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Income Tax Appellate Tribunal, BANGALORE BENCH A, BANGALORE
Before: SHRI. ABRAHAM P. GEORGE
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : These are cross appeals filed by assessee and Revenue. Assessee has also filed a cross objection. The appeals and cross objection are against an order dt.26.08.2013 of CIT (A), for A. Y.2005-06
Appeal of assessee is taken up first for disposal. Assessee has altogether taken ten grounds of which grounds 1 and 10 are general needing no adjudication. Grounds 2 to 4 are on TP related issues, whereas grounds 5 to 9 are on corporate tax issues.
Ld. Counsel for the assessee at the outset submitted that if his grounds with regard to exclusion of certain comparables considered by the TPO in his TP study for analysing the ALP of the transactions with its AE IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 3 is considered, then other grounds relating to TP may be treated as not pressed. Accordingly, we are confining ourselves to the grounds for exclusion of certain comparable companies from the list finally arrived at after exclusions directed by the CIT (A). We also find that Department in its appeal has raised a transfer pricing issue assailing the direction of CIT (A) to exclude comparables having turnover in excess of Rs.200 crores.
This issue appears as ground 7 of Revenue’s appeal. Hence while considering assessee’s grounds seeking exclusion of some comparables, we will also deal with the Departmental ground mentioned supra.
Facts apropos are that assessee was a 100% subsidiary of one company called AMP Inc, USA which was later acquired by one M/s. Tyco group in 1999. Assessee manufactures electrical and electronic Inter connection devices, wiring harnesses and fibre optic cables, assemblies and accessories, presses and applicators, which were sold in India as well as exported to Tyco group world wide. Assessee had also rendered software development services to its AE abroad. Segmentwise revenue of the assessee for the relevant previous year was as under :
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 4
International transactions of the assessee with its AE for the relevant previous year were as under :
Royalty INR 2,14,53,835 None 8. Software development & Service INR 6,97,35,671 Adjustment done by Income TPO IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 5 Since the adjustments recommended by the TPO were confined to the software development segment, issues raised by the assessee in this appeal are also on the said segment.
For justifying the pricing of its international transactions relating to software development segment, assessee had selected 93 comparables from prowess and capitaline data base and applied TNMM. As per assessee the average mark-up of these comparables came to 11% and this was within the tolerance range of its own mark-up, thereby not necessitating any adjustments on ALP. List of 93 comparables selected by the assessee are reproduced hereunder :
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 6 IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 7
7. TPO while accepting TNMM as the most appropriate one, applied certain filters and finally arrived at the following set of comparables as proper for analysing the ALP of the international transactions undertaken by the assessee with its AE :
Filters applied by the TPO were software development income less than 75%, current year data not available, RPT transactions more than 25%, adoption of different financial year, diminishing revenue, persistent losses, employee cost to sales less than 25%, export sales less than 25%, turnover less than Rs.1 crore, and on-site income of more than 75%. The IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 8 list of comparables selected by the TPO consisted of five companies from assessee’s own TP study namely Bodhtree Consulting Ltd, Geometric Software Solutions Co. Ltd, L & T Infotech, Sathyam Computer Services Ltd and Infosys Technologies Ltd,
On the average PLI of 26.59%, TPO allowed a working capital rebate of 2%. Recommended adjustment u/s.92CA of the Act, were as follows :
Assessment was thereafter completed by making the addition as recommended by the TPO.
Assessee moved an appeal before the CIT (A). One of the pleadings taken by assessee was for exclusion of companies having turnover in excess of Rs.200 crores from the list of seventeen companies selected by IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 9 the TPO, CIT (A) was appreciative of this contention. He directed exclusion of these companies which were having turnover in excess of Rs.200 crores.
Now before us, Ld. AR submitted that he was seeking exclusion from the list, as finally arrived at by the TPO, even without considering benefit of exclusion of companies having turnover in excess of Rs.200 crores. According to him, out of the 17 comparables selected by the TPO, Bodhtree Consulting Ltd, Geometric Software Solutions Co. Ltd, L& T Infotech, Sathyam Computer Services Ltd and Infosys Technologies Ltd, were a part of assesses own TP study. However according to him, assessee had before the CIT (A) sought exclusion of all the above, except Bodhtree Consulting Ltd, but this was not accepted by the CIT (A). In so far as Bodhtree Consulting Ltd was concerned, as per the Ld. AR assessee had filed an additional ground before this Tribunal seeking its exclusion. For admission of additional ground, he placed reliance on the Special Bench decision in the case of DCIT v. Quark Systems Pvt. Ltd. [42 DTR 414].
Adverting to each of the companies that he was seeking exclusion, Ld. AR submitted that Bodhtree Consulting Ltd, was functionally dissimilar to that of the assessee. Further as per the Ld. AR, it had RPT in IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 10 excess of 15% as well. In support of his contention that Bodhtree Consulting Ltd, was to be excluded, Ld. AR placed reliance on the decision of coordinate bench decision in the case of ACIT v. Symbol Technologies P. Ltd, [IT(TP)A.391 & 296/Bang/2012, dt.27.03.2015].
According to him, annual report of Bodhtree Consulting Ltd, reflected that one M/s. Perigon LLC(PB, p.730) was having more than 50% shares holding in that company. Reliance was placed on letter dt.13.09.2007 written by the statutory auditors of the said company, addressed to Addl. CIT, in reply to a notice u/s.133(6) of the Act issued to the said company. As per the Ld. AR in this letter it was mentioned that turnover of M/s. Bodhtree Consulting Ltd to M/s. Perigon LLC came to Rs.133.90 lakhs. According to him against total turnover of the said company which came to Rs.386.86 lakhs, sales to related party came to 34.61%. As per the Ld. AR, this exceeded the recognised RPT limit of 25%.
