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Income Tax Appellate Tribunal, “C” BENCH, PUNE
Before: SHRI R.S. SYAL & SHRI S.S. VISWANETHRA RAVI
आदेश / ORDER
PER S.S. VISWANETHRA RAVI, JM :
These cross appeals filed by the assessee and Revenue against the common order dated 18-07-2017 passed by the Commissioner of Income Tax (Appeals)-13, Pune [„CIT(A)‟] for assessment year 2013-14.
We note that the issues raised in both the appeals are similar basing on the same identical facts. Therefore, with the consent of both the parties, we proceed to hear both the cross appeals together and to pass a consolidated order for the sake of convenience.
First, we shall take up appeal in ITA No. 2315/PUN/2017 filed by the assessee.
Ground No. 1 raised by the assessee is general in nature, hence, requires no adjudication.
Ground Nos. 2 to 8, 10 and 11, the ld. AR submits that the assessee has not interested to prosecute ground Nos. 2 to 8, 10 and 11. Accordingly, the same are dismissed as not pressed.
Ground No. 9 raised by the assessee contending that both the authorities below in appropriately considered Infobeans Systems Private Limited (Infobeans) as comparable to the assessee, thereby, the assessee intends to exclude the Infobeans from the final set of comparable companies.
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The brief facts of the case regarding the assessee i.e. SAS R&D is a wholly owned subsidiary of SAS Institute Inc (SAS US). The assessee was established on 28-07-2000 as a private limited company. The assessee is primarily engaged in providing software development and software consultancy services to its AEs during the year under consideration. For the sake of convenience these services hereinafter called as software services. The total value of provision of software development support and consultancy services is Rs.88,02,72,835/-. The assessee selected TNMM as the most appropriate method to benchmark the international transactions of software services. The assessee worked out its PLI margin by OP/OC at 10.78% and shown the PLI margin of comparables by OP/OC at 10.01%. The assessee used filters to exclude comparable companies non availability of descriptive information, ceased business operations, sick and persistent negative net worth, different functions, having turnover less Rs.1 crore or more than 200 cores, having less than 25% foreign exchange, in excess of 25% transactions with related parties, persistent operating losses, exceptional years of operations and merged to form another company.
In terms of the above filters the assessee selected 18 companies as comparables, the details of which reproduced at Page Nos. 7 and 8 of the TPO‟s order. The TPO also by invoking Rule 10B(4) carried out the search to find out appropriate comparables. It is noted that the TPO has taken criteria for selection of comparables such as current year data, companies with income from IT services which has more than 50% of the operating revenue or segmental revenue, companies with less than 25% of related party transactions and companies having turnover from Rs.1 crore to Rs.500 crore, accordingly, rejected 12 companies from the set of comparables provided by the assessee. In addition to the remaining set of
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comparables the TPO also added another set of 6 comparable companies making total 12 comparable companies and worked out arithmetic mean by OP/OC at 21.10%. Thereby, meaning the TPO rejected PLI at 10.78% as worked out by the assessee and proposed to take PLI of comparables at 21.10%. The assessee requested the TPO to exclude Infobeans by contending that the said company has acquired software from the merger company but the TPO by taking reference of Director‟s Report, Management Discussion, and Analysis in the Annual Report held that the said merger is technical and effective from 26-09-2012 does not attribute reasons of growth to any extraordinary events. Further, he also held that the Infobeans passed all the filters. The CIT(A) mainly relied on the order passed by him in earlier year for A.Y. 2012-13 and confirmed the view of TPO for inclusion of Infobeans in the final list of comparables by adopting the reasons recorded by him for A.Y. 2012-13.
