Income Tax Appellate Tribunal - Hyderabad
Virtusa (India) Private Limited, ... vs Assessee on 24 June, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 1962/Hyd/2011
Assessment Year : 2007-08
Virtusa (India) Pvt. Ltd., ... Appellant
Hyderabad.
(PAN - AABCV4077E)
Vs.
Dy. Commissioner of Income-tax, ... Respondent
Circle - 3(3), Hyderabad.
Appellant by: Shri Ravi Bhardwaj &
Shri Mithlesh
Respondent by : Shrr M. Ravindra Sai
Date of Hearing : 24/06/2013
Date of Pronouncement : 30/08/2013
ORDER
PER SAKTIJIT DEY, J.M.:
Assessee's appeal is directed against the assessment order passed u/s 143(3) read with section 144C of the Act on the direction of the Dispute Resolution Panel (hereinafter called 'DRP'), Hyderabad pertaining to the assessment year 2007-08.
2. Briefly, the facts are, the assessee is wholly owned subsidiary of Virtusa Corporation of USA and part of the Virtusa group. It provides software development services to its group companies. The assessee is a 100% export oriented unit registered under Software Technology Park 2 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
of India (STPI) Scheme. For the assessment year under dispute. The assessee filed its return of income declaring total income of Rs. 45,79,591/- after claiming deduction u/s 10A of the Act in respect of the profits of its STPI unit located in Hyderabad and Chennai. Initially the return was processed u/s 143(1) of the Act.
Subsequently, however, the assessee's case was selected for scrutiny and in course of scrutiny assessment proceeding, the Assessing Officer noticing that the assessee has entered into international transactions with its Associates Enterprises (AE), a reference was made by him to the Addl. Commissioner of Income-tax (Transfer Pricing), (hereinafter called TPO),Hyderabad for determining arm's length price of the international transaction with its AE. The assessee during the year reported the following receipts earned from international transaction with its AE:
i) Provision of software development services 186,96,89,012
ii) Reimbursement of expenses to AE 62,71,942
iii) Reimbursement of expenses by AE 4,42,63,545
3. In course of the proceeding before the TPO, the assessee submitted TP study conducted by M/s Ernst & Young, CAs., after undertaking a detailed analysis for determining the functions, assets and risks utilized by the assessee and its AE in respect of international transactions between them. As per the functional analysis in the TP study the assessee was categorised as risk mitigated contract services provider. Transaction Net Margin Method (TNMM) was adopted as most appropriate method for determining ALP. Search was conducted in the Prowess and Capitaline Data Bases to select 3 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
comparable companies by selecting the operating margin i.e. operating profit to operating cost as profit level indicator. The assessee considered the financial results for the period ending between 1st April, 2004 to 30/06/2007. The aforesaid search process yielded a set of 28 comparables with a weighted average profit margin of 14.64% on operating cost. Since the assessee's net margin during the year was found to be within arm's length no adjustment was required to be made. The TPO, however, rejected the TP study of the assessee, broadly citing the following reasons:
i) the assessee has used multiple year data instead of using the current year data.
ii) Overwhelming number of companies were eliminated by the tax payer by not applying quantitative filters but by applying the so called qualitative filters.
iii) The assessee could not have determined about the nature of business and quality of the services rendered by the company without going into financial results or making other enquiries.
iv) selection/rejection of comparables on the basis of qualitative filter of functionally different criteria is not objective and uniform.
v) There is a complete disconnect between search for comparables and the comparability analysis.
vi) the assessee has considered the companies as comparables, which have related party transactions of more than 25% of the operating revenue.
vii) The assessee has considered companies, which are predominantly on site companies rendering 4 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
services at the site or client or through third parties located outside India.
viii) The assessee has considered companies as comparables even though they are functionally dissimilar.
