Income Tax Appellate Tribunal - Delhi
Element K India Pvt. Ltd.,, New Delhi vs Assessee on 14 November, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I' : NEW DELHI)
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
and
SHRI C.M. GARG, JUDICIAL MEMBER
ITA No.431/Del./2012
(Assessment Year : 2007-08)
Element K India Private Ltd., vs. ITO, Ward 11 (1),
C - 72, Basement Floor, New Delhi.
South Extension,
New Delhi - 110 049.
(PAN : AAACE9836D)
(Appellant) (Respondent)
Assessee by : S/Shri Ashwani Taneja & Rahul Khare, Advocates
Revenue by : Shri Peeyush Jain, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal is filed by the assessee against the Assessing Officer's order u/s 143 (3) read with section 144C of the Income-tax Act, 1961.
The return of income filed on 30.10.2007 declaring income of Rs.15,550/- and paid taxes u/s 115JB of the Act. Return was revised on 13.11.2007. Assessee is an IT Service Provider to its parent company -
EK, USA. Assessee provides design and development support services for online courseware to its parent company. These services are provided at an agreed cost plus markup. A reference was made to TPO. TP adjustments were suggested. After approval from DRP-I, New Delhi, 2 ITA No.431/Del/2012 Assessing Officer made addition and assessed income at Rs.4,36,46,800.
Now assessee is in appeal before us.
2. The grounds taken by the assessee in the appeal read as under :-
"That on the facts and circumstances of the case, and in law;
1. The assessment order passed by the Learned Assessing Officer ('Ld. AO') pursuant to the directions of Learned Dispute Resolution Panel ('Ld. DRP') is bad in law and void ab-initio.
2. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition of Rs. 11,859,033 to the income of the appellant proposed by the Transfer Pricing Officer ('Ld. TPO') by holding that the international related party transactions pertaining to provision of content development support services do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act') and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of:
2.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case;
2.2. ignoring the fact that the appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions;
2.3. disregarding the arm's length price (,ALP'), as determined by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the appellant;3 ITA No.431/Del/2012
2.4. disregarding multiple year! prior years' data as used by the appellant in the TP documentation and holding that current year (i.e. FY 2006-07) data for comparable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing its TP documentation, and in doing so have grossly erred in;
2.4.1. interpreting the requirement of 'contemporaneous' data in the Rules to necessarily imply current/ single year (i.e. FY 2006-07) data; and 2.4.2. holding that at the time of creating/ maintaining the TP documentation, the appellant could have procured current single year data (i.e. FY 2006-07 data) from sources other than the electronic data bases, when in fact practically no such other sources were available in case of most companies;
2.5. collecting information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the appellant in the public domain and relying on selective information for comparability purposes (and to the extent of completely ignoring reliable data available in public domain/ annual reports in numerous cases);
2.5.1. and in doing so violating the fundamental principles of natural justice by relying on the information sourced under section 133(6); and also by 2.5.2. not sharing with the appellant, in case of a number of comparables, the information/ reply received by the TPO/ AO u/s 133(6);
2.6. benchmarking the appellant wrongly as a software development service provider without providing any reasoning or basis of such treatment despite the fact that the appellant has been characterized as a provider of content development services in the appellant's TP documentation;
2.7. rejecting comparability analysis in the appellant's TP documentation/ fresh search and in conducting a fresh 4 ITA No.431/Del/2012 comparability analysis based on application of the following additional/ revised filters in determining the ALP for the international transactions:
2.7.1. exclusion of companies having different financial year ending (i.e. not March 31,2007);
2.7.2. exclusion of companies with export sales that are less than 25% of their total revenue;
2.7.3. exclusion of companies with diminishing revenues/ persistent losses for last three years upto and including FY 2006-07;
2.7.4. retaining companies with related party transactions upto 25% of their sales;
