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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Element K India Private Ltd., C 72, Basement Floor, South Extension, New Delhi 110 049. Vs. ITO, Ward 11 (1), New Delhi.
November, 17th 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/2012

4.      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/2012

     10.      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/2012

22. 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/2012

29.1. 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/2012

31.2. 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/2012

13.   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

 
 
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