4. He, therefore, came to a conclusion that TP study submitted by the assessee is not reliable and, therefore, has to be rejected. After rejecting the TP study, the Assessing Officer undertook fresh search in the data bases for selecting comparables. While doing so, the TPO applied certain additional filters and in this process selected 26 companies as comparables, with average arithmetic mean PLI of 25.14% and after making working capital adjustment of 0.82% arrived at adjusted arithmetic mean PLI of 24.32% by applying the aforesaid arithmetic mean PLI of 24.32% to the operating cost of Rs. 166,29,22,973/- determined arm's length price at Rs. 206,73,45,840/-. The price charged by the assessee for its international transactions being shown at Rs. 193,29,17,969/- (including the reimbursement of expenses by AE), the shortfall of Rs. 13,44,27,871/- was treated as TP study adjustment u/s 92CA of the Act. In pursuance to the order passed by the TPO proposing the aforesaid TP adjustment, the AP passed a draft assessment order incorporating TP adjustment of Rs. 13,44,27,871/-. Apart from adding TP adjustment, the Assessing Officer also reduced the communication charges from the export turnover while computing deduction u/s 10 of the Act and also made some other disallowances.
5 ITA No. 1962/Hyd/2011Virtusa (India) Pvt. Ltd.
5. Being aggrieved of the draft assessment order, the assessee raised the objections before the DRP.
6. The DRP, however, rejected the objections raised by the assessee with regard to selection of comparables made by the TPO excepting in the case of one of the company selected as comparable, namely, Celestial Labs, which DRP directed to be excluded for determining the ALP. As a result of such order of the DRP, the draft assessment was made final.
7. Being aggrieved, the assessee is in appeal before us.
8. So far as the transfer pricing issues are concerned, the assessee has raised altogether 12 grounds. At the outset, the learned AR submitted before us that the assessee does not want to press ground Nos.
1,2,3,4,5,6,9, 10 & 11. In view of the aforesaid submissions of the learned AR, these grounds are dismissed as not pressed.
9. In Ground No. 7, the assessee has raised objection with regard to selection of certain companies as comparables by the TPO and sought for their exclusion. Herein below we will deal with the contentions of the parties with regard to acceptability or otherwise of the companies objected to by the assessee to be treated as comparable and record our finding in respect of each of these companies.
1. Avani Cimcon Technologies Ltd.
1.1 The learned AR objecting to the aforesaid company to be treated as comparable, submitted that the said company is not only functionally different as it is earning revenues from products also but that besides, it has shown high margin, which cannot be compared to the assessee. The learned AR referring to the order passed by the TPO submitted that the TPO has himself categorised the assessee as a purely software service provider and has discussed the difference between a software product company and software development provider. The learned AR further submitted that the information available in the company's website also reveal that the company has developed a software product by name 'D' Exchage. Hence, the company being functionally different cannot be selected as a comparable. In support of such contention, the learned AR relied upon a number of decisions of the coordinate benches of this Tribunal wherein the aforesaid company has been considered to be not a comparable as it is into product development also. The decisions relied upon by the AR are as under:
1. Intoto Software India Pvt. Ltd., ITA No. 1196,1197/Hyd/10.
2. Triology E Business Solutions, ITA No. 1054/Bang/2011.
3. Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011.
4. Bearing Point Business, ITA No. 1124/Bang/2011.
5. LG Soft India Pvt. Ltd., ITA No. 1121/Bang/2011
6. Transwitch India Pvt. Ltd., ITA No. 948/Bang/2011.
7. Mercedes Benz Research & Development India Pvt. Ltd., ITA No. 1222/Bang/2011.7 ITA No. 1962/Hyd/2011
Virtusa (India) Pvt. Ltd.
8. CSR India Pvt. Ltd., ITA No. 1119/Bang/2011.
9. First Advantage, ITA No. 1086/Bang/2012
10. HCL EAI Services Ltd., ITA No. 1348/Bag/2011.
1.2 The learned DR, on the other hand, submitted that both the TPO and DRP having accepted the aforesaid company as a comparable after objectively considering contentions raised by the assessee, there is no reason to exclude it.
1.3 We have heard the submissions of the parties and perused the material on record with regard to the aforesaid company being treated as comparable. The fact that this company is earning revenue from product development also has not been controverted by the learned DR. The ITAT, Mumbai Bench in case of Telcordia Technologies India Pvt Ltd. Vs. ACIT (supra) while considering the objections raised with regard to the aforesaid company held as under:
Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis."
It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:-
Particulars FYs 05-06 06-07 07-08 08-09
8 ITA No. 1962/Hyd/2011
Virtusa (India) Pvt. Ltd.
