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Income Tax Appellate Tribunal, HYDERABAD BENCH “B”, HYDERABAD
Before: SMT P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, A.M.:
These two appeals are cross appeals by the revenue as well as assessee against the order passed u/s 143(3) r.w.s. 92CA(4) r.w.s 144C(13) of the Income Tax Act, 1961 (in short ‘Act’) relating to AY 2010-11. 2. Brief facts of the case are, the assessee engaged in the business of providing software and ITES services to its AE which includes software development, research, modification, reuse, reengineering, maintenance, coding etc., filed its return of income for
2 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. the AY 2010-11 on 13/10/2010 admitting total income of Rs. 1,48,62,828/- under normal provisions and book profits u/s 115JB amounting to Rs. 10,02,18,410/-, which was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS.
2.1 In the year under consideration, the international transactions and services rendered to AE falls within the ambit of Arm’s length price transactions. The assessee filed an audit report in form 3CEGB containing the details of transactions with the AE. As the value of international transactions with AE exceeded Rs 15 cores, the cases were referred to the TPO for the purpose of determining Arm’s Length Price.
2.2 The TPO passed an order u/s 92CA(3) of the Act on 30/12/2013 in which, he arrived ALP of the assessee at Rs. 24,28,49,732/- and the short fall of Rs. 14,27,31,508/- was held as adjustment u/s 92CA of the act.
2.3 In conformity with the order of the TPO, the AO passed the draft assessment order adding the shortfall adjustment of Rs. 14,27,312,508/- to the taxable income of the assessee.
Aggrieved with the above order, the assessee filed objections before the DRP, who directed the TPO vide its order dated 28/11/2014 to recompute the adjustment u/s 92CA at Rs. 11,23,43,569 as against the original TP adjustment of Rs. 14,27,31,508/-. The TPO passed the order accordingly.
The AO passed the final assessment order determining the total income of the assessee at Rs. 12,72,06,397 by adding the adjustment of Rs. 11,23,43,569/- u/s 92CA as per the directions of the DRP.
3 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. 5. Aggrieved with the order of DRP, both the revenue and assessee are in appeals before us.
First we will take up the appeal of the revenue wherein the it has raised the following grounds of appeal: “1. The DRP erred on facts and in law in granting relief to the assessee. 2. The DRP erred in law directing the AO/TPO to exclude the comparable companies on the basis of huge turn over. 3. Whether on facts and circumstances of the case of the DRP is correct in directing the TPO when the assessee failed to provide comparables either before the TPO/DRP in support of its claim on working capital. 4. In the facts and circumstances of the case the DRP failed to appreciate the fact that working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparable with an assumption that the difference should be reflected in profits.
Any other ground that may be taken up at the time of hearing.”
Ground Nos. 1 & 5 are general in nature, hence, need no adjudication.
As regards ground No. 2 regarding directions of DRP to exclude the comparable companies on the basis of huge turnover, the brief facts are, the assessee has two segments Viz., software development and management service segment and ITES Segment, the TPO rejected the TP study filed by the assessee and conducted new search for comparables, the following comparables were selected as final comparables after analysing the databases, the annual reports and after considering the objections filed by the assessee:
4 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. a) Final comparables selected for ‘Software Development and Management Services (SDS) segment: S.No. Name of the company OP/OC 1. Avani Cimcon Technologies Ltd. 3.39 2. CAT Technolgoies Ltd. 13.04 3. Comp-U-Learn Tech India Ltd. 19.96 4. E-Infochips Bangalore Ltd. 72.32 5. Evok Tech 18.61 6. E-Zest Solutions Ltd. 22.1 7. Infosys Technology Ltd. 45.44 8. Kals Information Systems Ltd. 22.05 (Seg.) 9. Kuliza Tech 25.92 10. L&T Infotech Ltd. 19.97 11. Mindree Ltd. (Seg.) 20.47 12 Persistent Systems & Solutions Ltd. 11.37 (Merged) 13 RS Software (India) Ltd. 9.88 14 Sasken Communication 25.23 Technologies Ltd. 15 Tata Elxsi Ltd. (Seg.) 17.24 16 Thinksoft Global Services Ltd. 11.22 17 Zylog Systems Ltd. 18.62 18 Persistent Systems Ltd. 31.57 Total 40.84 Average 22.69
b) Final comparables selected for customer support & transaction services (ITES) segment: S.No. Name of the company OP/OC 1. Accentia Technologies Ltd. 43.62 2. Acropetal Technologies Ltd. (Seg.) 10.12 3. Axis IT & T Ltd. 11.89 4. Cosmic Global Ltd. 16.59 5. Eclerx Services Ltd. 42.17 6. Infosys BPO Ltd. 31.63 7. TCS e-Serve International Ltd. 51.51 8. TCS e-Serve Ltd. 67.58 9. Jeevan Softech Ltd. (Seg.) 8.04 10. Microgenetics Systems Ltd. 6.60 11 Crossdomain Solutions Pvt. Ltd. 17.13 Total 306.88 Average 27.90
5 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. 8.1 After applying the average margins of the comparables to the financials of the assessee, the TPO determined the arm’s length price of the assessee as under:
a) Software Development & Management Services (SDS) Segment:
Description Amount (in Rs.) Arm’s Length Margin 22.69% Less: WCA (-)0.61% Adjusted Arm’s Length Margin 23.30%
Operating Cost (OC) 73,51,92,036 Adjusted Arm’s length margin 23.30% (%) (AALM) Arm’s Length Price = 90,64,91,780 (100+AALM)*OC Price Received (OR) 80,21,70,428 Adjustment u/s 92CA 10,43,21,352
The TPO noted that for the provision of software development, the arm’s length price of the assessee is Rs. 90,64,91,780/-0 and the shortfall of Rs. 10,43,21,352/- is treated as adjustment u/s 92CA of the Act. b) Customer support & transaction services (ITES) Segment: Description Amount (in Rs.) Arm’s Length Margin 27.90% Less: WCA (-)1.71% Adjusted Arm’s Length Margin 29.61%
Operating Cost (OC) 18,73,69,595 Adjusted Arm’s length margin 29.61% (%) (AALM) Arm’s Length Price = 24,28,49,732 (100+AALM)*OC Price Received (OR) 20,44,39,576 Adjustment u/s 92CA 3,84,10,156
The TPO noted that for customer support and transaction services, the arm’s length price of the assessee is Rs. 24,28,49,732/- and the
6 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. shortfall of Rs. 3,84,10,156/- is treated as adjustment u/s 92CA of the Act. c) Total adjustment u/s 92CA
Adj. u/s 92CA in respect of international 10,43,21,352 transactions relating to software development & management services Adj. u/s 92CA in respect of international 3,84,10,156 transactions relating to customer support & transaction services (ITES) Total Adjustment u/s 92CA 14,27,31,508
Aggrieved, the assessee raised objections before the DRP.