2.7.5. adopting employee cost/ revenues filter greater than 25% of their total revenues as a search criteria for short listing and evaluating comparables;
2.7.6. exclusion of companies with onsite revenues greater than 75% of their export revenues for selecting comparables;
and rejecting, in particular, the following filters applied by the appellant in its TP documentation/ fresh search:
2.7.7. companies having other operating income (i.e. income other than manufacturing and trading income) to sales greater than 50% were accepted;
2.7.8. companies with net worth less than zero were rejected;
2.7.9. companies having research & development costs to sales less than 3% were accepted; and;
2.7.10. companies having advertising, marketing and distribution costs to sales less than 3% were accepted.5 ITA No.431/Del/2012
2.8. including high-profit making companies in the final comparables' set for benchmarking a low risk captive unit such as the appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-
formulated opinion without complete and adequate application of mind with the single-minded intention of making an addition to the returned income of the appellant;
2.9. including certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed;
2.10. resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous and inconsistent reasons;
2.11. excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed;
2.12. ignoring the business/ commercial reality that since the appellant is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a bench marking analysis, the appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact;
2.13. committing a number of factual errors in accept-reject of comparables and/ or in the computation of the operating profit margins of the comparables;
2.14. disregarding judicial pronouncements in India in undertaking the TP adjustment;
3. The Ld. AO erred in not verifying the factual errors in computation of the operating margins of the comparables and accordingly re-computing the ALP accordingly while passing the order, pursuant to the directions of the Ld. DRP;
6 ITA No.431/Del/20124. The Ld. AO and Ld. DRP erred in rejecting the claim of the appellant for deduction under section 10A of the Act, in respect of profits derived by its STP unit in Chennai on the allegation that it was formed by reconstruction of old business.
4.1 The Ld. AO and Ld. DRP erred in not following the order of the Bombay High Court on this issue in appellants own case for AY 2005-06 by stating that it is not aware whether any SLP has been filed by the Department against the said order of the Hon'ble High Court.
4.2 The Ld. AO and Ld. DRP erred in not adjudicating on merits and disregarding the detailed arguments/ submissions put forth by the appellant during the course of the DRP/ assessment proceedings.
5. The Ld. AO and Ld. DRP erred in disallowing Rs.809,447 under section 40(a)(ia) of the Act on which TDS has been deducted and deposited under Chapter XVII- B of the Act.
6. The Ld. AO and Ld. DRP erred in disallowing and considering Rs.114,030 on account of 'Computer Consumables & Small Accessories' and Rs.24,469 on account of 'Repair & Maintenance - others' as an expense of capital in nature.
7. The Ld. AO and Ld. DRP erred in disallowing an amount of Rs.925,768 on account of advances written off by the appellant.
8. Without prejudice to the grounds 4 to 7 above, on the facts and in the circumstances of the case and in law, the Ld. AO erred in not allowing deduction under section 10A of the Act on the increased amount of business income/profits on account of additions/disallowances made by the Ld. AO.
9. The Ld. DRP erred in disregarding the detailed arguments/ submissions put forth by the appellant during the course of the DRP/ assessment proceedings while passing its direction under section 144C of the Act;
7 ITA No.431/Del/201210. That the Ld. AO erred on facts and in law in charging interest under sections 234 A, B and C of the Act;
11. The Ld. AO has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation.
The above grounds are without prejudice to each other.
The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing."
3. Ground No.1 and Ground Nos.8 to 11 are general in nature, hence, does not require any separate adjudication.
4. Ground Nos.2 and 3 related to the addition of Rs.1,18,59,033/-
made by Assessing Officer on the basis of TPO report with regard to international transactions entered into by the assessee with parent company by holding that they were not at arm's length. This addition has been approved by the DRP though it was objected by the assessee.
5. Assessee has raised several sub-grounds in this regard in the ground no.2 of the appeal but all the grounds assail the TP adjustment of Rs. 1,18,59,033/-.