Operating Revenue 21761611 35477523 29342809 28039851
Operating Expns. 16417661 23249646 23359186 31108949
Operating Profit 5343950 12227877 5983623 (3069098)
Operating Margin 32.55% 52.59% 25.62% - 9.87%
1.4 The ITAT, Hyderabad bench following the aforesaid decision of the Mumbai Bench also held in case of Intoto Software India Pvt. Ltd. in ITA No. 1196/Hyd/10 and others vide order dated 24/05/13 that the aforesaid company since is involved in software product development cannot be treated as comparable with companies which are providing only software development services and directed exclusion of the said company. In view of the aforesaid decision of the coordinate bench, we direct the Assessing Officer/TPO to exclude the aforesaid company from the list of comparables while determining the ALP.
2. Infosys Technologies Ltd.
2.1 The learned AR objecting to the aforesaid company being treated as comparable, submitted that not only the turnover of the company at Rs. 13,149/- crore is huge as compared to the assessee but it is a giant company in the field assuming all risks and is also functionally different. It was submitted that the brand Infosys commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value and also engaged in diversified activities including products, consultancy and solutions. It was submitted that due to scale of operations, 9 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. Therefore, the comparability of assessee, which is only captive services provider to such a company cannot be made. It was submitted that various benches of the Tribunal have declared Infosys as not comparable on various parameters to a captive services provider and have directed for exclusion of the said company. The AR relied on the following cases:
1. Intoto Software India Pvt. Ltd., ITA No. 1196,1197/Hyd/10.
2. Triology E Business Solutions, ITA No. 1054/Bang/2011.
3. Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011.
4. Patni Telecom Solutions Pvt. Ltd., ITA No. 1846/H/12.
5. Adaptec (India) Pvt. Ltd. DCIT, ITA No. 1801/H/2009
6. Cordys Software India Pvt. Ltd. Vs. ACIT, ITA No. 1972/H/11.
7. Trinity Advanced Software Labs Pvt. Ltd. Vs. ACIT, ITA No. 1129/H/2005.
8. DCIT Vs. Deloitte Consulting India (P) Ltd., 46 SOT 379 (Mum.)
9. Agnity India Technologies Vs. ITO, ITA No. 3856/Del/10
10. Genesis Integrating Systems India P. Ltd., ITA No. 1231/Bang/2010.
10. Brigade Global Services Pvt. Ltd., ITA No. 1449/H/10.
11. Frost & Sullivan India Pvt. Ltd., 50 SOT 517 (Mum.) 2.2 The learned DR, on the other hand, supported the orders of the DRP and TPO in so far as selection of the aforesaid company as comparable.
2.3 We have heard the submissions of the parties and perused the material on record. The issue of comparability of Infosys to companies which are merely captive service provider is no longer RES INTEGRA as different benches of the Tribunal have held that Infosys being a giant company and into diversified 10 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
activities cannot be treated as comparable. In a recent decision in case of Intoto Software India Pvt. Ltd., (supra), the Hyderabad Bench while considering the comparability of Infosys Technologies Ltd held as follows:
"20. We have heard both the parties. We find that Infosys Technologies Ltd., though, is into the similar business of the assessee as software development, cannot be considered as a comparable to any other companies which are also involved in similar activities. It is not only a giant company but is also engaged in development of various niche products. It cannot be compared to the assessee in any manner. Similar directions have been given by the Tribunal at Delhi and Hyderabad Benches in the cases cited (supra).
21. In the result, we direct the Assessing Officer/TPO to exclude this company from the list of comparables."
2.4 The Hon'ble Delhi High court in a recent decision dtd. 10 th July, 2007 in case of CIT Vs. Agnity India Technologies Pvt. Ltd., ITA No. 1204/2011, affirmed the order of ITAT, Delhi Bench holding that big companies like Infosys Technologies Ltd. cannot be treated as comparable. Following the ratio laid down as above, we direct the exclusion of the aforesaid company from the list of comparables for determining ALP.
3. Ishir Infotech Pvt. Ltd.
3.1 The learned AR objecting to the aforesaid company being treated as comparable, submitted before us that the aforesaid company fails the employee cost filter applied by the TPO as the employee cost of the company is less than 25%, which is the bench mark adopted by the TPO. It was further submitted that while employee cost as a percentage of operating revenue of Ishir Infotec Pvt. Ltd. Is only 3.96% where as the assessee's 11 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
employee cost is 61.23%, In support of such contention, the learned AR relied on the following decisions:
1. Intoto Software India Pvt. Ltd., ITA No. 1196,1197/Hyd/10.
2. LG Soft India Pvt. Ltd., ITA No. 1121/Bang/11
3. Transwitch India Pvt. Ltd., ITA No. 948/Bang/11
4. Mercedes Benz Research & Development India Pvt Ltd., ITA No. 1222/Bang/11.
5. CSR India Pvt. Ltd., ITA No. 1119/Bang/11.
6. First Advantage, ITA No. 1086/Bang/12
7. HCL EAI Services Ltd., ITA No. 1348/Bang/11 3.2 The learned DR, on the other hand, supported the orders of the DRP & TPO.
3.3 We have considered the submissions of the parties and perused the material on record. As it can be seen, the ITAT Hyderabad Bench while considering identical issue of the aforesaid company being treated as comparable in case of Intoto Software (supra) found it to be not a comparable company as it has failed both on account of employee cost filter as well as related party transaction filter and directed to be excluded this company from the list of comparables. Following the aforesaid decision of the coordinate bench, we also direct exclusion of the aforesaid company from the list of comparables while determining the ALP.
4. Lucid Software Ltd.
4.1 Objecting to the aforesaid company being treated as comparable, the learned AR submitted that the aforesaid company cannot be treated as comparable as it has revenue from products also. It was further submitted that segmental financials of the company are also not available. In support of 12 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
such contention, the learned AR relied on the following decisions of coordinate benches of the Tribunal.
1. Intoto Software India Pvt. Ltd., ITA No. 1196,1197/Hyd/10.
2. LG Soft India Pvt. Ltd., ITA No. 1121/Bang/11
3. Transwitch India Pvt. Ltd., ITA No. 948/Bang/11
4. Mercedes Benz Research & Development India Pvt Ltd., ITA No. 1222/Bang/11.
5. CSR India Pvt. Ltd., ITA No. 1119/Bang/11.
6. First Advantage, ITA No. 1086/Bang/12
7. HCL EAI Services Ltd., ITA No. 1348/Bang/11
8. Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011.
4.2 The learned DR, on the other hand, supported the orders of the DRP as well as TPO.
4.3 We have heard the submissions of the parties and perused the materials on record. On perusal of the order passed by the coordinate bench in case of Intoto Software (supra), it is to be seen that this bench of the Tribunal following two other decisions of the Tribunal held 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."
4.4 Respectfully following the aforesaid decision of the coordinate bench in case of Intoto Software (supra), we direct 13 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
the AO/TPO to exclude the aforesaid company from the list of comparables while determining the ALP.
5. Megasoft Ltd.
5.1 While objecting to the aforesaid company being treated as comparable, the learned AR submitted before us that the said company does not satisfy certain filters applied by the TPO himself. It was submitted that the onsite revenue of the company is Rs. 75.26 crores whereas the revenue of the services division (Blueally division) is Rs. 63.71 crores. Onsite revenues are significantly attributable to services division of the company, hence, services segment fails 75% onsite revenue filter applied by the TPO. It was further submitted that as otherwise Mega Soft ltd is also functionally different as Megasoft XIUS division is a product division and revenue of XIUS division includes sale of hardware embedded with customized software, sale of license, revenue sharing in upfront mobile usage, upfront fee for production installation etc. It was further submitted that the TPO has considered entity wise data of Megasoft for calculation of operating margin, instead of considering the data of only Blueally division, which provides services only. It was submitted that different benches of the Tribunal while considering identical issue have held that segmental margin of the services segment should only be considered as comparable to a software services provider. For such contentions, the learned AR relied on the following decisions:
1. Intoto Software India Pvt. Ltd., ITA No. 1196,1197/Hyd/10.
2. LG Soft India Pvt. Ltd., ITA No. 1121/Bang/11
3. Transwitch India Pvt. Ltd., ITA No. 948/Bang/11 14 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
4. Mercedes Benz Research & Development India Pvt Ltd., ITA No. 1222/Bang/11.
5. CSR India Pvt. Ltd., ITA No. 1119/Bang/11.
6. First Advantage, ITA No. 1086/Bang/12
7. HCL EAI Services Ltd., ITA No. 1348/Bang/11
8. Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011.
