltd., and Kals Information Systems Ltd., (Seg). On the basis of the objections raised by assessee, DRP has excluded the above two companies stating as under:
"33. With regard to the thirteenth ground regarding inclusion of Infosys Technologies Limited ("Infosys" or "the Company") as comparable, :- 18 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., assessee expressed that Infosys Technologies Limited has to be rejected based on the presence of the brand, the impact of brand on profits earning etc. The submissions of assessee are as under.:
"The Assessee had submitted in response to the show cause notices issued by the Learned TPO, that Infosys has sales turnover of Rs..21,206 Crore (ref Page 39 AR 2010) for the FY 2009-10 and hence should be rejected as it is having a turnover of more than 720 times of the Assessee.
The Assessee has submitted to the Learned TPO that Infosys has identified the presence of brand in its services/ products and has performed a brand valuation exercise to determine the value of profits earned by Infosys that can be attributed to the "Infosys" brand, The Assessee being a captive service provider cannot be compared to companies which hold significant brand value as such companies will be receiving a premium in the market because of the existence of the brand.
Without prejudice the above argument that Infosys has to be rejected, the Assessee submitted that if the Learned TPO wishes to consider Infosys as a comparable, the brand related profits as disclosed in the annual report should be excluded in determining the profitability of the company for transfer pricing purposes.
Please refer to Section 6 of Annexure A of the submission to the Learned TPO dated August 7, 2013.
The Learned TPO in the Final Order has commented the following on selection of Infosys as a comparable:
• The Learned TPO in the final order has accepted the fact that Infosys has brand but has argued that brand only improves the volume but does not materially impact the profitability.
34. We have gone through the submissions and the order of the AO. The grounds raised before us were the same grounds raised before the TPO. Respectfully following various decisions of the Hon'ble ITAT, this panel and earlier panel decided that Infosys Technologies Limited shall not be taken as comparable and on the same lines we direct the TPO / AO to exclude Infosys Technologies Limited, as a comparable.
35. With regard to the fourteenth ground regarding inclusion of KALS Information Systems Limited ("KALS" or "the Company") as comparable, assessee expressed that it is predominantly a product company and should be rejected, as the Company is not functionally comparable to the Assessee. The submissions of assessee are as under.:
In response to the show cause notices issued by the Transfer Pricing Officer ("Learned TPO''), the Assessee submitted that KALS Information Systems is primarily a software product company. This is evident from the information provided in the company website [www.kalsinfo.com] regarding the products offered by the Company. The segmental information provided in the Annual report of KALS Information Systems is inconsistent with the P&L for FY 2009-10.
Without prejudice to the above contention of the Assessee that Kals is functionally dissimilar. Even if it is selected, entity level margin should be taken for comparison.
:- 19 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
Please refer to the detailed submission (Section 7 of Annexure A) dated 07 August, 2013 made to the Learned TPO.
The Learned TPO has wrongly interpreted the reply provided by KALS Information Systems in response to the notice issued u/s 133(6) of the Act in the preceding years and concluded that the company is a pure software development service provider, and in many cases the company uses its own library of products and prepares customized software. Further stated that the company has got substantial inventory and also such inventory is in the nature of computer spares and not products as contemplated by the taxpayer.
36. We have gone through the submissions and the order of the AO. The grounds raised before us were the same grounds raised before the TPO. Before this Panel the assessee submitted that in its own ease for AY 2005- 06 and 2007-08, the Hon'ble ITAT vide order in ITA No. 1196/Hyd/2010 and ITA No.2102/Hyd/2011, dated 24.05.2013 excluded this comparable stating as under:
"36. We find that both M/s. HCL EAI Services Ltd. as well as M/s. Trilogy E-Business software India Private Limited are into software development services to its parent companies. The assessee is also into similar type of activity. Therefore, the decision taken in M/s. Trilogy E- Business software India Private Limited as well as M/s. HCL EAI Services Ltd. to exclude Lucid software and Kals Information Systems Ltd. applies to the facts of the case before us also. Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude these two companies also from the list of comparables".
Respectfully following the decision of the Hon'ble ITAT referred above we direct the TPO/AO to exclude KALS Information System Ltd., as a comparable".
17.1. We do not find any reason to interfere with the order of the DRP which has rightly considered that these companies are functionally not comparable. This ground is dismissed.
18. Ground No.3 pertains to exclusion of telecommunication charges from both Total Turnover and Export Turnover.
18.1. We have considered the submissions of the parties on the issue and perused the materials on record. This issue is :- 20 -: I.T.A. Nos. 1921/Hyd/14 & 25/Hyd/2015 Intoto Software (India) Pvt. Ltd., squarely covered by the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353] wherein it has been held that communication charges etc., attributable to the delivery of the computer software outside India which are to be reduced from the export turnover should be reduced from the total turnover as well, while computing the deduction u/s. 10A. Therefore, following the ratio laid down in the aforesaid cases, we approve the direction of DRP to the AO to reduce the amount from the export turnover as well as from total turnover, while computing the deduction u/s. 10A of the I.T. Act. This Ground is accordingly rejected.
19. In the result, appeal of Revenue is dismissed.
20. To sum up, appeal of assessee is considered partly allowed for statistical purposes and appeal of Revenue is dismissed.
Order pronounced in the open court on 31st January, 2017 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 31st January, 2017
TNMM
:- 21 -: I.T.A. Nos. 1921/Hyd/14 &
25/Hyd/2015
Intoto Software (India) Pvt. Ltd.,
Copy to :
1. Intoto Software (India) Private Limited, Hyderabad; C/o. Y. Raghuram, Chartered Accountant, #118, H.No. 8-3-833/118, Kamalapuri Colony - Phase 1, Srinagar Colony, Hyderabad.
2. The Income Tax Officer, Ward-2(1), Hyderabad.
3. Dispute Resolution Panel (DRP), Hyderabad.
4. Director of Income Tax (IT & TP), Hyderabad.
5. Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad.
6. D.R. ITAT, Hyderabad.
7. Guard File.