TaxTMI 
TaxTMI 
2018 (4) TMI 878
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....ned Assessing Officer ('Ld. AO') in the assessment order passed under section 143(3) of the Income-tax Act, 1961 ('the Act'), by holding that the international related party transaction of the Appellant with respect to the provision of software development services do not satisfy the arm's length principle as envisaged under the Act. In doing so the Ld. CIT(A) has erred: 2.1 by not appreciating the fact that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2.2 by disregarding the economic analysis conducted by the Appellant to determine the Arm's Length price ('ALP') of the international transaction pertaining to software development services in compliance with section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') in the Transfer Pricing ('TP') documentation; 2.3 by disregarding multiple year/prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2008-09) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 2....
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....rs in selection/ rejection of proposed comparables and/ or in the operating profit margins of the comparables; 2.11 by disregarding judicial pronouncements in India while computing an adjustment to the transfer price of the international transaction entered into by the Appellant. 2.12 The Ld. CIT(A)/ AO has erred by not limiting the amount of adjustment to the lower end of the arithmetic mean as envisaged under second proviso to section 92C sub section 2 of the Act. 2.13 by ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 3. That the learned AO, on the facts and in the circumstances of the case and in law, has erred in 4. That given the facts and circumstances of the case and in law, the Ld. CIT(A)/ AO has grossly erred in confirming the action of the Ld. AO of initiating penalty proceedings under section 27i(i)(c) of the Act. The above grounds and sub-grounds are independent, mutually exclusive and without prejudice to each othe....
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....f a transaction between the Branch Office and Head Office is to prevent Base Erosion and bring to tax in India profits of the foreign entity attributable to the Functions Performed, Assets Utilized and Risks Assumed through the Branch Office in India. The Transfer Pricing exercise does not obliterate the fundamental fact that the Branch Office and the Head Office together constitute a single entity. 1.3 Whether on the facts and in the circumstances of the case, the Ld CIT(A) has erred in not appreciating the fact that the true intention of legislature behind enshrining the deduction u/s 10A, as evident from subsection (3) thereof, was to bring in precious foreign exchange, which is not fulfilled in the present case, because the assessee being a foreign company is not retaining the sale proceeds in India except the tax on a fraction of the profit which is attributable to Indian branch of the foreign company. 1.4 Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in not appreciating the fact that in this case the Indian Branch Office has received in India only the remuneration fixed on man hour basis for preparation of software and n....
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....of arranging a course of business between the assessee carrying on the eligible business and any other person closely-connected with the assessee. However, there being no two separate assessees in this case, this provision in also not applicable. 1.8 Whether the Ld. CIT(A) has erred in not appreciating the fact that in Section 10A of the Act there is no provision akin to explanation 2 to Section 80HHC and therefore there is no concept of deemed export under the provisions of Section 10A of the I.T. Act. 2. Whether on the facts and in circumstances of the case, the Ld. CIT(A) has erred in directing the Assessing Officer/Transfer Pricing Officer (AO/TPO) to exclude M/s Bodhtree Consulting Ltd from the list of comparables for the purpose of benchmarking the International Transaction and computation of Arm's Length Price in relation to software development services. 2.1 Whether the action of Ld. CIT(A) in excluding M/ s Bodhtree Consulting Ltd from the list of comparables solely on the basis of abnormally high profits is erroneous and unsustainable in law, considering the settled position of law to the effect that no comparable can be excluded merely on t....
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.... a Software Technology Park unit under the Software Technology Parks Scheme of the Government of India for establishing the unit therein per approval dated September 23, 1999. Since the date the branch was established, and also during the instant year, the business of the branch office was to develop and export of computer software to its head office in USA. Products delivered by Virage group consist of various software tools along with supporting files that contain design data for creating the requisite silicon IP (Memory or Logic elements). Since inception of India Branch Office in May 1999, the engineering site at India has been working on various following activities related to the IP products and platforms offered: * Software development in C, C++ and TCL/Tk on our Embedded-IT range of software tools. * Development of programs and files that constitute our Memory Compilers or Logic libraries. - EDA views in TCL/Tk programming language. - Programming files in appellant's proprietary format that describes the physical, functional and timing behavior of the Memory or Logic elements. All of the above files are developed on UNIX oper....
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....cating the transfer pricing issues, brief background of the addition is discussed below: (a) The assessee in its transfer pricing study reported value of the international transaction of provision of software development services at Rs. 16,55,40,226/-. For the purpose of benchmarking the transaction, the assessee carried out a search on databases and chose Transactional Net Margin Method (TNMM) as the most appropriate method and Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI). The assessee selected 16 companies as comparable and worked out average PLI of 11.64 percent, by using multiple year data as compared to PLI of the assessee of 7.53%. The margin of the assessee being in the +/- range of 5% as prescribed under section 92C(2) of the Act, the assessee concluded that the international transaction is at arm's length. The Ld. TPO observed that the assessee should have used current year data rather than multiple year data of comparables. The filter applied by the assessee was also not found appropriate by the Ld. TPO. The Ld. TPO after considering the submission of the assessee, selected 10 comparables with their average PLI of 30.86% using current y....
