TaxTMI 
TaxTMI 
2013 (3) TMI 658
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.... and testing is registered under the Software Technology Parks of India (STPI) scheme and has claimed deduction u/s.10A of the Income-tax Act, 1961, in respect of profits earned from the provision of software development services to Cisco Technology Inc., USA (Cisco Technology Inc) from the STPI unit. Product development services transaction: 03. Cisco Systems Inc., USA (Cisco US) is the parent company for a number of Cisco subsidiaries worldwide. Cisco US conducts business globally and develops, manufactures and sells networking and communication products and services associated with the equipment and its use. Cisco US makes direct sale to customers in India. In relation to the direct sales made by Cisco US to customers in India, Cisco India provides 'product replacement services' to Cisco US. As a part of the product replacement services, Cisco India purchases spare parts from Cisco US, maintains a stock of spare parts and facilitates delivery of the same to Cisco US's customers (at the time of requisition of produce replacements) and bills them to Cisco US. In relation to the provision of product replacement services to Cisco US, Cisco India acts in its indepen....
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....rd to the provision of product replacement services was considered to be at arm's length. 05. In the TP order dated.28.10.2010, the TPO has not concurred with the analysis undertaken by the assessee. The TPO was of the view that the approach adopted by the assessee and the comparable companies identified in determining the arm's length nature of the international transaction was not appropriate. The TPO has characterized the assessee as a trader/distributor of spare parts pursuant to which, he has identified companies engaged in trading of networking products as being comparable companies and rejected the comparables identified by the assessee. The TPO has also not accepted the TNMM used by the assessee as the most appropriate method on the grounds that the assessee is not a service provider, but is a trader/distributor of spare parts. Pursuant to the characterization of the assessee as a trader, the learned TPO stated that the purchase of spare parts by the assessee is a significant international transaction and accordingly the cost of goods cannot be regarded as "pass through costs". In determining the arm's length price for the spare replacement services segment, ....
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.... as provided in the TP documentation for determining its characterization for transfer pricing purposes. The appellant wishes to submit that the nomenclature used in the agreement as 'purchaser' and 'seller' is not determinative for characterization of the appellant for transfer pricing purposes. The appellant has benchmarked its margin using the companies engaged in providing logistics services. However, the learned TPO has characterized the appellant as a trader/distributor of spare parts and identified companies engaged in trading of networking products as being comparable companies and rejected the comparables identified by the appellant. Pursuant to the characterization of the appellant as a trader, the learned TPO has stated that the purchase of spare parts by the appellant is a significant international transaction and accordingly the cost of goods cannot be regarded as a "pass through costs". In determining the arm's length price, the TPO has adopted Resale Price Method ("RPM") using gross profits/total sales as a PLI and determined the same at 18.60% on sales. We wish to bring to the attention of the Hon'ble Tribunal the decision in the app....
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....ee's own case for earlier assessment year in ITA No.1410/Bang/2010, wherein it was observed as under : 7.1. Having heard both the parties and having considered the rival contentions, we find that the determination of ALP of the international transaction between the assessee and the AE in USA as regards the 'product replacement service' is before us. It is not in dispute that the international transaction with the associated enterprises has to be scrutinized to verify, if the same is at ALP. The dispute before us is with regard to the method of computing the ALP and also the comparables selected by the TPO. We, therefore, first proceed to decide the correct method of computing the ALP. 7.2 In the case before us, two different methods are adopted TNMM by the assessee and RPM by the TPO. Which is the most appropriate method for arriving at the ALP is to be examined. Rule l0B of IT Rules provides for different methods to be followed for determination of the ALP under sub-sec.2 of sec.92C of the IT Act. The following are the methods for computing the ALP. (a) Comparab1e Uncontrolled Price Method (CUP) in which the price charged or paid for property transferred or servic....
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....ement services agreement, he has no right to fix the resale price or to choose the customer to whom the products are to be sold. It is clear from the agreement that the assessee purchases the spare parts to be sold to its associated enterprise only and for doing so, it earned 1% of mark up on the value of the products and the cost of importing the goods. Thus, it can be seen that the assessee is only a custodian of the goods imported till they are delivered to the client or customer of its parent company on its directions. Therefore, the assessee cannot he held to be a trader or distributor of the goods. When the assessee cannot be held to be a trader or distributor of the spare parts, it is clear that the resale price method is not applicable for arriving at the ALP of the international transactions. 7.4 The other methods provided are cost plus method which is applicable LS relating to manufacture and sale of goods and Profit Split Method which is applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interre1ated that they cannot be evaluated separately for the purpose of determining th....
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....en. Further, the assets employed and the risk undertaken by these companies are also higher than the assessee. Therefore, we are in agreement with the learned counsel for the assessee that these companies have to be rejected as the comparables. The only comparable which can be accepted is Iris Computers and is to be accepted and the gross profit as pointed out by the learned counsel for the assessee should also be reconsidered by the TPO. Holding thus, we remit the issue back to the TPO/AO with a direction to recompute the ALP by adopting the proper comparables and also by using the TNMM method for arriving at the ALP. 10. Following the same, we restore the matter back to the file of the Assessing Officer with similar directions as given therein. However, it is also directed to consider the issue of allowing the benefit of +/-5% range as per the amended provisions of the Act. It is needless to say that the assessee should be given an opportunity of hearing before deciding the issue. Software Development Services transaction : 11. The facts relating to Software Development Services are that the assessee carries out its development activities based on specific requests made ....