Seeking exclusion of Extensys Software Solutions Ltd, Ld. AR submitted that the said company had abnormal profits for the relevant previous year due to amalgamation of another company called M/s. Halool India Ltd, As per the Ld. AR, results of this company for the relevant IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 11 previous year was considerably affected due to this amalgamation. Ld. AR submitted that abnormal profits received from amalgamation was a good reason for exclusion of this company from list of comparables. Reliance was placed on the decision of coordinate bench in the case of Symbol Technologies India P. Ltd (supra) once again.
Seeking exclusion of Sankhya Infotech Ltd, Ld. AR submitted that the said company was functionally different from that of the assessee. As
per the Ld. AR in the decision of the coordinate bench in the case of Symbol Technologies India P. Ltd, (supra), Sankhya Infotech Ltd, was directed to be excluded from the list of comparables in the software development segment.
Seeking exclusion of Foursoft Ltd, Ld. AR submitted that the said company was functionally different from that of the assessee. As per the Ld. AR, Foursoft Ltd, also had RPT in excess of 15%. Reliance was once again placed in the case of Symbol Technologies India P. Ltd, (supra).
17. Seeking exclusion of Thirdware Solutions Ltd, Ld. AR submitted that the said company was also functionally different and had diversified activities including distribution of software products and providing turn- IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 12 key projects. As per the Ld. AR, segmental results were not available despite such diversified activities. Further as per the Ld. AR, coordinate bench in the case of Symbol Technologies India P. Ltd (supra) had directed exclusion of M/s. Thirdware Solutions Ltd, in the software development segment.
18. Seeking exclusion of Geometric Software Solutions Co. Ltd, Ld. AR submitted that it was a comparable originally selected by the assessee.
However as per the Ld. AR, assessee had canvassed for its exclusion before the CIT (A). Relying on the coordinate bench decision in the case of ITO v. Net Devices India P. Ltd, [IT(TP)A.1099/Bang/2011, dt.25.05.2016], Ld. AR submitted that this company was not a good comparable in the software development segment.
Seeking exclusion of Tata Elxsi Ltd (seg), Ld. AR submitted that the said company was into product-design services, design engineering services and visual computing. As per the Ld. AR it was functionally different from that of the assessee was developing niche products.
Reliance was again placed on the decision of coordinate bench in the case of Net Devices India P. Ltd, (supra).
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 13
20. Seeking exclusion of Visual soft Technologies Ltd (seg), Ld. AR submitted that the said company was basically a software product company. According to him, annual report of the said company placed at paper book page.1210, clearly mentioned that the company was providing services in application development, product reengineering, product development, application maintenance and support, enterprise application integration, packaged software implementation and BPO. According to the Ld. AR, these areas were mainly related to software product development.
In any case, as per the Ld. AR, the said company was considered to be functionally dissimilar to a software service provider by the Delhi Bench of this Tribunal in the case of ITO v. Colt Technology Services India P. Ltd [ITA No.609/Del/2011 & CO.81/Del/2011, dt.23.10.2012].
Seeking exclusion of Flextronics (seg), Ld. AR submitted that it was functionally different from the assessee and was providing a hybrid service including both products and services. Reliance was placed on the decision of coordinate bench in the case of Net Devices India P. Ltd, (supra).
22. Vis-a-vis Satyam Computer Services Ltd, Ld. AR submitted that this company appeared in TP study of assessee. However as per the Ld. AR, assessee had contested its inclusion before the CIT (A) on a ground that IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 14 profits reported by the said company were inflated. As per the Ld. AR, coordinate bench in the case of Net Devices India P. Ltd, (supra) had held that Satyam Computer Services Ltd, could not be considered as a good comparable.
23. Seeking exclusion of Infosys Technologies Ltd, Ld. AR submitted that the said company also appeared in the list of comparables selected by the assessee. However according to the Ld. AR, assessee had sought exclusion of this company before the CIT (A) since it was having diversified folio of activities and huge in nature, owning a number of intangible and intellectual property. Reliance was placed on the judgment of Hon’ble Delhi High Court in the case of CIT v. Agnity India Technologies P. Ltd [(2013) 93 DTR 375].
Per contra, Ld. DR opposing the exclusions sought by assessee submitted that M/s. Bodhtree Consulting Ltd, Geometric Software Solutions Co. Ltd, Satyam Computer Services Ltd, and Infosys Technologies Ltd, appeared in assessee’s own TP study. As per the Ld. DR, assessee could not now turn back and say that such companies were not good comparables.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 15
We have perused the orders and heard the rival contentions. It is true that out of the many companies which assessee is seeking exclusion, Bodhtree Consulting Ltd, Geometric Software Solutions Co. Ltd, Satyam Computer Services Ltd, and Infosys Technlogies Ltd, were in assessee’s own list of comparables. However assessee had contended before the CIT (A) that Geometric Software Solutions Co. Ltd, had diversified operations consisting of software products and services. In so far as Satyam Computer Services Ltd, assessee had contended before the CIT (A) that its financials were unreliable. In so far as Infosys Technologies Ltd, assessee had contended before the CIT (A) that its turnover was far in excess of that of the assessee which had a turnover was only Rs.6.97 crores in the software development segment. Once assessee had taken grounds seeking exclusion of certain companies before the CIT (A) in our opinion, even if such companies appeared in the TP study of the assessee itself, CIT (A) having adjudicated and decided on such ground against the assessee, assessee cannot be precluded from seeking exclusion of such companies before the Tribunal. However, in so far as Bodhtree Consulting Ltd, is concerned, not only was the said company in the list of assessee, but we find that assessee had not contested its inclusion before the TPO or before the CIT (A).
