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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI.
Before: SH. A.D. JAINAND SH. N.K. BILLAIYA
“On the facts and circumstances of the case, the Dispute Resolution Panel (‘DRP’), the learned Assessing Officer (‘AO’) and the learned Transfer Pricing Officer (‘TPO’) on the following grounds making an adjustment of INR 31, 28,41,221/- to the arm’s length price (‘ALP’) in respect of recomputing 10A deduction, thereby determining the total income of the Appellant at INR 36,62,68,380/- as against the returned income of INR 23,91,580/-by the Appellant. The assessment order passed in the case of your appellant for Assessment Year (‘AY’) 2009-10 is following DRP’s directions and this appeal is directed against the said order. Transfer pricing grounds 3 Ground no.1: Treating foreign exchange as non-operating in nature for the computation of profit level indicator (PLI) 1. 1 On the facts and circumstances of the case, and in law, the DRP has erred in excluding the amount of Foreign Exchange Gain amounting to INR 15,99,29,779 from the operating revenue of the Appellant and treating the same as non-operating. 1.2 On the facts and circumstances of the case, and in law, the DRP has erred in enhancing the order ignoring the fact that TPO himself has agreed the treatment of foreign exchange as operating in nature in its order on the principle of consistency. In the earlier assessment years foreign exchange loss was also treated as operating in nature, thereby denied consistent treatment of foreign exchange gain/loss to the Appellant. 1.3 The Appellant prays that the foreign exchange gain amounting to INR 15,99,29,779 be treated as operating in nature for the computation of profit level indicator (PLI) and the consequential upward adjustment be deleted. Ground no.2: Systematic exclusion of comparable companies identified by the Appellant. 2.1 On the facts and circumstances of the case, and in law, the DRP have erred in selectively excluding Computech International Ltd. a comparable company identified by the Appellant, having negative operating margin, from the finanl set of comparable companies stating that the company is not comparable in the absence of segmental information without appreciating that the annual report of the relevant year contains the segmental information and only the relevant segment has been considered comparable by the Appellant and was also provided during the DRP hearing. 2.2. On the facts and circumstances of the case, and in law, the TPO and DRP have erred in selectively excluding Kaashyap Technologies Ltd. and SIP Technologies & Exports Ltd., an identified comparable companies by the Appellant from the final set of comparable companies stating that the said companies are not comparable on the ground of diminishing revenue, without establishing that the revenue of the said companies are actually diminishing over a period of time. 2.3 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in excluding R Systems International Ltd. and Roita India Ltd., identified by the Appellant from the final set of comparable companies stating that the said companies are not 4 comparable on the ground that they have a different financial year ending. 2.4 On the facts and circumstances of the case, and in law, the DRP have erred in rejecting the objections raised by the Appellant in relation to rejection of comparable companies in passing the order under section 92CA of the Act. 2.5 The Appellant prays that the systematic exclusion of the above comparables be struck down and the consequential upward adjustment be deleted. The appellant prays to include the above companies in the final comparable set. Ground no.3: Systematic inclusion of additional comparable companies which are functionally different, not fulfilling filters applied, are having high turnover and are having higher margins. 3.1. On the facts and circumstances of the case, and in law, the TPO and DRP have erred in selectively including Geneysys International Corporation Ltd., in the final set of comparable companies and falling to follow the order of the DRP in the Appellants own case for AY 2008-09 without appreciating that the said company is functionally different compared to the appellant. 3.2 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in selectively including Infosys Technologies Limited in the final set of comparable companies without appreciating the facts that the said Company is failing the filter applied by the TPO for software development income being greater than 75% of total operating income, is also functionally different in many parameters and the turnover of the said company is far greater than the turnover of the appellant. 3.3 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in including KALS information Systems Ltd. and persistent Systems Ltd. In the final set of comparable companies without appreciating that the said companies are functionally different compared to the appellant. 3.4 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in including infosys Technologies Limited, Igate Global Solutions Ltd., Mindtree Ltd. and Persistent Systems Ltd. in the final set of comparable companies without appreciating that the turnover of the said companies is far greater than the turnover of the appellant.
5 3.5 Aggrieved by the systematic inclusion of the above mentioned companies and non consideration of your appellant’s submissions. Your appellant humbly prays that the systematic inclusion of the above companies be struck down and the consequential upward adjustment be deleted. The appellant prays to exclude the above companies from the final comparable set. Ground no.4: Inclusion of pass through cost in the cost base at the time of calculating the PLI of the appellant 4.1. On the facts and circumstances of the case, and in law, the TPO and the DRP has erred in ignoring the fact that the outsourcing third party service cost of INR 7,95,55,035/- is a pass through cost and no value addition is created by the Appellant on such services. It is a pure reimbursement of costs and accordingly the same should not be considered in the cost base at the time of calculating the PLI of the Appellant. 4.2. The Appellant prays that the pass through cost amounting to INR 7,95,,035/- be excluded from the cost base at the time of calculating the PLI of the Appellant and the consequential upward adjustment be deleted.
Ground no.5: Rejecting of use of multiple year
5.1 Notwithstanding the aforementioned grounds, the TPO and DRP have erred in rejecting use of multiple year data to justify the ALP. 5.2. The Appellant Prays that the Transfer Pricing documentation maintained by the Appellant be accepted.
Ground no.6: No working capital risk adjustment granted 6.1. Notwithstanding the aforementioned grounds, the TPO and DRP has erred in not making a further downward margin adjustment to consider working risk differentials between the Appellant and the comparable companies.
6.2 The Appellant prays that the working capital risk adjustment be granted to the appellant.
Ground no.7: Granting of benefit of +7-5 per cent range to the Appellant.
7.1. The Appellant prays that the benefit of +7-5 per cent range be granted to the appellant as envisaged by the provisions of section 92C(2) of the Act.
Ground no.8: Non-applicability of the provisions of Chapter X of the Act to the Appellant. 8.1. The TPO and DRP has erred in not applying the provisions of Chapter X of the Act although the Appellant is availing the relief under section 10A of the Act. 8.2 The Appellant prays that the provisions of Chapter X of the Act be made applicable to the appellant.
Corporate-tax grounds Ground no.9: Exclusion of unrealized foreign exchange for determining the deduction under section 10A of the Act.
9.1 On the facts and in the circumstances of the case and in law, the AO and the DRP have erred in concluding that unrealized foreign exchange gain, relating to the activity of export, amounting to INR 3,75,69,434/- is not derived from the activity of export and therefore not entitled for deduction under section 10A of the Act.
9.2. The Appellant prays that the unrealized foreign exchange gain be included in the profits of the undertaking and the relief under section 10A of the Act be recomputed accordingly.
Ground no.10: Exclusion of realize foreign exchange gain from Export Turnover however included in Total Turnover while computing deduction under section 10A of the Act.
10.1 On the facts and circumstances of the case and in law, the learned AO and DRP has erred in including realized foreign exchange gain amounting to INR 9,68,96,182/- only in Total Turnover and not in Export Turnover.
10.2 The Appellant prays that the foreign exchange gain be excluded from the total turnover of the Appellant and the relief under section 10A of the Act be recomputed accordingly.
7 10.3 Without prejudice to the above, even if accepting the ground of TPO and DRP to consider realized foreign exchange gain to be considered as part of Total Turnover the assessee prays that a similar adjustment be made to the Export Turnover for computing deduction under section 10A of the Act. Ground no.11: Levy of Interest by AO 11.1 On the facts and in the circumstances of the case and in law, the AO erred in levying interest under section 234B and 234D of the Act. The Appellant prays that the interest levied be deleted. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds, at any time before or at the time of hearing of the appeal. Each of the above grounds is independent and without prejudice to the other grounds preferred by the Appellant.”
