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Income Tax Appellate Tribunal, DELHI BENCHES : I-1 : NEW DELHI
Before: SHRI S.V. MEHROTRA & SHRI KULDIP SINGH
ORDER PER S.V. MEHROTRA, VP: The assessee has filed this appeal on 14th August, 2012 against the assessment order dated 30th December, 2011. As per the report of the Registry, the appeal is time barred by 148 days. The assessee has filed a condonation petition dated 13th August, 2012, wherein it is, inter alia, stated that the assessment order was received by the assessee on 19th January, 2012. However, though the assessee was not agreeable to the additions proposed in the assessment order, but, in order to avoid the cost of long drawn litigation, the assessee was initially advised not to pursue the matter further. However, subsequently, the assessee has been advised that not filing an appeal before the Tribunal may prejudice its tax related cases on similar matters pending adjudication before different forums within the Indian dispute resolution chain. The assessee has also filed an affidavit of Mr. Chandra Sekhar Mishra of the assessee company being the authorized representative of the assessee.
The ld. counsel submitted that same issue is permeating through all the years. At initial stage third party data was not available to come to any conclusion and, therefore, in larger interests of justice delay may be condoned. The ld. counsel relied on the decision of the Hon'ble Bombay High Court in Prima Paper and Engineering (P) Ltd. vs. CIT (2014) 41 taxmann.com 240, wherein in para 8 and 9, it has been observed as under:-
“8. In State of West Bengal (supra), the Supreme Courthas held that it is not possible to lay down precisely as to whatfacts constitute “sufficient caus e” under section 5 of the Limitation Act. But it may be safely stated that delay in filing an appeal should not have been for reasons which indicate the party's negligence in not taking necessary steps, which he could have or should have taken. Here again, what will be such necessary steps will depend upon the circumstances of the case. Any observation of an illustrative circumstance or fact, will only tend to be a curb on the free exercise of the judicial mind by the Court in determining whether the facts and circumstances of a particular case amount to "sufficient cause" or not. It is needless to emphasise that courts have to use their judicial discretion in the matter soundly in the interest of justice. The words “sufficient cause” should receive a liberal construction so as to advance substantial justice when no negligence or inaction were imputable to the appellant.
Having regard to the following facts: (i)appellant's appeal raising the same question for the earlier assessment year has been admitted. (ii) the decision of the Special Bench of the Tribunal, which has been followed by the Tribunal in the impugned order, has not been approved by the Madras High Court in Velayudhaswamy Spinning Mills Pvt.Ltd. Vs. Asst.CIT, (2010) 231 CTR (Mad) 368 and (iii) the delay in filing the appeal has been caused on account of what appears to be negligence on the part of the staff of the appell ant's consultant, we are of the view that interests of justice would be served if delay in filing the appeal is condoned, subject to the condition that the appellant shall pay costs quantified at Rs.10,000/ to the respondent , which shall be paid within one month from today.”
Ld. DR submitted that reasons given as sufficient cause for delay in filing the appeal are not such which were beyond the control of the assessee. He submitted that delay cannot be condoned in anticipation of benefits. In this regard, he relied on the decision in the case of Chief Post Master General vs. Living Media India Ltd. The ld. DR further relied on the decision in the case of J.V. Advani and Co. Pvt. Ltd. vs. CIT 72 ITR 397 and submitted that every day delay has to be explained.
We have considered the submissions of both the parties and have perused the case record. The issue is adjustment in regard to international transaction related to software development segment of the assessee. Various comparables have been taken into consideration for determining the arm’s length price (ALP). Therefore, it cannot be denied that this issue permeates through all the years and, therefore, if in one year on account of wrong advice of the counsel appeal is not preferred in time, then, the adverse finding for that year should not prejudice the assessee’s claim for other years. Under such 4 circumstances, it would be in the interest of justice to condone the delay in filing the appeal. We, accordingly, condone the delay in filing the appeal.
The brief facts of the case are that in the relevant assessment year the assessee company was engaged in the business of software solutions and consultancy services in the area of telecommunication industry.
The assessee is a 100% subsidiary of Aircom International, UK. It had filed its return of income declaring an income of Rs.1,01,82,082/- on 8th December, 2006. The international transaction reported in Form No.3CEB, inter alia, included software development of Rs.281,86,213/-.
The ld. TPO, after adopting various filters, considered the following five comparables:- i) Einfochips Bangalore Limited ii) Apex Advanced Technology Private Limited iii) Apex Knowledge Solutions Private Limited iv) Synetairos Technologies Limited v) Sankhya Infotech Limited
After considering the assessee’s submissions, the ld. TPO rejected all the objections of the assessee on this count. In regard to four comparables, it excluded Apex Knowledge Solutions Private Limited.