However, in view of the decision of the Special Bench in the case of Quark IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 16 Systems Ltd, (supra), assessee again cannot be precluded from seeking exclusion of a comparable, though it was a part of its own comparables, since TP is an evolving area. Said decision of the Special Bench was confirmed by the Hon’ble Punjab & Haryana High Court in (2011) 62 DTR
Nevertheless since comparability of the said company was not before any of the lower authorities, we are of the opinion that this has to be looked into afresh by the AO / TPO. It is true that coordinate bench in the case of Symbol Technologies India P. Ltd, (supra) had held that Bodhtree Consulting Ltd, had RPT of more than 15% and was required to be excluded. However as mentioned above, the grounds seeking exclusion of M/s. Bodhtree Consulting Ltd was not raised before TPO or CIT (A).
Hence in our opinion, the issue requires a fresh look by the AO / TPO. We set aside the order of CIT (A) and remit the issue of comparability of Bodhtree Consulting Ltd, to the AO / TPO for consideration afresh in accordance with law.
26. Now we will try to resolve the grounds raised by the assessee seeking exclusion of various other companies in the list considered by the TPO, including M/s. Geometric Software Solutions Ltd, Satyam Computer IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 17
27. Taking up the case of M/s. Extensys Software Solutions Ltd, annual report of the said company has been placed before us at paper book page
It does mention that there was an amalgamation of that company with one M/s. Holool India Ltd, with effect from 01.04.2004. In the notes to accounts, placed at paper book page 767, it is clearly mentioned that amalgamation was come into effect from 31.03.2004. Thus the profits of the said company could have been skewed because of the amalgamation factor. In the case of Symbol Technologies India P. Ltd, (supra), this Tribunal had held as under at para 14 of its order, which is reproduced hereunder :
14. The Ground raised by the Revenue with regard to the action of the CIT(A) in excluding companies with abnormal profits is misconceived and the issue and does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon’ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore the grievance as projected by the Revenue in ground No.5 is misconceived. On the facts of the present case, we are of the view IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 18
that the CIT(A) rightly excluded Exensys Software Solutions Ltd., and Satyam Computers Ltd., from the list of comparable companies. Accordingly we direct exclusion of Extensys Software Solutions Ltd.
Coming to the case of Sankhya Infotech Ltd, argument of the assessee is that it was engaged in the business of software products and services training and hence functionally different. Comparability of Sankhya Infotech Ltd, in the software development segment was an issue which came up before this Tribunal in the case of Net Devices India P. Ltd, (supra). Said decision was also for the very same assessment year. This Tribunal had held as under at para 18.1.1 of its order dt.25.05.2014 :
18.1.1 The learned Authorised Representative of the assessee has submitted that this company is functionally dis-similar as this company is product based company and also engaged in R&D activity and development of niche product for the transportation and aviation fields. This company also owns intangibles. Thus this company cannot be considered as a good comparable when it is engaged in software products for transportation and aviation industry and incurred selling and marketing expenses. In support of his contention, he has relied upon the following decisions :- i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 & 1388/Bang/2011. ii) M/s. Sunquest Information Systems (India) Pvt. Ltd. (IT(TP)A No.1302/Bang/2011 & 92/Bang/2012) iii) Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 19
18.1.2 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO. 18.1.3 We have considered the rival submissions as well as relevant material on record. At the outset, we note that the functional comparability of this company has been examined by the Tribunal in a series of the cases as relied upon by the learned Authorised Representative of the assessee. In the case of ITO Vs. M/s. Sunquest Information Systems (India) Pvt. Ltd. (IT(TP)A No.1302/Bang/2011 & 92/Bang/2012), the Tribunal has considered and decided an identical issue in paras 19 & 20 as under : “ Sankhya Infotech Limited (‘Sankhya’) 19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information – SILICON TM QT (Online Assessment System) – SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to end solution for all Flight Operations.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 20 - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: “2. Activities The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956.” The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in for the assessment year 2005-06) has held that the said company is not a comparable to the assessee therein which was also in the business of software development.
The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies.” A similar view has been taken by the Tribunal in the other decisions as relied upon by the ld. A.R. Following the earlier order of the Tribunal where it was found that this company is engaged in the business of development of software products and services as well as training, it cannot be considered as a good comparable of software development services provider. Accordingly, we direct the A.O/TPO to exclude this company from the list of comparables. Accordingly we direct exclusion of Sankhya Infotech Ltd, from the list of comparables.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 21
Coming to M/s. Foursoft Ltd, argument of assessee is that this company was functionally different and had been catering to enterprise solutions and software products. It is also stated by the assessee that RPT of the said company exceeded 15%. Comparability of Foursoft Ltd, was an issue which came up before the coordinate bench of this Tribunal in Symbol Technologies India p. Ltd, (supra), within the very same segment.
It was held as under by the Tribunal at para 22 of its order dt.27.03.2015:
We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were :- “15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 22 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : "23. The other companies which are objected to by the assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables.
24. The learned D.R. however, supported the Orders of the authorities below.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 23 25.Having heard both the parties and having gone through the material on record, we find that the TPO at page 37of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO’s Order, the said company has derived income from software licence also and AMCs.
As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products.
As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 24 The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables". Respectfully, following the same, we accept the assessee’s objections and direct the TPO to exclude the above three companies from the list of comparables.”
In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that Foursoft Ltd., and Thirdware Solutions Ltd., should be excluded from the list of comparable companies. Following the above, we direct exclusion of Foursoft Ltd, from the list of comparables.
