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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SMT. BEENA PILLAI & Ms. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.844/Bang/2017 Assessment year : 2012-13 The Joint Vs. M/s.Dell International Services India Commissioner of Private Limited, Income Tax, LTU, (for the merged entity Dell India Bangalore. Private Limited), No.12/1, 12/2A, 13/1A, Divyashree Gardens, Challagutta Village, Varthur Hobli, Bangalore – 560 071. PAN : AAACH1925Q APPELLANT RESPONDENT IT(TP)A No.932/Bang/2017 Assessment year : 2012-13 M/s.Dell International Services Vs. The Joint Commissioner India Private Limited, of Income Tax, LTU, (for the merged entity Dell India Bangalore. Private Limited), Bangalore – 560 071. PAN : AAACH1925Q APPELLANT RESPONDENT Revenue by : Shri Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. Assessee by : Shri T. Suryanarayana, Advocate Date of hearing : 07.11.2022 Date of Pronouncement : 14.11.2022
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O R D E R Per Padmavathy S., Accountant Member This appeal is against the order passed by the Commissioner of Income Tax (Appeals) – 14, Bangalore dated 31.01.2017 for the assessment year 2012-13.
The brief facts are that the Assessee is engaged in the business of providing Information Technology (“IT”) support services / software development services and IT Enabled services (“ITES”) to its AEs. For the assessment year 2012-13, the assessee filed the return of income on 30.11.2012 declaring a total income of Rs.464,04,33,480. The case was selected for scrutiny under CASS and a notice u/s.143(2) was duly served on the assessee. During the year the international transactions between the Assessee and its AEs were the provision of software development services and ITES and therefore a reference was made to the Transfer Pricing Officer for determination of the Arm’s Length Price (ALP). The TPO passed an order dated 14.01.2016 u/s. 92CA of the Act, determining a TP adjustment of Rs. 210,53,06,218 i.e., Rs. 70,93,30,168/- in the SWD segment and Rs. 139,59,76,050/- in the ITES segment. Incorporating the aforesaid TP adjustment, the AO passed the final assessment order vide order dated 16.05.2016. A rectification application was filed by the Assessee on 18.5.2016 on account of a mistake apparent from the record as the TPO had considered the operating cost for the ITES segment. Subsequently, the TPO passed a rectification order reducing the ITES adjustment to Rs.
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138,79,80,037. Therefore, the total TP adjustment stood at Rs. 209,73,10,205. Aggrieved by the assessment order, the Assessee preferred an appeal before the CIT(Appeals), who vide order dated 31.01.2017 granted partial relief. Aggrieved by the order passed by the CIT(Appeals), both the assessee (IT(TP)A No.932/Bang/2017) and revenue (IT(TP)A No.844/Bang/2017) are in appeals before the Tribunal.
SOFTWARE DEVELOPMENT SEGMENT 3. The assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method. The profit level indicator is Operating Profit by Operating Cost (OP/OC). The net mark-up on cost earned by the Assessee as per the TP study is as follows
Particulars Amount – Rs. Operating Revenue 13,863,792,857 Operating Cost 12,073,667,569 Operating Profit (Total Income – Total Cost) 1,790,125,288 Operating/Net mark-up (OP/OC) 15% 4. The Assessee selected the below listed comparables to arrive at the arithmetic mean basis which the assessee concluded that the international transaction with respect to software development services is within arm’s length.
Sl. Name of the company Average NPI No (in %) 1. Acropetal Technologies Ltd. 26.19 2. Akshay Software Technologies Ltd. -0.17 3. CAT Technologies Ltd. 8.68 4. Helios and Matheson Information Technology Ltd. 14.16 5. Maveric Systems Ltd. -0.60
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R S Software (India) Limited 14.23 7. Silverline Technologies Ltd. 9.50 8. Cherrytec intelisolve Ltd. 21.38 9. Cigniti Technologies Ltd. 7.63 10. Mindtree Limited 13.23 Arithmetical Mean 11.42%
The TPO accepted two comparables i.e., R S Software (India) Limited and Mindtree Limited and rejected the remaining 8 comparables selected by the Assessee. The TPO applied new filters and arrived at a fresh set of comparables as under:-
Sl. Mark-up on Mark-up on No. Total Costs Total Costs Name of the Company (WC–unadj) (WC–adj) (in %) (in %) 1 Datamatics Global Services Ltd. 14.57 14.48 2 Genesys International Corpn. Ltd. 30.09 25.10 3 ICRA Techno Analytics Ltd. 17.24 15.63 4 Infosys Ltd. 43.10 41.37 5 Larsen & Toubro Infotech Ltd. 25.47 25.12 6 Mindtree Ltd. 15.01 14.43 7 Persistent Systems Ltd. 27.20 26.52 8 RS Software (India) Ltd. 15.34 17.25 9 Sasken Communication Technologies Ltd. 12.15 12.79 10 Spry Resources India Pvt. Ltd. 26.18 10.66 AVERAGE MARK-UP 22.63 20.34 6. The TPO reworked the operating cost of the assessee at Rs. 12,110,964,036/- and re-computed the arm’s length price (ALP) to arrive at the TP adjustment as under:-
Arm’s Length Mean Mark-up 22.63% Less: Working Capital Adjustment 2.30% Adjusted mean mark-up of the comparables 20.33% Operating Cost Rs. 1211,09,64,036/-
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Arm’s Length Price – 120.33% of Operating Cost Rs. 1457,31,23,025/- Price Received Rs. 1386,37,92,854/- Shortfall being adjustment u/s. 92CA Rs. 709,330,168/-
On appeal, the CIT(A) accepted the contentions of the Assessee and directed exclusion of Genesys International Corpn. Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., and Spry Resources India Pvt. Ltd. The CIT(A) upheld the exclusion of the remaining comparables selected by the Assessee.
IT(TP)A No.844/Bang/2017 (Revenue’s appeal)
The revenue is in appeal before us contending the exclusion of Genesys International Corpn. Ltd., ICRA Techno Analytics Ltd., Infosys Ltd. and Spry Resources India Pvt. Ltd. by the CIT(Appeals) with regard to the Software development segment. Ground No. 1 to 4 of revenue appeal relate to the same which we will take up for adjudication first.
The ld AR made the following submissions with regard to the exclusion of Genesys International Corpn. Ltd and Infosys Ltd -
Genesys International Corporation Ltd. (“Genesys”): It is submitted that Genesys provides geographical information services comprising of photogrammetry, remote sensing, cartography, data conversion and state of the art terrestrial and 3D geo-contentincluding location based and other computer based services. However, despite providing the aforesaid diverse services, it has only one reporting segment and, therefore, in the absence of segmental data, it cannot be taken as a comparable to the Appellant’s SWD service segment. Also, a
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perusal of its annual report discloses that Genesys made substantial investments in the area of advanced survey technologies to provide services, which therefore led to increase in operating costs during the year. Further, Genesys is actively engaged in carrying out R&D and, what is more, has substantial intangible assets amounting to more than 10% of its total asset base. The fact that Genesys has diversified into other areas is amply demonstrated by the fact that it has altered its main objects by including new business areas, viz. On-shore and Off-shore Oil & gas and other field surveys etc.Detailed submissions in this regard are made at pages 357-365 and 573of the paperbook. Therefore, it is submitted that the CIT(A) has rightly directed exclusion of the aforesaid company. Infosys Limited It is submitted that Infosys is engaged in diversified operations and also has huge brand value. It is engaged in application development and maintenance, infrastructure management services, product engineering and testing services, business process management, consulting, package implementation etc. whereas the Appellant is engaged in providing routine software development services. Further, despite providing the aforesaid diverse services, its annual report does not provide details between services and products and, therefore, it cannot be taken as a comparable to the Appellant’s SWD service segment. Further, the brand value of Infosys is very high and has been valued at Rs.56,286 crores which is 1.66 times its total revenue for FY 2011-12. Infosys has also incurred Rs. 90 crores specifically for brand building and marketing rendering it incomparable to the Appellant on this ground as well. Infosys has also incurred huge expenditure towards R&D amounting to Rs.676 crores and, in addition, it has presence of significant intangibles forming 96.35% of the total asset base in the company. Infosys derives more that 50% of its revenue from onsite activities. Therefore, it is submitted that the CIT(A) has rightly directed exclusion of the aforesaid company. Detailed submissions in this regard are made at pages 374-381 and 567 of the paperbook
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The ld AR placed reliance in this regard on the decision of this Tribunal in the case of Microfocus Software India Pvt. Ltd. v. ACIT (Order dated 17.03.2020 passed in IT(TP)A No. 368/Bang/2017) wherein this Tribunal directed exclusion of above four companies from the list of comparables to a SWD service provider for the same assessment year.