3. Out of the original TP Grounds, i.e., Ground nos. 1 to 8, Ground nos.1 to 4 have been amended by filing the following Modified Grounds:
1. That the TPO/DRP erred on facts and in law in not considering foreign exchange gains amounting to Rs.15,99,29,779 as part of the operating income for computation of operating profit margin of the appellant for undertaking benchmarking analysis applying TNMM. (Original ground of appeal
Nos.1,1.1 to 1.3)
2. That the TPO/DRP erred on facts and in law in considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the appellant: (i) 3D PLM Software Solutions Ltd., (Addl). GOA No 2 to 6) (ii) Bodhtree Consulting Ltd., (Addl). GOA Nos 2 to 6) (iii) Cosmic Global Ltd. (Addl. GOA Nos 2 to 6) (iv) Genesys International Corporation Ltd. (Addl. GOA No.3.1) (v) Infosys Ltd. (Addl. GOA No.3.2)
3. That the TPO/DRP erred on facts and in law in rejecting Computech International Ltd., satisfying all the filters, in the final set of comparable companies allegedly on the ground that segmental information of the said company is not available. (Original ground of appeal
No.2.1)
4. That the TPO/DRP erred on facts and in law in not excluding the pass through cost of Rs.7,95,55,035 on translation work outsourced to third parties from the total operating cost for determining the operating profit margin for the purpose of undertaking benchmarking analysis applying TNMM. (Original ground of appeal No.4, 4.1 to 4.2)
The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal.”
4. The following Additional Grounds have also been taken by the assessee:
“1. That on the facts and circumstances of the case and in law, the DRP/TPO ought to have allowed appropriate risk adjustment to establish comparability considering that the applicant is a low- risk-bearing captive service provider as opposed to the comparable companies who were independent service provider. 1.1 That on the facts and in the circumstances of the case and in law, the DRP erred in rejecting the contention of the applicant regarding risk adjustment without giving the applicant an opportunity to provide workings to support the claim of risk adjustment.
2. That on facts and circumstances of the case and in law, the DRP/TPO ought to have excluded the following companies from the set of comparable companies for the purpose of benchmarking analysis: a) Cosmic Global Ltd. b)Bodhtree Consulting Ltd.
That on the facts and circumstances of the case and in law, Bodhtree Consulting Ltd. and 3D PLM Software Solutions Ltd. ought to be excluded from the final set of comparables on account of super normal profits earned by both the companies and also considering specific functional characteristic in comparison to the applicant which is a low end captive service provider.
4. That on the facts and circumstances of the case and in law, the DRP/TPO ought to have excluded Bodhtree Consulting Ltd. and Cosmic Global Ltd. from the final set of comparable companies on account of the fact that the year under consideration is the exceptional year of operation of both the companies.
5. That on the facts and circumstances of the case and in law, the DRP/TPO ought to have excluded Cosmic Global Ltd. on account of non-availability of information regarding related party transactions and thereby, not satisfying the filter of related party transactions applied by the TPO himself.
6 That on the facts and circumstances of the case and in law, the DRP/TPO ought to have excluded 3D PLM Software Solutions Ltd. on account of substantial related party transactions and thereby no qualifying the filter applied by the TPO.”
5. Modified Ground no.2 is regarding five companies considered, according to the assessee, wrongly by the TPO/DRP, as companies comparable to the assessee. These comparables are also the subject matter of Additional Ground nos. 2 to 6.
6. An application for additional evidence has been filed, seeking to place on record the following documents:
1. Audited financial statement of 3D PLM Software Solutions Ltd. for the financial year 2008-09- Refer page 940 of Paper Book.
2. Audited financial statements of Genesys International Corporation Ltd. for the financial year 2006-07-Refer page 975 of Paper Book. 3. DRP order in the case of the appellant for the assessment year 2008- 09-Refer page 1063 of Paper Book. 4. TPO order in the case of the appellant for the assessment year 2008- 09-Refer Page 1077 of Paper Book.
7. Apropos Additional Grounds 2 to 6/Modified Ground No.2 and the additional evidence sought to be filed on behalf of the assessee, it has been contended that undisputedly, these companies were taken as comparables by the assessee itself in its TP study. Therefore, these companies can now be taken and are being sought to be considered. It has been contended that the legal position in this regard is that there is no estoppel in Income-tax proceedings and the assessee can make a claim, notwithstanding that the same was not made in the return of income. Of the five comparables taken in the Modified Ground, the assessee contends that three comparable Companies, i.e., 3D PLM Software Solutions Limited, Bodhtree Consulting Limited and Cosmic Global Ltd., were undoubtedly taken by the assessee itself in its Transfer Pricing documentation for bench-marking. The TPO/DRP considered them as companies comparable to the assessee- company, holding them to be functionally comparable to the assessee company. However, even now, they can be rejected for determination of arm’s length price of the international transaction of provision of software
i) “CIT vs. C.Parakh & Co. (India ) Ltd.”, 29 ITR 661 (SC) ii) “CIT vs. V.M.R.P. Firm”, 56 ITR 67 (SC) iii) “National Thermal Power Co. Ltd. vs. CIT”, 229 ITR 383(SC) iv) “CIT vs. Enron Expat Services Ind.”, 327 ITR 626 (Uttrakhand) v) “R.B.Jessa Ram Fateh Chand vs. CIT”, 81 ITR 409 (All.) vi) “Pandit Seho Nath Prasad Sharma vs. CIT”, 66 ITR 647 (Del.) vii) “CIT vs. Bharat General Reinsurance Co. Ltd. ”, 81 ITR 303 (Del). viii) “DCIT vs. Quark Systems Pvt. Ltd.”, 100 & 115/Chd/2009 (SB) [approved by the Hon’ble P & H Court). ix) Honeywell Autoation India Pvt. Ltd. vs. DCIT”, (ITA No.4/PN/08). x) Sapient Corporation Pvt. Ltd. vs. DCIT ( ITA No. 5263/Del/2010) xi) DCIT vs. BP India Services Pvt. Ltd. ( ITA No. 4425/Mum/2010).
So far as regards the additional evidence, it has also been contended that this additional evidence is, even otherwise, available in the public domain.
On the other hand, the ld. DR has opposed the request of admission of the Additional Grounds and the additional evidence, mainly contending that documentation, it cannot now seek to withdraw these companies as comparables. It has been contended that without prejudice, in case the Additional Grounds are admitted, the matter may be restored to the file of the TPO. So far as regards the additional evidence, it has been submitted that no reason has been given as to why the assessee could not produce the same before the Authorities below. In the alternative, it has been contended that in case the additional evidence is admitted, again, the matter should be restored to the file of the TPO/DRP for reconsideration.
9. In this regard, it is seen that it remains undisputed that these companies were chosen as comparables by the assessee itself in its TP documentation. However, in “Quark Systems Pvt. Limited” (supra), the Special Bench of the Tribunal, a similar contention, as now raised by the Department, had been raised, that since one of the comparables was the choice of the assessee and no objection to its inclusion was taken before the Authorities below, such request at the second appellate stage was not sustainable. Rejecting this contention, the Special Bench of the Tribunal held that even if the comparable had been taken by the assessee in its Transfer Pricing audit, the assessee was entitled to point out to the Tribunal that the company had been taken wrongly as a comparable. It was held that all the relevant material and determine the question as per the statutory regulations; that the assessee is not estopped from pointing out a mistake in the assessment, though such mistake may be the result of evidence adduced by the assessee itself; that when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done due to some mistake on its part. “Quark Systems Pvt. Limited” (supra), was approved by the Hon’ble Punjab & Haryana High Court. This decision of the Special Bench has since been followed, inter-alia, in “DCIT vs. BP India Services Pvt. Ltd.” (supra).
10. In view of the above, the Additional Grounds are admitted. The request for additional evidence is accepted too, particularly keeping in view that this evidence is also available even otherwise in the public domain.
11. Concerning Modified Ground No.1, the assessee contends that the TPO/DRP erred in not considering foreign exchange gains amounting to Rs.15,99,29,770/- as part of the operating income of the assessee for computation of the operating profit margin of the assessee for undertaking bench-marking analysis applying TNMM. In this regard, it has been contended that “operating profit” includes within its scope, the profit earned transaction and expenses of purely financial nature are required to be excluded therefrom. It has been submitted that the ld. DRP erred in upholding the TPO’s finding that the foreign exchange gain/loss is neither a consideration, nor can it be considered to negotiate or determine the price of the product or service, since it is uncertain and indefinite and can fluctuate either direction. As per the assessee, in its case, as well as in the case of the comparable companies, the exchange gain/loss is on the trading account and is of operating nature and, therefore, it needs to be considered as part of the net profit margin. In this regard, reliance has been placed on the following case laws:
1) “Renaissance Jewellery (P) Ltd”, 101 ITD 380. 2) “Changepon Technologies (P) Ltd. vs. ACIT”, 119 TTJ 18 3) “Priyanka Gems vs. ACIT”, 94 TTJ 557 4) “Discover India Tours (P) Ltd.”, 104 TTJ 298 (Del.)