Coming to Thirdware Solutions Ltd, claim of the assessee is that this was also a functionally different company engaged in the sale of software designs, software products and software development, and no segmental results were available. We find that comparability of Thirdware Solutions Ltd, was an issue which came up before the coordinate bench in the case of IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 25 Net Devices India P. Ltd, (supra). In its order dt.25.05.2016, it was held as under at para 9.1 of the order :
Thirdware Solutions P. Ltd :
9.1 There is no dispute that the high profit margin or loss cannot be a ground for exclusion or inclusion of a particular company in the list of comparables. The learned Authorised Representative of the assessee has submitted that this company is in the diversified activities and derive its income from sale of software license, software products apart from software development services. This company is engaged in the diversified activities of rendering application development, customer relationship management and ERP, software products. He has referred to the Annual Report of this company and submitted that this company is also engaged in the distribution of software products and providing trunky project which include a bundle of activities such as providing software product combined with implementation and customer services. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 & 1388/Bang/2011. ii) M/s. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2012. iii) M/s. Symbol Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. iv) Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 9.2 The learned Departmental Representative has submitted that the TPO has analysed the functions of this company and it was found that this company is engaged in the similar activity of providing software development services. He has relied upon the orders of the authorities below.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 26
9.3 We have heard the rival submissions as well as considered the relevant material on record. The learned Authorised Representative of the assessee has contended that this company is having diversified activities including software product as well as trunky project. We find that as per Schedules 12 as well as 14 of the balance sheet of this company, this company has sale of license, purchase of license and purchase of AMC charges. The details of the sales in Schedule 12 and details of purchase in Schedule 14 are as under : SCHEDULE 12 : SALES Sale of Licence .. 27,202,087 Software Services .. 80,602,781 Export .. 147,425,780 Revenue from Subscription .. 35,939,678 SCHEDULE 14 : DETAILS OF PURCHASE Purchase of Licence .. 21,168.657 Clearing and Forwarding charges 835,754 Purchase – AMC Charges .. 16,893,037 Software Service Charges .. 17,329,999 Training Expenses .. 554,296 Purchase others .. 0 Thus it is clear from the Schedules 12 & 14 of the balance sheet of this company that this company is in trading of licenses and no separate segmental data are available. Therefore, this company cannot be considered as a good comparable to the software development services provider, companies like assessee which is a captive service provider. Accordingly, we direct the A.O./TPO to exclude this company from the list of comparables.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 27 Following the above decision, we direct exclusion of Thirdware Solutions Ltd, from the list of comparables.
Coming to Geometric Software Solutions Co. Ltd, case of the assessee is that its RPT exceeded 15% and was doing software product work also. We find that the issue of comparability of Geometric Software Solutions Co. Ltd, had come up before this Tribunal in the case of Net Devices India P. Ltd, (supra). It was held as under in its order dt.25.05.2016 :
7.3 We have considered the rival submissions as well as the relevant material on record. At the outset we note that in strict sense, the ALP has to be determined by considering uncontrolled comparable prices which means unrelated comparable prices has to be taken into account to bench mark the international transactions which are the control and RPTs. However, 0% RPTs of the comparable price is an impossible situation and therefore a reasonable tolerance range of the revenue from RPT can be considered for selecting the uncontrolled comparables. There cannot be a single criteria / parameter which can be applied as a general rule in all cases. Therefore, this tolerance range varies from case to case and depending upon the availability of the comparables. If the comparables of international transactions are easily available, then, this tolerance of RPT should be restricted to minimum. There is no specified tolerance range in the Act or Rules under the Transfer Pricing provisions, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, commonly accepted tolerance range of 5% to 25% of the total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case on hand, the availability IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 28 of the comparables is abundant in number as the TPO selected 17 comparables by applying the filter of 25% of revenue from related parties. Therefore, in this case, good number of comparables are available and there is no difficulty in searching the comparables. Accordingly, in order to determine the ALP by considering the comparable uncontrolled transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the RPT in the case of DCIT Vs. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012 & C.O. No.40/Bang/2012 Dt.20.3.2015 for the Assessment Year 2005-06 the Tribunal has held in para 17 as under :- “ 17. In view of the conclusion above that exclusion of comparable companies with RPT of less than zero percent is not valid, and that companies where RPT is less than 15% alone can be considered, then the comparable rejected by the CIT (Appeals) on the basis of the said filter will have to be included along with the four comparable retained by the CIT (Appeals). Although 12 comparable which were rejected on the basis of RPT being more than zero percent, one comparable viz., Four Soft Ltd, will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd. and Infosys Technologies Ltd. will get excluded for the reason that the financial results are not reliable in the case of Sathyam Computers Ltd. and for the reason that the high turnover, brand value, high risks etc. The remaining 9 comparable companies which were excluded by the CIT (Appeals) by applying the RPT filter of 0% related party transaction will not have to be included. Their comparability with the assessee in terms of other filters will be discussed in the following paragraphs.” We further note that in the assessee's own case for the Assessment Year 2006- 07, the Tribunal has taken a similar view has been taken in assessee's own case for the Assessment Year 2006-07 in para 14 as under : “ 14. Further, as regards Mega Soft Ltd., Aztec Software Ltd., and Geometric Software Ltd.(segment) are concerned, it is stated by the learned counsel for the assessee that RPT of these IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 29 companies is 17.08%, 17.78% and 19.34% respectively. He stated that this Tribunal, in a number of cases has been holding that if the RPT are more than 15%, then such comparable companies have to be excluded from the final list of comparables. In support of this contention also, the learned counsel for the assessee has placed reliance upon the decision of the co-ordinate bench of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd.” In view of the facts and circumstances of the case when there is good number of comparables available then, we concur with the view of the co-ordinate bench that the RPT filter of 15% is proper in the case of the assessee. Accordingly we direct the Assessing Officer/TPO to exclude the comparable companies having the revenue of more than 15% from related parties. The learned Authorised Representative of the assessee has referred Annexure A to TPO order which mentions the percentage of RPTs. Thus as per the Annexure A of the TPO’s order, the following companies having more than 15% of RPT are directed to be excluded. Sl. No. Comparable Company Name % of RPT Over sales 1. Aztec Software Limited 17.78 2. Geometric Software Limited 19.34 3. Megasoft Limited 17.08
The order of the CIT (Appeals) stands modified on this issue. Tribunal had given a finding that 15% RPT filter was proper threshold in the case of Net Devices India P. Ltd, (supra). Further in the case before us comparables on the segment relating to international transactions undertaken by the assessee were easily available. Assessee itself had IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 30 selected 93 cases in its TP study. Thus the tolerance of RPT can be restricted to the minimum level of 15%. Therefore exclusions directed by the Tribunal in the case of Net Devices India P. Ltd, (supra) based on RPT filter of 15% can be applied here also. Accordingly we direct exclusion of Geometric Software Solutions Ltd, from the list of comparables.