6. Ld. Counsel for the assessee drew our attention towards Pages 130, 158 and 159 of the TPO order. TPO selected 26 companies as comparable companies having the average mean of profits at 25%. These 8 ITA No.431/Del/2012 companies and their profit PLI (OP/TC) as reproduced in the TPO order are as under:-
S.No Company Name Sales (Rs. OP to Total Cost % Cr) 1 Accel Transmatic ltd 9.68 20.90% (Seg.) 2 Avani Cimcon Technologies 3.55 50.29% Ltd 3 Celestial Labs Ltd 14.13 58.35% 4 Datamatics Ltd 54.51 1.38% 5 E-Zest Solutions Ltd 6.26 35.63% 6 Flextronics Software Systems 848.66 25.31% Ltd (Seg.) 7 Geometric Ltd (Seg.) 158.38 10.71% 8 Helios & Matheson 178.63 35.63% Information Technology Ltd 9 IGate Global Solutions Ltd 747.27 7.49% 10 Infosys Technologies Ltd 13149 40.30% 11 Ishir Infotech Ltd 7.42 30.12% 12 KALS Information Systems 2.00 30.55% Ltd (Seg.) 13 LGS Global Ltd (Lanco 45.39 15.75% Global Solutions Ltd) 14 Lucid Software Ltd 1.70 19.37% 15 Mediasoft Solutions Ltd 1.85 3.66% 9 ITA No.431/Del/2012 16 Megasoft Ltd 139.33 60.23% 17 Mindtree Ltd 590.35 16.90% 18 Persistent Systems Ltd 293.75 24.18% 19 Quintegra Solutions Ltd 62.72 12.56% 20 R S Software (India) Ltd 101.04 13.47% 21 R Systems International Ltd 112.01 15.07% (Seg) 22 Sasken Communication 343.57 22.16% Technologies Ltd (Seg.) 23 SIP Technologies & exports 3.80 13.90% Ltd 24 Tata Elxsi Ltd (Seg) 262.58 26.51% 25 Thirdware Solutions Ltd 36.08 25.12 26 Wipro Ltd (Seg) 9616.09 33.48% 25% Ld. AR's pleadings were based on the decision of the Tribunal in the case of M/s Toluna India Pvt. Ltd. in ITA No. 5645/Del/2011 dated 26.08.2014. According to Ld. AR, the case of Toluna India Pvt. Ltd. was of AY 2007-08 and there were 26 comparable companies in the same serial order which were treated as comparable companies by the TPO. As per Ld. AR, Tribunal in the case of Toluna India Pvt. Ltd., supra, has discussed each and every comparable in detail and found only some 10 ITA No.431/Del/2012 companies as comparable. Ld. AR pleaded that the decision of Toluna, supra, should be followed in the assessee's case also as facts are same.
7. On the other hand, Ld. CIT DR opposed the submission and relied upon the orders of the authorities below and placed a copy of the decision of Delhi Bench in the case of Interra Information Technologies India Pvt.
Ltd. in ITA No. 5568 and 5680/Del/2010 and 2011 dated 31.10.2012 to the effect that such decision in the case of Toluna, supra, cannot be followed.
8. After hearing both the sides and having gone through the material placed on record, we hold that assessee is a wholly owned subsidiary of Element K Corporation, USA. It provides content design and development support services for online coursesware under a service agreement with its parent company. Assessee is remunerated on cost plus 15% markup for the services rendered. Thus, assessee is a low risk captive service provider. According to TPO also, assessee was IT service provider in the field of software development services to its parent company. TPO considered 26 companies mentioned above as comparable with average mean margin of 25%. We have gone through the order of TPO and order of the Tribunal in the case of Toluna India Pvt. Ltd. supra.
Comparison of both the orders shows that in the case of Toluna, the Assessment Year was 2007-08. TPO has taken these very 26 companies 11 ITA No.431/Del/2012 as comparables. Therefore, the action of the TPO itself suggests that assessee's case is comparable with the case of Toluna India Pvt. Ltd.
Assessment year involved is AY 2007-08 in both the cases. We have gone through the order passed by Delhi bench of Tribunal in the case Toluna India Pvt. Ltd, supra. Respectfully following the decision of ITAT, Delhi Bench in the case of Toluna India Pvt. Ltd., supra, we decide the issue accordingly. The relevant paras of the said decision are reproduced as under:-
"Accel Transmatic Limited (Software Services segment):
16.1. The TPO noticed that this company was finding place in the accept/reject matrix of the tax payer, but was rejected in the TP documents by stating that it failed the filter of Advertising, marketing and distribution expenses to sales at less than 3%. As the data of the Software services segment of this company was available, the TPO proposed to include it in the list of comparables. The assessee objected to the inclusion of this company on two issues, namely, the related party transactions were more than 10% and the advertisement expenses were more than 3% of sales. After rejecting such objections, the TPO included the software service segment of this company in the list of comparables. The assessee's objections before the DRP also met with failure before the DRP.