As regards comparables selected for ‘Software Development and Management Services (SDS) segment, the DRP directed the TPO to exclude the following companies from the list of final comparisons and recompute the ALP accordingly: 1. Infosys Technologies Ltd. 2. L&T Infotech Ltd. 10.1 As regards comparables selected for customer support & transaction services (ITES) segment, the DRP directed the TPO to exclude the following comparables from the list of final comparables and recompute the ALP: i) Eclerx Services Ltd. ii) Infosys BPO iii) TCS e-Serve Ltd.
10.2 Further, DRP allowed the contention of the assessee on negative working capital and directed the TPO to delete the negative working capital adjustment.
10.3 After the above direction of DRP, AO passed final assessment order after necessary modification, the final ALP adjustment u/s 92CA is as under:
7 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. Adjustment made u/s 92CA for international transaction relating to SDS 9,06,46,781 Adjustment made u/s 92CA for international transactions relating to ITES 11,23,43,569
Aggrieved by the direction of DRP in directing to exclude the above companies, the revenue is in appeal before us.
Considered the rival submissions and perused the material on record. With regard to exclusion of Infosys Technologies Ltd and L&T Infotech in the SDS segment, the issue is squarely covered by various decisions of ITAT, Hyderabad including the decision in the case of Wissen Infotech Pvt. Ltd. in ITA No. 99/Hyd/2015 wherein the Bench has held as under: “27. As regards Revenue's appeal against the exclusion of Infosys Technologies Ltd & L&T Infotech Ltd, we find that in several cases, the Coordinate Benches of this Tribunal have directed exclusion of these companies as they are having super profit and very high turnover and we find that the order of the DRP is in accordance with the said decisions. Therefore, we see no reason to interfere with the order of the DRP on these 2 companies and the Revenue appeal is accordingly dismissed.” 12.1 As regards comparability analysis relating to ITES, the issue is squarely covered by the following cases: 1. Scanafe Digital Solutions Pvt. Ltd., ITA no. 450/Bag/2015 2. Hyundai Motors India Engineering Pvt. Ltd., ITA No. 1743/Hyd/2014 3. Cognizant Technology Services Pvt. Ltd., ITA No. 1743/Hyd/2014. 4. C3i Support Services Pvt. Ltd., ITA No. 103/Hyd/2015. 12.2 In the case of Scanafe Digital Solutions Pvt. Ltd., the coordinate bench regarding Infosys BPO Ltd., Eclerx Services Ltd. and TCS e-Serve ltd. held as under: 15. As regards these grounds, we find that the TPO had proposed all these three companies as comparables and the assessee had objected to all these three companies before the TPO on various grounds. However, TPO rejected the assessee's contentions. Aggrieved, the assessee had raised
8 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. objections before the DRP against these companies also. We find that the DRP has considered assessee's contentions at length and directed the A.O. to exclude these companies from the final list of comparables. As far as Infosys BPO is concerned, the DRP has considered the decision of ITAT in assessee's own case for the A.Y. 2009-10 and directed it to be excluded. The Ld. D.R. has not been able to bring to our notice any distinguishing features and facts for the A.Y. 2010-11 from that of the A.Y. 2009-10 to take any other view. Therefore, we do not see any reason to interfere with the order of the DRP on this issue. 16. As regards My s. Eclerx Services Ltd., is concerned, we find that this company was also directed to be excluded by following the decision of !TAT in assessee's own case for the A.Y. 2009- 2010 on the ground that it is a KPO. The Ld. Counsel for the assessee has drawn our attention to the annual report of the said company to demonstrate that the facts and circumstances and the nature of the activities carried on by the said company in the A.Y. 2010-11 are also same.
Ld. D.R. has not been able to rebut this factual aspects of the said company with any evidence to the contrary. The only ground relied on by the Revenue is that in the case of Agilent Technologies International P. Ltd., the ITAT, Delhi Bench has upheld selection of M/s. Eclerx Services Ltd. A copy of the said order is filed before us. Assessee's contentions therein that the KPO services are distinct from BPO services and are not comparable, has been rejected by the Tribunal. However, since a uniform and consistent stand has to be taken in the case of the same assessee on similar facts and circumstances, we, respectfully following the decision of the Coordinate Bench in assessee's own case, do not see any reason to interfere with the order of the DRP. Ground No.2 is accordingly rejected.” Following the said decisions of ITAT, we uphold the directions of DRP in directing to exclude the said companies in both SDS and ITES segments for computation of ALP. Accordingly, we dismiss ground No. 2 raised by the revenue in this regard.