As regards the assessee’s claim of working capital adjustment, the same was rejected observing that the assessee had not furnished any computation of working capital adjustment and the quantum of working capital adjustment had not been determined by it. Accordingly, the ld. TPO made adjustment of Rs.64,80,621/-. The ld. DRP vide its order dated 31st May, 2010, which was amended vide order dated 22nd December, 2011 u/s 144C(5), pointed out that the comparables that had been chosen by the TPO had been found to fail the filters that had been applied by him. The ld. DRP determined the average margin at 18.99% in regard to the following comparables:-
Sl.No. Name OP/TC (%) 1. Kals Information Systems Ltd. 42.15 2. Lanco Global Systems Ltd. 5.94 3. Quintegra Solutions Ltd. 14.23 4. Sasken Communications Technologies Ltd. 13.63 Average 18.99
Accordingly, adjustment was determined at Rs.24,48,270/-. As regards the working capital adjustment, ld. DRP confirmed the TPO’s action, inter alia, observing as under:-
“As has been brought out, the issue of working capital will be relevant when there is a situation of inventory remaining tied up or receivables being held up. Frankly speaking these situations may not be so relevant to the service industry. The assessee, as also the comparables used, shall launch into a project only when they have been awarded a contract. It is not as if these parties have manufactured goods that await buyers. This being the case, there is a serious question on the very need for a working capital adjustment in the service industry. A working capital adjustment will be required only when the varying levels of the working capital deployed is actually making a difference to the margins earned by the assessee and the comparables. This is actually at the heart of every comparability adjustment. The assessee has not been able to demonstrate that the difference in the working capital deployed is making a difference in the margin earned by the assessee and the comparables in this year.”
The assessee has assailed the final assessment order primarily on two counts. Firstly, the assessee is aggrieved by inclusion of Kals Information Systems Ltd., in the list of comparables for determining the ALP of the international transaction relating to software development segment. The second grievance of the assessee is on account of non- grant of working capital adjustment. As regards the first issue, the ld. counsel referred to the annual report of Kals Information Systems Ltd., contained at pages 238 to 259 of the paper book and specifically referred to page 255, wherein the schedule No.22 - Notes to the Financial Statements – is contained, wherein Significant Accounting Policies have been given. In the Revenue Recognition, it has been observed as under:-
“Revenue Recognition: The Company derives its revenues primarily from software services and software products. Revenue from time and material contract is recognized on the basis of software developed and billed in accordance with the terms of the contract. Revenue from the fixed price contract is recognized on the completion of milestones in contracts, under the percentage of completion method. Income from training is recognised on time proportion basis.”
The ld. counsel further referred to the financial statements of the assessee contained from page 1 to 17 of the paper book and pointed out that the assessee does not have any revenue from products CTR. Ld. DR referred to the annual report of Kals Information Systems Ltd., placed at page 258 of the paper book, wherein generic names of three principal products/services of the company is given in which it is stated as under:-
“Item Code No. : N.A. Product Description : Software Development & Consultancy Item Code No. : N.A. Product Description : Educational Services”
9. With reference to these details, ld. CIT, DR submitted that it is inconceivable to consider any product being there without code number.
He pointed out that code No. is necessary for products. Therefore, it is wrong to suggest that Kals Information Systems was dealing in products. To further buttress his statements, ld. DR referred to page 254, wherein the schedule relating to software development expenditure is contained to demonstrate that no product related expenses were debited to Profit & Loss Account. He referred to schedule 15 relating to sales, services and training and pointed out that no software product is mentioned there. Ld. CIT, DR further referred to page 256, wherein the significant accounting policies are contained in which at para 6, it has been pointed out as under:-
“The company is engaged in the business of development of computer software and other related services. The production and sale of such software is not capable of being expressed in any generic unit and hence it is not possible to give the quantitative details of the sales and information as required under paragraphs 3, 4C and 4D of Part II of Schedule VI of the Companies Act, 1956.”
With reference to the above statement in the financial statement, ld. DR submitted that exclusion of Kals Information Systems Ltd., on the ground of dealing in products is not justified.
We have considered the submissions of both the parties and have perused the record of the case. The ld. counsel has relied on the following decisions in support of its contention that Kals Information Systems Ltd., is not to be included in the set of comparables:-
i) Toluna India (P) Ltd. vs. ACIT (ITA No.5645/Del/2011, Order dated 26th August, 2014; ii) Cincom Systems India P. Ltd. vs. ACIT (ITA No.761/Del/2012, Order dated 31st May, 2013); iii) Telelogic India (P) Ltd. vs. DCIT (ITA No.166/Mum/2011, Order dated 18th May, 2015).