We heard the parties. We notice that the coordinate bench in the case of Microfocus Software India Pvt. Ltd.(supra) has considered the inclusion of the above four companies and held that –
We heard Ld D.R and perused the record. In the case of CGI Information systems & management Consultants P Ltd (supra), following four companies were excluded with the following observations – “29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows:
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(a) Infosys Ltd., was excluded from the list of comparable companies by following the decision of the Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi). The discussion is contained in paragraphs 4.5 to 4.7 of the Tribunal's order. The Tribunal accepted that Infosys Ltd. is a giant risk taking company and engaged in development and sale of software products and also owns intangible assets and therefore not comparable with a software development service provider such as the Assessee in that case. (b) ***** (c) ***** 30. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP bas endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. 31. The learned DR. next submitted that Genesys International Corporation Ltd., should be excluded from the list of comparable companies. The comparability of this company with the Assessee has been discussed by the TPO in page-11 of his order. The Assessee objected to inclusion of this company in the list of comparable companies for the reason that this company is functionally different and owns intangible assets which are peculiar only when the Assessee owns software products. The objections of the Assessee are contained in its letter dated 22.12.2015 addressed to the TPO and in annexure-B to the said letter. The relevant portion of the objection is at pages 711- 713 of the Assessee's paper book. According to the Assessee this company is engaged in providing Geographical Information Services
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comprising of Photogrammetry, Remote Sensing, Cartography, Data Conversion, state of the art terrestrial and 3D geocontent including location based and other computer based related services. Pagc-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO, Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey, to be innovators and leaders in the fields of location based services related geoplatforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover. 32. The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates a few development centres in India. The company is predominantly into software development services. The intangibles in the possession of the company are only the GIS database which is only depreciation. It does not add significant value to the company. 33. The objections as put forth before the TPO were reiterated before the DRP. The DRP in paragraphs 6.2.2 & 6.2.3 of its directions dealt with this issue as follows: "6.2.2 The functions of the Assessee company have been examined in detail. A financial product on which the settlement system of bank runs is a real time system. It is very complex. Any bug or problem in it can crash the entire banking system of several nations. The Assessee's claim of providing only basic software services is rejected. 6.2.3 The Panel holds that the software for financial product is much more complex than a geospatial software. Therefore, the panel holds that the Genesys is a valid comparable."
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The learned counsel for the Assessee submitted that the DRP has completely proceeded on wrong facts which does not either emanate from the order of the TPO or the submissions of the Assessee. He reiterated submissions made before the TPO and DRP. The learned OR relied on the order of the DRP/TPO. 35. We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this: company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental results. In the circumstances, we are of the view that there is no basis for the TPO to conclude that this company is predominantly into software-development services. The presence of intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub- rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
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In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly.” “Accordingly, following the decision rendered by the co- ordinate bench in the case of CGI Information Systems & Management Consultants P Ltd (supra), we direct exclusion of M/s Genesys International Corporation Ltd, M/s Infosys Ltd, M/s Larsen & Toubro Infotech Ltd and Persistent Systems Ltd.”. 12. Respectfully following the above decision of the coordinate bench we direct the exclusion of M/s Genesys International Corporation Ltd, M/s Infosys Ltd.
ICRA Techno Analytics Limited
The ld. AR submitted that ICRA is engaged in various business activities such as Software development, consultancy services, engineering services, web development and hosting services, and business analytics and business process outsourcing. It is submitted that ICRA concentrates in niche areas of business intelligence and analytics space. Therefore, ICRA cannot be considered as a comparable. Moreover, ICRA as merged with its wholly owned subsidiary, Axiom Technologies Ltd. ICRA also fails the Related Party Transaction filter applied by the TPO. Perusal of the annual report reveals RPT amounting to 29.36% of the total sales. Detailed submissions in this regard are made at pages 366-373 of the paperbook.
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The ld DR submitted that for the purpose of RPT test the assessee has included the reimbursements which is upheld by the CIT(A). The ld DR also submitted that the reimbursements cannot be considered for RPT and the company does not fail the RPT test if reimbursements are not considered. The ld DR therefore submitted that the company should be included as a comparable.
We heard both the parties and perused the material on record. We notice that the exclusion of M/s.ICRA Tecno Analytics Ltd has been considered by the coordinate bench in the case of Micrfocus Software India Pvt ltd (supra) where it is held that –
In respect of ICRA Techno Analytics Ltd, it is the submission of the Ld A.R that this company was excluded in AY 2011-12 in the case of Applied Materials India P Ltd (supra) by holding that it is providing various types of services and segmental information thereof is not available. He invited our attention to the annual report of this company pertaining to the year relevant to AY 2012-13 and submitted that, in the year under consideration also, the facts are identical. Accordingly, he sought exclusion of this company. 8 We heard Ld D.R and have gone through the Annual Report of this company. It is stated in page 44 of the Annual report (Running page 2364 of assessee’s paper book) that this company is engaged in the software development & consultancy, engineering services, web development & hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing. It is further stated under the head “Revenue recognition” (page 45 of the Annual report) that a. the revenue from services consists of revenue earned from services performed for software development & consultancy, licensing & sub- licensing fee, annual maintenance charges for
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software support, web development and hosting which is recognized to the extent services are performed. b. Revenue from sales is recognized as and when the delivery of branded software is made is booked net of trade discount….. Page no.2 of Annual Report (Running page 2379 of paper book) contains Profit and Loss account. The Revenue from sale of services is mentioned therein, but break-up details is not given. Thus, we notice that this company is engaged in various types of services and break-up details of each of the services are not available. The Ld A.R also mentioned that a company named M/s Axiom Technologies Ltd has merged with this company during this year. However, the Director’s report states that the Hon’ble High Court of Calcutta has passed the order confirming the merger of above said company. The effective date of merger is not given. Hence it is not clear as to whether the effective date of merger falls during the year under consideration or in any of the earlier years. If it is falling in any of the earlier years, then the merger should not have any effect, unless the assessee is able to demonstrate the impact, if any. We notice that the TPO has applied RPT filter of 25%. According to the assessee, the RPT works out to 29.36%, while the TPO has worked out the same at 23.15%. We notice that the Ld DRP has not addressed this issue. We notice that the TPO has also taken the view that the services rendered by this company are not different, while the contention of the assessee is that this company is engaged in providing different kinds of services which are not akin to that of the assessee. Hence we are of the view that this company requires examination afresh at the end of AO/TPO. Accordingly, we restore this company to the file of AO/TPO for examining it afresh. 16. Considering the above decision of the Tribunal and that the method as to how that RPT filter is considered by the TPO / CIT(A) needs factual verification we remit the issue of exclusion of M/s. ICRA Techno Analytics Ltd back to the TPO/AO for examining afresh.