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....are Technologies Ltd. 8.22 Average 19.33 2 5.2 In the appeal effect giving order, the Assessing Officer computed the transfer pricing adjustment applying average PLI of 19.33% on the basis of the comparables finally selected by the Ld. CIT(A). 5.3 Before us, the assessee's objected to inclusion of following comparables by the Ld. TPO: 1. Cat Technologies Ltd. i. Before the Ld. TPO, the assessee submitted that the company was engaged in providing diversified services in the nature of legal processing services, human resource services, business process outsourcing services, medical transcription services and infrastructure services and thus, it was not functionally comparable to the assessee. The Ld. TPO rejected objection of the assessee on the ground that majority of the income of the company is from software development and consulting. The Ld. CIT(A) accepted the finding of the Ld. TPO and retained the company as comparable. ii. Before us, the Ld. counsel of the assessee referred to page No. 40, 11, 36 of the Annual Report Compendium and submitted that the company derived its income from training, software development and medi....
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....o software development segment. Thus, in absence of segmental result of software development, the company cannot be compared at entity level, with the assessee who is a software development entity. We also note that the Tribunal in the case of Sun Life India Services Centre Private Limited (supra) has not found the company as comparable to the software development segment. The relevant finding of the Tribunal is reproduced as under: "8.3 It is this total figure of Rs. 9.36 crore which has been taken by the TPO. It shows that the TPO has included CAT Technologies Ltd. as comparable on entity level. On a perusal of the above detail of income of this company, it is apparent that it not only includes revenues from Medical transcription and Training, but the major component of Rs. 8.49 crore is income from 'Software Development and Consulting Services.' It is reiterated that the segment under consideration is 'Software development and maintenance support services' and the assessee has a separate international transaction of 'Provision of advisory services' with the transacted value at Rs. 1.75 crore, whose ALP has been disjointedly determined by the TPO. When we come back t....
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....mpendium and submitted that the company has acquired stake in Aztecsoft and another company TES-PV (re-named as Mind Tree Technologies Private Limited) was merged through an order of Hon'ble High Court of Karnataka. According to the Ld. counsel restructuring/extraordinary circumstances, makes the company functionally dissimilar with the assessee. The Ld. counsel referred to profit and loss account of the company available on page 130 of the Annual Report Compendium and submitted that due to the extraordinary event, the turnover of the company has jumped by Rs. 30 crores, and profit has jumped by Rs. 20 crores which is abnormal in view of the past performance of the company. iii. The Ld. counsel also referred to pages 122, 125 and 145 of the Annual Report Compendium and submitted that company is functionally in different lines service which include business process management, cloud computing services, infrastructure management services, product engineering and mobility solutions, and on this ground also the company need to be excluded from the set of comparables. The Ld. counsel referred to page 145 of the Annual Report Compendium and submitted that two segment of R&D serv....
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....ate Limited was already acquired on 17/12/2007 by the assessee and was a subsidiary of the assessee company during the year under consideration. Similarly the assessee acquired equity shares of another company namely Aztecsoft Ltd during the year under consideration, and which was merged with the assessee only in the subsequent year corresponding to assessment year 2010-11. On perusal of the profit and loss account available on page 130 of Annual Report Compendium, we find that during the year profit before interest and depreciation and tax of the company's Rs. 95,60,25,148/- as against the profit of Rs. 153,55,42,134/- in immediately preceding year, thus, we do not find any increase in profit due to merger of subsidiary. Further, we find that decrease in profit before interest depredation and tax, during the year under consideration was mainly due to increase in administrative and other expenses, on account of exchange loss. Thus, in our opinion, the event of acquisition has not increased the profit of the company abnormally, which may become one of the reason for its exclusion from the set of comparables. viii. The 2nd ground for exclusion of the comparable has been clai....
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....sel referred to page 273 of the Annual Report Compendium and submitted that revenue of the company includes licensing of products. The Learned counsel also submitted that revenue in the profit and loss account has also been shown from sale of software services and products and, thus, the companies functionality dissimilar to the assessee and accordingly it should be excluded. iii. On the contrary, the Ld. DR relied on the finding of the Assessing Officer and the Ld. CIT-(A) in support of retaining the company as comparable. iv. We have heard the rival submission and perused the relevant material on record. We find that the Ld. TPO has referred to various pages of the Annual Report of the company, containing 'company overview', 'our strengths' and concluded that reference to product was in respect of software product development services to independent software vendors and thus there is no sale of software product as such. The Ld. counsel failed to brought any material before us, contrary to the above finding of the Ld. TPO. Regarding the claim of the Ld. counsel that revenue consist of licensing of product, we find from page 273 of the Annual Report Compendium tha....
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....420 263,971,033 Export from STPI Unit 162,900,630 168,863,049 Revenue from Subscription 16,433,714 9,293,874 770,321,375 522,768,754 2 v. It is evident from the revenue stream of the company that in addition to software services, the assessee is having income from sale of licenses and subscription. The activity or sale of license and subscription is functionally different from the activity of software services. On perusal of the Annual Report of the company, it is seen that only geographical segment reporting is available and no separate segment for software development services is reported. We also note that company has been excluded as comparable in the case of Sun Life India service Centre private limited (supra). The relevant finding of the Tribunal is reproduced as under: "12.2 We have heard both the sides and perused the relevant material on record. It is observed from the Annual Report of this company that apart from revenue from 'Software services', this company has also earned revenue from 'Sales.' The TPO has considered entity level figures of this company for comparison. In view of the joining of the revenue from ....
