TaxTMI 
TaxTMI 
2017 (11) TMI 71
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....r Section 143(3) read with Section 144C of the Income-tax Act, 1961 ('Act'), is bad in law, violative of principles of natural justice and void ab-initio. 2. That assessing officer erred on facts and in law in determining income of the appellant at Rs. 16,67,38,442 against the total income returned by the appellant of RS.3,09,32,409. Transfer Pricing Matters: 3. That the assessing' officer erred on facts and in law in making an addition of Rs. 4,11,03,650 to the income of the appellant, on account of the alleged difference in the arm's length price of the international transactions of rendering software services undertaken during the previous year, on the basis of the order passed under section 92C(3) of the Act by the TPO. 3.1 That the TPO / DRP erred on facts and in law by failing to appreciate the commercial expediencies surrounding the international transaction pertaining to provision of software development services, 3.2 That the TPO / DRP erred on facts and in law in rejecting the corroborative analysis performed using Comparable Uncontrolled Price ("CUP") Method to establish the arm's length price of international trans....
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....ant. 3.14 That the TPO/DRP erred on facts and in law in considering the following companies in the final set of comparable companies not appreciating that such companies are not functionally comparable to the appellant: (i) Tata Elxsi Limited (ii) Infosys Technologies Limited (iii) Thirdware Solutions Limited 3.15 That the TPO/DRP on facts and circumstances of the case, ought to have excluded Persistent Systems Limited and Evoke Technologies Limited from the final set of comparable companies as being functionally not comparable to the appellant 3.16 That the TPO / DRP erred on facts and in law in considering Infosys Technologies Limited in the final set of comparable companies without appreciating that its scale of operations cannot be compared with that of the appellant. 3.17 That the TPO / DRP have erred on facts and in law in selecting companies earning super normal profits as comparable to the Appellant. 3.18 That the TPO / DRP erred on facts and in law in considering foreign exchange gains or loss as non operating item for the purpose of computing the operating profit margins. 3.19 That the TPO / ....
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....ssment year 2012-13, when no deduction under section 10A is available 7. That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : NEC Technologies India Limited (NEC HCL) has been set up at Noida which is availing tax exemption under section 10A of the Act and is also having branch office in Japan (NEC HCL BO). The main activity of the taxpayer is with NEC group companies with regard to the contract awarded to NEC HCL. During the year under assessment, the taxpayer has entered into international transaction qua software development services to the tune of Rs. 56,76,10,033/- which are to the following effect :- S. No. Nature of transaction Approach of taxpayer Value of transaction Method PLI 1 Provision of software development TNMM OP/TC 56,76,10,033 2 Payment of outsourcing costs TNMM OP/TC 9,34,91,383 3 Availing of management services TNMM OP/TC 46,32,003 4 Payment of lease rent TNMM OP/TC ....
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.... 6. Grounds No.1 & 2 are general in nature and do not require any adjudication. GROUNDS NO.3 TO 3.23 7. Undisputedly, Transactional Net Margin Method (TNMM) used by the taxpayer in its TP documentation for benchmarking the international transaction qua software development services as most appropriate method has been accepted by the ld. TPO. It is also not in dispute that benchmarking the international transaction, the taxpayer treated itself as a tested party by taking OP/OC as Profit Level Indicator (PLI) and by selecting 21 companies as comparables with OP/OC of 11.26% as against taxpayer's operating profit margin at 9.63% and found its international transactions at arm's length. 8. TPO, after retaining some of the comparables chosen by the taxpayer, introduced its own comparables and finally selected the following companies as comparables for benchmarking the international transactions :- S.No. Company Name Working Capital Adjustment OP/OC 1. Akshay Software 0.91% 2. Cat Technologies Ltd 11.14% 3. Evoke tech 20.71% 4. E-zest Solutions 19.92% 5. Infosys Ltd 45.65% 6. Larsen and Toubro Infotech 22.72% ....
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....ighlight the profile of the taxpayer and to prove the fact that the taxpayer is a high end service provider and the comparable sought to be excluded are also high end service provider. 14. For ready perusal, para 2.1 of the joint venture agreement, available at page 890 of Vol.III of the paper book, is reproduced as under :- "2.1 The Parties hereby agree that the Company is being established for the purpose of providing offshore centric software engineering services and solutions primarily to NECC, NECST and their Subsidiaries and clients. It is contemplated that at the end of the Initial Term, the Parties shall discuss and review the business of the Company and unanimously agree on the future functioning of the Company including its further Business Plan. In no event, shall anything in this Agreement be construed as obligating NECCC to place any order to the Company for purchasing the software services and solutions." 15. However, when ld. AR for the taxpayer drew our attention towards para 2.2 of the joint venture agreement, available at page 891 of Vol.III of the paper book, it has become clear that the taxpayer is a routine service provider. Moreover, the taxpaye....