As regards ground Nos. 3 & 4 regarding working capital adjustment, the TPO determined the ALP for the international transactions with AEs by making a negative working capital
9 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. adjustment for the differences in the working capital between the assessee and the companies considered as comparables.
13.1 Before the DRP, the assessee contended that the company does not bear any working capital risk since it has been fully funded by its AE from its inception and has no working capital contingencies. The assessee further contended that 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.
13.2 After considering the submissions of the assessee, the DRP held that the TPO based on the year ending figures of receivables etc. made the negative working capital adjustment without bringing all the relevant facts of the comparable on record. DRP, therefore directed the TPO to delete the negative working capital adjustment and compute the ALP and the adjustment.
Considered the rival submissions and perused the material on record. We find that the issue is squarely covered by the following decisions: 1. Adaptec (India) P. Ltd., ITA No. 206/Hyd/2014 2. CAPCO IT Services India Pvt. Ltd., ITA No. 1340/Bang/2011 In the case of Adaptec (India) P. Ltd., (supra), the coordinate bench held that there is no need for making any negative working capital adjustment when the assessee does not carry any working capital risk and in fact the TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. Following the said decision, we uphold the order of DRP in directing the TPO to delete the negative working capital adjustment. Accordingly, ground Nos. 3 & 4 are dismissed.
In the result, appeal of the revenue is dismissed.
10 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd.
ITA No. 334/Hyd/2015 by the assessee
In this appeal, the assessee has raised the following grounds of appeal: “Based on the facts and circumstances of the case and in law, the learned Assessing Officer (" AO") / learned Transfer Pricing Officer ("TPO") and the Hon'ble Dispute Resolution Panel ('DRP') erred in: TRANSFER PRICING MATTERS - Relating to determination of Arm's Length Price ("ALP") in respect of provision of software services and Information Technology Enabled services ("ITES") provided to the Associated Enterprises ("AEs") under Transactional Net Margin Method ("TNMM") Rejection of transfer pricing documentation maintained 1. Rejecting the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('Rules') and making adjustment of Rs 11,23,43,569. Not considering the segmental financials submitted by the Assessee 2. Disregarding the segmental financials for software and ITES transactions submitted by the Assessee. Rejection of use of contemporaneous data and multiple year data 3. Using single year data of companies to determine the arm's length price of the international transactions without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. Selection of comparables - Software segment 4. Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the software services of the Appellant: • Comp-U-Learn Tech India Ltd;
11 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. • E Infochips Bangalore Ltd; • Persistent Systems Ltd; • Sasken Communication Technologies Ltd;
• KALS Info Systems Ltd; and • Tata Elxsi Ltd (seg). Rejection of comparables - Software segment 5. Not undertaking an objective comparative analysis and interalia rejecting the following comparable companies: • Akshay Software Technologies Ltd; CG V AK Software and Exports Ltd; and • Satyarn Computers Services Ltd. Selection of comparables - ITES segment 6. Not undertaking an objective comparative analysis and interalia selecting the following companies as comparable to the software services of the Appellant: • Accentia Technologies Ltd; and • TCS e-Serve International Ltd. Rejection of comparables - ITES segment 7. Not undertaking an objective comparative analysis and interalia rejecting the following companies as comparable to the ITES of the Appellant: • CG V AK Software and Exports Ltd; • Fortune Infotech Limited; • Informed Technologies India Ltd; • Jindal Intellicom Ltd; and • Microland Limited. Error in margin computation 8. Computation of net margins of the following companies selected as comparables:
12 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd.
a) Computing the net margins of CAT Technologies Ltd by excluding advertisement expenses written off considering it as inoperative expenses. b) Considering Provision for Bad debts as Non-Operating expenses in computing margins for the following companies - Software segment • E-Infochips Bangalore Ltd; • E-Zest Solutions Ltd; • Kuliza Technologies Private Limited; ITES segment • Axis IT&T c) Not allowing unallocable cost in the computation of net margins for the following: • Kals Information Systems Ltd (Seg); and
• Tata Elxsi Ltd (Seg). Considering foreign exchange fluctuation as operating in nature 9. Not appreciating the fact the foreign exchange loss of Rs. 7.35 crores is an extraordinary item for the year and hence adjustment should be provided for the same. Adjustment for risk differences 10. Not adjusting the net margins of the comparable companies taking into account the functional and risk differences between the international transaction of the Appellant and the comparable companies in accordance with the provisions of Rule 10B(1)(e); Corporate Tax Issues • Imposition of interest u/s 234B and 234C of the Act. • Initiating penalty proceedings.
13 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.” 17. Ground Nos. 1, 2, 3, 7 and 10 were not pressed by the ld. AR of the assessee at the time of hearing. Hence, these grounds are dismissed as not pressed.
As regards ground No. 4 regarding selection of comparables towards software segment, the assessee objected to the selection of following companies as comparable to the software services of the assessee: 1. Comp-U-Learn Tech India Ltd. 2. E Infochipts Bangalore Ltd. 3. Persistent Systems Ltd. 4. Sasken Communcation Technologies Ltd. 5. Kals Info Systems Ltd. and 6. Tata Elxsi Ltd. (Seg).
