AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (9) TMI 1088
X X X X Extracts X X X X
X X X X Extracts X X X X
....are that the assessee, Siemens Product Life Cycle Management Software (India) Pvt. Ltd. (Now known as M/s Siemens Industry Software (India) Pvt. Ltd.) is engaged in the business of distribution of Product Lifecycle ('PLM') software solutions and enterprise product development solutions to third party clients in India. It provides Computer Aided Design ('CAD'), Computer Aided Manufacturing ('CAM') and Computer Aided Engineering ('CAE') solutions. The company also provides software development and IT support services to its overseas group entities through a facility in Pune registered under the Software Technology Park ('STP') scheme of the Government of India. Besides the software development and IT support services, SISPL also provides certain consulting and best practices support services to customers of the Group in Asia Pacific region through its Competency centre in Bangalore. 3. For the assessment year 2009-10, the assessee filed their return of income on 30.9.2009 declaring a total income of Rs. 6,99,13,404/-. Since it was found by the learned AO that the assessee entered into the following international transactions with its AEs u/s 92CA(3) of the Income-tax Act, 1961 ('the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....osed by the learned TPO. Learned DRP did not interfere with the other disallowances made by the learned AO. Hence, the assessee is in appeal before us. 8. In so far as transfer pricing issue is concerned, learned TPO accepted the TNMM method adopted by the assessee as the most appropriate method. There is no dispute in respect of the profit level indicator also. However, the assessee's grievance is against the learned TPO rejecting the segregation approach adopted by them and clubbing of the segments in question for benchmarking the international transactions. Though the assessee challenged this approach of the learned TPO vide ground No.4, at the time of argument, this ground is not pressed and withdrawn. Therefore, what effectively needs to be adjudicated now on this issue relating to the excludability of four comparables selected by the TPO, namely, M/s Cat Technologies Ltd.; M/s Infosys Technologies Ltd.; M/s Tata Elxsi Ltd; and M/s Thirdware Solutions Ltd. on the grounds of functional dissimilarity and other parameters like diversified activities, brand building, sale of products and non availability of segmental data. We shall now proceed to deal with the issue of comparabil....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ribunal order is Sun Life India Service Centre P. Ltd. reproduced below: "8.1. The TPO considered this company as comparable. The assessee's objections against the incomparable functional profile of this company were rejected. The TPO noticed that this company launched a job portal viz., Logtalent.com, which was quite successful with job aspirants. The assessee's objection about the incomparability of this function adopted by CAT Technologies Ltd., was held by the TPO to be irrelevant in view of insignificant contribution of such a portal to the assessee's income. The TPO observed that majority of the income of this company was from `Software development & consulting services'. Income of this company from `Training' and `Medical transcription' was found to be ITA No.1489/Del/2014 minimal. He, therefore, considered this company as predominantly a software development provider. The assessee's request before the DRP for the exclusion of this company met with the fate of dismissal. Now, the assessee is before us assailing the inclusion of this company. 8.2. After considering the rival submissions and perusing the relevant material on record, we find fro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is, therefore, directed to be excluded from the list of comparables." 14. Per contra, learned DR submitted that all the three services rendered by the assessee, namely, software development, competency centre and IT support services are very much rendered by the CAT Technologies also and it is very much evident from the annual report at page 11 under the sub heading "Outlook of the company". He further submitted that in so far as running of job portal is concerned, it is just like Naukri.com and does not know whether anything is charged from the user of such website without which information is not safe to exclude this company from the list of comparables. 15. On a careful consideration of the annual report and also the observations of the coordinate bench in Sunlife India Service centre (supra), we are convinced that the CAT Technologies, besides the software development and other IT support services onsite and offsite, has also rendered the services in the nature of advisory and consulting besides launching the job portal, namely, Logtalent.com. It is true that the record does not reveal the mode of earning revenues from running such activity by the CAT Technologies. As pointed....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... criteria in not a valid criteria as per Rule 10B(2) and hence, cannot be applied inasmuch as there is no relation between the turnover and the margins of an entity. Learned DRP recorded that comparability of international transactions with uncontrolled transactions has to be judged with reference to functions performed and assets employed and risks assumed. On this ground by placing reliance on some other decisions of the Tribunal, learned DRP preferred to retain this company in the list of comparables. 19. It is submitted by the learned AR that Infosys Technologies is engaged in providing the development and maintenance of computer software and it also produces and sells software, being engaged in other diverse activities. It is further submitted that the admitted position of the company is that it faces competition from consulting, offshore technology, BPO firms etc. Learned AR further submitted that this company enjoys a favourable market place in terms of its ownership of brands and it offers its product to banking industry (Finance) while the assessee is only a captive service provider to its AEs. He further submitted that in assessee's own case in preceding assessment year ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rformance. The solutions span the entire software life cycle encompassing technical consulting, design, development, reengineering, maintenance, systems integration, package evaluation and implementation, and testing and infrastructure management services. In addition, the company offers software products for the banking industry. 