In the case of Toluna India (P) Ltd., the Tribunal has noticed that the assessee rendered software development and related services to Greenfield Group. In that context, the Tribunal directed for exclusion of Kals Information Systems Ltd., observing as under:- 10
“KALS Information Systems Limited (Segmental):
27.1. The TPO observed that this company was engaged in Software development and training. As the software products constituted only 3% of its revenue and training revenue constituted 8.56%, the TPO held that this segment of KALS Information Systems Limited was rightly includible. 27.2. After considering the rival submissions and perusing the relevant material on record, it is an admitted position that the TPO adopted Software development segment of this company by noticing that this segment also included revenues from software products and training. In view of the fact that the assessee is not engaged in imparting any training on commercial basis or selling its software products, we hold that the financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability. As such, this case is directed to be excluded. The assessee succeeds.”
This decision has been rendered for assessment year 2007-08.
In Cincom Systems India P. Ltd. (supra), the Tribunal has observed that the assessee was engaged in the business of development and support of computer software for its parent company. In that context, the Tribunal directed for exclusion of Kals Information Systems Ltd., relying on the decision in the case of Bind View India Pvt. Ltd. vs. DCIT
“9.2. In the case of Bind View India P. Ltd. vs DCIT Pune. for same asstt year 2006-07, the ITAT has held that KALS activities are different hence need to be excluded: "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 development 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 9 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 aspect, assessee succeeds." 9.3. Above bind view case has been followed in the case of Trilogy EBusiness Software India (P.) Ltd. vs DCIT [2013] 29 taxmann.com 310 , ITA No 1054/2011; the Bangalore Bench of ITAT has held: "46. 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 repot, 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 (P.) Ltd. v. Dy. CIT [ITA No 1386/PN/10, dated 30-11-2011] wherein KALS as comparable was rejected for AY 2006-07 on account of it being 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 10 comparable to software development 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 aspect, 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.
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 available 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."
The decision in the case of DHL Express (India) (P) Ltd. vs. ACIT (2011) 11 taxmann.com 40 (Mum.) was also cited as under:-
“10.1. In the case of DHL Express (India) (P.) Ltd. v. ACIT [2011] 11 taxmann.com 40 (Mum.) Mumbai Tribunal held that though segmented results are now required to be published in India, but still it is a common experience that in many such results certain expenditures, particularly expenditure on account of interest and head office, are generally not allocated and shown in the published results as separate expenditure. Therefore, the TPO was correct that when direct comparables were available there was no need to consider the segmented results of TCI. It is only the operating profit which can be considered. It is important to note that in this case it was the department’s contention that segmented results should not be considered when direct comparable are available. As in assessee’s the direct comparable are available, hence KALS Information Systems Ltd should not be taken as comparable.
The Tribunal noticed that Kals Information Systems Ltd., consisted of an STPI unit engaged in development of software and software products and training centres engaged in training of software professional for online projects. Further, in Telelogic India (P) Ltd., the Tribunal, inter alia, observed that the assessee was engaged in the business of development of software and maintenance of data for software for its parent company in assessment year 2006-07 and directed for exclusion of Kals Information Systems Ltd., inter alia, observing that the company had revenues from software products as well as software development. The ld. CIT, DR referred to the decision in Agnity India Technologies (P) Ltd. TS-573/ITAT/2016/TP for the proposition that each year is to be considered separately and the decisions should not be followed without proper verification. He submitted that the matter may be restored to find out if product revenue is there or not in the case of Kals Information. We are constrained to observe that this plea of Ld. CIT, DR cannot be accepted, particularly, when the decisions have been rendered by the Tribunal for assessment year 2006-07 and 2007-08 with reference to the annual report of Kals Information. The revenue recognition statement noted on page 255 of the paper book clearly holds that Kals Information was dealing in products also. This is also evident from page 254, wherein the details of software development expenditure have been given which, inter alia, includes software consumption from inventory. Once inventory was there, it cannot be said that Kals Information Systems Ltd., was not having any revenue from products. The ld. DR has submitted that the principal items mentioned on page 258 do not contain any item code number. However, this information is only with reference to principal products and not with reference to the entire spectrum of products/services dealt by the company. Consistent with the decisions relied upon by the ld. counsel for the assessee, we direct for the exclusion of this company. The second issue is regarding denial of working capital adjustment. The reason for denial is that the assessee had not submitted the details as has been observed by ld. TPO in para 15 7.1 of his order. The ld. counsel referred to page 140 of the paper book and pointed out that the assessee had made submissions in this regard before the ld. DRP in regard to all the four comparables selected by ld. DRP. We, therefore, restore this issue to the file of ld. TPO to consider the information furnished by the assessee in regard to its claim for working capital adjustment.
In the result, this issue is allowed for statistical purposes.
The order pronounced in the open court on 19.05.2017.