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....omparable with the assessee : Sl.No. Name of the Company Weighted average Margins (%) 1 Akshay Software Technologies Limited 7.64% 2 Aztecsoft Limited (formerly known as Aztec Software & Technology Services Limited) 18.42% 3 Four Soft Limited 22 .27% 4 Gebbs Infotech Limited 16.52% 5 Genesys International Corpn. Limited - 11.24% 6 Goldstone Technologies Limited 3.79% 7 Hellos & Matheson Information Technology Limited 35.17% 8 Infosys Technologies Limited 41.04% 9 KPIT Cummins Infosystems Limited 13.30% 10 Lanco Global Systems Limited 6.73% 11 Larsen & Toubro Infotech Limited 11.03% 12 Maars Software International Limited 17.12% 13 Meistar information Technologies limited 1.30% 14 MindTree Consulting Limited 16.60% 15 Orient Information Technology Limited 2.68% 16 Quintegra Solutions Limited 11.93% 17 R S Software (India) Limited 12.19% 18 S I P Technologies and Exports Limited 25.25% 19 Sasken Communication Technologies Limited 17.71% 20 Sasken Network Systems Limited 16.19% 21 Satyam Compu....
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....the decisions of this Tribunal in the case of Triology E-business Software India Ltd., Genesis Integrating System India Ltd., and submitted that in the above said decisions, classification of companies on the basis of net sales or turnover are upheld and the Hon'ble Tribunal has held that, considering the Indian scenario, the classification made by Dun Bradstreet is more suitable and reasonable. As per the ratio laid down, comparables having turnover between Rs. 200 crores to Rs. 2,000 crores needs to be considered in the case of the assessee as the revenue of the assessee is Rs. 508 crores. On application of the principles of the aforesaid decisions, there would only be 6 comparables as below, out of the set of 26 comparables as identified by the TPO: Sl.No. Company Name Turnover as per TPO Gross Margins as per TPO 1. Flextronics Software Systems Ltd., (Seg.) 848.66 25.31% 2. iGate Global Solutions Ltd., 747.27 7.49% 3. Mindtree Ltd., (Seg.) 590.35 16.90% 4. Persistent Systems Ltd., 293.75 24.52% 5. Sasken Communication Technologies Ltd. (Seg.) 34 3.57 22.18% 6. Tata Elxi Ltd. (Seg.) 262.56 26.....
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....turnover limit. The size of the comparable is an important factor in comparability process. The ICAI TP guidance note has observed that the transaction entered into by a Rs. 1000 crores company cannot be compared with the transaction entered into by a Rs. 10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The TPO's range had resulted in selection of companies as comparable such as Infosys which was 25 times bigger than that of the assessee. The Bangalore Bench of the Tribunal in the case of Genisys Integrating Systems (India) P. Ltd., v. DCIT - ITA No.1231/Bang/2010 relying on Dun and Bradstreet's analysis had held that turnover range of Rs. 200 crores to Rs. 2000 crores is appropriate. The said proposition has been followed by the earlier orders passed by this bench in the following cases : Sl.No. Name of the case ITA No. 1. M/s. Kodiak Networks (I) P. Ltd v. ACIT ITA.1413/Bang/2010 2. M/s. Genesis Microchip (I) P. Ltd., v. DCIT ITA 1254/Bang/2010 3. Electronic for Imaging India P. Ltd., ITA.1171/Bang/2010 4. M/s. Trilogy E-Business Software ....
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....ame is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development....
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....ge loss incurred in the normal course of carrying on the business operations as 'operating' in nature and thus included as part of 'total operating costs'. This approach had been adopted in determining the margins of the assessee as well as the comparable companies' margins as identified in the TP report. The TPO while computing the margins of the comparable companies had excluded the foreign exchange fluctuations (gains/losses) as being 'nonoperating' in nature. However, in determining the margins earned by the assessee, the TPO had considered net foreign exchange loss incurred by the assessee as being 'operating' in nature, included as part A of the total operating costs and the transfer pricing adjustment had been made thereafter. The learned representative for the assessee submitted that if foreign exchange fluctuation losses are not considered as part of 'operating expenses' in the case of comparable companies, then the same approach needs to be consistently applied in the case of the assessee as well. Otherwise, this would lead to a different and inconsistent approaches as adopted for determining the net margins earned by the assess....
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....rposes as well ; iii) The learned Assessing Officer has erred in law and in fact by considering traveling expenditure incurred in foreign currency as being attributable to delivery of computer software outside India ; iv) The learned Assessing Officer has erred in law and in fact by not considering the plea of the appellant that it does not provide any technical services outside India and therefore foreign currency expenditure incurred by the appellant should not be reduced from 'export turnover' for the purposes of computing the deduction under the Act ; v) The learned Assessing Officer has erred in law and in fact by not considering the plea of the appellant that if expenses such as lease line charges, telephone charges (landline), internet charges and foreign currency expenditure, if reduced from 'export turnover' should also be reduced from 'total turnover' for computing the deduction under section 10A of the Act ; vi) The learned Assessing Officer has erred in law and in fact by disallowing the staff advances written off as a non-deductible loss, in computing the taxable income under the Act. 27 The facts relating to this issue are....