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Spry Resources India Private Limited
The ld. AR submitted that this company is functionally dissimilar to the assessee as it is engaged in development of software products and outsourcing activities. The segmental information pertaining to revenue generated from software development services and development of software products is not available. Moreover, it is submitted that there has been an error in the computation of NCP margins by the TPO wherein, foreign exchange fluctuation gains/losses have been taken into consideration. Detailed submissions in this regard are made at pages 396-399 of the paperbook
We heard the DR and perused the material on record. We notice that the exclusion of M/s Spry Resources P Ltd has been considered by the coordinate bench in the case of Micrfocus Software India Pvt ltd (supra) where it is held that –
The next company that was sought by the Ld A.R to be excluded is M/s Spry Resources P Ltd. It is the submission of the assessee that this company is engaged in the development of software products and outsourcing activities. The segmental details are also not available. It was further submitted that this company is engaged in rendering onsite activities. Accordingly he sought for exclusion of this company. 10. We have heard Ld D.R and gone through the Annual Report of this company. The Revenue recognition policy given under Significant Accounting policies (Page 2790 of paper book) states that the assessee is recognizing revenue from software consultancy and also from sale of products. This company is possessing inventories also, which is shown
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in Note no. 18 (page 2787 of paper book). The revenue from operations, however, consists of Income from software development. Hence it is not clear as to whether this company has sold any of its inventories or not during the year under consideration. We notice that the TPO has not examined the aspects relating to software products. We notice that in the case of CGI information systems & Management Consultants (P) Ltd (supra), M/s Spry Resources India P Ltd has been taken as a comparable company. All these aspects show that there is no clarity on the factual aspects relating to this company. Accordingly, we are of the view that this company also requires fresh examination at the end of AO/TPO. Accordingly we restore this company to the file of the AO/TPO for examining it afresh. 19. Respectfully following the above decision and the fact that in assessee’s case also the TPO and the CIT(A) has not given any clear finding with regard to the factual aspects, we remit the issue of exclusion of M/s Spry Resources P Ltd back to the TPO/AO for fresh examination.
During the course of hearing the ld AR submitted that if the ground no 1 to 4 of the revenue appeal with regard to the exclusions in the SWD segment is adjudicated and allowed, the grounds raised by the assessee for SWD segment would become academic and will not be pressed. In the light of our adjudication in the above paragraphs, the assessee’s grounds with regard to SWD segment are dismissed as not pressed. The TPO/AO is directed to re-compute the ALP of the said segment in accordance with the directions given herein above. It is ordered accordingly
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INFORMATION TECHNOLOGY ENABLED SERVICES (ITeS)
The assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method. The profit level indicator is Operating Profit by Operating Cost (OP/OC). The net mark-up on cost earned by the Assessee as per the TP study is as follows
Particulars Amount – Rs. Operating Revenue 11.354.253.017 Operating Cost 9,908,477,671 Operating Profit (Total Income – Total Cost) 1,445,775,346 Operating/Net mark-up (OP/OC) 15% 22. The Assessee selected the below listed comparables to arrive at the arithmetic mean basis which the assessee concluded that the international transaction with respect to software development services is within arm’s length.
Sl. Name of the company Average NPI (in %) No. 1. Informed Technologies India Ltd. 14.00 2. Jindal Intellicom Limited 13.27 3. Accentia Technologies Ltd. 24.99 4. ICRA Online Limited 24.01 5. Cameo Corporate Services Ltd. 10.06 6. In house Production 10.33 7. Cosmic Global 11.27 8. Wisec Global Limited 0.14 9. Techprocess solutions Ltd. 4.40 Arithmetical Mean 12.50%
The TPO accepted three comparables highlighted above i.e., Informed Technologies India Ltd., Jindal Intellicom Limited and
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Accentia Technologies and rejected the remaining 6 comparables selected by the Assessee. The TPO applied new filters and arrived at a fresh set of comparables as under:-
Sl. Mark-up on Mark-up on No. Total Costs Total Costs Name of the Company (WC–unadj) (WC–adj) (in %) (in %) 1 Accentia Technologies Ltd. 9.11 11.75 2 Universal Print Systems Ltd. (Seg) (BPO) 54.52 52.46 3 Informed Technologies India Ltd. 6.42 6.08 4 Infosys BPO Ltd. 32.96 36.30 5 Jindal Intellicom Ltd. 0.46 -0.05 6 Microgenetic Systems Ltd. 19.99 19.61 7 TCS E-Serve Ltd. 62.10 63.69 8 BNR Udyog Ltd. (Seg) (Medical Transcription) 47.19 41.58 9 Excel Infoways Ltd. (Seg) (IT/BVPO) 35.02 29.79 10 e4e Healthcare Business Services Pvt. Ltd. 18.99 19.85 AVERAGE MARK-UP 28.11 28.68 24. The TPO re-computed the arm’s length price (ALP) to arrive at the TP adjustment as under:-
Arm’s Length Mean Mark-up 28.11% Less: Working Capital Adjustment -0.57% Adjusted mean mark-up of the comparables 28.68% Operating Cost Rs. 990,84,77,671/- Arm’s Length Price – 120.33% of Operating Cost Rs. 1275,02,29,067/- Price Received Rs. 1135,42,53,017/- Shortfall being adjustment u/s. 92CA Rs. 139,59,76,050/-
The TPO inadvertently considered the wrong operating cost of INR 990,84,77,671/- in the above computation of the adjustment instead of the correct operating cost of INR 990,22,63,797/-. A rectification
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application was filed in this regard and subsequently, the TPO issued a rectified TP order with the rectification adjustment of Rs.138,79,80,037/-.
The CIT(A) rejected the contentions of the Assessee and upheld inclusion of (i)Universal Print Systems Ltd., (ii) TCS e-Serve Ltd., (iii) Infosys BPO Ltd and (iv) BNR Udyog Ltd. The CIT(A) accepted the contention of the Assessee and directed exclusion of Excel Infoways Ltd. The CIT(A) suo moto directed exclusion of Jindal Intellicom Ltd.
IT(TP)A No.844/Bang/2017 (Revenue’s appeal)
Exclusion of Excel Infoways Ltd (“Excel”) - Ground No.5
The assessee submitted before the TPO that the company fails the employee cost filter and the service revenue filter. The TPO based on the information obtained from the company u/s.133(6) held that the employee cost constitutes 26% and therefore clears the employee cost filter. With regard to service revenue filer the TPO held that the revenue of ITES/BPO segment alone is considered and therefore the company should be included for comparable.
On perusal of the annual report the CIT(A) observed that the company has not allocated any employee cost to the Infra Activity segment and therefore concluded that the information obtained from the company u/s.133(6) is not reliable. Basis this, the CIT(A) held that the company is to be excluded.
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The ld. DR submitted that the CIT(A) held that the financial data of the comparable company is unreliable even when the data adopted for benchmarking was from the audited annual reports and procured from the company u/s. 133(6) of the Act.
The ld. AR submitted that
(i) Excel is functionally dissimilar to the Assessee and is engaged in handling business relations and managing customer relationship but there is no information available on the activities in performance as part of managing business relations and customer relationships. (ii) Its functions do not include maintaining business/customer relations and, therefore, it is not functionally comparable to the Assessee. (iii) Excel has employed software and hardware experts to render its services to its customers and is equipped with an extensive fleet of the IT sector related equipments including advanced mechanisms in IT sector and latest software to conduct its operations smoothly. This would clearly demonstrate that Excel is engaged in providing high end services as well which are wholly dissimilar to the services provided by the assessee. (iv) A perusal of its annual report clearly discloses that Excel provides innovative solutions services unlike the Assessee. (v) It is disclosed in its annual report that Excel considered closing down its IT and BPO segments of the company and to diversify into construction, development and real-estate. (vi) During FY 2014-15, the company changed its name from “Excel Infoways Ltd.” to “Excel Realty Infra Ltd.” which suggests an altogether different nature of services being provided by the company.
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(vii) Excel fails the employee cost filter applied by the TPO as its ratio of employee costs to sales is only 13.05%. (viii) Excel fails the ITE service revenue filter applied by the TPO as the income from ITE services is only 51.06% of the total revenue. (ix) From the annual report of the company, it is also evident that the company has had an exceptional year of operations, recording a steep decrease of 85.45% in year on year profits after taxes for FY 2011- 12, without there being any reason forthcoming for the same. 30. We heard the DR. We notice that the coordinate bench of the Tribunal in the case of Micro Focus Software India Private Limited(Supra) has considered the issue and held that Excel be excluded. The relevant part of the decision of the Tribunal is extracted in the later part of this order. Respectfully following the said decision we uphold the decision of CIT(A) to exclude Excel from the list of comparables.