16.2. After considering the rival submissions and perusing the relevant material on record, we find that the assessee itself considered this company as functionally comparable by including it in the accept/reject matrix, but, rejected it on the ground that advertisement expenses were more than 3%. It is important to mention that the TPO has taken the figures of this company's Software services segment alone, which is admittedly akin to that of the assessee and that the Advertisement, marketing and distribution spend in this 12 ITA No.431/Del/2012 segment is less than 3%, being the filter applied by the assessee.
16.3. In so far as the other objection of the percentage of related party transactions is concerned, the Id. AR relied on two tribunal orders in which filter of 15% RPT has been accepted. On the contrary, we find the predominant view of the Tribunal across the country in several cases including Actis Advisors Pvt. Ltd. Vs. DCIT [(2012) 20 ITR (Trib.) 138 (Del)], Stream International Pvt. Ltd. Vs. ADIT (IT) [(2013) 141 ITD 492 (Mum) [authored by the AM of this order] and Agilent Technologies International Pvt. Ltd. Vs. ACIT [(2013) 36 CCH 187 (Del) (Trib.)], is that a company having more than 25% of related party transactions is considered as controlled. In other words, if the related party transactions in a company are less than 25%, then, it cannot be considered as controlled and hence qualifies to be comparable, if it is otherwise so.
16.4. Since both the objections taken by the assessee against the inclusion of this company are not sustainable, we uphold the inclusion of the Software service segment of Accel Transmatic Limited in the list of comparables. The assessee fails.
Avani Cimcon Technologies Limited:
17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to get complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such contention by relying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software development company engaged in providing software development and consulting IT services to its clients. This company was concentrating on internet enabled business information systems in a wide range of industries. Resultantly, this company was included in the list of comparables.
17.2. After considering the rival submissions and perusing the relevant material on record, we find from the description 13 ITA No.431/Del/2012 of business activity of this company as reproduced on internal page 90 of the TPO's order, that it is a pure software development service provider. In the absence of any other specific objection against this company, we are of the considered opinion that this company has been rightly included by the TPO in the list of comparables. The assessee fails.
Celestial Labs limited:
18.1. The TPO included this company in the list of comparables by observing that it was rendering mainly software development services.
18.2. After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of this company, a copy of which is available on page 41 of the paper book, that it is engaged mainly in the developing the software products in the shape of tools etc., which are protected using the patent. This company developed a tool, "CELSUITE" to drug discovery in finding the lead molecules for drug discovery. As this company is engaged in developing software tools after enough research and development activity and the tools so produced by it are its intellectual property, it cannot be considered as comparable to the assessee which is, also albeit in software development, but is doing it on contract basis without having any I.P. rights in the software developed by it.
It is further relevant to note that this company has been held to be not comparable by the Dispute Resolution Panel (DRP) in its Directions for a subsequent year, a copy of which is available on record. Thus this company can't be considered as functionally similar to that of the assessee. We, therefore, direct to exclude this company from the list of comparables. The assessee succeeds.
Datamatics Limited:
19. The assessee has no objection to the inclusion of this company in the list of comparables.
E-Zest Solutions Limited:
20.1. The annual report of this company was available, but, the functionality was not clear. Notice u/s 133(6) was issued 14 ITA No.431/Del/2012 by the TPO. On receipt of reply from the company, it was noticed that it was engaged in software development services and, hence, qualified all the filters applied by the TPO. After considering the objections of the assessee, the TPO held it to be includible in the list of comparables. The DRP upheld the draft order on this count.
20.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be comparable to that of the assessee company, because it is also engaged in rendering software development services to outsiders. The Id. AR needlessly tried to distinguish this company by contending that the services rendered by it were different from that of the assessee. We do not find any force in this submission. The comparability of a company is tested on various parameters and a view is taken as to its comparability or otherwise by considering the entirety of the facts and circumstances. Simply because the nature of software development services provided by a company is different from those provided by the assessee, the same does not become incomparable. Here is a case in which this company is also providing software development services as is done by the assessee on contract basis for others without having any intellectual property rights in them. A small variation in the nature of services does not make a company incomparable. It is not a case that the TPO has considered a company rendering managerial or engineering services and treated it as comparable to the assessee rendering software development services. Merely because the nature of service rendered by this company within the overall software development services, is not identical, will not make it incomparable, when it is otherwise similar to that of the assessee on all other scores. As such, we hold that this company was rightly included by the TPO in the list of comparables. The assessee fails.