5. “DCIT vs. Think 3 Designs India (P) Ltd.”
6. “Think 3 Designs India (P) Ltd. vs. DCIT”, to 694(Bang)/2010 (Bang. ITAT). 7. “K. Uttamlal Exports Ltd. vs. DCIT”, 133 Taxman 248 (Mum.) 8. “Mohindra Impex vs. ACIT”, 121 Taxman 326 (Del.)
9. “ITO vs. Banyan Chemicals (P) Ltd.”, 310 ITR 384
15 10. “Livingstones Jewellery (P) Ltd.”, 31 SOT 323 11. DCIT vs. Accentures Services (P) Ltd.” ITA No.4540/M/08 (Mum. ITAT) 12. “Sujata Grover”, 74 TTJ 347 (Del.) 13. “Deutsche Bank A.G. vs. DCIT”, 86 ITD 431 14. “Bestobell (India) Ltd”, 117 ITR 789 (Cal.) 15. “Khandelwal Brothers Pvt. Ltd. v. CIT”, 117 ITR 452 (Cal. 16. “CIT vs. Oil India Ltd.” 143 ITR 848 (Cal.) 17. “CIT vs. Martin and Harris P. Ltd.” 154 ITR 460 (Cal.) 18. “Oil and Natural Gas Corpn. Ltd. vs. DCIT”, (2003) 261 ITR 1 (SB) (Delhi ITAT) 19. “DCIT VS. Sony India Pvt. Ltd.”. 114 ITD 446 [ affirmed up to the Hon’ble Supreme Court, as reported at 312 ITR 254 (SC)] 20. “Sumit Diamond India P. Ltd. vs. ACIT”, ITA No.7148/Mum/2012). 21. “M/s. Techbooks International Pvt. Ltd. v. ACIT”, ITA No.722/Del/2014 22. “Westfalia Separator India Pvt. Ltd vs. ACIT”, ITA Nos.4446/Del/2007 & 4447/Del/2007). 23. “CISCO Systems (India) Ltd. vs. DCIT”, [IT (TP) A. No.271/Bang/2014] 24. “Four Soft Limited”, ( ITA No.1495/Hyd/10) 25. “M/s. Mercendex Benz Research & Development India Pvt. Ltd. vs. DCIT”, ( ITA No.1222/Bang/2011)
27. “S. Narendera vs. ACIT”
28. “Rusabh Diamonds vs. ACIT” ( ITA No.7215/Mum/2012)
29. “Trilogy E-Business Software India (P) Ltd. vs. DCIT” (ITA No.1054/Bang/2011).
“M/s. Sap Labs India Pvt. Ltd. vs. ACIT”, 44 SOT 156
31. “M/s. Mindtech (India) Ltd.”, ( ITA No.70/Bang/2014)
It has been contended that after considering foreign exchange gain as its operating income, the operating profit margin of the assessee works out to 11.85% and the same is required to be considered for the purpose of bench- marking analysis.
On the other hand, the Department has contended that as against ground taken, the order of the ld. DRP which excludes foreign exchange gain/loss from the ambit of operating income should be upheld. It was further contended that however, without prejudice, in case, foreign exchange gain, is to be treated as operating income, the true effect of the ratio of the judgment in the case of “Techbook International”, (supra) of the Tribunal be given. Attention in this regard was drawn to para 4.6 of this decision, as per which, when the foreign exchange gain directly emanates its AE, the foreign exchange gain fluctuates and it ought not to be considered as an item of non-operating revenue, and that the same is also equally true for the foreign exchange loss, which needs to be considered as part of operating cost from the transactions of revenue nature.
It is further contended on behalf of the Department that though complete details of the foreign exchange of Rs.15.99 crores were submitted by the AO to the assessee, they were not filed before the TPO, due to which, the TPO did not have the benefit of the details of foreign exchange gain and its various components; that there are 3 components of the net foreign exchange gain of Rs.15.99 crores:
(1) Unrealised exchange gain on account of Sundry Debtors Rs.14,54,16,911 (2) Realized exchange loss related to Sundry Creditors Rs. 1,09,51,295 (3) Exchange gain related to other revenue items Rs. 2,54,64,153 According to the ld. DR, a different treatment is to be given to each of the above components of the assessee’s net foreign exchange gain of Rs.15.99 crores, as per the requirement of “Techbook International” (supra). It is contended that in accordance with “Techbook International” (supra), the exchange gain related to sundry debtors will go to increase the operating cost; and that the exchange gain relating to other revenue items need not to gain relating to other revenue items may be related to business income, but it cannot be treated as operating receipt; it may be on account of reinstatement of interest receivable on account of foreign exchange currency; that interest is not treated as operating income or expense for the purpose of computation of the PLI; that on the other hand, without prejudice, if it is to be so considered, it will go to increase the operating revenue and not cost. It has been urged that here, the denominator in the computation of the PLI (OP/OC) is the operating cost or the total cost; and that, therefore, necessary direction be issued for computation of the assessee’s PLI accordingly, since the TPO could not make the necessary adjustment in the working of the PLI, in the absence of details.
In this regard, we find the contention of the ld. DR to be correct. It remains undisputed that “Techbook International” (supra), rendered by the Delhi Bench of the Tribunal, is the applicable decision. It is also patent on record that the concerned details were not made available to the TPO, though they were furnished before the AO. Accordingly, we remit this matter to the file of the TPO, to be decided afresh in accordance with law, in the light of the decision of the Tribunal in “Tech Book International” and adequate opportunity of hearing to the assessee.
16. As such, Modified Ground No.1 is treated as allowed, for statistical purposes.
17. Turning to Ground No.2 of the Modified Grounds of Appeal, according to the assessee, the TPO/DRP erred in considering the following companies as companies comparable to the assessee, holding them to be functionally comparable to the assessee:
i) 3D PLM Software Solutions Ltd. ii) Bodhtree Consulting Ltd. iii) Cosmic Global Ltd. iv) Genesys International Corporation Ltd. v) Infosys Ltd.
Apropos the first company, i.e., 3D PLM Software Solutions Ltd., this company was taken as a comparable by the assessee in its TP study. Its OP/OC percentage is 69.93. The contention of the assessee is that since the related party transactions (RPT) of 3D PLM is more than 25%, it does not satisfy the filter applied by the TPO. In this regard, the assessee has sought to rely on the decision of the Delhi Bench of the Tribunal in the case of “Global Logic India Pvt. Ltd. vs. DCIT”, rendered in ITA No.5110/Del/2010.
Here, it is seen, that as per the record, the related party transactions to sales ratio of 3D PLM is as follows: Related Party transaction INR (Rs.) Sales to parties having substantial interest 50,17,16,704 Sales to parties exercising significant influence 86,22,71,870 Rent & expense towards leased premises 1,17,58110 Reimbursement of expenses 4,74,52,425 Other expenses 1,78,683 Total 1,42,33,77,792 Sales 1,36,39,88,574
These facts have not been disputed on behalf of the Department. It has only been submitted as follows: “As regards RPT of comparable 3D PLM, it is submitted that there can be no situation where RPT exceeds 100%. The TPO has applied RPT filter of 25%. It is submitted that 3D PLM may not be excluded on functional comparability. The same may be decided subject to verification of RPT.”
As regards the RPT of 3D PLM, it is submitted that there cannot be any situation where related party transaction exceeds one hundred percent The TPO has applied related party transaction filter of 25%. It is submitted that 3D PLM may not be excluded on functional comparability. The same may be decided subject to verification of related party transactions.
The contention of the Department is found to be justified.