Coming to Tata Elxsi Ltd,(seg), in the case of Net Devices India p.
Ltd, (supra), it was held as under at para 18.4.3 of order dt.25.05.2016 :
18.4.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that the functional comparability has been considered by this Tribunal in assessee's own case for the Assessment Year 2006-07 vide order dt.30.6.2015 in in para 13 to 18 as under : “ 13. Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz., 2006- 07 in the case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 & 13 of its order, has held as under: “12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E- Business Software India Pvt.Ltd.(supra): Xxxxxx Xxxxxx IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 31
As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica Pvt.Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- “14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- “7.7.Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties.” 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable.”
In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. Respectfully following the same, we direct the AO to exclude these companies from the final list of comparables.” We find that there is IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 32
no change in the business activity of this company in the year under consideration in comparison to the Assessment Year 2006-07. We further note that a similar view has been taken by this Tribunal in the other cases as relied upon by the assessee pertaining to the Assessment Year 2005- 06. Accordingly, by following the earlier decisions of this Tribunal, we are of the view that this company cannot be considered as a good comparable to the assessee. Hence, the Assessing Officer / TPO is directed to exclude this company from the list of comparables. Accordingly we direct exclusion of Tata Elxsi Ltd, (seg) from the list of comparables.
Coming to Visual Soft Technologies Ltd, (seg), claim of assessee is that the said company was a product company and Delhi bench in the case of ITO v. Colt Technology Services India p. Ltd, [ITA.6091/Del/2011, dt.23.10.2012] had directed its exclusion in the software development segment. What was held by the coordinate bench in the case of Colt Technology Services India p. Ltd (supra) is reproduced hereunder :
14. We find the submissions of the assessee differentiating its case with the claimed comparables (i) Exensys Software Solutions Ltd. 2) Sankhya Infotech Ltd. 3) Third Ware Solution Ltd. And 4) Visual Soft Technologies Ltd. (SEG) searched by TPO, which have been accepted by the Ld. CIT(A), have not been successfully rebutted by the department before us. Regarding Exensys Software Solutions Ltd. the submission of the assessee remained that the said company owns brands worth Rs. 5 crores as against its turn over of Rs. 7.37 crores during the financial year 2004-05, hence the company is a brand owner of the IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 33
products developed by it. The said company is also engaged in section R & D and owns several software products such as X migrate, integration workbench , and report designer etc. Regarding Sankhya Infotech Ltd., it was submitted that they own the intellectual property rights in the form of software products developed by it and bears substantial risk associated with the success / failure of these products in the market. These submissions were made on the basis of its annual report for the relevant financial year. It was also submitted that as a part of its business operations the said company is engaged in and focuses on development of niche products for the transportation and aviation industry and accordingly spends heavily on development of software products. It was also submitted that the said company owns software products. This information was based on a review of the schedule 4 of its books of accounts on fixed assets. Regarding Thirdware Solutions Ltd. it was submitted that the said company has a diversified functional professional profile and is also engaged in sale of software licenses. They invest in R&D and also provides / sells software licenses and there are no segmental results available in its audited financials to segregate profitability from provision of software development services and from sale of software licences.. These informations were supported by the annual report for Financial year 2004-05 of the said company. In its annual report a generic disclosure was made that the company is involved in trading of software and provision of IT services. Schedule 14 of the Financial statement of the said company provide information on details of purchases as per which the total purchase cost incurred by the company was about Rs. 56871743/- as against the total cost of Rs. 175527264/- which is about 32% of the total cost. Besides the said company earned abnormally high OP / TC margin of 66.11% during Financial Year 2004-05 indicating risk dissimilarity vis a vis the assessee which claimed to be a cost plus low risk captive which cannot be expected to earn such high profitability. Regarding Visual Soft Tech Ltd. (seg) it was submitted that company is engaged in undertaking substantial R & D activities and IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 34 hence should be excluded from the final set of comparables since its return includes a return on account of the R & D function. It was demonstrated by the fact that during Financial Year 2004-05, the said company was having a high R & D / sales spend of 4.5% (fails the R /& D filter of 3%as applied by the assessee). The Ld. CIT(A) on the basis of Indian TP regulations, OECD Guidelines and judicial decisions came to the conclusion that in much as these companies owning software products and undertaking R & D command a premium return compared to any routine contract software development service provider, they should not be taken as comparable for a contract software development service provider such as the assessee. Delhi bench decision mentioned supra was also in relation to the software development segment. In the said case, CIT (A) himself had directed exclusion of the said company finding it to be not a routine software development service provider. Nothing was brought before us by Ld. DR for taking a different view, though the annual report of the company placed by assessee at paper book page 1210 does not clearly indicate whether the said company was into software products segment only. Judicial discipline requires us to follow the decision of a coordinate bench unless it has taken a view which is not a possible one. In the circumstances we direct exclusion of Visual soft Technologies Ltd, (seg) from the list of comparables.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 35
Coming to Flextronics Ltd, (seg), we find that comparability of the said company was an issue which came up before the coordinate bench in the case of Net Devices India P. Ltd, (supra). It was held by the coordinate bench as under in its order dt.25.05.2016 :
17.1 The learned Authorised Representative of the assessee has submitted that this company is having hybrid model of supplying both products and services. It offers new product design and development to enhancing and testing their current products. These services are provided for fixed networks, mobile networks, voice over packet and data network. Thus the learned Authorised Representative of the assessee has submitted that this company is functionally different from the assessee. He has contended that this company is engaged in the R&D activity as it is evident from the Annual Report of this company. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 & 1388/Bang/2011. ii) M/s. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 & 92/Bang/2012. iii) M/s. Intoto Software India Pvt. Ltd. (ITA No.1196/Hyd/2010) iv) M/s. CNO IT Services (India) Pvt. Ltd. (ITA No.1280/Hyd/2010) 17.2 On the other hand, the learned Departmental Representative has submitted that the TPO has examined the functional comparability of this company and it had qualified all the parameters and filters applied by the TPO. The objections raised by the assessee at this stage were not available before the TPO and therefore the same cannot be accepted in the absence of the examination of the fact by the TPO. 17.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that the IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 36 comparability of this company has been examined by this Tribunal in various cases as relied upon by the learned Authorised Representative of the assessee. In the case of McAfee Software (India) Pvt. Ltd. (supra), the co-ordinate bench of this Tribunal has again considered this issue in para 10.10 as under : “10.10 This company was objected to on functional dissimilarity. This was considered in ITO Vs. M/s. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 dt.11.6.2015 (supra) as under : “ 26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables.”. Respectfully following, we exclude the same.” In view of the facts as recorded and considered by the co-ordinate benches of this Tribunal that this company is in the activity of software development services as well as software products and further also incurred R&D expenditure. Therefore, the same was found to be dis-similar to this pure software development services provider in the capacity of captive service provider. By following the earlier order of the Tribunal, we direct the Assessing Officer/TPO to exclude this company from the list of comparables.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 37 Accordingly we direct exclusion of Flextronics Ltd, (seg) from the list of comparables.
Vis-a-vis, Satyam Computer Services Ltd, comparability of this company was an issue which came up before this Tribunal in the case of Net Devices India p. Ltd, (supra). This Tribunal has held as under in its order dt.25.05.2016 :
18.5.1 The learned Authorised Representative of the assessee has submitted that the financial results and information of this company is not reliable due to the financial irregularity and fraudulent activities by the Directors of this company. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 & 1388/Bang/2011. ii) M/s. Agnity India Technologies Pvt. Ltd. (ITA No.3856/Del/2010). iii) M/s. Symbol Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. iv) M/s. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 18.5.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 18.5.3 We have considered the submissions of rival parties and the relevant material on record. At the outset, we note that an identical issue has been considered by the co-ordinate bench of this Tribunal in case of Textron Global Technology Pvt. Ltd. (supra) in para 14 as under :
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 38
“ 14. Ground No.3 raised by the Revenue is misconceived and the issue does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd. Infosys Technologies Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon’ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore the grievance as projected by the Revenue in ground No.3 is misconceived. On the facts of the present case, we are of the view that the CIT(A) rightly excluded Exensys Software Solutions Ltd., Infosys Technologies Ltd., and Satyam Computers Ltd., from the list of comparable companies.” It is clear from the record that this issue was also involved in the case of Agnity India Technologies Pvt Ltd Vs. ITO (supra) wherein Delhi Bench of ITAT has excluded this company on the ground of unreliable data and information. The order of the Delhi Bench of Tribunal has been confirmed by the Hon'ble Delhi High Court. In view of the finding of the co-ordinate bench of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparables. Following the above, we direct exclusion of Satyam Computer Services Ltd, from the list of comparables.
Coming to the issue of comparability of Infosys Technologies Ltd, Hon’ble Delhi High Court in the case of Agnity India Technologies P. Ltd, (supra) has held that due to the huge revenues, ownership of intangibles IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 39 and proprietary brand of the said company, it would not be a proper comparable. We find that this Tribunal in a number of cases including that of Symbol Technologies India P. Ltd, (supra) held Infosys Technologies Ltd, not to be a good comparable. Accordingly we direct the exclusion of Infosys Technologies Ltd, from the list of comparables.
In view of the discussions at para 27 to 36 above, we direct the AO / TPO to exclude Extensys Software Solutions Ltd, Sankhya Infotech Ltd, Foursoft Ltd, Thirdware Solutions Ltd, Geometric Software Solutions Co.
Ltd, Tata Elxsi Ltd, (seg), Visual Soft Technologies Ltd (seg), Flextronics Ltd (seg), Sathyam Computer Services Ltd, and Infosys Technologies Ltd, from the list of comparables for computing arms length price of international transactions of the assessee with its AE.
In so far as Bodhtree Consulting Ltd, is concerned, comparability of the said company is remitted back to the AO / TPO for consideration afresh in accordance with law. Ordered accordingly.
In the result, grounds 2 to 4 of the assessee are partly allowed.
Ground 7 of the Departmental appeal has become infructuous since comparables coming in if turnover filter, has also been considered by us in IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 40 the exclusions sought by the assessee in its appeal. In the result, ground 7 of the Revenue is dismissed as infructuous.
Now we shall take up the corporate tax grounds taken by the assessee and Revenue. Assessee vide its ground.5 state that lower authorities erroneously reduced a sum of Rs.2,63,77,801/- from export turnover while computing deduction u/s.10A of the Act, for a reason that it did not produce receipt for export proceeds to this extent, within the time allowed. Ld. AR submitted that sale proceeds were received by the assessee during the time allowed under the Act, but due to reasons beyond its control, evidence in this regard could not be produced before the lower authorities. We are of the opinion that this matter can be verified by the AO and if the assessee is able to produce evidence to show that proceeds were received within the time allowed under the statute, then its claim for deduction u/s.10A cannot be curtailed. Matter is therefore set aside to the file of AO for consideration afresh. Ground.5 is allowed for statistical purpose.
Vide its ground.6, grievance raised by the assessee is that CIT (A) upheld an adhoc disallowance of Rs.50 lakhs on sales promotion expenses.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 41
Facts apropos are that assessee had claimed an expenditure of Rs.3,81,79,000/- on sales promotion. AO was of the opinion that such amount included expenditure in relation to parties, get-togethers and conferences in high-end hotels at different places. As per the AO, assessee was having its own conference facility and therefore expenditure could not be considered as incurred for business purpose. AO also referred to the FBT provisions under which sales promotion expenditure was subject to Fringe Benefit Tax. An ad hoc disallowance of Rs.50 lakhs was made.
Assessee’s appeal before the CIT (A) did not meet with any success.
As per the CIT (A), assessee could not show business purpose of such expenditure.
Before us, Ld. AR submitted that expenditure was fully vouched and voucher / bills produced. As per the Ld. AR expenditure was for business purpose only. Further as per the Ld. AR, business purpose of the expenditure was for the assessee to decide and not the Revenue.
Per contra, Ld. DR supported the order of lower authorities.
We have perused the materials and heard the rival contentions.
Disallowance was made for a reason that assessee could not show the IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 42 business purpose of expenditure, for holding parties, get togethers and conferences in high-end hotels. There is no finding of the AO that the expenditure was of personal nature. Whether the employees and guests of the assessee are to be hosted in high-end or low-end hotel and whether the business of the assessee required such a facility, is an issue which is entirely in the domain of the businessman. Assessee had substantial turnover and was doing business on a large scale. Obviously, assessee was doing large scale business. In such a situation disallowance of such amount by Revenue in our opinion was not warranted. Revenue cannot sit in the arm-chair of a businessman and cannot decide what is proper and not proper in running the business. We are of the opinion that the disallowance was not called for. Such disallowance stands deleted. Ground.6 stands dismissed.
Vide ground 7, grievance of assessee is that CIT (A) confirmed the disallowance of warranty provision of Rs.37,54,000/-. As against this, Revenue in ground 1 of its appeal is aggrieved that a relief of Rs.20,60,000/- was given to the assessee by the CIT (A). The AO disallowed the claim considering it to be a contingent liability and not an ascertained one.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 43
Argument of assessee before the CIT (A) was that it was an ascertained liability. Reliance was placed on judgment of Hon’ble Apex Court in the case of Rotork Controls India P. Ltd, v. CIT [314 ITR 62].
Further as per the assessee, during the relevant previous year actual warranty expenditure came to Rs.20,60,000/-. Ld. CIT (A) was of the opinion that there was no objective or scientific study nor any documented experience based on which the estimate was made. CIT (A) noted that assessee had relied on just one year data for justifying the warranty provisioning. He held that the claim was not allowable, except for the actual out go of Rs.20,60,000/-. Disallowance was restricted to Rs.16,94,000/-.
Now before us, Ld. AR submitted that assessee had vide its letter dt.21.08.2013, given details of the provisioning for warranty. As per the Ld. AR, it was very scientific. According to him by virtue of the judgment of Hon’ble Apex Court in the case of Rotork Controls India P. Ltd, (supra), the claim had to be allowed.
Per contra, Ld. DR supported the order of lower authorities. Ld. DR submitted that even the relief of Rs.20,60,000/- given by the CIT (A) was not warranted on facts.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 44
We have heard the rival contentions and perused the orders. The basis for creating warranty provisions furnished by the assessee before the lower authorities, is reproduced hereunder :
Assessee had relied on ratio of trading sales for the financial year 2003-04. As per the assessee warranty provisioning for switches were based on actual usage. However the table above clearly indicates that provisioning was made by applying 0.18% on estimated trading sales for F. Y. 2003-04. We cannot say that this was a scientific method. No IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 45 historical data was relied on by the assessee for working out the provisioning. Details of the actual usuage was not provided. How the percentage of 0.18% was arrived is also not clear. In our opinion the provisioning done by the assessee was a pure estimation without any scientific data to back. In such a situation, judgment of Honble Apex Court in the case of Rotork Controls India P. Ltd (supra) will not come to the aid of assessee. First condition for allowing a warranty provision is that assessee should be able to show the scientific data based on which such provisioning is done. In our opinion, CIT (A) was justified in restricting the claim to the extent of actual warranty expenditure incurred by the assessee during the relevant previous year. No interference is required.
Ground.7 of the assessee and ground 1 of the Revenue are dismissed.
Vide its ground 8 assessee assails an ad hoc disallowance of Rs.20 lakhs made by the lower authorities for commission paid to selling agents.