Flextronics Software Systems Limited (Products and Services segment):
21.1. This company was finding place in the accept/reject matrix of the assessee, but was rejected in the TP study report because it failed R&D spend filter. The TPO noticed that the "Products and service segment" of this company was 15 ITA No.431/Del/2012 comparable to that of the assessee. As the product revenue was Rs. 92.1 crore out of the total product and service segment revenue of Rs. 847.2 crore, the TPO held this company to be comparable. The assessee's objection that this company had incurred huge R & D expenses and, hence, should be ignored, did not find favour with the TPO. The DRP approved the view taken by the authorities below on the comparability of this case.
21.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be not comparable to that of the assessee. The reason for our this decision is that the TPO has taken segmental data of Rs. Product and service segment of this company which has Product revenue of 92.1 crore. In contrast to it, the instant assessee is not selling any software products, but, is doing the job assigned to it on cost plus basis. The contention of the Id. DR that since the majority of the revenue from Rs. Product and services segment' was from the services segment and, hence, this company should be considered as comparable, is bereft of any force. When figures of Products and services are combined, it cannot be ascertained as to how much contribution was made by the product division or the service division to the overall revenue of the Product and services segment. As the assessee is admittedly not engaged in selling its-software products, such a company cannot be considered as comparable. It can be seen from the annual report of this company, a copy of which is available on page 88 of the paper book, that it consolidated its existing product portfolio and took steps to expand into further technologies by increasing the momentum in key initiatives in WIMAX, IMS, SIP & ISS/ESS domains. This company has its own products such as ASN, W1MAX, Gateway Product with ASN Light. It is further relevant to note that the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO has adopted the relevant figures for comparison. In view of the foregoing discussion, we hold this company to be not comparable and direct its exclusion from the list of comparables. The assessee succeeds.
Geometric Limited (Segmental):
16 ITA No.431/Del/201222. The assessee has no objection to the inclusion of this company in the list of comparables.
Helios & Matheson Information Technology Limited:
23.1. The TPO noticed from the annual accounts of this company that it was engaged in the software development services and also qualified employee cost filter. The assessee objected to its inclusion by, inter alia, contending that the PLI of this company was incorrectly worked out by the TPO.
Correcting this mistake in calculation part, the TPO held this company to be comparable and determined its revised PLI at 36.63%. The DRP upheld the inclusion of this company in the list of comparables.
23.2. After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of this company that it is engaged in rendering ITES BPO services, Application management services, Offshore delivery, Project management services. Public sector services, Maritime practice and Executive education information systems, etc. From the above narration of the nature of services rendered by this company, it can be seen that the same is not at all comparable to that of the assessee. It can further be noticed that the TPO has taken the figures of this company which represent Rs. Income from software sales and services'. Obviously, the assessee is not engaged in software sales. In view of our above discussion while dealing with the comparability of Flextronics Software Systems"
Limited, we are satisfied that this company cannot be considered as comparable and is, hence, directed to be excluded from the list of comparables. The assessee succeeds.
IGate Global Solutions Limited:
24. The assessee has no objection to the inclusion of this company in the list of comparables.
Infosys Technologies Limited:
25. From the nature of services rendered by the assessee to its AE on a cost plus basis without having any intangible assets or retaining any intellectual property in the work done by it, we find that Infosys Technologies Ltd., which is a giant company in terms of risk profile, scale, nature of services, 17 ITA No.431/Del/2012 revenue ownership of branded/proprietary products, onsite and offshore services, etc., cannot be compared with the assessee. Our view is fortified by the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. [(2013) 219 Taxman 26 (Del)] in which Infosys Ltd. has been held to be not comparable to a company that was engaged in the business of development of software for parent company. We, therefore, direct the exclusion of this case from the list of comparables. The assessee succeeds.
Ishir Infotech Limited:
26.1. T h e AO included this company in the list of comparables by observing that it qualified 25% employee cost filter and all other filters on the basis of information received u/s 133(6). The assessee objected to the inclusion of this company by contending that its related party transactions were more than 15% and employees cost was only 4%. The TPO rejected both the contentions by noticing that the employees cost was, in fact, more than 25% as was apparent from the information received u/s 133(6) and, further, the RPTs also did not exceed 25%.