Accordingly, the TPO is directed to verify the related party transactions of more than 25%, is found to be correct, 3D PLM Software Solutions Ltd. will be excluded from the final set of companies comparable to the assessee, in accordance with “Global Logic India Pvt. Ltd.” (supra). The TPO shall also keep in mind the assessee’s contention that 3D PLM is a software product company, for which reason also it is not comparable to the assessee.
Apropos Bodhtree Consulting Ltd., which was also taken as a comparable by the assessee itself in its TP study, the assessee’s objection against its inclusion for the final set of comparable companies is that it is a software product manufacturing company, which is the assessee is not and, therefore, it is not functionally comparable to the assessee. In this regard, it has been contended that Bodhtree Consulting Ltd. has been excluded from the set of comparable companies by the Mumbai Bench of the Tribunal in the cases of “Nethawk Networks Pvt. Ltd.” (ITA No. 7633/M/2012) and Wills Processing Services (I) P. Ltd.” ( (copies of which decisions have been placed on record) and that following these decisions, the Bangalore Bench of the Tribunal, in the case of “CISCO Systems Pvt. Ltd.”, for A.Y. 2009-10, directed CISCO to be excluded from the set of comparables.
The ld. DR’s objection in this regard is that the assessee is also a product manufacturing company and, therefore, Bodhtree Consulting Ltd., ought not to be excluded from the final set of comparables.
24(a) In the Department’s written submission at page 4, para 3.2.3, as also by way of his oral arguments, the ld. DR has sought to place reliance on the assessee’s Transfer Pricing Report ( TPR), as per which, according to the ld. DR, the assessee is into “application development”, which includes, inter- alia, “product release”. Therefore, according to the ld. DR, the assessee is a product manufacturing company. This, however, has been emphatically denied on behalf of the assessee. It has been contended that the TPR is, in fact, being grossly mis-construed and mis-read in as much as “product release” does not, in any manner, have any equivalence whatsoever with “product manufacture”. As a matter of fact, according to the ld. Counsel for the assessee, if the TPR is correctly construed, it refers to the “product release” only in the context of “application development” , software development being the sole business activity of the assessee.
24(b) Here also, the argument of the ld. DR is found to be misplaced. He has sought to develop this argument out of para 3.2.2 of the TPR of the
10. It would be apt to reproduce the relevant portion thereof:
“Application development includes testing, application building, quality assurance, program assembly and product release.
A plain reading of the above sentence belies the Department’s contention .
Reading this sentence as it is shows that it concern the components of “application development” only and “product release” is but one such component. In the absence of any evidence to the contrary, either in the TPR, or elsewhere in the record, this argument of the ld. DR is unsustainable and is rejected.
Besides, the TPO’s order does not record any finding that the assessee is a product manufacturing company. Rather, the assessee was found to be in the calling of localization and software services, as recorded by the TPO in para 5.1 of his order. This finding of the TPO was confirmed by the ld. DRP. The Department cannot now be allowed to set up a new case, as is sought to be done. Even otherwise, the case sought to be now set up at this stage, i.e., that the assessee manufacturing company is a product company, is factually incorrect.
On the basis of the above, it is correct that Bodhtree Consulting Ltd., being a software product manufacturer, is not comparable to the assessee ( supra), “Wills Processing Services (I) Pvt. Ltd.” (supra) and “CISCO Systems Pvt. Ltd.” (supra). Accordingly, here also, it is ordered to be excluded from the final set of comparables.
So far as regards Genesys International Corporation Ltd., this company was not included by the assessee in its Transfer Pricing study.
Rather, it was the TPO who considered it in the set of comparables. The assessee’s objection against such inclusion of Genesys International Corporation Ltd. in set of comparable is that Genesys is engaged in the business of providing Geospatial Information System or GIS services, which comprises of photogrammetric remote sensing, cartography, data conversion related computer based services and other related computer based services and that, therefore, this company is also functionally not comparable to the assessee company. Moreover, it is earning super normal profits and is in an exceptional year of operation. For the assessment year 2008-09 in assessee’s case, this company was excluded by the DRP, which action has wrongly been sought to be distinguished for the year under consideration, though there are no features distinguishing the facts for the year under consideration from those of A.Y. 2008-09.
The Department objects that the Additional Grounds relate to three comparables and the reasons are given in the table below:
Sr.No. Name of the Companies Reasons 1 Cosmic Global Ltd. Abnormal profit margin on account of the exceptional circumstances in the financial year ending on 31st March, 2009. 2 Bodhtree Consulting Ltd; Abnormal profit margin on account of specific functional difference viz. company is engaged in development and sale of software products. 3 3D PLM Software Solutions Abnormal profit margin on account Ltd. of specific functional difference viz. a software product company, and high related party transactions
It has been contended that as per the assessee, super normal profits were earned by Genesys International Corporation Ltd., during the year and not in any other year; that this is not relevant, since year to year volatility is not a consideration for determining ALP; that the assesse seeks to make a comparison with the growth in the software industry and also the rise in the profitability of the industry; that however, the TP calculations under Chapter X of the Act do not mandate benchmarking on the basis of industry average; that further, the assessee has also not chosen any criterion to align results of industry averages in its TP Study Report; that also, this issue was never before the TPO/DRP; that the some of the comparables have outperformed criterion selectively to the comparables which are showing higher gain and this criterion has not been applied to the other comparables, based on which, the TPO has determined the ALP, where the PLI or the operating margins are far below that of the industry average, as in the cases of “Gold Stone Technologies”, “R.S. Software”, “Intertech Communications Ltd.” and “Mindtree Limited”; and that there are numerous factors affecting profit and turnover is only one such factor. Reliance has been placed on the decision of the Hon’ble Delhi High Court in the case of “Chryscapital Investment Advisors (I) Pvt. Ltd.”, (2015) 56 taxman.com 417 (Del), as per which, wide fluctuations in profits margins of the same entity on an year to year basis would be offset by taking the arithmetic means of all the comparables in the assessment year in question. It has been contended that, therefore, Genesys cannot be excluded as a comparable, particularly when the assessee has itself selected “Rolta India Ltd.”, which is at parity with Genesys as a comparable. Whereas Genesys is involved in Geospatial Information System, M/s. Rolta India Ltd., as per its profile given by the assessee itself, is a provider and developer of digital map based geospatial information system and, thus, it is exactly similar to Genesys.
30. Here also, the work profile of the comparable sought to be excluded, i.e., Genesys, is entirely different from that of the assessee. Genesys is engaged in the business of providing Geospatial Information System services, which is not at all the calling of the assessee. To reiterate, the assessee company is engaged in the business of providing low and contract software development services to its AE. Therefore, on this very basis, Genesys needs to be excluded from the set of comparables. It is noteworthy that this company was excluded by the ld. DRP in the assessee’s case for AY 2008-09. However, while upholding the inclusion this was of Genesys in the set of comparables for the year under consideration, the ld. DRP has not pointed out any distinguishing features or facts different from those in AY 2008-09. Moreover, reference by the ld. DR to M/s. Rolta India Ltd., as rightly contended on behalf of the assessee, has rather aided the cause of the assessee, in asmuch as M/s. Rolta India Ltd. is also into GIS services and though initially included, it was ultimately excluded from the set of comparables.
The assessee has sought to exclude Cosmic Global Ltd. and Infosys Ltd. from the final set up of comparables. However, it is seen that if the Forex gain and the first three comparables, i.e., 3D PLM, Bodhtree Consulting Ltd. and Genesys International Corporation Ltd. are excluded, TPO, works out at 19.56%, as against the assessee’s OP/OC of 18.15%, which falls within the +/- 5% range, as provided in the proviso to section 92C(1) of the Act. Therefore, we find no need to go into the merits of the comparability of the remaining two companies, i.e., Cosmic Global Ltd. and Infosys Ltd. , and we are not doing so.
Hence, the adjustment made by the TPO, as confirmed by the ld. DRP, is deleted, subject to the verification to be made by the TPO, as directed by us hereinbefore.
Accordingly, Ground no.2 of the Modified Grounds of Appeal is partly accepted., as above.
