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Income Tax Appellate Tribunal, DELHI ‘I-1’ BENCH,
Before: SHRI N.K. BILLAIYA, & MS. SUCHITRA KAMBLE
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee is preferred against order dated NIL framed u/s 143(3) r.w.s 144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act]' pertaining to A.Y 2014-15.
The substantive grievance of the assessee relates to the disallowance of forex loss on cancellation of forward contract, TP adjustment of Rs. 19,17,52,485/-, calculation of surcharge and education cess on gross tax payable without giving effect to MAT credit u/s 115JAA of the Act and allowing short credit of TDS to the extent of Rs. 1,89,349/-.
Briefly stated, the facts of the case are that the assessee is engaged in the provision of software development services to Global Logic Inc and other Global Logic Group Companies. The international transactions reported for the year under consideration are :
(i) software development and related services Rs. 1,69,68,10,990/- (ii) reimbursement of expenses from associated enterprise [AE]. Rs. 13,72,80,256/-
During the course of T.P. assessment proceedings, the TPO noticed that the assessee has used TNMM as the most appropriate method and OP/TC as the PLI. It was found that the assessee has arrived at a set of 22 of companies with average margin of 13.60%. It was also noticed that the assessee has used multiple year data and the assessee’s own margin is worked out to be 13.79%.
After going through the TP report and comparables, the TPO analysed the comparables with remarks as under:
SI. Name of the Comparable Remarks No. 1 Akshay Software Technologies This is a suitable comparable. Ltd. 2 Ancent Software International This company is having sales below Rs. 5 Ltd. crores. Hence, not a suitable comparable. 3 Aztecsoft Ltd. (consolidated) Annual Report for the current year is not available on the public domain. Hence, not a suitable comparable. 4 Caliber Point Business This company is an ITES company and having different' financial year ending. Solutions Ltd. Hence, can't be taken as suitable comparable. 5 Cat Technologies Ltd. This company is an ITES company and having significant RPT too. Hence, can't be taken as suitable comparable. 6 CC - VakSoftware & Exports This company fails employee cost filter Ltd. (6%). Hence, not a suitable comparable. 7 Evoke Technologies Pvt. Ltd. This is a suitable comparable. ' 8 Giodstone Technologies Ltd. This company fails export filter (55.09%). Hence, not a suitable comparable.
9 Helios & Matheson Information Technologies This company fails' export filter '(2.66%). Ltd. Hence, not a suitable comparable. This company is having' significant RPT. 10 KP1T cummins Infosystems Hence, not a suitable comparable. Ltd. (Consolidated) 11 Larsen & Turbo infotech Ltd. This is a suitable comparable. LGS Global ltd. 12 This company fails export filter(22.46%). Hence, not a suitable comparable. 13 Maveric Systems ltd. This company fails export-filter(00.00%). Hence, not a suitable comparable. 14 Mindtree Ltd. (Segment) This is a suitable comparable. 15 Persistent Systems Ltd This is a suitable comparable. 16 RS Software (India ) Ltd. This is a suitable comparable 17 R Systems International Ltd. This company is having different financial year ending i.e December. Hence, can't be 18 Sasken Communication cony^efed'dSSultfble comparable. This is a suitable comparison Technologies Ltd. Saven Technologies Ltd. 19 This company is having significant BPT ( Consolidated Segmental) (100%). Hence, not a suitable comparable. Thinksoft Global Services Ltd 20 This company fails export filter(8.58%). Hence, not a suitable comparable. 21 Thirdware Solutions ltd. This is a suitable comparable. 22 Zylog Systems Ltd. This is a suitable comparable.
Based on the above analysis, the TPO chose the following comparables: SI No. Name of the Comparable 1 Akshay Software Technologies Ltd. 2 Evoke Technologies Pvt Ltd. 3 Larsen & Turbo infotech Ltd. 4 Mindtree Ltd. (Segment) S Persistent Systems Ltd. 6 R S Software (India ) Ltd. 7 Sasken Communication Technologies Ltd. 8 Thirdware Solutions ltd. 9 Zylog Systems Ltd.
The TPO found that the following set of comparables which have been rejected by the assessee which are, in fact, good comparables:
SI. Company Long Name TPO's Remarks No. 1 Ceistream Technologies You have rejected this company on the Pvt Ltd. ground mentioned in Accept/Reject matrix that 'Insufficient financial or. descriptive 2 Kireeti Soft Technologies Ltd. information to perform analysis'. However; the annual report of the company has been 3 Wipro Technologies Limited perused which is available on the public domain. This is very much an IT company and passes all filters too. Hence, this is a robust comparables in your case. 4 Infosys Ltd You have rejected this company on the ground mentioned in Accept/Reject matrix 5 Igate Glo9bal Solution Ltd that functionally different. However, the annual report of the company has been 6 Persistent Systems & Solutions Ltd [Merged] perused which is available on the public domain. This is very much an IT company 7 Sankhya Infotech Ltd and passes all filters too. Hence, this is a 8 Tata Elxsi Ltd [Segment] robust comparables in your case.