26.2. Having heard both the sides and perused the relevant material on record, we find this company to be comparable to that of the assessee. The assessee's objection that employee cost of this company was 4% only, is not correct because of the exercise carried out by the TPO indicating that the employees cost was more than 25%. The Id. DR has taken us through the Annual accounts of this company which show that some part of the employees cost was also included in 'Administrative expenses' apart from direct Establishment expenses. It can be seen that the company has included Professional fees of Rs.3.41 crore a long with Director's salary, etc., under the head 'Administrative expenses'. When this objection was taken by the assessee before the TPO that the employee cost was only 4% viewing only the 'Establishment expenses' in isolation without considering the employee cost included under the head 'Administrative expenses', the TPO corrected the position by observing that the employee cost was more than 25% by impliedly including the personnel cost included under the head 'Administrative 18 ITA No.431/Del/2012 expenses'. The assessee did not challenge the TPO's calculation before the DRP on this issue. As such, it becomes apparent that there is no merit in this objection again taken up before us which has already been successfully dealt with by the TPO. Insofar as the assessee's objection about the related party transactions is concerned, we have discussed this issue thoroughly while dealing with the comparable case of Accel Transmatics Ltd. (supra) in which it has been held that filter of 25% of RPT is good enough to make a controlled transaction and thus expunging it from the list of comparables, which can only be uncontrolled transactions. The Id. AR failed to point out any functional difference of this company vis-a-vis the assessee. As such, we approve the view taken by the TPO in including this case in the list of comparables. The assessee fails.
KALS Information Systems Limited (Segmental): 27.1. The TPO observed that this company was engaged in Software development and training. As the software products constituted only 3% of its revenue and training revenue constituted 8.56%, the TPO held that this segment of KALS Information Systems Limited was rightly includible. 27.2. After considering the rival submissions and perusing the relevant material on record, it is an admitted position that the TPO adopted Software development segment of this company by noticing that this segment also included revenues from software products and training. In view of the fact that the assessee is not engaged in imparting any training on commercial basis or selling its software products, we hold that the financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability. As such, this case is directed to be excluded. The assessee succeeds.
LGS Global Limited (Lanco Global Solutions Limited):
28. The assessee has no objection to the inclusion of this company in the list of comparables.
Lucid Software Limited:
19 ITA No.431/Del/201229.1. The TPO noticed that this company was a pure software development services company and did not have any related party transactions. On being called upon to explain as to why this company be not treated as comparable, the assessee replied that Lucid Software Limited has developed Rs.Muulam' software, the details of which were collected from the website of Lucid Software itself. In view of such details, it was contended that this company was a software product company having intellectual property rights. Rejecting the assessee's objections, the TPO included this company in the list of comparables. 29.2. After considering the rival submissions and perusing the relevant material on record, it can be seen that the assessee categorically objected before the TPO to the effect that this company was mainly into software product business having license of such products. The TPO ignored the assessee's submissions despite the fact that sufficient material taken from the website of this company was placed before him in support of the contention. It can be seen from page 192 of the paper book, being Notes to the balance sheet of Lucid Software Ltd., that this company developed software products in-house. The expenditure so incurred on product development has been duly capitalized by Lucid Software Ltd. These facts amply bring out that Lucid Software Ltd. cannot be considered as comparable. We, therefore, direct the exclusion of this case from the list of comparables. The assessee succeeds.
Mediasoft Solutions Limited:
30. The assessee has no objection to the inclusion of this company in the list of comparables.
Meqasoft Limited (Consulting/Blue Alley Division): 31.1. The TPO, on perusal of data of this company available in the Prowess and also on consideration of information received u/s 133(6) observed that this company was engaged in software development services under its Consulting division. The assessee objected to its inclusion before the TPO on the ground that there was restructuring inasmuch as there was acquisition of some other companies during the year. Not convinced with the assessee's objection, the TPO included this company in the list of comparables.