In view of our discussion of and decision on Ground no.2 of the Modified Grounds of Appeal
, Ground nos. 3, 4 &
6. ( of the Original Grounds of Appeal) are also not required to be gone into and we are not doing so.
Now, turning to the remaining effective Grounds in the Original Grounds of Appeal
, the ld. Counsel for the assessee has chosen not to press Ground Nos. 5, 7 &
8. Ground nos. 5, 7 & 8 are, therefore, rejected as not pressed.
36. Ground no.9 of the Original Grounds pertains to the Cororate-tax issue. It challenges the exclusion of unrealized Forex gain from the profits of the business of the undertaking, for computing deduction u/s 10A of the Act.
As per the record, during the year under consideration, the assessee earned net foreign exchange gain of Rs.15,99,29,779/-, as follows:
Nature of loss Amount in (Rs)
Exchange gain related to Sundry Debtors Realised Gain 10,41,77,395 Unrealised Gain 4,12,39,516 Total Exchange gain related to 14,54,16,911 Sundry Creditors Exchange gain related to Sundry Creditors Realised Gain (72,81,213)
Unrealised Gain (36,70,082)
Total Exchange gain related to (1,09,51,295) Sundry Creditors Exchange Gain related other revenue 2,54,64,163 item 15,99,29,779
This amount was credited to the profit & loss account and was offered for tax as business income. However, the AO disallowed an amount of account of reinstatement of debtors and creditors outstanding at the end of the relevant financial year. The AO observed that mere reinstatement of books of account cannot be treated as profit of the undertaking or export turnover from the export activity eligible for deduction u/s 10A of the Act.
This action of the AO was upheld by the ld. DRP.
As per the assessee, this issue is covered in its favour by the decision of the Hon’ble Supreme Court in the case of “CIT vs. Woodward Governor India (P.) Ltd.”, 312 ITR 254 (SC). This has not been disputed by the ld. DR and no decision contrary to “Woodward Governor India (P) Ltd.” (supra), has been brought to our notice.
Therefore, in accordance with “Woodward Governor India (P) Ltd.”
(supra), the net foreign exchange fluctuation gain booked by the assessee in its books of account is directed to be included in the export turnover for computing deduction u/s 10A of the Act. Accordingly, Ground no.9 of the Original Grounds of Appeal is accepted.
As per Ground no.10 of the Original Grounds of appeal, realized Forex gain needs to be included in both, the export turnover and the total turnover, for computing deduction u/s 10A of the Act.
41. Here, the AO included foreign exchange gain amounting to Rs.9,68,96,182/- in the assessee’s total turnover, but did not included it in the assessee’s export turnover. The ld. DRP confirmed this.
The assessee contends that the foreign exchange gain earned by it has never been included in the export turnover, since it has been accounted for separately under the head “Foreign Exchange Capital Gain”, which fact has been acknowledged in the assessment order itself. 43. It has been contended that it has been repeatedly judicially held that for the computation of deduction u/s 10A of the Act, the total turnover in the denominator and the export turnover in the numerator have to be read in the same manner. For this reliance has been placed on the following case laws:
i) “CIT vs. Gem Plus Jewellery India Ltd.”, 330 ITR 175 (Bom.) ii) “M/s. Microchiop Technology Designs (India) Pvt. Ltd.”, (Bang.) iii) “M/s. Alternative Food Process P. Ltd. vs. ITO”, ITA No.52/Bang/2008 (Bang.) iv) “M/s. Goodrich Aerospace Services P. Ltd. vs. DCIT”, ITA No.58/Bang/2008 (Bang.) v) “M/s. Hewiett Packard Global Soft Ltd.” IT No.333/Bang/208 (Bang) vi) “ACIT vs. Infosys Technologies Ltd.”, 172 Taxman 134 (Bang) vii) “ITO vs. Servio Global Solutions Ltd.”, 117 TTJ 380( Chennai) viii) “I-Gate Global Solutions Ltd. vs. ACIT”, 112 TTJ 1002 (Bang) ix) “Tata Elxsi Ltd.”, 115 TTJ 423 (Bang) –affirmed by Karnataka High Court in CIT vs. Tata Elxsi Ltd.: ITA No.70/2009, decided on 30.8.2011.
32 Infosystems (P) Ltd. vs. ITO”, ITA No.1042/Bang/07 (Bang.) xi) “Mphasis Ltd. vs. ACIT”, ITA No.884/Bang/07 (Bang). xii) “Patni Telecom (P) Ltd. v. ITO”, 22 SOT 26 (Hyd.) xiii) “DCIT vs. Softsol India Ltd.”, 22 SOT 271 (Hyd) xiv) “CIT vs. Sitel Operating Corpn. India Ltd.”, IT no. 153 of 2011 (Kar HC) xv) “DCIT vs. Binary Semantics Ltd.”, 109 TTJ 556 xvi) “ITO vs. Sak Soft Limited”, 313 ITR (AT) 353 (Chennai ITAT)
Here also, the Department has remained unable to effectively controvert the assessee’s contention. In “Gem Plus Jewellery India Ltd.” (supra), under similar circumstances, it has been held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between the numerator and the denominator while calculating deduction u/s 10A of the Act. No decision to the contrary has been brought to our notice. All other case laws cited on behalf of the assessee also reiterate that for computation of deduction u/s 10A of the Act, the total turnover in the denominator and the export turnover in the numerator have to be read in the same manner. Therefore, the assessee is correct in contending that an equivalent amount of foreign exchange gain attributable to the delivery of goods outside India, as included in the total turnover by the AO, is also entitled to be included in the export turnover for way of Ground no.10 of the Original Grounds is accepted.
Ground No.11 of the Original Grounds of appeal is consequential.
Accordingly, is partly allowed.
This is the Department’s appeal for the assessment year 2009-10. The Department’s challenge in this appeal is to the expenditure incurred in foreign exchange, as excludible from the total turnover, for the purposes of computing deduction 10A, whereas the AO and the ld. DRP excluded it only from the export turnover.
This issue, it is seen, has been decided in favour of the assessee by the ld. DRP, relying on the decision of the Hon’ble Jurisdictional Bombay High Court in the case of “CIT vs. Gem Plus Jewellery India Ltd.”, (supra).
The Department contends that it has not accepted the decision of the Hon’ble Bombay High Court in the case of “Gem Plus Jewellery India Ltd.”
(supra) and an appeal there against is pending before the Hon’ble Supreme Court.
Here, we find that it is the decision of the Hon’ble Jurisdictional Bombay High Court in the case of “Gem Plus Jewellery India Ltd.” (supra), which holds the field, the operation whereof has not been shown to have assessee. Therefore, the appeal of the Department against the decision of the Hon’ble Jurisdictional Bombay High Court in “Gem Plus Jewellery India Ltd.” (supra), notwithstanding, the order of the ld. DRP is confirmed.
Accordingly, is dismissed. 52 This is the assessee’s appeal for the assessment year 2010-11 against the order dated 26th Sept., 2014, passed by the ld. DRP. The assessee has taken the following grounds: “Based on the facts and circumstances of the case, the appellant respectfully submits that the learned AO erred in determining the total income of the appellant at Rs.17,61,98,340 as against the returned income of Rs.8,98,670 fled by the Appellant. The grounds of the Appellant against the action of the AO are as follows:
1. The assessment order dated November14, 2014, passed by the AO under section 143(3) read with section 144C of the Act is not in accordance with the law and is contrary to the facts and circumstances of the present case. Transfer pricing related grounds
2. The AO has erred in law and on facts in making an adjustment of Rs.12,72,63,996 to the arm’s length price (‘ALP’) determined by the Appellant in respect of the international transactions in connection with IT and ITES activity undertaken by the Appellant with its Associated Enterprises (AE) . In doing so, the AO has erred in law and in facts ad follows: 2.1. Rejecting the transfer pricing analysis undertaken and the comparable companies identified by the appellant. 2.2. Not computing ALP in respect of the international transactions as computed by the Appellant and in ignoring the provisions of Rule 10B(4) of the I.T.Rules, 1962 which authorizes usage of 35 ALP under section92F of the Act. 2.3. Rejecting the objections raised by the appellant in relation to selection/rejection of filters. 2.4. Rejecting the objections raised by the appellant in relation to selection/rejection of companies while determining the arm’s length price. 2.5. Erroneously recomputing the profit level indicator of the appellant. 2.6. Failing to grant the benefit of +/- 5 percent range as envisaged by the provisions of Section 92C(2) of the Act.
Corporate Tax related grounds. 3. The AO has erred in law and in facts in disallowing the foreign exchange loss of Rs.4,80,35,675 on account of the same being neither accrued nor an actual loss. 4. The AO has erred in law and in facts in proposing to levy interest u/s 234B of the Act.”
The following Additional Ground has also been sought to be taken :
“Based on the facts and circumstances of the case, the appellant respectfully submits that the learned AO erred in determining the total income of the appellant at Rs.17,61,98,340 as against the returned income of Rs.8,98,670 fled by the Appellant. The grounds of the Appellant against the action of the AO are as follows:
Corporate Tax related ground “1. That the Hon’ble DRP and the AO have erred in not considering the disallowance of foreign exchange loss of Rs.2,98,03,522 for the purpose of re-computation of profits eligible for deduction u/s 10A of the Act.”
At the outset, the ld. Counsel for the assessee has stated at the bar that the Additional Ground is not pressed. Rejected as not pressed.
Ground No.1 is general in nature.
Ground No.2 challenges the adjustment of Rs.12,72,63,996/- to the arm’s length price determined by the assessee in respect of international transactions in connection with IT and ITES activity undertaken by the assessee with its Associated Enterprise (AE).
The Taxing Authority selected/rejected certain comparables. The TPO computed 12.10% as the assessee’s operating profit margin (OP/TC).
As against this, the assessee took 18 comparables in its TPR, as follows:
Sr.No. Company Name Weighted Average 1. 3D PLM Software Solutions Ltd. 45.28%
2. A S M Techlologies Ltd. 13.68%
3. Bodhtree Consulting Ltd. 41.22%
4. California Software Co. Ltd. 3.98%
5. Cosmic Global Ltd. 31.98%
6. Goldston Technologies Ltd. -1.38%
7. Indus Networks Ltd. 3.00%
8. Intertec Communication Ltd. 7.00%
9. Kaashyap Technologies Ltd. 18.66%
10. Mindtech (India) Ltd. 0.77%
11. R.S.Software (India ) Ltd. 8.34% 12 R Systems International Ltd. 18.49%
13. S Q L Star International Ltd. 7.20%
14. Sagarsoft (India) Ltd. -8.12% 15 Synetairos Technologies Ltd. 20.91%
16. Zylog Systems (India ) Ltd. -0.01%
17. Core Projects & Technologies Ltd. (seg) 36.03%
18. Roltaiondia Ltd. (seg) 12.45%
Average (Arithmetic man) 14.42%
As per the record, during the TP proceedings, the assessee was required to submit the updated OP/TC for the comparable companies using data for the assessment year 2009-10 only. This was submitted by the assessee as follows:
Sr.No. Company Name NCP
1. 3D PLM Software Solutions Ltd. 44.11%
2. A S M Techlologies Ltd. 13.44%
3. Bodhtree Consulting Ltd. 29.47%
4. California Software Co. Ltd. 19.62%%
5. Cosmic Global Ltd. 18.27%
Goldston Technologies Ltd. 3.13%
7. Indus Networks Ltd. 2.59%
8. Intertec Communication Ltd. 11.38%
Kaashyap Technologies Ltd. 6.48%
Mindtech (India) Ltd. -1.60%
R.S.Software (India ) Ltd. 10.27% 12 R Systems International Ltd. 20.85%
13. S Q L Star International Ltd. -14.31%
14. Sagarsoft (India) Ltd. 11.85% 15 Synetairos Technologies Ltd. 19.00%
Zylog Systems (India ) Ltd. 6.55%
Core Projects & Technologies Ltd. (seg) 63.23%
18. Roltaiondia Ltd. (seg) 14.75%
Average (Arithmetic man) 16.61%
As evident, the arithmetic mean of the operating profit margin of these comparable companies was 15.51%. As such, according to the assessee, the assessee’s OP/TC fell within permitted AL range of +/-5% as provided by assessee.
However, the TPO finally selected seven comparables, as follows:
Sr.No. Comparable companies NCP
1. Cosmic Global Ltd 16.59%
2. RS Software (India ) Ltd. 10.27%
3. Igate Global Solutions Ltd. 19.19%
4. Infosys Technologies Ltd. 45.47%
Kals Information Systems Ltd. 34.41% Segmental 6. Mindtree Ltd. 22.83%
7. Persistent Systems Ltd. 30.56%
Arithm,etic Mean 25.62%
Of the above, seven comparables, Infosys Technololgies Ltd., Kals Information Systems Ltd., and Persistent Systems Ltd. are the companies introduced by the TPO, though not taken as comparables by the assessee.
The TPO, thus, arrived at an average profit margin of 25.62%.
On the basis of the above, the TPO made addition on account of TP adjustment amounting to Rs.12.72 crores. The DRP upheld this addition, bringing the assessee now before us.
The assessee is aggrieved with the action of the DRP in confirming the TPO’s action of selecting the above said three companies, i.e., Persistent, Infosys and Kals, as companies comparable to the assessee. In this regard, the ld. Counsel for the assessee has contended that the services rendered by the assessee include providing low-end software development and related services, i.e., Information Technology (IT) and Information Technology Enabled Services (ITES) and export thereof to its Associated Enterprises. The assessee offers a range of services, such as software development services & application maintenance, testing services, localization services. It has been contended that so, the three companies have wrongly been taken as comparables, since the assessee is not into software product manufacturing.
Apropos Persistent Systems Ltd., it has been contended that this company is functionally not comparable with the assessee; that on perusal of the annual report, it is observed that the company is engaged in outsourced software product development services; that further, the company derives its revenues primarily from the sale of software services and software products; that as per the company’s website, it is a global company specializing in software product and technology innovation; and that the company utilizes its product engineering processes to develop best-in/class solutions for its science, healthcare, banking and consumer products sectors.
So far as regards the Infosys Technologies Ltd., it has been contended that functionally not comparable with the assessee; that on perusal of the annual report, it is observed that it provides end to end business solutions that leverage cutting-edge technology, thereby enabling clients to enhance business performance; that further, Infosys also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services; and that additionally, Infosys also offers software products for the banking industry.
Concerning Kals Information System Ltd., it has been submitted that on perusal of the annual report, the company consists of an STPL unit engaged in development of software and software products and a training centre engaged in training of software professional online projects; that the company derives its revenues primarily from software services and software products; that some of the products sold by the company are Shine – ERP software, Docuflo, Dac4Cast, CMSS, La Vision Virtual Insure etc.; and that development of software and software products, it cannot be considered as a comparable.
On the other hand, the ld. DR has sought to place reliance on the assessee’s Transfer Pricing Report ( TPR), as per which, according to the ld. DR, the assessee is into “application development”, which includes, inter- alia, “product release”. Therefore, according to the ld. DR, the assessee is a product manufacturing company. This, however, has been emphatically denied on behalf of the assessee. It has been contended that the TPR is, in fact, being grossly mis-construed and mis-read, in as much as “product release” does not, in any manner, have any equivalence whatsoever with “product manufacture”. As a matter of fact, according to the ld. Counsel for the assessee, if the TPR is correctly construed, it refers to “product release” only in the context of “application development” , software development being the sole business activity of the assessee.
Referring to page 72 of the APB, it was pointed out that as declared by the assessee itself, LB India has two development centres in Mumbai and Chennai employing more than 1200 professionals. The services rendered by LB India include low-end, routine development and maintenance of content application as well as testing to ensure the quality, interoperability, technology products, web-sites and content. LB India has an integrated model for service delivery that enables it to offer a range of options including low-end, routine, software development and application maintenance, localization and translation, testing service, etc., to the Lionbridge group and also to independent customers.