Challenging the same, the ld. AR referred to Form 3CEB at Page No. 37 and break up at Page No. 973 of the paper book. Further, he referred to Consultant Agreement at Page No. 192 of the paper book. On perusal of the Consultant Agreement at Page Nos. 192 to 194 of the paper book wherein the conditions of services provided by the consultant is reflected. On an examination of said agreement we note that the assessee in the capacity of consultant provide professional services in support of the Institute‟s R&D department with a condition that the consultant shall not subcontract any of consultant‟s obligations. The Institute also has the right to inspect work at any time, stop work, require changes to the work and request modifications to the work. The Institute is the sole owner of all proceeds in any form developed pursuant to the agreement. The consultant has no ownership interest in any material, data, specification, tape, or program, or any confidential information provided to the
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consultant in connection with this agreement. Further, we note that the consultant shall invoice the institute each month for the previous month‟s services and expenses or upon completion of the services, whichever occurs earlier. We find an invoice at Page No. 976 of the paper book which is similar to the invoice reflecting in Page No. 191 of the paper book. Further, we note that the details of activities are provided at Page No. 978 of the paper book wherein the assessee has been shown as vendor and the Institute has been shown as recipient of the said activities and invoice also raised on the name of SAS Institute based in USA. Invoice at Page No. 980 shows the value of services for the month of May, 2012 and its break up is at Page No. 981 of the paper book showing the same amount reflected in Page No. 980 to an extent of $863,552.44. Likewise another invoice is placed at Page No. 982 raised on SAS Institute by the assessee for the services in the month of July, 2012 and its break up of value of services is placed at Page No. 983 of the paper book. Likewise, the assessee submitted invoices up to Pages 1058. The ld. AR contends that the financials of Infobeans does not provide the detail description about the business of the said company except the fact that the company has revenue from sale of software. Further, he also contended earning foreign exchange from export of goods to FOB basis. The software business of Infobeans is demerged and transferred to the company in pursuance of the scheme of arrangement as approved by the Hon‟ble High Court of Madhya Pradesh being appointed date as on 01-04-2011. He also relied on the case laws of Mumbai ITAT as well as Pune ITAT in the cases of M/s. Emerson Electric Company (India) Private Limited and M/s. PubMatic India Private Limited and referred to Page Nos. 713 and 743, respectively. The ld. DR relied on the order of TPO and CIT(A).
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After hearing both the parties and on perusal of the record, we note that the ld. AR vehemently contended that the Infobeans cannot be considered as comparable as there was no detailed description of its business and demerger to form another company. On an examination of notes forming part of financial statements of Infobeans at Page No. 419 of the paper book we note that no segmental details were available and the said company was earning foreign exchange from export of goods on FOB basis which is clear from Page No. 422 of the paper book. In our opinion, when there is no information the proper comparability cannot be examined in view of absence of segmental details. Further, we note that at Page No. 425 of the paper book demerger of business of Seed Enterprises Private Limited was taken place wherein the said concern had filed revised accounts which clearly shows the financial statements of the said concern included the financial statements of software business of demerged company which in our opinion is an extraordinary event which has taken place making the said concern has not comparable to the company. The similar issue came up before this Tribunal in assessee‟s own case for A.Y. 2012-13, the order of which is placed at Page No. 749 of the paper book. The relevant discussion is made at Para No. 23 of the said order wherein we note that this Tribunal considering the order in the case of M/s. PubMatic India Private Limited held the Infobeans is not a comparable in view of demerger and directed the AO/TPO to exclude Infobeans Systems Private Limited from the final set of comparables. The ld. DR did not dispute the same nor placed on record any view contrary to the decision of the Tribunal in assessee‟s own case for A.Y. 2012-13. Having considering the facts and circumstances of the case and the discussion made by us here-in-above following the same findings as rendered by the CO-ordinate Bench of Tribunal in assessee‟s own case for A.Y. 2012-13, we direct the
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AO/TPO to exclude Infobeans Systems Private Limited from the final set of comparables. Thus, the ground No. 9 raised by the assessee is allowed.