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....e - As much as half of the software development services rendered by Infosys are onsite (i.e., services performed at the customer's location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore services (i.e., remotely from India) Expenditure on Rs.61 Crores Rs. Nil (as the Advertising/Sales promotion and brand building 100% services are provide to AEs) Expenditure on Research & Development Rs. 102 crores Rs. Nil Other 100% offshore (from India) 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that I....
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....eading to creation of significant intellectual property during the year under assessment and has incurred substantial expenditure of R&D activities to the tune of Rs. 267 crores i.e. 1.3%. 19. Keeping in view the fact that the taxpayer is a low end captive service provider to its AE having no intangibles or branded / proprietary products vis-à-vis Infosys and following the decision rendered by Hon'ble High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra), we are of the considered view that this company is not a suitable comparable for benchmarking the international transaction qua software development services. PERSISTENT SYSTEMS LTD. (PERSISTENT) 20. Persistent is taxpayer's own comparable and retained by the TPO in the final set of comparables on the operating profit margin of 32.50%. However, now the taxpayer sought to exclude Persistent on ground of having different business model vis-à-vis taxpayer as Persistent is into the business of providing software product and relied upon Taluna India Pvt. Ltd. (supra), Steria India Ltd. (ITA No.107/Del/2016) affirmed by Hon'ble Delhi High Court in ITA 762/2017, Agilis Technologies India Pvt. Ltd. vs. ACIT....
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....s: No further bifurcation given for revenues from software development and services". However, TPO retained this company as comparable by observing that the company is engaged in providing software services by relying upon annual report of the company which is to the effect that, "Visual Computing Labs : VCL delivers 3D computer graphics, animation and special effects in the pre-production, production and post-production of content for the film, television, gaming and advertising industry." 25. Comparability of this has been examined by the coordinate Bench of the Tribunal in Toluna India Pvt. Ltd. (supra) wherein it has been ordered to be excluded as a comparable with Toluna India Pvt. Ltd. (supra), a software development and service provider by making following observations :- "39.1. The TPO included this company in the list of comparables by noticing that its 'Software development and services segment' matched with the assessee. On being called upon to explain as to why this company be not included in the list of comparables, the assessee stated that the nature of activity done by this company was different inasmuch as it was engaged in R&D activities also which resu....
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....ounds inter alia that it has insufficient financial or description information to perform analyses; that it has functional dissimilarity because its revenue from subscription as well as sale of licence and relied upon Egain Communication (P.) Ltd. vs. ITO - (2008) 23 SOT 385 (Pune), 3DPLM Software Solutions Ltd. vs. DCIT - ITA No.1303/Bang/2012 and St. Ericson India Pvt. Ltd. vs. ACIT - ITA No.7821/Mum/2011; that Thirdware also owns software/ proprietary products and is also into purchase and sale of licence to earn income. 30. The factum of earning of revenue subscription as well as of licence is proved from page 258 of the annual report of Thirdware of the paper book, schedule forming part of balance sheet and profit & loss account wherein the revenue from subscription as well as from purchase in licence is shown at Rs. 74,26,721/- and Rs. 1,35,24,304/- respectively and this income makes Thirdware incomparable to the taxpayer for benchmarking the international transaction. 31. Coordinate Bench of the Tribunal examined comparability of Thirdware in case of St. Ericson India Pvt. Ltd. vs. ACIT - ITA No.1672/Del/2014 which is also a software development service provider and he....
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....er income' the taxpayer has shown 'other income' at Rs. 1,41,55,687. The detail given as per Schedule 13 is as under: Schedule 13: Other Income Interest on Deposit 2.953.027 Interest on Bank Deposit 7.600.902 Debtors written back --- Other Income --- Profit on sale of investment (1.180,188) Excess provision w/back 183,400 Interest on IT Refund 394,838 Deposit W/Back-Reed. 40,000 Dividend Income 4,163,708 14,155,687 22. Schedule XIV of the balance sheet further shows that above company was in the trading of software in the relevant period. It was purchasing licenses and clearing them. Purchase and sale of license is not a business which can at all be compared with the software business. The balance sheet further makes it clear that the company has paid wealth lax advance and was not involved in development of technology. It did not have any income from development of software but had income from mutual lands." 33. So, we are of the considered view that because of functional dissimilarity the Thirdware is not a suitable comparable for benchmarking the international transactions qua software dev....