9. Triology E Business Solutions, ITA No. 1054/Bang/2011.
10. Bearing Point Business, ITA No. 1124/Bang/2011.
5.2 The learned DR, on the other hand, referring to the discussions made by the TPO with regard to the aforesaid contention submitted that the aforesaid company has been selected as a comparable on the basis of well founded reason, hence, there is no reason to entertain the objections raised by the assessee 5.3 We have heard the submissions of the parties and perused the materials on record. In case of Intoto Software (supra), the ITAT Hyderabad Bench after following the decision of the M/s. Trilogy E-Business Software India Private Limited vs. DCIT in ITA.No.1054/Bang/2011 directed the AO/TPO to take only segmental margin of the company for the relevant previous year into consideration to compute ALP. Respectfully following the aforesaid decision of the coordinate bench in case of Intoto Software, we also direct the AO/TPO to take only segmental margin of Megasoft Ltd in the relevant previous year into consideration while computing ALP of the assessee.
6. Tata Elxi Ltd.
6.1 While objecting to the aforesaid company being treated as comparable, the learned AR submitted before us that in response to the notice issued u/s 133(6) of the Act, the 15 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
aforesaid company has clearly stated that it cannot be considered as comparable to any other software company due to complex nature of its business. However, while the TPO selected the aforesaid company by holding that the services provided are akin to software development services, the DRP, did not comment on the comparability of this company. The learned AR submitted that comparability of the aforesaid company was considered and analysed by different benches of the ITAT and the aforesaid company was rejected as comparable to the software services provider. For such contention, the learned AR relied upon the following decisions:
1. Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011.
2. Triology E Business Solutions, ITA No. 1054/Bang/2011.
6.2 The learned DR, on the other hand, supported the orders of the AO/TPO and DRP in this regard and referred to the observations made by the TPO in his order.
6.3 We have heard the submissions of both the parties and perused the material on record. In case of Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011, the ITAT Mumbai Bench while considering the comparability of the aforesaid company with software services provider held as under:
"7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable 16 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties. "
6.4 Following the decision of the ITAT Mumbai Bench as aforesaid and also considering the fact that the company itself information provided in response to the notice issued u/s 133(6) of the Act has admitted that it cannot be considered as comparable with the assessee, we direct exclusion of the aforesaid company from the list of comparables while determining ALP.
7. Wipro Ltd.
7.1 While objecting to the aforesaid company being treated as comparable, the learned AR submitted that the TPO only on considering segmental details submitted by the said company for IT services, in response to notice issued u/s 133(6), has considered it as a comparable. It was submitted that the aforesaid company is a diversified company and discloses segmental information for IT services and products as one segment in its annual report. It was submitted that the TPO has not provided any other documents excepting segmental information obtained from TP report of Wipro, which is unaudited, manually corrected and unverified. It was submitted that Wipro is also considered to be a giant in its field assuming all the risks and cannot be compared to captive service provider like the assessee. To support his contentions with regard to non-comparability of the said company, he relied upon the following decisions:
1. Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011.17 ITA No. 1962/Hyd/2011
Virtusa (India) Pvt. Ltd.
2. Triniti Advances Software P. Ltd., ITA No. 1129/H/2005. 7.2 The learned DR on the other hand supported the orders of the DRP as well as TPO so far as the selection of the aforesaid company as comparable while determining ALP.
7.3 We have heard the submissions of the parties and perused the material on record. The ITAT Mumbai Bench in case of Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011, while considering the objection of the assessee for treating the aforesaid company as comparable held as follows:
"7.5 This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, we hold that Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO."
7.4 As can be seen from the facts and materials on record during the year under consideration, the segmental turnover of the Wipro Ltd. Is 9616.09 crores. Therefore, considering the turnover, brand value as well as other dynamics of Wipro Ltd., it comes in the same category as Infosys and certainly cannot be compared with the assessee. Therefore, following our reasoning in case of Infosys Technologies Ltd. we hold that Wipro Ltd. cannot be treated as comparable with the assessee.