In ground No. 12, the assessee has assailed initiation of penalty proceedings u/s. 234B, 234C and 271(1)(c) of the Act, in our opinion, challenge to penalty proceedings at this stage is premature. Accordingly, ground No. 12 raised in the appeal is dismissed.
The assessee raised additional ground No. 13 for exclusion of Thirdware Solutions Limited from the list of comparable companies. We note that the assessee selected the Thirdware Solutions Limited as one of the comparable which was accepted by the TPO. It was submitted by the ld. AR that the assessee did not dispute the inclusion of Thirdware Solutions Limited before the CIT(A) and no verification has been done by the CIT(A) in the First Appellate proceedings. Now, the ld. AR submits that the Thirdware Solutions Limited should not be considered as comparable as it is involved in trading activity and no segmental data is reflected in annual reports. Further, the said company recognized the revenue from subscription contracts, sale of user license for software application and details of segment profitability of those various activities are not available. Therefore, According to ld. AR the Thirdware Solutions Limited cannot be included in the final list of comparables while admitting the challenge to exclude the Thirdware Solutions Limited is made before this ITAT for the first time. We note that the similar issue came up before this Tribunal in assessee‟s own case for A.Y. 2012-13 and the relevant portion at Para No. 33, we note that this Tribunal directed the AO/TPO for detailed factual verification based on annual report and other relevant documents in order to verify nature and scope of functions of Thirdware Solutions Limited. The ld. DR agreed for remand the said issue to the file of AO/TPO for its
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fresh verification in terms of direction rendered by this Tribunal in assessee‟s own case in A.Y. 2012-13. Accordingly, we direct the AO/TPO follow the same direction as contained in order dated 10-05-2021 in ITA No. 632 & 619/PUN/2017 for A.Y. 2012-13. Thus, the additional ground No. 13 raised by the assessee is allowed for statistical purpose.
The assessee also raised additional ground No. 14 of appeal seeking deduction paid towards Education Cess under Finance Act while computing the taxable income. The ld. AR submits that the above ground raised by the assessee is purely legal ground and raised for the first time before this Tribunal. Since, the Education Cess paid by the assessee available with the respondent revenue which does not require any further examination of facts and prayed to allow the additional ground. Further, he submitted that this Tribunal taking support from the decision of Hon‟ble High Court of Bombay in the case of Sesa Goa Ltd. reported in 423 ITR 426 directed the AO to allow deduction paid towards Education Cess.
After hearing both the parties, we note that the assessee paid Education Cess while computing the taxable income. The Hon‟ble High Court of Bombay in the case of Sesa Goa Ltd. (supra) was pleased to hold that the Education Cess is an allowable expenditure as per the provision of the I.T. Act. The relevant portion of the order of Tribunal in ITA No. 1578/PUN/2017 for A.Y. 2011-12 in the case of M/s. Advik Hi-Tech Pvt. Ltd. is reproduced here-in-below for ready reference : “12. The assessee has also preferred additional ground which reads as follows: “The Ld. AO be directed to allow deduction of Rs.12,91,464/- paid towards Education Cess under Finance Act while computing the taxable income under normal provision of the IT Act.” 13. We find that this issue is squarely covered by the decision of the Hon‟ble Bombay High Court in the case of Sesa Goa Limited Vs. The Joint Commissioner of Income Tax, Tax Appeal No.17 of 2013 wherein it has been observed and opined by the Hon‟ble Bombay High Court as follows:
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“22. Applying to the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that "any rate or tax levied" on "profits and gains of business or profession" shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession". There is no reference to any "cess". Obviously therefore, there is no scope to accept Ms. Linhares’s contention that “cess” being in the nature of a “Tax” is equally not deductable in computing the income chargeable under the head “profits and gains of business or profession”. Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act. 23. If the legislature intended to prohibit the deduction of amounts paid by an Assessee towards say, “education cess” or any other “cess”, then the legislature could have easily included reference to “cess” in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by the assessee towards the “cess”, when it comes to computing income chargeable under the head “profits and gains of business or profession”.” The Hon‟ble Bombay High Court observing on the impugned order of the ITAT has reasoned at Para 33 of the said order that the Tribunal has observed that since “cess” is collected as a part of the income tax and fringe benefit tax, therefore, such “cess‟ is to be construed as “tax”. However, the Hon‟ble Bombay High Court held that there is no scope for such implications when construing a taxing statute. Even though, “cess” may be collected as a part of income tax, that does not render such “cess” either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii) of the Act. The mode of collection is really not determinative in such matter. Therefore, it was held that amount “cess” paid is deductable from total income of the assessee. 14. The Pune Bench of the Tribunal in the case of DCIT Vs. Bajaj Allianz General Insurance Company Limited, ITA Nos.1111 & 1112/PUN/2017 for the assessment years 2013-14 & 2014-15 dated 25.07.2019 on the issue has held and observed as follows: “13. On hearing both the parties on this issue, we find that this issue is covered one by the decision of the Hon’ble High Court of Judicature for Rajasthan Bench at Jaipur in the case of Chambal Fertilisers and Chemicals Ltd. Vs. JCIT, Range -2, Kota wherein substantial question of law No.3 is relevant in this regard (Para 3) and the same was adjudicated by the Hon’ble High Court at Para 12 of the judgment. The Hon’ble High Court on this issue held the said question No.3 is answered in favour of the assessee. For the sake of completeness, the said Paragraph is extracted as under: “12. We have heard consel for the parties. On the third issue in appeal no.52/2018, in view of the circular of CBDT where word “Cess” is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no.3 is required to be reversed and the said issue is answered in favour of the assessee.” From the above, it is evident that education Cess, which is not disallowable item, on its payment, the cess is an allowable expenditure as per provision of section 40(a)(ii) of the Act. Considering the settled nature of the issue as per the ratio laid down in the above referred case by the Hon’ble High Court of Judicature for Rajasthan Bench at Jaipur, ground of Cross objection No.4 is allowed.” That therefore, from the legal perspective, the issue of „education cess‟ is an allowable expenditure as per provisions of Section 40(a)(ii) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) and placing reliance on the
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decision of the Hon‟ble Bombay High Court (supra.), we allow the additional ground of appeal raised by the assessee.”
Therefore, in view of the above decision, we direct the AO to allow deduction in respect of Education Cess paid by the assessee. Accordingly, the additional ground No. 14 raised by the assessee is allowed.
In the result, the appeal of assessee in ITA No. 2315/PUN/2017 is partly allowed for statistical purpose.
ITA No. 2284/PUN/2017 (Revenue’s Appeal)
Ground No. 1 raised by the Revenue challenging the action of CIT(A) in directing the AO for consideration of inclusion of M/s. Lucid Software Limited and Evoke Technologies Private Limited in the list of comparable companies.
The ld. DR supported the order of TPO.
The ld. AR submits that the TPO did not discuss any specific ground for non-acceptance of M/s. Lucid Software Limited in the list of comparable companies. We note that it was submitted before the CIT(A) that the M/s. Lucid Software Limited is into software development services and on satisfaction on examination of annual report of the said company the CIT(A) held the same as functionally comparable to the assessee. He also observed that the TPO in assessee‟s own case for A.Y. 2012-13 accepted M/s. Lucid Software Limited as comparable to that of the assessee and without there being any discussion the TPO denied to have taken the said company as comparable. Before us, it was submitted by the ld. AR that the M/s. Lucid Software Limited engaged in rendering software development services and referred to Page No. 466 of the paper book and
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contended that 95% of operating revenues were derived from software services. The ld. AR argued that the M/s. Lucid Software Limited should be considered as comparable in view of the details as submitted by the assessee. The CIT(A), we note that discussed about M/s. Lucid Software Limited in the impugned order from Page Nos. 19 to 22 wherein we note that the CIT(A) on his satisfaction with the annual report of the said company held functionally comparable to the assessee. The ld. DR did not bring on record anything contrary to the material evidence against the view of CIT(A) and we uphold the direction of CIT(A) in directing the AO to include the M/s. Lucid Software Limited as comparable in the final list of comparable companies.