18.1 As regards Comp-U-Learn Tech India Ltd., objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company has revenue from ITES and software, further segmental details are not available. He submitted that it has exceptional growth in the profits of 160% abnormal growth in profits on standalone basis and engaged in internet based solution, education and training, e-governance solutions. R&D work in pharma sector and revenue from sale of software products and courseware materials. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 – FY 2009-10 2. Wissen Infotech Pvt. Ltd., ITA No. 99/Hyd/2015 – FY 2009-10 3. DE Shaw Software Pvt. Ld., ita No. 304/Hyd/2015 – FY 2009- 10 4. Sum Total Systems India Pvt. Ltd. Vs. DCIT, ITA No. 255/Hyd/2015 – FY 2009-10 5. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014.
14 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. 18.2 The ld. DR, on the other hand, relied on the orders of revenue authorities.
18.3 Considered the rival submissions and perused the material on record. In the case of Open Text Corporation of India Pvt. Ltd. (supra), the coordinate bench of Hyderabad Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under: “10. Having regard to the rival contentions and the material on record, we find that in the Directors’ Report of CompU Learn Tech India Ltd, which is at page No.1 of the Paper Book, it is mentioned that during the year under review, the company has grown manifold and has consolidated turnover of Rs.28.46 crores and net profit of Rs.3.68 crores registering growth of 423% in turnover and 281.37% in net profit over the previous year. It is also reported that it was originally into business of software development and education training and that during the past two years, their focus was shifted to e-governance solutions to Govt. Departments of State and Central Govts. It was also stated that the company has expanded its operation in its core activity i.e. software development, e-governanace solutions, IT Services, IT Enabled Services etc. It is also seen that the assessee is into research & development to enhance the quality of its products and the revenue from the sale of software products and courseware materials is recognized when sale has been completed, with the passing of title or licenses or raising invoices as the case may be. As against these activities of CompU Learn Tech, the assessee is into simple software development services. The Coordinate Bench of the Tribunal in the case of M/s. Wissen Infotech Pvt. Ltd in ITA No.99/Hyd/2015 for the A.Y 2010-11 has taken note of these dissimilarities to hold that it is different in line from the activities of the said assessee company and following the decision of the Coordinate Bench in the case of Pegasystems Worldwide Services (P) Ltd, and E-Infochips Bangalore Ltd, has TAXPUNDIT.ORG ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad. Page 9 of 22 directed the exclusion of the said company. Facts and circumstances of the case before us being similar, respectfully following the above decisions, we direct the AO to exclude this company from the final list of comparables.”
Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables.
15 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd.
18.4 As regards E Infochips Bangalore Ltd, objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is engaged in both IT and ITES and segmental data is not available. It has fluctuations in margins and the company is having an amalgamation status. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 – FY 2009-10 2. Pegasystems Worldwide India Pvt. Ld., ITA No. 1758/H/14 3. DE Shaw Software Pvt. Ld., ita No. 304/Hyd/2015 – FY 2009- 10 4. Oakton Global Technology Services Pvt. Ltd., ITA No. 434/Hyd/15 – FY 2009-10 5. Sum Total Systems India Pvt. Ltd. Vs. DCIT, ITA No. 255/Hyd/2015 – FY 2009-10
18.5 The ld. DR, on the other hand, relied on the orders of revenue authorities.
18.6 Considered the rival submissions and perused the material on record. In the case of Open Text Corporation of India Pvt. Ltd. (supra), the coordinate bench of Hyderabad Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under: “13. Having regard to the rival contentions and the material on record, we find that E-Infochips Bangalore Ltd is receiving income from software services as well as consultancy charges and it is also reported that the company is engaged in the development and maintenance of computer software and that the production and sales of software cannot be expressed in any generic units. About the primary business of the said company, it is reported that it is primarily engaged in software development and IT enabled services, which are considered as only one business. Thus, it is seen that the E-Infochips Bangalore Ltd, is not only into software development services but is also into consultancy services and there is no segmental data available and only the aggregate results are reported. As held by the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd (Supra) the said company cannot be held to be comparable to
16 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. the assessee. The relevant paragraph of the ITAT order is reproduced below: “1. E Infochips Bangalore Ltd., 1.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is functionally different and segmental information is not available. He submitted the ITAT has rejected this company in the following cases: 1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014 AY 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Allscripts (India) Pvt. Ltd., ITA No. 771/Ahd/2014 AY 2009-10 1.2 Ld. DR relied on the orders of revenue authorities and submitted as under: i) that the company is engaged in development of software (Annexure to directors report. Hence it is not functionally different.) ii) As per schedule 7 & 8 of P&L A/c, the income derived is from software services. iii) In notes to accounts, it was mentioned as revenue from software development. iv) Hence this company cannot be rejected as comparable. 1.3. Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee's case in this assessment year. We are also aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally different from
17 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. Assessee's activities and in the absence of segmen al information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the ple of Assessee in this regard." 1.4 In the case of Allscripts (india) Pvt. Ltd. (supra), the coordinate bench of ITAT, Ahmedabad held as under: "10.Before us, Revenue has not brought any contrary binding decision in its support. With respect to E-Infochip Bangalore Ltd., we find that in the annual accounts of the company, with respect to the segment information it is stated that the company is primarily engaged in software development and I.T enabled services which is considered the only reportable business segment as per Accounting Standard AS-17 "segment reporting" prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available. With respect to E-infochip Ltd. Assessee had raided objection against its inclusion to which TPO in the order had directed to verify the facts and it was held that it cannot be included on the basis of diminishing of Revenues so long it was a not a consistent loss making company. Considering the aforesaid facts, we are of the view that the aforesaid two companies needs to be excluded while working out the comparability analysis and therefore uphold the plea of the Assessee in excluding the margins of the aforesaid 2 companies. We therefore deem it fit to restore the issue back to the file of A.O/TPO, who after excluding the aforesaid 2 companies rework the addition as per facts and law. Needless to state that A.O/TPO shall grant adequate opportunity of hearing to the Assessee. The issue of respect to determination of ALP is thus set aside to the file of A.O/TPO and the ground of appeal raised by the Assessee is thus allowed for statistical purposes." 1.5 In view of the above, in line with the decisions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies. With regard to DR submissions, he strongly submitted that in the case of M/s Virtusa India (supra), the matter was remitted back to the AO, in this case also, it should be remitted. We observe that the observations of the coordinate bench also that when the segmental data is not available, we cannot keep the company as comparable. In the present case also, there is no segmental data available on record. Hence we do not find merits in the submissions of the DR” 14. Respectfully following the same, we direct the AO to exclude this company from the list of comparables.”
Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables.
18 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd.
18.7 As regards Persistent Systems Ltd., objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is engaged in product development design services and also engaged in offshore product development. Segmental data is not available. He submitted that the ITAT has rejected this company in the following cases: 1. Cash Edge India Pvt. Ltgd., ITA No. 64/Del/2015 2. Target Corporation of India Pvt. Ltd., ITA No. 343/Bang/2015 3. Intoto Software (India) Pvt. Ltd., ITA No. 25/Hyd/2015. 18.8 The ld. DR, on the other hand, relied on the orders of revenue authorities.
18.9 Considered the rival submissions and perused the material on record. In the case of Cash Edge India Pvt. Ltd (supra), the coordinate bench of Delhi Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under:
“16. We have considered the rival submission and perused the material on record. A co-ordinate Bench of the Delhi Tribunal in the case of Ciena India Pvt. Ltd. v. DCIT in ITA Nos. 2948, 3324/Del/2013, has held as under "9.2. We have heard the rival submissions and perused the relevant material on record. It can be seen from the information supplied by this company u/s 133(6) of the Act, a part of which has been reproduced in the TPO's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at Rs.288.93 million as against the revenue from software development services at Rs.4829.57 millions. Though this company is more engaged in software development services, but, is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total profits of the company on entity level also, inter alia, include revenue from product licences. As there is no separate segmental information and it has been considered as comparable on entity level, it implies that the total revenue considered also consist of some part from product licences. In such circumstances, it is not possible to ascertain the impact of such revenue on the total revenue of this company. Further,
19 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. there is no information available from the Annual report of this company or the data collected by the TPO u/s 133(6) of the Act to divulge the amount of revenue from software development services alone to the exclusion of revenue from product licences. As the assessee is not engaged in the sale of any software products, this company on entity level, cannot be considered as comparable. The Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Since both these companies are also engaged in the business of providing software development services to its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables." Similarly, in the case of assessee's group company, viz., Fiserv India Pvt. Ltd. for AY 2010-11, which company is also in the business of software development services, a co-ordinate Bench of the Delhi Tribunal in ITA No.6737/Del/2014 deleted Persistent from the list of comparables. 17. Further a perusal of page 484 (PB-2) Annual Report of Persistent reveals that it is not only engaged in the business of software development services but also manufacture and sale of software products and owns significant intangibles and that segmental data for services and ITA No.64/Del./2015 products is not available and the ld DR, could not controvert this fact, so we concur with the order of co-ordinate bench of the Tribunal, and we direct exclusion of Persistent Systems Ltd. from the list of comparables” Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables.
18.10 As regards Sasken Communication Technolgies Ltd., objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company earns revenue from 3 segments but segmental margins as well as segmental data are not available. He
20 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. submitted that the ITAT has rejected this company in the following cases: 1. Electronics for Imaging India Pvt. Ltd., IT(TP) No. 212/Bang/2015. 2. Cerner Healthcare Solutions Pvt. Ltd., IT(TP) No. 44/Bang/2015 3. DE Shaw Software Pvt. Ltd., ITA No. 304/Hyd/2015 18.11. The ld. DR, on the other hand, relied on the orders of revenue authorities.
18.12 Considered the rival submissions and perused the material on record. In the case of Electronics for Imaging India Pvt. Ltd. (supra), the coordinate bench of Bangalore Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under: “29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment.” Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables.
18.13 As regards Kals Information Systems Ltd. (seg), objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company has inventory which is 26% of total revenue and is engaged in development of software products. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 – FY 2009-10 2. Sterling Commerce Solutions India Pvt. Ltd., IT(TP) No. 546/Bang/2015. 3. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014. 4. Sum Total Systems India Pvt. Ltd. Vs. DCIT, ITA No.
21 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. 255/Hyd/2015 – FY 2009-10 5. DE Shaw Software Pvt. Ld., ita No. 304/Hyd/2015 FY 2009-10 6. Target Corporation of India Pvt. Ltd., ITA No. 323/Bang/2015 7. Oakton Global Technology Services Pvt. Ltd., ITA No. 434/H/2015 18.14. The ld. DR, on the other hand, relied on the orders of revenue authorities.
