TaxTMI 
TaxTMI 
2013 (3) TMI 658
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.... 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 independent capacity. The product replacement services a....
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.... 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, the TPO adopted Resale Price Method (RPM) using gross....
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....r 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 appellant's own case of AY 2006-07 in respect of the product replacement service transacti....
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.... 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 services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified and such price is adjus....
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.... 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 the ALP of any one transaction. These two methods cannot be made applicable to the facts before us. The only remaining method is the Tra....
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.... 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 by customers or from surveying customers worldwide, conducted with the assistance of its marketing department. The specifications are thereafter gi....
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....ormerly 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 Computers Services Limited 29.27% 22 TV S Infotech Limited - 4.8 1% 23 Transworld Infotech Limited 26.34% 24 Tyche Industries Limited 10.62% 25 VJIL Consulting Limited 6.26% 26 V M F Softech Limited 18.39% 27 Visualsoft Technologies Limited 18.73% 28 Zylog Systems Limited 1....
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....et 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 26.51% 16. On the other hand the learned DR supported the findings of the authorities below. It was further submitted that the TPO had analysed the various factors as recorded in the order u/s.92C of the Act, to arrive at the conclusion that the assessee's international transactions had resulted in adjustment of Rs. 60,23,60,764/-, which has been duly sustained by the DRP vide its directions u/s.144C(5) r.w.s.144C(8),....
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..../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 India P. Ltd., v. DCIT ITA.1054/Bang/2011, dated.23.11.2012 18. Applying the reasoning given by us as above and the orders of this bench as above, only the six companies the list of which is given below are to be considered as comparables and the balance 20 cases are to be eliminated from the list of 26 comparables : 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.)....
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....s. 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 and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was....
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....mitted 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 assessee and that of the comparable companies. In relation to the above inconsistent approach, the assessee had also filed a rectification application before the DRP on the directions issued under Rule 13 of the Income-tax (Dispute Resolution Panel) Rules, 2009 and this rectification application is pending before the DRP. 23. We have also heard the learned DR who relied on the contents of the orders of the TPO and DRP. 24. After considering the submissions made before us and the facts and materials on record, we find that the DRP/TPO has adopted different standards in the case of the comparables and the assessee, as far as the loss on foreign exchange fluctuation is concerned. In our considered view, if the Revenue treats the profit/loss on foreign exchange fluctuation as part of operating cost in the case of comparable....
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....rnover' 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 that the Assessing Officer proposed certain additions/disallowances to the total income on account of the following : Nature of addition/disallowance Amount(Rs.) Reduction from 'export turnover' for computing deduction u/s.10A, amounts on account of the following: a)'leased line charges' attributable to delivery of software outside India 21,52,81,756 b)'internet charges' attributable to delivery of software outside India 82,89,094 c)'telephone charges (landline)' attributable to delivery of software outside India 2,32,35,203 d)'International assignee costs' incurred by the appellant in foreign currency 4,89,43,259 e)'travel expenses' incurred by the appellant in foreign currency 7,28,70,842 Against the proposed additions, the assessee filed its objections before th....