TaxTMI 
TaxTMI 
2018 (1) TMI 1370
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....e DRP") and computing the total income of the Appellant for Assessment Year ('"AY") 2008-09 at INR 27,30,95,863 as against the returned income of INR 12,07,44,372. 2. The Ld. AO erred in proposing and the Hon'ble DRP further erred in confirming the addition of Rs. 15,23,51,491 to the Appellant's returned income of Rs. 12,07,44,372. Transfer Pricing Adjustment - INR 10,91,38,523 3. On the facts and in law, the Learned Additional Director of Income Tax, Transfer Pricing Officer- II(4) ("'Ld. TPO") and the Ld. AO erred in proposing and the Hon'ble DRP erred in confirming the addition of Rs. 10,91,38,523 in relation to the international transactions of provision of software development, competency center and IT support services. 4. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant under section 92D of the Income-tax Act, 1961 ("the Act") read with Rule 10D of the Income-tax Rule, 1962 ("the Rules") and calling for a fresh search, applying arbitrary filters during the assessment proceedings, without discharging the statutory onus ....
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....cement and support services (Advance Billing / Deferred Revenue) without appreciating that no income has accrued to the Appellant for the year under consideration and that on similar facts the Hon'ble Tribunal deleted such additions in earlier years. 12. Without prejudice to above and in alternate, Ld. AO and the Hon'ble DRP has erred on facts and in law in disregarding the regular and the consistent method of accounting being followed by the Appellant in recognizing the revenue from maintenance, enhancement and support services provided by the Appellant to its customers. 13. On the facts and in law, the Ld. AO erred in initiating penalty proceedings u/s 271( 1)(c) of the Act. 14. On the facts and in law, the Ld. AO has erred holding that interest under Section 234B and Section 234C be charged on the assessed income of the Appellant. 15. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in withdrawing interest u/s 244A of the Act." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : the taxpayer is a subsidiary of Siemens US (formerly UGS Corp., USA). The taxpaye....
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....development, competency centre and ITSS and have clubbed all the three segments. However, the taxpayer has not challenged the aggregation. 6. The TPO, after taking into consideration the TP study made by the taxpayer in its economic analysis, finally selected 14 comparables having average OP/TC at 27.43% as against taxpayer's OP/TC margin of 10.96% and thereby proposed the TP adjustment of Rs. 16,20,62,898/-. 7. The taxpayer carried the matter before the ld. DRP by filing objections who has partly accepted the contentions raised by the taxpayer. Post DRP directions, mean OP/TC margin of comparables come down to 19.67% (18% after treating forex mean/loss as operating) and accordingly, AO recomputed the ALP adjustment at Rs. 10,91,38,523/-. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1, 2, 3 &4 9. Grounds No.1, 2, 3 & 4 need no findings being general in nature and having been c....
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.... be made 14,89,35,079 Adjustment already offered by the taxpayer 3,97,96,556 Adjustment required to be made by the AO 10,91,38,523 13. In the backdrop of the aforesaid facts and circumstances of this case, the ld. AR to cut short the controversy sought exclusion of six comparables viz. Infosys Technologies Ltd., 3K Technologies Ltd., KALS Information Systems (Seg.), Persistent Systems Ltd., Bodhtree Consulting Ltd. and Zylog Systems Ltd.. 14. Before examining the comparability of the aforesaid companies vis-à-vis the taxpayer, we would like to have an overview of the nature of the work done by the taxpayer for its AE which is otherwise not in dispute, for ready perusal. 15. During the year under assessment, the taxpayer provided software development services, competency centre services and IT Support Services to its AE qua which ALP adjustment of Rs. 10,91,38,523/- have been made. 16. Now, we would like to examine the comparability of the aforesaid companies vis-à-vis the taxpayer one by one. INFOSYS TECHNOLOGIES LTD. (INFOSYS) 17. The taxpayer sought to exclude Infosys from the final set of comparables on the grounds ....
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....chnologies (P.) Ltd. (supra) while examining its comparability with Agnity India Technologies which was a captive service provider operating on minimal risk providing software development services which has affirmed the decision rendered by the coordinate Bench of the Tribunal for excluding Infosys from the list of comparables for the reason that Infosys is a giant company in the area of development of software, assumption of risk leading to higher profits etc. Keeping in view the aforesaid discussion, we are of the considered view that Infosys being a giant company operating on full-fledged risk leading to maximum profit having huge revenue and expending 1.3% of its turnover on R&D having huge intangibles is not a suitable comparable vis-à-vis taxpayer which is a captive service provider operating on a minimum risk and only having turnover of Rs. 109 crores as against turnover of Infosys of Rs. 15648 crores. So, we order to exclude Infosys from the final set of comparables. 3K TECHNOLOGIES LTD. (3K) 21. The taxpayer sought exclusion of 3K for benchmarking the international transactions on grounds of functional dissimilarities, unreliable financial information, fails empl....