19. Moreover, turnover of Infosys is of Rs. 15648 crores for AY 2007-08 as against taxpayer's turnover of Rs. 109 crores which is 143 times of the turnover of the taxpayer. Infosys is also having huge intangible of Rs. 130684 crores as per the detailed report filed at page 128 of the annual report. Infosys is also expending huge amount on R&D for developing and creating new functionalities which is to the tune of 1.3% of the total revenue. Furthermore, it is also not in dispute that Infosys owns product "Finacle" which is a universal banking solution empowering 109 banks across 60 countries helping them serve over 20000 branches (referred at page 80 of the annual report compendium). Perusal of the P&L account, available at page 124 of the annual report also shows that Infosys has income of Rs. 15648 crores from software services and product of which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ucts. However, learned TPO while referring to the annual report at page 12 and 14 held that the Tata Elxsi Ltd. is also providing software services but only with its verticals, as such, it cannot be excluded from the list of comparables. He further recorded that R&D expenses of the company is only 3.26% of its revenue and in no way substantial in nature. 24. Per contra, it is the argument of the learned DR that like assessee Tata Elxsi is a software developer and they are involved in the product design services. Learned DR contended that in the profit and loss account, there is no break up. However, the learned TPO dealt with all the objections of the assessee at length, as such, on a comparison of the basic function of the assessee and the comparables it can be easily concluded that it is providing software services but with different verticals Tax Elxsi does not cease to a good comparable. 25. When we turn to the order of the learned DRP, we find a similar reasoning given for this company also and the learned DRP held that this company is engaged in the software development and functionally similar to the assessee. It is argued on behalf of the assessee that this company, namel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t a good comparable to the assessee, as such, it has to be deleted from the list of comparables for benchmarking the international transaction. We direct the learned AO/TPO to do so. Thirdware Solutions Ltd 29. Now coming to the last comparable i.e. Thirdware Solutions Ltd. It was argued before the learned TPO by the assessee that inasmuch as this Thirdware Solutions is involved in the application implementation, management and development services, it is not a good comparable with the assessee, who is only a captive contract software developer with attendant IT support services. 30. Learned TPO, however, held that on a perusal of the details of purchase, it was found that the majority of the expenses were in the form of software service charges and salaries which clearly establish that the exports are software service exports. Inasmuch as software development implementation and support services are various sub segments of software development services only and require employment of software engineers, the functions of this company are fairly comparable with the functions of the assessee and on that ground M/s Thirdware Solutions Ltd. Is a good comparable with the assessee. 32.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct learned AO to delete this company from the list of comparables for benchmarking the international transactions. 37. Now coming to the corporate issues, there are three issues to be dealt with. First one relates to the treatment of forex, second one relates to the adjustment on account of advance billing and the last one relates to the adjustment on account of business promotion and conference. 38. In so far as the treatment of forex fluctuation is concerned, the assessee contended before the learned TPO that foreign exchange fluctuation income of the assessee should be treated as an operation item of the income. However, learned TPO did not agree with the same and held that the actual profit margin at the end of the year may vary substantially from the expected profit margin at the time of entering into project because of fluctuation in the exchange rate and its risk management policy that is extent to which its forex transactions were hedged, and the margins of two companies entering into similar transactions at the same price may vary substantially depending upon the level of hedging of their forex transactions though at the time of entering into transactions their estimated....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... case for the immediately preceding asstt. Year 2008-09, the Tribunal dealt with this issue and vide para 47 to 50 and while following the decision of a Special bench of the Tribunal in the case of ACIT vs Prakash Shah, 63 Taxman 114 (Delhi) the Tribunal held that the foreign exchange loss/gains arising from the transaction of the revenue nature has to be considered as part of operating profit/cost of the assessee as well as that of the parties. 42. We have gone through the decision relied by the assessee. Similar is the view of another coordinate bench in the case of Sunlife India Service Centre Ltd. (supra) Since the issue is no longer res Integra while respectfully following the binding decision of the Special bench in the case of Prakash Shah (supra) and other decisions, we hold that the foreign exchange loss or gain arising out of the transaction of revenue nature has to be considered as part of operating profit/cost. We, therefore, set aside the impugned order and remit the matter to the file of AO/TPO for reconsideration of the ALP afresh in consonance with the above directions given in the preceding paragraphs. However, we made it clear that the treatment of forex should b....