10. In Ground No. 8, the assessee has challenged the action of the TPO in rejecting certain comparables selected by the assessee, which are as under:
1. Aztec Soft Ltd.
2. Birla Technologies Ltd.
3. Indium software India Ltd.
4. Larsen & Toubro Infotech.
5. PSI Data systems Ltd. (SEG)
6. VMF Softech Ltd.
11. The learned AR challenging rejection of the aforesaid comparables selected by the assessee in the TP study by the DRP/TPO submitted that the criteria adopted by the TPO while rejecting aforesaid comparables selected by the assessee is not valid as he has not followed a uniform and consistent approach while applying filters.
12. The learned DR, on the other hand submitted that the TPO after appropriately applying filters having found the companies as selected by the assessee to have failed comparability analysis rejected them. Therefore, rejection of the companies is justified.
13. We have heard the submissions of the parties and perused the materials on record. On perusal of the order of the DRP on this issue it is to be seen that so far as the VMF Softech Ltd. is concerned, the DRP has recorded a specific finding that after enquiry being conducted, it was found that the company was taken up by one Kelton Security Pvt. Ltd. and in spite of being called upon the company failed to produce its cash book, ledger, exports, particulars of salaries paid, etc., hence, genuineness of the company and its activities are doubtful. This finding has not been controverted by the assessee. Considering the aforesaid 19 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
finding of the DRP, we are of the view that the aforesaid company has been rightly rejected as comparable.
14. However, so far as, other companies are concerned, which were selected as comparables by the assessee, we find that the DRP ha not objectively considered the contentions of the assessee in this regard. We, therefore, restore the matter back to the file of the AO/TPO to consider the comparability of the aforesaid companies after giving due opportunity of hearing to the assessee and considering all aspects of the matter.
15. In Ground No. 12, the assessee challenged the action of the TPO in adding the amount of Rs. 4,42,63,545/- being reimbursement received from the AE with operating cost for determining ALP. The TPO while determining the ALP of the assessee has also included the amount of Rs. 4,42,63,545/- claimed to be the reimbursement received by the assessee from its AE. The TPO observed that since the expenditure was incurred on behalf of the parent company and assessee received money back, hence, the expenditure is connected to the business services and should form part of the turnover. He, therefore, was of the view that the amount should be treated as part of export turnover and total turnover. The DRP while upholding the finding of the TPO to the extent that reimbursement should form part of export turnover, however, directed the AO to verify whether foreign exchange received is within the stipulated time as per section 10A of the Act and if it is found to have been received within the stipulated time after getting FIRC and CA certificate, it can be included as part of export turnover.
16. We have considered the submissions of the parties and perused the material on record. We find that in case of M/s LG 20 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
Soft India Pvt. Ltd. Vs. DCIT in IT(TP)A No. 1121/Bang/2011, order dated 20/02/213, while considering identical issue, the Bangalore Bench of Tribunal held as follows:
"4.5 We have heard the rival submissions and perused the materials on record. We have noticed that the details of reimbursement expenses are given at page 334 of the paper book filed by the assessee. The break-up of the said expenses are not given in detail and it is not clear whether it is the reimbursement of expenses incurred on behalf of the AE. Since the issue is not clear and there is no detailed discussion of the break-up of expenses, we deem it fit and proper to remit the issue to the file of the AO/TPO for detailed verification. We make it clear that if the receipts are mere recovery of expenses without any service then the same should not be added back to the cost base for the purpose of mark-up. It is ordered accordingly."
17. Respectfully following the aforesaid decision of the coordinate bench in case of M/s LG Soft India Pvt. Ltd. (supra), we also direct the AO to verify whether these receipts are mere recovery of expenses without any services. If it is found to be so, then the same should not be added back to the cost base.
18. In aforesaid view of the matter, we direct the AO/TPO to recomputed the ALP keeping in view our directions made hereinabove.
19. Ground Nos. 13 to 21 are relating to corporate tax issues.
20. The learned AR submitted before us that on instruction from the assessee, he does not want to press ground Nos. 15,18,20 & 21, therefore, the same are dismissed as not pressed.
21. In Ground Nos. 13 & 14, the assessee has challenged the decision of DRP in not allowing deduction u/s 10A of the Act in respect of Chennai Unit.