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....lso referred to page 361 of the Annual Report Compendium and submitted that design services included design of hardware products which is altogether different from the function of software development and accordingly, he requested to exclude the company from the set of comparables. The Ld. counsel also submitted that company has been excluded in the case of Sun Life India Service Centre Private Limited Vs. DCIT (supra) by the Tribunal as not comparable to an assessee providing contract software development services. iii. On the contrary, the Ld. DR submitted that the TPO has compared segment of software development services and not compared the company at entity level. The Ld. DR submitted that in preceding year the company has been excluded on the ground of being engaged in Niche Product, whereas the assessee is also engaged in developing Niche products. The Ld. DR submitted that the assessee as well as the company both are enaged developing chipset software development and therefore the company is comparable at segment level. iv. We have heard the rival submission and perused the relevant metal on record. We note that the Ld. TPO has compared the company at segm....
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....ompany from the set of comparables. 6. L & T Infotech Ltd: i. The Ld. TPO selected the company, as according to him it is predominantly a software service provider. The Ld. CIT(A) observed that the company was selected by the assessee itself as comparable. He also observed that the assessee could not establish whether intangibles owned by the company are in the nature of product patents. He found the FAR of the company similar to the assessee, and hence retain the comparable. ii. Before us, the Learned counsel referred to page 63 of the Annual Report Compendium and submitted that during the year the company launched consulting service line and testing service line. The consulting service line included maximization of business value of IT, IT operation cost optimization, leveraging data for decision-making, IT organization post M&A and IT enabled business growth. According to the learned counsel the consulting services being functionally dissimilar to software development services, the company cannot be compared functionally with the assessee. The Learned counsel also drawn our attention to page 74 of the Annual Report Compendium, which is profit and loss ....
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....e company service offering are in the areas of application maintenance and development, enterprise resource planning, and a specialized services like data warehousing and business intelligence, testing services and infrastructure management services. We find that all these are the verticals in which the company is providing its services of software development and thus, contention of Learned counsel of functional dissimilarity are rejected. Accordingly, we direct, the Learned TPO/AO to include the company in the set of comparables, subject to the direction to take appropriate PLI of the company for computation of average PLI of the comparables. The assessee shall be provided adequate opportunity of being heard while computing the PLI of the company. 5.5 Thus, ground Nos. 2.5 to 2.7 and 2.10 of the appeal of the assessee are allowed partly for statistical purposes. 6. The Revenue in ground No. 2 has challenged exclusion of company M/s Bodhtree Consulting Ltd. by the Ld. CIT(A) from the set of comparables. 6.1 The Ld. TPO held that the company was having only segment of software development and engaged in providing solutions in the field of sharing data management, data ware....
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....ny and then decide the issue of exclusion/inclusion of the company in the set of comparables. 6.6 We have heard the rival submission and perused the relevant metal on record. The ld. CIT(A) has excluded the company on the ground of 300% growth and volatility of the profit margin of the company in past years. However, we find that the Ld. CIT(A) has not referred any page of Annual Report for arriving at this factual finding. Further, the submission of the Ld. counsel of assessee that there is a volatility in the margin of the company and that is due to the revenue recognition method followed by the company need verification from the Annual Report of the company. In view of aforesaid facts and circumstances, we feel it appropriate to restore the issue of inclusion/exclusion of the company from the set of the comparables to the file of the Ld. TPO/AO for deciding afresh. Thus, grounds No. 2 and 2.1 of the appeal of the Revenue are allowed for statistical purposes. 7. In grounds No. 3 and 3.1, Revenue has challenged inclusion of the company M/s Quintegra solutions Ltd as comparable. 7.1 The Learned TPO excluded the company from the set of comparables on the ground that it is f....
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....herefore it should be excluded as comparable. 8.2 The Ld. counsel of the assessee, on the other hand, referred to Annual report of the company and submitted that sales are predominantly software services and, therefore, company is functionally similar to the assessee. 8.3 We have heard the rival submission and perused the relevant material on record. On perusal of details of sales available on page 20 of the Annual Report, it is seen that sales includes sale of products amounting to Rs. 51,79,577/- alongwith software services of Rs. 10,73,51,944 (exports) and Rs. 97,89,962 (domestic). Since no separate segment of software development services is available, the company cannot be selected as comparable at entity level. Accordingly, we direct the TPO/AO to exclude the company from the set of comparables. The ground Nos. 4 and 4.1 of the appeal of the Revenue are accordingly allowed. 8.4 In view of our above finding on the issue of inclusion/exclusion of the comparables, the Ld. TPO/AO is directed to recompute the average PLI of the comparables and compute adjustments to the value of international transaction carried out by the assessee, if required so, in accordance with law.....