It was further pointed out that Global Development and Testing (GDT) through its GDT solutions, LB India provides applicaton-outsourcing services, including new low-end, routine, software development, maintenance and user support. Application development includes testing, applications building, quality assurance, program assembly and product release. Application maintenance includes minor modifications changes, maintenance of already existing low-end, routine, software depending upon the customer’s requirements. Lionbridge’s testing services include product certification and competitive analysis. Lionbridge provides its GDT services in a cost efficient and blended on site and offshore model.
It was also pointed out that content development consists of continuous updating and other ongoing management of the client’s localized low-end, routine, software products and multilingual web content. By utilizing the LB US and LI technology and integrating the LB US and LI and technology. LB India is able to manage the content development in a semi-automated manner for large volumes of content. Examples of client content requiring these types of services include online support site maintained in multiple languages, learning programs and marketing product databases all of which are frequently updated to reflect the latest products and terminologies.
It has been argued that the services rendered by the assessee give rise to intellectual properties rights, which rights are vested with the assessee’s AE in Ireland. It has been contended that the assessee itself, in its TP Study, has chosen these comparables having the profile identical with itself.
With regard to KALS, it has been contended that this was also the TPO’s comparable for AY 2009-10. Its margin is 23%. It was not contested for AY 2009-10 and it is not comprehensible as to how, in these facts, it is not a comparable for the year under consideration. The assessee is also rendering a mixture of high-end services and release of products. Therefore, according to the Ld. DR, KALS is definitely comparable to the assessee.
Moreover, since it was accepted last year, the assessee cannot cherry-pick for the year under consideration. Besides, there are four companies taken as comparables which are product manufacturing companies, i.e., 3 D PLM Ltd., and Zylog Systems (India ) Ltd. So, according to the ld. DR, the assessee selects and then detracts from these comparables for these reasons, which are not permissible in law.
In this regard, it is seen that the assessee cannot be faulted with in contending that since the assessee is not into software products manufacture, it cannot be compared with companies which are not into this activity. Like can be compared only with like, as is well settled . We have also held so in the assessee’s own case for the AY 2009-10 while dealing with (supra) that Kals is into product manufacturing services ( As
per APB-291), whereas the assessee is only providing services. Complete segmental data regarding software is available at APB 292 which is, as follows:
Year Ended 31.3.2010 31.3.2009
1. Segment Revenue Application Software 21692935 20533880 Training 1352209 870807 Net Sales/Income from operations 23045144 21404686
2. Segment Results Profit/loss before tax and interest from each segment Application software Training 5553647 6064571 Total profit -140594 -145053 Interest 5413057 4614040 Other Income - - Investment written off 2103759 2784259 Prior Period of Income - - ------------------ ------------------ Total Profit before tax 5373695 4586475
3. Other information Segment assets ( Net of Liabilities) Application software 27185317 17752290 Training & Investments 27147046 30407835 Total 54332363 48160125
4. Sales Overseas Application Software 21692935 20533880 Domestic Training 267961 704683 Translation & Interpretation 1084248 166123 So, it is not possible to make a comparison.
In this regard, the DRP has held as follows: “2.2 Before us the ARs objected to selection of 3 fresh comparable by the TPO as erroneous inclusion. Two out of three comparables viz. M/s. Infosys technologies Ltd. and M/s. KALS Infosys Ltd. were rejected by the TPO in the previous year as well, which was agitated before the predecessor DRO. After a detailed discussion the panel had upheld the action of the AO in considering these two comparable.
Apropos KALS, the DRP, for the year under consideration, followed the DRP’s order for the assessment year 2009-10, which reads thus:
“KALS Information Systems Ltd. has revenue from both software development and not software products. As such the same is said to be functionality not comparable with the assessee. This company is into the business of software development and training. Segmental results are available. There cannot be dispute if segmental results of software segment are used for comparison. TPO is directed to determine the mean profitability on the basis of segmental results of software development of this company for comparison and determination of mean PLI.”
So, for the AY 2009-10, segmental data regarding products manufactured and services rendered was available.
Thus, for the assessment year 2009-10, as per the DRP, segmental results of software development were available. It was, therefore, that the TPO was directed by the DRP to make a comparison considering segmental results of the software development segment of KALS and to thereby determine the mean PLI of the comparables.
Such finding of the DRP for AY 2009-10 stands final. This is due to the fact that comparability only with three companies, i.e. 3D PLM, Bodhtree and Genesys served the assessee’s purpose for that year and on our call, the assessee was not required to go into the other comparables.
However, the said finality of the DRP order in AY 2009-10 regarding KALS cannot be taken in any manner detrimental to the assessee qua the year under consideration. It is trite that each year is independent and facts are to be viewed and decided for each year separately.
So, we have to consider the comparability or otherwise of KALS with the assessee regarding the year under consideration separately and now we are proceeding to do so.
In this regard, it is seen that the audited financials of KALS for AY 2010-11 are at APB 271 – 298. At APB 291, is Schedule no. 14, i.e., “Notes to the Financial Statements”. In para -1 thereof, it is stated as follows:
“The company was incorporated under the Companies Act, 1956 as a Private Limited Company in the year 1993. Subsequently the company was converted into a public limited company in the year 2000. The company is engaged in development of Software and Software products since its inception. The company consisting of STPL unit engaged in Development of Software and Software products and a Training Centre engaged in training of Software professionals on online projects.”
This clearly shows that KALS is into development of software and software products.
The segmental information of KALS is available at APB 293, as follows:
Year Ended 31.3.2010 31.3.2009
1. Segment Revenue
Segment Results Profit/loss before tax and interest from each segment Application software Training 5553647 6064571 Total profit -140594 -145053 Interest 5413057 4614040 Other Income - - Investment written off 2103759 2784259 Prior Period of Income - - ------------------ ------------------ Total Profit before tax 5373695 4586475
3. Other information Segment assets ( Net of Liabilities) Application software 27185317 17752290 Training & Investments 27147046 30407835 Total 54332363 48160125
4. Sales Overseas Application Software 21692935 20533880 Domestic Training 267961 704683 Translation & Interpretation 1084248 166123
From the above, it is evident that segmental information of KALS regarding its software development segment is not available. Therefore, comparison of the assessee, who is into software development only, with the software development segment of KALS is not possible. Therefore, finding company as a comparable. We hold that the DRP has erred in confirming the TPO’s action including KALS as a comparable.
Apropos Persistent Systems Ltd., it is an offshore software product development company, as available at APB 305. In this regard, the assessee has contended that the company derives its revenues primarily from sale of software services and software products. It was further submitted that this company is a global company specializing in software product and technology innovation. The company utilizes its product engineering processes to develop best-in-class solutions for its customers who are players in the technology, telecommunication, life science, healthcare, banking and consumer products sectors.
On the other hand, the ld. DR, again, like in the case of KALS, states the assessee to be a product manufacturing company.
However, while dealing with KALS, we have rejected this company as a comparable. Like-wise, we hold that Persistent Systems Ltd., has also not been correctly chosen as acomparable. This comparable is also rejected.
Coming to Infosys Technologies Ltd.. the assessee’s contention is that it provides end-to-end business solutions that leverage cutting-edge technology, thereby enabling clients to enhance business performance. It entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. This company also offers software products for the banking industry.
It has been contended that (as available at APB 452 in para 4 & 7 and at APB 461 in para 5 )
“4. Finacle: Finacle from Infosys – partners with banks across the globe to power their innovation agenda, enabling them to differentiate their products and services, enhance customer experience and achieve greater operational efficiency. Finacle solutions address world-wide banking needs such as core banking, wealth management. Customer Relationship Manager (CRM). Islamic banking and treasury requirements of retail corporate and universal banking. Finacle solutions also empower banks with multiple sales, service and marketing channels including e-banking, mobile banking and call centers. Recently Finacle has launched a slew of innovative offerings including Finacle Advisor,. Finacle Treausry-in-a-box. Finacle Core Banking for rural regional banks and Finacle Financial Inclusion solutions. These offerings make Finacle a strong innovation facilitator enabling banks to accelerate growth while maximizing value from their large-scale business transformation. Finacle is the chosen solution in over 130 banks across 65 countries helping them serve more than 30,000 branches. These include over 2,000 branches of regional rural banks in India which are leading the financial inclusion initiative in the country Independent reports by renowned research firms have positioned Finacle among the leaders in the global evaluation of retail core banking solution vendors. Finacle is one of the most scalable core banking solutions in the world with an unparalleled performance benchmark of 104 million effective transactions per hour (29,010 ETPS).
Branding: We believe that the Infosys brand is one of the most Important intangible aspects that we own. During this fiscal year, we have been appreciated by the following bodies as a recognition of how we appear and conduct business. • Ranked as the most admired company in India according to the Wall Street Journal Survey. • Ranked among the 50 most respected companies in the world by Reputation Institute’s Global Reputation Pulse 2009. • Ranked among the top 25 companies in Business Week’s Infotech 100. • Ranked among the top 25 companies in the world for developing leaders by Fortune/Hewitt. • Ranked as the best company to work for in India for Business Today’s ninth survey of ‘Best Companies to Work For’. Industry analysis rates as highly in reports on our key services and markets. The services for which we were rated highly include, Service Oriented Architecture, Oracle Service providers. Comprehensive Finance and Accounting Business Process Outsourcing, and also for the Finacle product suite. We had over a million visits to our blogs on business and technology related topics on our website wwwinfosys.com during the year. Our employees contributed and published several thought leadership articles across various industry for a and publications. We leveraged social media platforms and engaged with our stakeholders and investors on You Tube, Slide Share. Twitter and Facebook. Leading global publications wrote about us, our leadership, our talent and our performance. We continued to have leadership presence at premier industry events like Oracle Open World and Sapphire. Our annual client events in the U.S. and Europe were well attended and highly appreciated. At the World Economic Forum in Davos, Switzerland, our lunch panel discussion witnessed a (full audience and the evening get-together hosted by us was attended by some of the most influential and powerful global business leaders. 5. Our end to end solutions: We complement our industry expense with specialized support for our clients. We also leverage the expense of our various Centers of Excellence and our software engineering group and technology lab to create customized solutions for our
53 clients. In addition, we continually evaluate and train our professionals in new technologies and methodologies. Finally, we ensure the integrity of our service delivery by utilizing a scalable and secure infrastructure. We generally assume full project management responsibility in each of our solution offerings. We strictly adhere to our SFI-CMM Level 5 internal quality and project management processes. Our project delivery focus is supplemented by a robust knowledge management system that enables us to leverage existing solutions across our Company. We use in-house tools for project management and software lifecycle support. We believe that our process, methodologies, knowledge management systems and tools reduce the overall cost to the client, mitigate risks, enhance the quality of our offerings and allow clients to improve time to market for their solutions. Revenues attributable to custom application development, maintenance and production support, product engineering, package- enabled consulting and implementation and technology consulting services represented a majority of our total revenues in fiscal 2010.
Infosys is into customized solutions, which is not the calling of the assessee. It has been pointed out that as per APB 464, Infosys is into software services and products, onsite and offshore. It has been contended that the assessee is not doing any “onsite” business. It has been submitted that as per APB 464 [Para 1(b)], Infosys is earning revenue from software products. It has further been pointed out that as per the company’s over- view (APB 478 para -1), Infosys provides end to end business solutions that leverage cutting-edge technology, thereby enabling its clients to enhance business performance. The company provides solutions that span the entire software lifecycle encompassing technical consulting, design, evaluation and implementation, testing and infrastructure management services. In addition, the company offers software products for the banking industry.
It has also been pointed out as per APB 454, para 20, Infosys has a strength of 92,688 employees. It has further been pointed out that per contra, the assessee company has a team of approximately 4600 employees only, out of whom, 1600 are professionals. It has been contended that in the case of “Agnity India Technologies P. Ltd.”, ITA/1204/11 (HC Delhi), Infosys has been rejected as a comparable.
On the other hand, the ld. DR has adopted the same argument as in the case of KALS.
In this regard, it is seen that the DRP, for the AY 2009-10, observed, with regard to Infosys, as follows:
“4.3.3. Infosys Technologies Limited is said to be a large company and not comparable with the assessee company for the reason that it operates as full-fledged risk taking enterprises, having diversified activities like consulting application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process management, etc., high turnover exceeding Rs.20,000 crores, having large numbers of patented products, spends about Rs.276 crores in R & D, and has about 50% onsite development revenue. Further reliance is also placed on the judgment of Delhi High Court in case of CIT vs. Agnity India Technologies Private Limited ( wherein it was concluded that Infosys is not comparable since it is a large and 55 bigger company in the area of development of software and the profits earned by it cannot be benchmarked with the assessee. However, as per rule 10B(2), turnover is not an valid filter. There is no relationship between turnover and margin of a company. The assessee has not demonstrated, how the turnover affects, the margin. Therefore, the turnover is not regarded as a valid filter and the objection of assessee is dismissed. The other grounds of objection are also not sustainable. Decisive factors for determining the inclusion for exclusion of a comparable are prescribed in Rule 10B(2). The reasons for exclusion argued by the assessee don’t find place in the Rules prescribed. ITAT Mumbai in case of Wills Processing in ITA No.4429/Mum/2012 in order dated 01.03.2012 has held in para 47.5 that there is no relationship between turnover and margin of an entity. The turnover is not a criteria prescribed under Rule 10B(2) for selecting the comparable. Further Infosys BPO Ltd. has been held in Wills Processing case as a valid comparable. The activities of Infosys are similar to those of the assessee. Various objections taken by the assessee are not tenable in view of the specific provisions of Rule 10B(2). Hence, the objection against Infosys is hereby rejected.”
So, for AY 2009-10, the DRP held that Infosys could not be excluded on the basis of the turnover. But for the year under consideration, it is seen that the assessee’s challenge to Infosys is not on this basis. The assessee’s contention is that Infosys is functionally different from the assessee, as above.
This grievance of the assessee is also found to be correct. Infosys has not been shown to be at parity with the assessee, on the basis of functionality. Its functionality is entirely different from that of the assessee, as seen in the preceding paragraphs. Therefore, we reject Infosys as a comparable.
Therefore, Ground No.2 is accepted, as indicated.
In view of the above, the final set of companies comparable to the assessee would be as follow:
Sr.No. Name of the company NCP(%)
Cosmic Global Ltd 16.59%
2. I-Gate Global Solutions Ltd. 19.19%
3. Mindtree Ltd. 22.83%
R.S. Software (India) Ltd. 10.27%
Arithmetic mean 17.22%
Appellants’ margin (computed by TPO) 12.10%
Apropos Corporate Tax related Grounds, as per Ground no.3, the AO erred in disallowing the foreign exchange loss of Rs.4,80,35,675/- on account of the same being neither accrued nor an actual loss.
As per the assessee, this issue has been decided in favour of the assessee in assessee’s own case by the Mumbai Bench of the Tribunal for the assessment year 2009-10.
This contention of the assessee is found to be correct. At APB 563 to 581 is a copy of the order of the Mumbai Tribunal in the assessee’s own case for AY 2009-10.
With regard to the assessee, it has been held as follows:
“10.1 In the draft assessment order, the AO has proposed disallowance of foreign exchange loss on the ground that loss is only contingent and not allowable u/s 37(1). The contention of the assessee before us was that relying on the decision of Hon’ble Supreme Court in the case of Woodward Governor (I) Pvt. Ltd. (supra), the same should be allowed or in alternative the profit eligible for deduction tax u/s 10A should be increased by the corresponding amount of such disallowance.
10.2. We have considered rival contentions. In view of the decision of the Hon’ble Jurisdictional High Court in the case of Gem Plus (supra), we direct the AO to allow the claim of deduction u/s 10A on the profit of business as increased by the disallowance made on account of foreign exchange loss. We direct accordingly.
Further, for the assessment year 2009-10 also, we have followed the decision of the Hon’ble Supreme Court, in the case of “Woodward Governor India (P) Ltd.”, 312 ITR 254 (SC), (supra).
In view of the above, Ground No.3 is accepted.
Ground no. 4 is consequential.
ITA No. 290/Mum/2014 FOR THE AY 2010-11