21 ITA No. 1962/Hyd/2011Virtusa (India) Pvt. Ltd.
22. During the course of assessment proceeding, the AO did not allow benefit u/s 10A of the Act on the Chennai unit of the assessee by holding that both Hyderabad and Chennai Units are rendering same services to same customers and it was found that Chennai unit is formed by transfer of existing business at Hyderabad. The AO further noted that losses suffered by Chennai Unit up to 2005-06 was not ascertainable, hence, there was a difficulty in computation of 10A benefit. It was further held that as the Chennai Unit was formed on reconstruction/splitting up of business already in existence, benefit u/s 10A cannot be granted. The DRP while dealing with the issue of diversion of business and splitting of business at Hyderabad unit for forming another unit at Chennai, considered the order of CIT(A) for the AY 2006-07 on identical issue holding that new unit at Chennai cannot be treated as separate and independent unit because the same business is carried out. Though the DRP agreed that Chennai unit is not formed by reconstruction of Hyderabad Unit, however, it held that the units at Chennai and Hyderabad are not two distinct and independent units. The DRP however directed that 10A benefit to be given on the combined profits of Chennai and Hyderabad Units.
23. The learned AR has submitted before us that Chennai and Hyderabad units should be considered as two distinct and separate units for benefit u/s 10A. It was submitted that benefit u/s 10A has to be granted separately for both the units as each of the unit has separate source of income. In support of such contention, the learned AR relied on the decision of ITAT, Hyderabad in assessee's own case for AY 2006-07 in ITA No. 268/Hyd/2011 and ITA No. 482/Hyd/11 vide order dated 24/08/2012. The coordinate bench while considering the issue as to whether Chennai and Hyderabad units are same unit or two 22 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
distinct and separate units so as to entitle each of them for the benefit of section 10A of the Act, has held as under:
"15. We understood the divergence in the opinions of both the parties to the litigation. It is an undisputed fact that distinct capital was invested in creating a new unit at Chennai, without comprising the employees strength of the Hyderabad Unit, Chennai unit also started raising its employees from 44 in number in March, 2004 to 1035 in March 2008, and thus the growth of number of employees is phenomenal by the end of March, 2008. There is no relocation of transfer of plant and machinery in any form from Hyderabad Unit to Chennai Unit. So, this being the strength of the new unit, so far as the infrastructural matters are concerned, we also examined the other areas of business activity of the assessee, to find out if the Chennai Unit cut into the business of the Hyderabad unit. In this regard, we have perused the business activities of the assessee both of Chennai Unit and Hyderabad Unit and find that the nature of services rendered by the assessee through both these units are classified into three categories, (1) BPM, (2)ECM and (3) Data warehousing. So far as the data warehousing/business intelligence is concerned, the Chennai Unit alone renders this service. This data warehousing/intelligence provides an eco system to transform raw data into actionable information, thus facilitating strategic and technological and operational decision making. The Chennai Unit addresses to these challenges by offering holistic, business and result oriented approach of the customer. These hyper specialised services of the Chennai unit were not properly appreciated by the Revenue authorities, who were merely carried away by the common service agreement for coming to the conclusion that the business of both the units are same. But, the fact is that the services of both the units are distinct and separable. Therefore, from the infrastructure point of view which involves land and building, plant and machinery and employees, etc., as well asfrom the business processes/activities point of view, both the units are separate and distinct with different objects and challenges of the clients. Thus, commonness of the projects/services should not be the basis of rejection of claim of exemption in principle. As such, the services of both the units are different, for different purposes and thus, the conclusions of the assessing officer and CIT(A) are not as per the law in force. Relevant decisions are discussed in the preceding paragraphs. In our opinion, the Revenue has stepped into 23 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
wrong decision making area, while denying exemption under S.10A of the Act in respect of the projects of Chennai Unit. Further, we also examined the available judicial pronouncement on the subject. It is a settled issue that existence of some old employees in the new undertaking is not a disqualification for granting exemption benefit to the assessee under S.10A of the Act as long as larger chunck of HR Department has not moved to the new unit from the old one. So long as both the units are existing and doing the declared business and are not formed out of the existing business, the assessee must not be denied the benefits of S.10A of the Act. It is also settled position that the old as well as new unit engaged in the same business with identical product shall not contribute to the denial of the beneficial exemption to the assessee.
16. Therefore, the Revenue's objections that similar agreements, common services, induction or migration of few employees of the Hyderabad Unit into the Chennai Unit, are not adequate enough to deny the exemption benefits to assessee in view of the case-laws relied upon and discussed in the preceding paragraphs of this order.