Likewise the TPO and CIT(A) rendered the same view as expressed in M/s. Lucid Software Limited in respect of Evoke Technologies Private Limited also, wherein we note that the TPO did not discuss any specific ground for non-acceptance of Evoke Technologies Private Limited as comparable company and the CIT(A) directed the AO/TPO to include the same as comparable companies on the services rendered by that company as reflected in annual report. Further, we find, that the TPO accepted the same as comparable in assessee‟s own case for A.Y. 2012-13. The ld. AR referred the chart and contended that Evoke Technologies Private Limited should be considered as comparable in view of the finding of TPO in earlier order concerning A.Y. 2012-13. On perusal of the impugned order at Para No. 2.2.1.5.1 to 2.2.1.5.3 we note that the CIT(A) observed that the TPO accepted Evoke Technologies Private Limited in A.Y. 2012-13. The CIT(A) on its satisfaction and examination of annual report directed the AO/TPO to accept the same as comparable. The ld. DR did not bring on record any contrary evidence challenging the action of CIT(A). Thus, ground No. 1 raised by the Revenue fails and it is dismissed.
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In ground No. 2, the Revenue challenging the finding of CIT(A) for exclusion of M/s. Harbinger Software Limited and Saven Technologies Limited from the list of comparable companies.
Regarding M/s. Harbinger Software Limited, we note that the TPO included M/s. Harbinger Software Limited as comparable and by mistake the assessee challenged the same before the CIT(A). It was contended raising of said ground before the CIT(A) challenging the action of TPO in accepting M/s. Harbinger Software Limited by inadvertent mistake and the ld. AR requested to treat the same as infructuous. Accordingly, we hold that M/s. Harbinger Software Limited is a comparable company.
Regarding Saven Technologies Limited, we find that Saven Technologies Limited has been accepted by the TPO as comparable to that of the assessee since it satisfied all quantitative and qualitative filter as applied by the TPO. The CIT(A) directed the TPO to exclude the same as it was engaged in 100% Related Party Transaction (RPT) sales to the total revenue and accordingly held the same as not comparable, directed the AO to exclude the same. We note that in Para No. 6 of the TPO‟s order that the assessee itself selected Saven Technologies Limited as comparable and the TPO accepted the same as comparable and placed the same in final set of comparables vide Para No. 10 of its order. The ld. AR submits before us that the assessee wrongly included the said company as comparable in its TP study and the CIT(A) considering his submissions on account of its 100% sales to the Related Party Transaction directed the AO to exclude the same. The ld. AR vehemently supported the order of CIT(A). The ld. DR did not dispute the same and no material evidence brought on record contrary to the view taken by the CIT(A) and accordingly, we affirm the finding of CIT(A) in excluding Saven Technologies Limited from the final list
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of comparable companies. Thus, ground No. 2 raised by the Revenue is dismissed.
In the result, the appeal of Revenue in ITA No. 2284/PUN/2017 is dismissed.
To sum up, the appeal of assessee is partly allowed for statistical purpose and the appeal by the Revenue is dismissed.
Order pronounced in the open court on 08th December, 2021.
Sd/- Sd/- (R.S. Syal) (S.S. Viswanethra Ravi) VICE PRESIDENT JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 08th December, 2021. RK आदेश की प्रनिलऱपप अग्रेपषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The CIT(A)-13, Pune 4. The Pr. CIT-3, Pune ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, “सी” बेंच, 5. ऩुणे / DR, ITAT, “C” Bench, Pune. गार्ड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रतत// True Copy// आदेशानुसार / BY ORDER,
तनजी सधचव / Private Secretary, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune