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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI B. RAMAKOTAIAH & SHRI NARENDRA KUMAR CHOUDHURY
Per B. Ramakotaiah, Accountant Member This appeal by assessee is against the order of the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C consequent to the directions of Dispute Resolution Panel [DRP].
Briefly stated, assessee, NMS Communications Private Limited was in the business of software development services. The return of income for the AY. 2007-08 was selected for scrutiny assessment and the AO has referred the international transactions with AE reported by assessee for the said assessment year to the TPO to determine the Arm’s Length Price
IT(TP)A No. 1541/Bang/2012 Page 2 of 9
(ALP). The AO reduced the leased line charges of Rs. 25,76,545/- and
travelling expense in foreign currency of Rs. 1,02,30,194/- from the ‘export
turnover’ but not from the ‘total turnover’, which resulted in reduction of
claim u/s. 10A of the Act to the tune of Rs. 17,41,860/-. Thereafter, the AO
denied the entire deduction u/s. 10A of the Act on the ground that assessee
did not furnish the Foreign Inward Remittance Certificate copies (FIRC) to
substantiate the fact that export proceeds were realized within the
permitted time. The AO passed a draft assessment order u/s. 144C of the Act dt. 24th December, 2010 with the following adjustments:
Rs. Total income as returned by assessee 7,000 Add: Adjustments: 1. Transfer Pricing adjustment 1,11,77,183 2. Denial of tax holiday u/s. 10A of the Act on account of non-production of FIRCs and 2,35,83,305 reduction in tax holiday on account of difference of opinion of the term ‘export turnover’. Assessed Income 3,47,67,488
2.1. Assessee preferred an appeal before the DRP against the said draft
order. DRP upheld the transfer pricing adjustment and reduction in tax
holiday claim on account of the term ‘export turnover’. However, with
regard to disallowance of entire tax holiday claim on account of non-
production of FIRC’s directed the AO to grant sufficient opportunity to
produce documents in support of tax holiday claim being a factual issue.
Pursuant to the directions, opportunity was given by the AO to produce
documents. Assessee produced FIRC’s copies, reconciliation statements
IT(TP)A No. 1541/Bang/2012 Page 3 of 9
along with the details of invoices. However, this time the AO disallowed the entire Section 10A claim on the ground of non-production of invoices. Accordingly, AO passed final order on 28th October, 2011 making the adjustments as mentioned in the table herein above. Being aggrieved by the above impugned order of DRP/AO, assessee has preferred this appeal before the ITAT.
Condonation of delay: The appeal was filed with a delay of 335 days with a petition for condonation of delay. It was submitted that assessee- company ceased its operations in the year 2009 and appointed authorized person to represent the company. The appointed AR suddenly withdrew the representation and the AO was informed accordingly. The company came to know about these facts after TRO started recovery proceedings on erstwhile directors and then company took steps to appoint a new AR, obtain copies of orders from the AO and prepared present appeal. It was submitted that the proceedings took considerable time and company has taken steps immediately on coming to know of orders. It was also submitted that in the later years orders were passed ex-parte and Ld.CIT(A) has condoned the delay and matter was adjudicated. Considering the submissions and examining the facts as placed on record, we are convinced that assessee has reasonable cause in not filing the appeal in time and so the delay in filing the appeal is condoned and appeal is admitted.
IT(TP)A No. 1541/Bang/2012 Page 4 of 9
Corporate matters: 4. Ground No. 2 raised by assessee is on denial of deduction u/s. 10A
on the ground of non-production of export invoices. At the draft assessment order stage, AO denied the deduction u/s. 10A on the reason
that Form 56A supporting foreign inward remittances (FIRC’s) were not
produced. On objection from assessee and furnishing of copies, DRP directed the AO to examine the same and allow deduction. AO, however,
denied the entire deduction on the reason of non-production of invoices inspite of submission of FIRC’s, list of invoices along with re-conciliation
statement. It was submitted that assessee is prepared to submit the invoices for verification and further submitted that on similar lines,
assessee could produce the invoices in later year before AO in remand
proceedings and Ld.CIT(A) has accepted the same. There was no appeal by Revenue on the issue in later year.
4.1. After considering the same, we are of the opinion that AO has
wrongly disallowed the claim. Initially, the claim was disallowed on non-
production of FIRC’s. In the post DRP proceedings, the disallowance was made on non-production of invoices. We are not convinced with reasons
stated by the AO. In fact, his order states that assessee has shown invoice value to the extent of Rs. 17,11,75,098/- as against Rs. 17,33,92,390/- and
balance was reconciled. Be that as it may, now assessee undertakes to produce the copies of invoices to the AO. Therefore, without going into the
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merits of action of AO, we direct the AO to examine the same and allow the claim. The issue of claim of 10A is accordingly set aside to the AO for that
limited purpose. Ground is accordingly allowed for statistical purposes.
Ground No. 3 is also on the issue of claim of deduction u/s. 10A.
AO excluded leased line charges of Rs. 25,76,545/- and travelling expenses of Rs. 1,02,30,194/- respectively from the export turnover but has
not reduced from the total turnover. DRP did not however, grant relief even though the issue was already decided by that time by various orders of
ITAT. This issue was already decided by the jurisdictional Hon'ble High Court in the case of Tata Elxsi Ltd., Vs. CIT,342 ITR 98 (Kar) wherein it
was held that whatever expenses reduced from export turnover should also
be reduced from total turnover, while computing the deduction u/s. 10A of the Act. We direct the AO accordingly. Ground is allowed.
TP adjustment:
Assessee has rendered software development services to an extent
of Rs. 17.34 crores with a net cost plus margin of 15.65%. TPO has selected 26 comparables and proposed TP adjustment of Rs.1,11,77,183/-.
DRP confirmed the same. Assessee has raised various sub-grounds in Ground No. 4 but during the course of arguments, Learned Counsel
restricted the arguments to Ground No. 4(g) on comparability of certain
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companies selected by TPO. Other grounds are not pressed therefore,
treated as withdrawn.
6.1. The final selection of comparables are as under:
Sl.No. Company Name Sales OP to (Rs. Cr) Total Cost % 1. Accel Transmatric Ltd (Seg) 9.68 21.11 2. Avani Cimcon Tech. Ltd., 3.55 52.59 3. Celestial Labs Ltd., 14.13 58.35 4. Datamatics Ltd. 54.51 1.38 5. E-Zest Solutions Ltd., 6.26 36.12 6. Flextronics Software Systems Ltd (Seg) 848.66 10.71 7. Geometric Ltd (Seg) -158.38 10.71 8. Helios & Matheson Information Tech Ltd 178.63 36.63 9. iGate Global Solutions Ltd., 747.27 7.49 10. Infosys Technologies Ltd 131.49 40.30 11. Ishir Infotech Ltd 7.42 30.12 12. KALS Information Systems Ltd (Seg) 2.00 30.55 13. LGS global Ltd (Lanco global Solutions Ltd) 45.39 15.75 14. Lucid Software Ltd 1.70 19.37 15. Mediasoft Solutions Ltd 1.85 3.66 16. Megasoft Ltd., 139.33 60.23 17. Mindtree Ltd., 590.35 16.90 18. Persistent Systems Ltd., 293.75 24.52 19. Quntegra Solutions Ltd., 62.72 12.56 20. RS Software (Ind.) Ltd., 101.04 13.47 21. R Systems International Ltd (Seg) 112.01 15.07 22. Sasken Communication Tech. Ltd (Seg) 343.57 22.16 23. SIP Tech. & Exports Ltd., 3.80 1.99 24. Tata Elxsi Ltd (Seg) 262.58 26.51 25. Thirdware Solutions Ltd., 36.08 25.12 26. Wipro Ltd., (Seg) 9616.09 3.65 Arithmetic mean 25.14
6.2. Out of the above, assessee has not objected to certain comparables
and also those which are not objected to before DRP/TPO, even though
some other companies were also excluded by the orders of ITAT in various
other similarly placed companies. Therefore, the agreed list of companies
by assessee are as under:
i. Datamatics Ltd., (Sr.No.4)
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ii. Flextronics Software Sustems (Seg) S.No. 6 iii. Geometric Ltd., (Seg) S.No. 7 iv. Igate Global Solutions Ltd., S.No. 9 v. LGS Global Ltd., S.No. 13 vi. Mediasoft Solutions Ltd., S.No. 15 vii. RS Software (India) Ltd., S.No. 20 viii. R Systems International Ltd., S.No. 21 ix. Sasken Communication Techn Ltd., S.No. 22 x. SIP Technologies & Exports Ltd., S.No. 23
6.3. With reference to the balance of companies from the above list in
para 6.1, it was submitted that they are functionally different and were excluded by various orders of Co-ordinate Benches in the following cases:
i. I2 Technologies India Pvt. Ltd., Vs. DCIT in IT(TP)A No. 1189/Bang/11; ii. NXP Semiconductors India P. Ltd., Vs. DCIT in IT(TP)A No. 1174/Bang/2011; and iii. Trilogy E Business Software India P. Ltd., Vs. DCIT in IT(TP)A No. 1057/Bang/2011
6.4. We have considered the detailed objections placed on record by way of a chart and Co-ordinate Bench decisions. We do not intend to
repeat the findings in various coordinate Benches orders. Suffice to say that the following companies are excluded for the brief reasons stated
against the company:
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Accel Transmatics Ltd (Seg) Functionally different. product/design company. 2. Avani Cimcon Technologies Ltd., Functionally different.. Product based company. 3. Celestial Labs Ltd., Functional dissimilarity. product based company. 4. E-Zest Solutions Ltd., Functional dissimilarity. product development service company. 5. Helios & Matheson Information Functional dissimilarity. engaged in Technology Ltd., sale of software. 6. Infosys Technologies Limited Functional dissimilarity. high turnover. High end products, brand name etc., 7. Ishir Infotech Pvt Ltd., Functional dissimilarity. product company. 8. Kals Information Systems Ltd., Functional dissimilarity. development of software products 9. Lucid Software Ltd., Functional dissimilarity development of soft products & R&D activity. 10. Persistent Systems Ltd., Functional dissimilarity. out sourced software development. No segmental data 11. Quintegra Solutions Ltd., Functional dissimilarity. focus on software development and consultancy services. 12. Tata Elxsi Ltd., (Seg) Functional dissimilarity. products, design services, high end services. 13. Thirdware Solutions Ltd., Functional dissimilarity. software and product development trading and licenses. 14. Wipro Ltd., (Seg) Functional dissimilarity, wide range of services, products design and consultancy.
We direct the TPO to exclude the above comparables.
6.5. One comparable, Megasoft Ltd., is functionally comparable but Co-
ordinate Benches are directing TPO to consider segmental details of
software development services only. In case of non-availability of data of
segment, TPO may consider excluding it from the comparability list.
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6.6. TPO is directed to rework out the Arithmetic Mean of accepted companies and prepare adjustment, if any required after considering the proviso to Section 92C(2). With these directions, the Ground No. 4(g) is considered allowed.
In the result, appeal is treated as allowed for statistical purposes.
Pronounced in the open court on this 18th day of March, 2016
Sd/- Sd/- (NARENDRA KUMAR CHOUDHURY) (B. RAMAKOTAIAH) Judicial Member Accountant Member Bangalore, Dated, the 18th March, 2016.
TNMM
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.