18.15. Considered the rival submissions and perused the material on record. In the case of Open text Corporation India Pvt. Ltd. (supra), the coordinate bench of Hyderabad Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under:
“18. As far as Kals Information Systems Ltd (Seg.) is concerned, it is the case of the assessee that the company has revenue from software products and software development services and that the company has inventory which is 26% of the total revenue. It is also argued that the Companies Website extracts state that it is into ITES as well. We find that this company has been directed to be excluded from the final list of comparables in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd (Supra) by observing as under: “2. Kals Information Systems Ltd 2.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is functionally different and dealing with software products. He submitted that the ITAT has rejected this company in the following cases: 1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014 AY 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10. 2.2 Ld. DR relied on the orders of revenue authorities and submitted as under: I) As per Pg. 22 of annual report, the company is engaged in the business of computer software. Hence, it is not functionally different. ii) As per segmental information, Page 23 of annual report, revenue is earned from application software and training. iii) As per age 21 of annual report, the inventories are in the nature of computer spares and not products. TAXPUNDIT.ORG ITA No 486 of 2015 Cordys Software India P Ltd Hyderabad. Page 15 of 22
22 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. iv) Hence, this company cannot be rejected as a comparable. 2.3 Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "10.1. Assessee's main objection before us is on functionality of the comparable company. As seen from the annual report of 2008-09 and 2009-10 and comparative statement placed by Assessee, the company classified itself as 'the company engaged in development of software and software products since its inception'. The company consisting of STPI unit engaged in development of software and software products and a training centre engaged in training of software professionals on on-line projects. This indicates that company is engaged in development of software and products and its inventory also indicates that Assessee has been using its readymade libraries for sales. This company was rejected in earlier year on functional analysis by ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 where in it was held that company is engaged in development of software products. Since its annual report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee's objections are accepted and AO is directed to exclude the company." 2.4 In the case of Planet Online Pvt. Ltd. (supra), the coordinate bench held as follows: 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- "(d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCIT, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being
23 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software developmen services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspec , assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not avail ble in public domain could not have been used by the TPO when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable." 2.5 In view of the above, in line with the decisions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies”. 19. Respectfully following the same, we direct this company to be excluded.”
Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables.
24 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd.
18.16 As regards Tata Elxsi Ltd. (seg), objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company has revenue from product design services, innovation design engineering and visual computing labs division which are specialized services. Further, he submitted that as per section 133(6), the company itself has indicated that it cannot be compared with any other software service company because of its complex nature. He submitted that the ITAT has rejected this company in the following cases: 1. Open Text Corporation India Pvt. Ltd., ITA No. 486/Hyd/2015 – FY 2009-10 2. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014. 3. Target Corporation of India Pvt. Ltd., ITA No. 323/Bang/2015 4. Oakton Global Technology Services Pvt. Ltd., ITA No. 434/H/2015 5. Sum Total Systems India Pvt. Ltd. Vs. DCIT, ITA No. 255/Hyd/2015 – FY 2009-10
18.17. The ld. DR, on the other hand, relied on the orders of revenue authorities.
18.18. Considered the rival submissions and perused the material on record. In the case of Open text Corporation India Pvt. Ltd. (supra), the coordinate bench of Hyderabad Tribunal, directed the AO to exclude the said company as comparable from the list of comparables by observing as under:
“22. As regards Tata Elxsi is concerned, we find that the learned Counsel for the assessee is arguing that it is functionally different due to the diverse nature of its business and specialization. We find that the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd has directed the exclusion of this company on the ground of functional dissimilarity only. The relevant paragraph is reproduced hereunder: "3. Tata Elxsi Ltd. (Seg.) 3.1 Objecting to the aforesaid company as comparable, the ld. AR submitted that this
25 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. company's business is of complex nature, functionally different and segmental information is not available. He submitted that the ITAT has rejected this company in the following cases: 1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014, AY 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10. 3.2 Ld. DR relied on the orders of revenue authorities and submitted as under: i)The company has two segments including software development services, which forms 89.52% of total revenues. ii) In response to notice u/s 133(6) the company has merely stated that it is engaged in SDS. iii) This company was considered as comparable in the AY 2008- 09, which the DRP has upheld. iv) Hence, this company cannot be rejected as a comparable. 3.3 Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "12.1. It was the objection of Assessee that above company is predominantly into product design services, Innovation Design Engineering and visual computing labs division which are specialized services. He referred to the order of ITAT in AY. 2009-10 in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this company was rejected on the reason that it is engaged in multiple segments. There is no break- up in the annual report and data on which margin from software services activity only can be computed is also not available. Moreover, the company itself has indicated that it cannot be compared with any other software service company because of its complex nature. Similar view was taken by many of the Co- ordinate Benches in earlier years that Tata Elxsi Ltd., cannot be selected as comparable company. Consistent with the above view, we are of the opinion that a company like Tata Elxsi Ltd., which has complex activities and segmental information of which is not available cannot be selected as comparable company to Assessee. Moreover, as seen from the
26 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. turnover as reported by TPO itself, it was many times Assessee's turnover and therefore cannot be exactly considered as a similar company unless the nature of activity, the incomes are analysed in detail. Since no segmental data is available, considering the software development services as a segment by TPO cannot be considered as segmental data, unless the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same." 3.4 In the case of Planet Online Pvt. Ltd. (supra), the coordinate bench held as follows: "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub- services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables." 3.5 In view of the above, in line with the decision of the various benches of this Tribunal, we direct the AO to exclude this company as comparable". 23 Respectfully following the same, we direct the AO to exclude this company from the final list of comparables.” Facts and circumstances in the present case are being similar, following the above decision, we direct the AO to exclude the said company from the final list of comparables.
27 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd.
18.9 In view of the above findings, the TP)/AO is directed to recompute the ALP excluding the aforesaid companies from the list of final comparables.
Ground No. 5 is regarding rejection of following comparables by the TPO/DRP: 1. Akshay Software Technologies Ltd. 2. CG VAK Software and Exports Ltd. and 3. Satyam Computers Services Ltd. 20.1 As regards Akshay Software Technologies Ltd., the TPO rejected this company as comparable by observing that the company in its annual report states that its export revenue from Dubai accounted for 90% of total income and due to steep pricing pressure and huge discounts requested by the clients, its business severely got affected. The DRP confirmed the action of TPO
20.2 The ld. AR submitted the company satisfies all the filters and there is no exceptional variation in the turnover of the company. The mere effect on the income was due to market circumstances and external factors. There were no exceptional factors that affected the company or its customers. Hence, it should be accepted as comparable.
20.3 Ld. DR relied on the orders of TPO/DRP
20.4 Considered the rival submissions and perused the material on record. The ld. AR of the assessee failed to establish the inclusion of the aforesaid as comparable by way of bringing any case law or cogent material in this regard. Hence, we uphold the action of the TPO/DRP for exclusion of this company as comparable.
28 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. 21. As regards CG VAK Software Exports Ltd., the TPO rejected this company as comparable by observing that it fails the employee cost filter and the details of the employee cost are not available in the annual report. The assessee relied on the annual report of 2007-08, wherein it is mentioned that cost of services is incurred towards salaries of employees. The DRP confirmed the action of TPO.
21.1 The ld. AR of the assessee submitted that the company satisfies the employee cost filter applied as the employee cost of the company is 76.10% of its total revenue. He relied on the following cases: 1. Yodlee Infotech Pvt. Ltd., IT(TP)A No. 108/Bang/2014. 2. Lam Research (India) Pvt. Ltd., IT(TP)A No. 1437/Bang/2014.
21.2 The ld. DR relied on the orders of TPO/DRP.
21.3 Considered the rival submissions and perused the material on record. In the case of Lam Research (India) P. Ltd, (supra), the coordinate bench has held as under: “ CG-VAK Software & Exports Ltd. (D) (i) As far as this company is concerned, the TPO rejected the same by applying the 25% employee cost filter. According to the TPO, usually software development services are high-end services performed by skilled and professional employees and hence the cost of rendering such high-end services is also high as they comprise of high salaries and better welfare facilities, compared to low- end services. Therefore, the filter of employee cost of more than 25% of turnover was considered by the TPO while choosing the comparable. (ii) The submission of the ld. counsel for the assessee was that in the case of assessee, this test is satisfied. In this regard, our attention was drawn to page 818 to 824 of the assessee’s paperbook wherein annual report of this company has been provided. Attention was drawn to the fact that in the profit & loss account of the audited accounts, the cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Accounts, it has been elaborated as follows:- Cost of services: Cost of Services - Overseas 2,77,32,337
29 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. Cost of Services – Domestic 2,58,40,435 Transcription charges 3,97,389 Web Designing Charges 1,64,602 Staff Welfare 11,43,144 Staff Training 3,63,496 Contribution to PF & ESI 15,47,906 Gratuity 13,04,894 Ex Gratia 0 HRD Expenses 3,10,871 5,88,05,074 (iii) It was submitted by the ld. counsel for the assessee that the TPO ignored the contribution to PF & ESI, Gratuity and Ex Gratia payments and arrived at the employee cost. According to the ld. counsel for the assessee, doing so was not proper. If all the employee costs are properly considered, then this company can pass the filter applied by the TPO for excluding it. (iv) We have considered the submission of the ld. counsel for the assessee and are of the view that prima facie the submissions of the ld. counsel are acceptable. We, however, feel that it would be just and appropriate to direct the TPO to consider including this company as a comparable afresh in the light of the facts brought to our notice by the ld. counsel for the assessee. We hold and direct accordingly. Following the above, we direct that CG-VAK can be considered as a good comparable.
Following the said decision of the Bangalore Tribunal, we direct the TPO/AO to include the said company as comparable.
As regards Satyam Computers Services Ltd., the TPO rejected this company as comparable on the ground that the company is still being investigated by various authorities and court. Further, auditor’s in their audit report on page 204-207 have certified the report with certain reservations. The DRP confirmed the action of TPO.
22.1 The AR of the assessee submitted that the company satisfied all the filters applied by the TPO, therefore, the same may be considered as comparable.
22.2 The ld. DR relied on the orders of TPO/DRP.
30 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. 22.3 Considered the rival submissions and perused the material on record. As observed by the TRP/DRP, still the company is still being investigated by various authorities and court, we uphold the action of the revenue authorities for exclusion of this company as comparable.
As regards ground No. 6 regarding selection of comparables towards ITES segment, the assessee objected to the selection of following companies as comparable to the ITES Segment: 1. Accentia Technologies Ltd 2. TCS e-Serve International Ltd. 24. Considered the rival submissions and perused the material on record. This issue is squarely covered by various decisions of coordinate benches of this Tribunal including the decision in the case of Hyundai Motors India Engg. P. Ltd., in ITA No. 1743/Hyd/2014 wherein the bench with regard to Accentia Technologies Ltd. and TCS e-Serve International Ltd, held as under: TCS e-Serve International Ltd, 11.2. Having regard to the rival contentions and the material on record, we find that during the relevant financial year, the TCS e-Serve International Ltd., had acquired the Citi group India based Captive business processing outsourcing (BPO) arm for an all-cash consideration and in return, had acquired the business of an aggregate amount of $ 2.5 billion over a period of 9.5 years. This definitely is an exceptional circumstance which has been taken note of by the TPO in the case of M/s. IGS Imaging Services (India) P. Ltd., to exclude the same from the list of comparable. This exceptional circumstance was not taken note of by the TPO and the DRP failed to appreciate the objection of the assessee in proper perspective. Any circumstance which would influence or result in abnormal result in the financials of a company have to be adjusted or where no adjustment can be done to make it comparable to the tested party, such a company has to be excluded from the list of comparables. This Tribunal in a number of decisions held that exceptional circumstance is a reasonable filter to exclude a company from the list of comparables. Therefore, we direct the A.O/TPO to exclude this company from the final list of comparables.
Accentia Technologies Ltd.,
31 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. 18.1. For the relevant A.Y. 2010-11, the Ld. counsel for the assessee has drawn our attention to the information available on Accentia Technologies Ltd., to demonstrate that the said company is into diversified knowledge process outsourcing activities. It is seen therefrom that the said company is involved in Healthcare documentation as well as receivables, management services including installation and maintenance of all software, hardware and band width infrastructure required for the same, deployment of man power and service delivery in all these areas. It is also seen that it is engaged in legal process outsourcing. From Schedule-IV showing the fixed assets of the assessee, it is also seen that the said company owns goodwill/brand/IPRs (Intellectual Property Rights). From the notes to the accounts, it is also seen that a subsidiary of the company Asscent Infoserve Pvt. Ltd. has been amalgamated with the company consequent to which, assets and liabilities of the erstwhile company were transferred and vested in the company w.e.f. 1st April, 2008 and the scheme has been given effect to in the accounts of the year. Therefore, it is clear that there is an extraordinary event in the case of Accentia Technologies Ltd.. during the relevant financial year particularly since the approval for amalgamation has been given by the Hon 'ble High Court of Mumbai vide orders dated 21st August, 2009 and by the Hon 'ble Karnataka High Court vide orders dated 6th February, 2010. This event would definitely have an effect on the profit margins of the said company and therefore, has to be excluded from the list of comparables as rightly done by DRP.” Following the said decision, we direct the TPO/AO to exclude the said companies as comparables. Thus, this ground is allowed.
As regards ground No. 8, it consists of three components; (a) for considering the provision of bad debts as operating expenses in computing the margins of (i) E-Infochips Bangalore Ltd; (ii) E-Zest Solutions Ltd and (iii)Kuliza Technologies (P) Ltd; and (b) computing the net margin of the CAT Technologies Ltd by excluding the advertisement expenses written off, considering it as inoperative expenses; and (c) segmenting unallocable cost in the computation of income of Kals Information Systems Ltd and Tata Elxsi Ltd. In support of these contentions, the learned Counsel for the assessee has placed reliance upon the decision of the Coordinate Bench of the Tribunal in the case of Kenexa Technologies (P) Ltd in ITA
32 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. No.243/Hyd/2014 for the financial year 2008-09 wherein it has been held that the provision for bad debts should be included in computing the net margins under the TNMM.
Having gone through the decision of the Coordinate Bench of the Tribunal, we find that the Tribunal has held that bad debts and provision for bad and doubtful debts are part of the operating expenses and that the margins of the companies should be computed by including bad debts and provisions of bad debts as provisions of expenses for the purpose of computing P&L of comparable companies.
The learned DR has not been able to bring any other material, contrary to the above decision, to our knowledge. In fact the Tribunal has followed the decision of the Coordinate Bench of the Tribunal at Delhi in the case of Sony India (P) Ltd vs. DCIT in ITA No.1189/Del/2005 and others. Respectfully following the same, we remand the issue to the file of the AO with a direction to recompute the margins of the companies by including the bad debts/provision for bad and doubtful debts as operating income of those companies as well as the assessee. Thus, this ground is allowed for statistical purposes.
As regards ground No. 9 with regard to foreign exchange fluctuation as operating in nature, we find that this issue is squarely covered by the decision of the coordinate bench in the case of M/s Open Text Corporation India Pvt. Ltd. in ITA No. 486/Hyd/2015 wherein the coordinate bench of this Tribunal held as under:
“7. Having regard to the rival contentions and the material on record, we find that the foreign exchange fluctuation loss is not abnormal only to the assessee. Such fluctuation would affect the margins of the comparable companies as well as long as the transactions are in the same currency. In a number of cases, we have already held that the foreign exchange fluctuation profit or loss is also part of the operating revenue. In fact, in the case of Honda Trading Corporation India Pvt. Ltd (Supra), the
33 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. Coordinate Bench of the Tribunal at Delhi had considered the huge fluctuation in the foreign exchange in favour of Thai Bhat against the INR and it was in these circumstances, that the Tribunal had directed the AO to make necessary adjustments. The distinction of the currency in the international transaction of the assessee and the comparable companies and also the abnormal fluctuation in foreign currency in the case before us has not been brought out by the assessee. Therefore, we are not inclined to accept the assessee's contention and ground of appeal No.5 is rejected.” Following the said decision, we dismiss this ground of appeal of the assessee.
As regards corporate tax issues, i) with regard to imposition of interest u/s 234B and 234C of the Act, charging of interest is consequential in nature, therefore, the AO is directed accordingly.
As regards initiation of penalty proceedings, this ground is premature in nature, hence, need no adjudication.
In the result, revenue appeal is dismissed and the appeal of the assessee is partly allowed. Pronounced in the open Court on 29th November, 2018.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 29th November, 2018 kv
34 ITA Nos. 222 & 334/Hyd/15 IVY Comptech Pvt. Ltd. Copy to:- 1) IVY Comptech Pvt. Ltd., 5th Floor, Divyasree Omega, Block – B, Plot No. 13/E, Survey No. 13, Kondapur, Hyderabad – 500 084 2) DCIT, Circle – 2(1), 8th Floor, B Block, IT Towers, AC Guards, Hyderabad. 3) DRP, Hyderabad 4) DIT, International Taxation, Income Tax Towers, 10-2-3 AC Guards, Hyderabad – 004. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File