17. In principle, the undertaking is not entitled to the benefits of the provisions of section 10A of the Act if the same is formed by the splitting up or the reconstruction of business already in existence and when the same is not formed by the transfer of plant or machinery previously used for any purpose to a new business. There is no issue about the transfer of the Plant or Machinery from Hyderabad to Chennai Unit and therefore, this limb of the provisions is unquestioned by the revenue. The objections of the revenue revolve around existence of similar agreements/similar services and migration of some of the employees to the Chennai unit. These issues have been already attended to by us in the preceding paragraphs and described how these objections in this case are not sustainable by us. It is not the case of the revenue that the Database Warehousing related services rendered by the assessee to the Principle/clients are not different from those services rendered by the Hyderabad Unit. In the light of the above discussion, we hold that the Revenue authorities are not justified in denying the benefit under S.10A of the Act to the assessee, treating the Chennai Unit as having been created merely by splitting up, or reconstruction of the Hyderabad unit of the assessee. Accordingly, grounds No.1 to 4 of the assessee in this appeal are allowed."
24 ITA No. 1962/Hyd/2011Virtusa (India) Pvt. Ltd.
24. The learned DR, on the other hand, relied upon the orders of TPO and DRP.
25. We have considered the submissions of the parties on this issue. As can be seen from the order of the DRP, though they have accepted the fact that the Chennai Unit is not formed by reconstruction of the Hyderabad unit, but, they ultimately held that Chennai Unit and Hyderabad Unit are not two distinct and independent units. However, on perusal of the aforesaid order of the coordinate bench, we find that the issue in dispute has been set at rest and decided in favour of the assessee. Therefore, following the decision of the coordinate bench, we allow the ground of the assessee and direct the AO to allow benefit u/s 10A of the Act to the Chennai Unit.
26. The next issue raised in ground Nos. 16 & 17 is with regard to rejection of reimbursement of expenses to Virtusa Corporation, USA of an amount of Rs. 62,71,942/- from the export turnover while computing deduction u/s 10A of the Act.
27. We have considered the submissions of the parties on this issue and perused the materials on record. The issue stands squarely covered by the decision of the Hon'ble Mumbai High Court in case of Gemplus Jewellery, 330 ITR 175 and the special bench decision of ITAT, Chennai in case of ITO Vs. Saksoft Ltd (313 ITR AT 353) wherein it has been held that if communication charges, insurance charges and reimbursement of expenses attributable to the delivery of computer software outside India, are to be reduced from the export turnover then the same should as well be reduced from total turnover while computing deduction u/s 10A of the Act. Therefore, following the aforesaid ratio laid 25 ITA No. 1962/Hyd/2011 Virtusa (India) Pvt. Ltd.
down in the said decisions, we direct the AO to reduce the amount of Rs. 62,71,942/- both from the export turnover as well as total turnover while computing deduction u/s 10A of the Act. Accordingly, this ground is allowed.
28. In Ground No. 19, the assessee has challenged the addition of an amount of Rs. 11,91,214/- being reimbursement expenses received from Virtusa Pvt Ltd., Srilanka to the export turnover.
29. We have heard the submissions of the parties and perused the materials on record. It is the contention of the learned AR that the Foreign Inward Remittance Certificate (FIRC) towards the amount of Rs. 11,91,214/- was received within the stipulated time and the AO without properly following the direction of the DRP has added the amount. After considering the submissions of the assessee, we direct the AO to verify this issue and if it is found that the FIRC is within stipulated time, then the amount of Rs. 11,91,214/- cannot be added to the income of the assessee. This ground is allowed for statistical purposes.
30. In the result, appeal of the assessee is partly allowed.
Pronounced in the open court
Sd/- Sd/-
(CHANDRA POOJARI) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 30 th August, 2013.
kv
26 ITA No. 1962/Hyd/2011
Virtusa (India) Pvt. Ltd.
Copy to:-
1) Virtusa (India) Pvt. Ltd., 6-3-1192, Block 'A', 3 rd Floor, My Home Tycoon, Begumpet, Hyderabad - 500 016.
2) DCIT, Circle - 3(3), 7 TH Floor, 'B' Block, IT Towers, AC Guards, Hyderabad - 500 004.
3) DRP, Hyderabad.
4) Addl. CIT (TP), Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.