At the end of the aforestated exercise, the following comparables were proposed to be used to determine the ALP of the international transactions related to provisions of ITES:
Sl. No. Company Long Name OP/OC 1 Akshay Software Technologies Ltd. 0.16% 2 Celstream Technologies Pvt. Ltd. 12.26% 3 Evoke Technologies Pvt Ltd 8.11% 4 iGate Global Solutions Ltd 23.71% 5 Infosys Ltd 43.53%
6 Kireeti Soft Technologies Ltd. 3.63% 7 Larsen & Toubro Infotech Ltd. 18.40% 8 Mindtree Limited (Segment] 10.740% 9 Persistent Systems & Solutions Ltd. 22.12% 10 Persistent Systems Ltd. 23.08% [Merged] 11 R S Software (India],Ltd. 16.20% 12 * Sankhya Infotech Limited 26.20% Sasken Communication 13 24.36% Technologies Ltd. 14 Tata Elxsi Ltd. (Segment] 13.00% 15 Thirdware Solutions 16.19% 16 Wipro Technologies Limited 54.42% 17- Zylag Systems Ltd 28.74% Average 20.28%
The assessee’s PLI was recomputed by removing forex fluctuation gain as non operational item and PLI was computed at 8.48%. As the average of the final set of comparables was taken at 20.28% and that of the assessee at 8.48%, proposed adjustment u/s 92CA of the Act was computed at Rs. 18,83,88,512/-.
10. The assessee objected before the DRP and on the directions of the DRP, the TPO recalculated the gross profit margin of the assessee and arrived at an adjustment of Rs. 19,17,52,485/-.
Before us, two propositions have been forwarded by the ld. AR. Firstly, it is the say of the ld. AR that foreign exchange fluctuation gain is part of operational income. Therefore, claim should not have been excluded while calculating assessee’s OP/OC. The ld. AR provided a chart demonstrating that if foreign exchange fluctuation gain is treated as part of operating profit, then the applicant’s margin would be 13.79%. The second proposition relates to the exclusion of Infosys Ltd and Wipro Technologies from the final set of comparables as Infosys Ltd was rejected as good comparable in assessee’s own case in A.Ys 2007-08 and 2008-09 by the Tribunal. In so far as WIPRO Technologies is concerned, the same was also excluded by the Tribunal in A.Y 2010-11 and 2012-13 in assessee’s own case.
12. Rebutting to the contention of the ld. AR, the ld. DR stated that the assessee may be following a certain policy in respect of hedging of forex, but we do not know hedging policies of comparable cases as they may be following different hedging policies and it is not possible to find out details of hedging policies followed by comparable companies.
The ld. DR heavily relied upon the observations of the TPO made at par 5.1 of his order.
We have given thoughtful consideration to the orders of the authorities below. In so far as removing forex fluctuation gain from operating profit is concerned, the Hon'ble High Court of Delhi in the case of Fiserv India Pvt Ltd in vide order dated 06.01.2016 has decided this issue in favour of the assessee and against the Revenue, The relevant findings of the Hon'ble High Court read as under:
:8. The ITAT has also dealt with the issue of foreign exchange fluctuation as operating income/exp /expenses and held that this issue is no longer res integra and is in favour of the Assessee by the decision of the Coordinate Bench of ITAT in Westfalia Separator India Pvt. Ltd. v. ACIT (ITA No. 4446/D/02). Accordingly, the AO/TPO was directed to treat the foreign exchange gain/loss as an operating item. The AO/TPO was directed to compute the ALP of the international transactions entered into by FIPL with its AEs keeping in view the observations made in the order of the ITAT.
9. In the present appeal, the Revenue has projected the following questions for consideration by the Court:
(i) Whether the ITAT was right in rejecting the comparables, as noted above, and whether the application of stringent standards of comparability will defeat the purpose of flexibility provided in the comparability analysis for determining ALP?
(ii) Whether the ITAT was right in foreign exchange fluctuation as operating expenses/income without considering that it has no bearing on the transaction and that Safe Harbour Rules stipulate exclusion of foreign exchange gain/loss as operating expenses/ income?
As regards question (ii) it is pointed out by learned counsel for the Assessee that the Safe Harbour Notification dated 18th September 2013 relied upon by the Revenue is prospective and did not apply to the AY in question. Even otherwise the Court finds that the decisions relied upon by the ITAT in the impugned order covers this issue in favour of the Assessee Page 6 of 6 as far as the AY in question is concerned. Consequently, the Court declines to frame any question on the issue”.
A similar view was taken by the Hon'ble High Court of Delhi in the case of CIT Vs. Agilis Information Technologies International [I] Pvt Ltd vide order dated 08.02.2016. The relevant observation of the Hon'ble High Court reads as under:
“2. The notice was issued in this appeal by an order dated 2nd December, 2015 confined to the question of treating income/loss on account of foreign exchange fluctuation as part of the operating revenue/expense.
3. It is pointed out by the learned counsel for the Assessee that reliance placed by the Revenue on the Safe Harbour Notification dated 18th September 2013 will be of no avail to the Revenue since that notice is prospective in nature. It is seen that by the order dated 6th January 2016 in (Pr. Commissioner of Income Tax-3 v. Fiserv India Pvt. Ltd.), this Court has accepted the above plea of the Assessee. Even otherwise, the decisions referred to by the ITAT in the impugned order on the issue also answer the question in favour of the Assessee and against the Revenue.”
Considering the facts of the case in hand, in the light of the decisions of the Hon'ble Jurisdictional High Court of Delhi [supra] we direct the Assessing Officer to treat the forex fluctuation gain as operating income for calculation of OP/OC. The assessee succeeds on this point.
The next issue relates to inclusion of Infosys Ltd and Wipro Technologies as good comparables.
18. In so far as Infosys is concerned, the Tribunal in assessee’s own case in A.Y 2007-08 and 2008-09 has rejected the same as comparable to the assessee in and ITA No. 122/DEL/2013 respectively. The relevant findings of the coordinate bench read as under:
2007-08
“17. The TPO included this company despite the assessee’s objections that it was a very high turnover company with functional dissimilarity.
It is an undisputed fact that the assessee rendered services to its AEs without the assistance of its intangible assets or by retaining any rights in intellectual property in the work done by it. In contrast to that, Infosys Ltd. is a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, on site and offshore services, etc. This company cannot be considered a comparable. Our view is fortified by the judgment of the Hon’ble jurisdictional High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (2013) 219Taxmann 29 (Del) in which Infosys Technologies Ltd., has been held to be not comparable with a company engaged in the business of development of software for its parent company. Similar view has been taken by the Tribunal in the case of Toluna India Pvt Ltd. Following the above precedents, we direct not to consider this company.”
2008-09
We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee's contention about the brand of this company helping in earning huge profits and also the brand-related products swelling the ultimate profit rate of this company. We find that the assessee is a captive unit rendering services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon'ble Delhi High Court held Infosys
Ltd. to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the extant assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt in our mind that Infosys Technologies Ltd. is incomparable with the assessee company. Respectfully following the judgment of the Hon'ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables.
Respectfully following the findings of the coordinate bench, we direct the Assessing Officer/TPO to exclude Infosys Ltd as comparable.
In so far a WIPRO Technologies Services Ltd is concerned, the same was excluded by the Tribunal in the case of Microsoft India [R&D] Pvt Ltd. in and 691/DEL/2016. The relevant findings of the coordinate bench read as under:
“45. The TPO proposed to include this company in the list of comparables despite the assessee's objection that it has more related party transactions. After going through the Annual report of this company, it is & 691/Del/2016 noticed that it was earlier Citi Technologies Ltd. On 21.1.2009, Wipro Ltd. signed a master agreement with Citi Group Inc., for delivery of technology Infrastructure Services and application development and maintenance services for a period of six years, which also includes the year under consideration. This shows that income from software development support and maintenance services was earned by Wipro Technology Services Ltd., from Citi Group Inc., by means of master service agreement entered into between Wipro Ltd., its parent company and Citi Group Inc., a third person.
Rule 10B(1)(e)(ii) provides that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The epitome of `comparable uncontrolled transaction' is that the companies or transactions, in order to fall within the ambit of sub-clause (ii) of rule 10B(1)(e), should be both comparable as well as uncontrolled. `Uncontrolled transaction' has been defined in Rule 10A(a) to mean: 'a transaction between enterprises other than associated enterprises, whether resident or non- resident.' This shows that in order to be called as an uncontrolled transaction, it is essential that the same should be between the enterprises other than the associated enterprises. Section 92B(2) provides that: `A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two AEs if there exists a prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If such an agreement exists, the third person is also considered as an AE and the transaction with such third person becomes international transaction within the meaning of section 92B. Once there is a transaction between two associated enterprises, it ceases to be an 'uncontrolled transaction' and, thereby, goes out of reckoning under Rule 10B(1)(e)(ii).
Coming back to the facts of this company, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables. Similar view has been taken by the Delhi Bench of the Tribunal in the case of Saxo India (P) Ltd. (2016) 67 taxmann.com 155 (Delhi-Trib.). This order of the Tribunal stands affirmed by the Hon'ble Delhi High Court vide its judgment dated 28.09.2016 in C.M. APPL.35744-35746/2016 by holding that no substantial question of law arises from the Tribunal order.
Respectfully following the finding of the coordinate bench, we direct the Assessing Officer/TPO to exclude this comparable. The TP adjustment of Rs. 19,17,52,485/- is directed to be deleted.
The next issue relates to the reduction in deduction allowed u/s 10A of the Act.
The assessee is having four units at Noida, Bangalore, Pune and Nagpur. Out of these, Pune unit is eligible for deduction u/s 10A of the Act. The assessee has allocated expenses based on turnover. The assessee also made a plea that alongwith the expenses, gain on forex exchange fluctuation is also required to be allocated amongst various units of the assessee as the same relates to profits and gains derived by the assessee from export of computer software. This plea of the assessee was rejected by the lower authorities.
We are of the considered view that once the forex fluctuation gain is treated as part of operating profit, then the same deserves to be allocated amongst various units of the assessee and basis of allocation should be same as that deduction for the allocation of expenses amongst various units. We, accordingly, direct the Assessing Officer to allocate forex fluctuation gain also to Pune unit based on turnover. The assessee succeeds on this issue.
Next issue relates to calculation of surcharge and education cess.
Facts on record show that during the year under consideration, the assessee computed tax payable by deducting MAT credit from gross tax payable and, therefore, after computing surcharge and education cess on the balance amount, however, the Assessing Officer has calculated surcharge and education cess on the gross amount without giving effect to the MAT credit deduction by the assessee for the year under consideration. Comparative calculation can be understood from the following chart:
As per rectification As per return Particulars order dtd of income 24.11.2016 Assessed Income as per order .......... (A) 218,298,137 41,20,25,971 Tax liability under normal provisions of the Act (B =30% * A) 65,489,441 123,607,791 - Less: MAT Credit (C) (20.312.967) Income tax....... (D = B - C) 45,176,474 123,607,791 Add : Surcharge (E = 7.5% * D) 3,388,236 9,270,584 Add : Education Cess [F = (D + E)* 3%] 1,456,941 3,986,351 Tax including surcharge and cess [G = D+E+F] 50,021,651 136,864,727 Less: MAT Credit (C) - (20.312.967) Less : Foreign tax credit (H) (2,277,420) (2,277,420) Less : Tax Deducted at Source (I) (13,640,365) (13,451,016) Less : Advance Tax (J) (46,272,422) (46,272,422) Returned Tax / Assessed Tax [K = G-C-H-I-J] (12,168,556) 54,550,902 - Add: Interest under section 234A - - Add: Interest under section 234B 31,639,522 Total Tax and Interest - Returned / Assessed (12,168,556) 86,190,424
Similar issue was considered by the Hon'ble Allahabad High Court in the case of Vacement India 369 ITR 304. The relevant findings read as under:
“The only question which is raised pertains to the computation of tax in accordance with the modalities which are prescribed in the relevant form, ITR-6. Insofar as is material, the relevant entries in the form (Part B-TTI) are as follows:
Gross tax payable (enter higher of 2c and 1) Credit under section 115JAA of tax paid in earlier years (if 2c is more than 1) (7 of Schedule MATC) Tax payable after credit under section 115JAA [(3-4)]Surcharge on 5 Education cess, including secondary and higher education cess on (5+6) Gross tax liability (5+6+7) The aforesaid entries leave no manner of ambiguity in regard to the method of computation of tax liability. Entry 3 requires computation of the gross tax payable. Under entry 4, credit is required to be given under Section 115JAA of the Act of the tax paid in earlier years. Entry 5 requires a computation of the tax payable after credit under Section 115JAA of the Act. The matter is placed beyond doubt by the parenthesis, which indicates that tax payable under entry 5 is to be arrived at by deducting the credit under Section 115JAA of the Act (under entry 3) from the gross tax payable (under entry 4). The surcharge is computed on the amount reflected in entry 5.”
Respectfully following the findings of the Hon'ble Allahabad High Court [supra] we direct the Assessing Officer to calculate the surcharge and education cess on net tax liability. The assessee succeeds on this issue also.
Last issue relates to allowance of short credit of TDS. We direct the assessee to furnish relevant details of TDS and the Assessing Officer is directed to verify the same and allow credit of TDS as per provisions of law.
Charging of interest is consequential and the Assessing Officer is directed to charge interest as per provisions of law.
Since we have decided the appeal, the Stay Petition becomes otiose.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 30.10.2018.