20 ITA No.431/Del/201231.2. Having heard the rival submissions and perused the relevant material on record, we find from the Director's report of this company, a copy of which is available on page 193 of the paper book, that the financial results for the year include the business performance of Visual Soft Technologies Ltd. w.e.f. 1st October, 2006 consequent to the amalgamation. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. vs. DCIT [(2013) 154 TTJ (Mum) 176] has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. Since the financial results of Megasoft Ltd. have the impact of the merger of Visual Software Technologies Ltd., w.e.f. 1st October, 2006, obviously, this company cannot be considered as comparable. Accordingly, this company is directed to be excluded. The assessee succeeds.
Mindtree Limited:
32. The assessee has no objection to the inclusion of this company in the list of comparables.
Persistent Systems Limited:
33. After considering the rival submissions and perusing the relevant material on record, we hold that this company also cannot be considered as comparable because of merger of another company into it, which fact is evident from page 196 of the paper book. It can be seen that a subsidiary company was merged into this company pursuant to judgment of Hon'ble Bombay High Court w.e.f. 1.4.06.
Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds.
Quintegra Solutions Limited:
34. The assessee has no objection to the inclusion of this company in the list of comparables.
R S Software (India) Limited:
35. The assessee has no objection to the inclusion of this company in the list of comparables.21 ITA No.431/Del/2012
R Systems International Ltd. (Segmental): 36.1. The TPO included this company in the list of comparables and determined its OP/OC at 15.07%. The Id.
AR has no objection to the inclusion of this company in the list of comparables. His only objection was confined to the calculation of OP/OC at 15.07%. He contended that the TPO erred in excluding the amount of Rs. Provision for doubtful debts' from Operating costs.
36.2. We are not agreeable with the contention advanced on behalf of the assessee for the reasons set out by the TPO on this issue at page 126 of his order. It has been mentioned that the provision for doubtful debts/advances was excluded because these were not recurring for the last three years and were also not at consistent level. We fail to appreciate as to how a Rs. Provision for doubtful debts can be considered as a part of operating cost unless it is shown that the actual expenditure on account of bad debts was equal to such amount of provision. Nothing of this sort has been proved on behalf of the assessee. As such, we hold that the TPO was justified in excluding the Rupee Provision for doubtful debts/advances' from total operating cost. This contention raised on behalf of the assessee is repelled. Resultantly, this company is held to be rightly included in the list of comparables with the correct percentage of OP/OC at 15.07%. The assessee fails.
Sasken Communication Technologies Limited (Segmental):
37. After considering the rival submissions and perusing the relevant material on record, we find that this company acquired Botnia Hitec Oyoy, Finland and its two wholly owned subsidiary companies during the year, which fact is apparent from the Director's report of this company available at page 202 of the paper book. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we order for the exclusion of this company from the list of comparables. The assessee succeeds.
SIP Technologies & Exports Limited:
38. The assessee has no objection to the inclusion of this company in the list of comparables.22 ITA No.431/Del/2012
Tata Elxsi Ltd. (Software development and services segment):
39.1. The TPO included this company in the list of comparables by noticing that its 'Software development and services segment' matched with the assessee. On being called upon to explain as to why this company be not included in the list of comparables, the assessee stated that the nature of activity done by this company was different inasmuch as it was engaged in R&D activities also which resulted in creation of intellectual property. Not convinced with the assessee's submissions, the TPO included this segment of the company in the list of comparables.
39.2. After considering the rival submissions and perusing the material on record, we find from page No.206 of the paper book, which is Annexure to the Director's report of this company, that the nature of its activity is quite distinct from that of the assessee. It can be seen that this company is into development of hardware and software for embedded products such as multimedia and some other electronics, etc. Apart from that, this company is also engaged in making some programmes developing technology intellectual property. As the nature of activity carried out by the assessee in question is nowhere close to that of Tata Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds.
Thirdware Solutions Limited (Segmental):
40. The assessee has no objection to the inclusion of this company in the list of comparables.
Wipro Limited (IT Services segment):
41. After considering the rival submissions and perusing the relevant material on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) has upheld the exclusion of this company also from the list of comparables ■ 23 ITA No.431/Del/2012 on the basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds.
42. In view of the foregoing discussion, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of ALP of the assessee's international transactions in consonance with the directions given hereinabove in the matter of inclusion or exclusion of the 26 comparables companies taken by the TPO as comparables."