Ld. AR submitted that he was not pressing the said ground. Hence this ground is dismissed as not pressed.
Ground 9 of the assessee relates to interest u/s.234B and 234D of the Act. This ground being consequential, no specific adjudication is required.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 46
Now we take up appeal of Revenue in so far as it relates to grounds already not disposed off by us, in the appeal filed by the assessee.
Grounds 1 and 7 of the Revenue are already considered by us in assessee’s appeal.
Vide its ground.2 grievance of Revenue is that CIT (A) allowed club expenditure of Rs.15,36,000/- claimed by the assessee.
Facts apropos are that AO had disallowed the above amount on a reasoning that these were personal expenditure of employees of the assessee. As per the AO, FBT provisions were applicable to club expenditure and this clearly meant that such expenditure was personal in nature.
When the matter reached the CIT (A), he was of the opinion that payments were on account of corporate membership taken by assessee in some clubs. According to CIT (A), assessee had made no payments for any individual members.
Nothing was brought before the Ld. DR to deviate from the view taken by the CIT (A) that expenditure incurred on corporate membership of clubs could be considered as personal in nature. It may be true that IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 47 employees of the assessee also got some advantage on account of club membership. However these were only expenditure which could be considered as linked to the business purpose of the assessee. We do not find any merit in the ground taken by the Revenue. Ground 2 is dismissed.
Vide ground 3, Revenue is aggrieved that CIT (A) allowed claim of staff welfare expenditure of Rs.49,60,750/-. AO after verification of the evidence produced by the assessee in relation to staff welfare expenditure of Rs.1,98,43,000/- had observed that 80% of such amount was paid to one M/s. Sai Hospitality Services for providing lunch, dinner, snacks etc., Relying on FBT provisions, AO made a disallowance of Rs.49,60,750/-.
When the matter reached CIT (A), he was of the opinion that providing free meals and non-alcoholic beverages to the employees during working hours could be considered as perquisites in the hands of employees. CIT (A) also noted that assessee had filed sample canteen bills which proved that meal cost was below Rs.50/-. After examining this, CIT (A) allowed the claim of assessee.
In our opinion food and beverages supplied to the employees by an assessee during working hours cannot be considered as perquisite in the IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 48 hands of employees and can also not be considered as an expenditure alien to the business of the assessee. We cannot find any fault in order of the CIT (A) in this regard. Ground.3 of the Revenue stands dismissed.
Vide its grounds 4, 5 and 6, grievance raised by the Revenue is that CIT (A) directed inclusion of insurance expenses of Rs.48,86,675/-, telecommunication expenditure of Rs.10,00,000/- and travelling expenditure of Rs.60,47,642/- in the export turnover while working out the deduction available to the assessee u/s.10A of the Act. AO while computing the deduction u/s.10A of the Act had excluded these amounts from export turnover relying on the definition of ‘export turnover’ as given in Explanation (iv) to the said section.
In its appeal before the CIT (A), argument of the assessee was that exclusion of foreign travel expenditure, telecommunication expenditure and insurance charges were incorrect. Assessee also relied on the judgment of Hon’ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd [349 ITR 98] and sought deduction of the amounts from the total turnover as well, in the alternative. CIT (A) held as under at para 21.4 of his order :
“21.4 I have gone through the submissions as above and I am convinced that there is strength in the appellant’s arguments.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 49
Respectfully following the decision of the jurisdictional High Court cited, as well as the other judicial decisions relied upon, the grounds raised by the appellant are allowed.”
66. Now before us, Ld. DR submitted that CIT (A) had directed inclusion of the above amounts in the export turnover and had not given a clear finding whether the claim of the assessee was allowed with regard to its alternative contention or the main contention.
Per contra, Ld. AR submitted that if the above amounts were to be excluded from the export turnover then such amounts had to be deducted from the total turnover also in view of the judgment of Hon’ble jurisdictional High Court in Tata Elxsi Ltd (supra).
We have perused the orders and heard the rival contentions. It is true that assessee had pleaded for inclusion of the above amounts in the total turnover before the CIT (A). Assessee had also raised an alternative plea before the CIT (A) seeking exclusion of such amounts from total turnover also. We find that CIT (A) had not given any clear finding on these grounds. By virtue of definition of ‘export turnover’ as given in Explanation (iv) to Section 10B of the Act, we are of the opinion that the above amounts cannot be included in the export turnover of the assessee.
However alternative contention of the assessee that the amounts which are IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 50 excluded from the export turnover have to be deducted also from the total turnover needs to be accepted in view of the judgment of Hon’ble jurisdictional High Court in the case of Tata Elxsi Ltd (supra).
Accordingly, we allow grounds 4 to 6 of the Revenue. However we direct that the amounts which are excluded from export turnover shall also be deducted from the total turnover for computing the relief u/s.10A of the Act.
Now coming the cross objection of the assessee, grounds 1 and 2 have already been dealt with in relation to ground 7 in assessee’s appeal.
Grounds 3 to 7 are in support of the order of CIT (A). Grounds 8 and 9 of the cross objection have been dealt with in relation to grounds 4 to 6 of the Revenue’s appeal. Grounds 11 and 12 in the cross objection stands allowed since the said ground seeks parity between export turnover and total turnover for computing the deduction u/s.10A of the Act. Grounds 10 12 and 13 are general needing no specific adjudication.
IT(TP)A.1603, 1722/Bang/2013, CO.14/Bang/2016 Page - 51
To summarise the result, appeal of the assessee is partly allowed for statistical purpose, appeal of the Revenue is partly allowed and cross objection of the assessee is also partly allowed for statistical purpose.
Order pronounced in the open court on 25th day of July, 2016.