TaxTMI 
TaxTMI 
2018 (7) TMI 1748
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.... for the assessment year 2013-14 was filed electronically on 28/11/2013 declaring total income of Rs. 34,17,11,680/-. The assessee-company also reported the following international transactions in Form 3CEB: Particulars Received/Receivable Paid/Payable Method Used Provision of contract software R&D services 3622659108 TNMM Reimbursement of expenses to AEs 146212588 Repairs and maintenance 4838023 Consultancy fees expenses 289330 Software license fees 41700439 Total Amount 3622659108 193040380 3. The assessee sought to justify the consideration received for the above international transactions to be at arm's length. The assessee-company also submitted TP study report adopting CUP method as the primary analysis and also additionally TNMM as a part of secondary analysis which was considered to be the most appropriate method for the purpose of transfer pricing study and operating profit to operating cost as the Profit Level Indicator (PLI). The assessee-company's profit margin was computed at 9.77% and the same was claimed to be at....
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.... & Different year ending, hence rejected. 13. Mindtree Limited (Segmental) 13.03 Qualifies all the filters of the TPO, However, TPO has considered current year data only and the applicable PLI is 20.23%. 14. Persistent Systems and Solutions Limited 14.70 No data & Different year ending, hence rejected. 15. Persistent Systems Limited 24.30 Qualifies all the Filters of the TPO, However, TPO has considered current year data only and the applicable PLI is 28.27%. 16. Priya Softweb Solutions Private Limited 13.79 No data available in public domain, Hence rejected". 17. R S Software (India) Limited 15.23 Qualifies all the filters of the TPO However, TPO has considered current year data only and the applicable PLI is 17.41%. 18. R Systems International Limited (Segmental) 5.56 The financials are reported for year ending 31st December 2012. Different year ending compared to that of the taxpayer and hence. 19. Sasken Communication Technologies Limited 12.67 The company's wireless software product portfolio comprises embedded software IP for wireless mobile devices, a comprehensive communication and applicati....
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....s.l Cr. were excluded iv. Companies whose Software services income is less than 75% of its total operating revenues were excluded. v. Companies who have more than 25% related party transactions of the sales were excluded. vi. Companies who have export service income less than 75% of the sales were excluded. By applying the above filters, the TPO accepted 5 comparable entities chosen by the assessee-company and rejected 21 comparables. The matrix of accept or reject of the comparable was chosen by the assessee-company is given supra. Finally, the TPO selected the following comparable entities: SI. No. Name of the taxpayer OP/OC 1. CG-VAK Software Exports Ltd. 20.54% 2. ICRA Techno Analytics Ltd. 17.10% 3. Larsen & Toubro Infotech Ltd. 26.06% 4. Mindtree Ltd. (Seg) 18.19% 5. Persistent Systems Ltd. 28.27% 6. R S Software (India) Pvt Ltd. 17.41% 7. Tech Mahindra Ltd. (Seg) 18.72% Unadjusted average margin 20.90% 5. The TPO computed average profit margin of the comparables finally selected at 20.90% after giving working capital adjustment of 2.97....
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....st returned income of INR 34,17,11,680/-; 2. Ld. AO/DRP/TPO erred in rejecting CPM/CUP chosen by Appellant as primary method and upholding Transactional Net Margin Method ("TNMM") as most appropriate method for determining arm's length price; 3. Ld.AO/ DRP/TPO erred in making an addition of INR 41,60,49,281 to total income of Appellant as adjustment in the arm's length price of the software research and development services transaction entered by the Appellant with its associated enterprise(s); 4. Ld. AO/DRP/TPO erred, in law and in facts, by not accepting the economic analysis undertaken by Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of ALP in connection with impugned international transaction and holding that Appellant's international transaction is not at arm's length; 5. Determination of the arm's length margin/price using only FY 2012-13 data which was not available to Appellant at the time of complying with transfer pricing documentation requirements is not as per law; 6. Companies comparable to Appellant were incorrectly rejected by appl....
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....ogies Limited, (c) Caliber Point Business Solutions Limited (Segmental), (d) Helios & Matheson Information Technology Limited, (e) R Systems International Limited (Segmental), (f) Cigniti Technologies Limited, (g) Evoke Technologies Private limited, (h) Thinksoft Global Services Limited, (i) Lucid Software Limited, (j) Sasken Communications and Technologies Limited (Segmental), (k) Kals Information Systems Limited and (l) Spry Resources India Private Limited 16. Larsen & Toubro Infotech Limited and CG-VAK Software and Exports Limited (Segmental) were chosen as comparable in transfer pricing study, however upon availability of more details in public domain, the companies are found to be not comparable and should be excluded from the final set of comparables. 12. Ground No.l is general in nature and do not require adjudication. 13. Ground No.2 challenges the finding of the TPO as confirmed by the Hon'ble DRP applying TNMM as the most appropriate method. This issue is covered against the assessee-company in the assessee's own case for assessment year 2008-09 in Mercedes Benz Resear....
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....not in a position to appreciate the Cost Plus Method. Moreover, most of captive service provides work on Cost Plus Method ranging from 5% mark-up to 25% mark-up. All the transactions are related party transactions. Therefore, uncontrolled comparable prices are generally not available in the Cost Plus Method. Even the assessee's analysis of 32% Gross Profit and 5% Net Profit cannot be accepted as there cannot be any Gross Profit in the case of assessee, who is operating on Cost Plus Method. Moreover, even though the assessee is stated to have been operating on Cost Plus 5% Method, OP/Cost as computed by the assessee itself is at 3.2% and if foreign exchange gain was added to the operating margin, then only it comes to 5%. Generally in a Cost Plus situation, the entire cost spent by the assessee with a mark-up of 5% would be billed to the AE on a periodical basis. The conversion generally done at the prevailing rate of USD or foreign currency involved. Therefore, the basic concept is the margin would be about 5%. In case of any foreign exchange gain, this could increase the margin to that extent. In case of foreign exchange loss on the USD/foreign currency quoted by the assessee, the....
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....parability under the CUP method is based on various assumptions of (a) estimating the offshore profits, (b) estimating number of employees, (c) estimating the working hours per employee per day per month, and then dividing the profit by so many assumptions/numbers. This analysis of the assessee cannot be relied on as an external CUP. As can be seen from the above, there is no internal CUP which can be relied on in order to accept the CUP method. Therefore, in our view, the analysis undertaken by the assessee is not only faulty, but devoid of any data or proper analysis. In view of this, we have no option than to accept the TPO's contention of TNMM as the most appropriate method." Respectfully following the decision of the co-ordinate bench of the Tribunal cited supra, we hold that TNMM is the most appropriate method in the facts of the present case. Accordingly, the ground of appeal raised by the assessee is dismissed. 14. Ground Nos. 3 to 9 and the additional grounds of appeal Nos. 14 to 16 challenge exclusion of the following comparables by TPO as confirmed by the Hon'ble DRP. 14. The learned AO/TPO and Hon'ble DRP erred in accepting Persistent Syste....
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.... its website. Therefore, the TPO has selected this comparable as the basic functions are software development services. - M/s. Persistent Systems and Solutions Ltd. and M/s. Persistent eBusiness Solutions Ltd. were the assessee's wholly owned subsidiaries engaged in providing IT solutions Since, the merged entities were only subsidiaries and engaged in the very same function, it does not affect the financial results of the year. - The margin is rechecked and adopted at 27.20%." 15.1 The Hon'ble DRP also confirmed the findings of the TPO in absence of any facts brought on record controverting the findings of the TPO. 15.2 Before us, exclusion of this company from the list of comparables was sought on the following grounds: i. The company is engaged in software product, services and technology innovation and also offers complete product life cycle services. ii. The company earns royalty income from its software products. iii. The company owns intellectual properties. iv. Company is involved in providing Outsourced Product Development ("OPD") services. v. Company has differentiated OPD b....
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....ignificant accounting policies' in the annual report of Persistent Systems, it is observed that intangible assets are primarily the 'software licenses purchased and contractual rights acquired' and are valued on the basis of 'purchase price and attributable cost of bringing the asset to its working condition for intended use'. Nowhere there is reference to the IPR generated by the company itself and its valuation. Thus the intangibles in the fixed assets schedule are on account of software/contractual rights purchased and used for the development purposes. Further, even if there is any self-generated intangible, not being on account of normal purchase as in case of software, as discussed supra, in the case of assessee too, while it is performing its functions of Software Development, substantial intangibles are generated. Considering above, the objection of the assessee is not accepted. 9.6 The next argument of the assessee is that Persistent Systems is functionally different as it is in product development. The issue has been discussed by the TPO in detail in his order. The assessee has not controverted the findings of the TPO with the help of any material brought on reco....
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....uld not matter as to what kind of customer it serves as the broad range of services remain the same and that is the development of software. Further, it will not matter whether the comparable develops complete software for its client e.g. develops a final product as per demand of the client or develops only some software modules for as per the requirements of its client. The function remains same. Thus, a company can be considered in the business of Software Products only if it is itself developing and selling the products developed by it and not if its client is selling the products developed for it by such company. The agreement between the assessee and its AE shows that the assessee is also similarly placed as it is also into software development for the products for its AE. So these objections of the assessee do not have any merit as the company is functionally similar to the assessee. In Agnity India Technologies Pvt. v. Assessee I.T.A No.-6485/Del/2012(AY-2008-09) order dt 19 July, 2016, the ITAT held Persistent Systems Ltd. to be a proper comparable for software development activities. Considering above, the objection of the assessee is not accepted. 9.7 The assesse....
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....echnologies (P.) Ltd. 2013 (7) TMI 696 . The learned counsel for the assessee had not brought any evidence contravening the above findings. Therefore, we uphold inclusion of this company in the list of comparables and reject the objections raised by the appellant. Akshay Software Technologies Ltd.: 16. This company was selected by the assessee-company and rejected by the TPO on the ground that it is functionally different. Even Hon'ble DRP had upheld exclusion of this company on the ground that revenue of this company consists of both from software services and products and there was no segmental information. The Hon'ble DRP further observed that this company was predominantly engaged in onsite software development which cannot be compared with the company which is in offshore software development. 16.1 Before us, assessee-company had sought inclusion of this company on the following grounds: i. As per 133(6) information, the company is involved in providing professional services, implementation, support and maintenance of ERP products. The TPO has selected Mindtree Limited which provides similar kind of function and hence the company is comparable.....
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....vices. Furthermore, segmental data between software services and software products is irrelevant as the revenue from the software services is more than 75% of the total revenue. Therefore, the findings of the lower authorities are not based on the facts of the case and hence we reverse the same. We direct the AO/TPO to include this company in the list of comparables. CAT Technologies Ltd. 17. This company was chosen by the assessee-company in the TP study. The TPO rejected it saying that this company is functionally different from the appellant. The Hon'ble DRP also confirmed its exclusion by holding that this company was into three segments being consultancy, medical transcription and software development and in absence of segmental details the same cannot be taken as a comparable. The Hon'ble DRP further observed that revenue from software development is only 75% of the total revenue. Therefore, fails to pass through the filter of earning from software development more than 75%. 17.1 Being aggrieved, the assessee-company is before us seeking inclusion of this company on the following ground: (i) The company is predominantly engaged in software development servic....
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.... IT services only which is a part of SDLC. Software testing has been described as a quality control tool which is similar to the testing and quality control services performed by MRDIPL. Software testing is a part of software development lifecycle. iii. 100% of the revenue is derived from software testing charges. 18.2 We heard rival submissions and perused material on record. We perused the annual report of the company placed at pages 2060 to 2167 of the paper book. At page 21 of the Annual report placed at page 2082 of the paper book functions of software testing are mentioned below. Software testing - Overview Software testing plays an integral part in the software development lifecycle (SDLC) where the software is testea in various ways during the development process to reduce defects before it goes to the end user. Software testing is a quality control (QC) activity aimed at evaluating a software item to detect differences between given input and expected output. Software testing constitutes two processes - verification and validation. Verification is the process which makes sure that the product satisfies the conditions imposed at the start of the deve....
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....sey Knowledge Centre India (P.) Ltd. and Asstt. CIT v. Techbooks Electronics Services (P.) Ltd. 2016 (2) TMI 1162 ii. The appellant has raised a separate ground for use of 75% as export earnings filter instead of 25%. The company i failing the 75% export earning filter as the company's export to earnings is 74.45%, which is less than 75%. 19.2 Reliance was placed on the following decisions: (i) Techbooks Electronics Services [IT Appeal No. 343 of 2017, dated 29-5-2017] (ii) CIT v. Mckinsey Knowledge Centre India (P.) Ltd. [IT Appeal No. 217 of 2014, dated 27-3-2015] 19.3 We heard rival submissions and perused material on record and also perused the Annual Report of the company placed at pages 2198 to 2282 of the paper book. Income from operations was mentioned as income from software sales and services as Rs. 306,34,58,126/-. However, in the item No.28 of Notes forming part of Annual Report, had given the break-up of foreign exchange earning was shown at Rs. 231,55,57,795/- which is obviously less than 75% of the total earning. Thus, this company does not pass through the filter of export earnings more than 75%. Needless to say, once the co....
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....that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings." However, in the present case, it is neither demonstrated that the assessee-company had extrapolated results of this company nor even before us extrapolated results were filed. Thus, since assessee-company had not discharged its onus, no relief can be granted to the assessee-company. Therefore, we uphold exclusion of this company. Caliber Point Business Solutions Ltd. 21. This company was chosen by the assessee-company in its TP study. The TPO rejected this company on the ground that no information was available in public domain and following different accounting year. The Hon'ble DRP also confirmed the exclusion of this company as it follows different financial year ending. Therefore, cannot be compared. 21.1 Being aggrieved, the assessee-company is before us seeking inclusion of this company on the following grounds: i.&....
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....elief can be granted to the assessee-company. Therefore, we uphold exclusion of this company. Evoke Technologies: 22. This company was selected by the assessee-company in its TP study. The TPO rejected this company on the ground that it fails to pass through the export earnings filter. The Hon'ble DRP also confirmed the findings of the TPO after placing reliance on the information contained under trade receivables in the balance sheet. 22.1 Being aggrieved, the assessee-company is before us seeking inclusion of this company on the following grounds: (1) After the thorough review of the annual report we observed that the comparable is passing the export revenue filter of 75%. (2) The comparable is engaged in rendering software development services and it is passing all the filters adopted by the learned TPO, hence it can be considered as a comparable. 22.2 We heard rival submissions and perused material on record. We perused the annual report of the company placed at pages 2168 to 2197. We find from Note No.14 to Annual Report placed at page 2169 of the paper book that out of total revenue of Rs. 37,39,04,810/- the company made export earnings of Rs. 37....
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....es a part of the entire process of software development as the developer itself checks and rewrites the code, if required. However, as an alternative the developer or the client of the developer may like to get this testing and validation done from a third party. When a company is involved in plain software testing and validation, it is not required to carry out the basic function of coding, which a software developer is required to do. Function of such a company is simply to verify and validate that the software developed by the other person is as per specifications provided to the software developer or not and give a report on the same. Software testing is only part of software development cycle and thus can't be equated with software development. So considering this aspect M/s Thinksoft Global Solutions Ltd. cannot be considered as a comparable as it is functionally different. In similar circumstances, the ITAT Bangalore in the case of Trilogy E- Business Software Ltd v. DCIT 2013 (1) TMI 672 rejected M/s. Thinksoft Global Solutions Ltd. as a comparable as it was providing software testing services and the same was held to be not comparable with software development servic....
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....sions and perused material on record. We perused the Annual Report of the company placed at pages 2363 to 2402 of the paper book. At page 3 of the Annual report, placed at page 2392 of the paper book, it is stated that it is engaged in the business of developing non-destructive testing software products and rendering services to the global non-destructive testing and material sciences industry. At page 13 of the Annual Report placed at page 2396 of the paper book, breakup of revenue is given as under: Significant Accounting Policies And Notes for the Year ended 31.03.2013 Note 2.14 Revenue from Operations Revenue from operations consists of the following (In Rs.) Particulars For the Year ended 31.03.2013 For the Year ended 31.03.2012 Income from Software Services Exports 24,240,202 29,807,707 Income from Software Products sold 1,158,000 6,709,892 Total 25,390,202 36,517,599 24.3 Though it is stated that income is generated from software services but from the description of the functions performed given under overview at page 2392, it is clear that it is rendering software testing services which cannot be treate....
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....een clubbed with Software Development segment. So in absence of the complete segmental details, the company cannot be considered as a proper comparable. Considering above, the objection of the assessee is not accepted. As regards functionality of Sasken, in the case of Dy. CIT v. Target Corpn. of India (P.) Ltd. IT. (T.R) Appeal No 3431 (Bang) of 2015 & CO No. 103/Bang/2015 AY 2010-11, the ITAT decided the issue of functionality of this company by relying on the decision of Tribunal in the cases of Dy. CIT v. Electronics for Imaging India (P.) Ltd. 2013 (1) TMI 672. The ITAT held that this company is not a proper comparable in the case of assessee (a software development company), as it is operating in multiple segments and segmental operating margins were not available. For the year under consideration too, the TPO has analysed the functionality of this company and as discussed above, it cannot be considered as a proper comparable due to absence of segmental data. Thus, the objection of the assessee is not accepted. 25.1 Being aggrieved, the assessee-company is before us seeking inclusion of this company on the following grounds: i. After the thorough re....
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....ducts. The findings of the TPO were confirmed by the Hon'ble DRP. 27.1 Being aggrieved, the assessee-company is before us seeking inclusion on the following grounds: After the thorough review of the annual report of the comparable it was observed that the company is wholly engaged in rendering software development services and 100% revenue is derived from rendering software services. 27.2 We heard rival submissions and perused material on record including the Annual Report of the company placed at pages 2994 to 3011 of the paper book. From perusal of Annual Report, under item No.2 Revenue Recognition as under: 2. Revenue Recognition Revenue is primarily derived from software development and related services and from the licensing of software products, Arrangements with clients for software development and related services are either on a fixed-price, fixed-time-frame or on a time-and-material basis. 27.3 However, there was no segmental information between software development services and software product development. In the absence of segmental information, this company cannot be considered as a comparable. In the circumstances, we uphold exclusion of this compan....
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.... for good reasons. The underlying basis for allowing the raising the additional ground in the case of Ahmedabad Electricity Co .Ltd. (supra) was the subsequent decision rendered by this Court in Amalgamated Electricity Co. Ltd. (supra) when appeal was pending. As held by the subsequent decisions of the Apex Court in NTPC Ltd. (supra), a judicial decision when an appeal is pending will entitle raising of additional ground. 24 In any view of the matter, the aforesaid decision does not deal with the situation which arises for consideration in this case viz. relying upon the evidence on record for a subsequent assessment year to hold that the assessee is entitled to a benefit of deduction u/s 80-IA of the Act for an earlier assessment year. A deduction under Chapter VIA of the Act under which Section 80-IA of the Act falls would depend, as pointed out above, upon the satisfaction of the facts necessary for claiming a deduction. The allowing of a deduction in a subsequent year's assessment order cannot determine the facts as existing in the earlier assessment year, such as in this case so as to allow the deduction. 25 In fact, the issue with regard to the raising of ne....