Ld. AR relied on the decision of Toluna India Pvt. Ltd., supra, where the functions, assets and risks are identical. TPO had selected those very 26 companies as comparables in the assessee's case also. Therefore, respectfully following the decision in the case of Toluna India Pvt. Ltd., supra, we direct TPO/AO to follow the above mentioned order of Tribunal in the case of Toluna India Pvt. Ltd. in the matter of comparable companies and work out the transfer pricing adjustment, if any, based on that. Accordingly, this ground is allowed subject to above observations.
9. Ground No.4 is regarding deduction u/s 10A amounting to Rs.2,98,09,829/- which was disallowed by Assessing Officer by following the assessment order for Assessment Year 2006-07, holding that the deduction u/s 10A was not allowable as there was reconstruction of old business. This was objected by the assessee before DRP contending that this issue has been decided in favour of the assessee in 24 ITA No.431/Del/2012 Assessment Year 2005-06 by the Tribunal and High Court. In Assessment Year 2006-07, CIT (A) has granted relief to the assessee.
The DRP declined to interfere with the finding of Assessing Officer on the ground that it is not known whether the department has filed an SLP in Assessment Year 2005-06 or not.
10. Ld. AR for the assessee submitted that this issue has been decided in favour of the assessee in Assessment Year 2005-06 by Hon'ble Bombay High Court. Therefore, the issue is settled in favour of the assessee. Hence, this ground should be allowed.
11. We have heard both the sides and perused the records. This issue has been decided by Hon'ble Bombay High Court in favour of the assessee in its own case. DRP did not dispute this. Ld. CIT DR did not controvert this factual aspect. Therefore, we hold that deduction u/s 10A is to be allowed to the assessee. We order accordingly. Hence, this ground is decided in favour of the assessee.
12. Ground No.5 is relating to disallowance u/s 40(a)(ia) amounting to Rs.8,09,447 made on the ground that though the tax has been deducted at source but it was not deducted at the rates applicable. DRP confirmed the action of the Assessing Officer by holding that there was short deduction of TDS and thus disallowance was in order.
25 ITA No.431/Del/201213. Ld. AR for the assessee argued that no disallowance can be made u/s 40(a)(ia) on account of short deduction. Disallowance u/s 40(a)(ia) can be made only when there is absolute failure to deduct the tax. Ld. AR relied on the order of Hon'ble Kolkata High Court in the case of CIT vs. S.K. Tekriwal reported in 361 ITR 432 (Cal). Ld. CIT DR supported the order of Assessing Officer and DRP.
14. After hearing both the sides on the issue, we delete the disallowance keeping in view the decision of Hon'ble Kolkata High Court in the case of CIT vs. S.K. Tekriwal, cited supra, according to which short deduction of TDS cannot be the basis for disallowance u/s 40(a)(ia) of the Act. There is no dispute that disallowance was made for short deduction of TDS. Hence, this disallowance of Rs. 8,09,447/- is hereby deleted.
15. Ground No.6 relates to the disallowance of Rs.1,14,030/- on account of computer consumables and small accessories and Rs.24,469/-
on account of repairs and maintenance. Assessing officer held pen writers, HDR ram, Hard Discs, PCI Card, Head Phone, Web Camera, I Pod, upgradation of Packeteers as capital in nature and allowed depreciation. DRP confirmed the action of Assessing Officer.
16. Ld. AR for the assessee drew our attention to the submissions made before DRP submitting that nature of expenses were revenue and 26 ITA No.431/Del/2012 not capital, but failed to demonstrate as to how such expenses were not capital in nature.
17. After hearing both the sides, we hold that assessee failed to demonstrate how these expenses were revenue in nature. We hold that the disallowance was correctly made. Hence, this ground of assessee's appeal is dismissed.
18. Ground No.7 relates to the disallowance of Rs.9,25,768/- on account of advances written off. The disallowance was made by Assessing Officer as it was excess TDS which was claimed as write-off.
DRP did not interfere.
19. Ld. AR for the assessee apart from submitting that such write-off should be allowed as business loss u/s 28 could not show with evidence in the nature of advance and circumstances under which it was written-
off. Therefore this ground of appeal is also dismissed.
20. In the result, the appeal of the assessee is partly allowed.
Order pronounced in open court on this 14th day of November, 2014.
Sd/- sd/-
(C.M. GARG) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 14th day of November, 2014
TS
27
ITA No.431/Del/2012
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi. AR/ITAT