IT(TP)A No.932/Bang/2017 (Assessee’s appeal)
Out of the 6 grounds and various sub-grounds raised by the assessee with regard to the TP issues, the ld AR during the course of hearing presented arguments with regard to only Ground no 2(j), Ground no 2(k), Ground no 4. The rest of the grounds are either general or not pressed and dismissed accordingly.
Through Ground no.2(j) the assessee is contending the inclusion of Universal Print Systems Ltd.,TCS e-Serve Ltd., Infosys BPO Ltd., and BNR Udyog Ltd as comparable.
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The ld AR presented the arguments through a detailed written submission and the relevant extract as given below -
Universal Print Systems Ltd: The Assessee submits that Universal Print Systems Ltd. (‘UPSL’ for short) should be excluded from the list of comparables as it fails the employee cost filter applied by the TPO since its employee cost to turnover ratio is 18.56%. Further, UPSL is also not functionally comparable to the Assessee as it is primarily engaged in providing integrated print solutions to its customers. The Pre-press BPO segment of UPSL is involved in providing services such as scanning, design/layout, trapping, hand- outlined clipping path and image masking, and magazine and catalogue publishing. Thus, it is clear that UPSL is not engaged in providing normal ITE services. Further, it is clear that the aforesaid activities performed by UPSL are akin to those performed by a digital media/advertising company and, therefore, it is clear that it is functionally dissimilar to the Assessee. Moreover, the functions performed by UPSL do not fall within the definition of IT enabled services as defined in Rule 10TA(e) of the Income-tax Rules, 1962, and thus for this reason as well it can be concluded that UPSL is not engaged in providing ITE services and is, hence, not comparable to the Assessee. The TPO held that the pre-press BPO segment as comparable to the Assessee and the DRP upheld the same despite the above submissions. Detailed submissions in this regard are made at pages 442-444 of the paperbook. Thus, this company ought to stand excluded from the final list of comparables Infosys BPO Ltd.: Infosys BPO enjoys huge brand value and has also made significant investments in creating intangibles and owns several intellectual properties. In view of its substantial brand value, the company enjoys an advantage in the market and has high bargaining power. As a result of
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the brand value, the company receives a premium in the market. The company owns significant intangibles. Further the company has had an exceptional year of operation where in Infosys BPO has acquired 100% voting interest in Portland Group Pty Ltd. It is, therefore, submitted that Infosys BPO is not comparable to the Assessee. Detailed submissions in this regard are made at pages 445-449 of the paperbook. It is also submitted that Infosys BPO is engaged in the provision of integrated IT and business process outsourcing solutions across a variety of verticals including Banking and Capital Markets, Communication Media and Entertainment, Manufacturing, Emerging Market Solutions, Insurance and Healthcare, Retail, Energy, Utilities and Resources, Automotive and Aerospace, Transportation and Services. The services rendered consist of Sourcing and procurement, customer service, financing and accounting, knowledge services and human resources. Further, the company is engaged in providing consultancy, management and strategic transformation services wherein business metrics and benchmarks developed by the company is used in assisting the client. The company is also engaged in the provision of cloud based services such as ‘E-Discover’ as well as services in relation to compliance in Health, Safety and Environment. The company focuses of delivering solutions to its clients and, hence these services cannot be compared to the services provided by the Assessee. The DRP without appreciating the functions of the Assessee, held that it performs high end complex services, which is without any basis and despite the functions being routine ITE services. As regards brand, the DRP wrongly held that brand cannot necessarily be said to generate higher profits. TCS E-Serve Ltd.: It is submitted that TCSE is a knowledge process outsourcing (‘KPO’ for short) company which is engaged in providing high end services like analytics, insights and support services for both data and voice processes. However, no break-up of income from KPO services is available in the annual report. The skillset required for rendering routine
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ITE services is entirely different from the one required for providing high end ITE services i.e., KPO services. Also, TCSE enjoys the brand value of the Tata group and therefore enjoys a high bargaining power in the market. It has incurred substantial expenses towards brand building during FY 2011-12. Further, the company bears several risks unlike the Assessee, which is a risk free service provider. Detailed submissions in this regard are made at pages 450-451 and 567, 587 of the paperbook. Without appreciating the above submissions the CIT(A) upheld the findings of the TPO holding that brand is irrelevant and that in any event the Appellant was part of a group having high brand value, which conclusion is without any basis. BNR Udyog Ltd. The Assessee submits that BNR Udyog Ltd. (‘BNR’ for short) is liable to be excluded from the list of comparables as it fails the RPT and ITE service revenue filters applied by the TPO. It is submitted that the ratio of BNR’s RPT to sales amounts to 49.60% and, therefore, fails the RPT filter applied by the TPO. The computation in this regard is set out at page 453 of the paperbook. Thus, BNR ought to be excluded on this ground. That apart, BNR also fails the ITE service revenue filter applied by the TPO. As per the disclosures in its Annual Report, its income from ITE services constitutes only 42.92% of its total revenue and thus fails the said filter applied by the TPO and, therefore, BNR is liable to be excluded on this ground as well. Detailed submissions in this regard are made at pages 452-455 of the paperbook. 34. We notice that the exclusion of all these companies have been considered by the coordinate bench of the Tribunal in the case of Micro Focus Software India Private Limited (supra) where it is held that –
We heard the parties and perused the record. M/s Universal Print Systems Ltd (seg.)(BPO) was restored back to the file of AO/TPO in the case of CGI Information Systems & Management Consultants P
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Ltd (2018)(94 taaxmann.com 97) at paragraph 47 to 52 of the order of Tribunal. The relevant paragraphs are extracted below:- “47. The next submission of the learned counsel for the Assessee was with regard to exclusion of 2 comparable companies from the list of 7 comparable companies that remain after the order of the DRP. The first comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP/TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP/TC of this company will be only 51.80%. The Assessee further pointed out (Page764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.63% of the total revenue from operations of this company as per its annual report. The Assessee also pointed out that in the Pre- press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The
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employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue. 48 to 51… 52. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre- press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised by the Assessee in this regard about lack of information about allied services performed by die pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by
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the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.” Following the same, we restore this comparable to the file of AO/TPO for examining it afresh. 13. M/s Infosys BPO Ltd, TCS E-serve Ltd and M/s Excel Infoway Ltd., were excluded by the co-ordinate bench in the case of CGI Information Systems & Management Consultants P Ltd (supra) 44-46. The co- ordinate bench had followed the decision rendered by another co-ordinate bench in the caseof Baxter (I) (P) Ltd vs. A.CIT (2017)(85 taxmann.com 285 (Delhi-Trib.). The relevant observations made by the co-ordinate bench in the case of CGI Information systems & management consultants P Ltd (supra) are extracted below:- “44. The learned counsel for the Assessee submitted before us that 3 out of the 5 companies which the Assessee seeks to exclude from the list of comparable companies viz., Infosys BPO Ltd. TCS B-service Ltd. and Excel Infoway Ltd., were considered for exclusion by the Tribunal in the case of a similar Assessee such as the Assessee engaged in providing ITES in the case of Baxter (I) (P.) Ltd. v. A.CIT [2017] 85 taxmann.com 285 (Delhi - Trib.). The learned DR relied on the order of the DRP/TPO. 45. We have considered the rival submissions. In the case of Baxter (I) (P.) Ltd., (supra) the Delhi ITAT Bench considered comparability of the aforesaid three companies with a company engaged in providing ITBS such as the Assessee. The functional profile of the Assessee and the Assessee in the case of Baxter (I) (P.) Ltd. (supra) are identical inasmuch as 7 out of the 10 companies chosen by the TPO in the case of the Assessee were chosen as comparable in the case of Baxter (I) (P.) Ltd. (supra). The Tribunal
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held on the comparability of the three companies Infosys BPO Ltd., TCS E-service Ltd. and Excel Infoway Ltd., as follows: (i) In paragraph 23 of its order the Tribunal held that Infosys BPO Ltd., is not comparable with a company providing ITES because of brand value and extraordinary events in the previous year relevant to AY 2012-13 viz., acquisition of an Australia based company which had effect on its profits. (ii) In paragraphs 24 & 25 of its order the Tribunal held Excel Infoway Ltd., as not comparable because of consistent diminishing revenue. The figures of diminution revenue are given in paragraph 24 of its order. (iii) In paragraphs 21 & 22 of its order the Tribunal held that Excel Infoway Ltd., was liable to be excluded because it was also engaged in the business of software testing, Verification and validation of software at the time of implementation and data centre management activities. 46. Respectfully, following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins.” Respectfully following the above said decision, we direct exclusion of above said three companies. 14. M/s BNR Udyog Ltd was held to be not a good comparable in the case of M/s Zyme Solutions P Ltd (Order dated 28-06-2019 passed in IT(TP)A No.1661/Bang/2016) with the following observations:- “8. We have heard the rival submissions on the comparability of the aforesaid company. The Delhi ITAT in the case of BT e-service (India) Ltd vs. ITO (ITA No.6690/Del/2016 for AY 2012-13 order dated 19-6-2018 considered the comparability of this company and came to the conclusion that this company was carrying out medical
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transcription, medical billing and coding whereas the Assessee was a captive service provider. The Tribunal followed its own ruling in the same assessee’s case in AY 2011-12 in ITA No.99/Del/2016 reported in (2017) 87 taxmann.com 251 (Del) in BT e-serve (India) P Ltd vs. ITO giving identical reasons for excluding BNR Udyog Limited from the list of comparable companies in the field of companies rendering ITES such as the Assessee. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO.” Respectfully following the above said decision of co- ordinate bench, we direct exclusion of M/s BNR Udyog Ltd from the list of comparable companies. 35. Respectfully following the above said decision of co- ordinate bench, we direct exclusion of M/s Infosys BPO Ltd, TCS E-serve Ltd., M/s BNR Udyog Ltd and M/s Excel Infoway Ltd., from the list of comparable companies and the issue of exclusion Universal Print Systems Ltd is restored to the file of AO/TPO for examining it afresh
Through Ground No. 2(k) the assessee is contending the exclusion of Jindal Intellicom Limited by the CIT(A).
The ld AR submitted that Jindal is a comparable company selected by the Assessee its TP study and accepted by the TPO as being comparable to it and thus, the CIT(A) erred in suo motu rejecting the same, that too without putting the Assessee on notice as regards the same. It is submitted that the CIT(A) has arbitrarily excluded the said comparable on the ground that there is no reliable segmental information with respect to the ITES segment. In this regard, it is
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submitted that the company is engaged only in the business of call centre services and therefore, the company has only one reportable segment. The company passes all the filters applied by the TPO and therefore, ought to be included in the final list of comparables.
We notice that the coordinate bench of the Tribunal in the case of CGIInformationSystems & Management Consultants (P.) Ltd vs ACIT ([2018] 94 taxmann.com 97 (Bangalore - Trib.)) has considered the issue of suomoto exclusion of Jindal Intellicom Ltd and has held that -
The same reasoning given for including Informed Technologies India Ltd., would apply for including Jindal Intellicom Ltd., also. This company was selected by the Assessee in its TP study and accepted by the TPO as being comparable to it (pages 16-17 of the TP order). Since it passed all the filters applied by the TPO, as subsequently upheld by the DRP, it was rightly included in the list of comparables. In the proceedings before the DRP, the Assessee did not object to its inclusion in the list of comparables. However, despite the above, the DRP on its own directed its exclusion on the premise that since it catered only to customers in USA, where there was allegedly an adverse business climate for outsourcing work, its profitability was impacted. According to the DRP the Assessee's AE was in Netherlands where there was no adverse market conditions and therefore Jindal Intellicom Ltd., was liable to be excluded from the list of comparable companies. The DRP did not put the Assessee on notice as to its proposed action of excluding this company. We find that the Assessee does not merely provide services to its AE in Netherlands. It also provides ITE services to its AE's in UK, Finland, Germany, Sweden, Belgium, Denmark, Norway and USA. A perusal of its Form 3CEB for the instant assessment year which is produced at pages 1035-1046 of the paper book, shows that it provided services to AE's at USA also. Therefore, the entire basis for its exclusion is wholly misconceived and erroneous and, accordingly, its
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suo motu exclusion by the DRP is not proper. The functions performed by this company are comparable to the services provided by the Assessee and have not been disputed whatsoever by the DRP. That apart, Jindal has been selected by the TPO as a comparable to the Assessee for the assessment years 2008-09, 2011-12 and 2013-14 and its inclusion for those assessment years has not been objected to by the Assessee either. Moreover, it is consistently figuring in the list of comparables in companies providing ITES. We therefore direct inclusion of this company in the list of comparable companies. 39. In assessee’s case, the CIT(A) has suomoto excluded company on the ground that there is no reliable segmental information with respect to the ITES segment. Considering the facts of the case and the decision of the coordinate bench in the case of CGIInformationSystems & Management Consultants (P.) Ltd (supra) we remit the issue back to the TPO/AO. The TPO/AO directed to verify the segmental details and consider the issue in the light of the decision of the coordinate bench. It is ordered accordingly
Ground No. 4: Negative working capital adjustment: 40. The TPO made a negative working capital adjustment and the CIT(A) upheld the order of the Assessing Officer.
In this regard it is submitted that the adjustment is made without appreciating that although the Assessee has some receivables appearing in its books, since the Assessee is a captive service provider, it does not carry any working capital risk since it is always funded by its AEs. Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee
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however is not an entrepreneur but a captive service provider which is entirely funded by the AEs. This being so, the Assessee does not stand to lose anything as it is compensated on a total cost plus basis. The Appellant is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise.
We heard the DR. We notice that the issue is covered by the decision of this Hon’ble Tribunal in Tivo Tech Private Limited v. DCIT (order dated 12.06.2020 in IT(TP)A No. 1619/Bang/2017), where it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. The relevant extract of the decision is as given below -
As far as Gr.No.2.6 is concerned, the Assessee has contended that the TPO and the DRP erred in adding to the average arithmetic profit margin of the comparable companies chosen by the TPO, negative working capital adjustment. It was submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however is not an entrepreneur but a captive service provider which is entirely funded by the AEs. This being so, the assessee does not stand to lose anything as it is compensated on a total cost plus basis. The assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. It was submitted that in the Assessee's own case for assessment year 2012-13, the CIT(A) has reversed the order of the TPO making negative working capital adjustments. Detailed submissions in this regard are placed at pages 154-155 and 333-337 of the paperbook.
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The Assessee also places reliance on Digital Juice Animation (P.) Ltd. v. Asstt. CIT [order dated 6-2-2020 in IT(TP) No. 215/Bang/2017], Lam Research India (P.) Ltd. [IT Appeal No. 1473 & 1385 (Bang.) of 2014, order dated 30-4-2015] and Dy. CIT v. Software AG Bangalore Technologies (P.) Ltd. in [IT Appeal No. 1628 (Bang.) of 2014, order dated 31-3-2016] passed by this Hon'ble Tribunal, where it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. The Tribunal in the aforesaid decisions have followed decision of ITAT Hyderabad Bench in the case of Adaptec (India) (P.) Ltd. v. Asstt. CIT [2015] 57 taxmann.com 307. The learned DR relied on the order of the TPO/DRP on the issue. 17. On the above ground, it is undisputed that the Hyderabad Bench of the ITAT in case of Adaptec (India) (P.) Ltd. (supra) held that no such addition can be made for the following reasons:- 'Ground No. 8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : 14. Ground No. 11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the
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assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as the company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 3-8-2012 has given a finding as under : "7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to this situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made." In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made.' 18. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the
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profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment. 19. It is undisputed that the Assessee is also a captive service provider such as the Assessee in the case decided by the ITAT Hyderabad Bench and therefore making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks, was not correct. No other contrary decision was brought to our notice. Following the aforesaid decisions, we allow Gr.No.2.6 raised by the Assessee. 43. Respectfully following the above decision of the coordinate bench we direct the TPO not to make negative working capital adjustment. The TPO is further directed to recomputed the ALP of the ITeS segment in accordance with the directions given in this order.
CORPORATE TAX Ground No. 7: Deduction under Section 10AA of the Act: 44. The Assessee had claimed a sum of Rs. 12,83,55,202/- as deduction under Section 10AA of the Act in respect of its SEZ unit at Chennai. The claim for deduction under Section 10AA of the Act commenced in the year 2010-11 when the Chennai unit was part of the erstwhile company i.e., Perot Systems Business Process Solutions India Pvt. Ltd. which was subsequently merged with the Assessee company. The Assessee is engaged in the business of process outsourcing services in the nature of data processing and software development since 1998. The Asseessee set up a third unit in Chennai which commenced business on 29.04.2009 in a Special Economic
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Zone (“SEZ”) and the assessment year 2010-11 was the first year of claim of deduction under Section 10AA of the Act for the Chennai SEZ unit.
In the year AY 2010-11 the claim of the Assessee came to be disallowed by the Assessing Officer on the ground that
(i) the softex forms were not certified by the SEZ/STPI authorities; (ii) the Chennai unit was formed by splitting up or reconstruction of a business already in existence and; (iii) the unit did not export any computer software. 46. For the year under consideration the AO followed the order for AY 2010-11, and disallowed the claim of deduction u/s.10AA by stating that the reasons for the denial of the claim has been discussed in detail in the order for AY 2010-11 and that the said order of the AO was confirmed by the CIT(A). The AO further held that there is no change in the facts of assessee’s case for AY 2012-13 and therefore the entire claim of deduction u/s.10AA was disallowed. The AO also gave a finding that no deduction from the total turnover is required towards the communication expenses since the issue pending before the Supreme Court and that the term total turnover is not defined under that Act. The AO did not make any disallowance towards this since the entire deduction u/s.10AA was denied.
The CIT(A) upheld the order of the AO by relying on his order for AY 2010-11 though he has recorded a finding in the rder that the
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assessee has filed evidences relating to the entire procedural aspects of export of software from Chennai SEZ.
During the course of hearing the ld AR presented arguments with regard to each of the grounds listed about based on which the deduction u/s.10AA is denied. –
Non-submission of the endorsed softex forms – The ld AR submitted that the STPI authorities were in-charge of the SEZ filings in the absence of a designated SEZ authority. Though the company was filing the softex forms on regular basis with the in-charge authorities, the authorities were not endorsing the same. It is submitted that non- endorsement of the softex forms submitted to the requisite authorities is attributable to a lapse on the part of the authorities and the Appellant should not be put into undue hardship on account of the same by disallowing the tax holiday claim made under Section 10AA of the Act. Further, it is submitted that the lower authorities failed to appreciate the evidences produced by the Assessee during the assessment proceeding. It is submitted that the submission of Softex Form and certification of the said form by STPI is a post facto procedure prescribed by the Reserve Bank of India to ensure timely and appropriate collection of export proceeds. Filing of softex forms is not a pre-requisite under Section 10AA of the Act and only a procedural requirement as per the SEZ Act. Reliance in this regard is placed on the decision of the Hon’ble Tribunal in the case of
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Microsemi India (P.) Ltd v. DCIT ([2016] 65 taxmann.com 318 (Hyderabad - Trib.)).
Chennai unit was formed by splitting up of the existing units, The ld AR submitted that the Chennai unit was set up and commenced its activities in the year 2009. The turnover of the three units demonstrates that the units have not been impacted by each other and the Chennai SEZ unit has been established as a part of its expansion program and not through splitting of its existing business. Further, the unit wise additions to fixed assets shows substantial investments have been made in the SEZ unit. Also, the entire investment made to the fixed assets by the SEZ unit is towards acquisition of new asset and no machinery previously used has been transferred to the unit. With regard to the contention that the assessee has not furnished project wise payroll of its employees to verify the new unit the ld AR submitted that the Assessee had filed the unit-wise payroll details for AY 2010-11 substantiating that the transfer of manpower from the existing units to the SEZ was less than the threshold of 50% as provided by the CBDT circular No. 14/2014 dated 08.10.2014. Reliance in this regard is placed on the decision of the Hon’ble Bombay High Court in the case of CIT v. Metropolitan Springs (P) Ltd (191 ITR 288). The ld AR also submitted that the test of whether the unit was formed by splitting up of the existing units or restructuring is to be done in the first year of the claim, i.e. AY 2010-11 and the Assessing Officer cannot now deny the claim by examining the factors which were required to be seen in the first year of the claim.
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No evidence for data transmission or export of software - The Assessing Officer in this regard held that the Assessee has not submitted documents substantiating the International Private Leased Circuit (“IPLC”) connection and it had a National Private Leased Circuit (“NPLC”) connection and not an IPLC connection and therefore, concluded that there was no export of software at all.
The ld AR submitted that the Assessing Officer has failed to appreciate the business model of the Assessee and has merely proceeded on the basis that since the Assessee did not have IPLC, there was no export at all. It is submitted that although the Assessee has NPLC, the internet connect would be used to access the Virtual Private Network (VPN”) which provides access database of customers outside India for their data/transaction processing. The VPN uses virtual connections routed through the internet from the business’s private network to the remote site. It enables a computer to send and receive data across shared or public networks as if it is directly connected to the private network, while benefiting from the functionality, security and management policies of the private network. A VPN is created by establishing a virtual point to point connection through the use of dedicated internet connections, virtual tunnelling protocols or traffic encryptions. A VPN connection across the internet is similar to the wide area network link between sites. Thus, the employees of the Assessee access the servers at the customer’s end over this VPN and process the data. Thus, the Assessee exports its services through internet and no separate IPLC connection is required for the same.
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The ld DR submitted that the coordinate bench of the Tribunal in assessee’s own case for AY 2010-11 had not given any finding with regard to the allowability and the assessee had also not contended the issue further. Therefore the ld DR argued that the issue of denial of deduction u/s.10A has been accepted by the assessee.
The ld AR submitted counter argument stating that the Hon’ble Tribunal in assessee’s own case for AY 2010-11 had dismissed the appeal on the ground that the order was passed in the name of erstwhile company i.e., Perot Systems Business Process Solutions India Pvt. Ltd. which was subsequently merged with the Assessee. The ld AR submitted that the contention of the ld DR that the issue has reached finality is not factually correct. The ld AR in this regard drew our attention to the relevant orders of the AO, CIT(A) and the Tribunal for AY 2010-11.
We heard the rival submissions and perused the material on record. According to the provisions of section 10AA the benefit in respect of newly established Industrial Undertaking in SEZ is available to all Assessees on export of certain articles or things or software subject to certain conditions. The term export turnover is defined to mean the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in
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rendering of services (including computer software) outside India. From the definition it is clear that for the purpose claiming the deduction u/s.10AA, the proceeds of the export turnover should have been brought into India. We notice that the Hon’ble Tribunal in the case of Microsemi India (P.) Ltd (supra) has held that the furnishing of the SOFTEX Form and certification of the said form by STPI is a post- facto procedure prescribed by the Reserve Bank of India to ensure timely and appropriate collection of export proceeds and that the deduction u/s.10A is to be granted based on the receipt of export proceeds into India in convertible foreign exchange.
In assessee’s case details of the invoices along with the corresponding FIRCs mapping are furnished by the assessee before the lower authorities to substantiate that the export proceeds are received by the assessee (pages 958-977 of the paper book). We also notice that the AO has denied the deduction, based on the findings of AY 2010-11 by stating that some of the SOFTEX forms are not certified and that the Bank of America has not sent any reply. However there was no adverse finding recorded by the AO with regard to the SOFTEX forms and there is no discussion of the documents submitted by the assessee for the year under consideration. Further, copies of the invoices and softex forms submitted to the authorities and the letters addressed to them requesting endorsement are furnished by the assessee before is in the additional evidence (pages 1-42 of the additional evidence compilation). In view of this we remit the issue to the AO to verify the evidences submitted keeping in mind the ratio laid down by the
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Hon’ble Tribunal in the case of Microsemi India (P.) Ltd (supra) that submission of Softex Form and certification of the said form by STPI is a post facto procedure prescribed by the Reserve Bank of India to ensure timely and appropriate collection of export proceeds and is not a pre-requisite under Section 10AA.
Next we will consider the issue of denial of claim of the Asseessee on the ground that the Chennai unit was formed by splitting up of the existing units. Para 2 & 3 of the CBDT Circular No.14/2014 [F.NO.178/84/2012-ITA.I] dated 18.10.2014 reads as follows:-
“2. Representations have been received stating that the aforesaid limit of 20% is inadequate and restrictive since it impacts the competitiveness of Indian Software Industry in global market in terms of quality of product and delivery time-lines. Global competitiveness can be ensured only when highly skilled and experienced manpower is deployed for software development. Requests have, therefore, been made seeking enhancement of the limit of 20% in line with the recommendation of Rangachary Committee, which was set up to review the taxation of IT Sector and Development Centers. 3. The matter has been re-examined by the Board. In supersession of the Circular No. 12/2014 dated 18th July, 2014, it has now been decided that the transfer or re-deployment of technical manpower from existing unit(s) to a new unit located in SEZ, in the first year of commencement of business, shall not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred as at the end of the financial year does not exceed 50 per cent of the total technical manpower actually engaged in development of software or IT enabled products in the new unit.” (emphasis supplied)
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In terms of the above circular, it is clear that the test is to be performed on the first year of commencement of business. It is noticed that the coordinate bench of the Tribunal in the case of IBM India (P.) Ltd vs ACIT [2020] 120 taxmann.com 424 (Bangalore - Trib.) has considered a similar issue and held that that the satisfaction of conditions in section 10AA(4) regarding formation are required to be established only in the year of formation.
In assessee’s case the Chennai unit is formed in the year 2009 and the first year of claiming the deduction u/s.10AA is AY 2010-11. We therefore direct the AO to keep in mind in the remand proceedings that conditions in section 10AA(4) regarding formation are required to be established only in the year of formation.
Next we will consider the contention of the AO that the assessee did not do any export no evidence was produced. It is an accepted fact that the assessee is a registered STPI/SEZ unit and that the evidences of the receipts towards exports received in convertible foreign exchange has already been furnished before the lower authorities. Once evidence for rendering of services, invoicing done to the service recipient and the realisation of foreign currency (through FIRC) are established, the denial of export benefits merely due to non-availability of IPLC connection in our considered view is not justifiable particularly when IPLC connections is not the only mode of communication by which IT and ITES services can be provided to
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overseas customers. We therefore direct the AO not to deny the claim on this basis in the remanded proceedings.
The ld AR during the course of hearing made a without prejudice submission that while re-computating the deduction under Section 10A of the Act the expenses towards telecommunication charges in foreign currency should be reduced from the export turnover and the total turnover.
We notice that the issue is settled now by the decision of the Hon’ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. which is affirmed by the Hon’ble Supreme Court in CIT v. HCL Technologies reported in [(2018) 404 ITR 719] that any adjustment made to the export turnover ought to be correspondingly made to the total turnover as parity is to be maintained between the two. We therefore direct the AO accordingly to make the adjustment, if any, towards telecommunication charges in foreign currency from the export turnover and the total turnover in the remanded proceedings.
GROUND NO. 8: Disallowance of Marked to Market losses: 63. The Assessee is primarily engaged in the business of outsourcing services to group companies located outside India and as a result, the Assessee has huge receivables in foreign currency and is exposed to risk on account of foreign currency fluctuations. In order to mitigate such risk, the company has entered into contracts with Banks to hedge its foreign currency exposure.
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The Assessing Officer has disallowed the same holding it to be a notional and contingent and treated the same as a speculative loss in terms of Section 43(5) of the Act. The Assessing Officer having noted that the forward contracts are in respect of debtors, relying on Instruction No. 3/2010 issued by the Central Board of Direct Taxes concluded that it is a notional loss and has to be treated the same as a speculative loss in terms of Section 43(5) of the Act.
In this regard, the ld AR submitted that the MTM losses has arisen due to hedging in revenue transactions and the same is not capital in nature. The ld AR further submitted that MTM losses are not notional or contingent in nature as they arise out of a contractual obligation. The ld AR also submitted that the loss is on account of restatement of debtors, creditors, book liability etc. which was incurred on account of forward contracts which includes both realized and unrealized losses. The ld AR drew our attention to the detailed submissions in this regard are placed at pages 787-794, 800-802, and 814 of the paperbook. It is also submitted that before the Assessing Officer and CIT(A), bank confirmations along with valuation statements were produced to demonstrate the nature of the transaction at page 980 read with page 1432 to 1444 of the paperbook. The ld AR place reliance on the decisions of the Hon’ble Karnataka High Court in the case of PCIT v. Mphasis Ltd. (order dated 24.02.2021 in ITA No. 62/2018), Hon’ble Bombay High Court in Income-tax-16, Mumbai v. D. Chetan & Co. reported in (2016) 75 taxmann.com 300 (Bombay) and the Hon’ble Supreme Court in the case of Commissioner of
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Income-tax, Delhi vs. Woodward Governor India (P.) Ltd., reported in (2009) 179 Taxman 326 (SC)
We heard the rival submissions and perused the material on record. We notice that similar issue is considered by the coordinate bench of the Tribunal in assessee own case AY 2009-10 (order dated 08.04.2022 passed in M.P No. 22-23/Bang/2022), wherein the Assessing Officer was directed to delete the disallowance of loss for the reason that loss on account of foreign exchange fluctuations is allowable as a deduction under Section 37(1) of the Act. For the year under consideration, the Assessing Officer did not dispute the fact that the loss incurred by the Assessee is in the ordinary course of its business. Therefore considering the facts of the case and that the issue being covered by the decision of the coordinate bench in assessee own case we hold that no disallowance is warranted for MTM loss incurred and the AO is directed to delete the addition.
GROUND NO. 9: Disallowance of Advances written off: 67. The Assessee had advanced certain amounts to its employees and the money advanced could not be recovered from the employees as they had either left the organisation or were terminated. The Assessee had written off the advances for an amount of Rs.1,89,26,071 in the profit and loss account and claimed the same as a deduction under Section 28(i) of the Act. The Assessing Officer disallowed the same on the ground that no details were furnished regarding the effort made to
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recover the same and that it is not allowable under Section 36(1)(vii) of the Act. The said disallowance came to be upheld by the CIT(A).
The ld AR submitted that giving advance to the employees were essential and wholly and exclusively linked to the business of the Assessee. The ld AR It is submitted that the advances written off should be allowed as a deduction under Section 28(i) of the Act. Reliance is placed on the decision of the Hon’ble High Court of Delhi in the case of CIT v. Triveni Engineering & Industries Ltd.
We heard the rival submissions and perused the material on record. The reason quoted by the AO and the CIT(A) for not allowing the deduction is that the efforts made by the assessee to recover the money from the employees is not clearly demonstrated. Further it was held that the amount could not be recovered from more than 1000 employees is not believable without proper evidence to substantiate the claim. We notice that a similar issue is considered by the coordinate bench of the Tribunal in the case of M/s.Xchanging Solutions Limited vs DCIT (IT(TP)A No.3358/Bang/2018 dated 01.11.2021) and held that -
8.4. We have heard rival submissions and perused the material on record. The claim made by the assessee is not towards bad debt u/s 36(1)(vii) of the I.T.Act, but under the provisions of section 28 of the I.T.Act as business or trade loss. Giving advance to the employees as well as vendors were essential and wholly and exclusively linked to the business of the assessee. The loss if any is an incidental business loss. In this context, we rely on the judgment of the Hon’ble Delhi High Court in the case of Triveni Engineering & Industries Limited (ITA No.56 of
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2009). Further, the advances given to the vendors, which is non- recoverable, is also allowable as business loss. This proposition has also been upheld by the Hon’ble Apex Court in the case of Mysore Sugar Co. Ltd. (1962) 46 ITR 649. Since the A.O. has not examined the claim of deduction u/s 37(1) r.w.s. 28 of the I.T.Act, we deem it appropriate to restore the issue to the files of the A.O. for de novo consideration. The assessee is directed to furnish necessary evidences before the A.O. The A.O. is directed to dispose of the matter expeditiously after affording a reasonable opportunity of hearing to the assessee. 70. As mentioned earlier in the order that the reason for not allowing the deduction is that the assessee has not furnished sufficient evidence in support of the claim. It is noticed that the Assessee has filed employee-wise listing of advances written off which are available at pages 1452-1470 of the paper book and detailed submissions are placed at pages 794-796 and 808 of the paper book. The ld AR during the course of hearing submitted additional evidence towards details of the advances written off (pages 88-139 of the additional evidence compilation (Vol II)). The ld.AR prayed for admission of additional evidences before the Tribunal as these evidences when considered would substantiate the claim of the assessee. The additional evidences now produced go the root of the issue and the core reason for not allowing the claim of the assessee. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record.
Considering the facts of the case and respectfully following the above decision of the coordinate bench we remit the issue to the AO for a de novo consideration based on the evidences and supporting
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furnished by the assessee after giving a reasonable opportunity of being heard to the assessee. It is ordered accordingly.
GROUND NO. 10: Disallowance of interest on delayed remittance of TDS: 72. The Assessing Officer disallowed the interest on delayed payments of TDS amounting to Rs. 2,56,390/- on the ground that it is not an allowable expenditure under the Act.
In this regard, the ld AR submitted as the interest paid on delayed remittance of TDS is compensatory in nature, the same is an allowable expenditure under Section 37 of the Act. Reliance in this regard is placed on the decision of this Hon’ble Tribunal in the case of Total Environment Building Systems Pvt. Ltd. v. DCIT (order dated 29.06.2022 passed by this Hon’ble Tribunal in ITA No. 45- 46/Bang/2017). Reliance is also placed on the decision of the Hon’ble Bombay Tribunal in the case of Resolve Salvage & Fire India Private Limited v. DCIT (order dated 18.04.2022 in ITA No. 841/Mum/2019).
We have considered the rival submissions and perused the material on record. The coordinate Bench of this Tribunal in Velankani Information Systems Ltd. v. DCIT [2018] 97 taxmann.com 599 dealt with this issue and held that interest on delayed payment of TDS cannot be allowed as deduction. The relevant observations of the Tribunal are as follows:-
"21. As far as delay in remittance of tax deducted at source u/s. 201(1A) of the Act is concerned, we find that the Hon'ble Madras High Court in
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the case of CIT v. Chennai Properties & Investment Ltd. (1999) 239 ITR 435 (Mad) has taken a view that interest paid u/s. 201(1A) is also in the nature of tax and notwithstanding the fact that it is not the tax liability of the assessee, the same cannot be allowed as a deduction. The following were the relevant observations of the Hon'ble Madras High Court:-- "14. As already noticed the payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which rendered the assessee liable for payment of interest was in the nature of a direct tax and similar to the income-tax payable under the Income-tax Act. The interest paid under Section 201(1A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by learned counsel for the assessee. 15. Counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Makalakshmi Sugar Mills Co. also relied on the decision of the apex court in the cases of Prakash Cotton Mills Pvt Ltd. v. CIT [1993] 201 ITR 684; Malwa Vanaspati and Chemical Co. v. CIT [1997] 225 ITR 383 and CIT v. Ahmedabad Cotton Manufacturing Co. Ltd. [1994] 205 ITR 163. In all these cases, the court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure. Further liability for interest which had been incurred by the assessee therein was regarded as compensatory in nature and allowable as business expenditure. 16. The ratio of those cases is not applicable here. Income- tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce and Industries [1998] 230 ITR 733, rejected the argument advanced by the assessee that retention of money payable to the State as tax or income-tax would augment the
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capital of the assessee and the expenditure incurred, namely, interest paid for the period of such retention would assume character of business expenditure. The court held that an assessee could not possibly claim that it was borrowing from the State, the amounts payable by it as income-tax, and utilising the same as capital in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure". (emphasis supplied) 22. The decision cited by the ld. counsel for the assessee of Kolkata Bench of the Tribunal on the issue is contrary to the decision of the Hon'ble Madras High Court. Though the decision of the Tribunal is later in point of time, judicial discipline demands that the decision of the Hon'ble Madras High Court is to be followed. It is also worthwhile to mention that the Kolkata Bench of Tribunal in the case of Narayani Ispat (P.) Ltd. (supra), which was cited by the ld. counsel for the assessee, did not consider or did not have an occasion to consider the decision of the Hon'ble Madras High Court in the case of Chennai Properties and Investment Ltd. (supra). In these circumstances, we follow the decision of the Hon'ble Madras High Court & uphold the order of the CIT(A) insofar as it relates to disallowance of interest on delayed remittance of tax deducted at source u/s. 201(1A) of the Act." 75. Following the above decision of the Tribunal, we hold that interest on delayed payment of TDS is not an allowable deduction and dismiss the ground raised by the assessee.
GROUND NO. 11: Disallowance of Gratuity payment claimed: 76. In the computation of income the Assessee had claimed an amount of Rs. 45,74,46,960/- towards actual payment of gratuity after disallowing the provision made during the year of Rs. 19,11,94,712/-. The assessee during the course of assessment proceedings furnished challans towards payment of Rs.38,62,09,368 and with regard to the
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remaining amount submitted that the same is paid directly to the employees in the transition period. The AO disallowed the difference amount of Rs.7,12,37,592 stating that no evidence for payment is produced. The CIT(A) confirmed the disallowance for the same reason.
The ld AR submitted that during the year under consideration, the Assessee was undergoing a transition phase on account of the merger and thus, certain employees were not covered under the gratuity scheme of the merged entity. Therefore, certain employees were paid gratuity directly by the company on account of settlement at the time of termination of employment. It is submitted that in the computation of income for the assessment year 2012-13, the entire gratuity amount of Rs. 19,11,94,712/- which was debited to the profit and loss account was disallowed and deduction was claimed for the total payment of Rs. 45,74,46,960/- (clause 17(i) of Form 3CD at page 1614). On the Assessing Officer asking for evidence, gratuity challans for Rs.38,62,09,368/- were submitted before the Assessing Officer. It is submitted that as the said amount was debited and paid during the year, the same would not be covered under the provisions of Section 43B as well as Section 40A(7) of the Act and therefore, is not disclosed in the tax audit report. Detailed submissions in this regard are placed at pages 797-798, 824, 980, 1426-1430 of the paperbook.
The ld DR submitted that the reason for disallowance by the lower authorities is that the assessee has not submitted any evidence of
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payment. Therefore the ld DR supported the decision of the lower authorities.
We heard the rival submissions and perused the material on record. The ld AR during the course of hearing submitted additional evidence (pages 1-87 of the additional evidence compilation (Vol II)) with regard to details of the pay register extracts and the payslips evidencing payment of more than 90% of the gratuity. We admit the additional evidence and since the same goes to the root of the issue and remit the issue to the AO with a direction to examine the additional evidence and allow the claim accordingly.
GROUND NO. 12: Credit of TDS and advance tax: 80. It is submitted that the Assessing Officer erred in granting TDS credit only to the extent of Rs. 7,66,56,411/- as against the actual credit claimed by the Assessee in its return amounting to Rs. 14,77,53,993/- without considering the tax paid under the PAN of the companies merged with the Assessee. Detailed submissions are placed at pages 798-799 of the paper book
In this regard we direct the AO to verify and allow the claim in accordance with law..
In the result, the appeals of the assessee and the revenue are partly allowed. Pronounced in the open court on this 14th day of November, 2022.
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Sd/- Sd/- ( BEENA PILLAI ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 14th November, 2022. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.