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....mployee cost filter applied by the TPO, 3K is not a suitable comparable for benchmarking the international transactions, hence ordered to be excluded. KALS INFORMATION SYSTEMS (SEG.) (KALS) 27. The taxpayer sought exclusion of KALS on ground of functional dis-similarity being into the business of software services and software products. Undisputedly, the taxpayer is into the business of software development services. Perusal of the annual report of KALS, available at pages 219 to 242 of the annual report compendium, particularly schedule 16 of the Notes to the Financial statements apparently proved that KALS is engaged in development of software and software products since its inception. The company consisting of STPI Unit engaged in software and software products and training centre engaged in training of software professionals on online projects. Revenue recognition of KALS is that it drives its revenues primarily from software services and software products, however, segmental data bifurcating the revenue from product and software development is not available. In the given circumstances, we are of the considered view that KALS cannot be considered as a suitable comparab....
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....omparable for benchmarking the international transaction, hence ordered to be excluded. BODHTREE CONSULTING LTD. (BODHTREE) 34. The taxpayer sought exclusion of Bodhtree on grounds inter alia that it is functionally dis-similar having volatile margin which has been ordered to be excluded by the coordinate Bench of the Tribunal in Intoto Software India (P.) Ltd. vs. ITO - (2016) 65 taxmann.com 119 (Hyderabad - Trib.) from the list of comparables to benchmarking the international transaction vis-àvis software developer. 35. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR. 36. Profile of the Bodhtree is described at page 33 of the annual report compendium as under :- "Bodhtree has only one segment, namely, software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions using the latest technologies. It has a large pool of skilled resources on advanced technology platform including J2EE, Microsoft, NET and Linux platforms. Bodhtree is ISO certified and has a presence in USA and South East Asian countries."....
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.... Limited, a UK based Life Insurance product company and Ewak Creative Compusoft Limited, Cheenai based Replacement Technology solution provider. Benefits from such acquisitions, as envisaged, include access to new clients, new geographical areas and new service offerings as well as an increase in per-capita revenue productivity. 44. Hon'ble High Court of Andhra Pradesh in case cited as CIT vs. M/s. Intoto Software India Pvt. Ltd. in ITTA No.233 of 2014 dated 27.03.2014 decided the identical issue of differences between a product and software development services provider in assessee's favour by returning the following findings :- "Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as softwa....
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....ed to compute the ALP accordingly. So, this ground is allowed for statistical purposes. GROUND NO.10 51. Ld. TPO as well as Ld. DRP have denied the working capital with adjustment claimed by the taxpayer. The ld. AR for the taxpayer submitted that high levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs and as such, no profit maximizing or entrepreneurial firm would hold working capital without a return and relied upon Rule 10B (3) of the Income-tax Rules, 1962 which are reproduced as under :- "Rule 10B 3) An uncontrolled transaction shall be comparable to an international transaction if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 52. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR. 53. It is a settled princi....
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.... to the ME&S Services are recognized on monthly basis over a period when these services are to be rendered. Thus, the revenue for services which are to be provided after the end of the year is accounted for in books in the subsequent year when services are actually rendered. 5.2 The above procedure of accounting is consistently followed by the appellant and is also so declared in its Accounting Policy No.2 in the "Significant accounting policies and notes to the accounts" forming integral part of the audited balance sheet which was attached with the return of income. 5.3 The above accounting procedure is stated to be based on Accounting Standard-9 "Revenue Recognition" issued by the ICAI. The AO held that the entire amount raised in the bill is income of the year and to be taxed accordingly as (i) amount not separately shown in invoice; (ii) amount is uncertain and cannot be calculated; (iii) sales-tax return shows total amount as sale; (iv) No tax is deducted by payer on such sum; and (v) It is a device to defer payment of tax. 5.4 Learned counsel for assessee submitted that it is not correct to say that the amount of ME&S services is not determ....
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....pared to invoices for sale of same software whether MES services are included or not. Thus, when the assessee charges extra sum for MES services, the revenue in this regard can be recognized only after such services are rendered or the period of contract is over. Hon'ble Delhi High Court in the case of Uttam Singh Duggal & Co. vs. CIT, 127 ITR 21 recognized this principle of matching revenue with cost. On general principle, it was held that if no work is done in the year of receipt of sum, it has to be treated as kind of advance payment and when the work was done thereafter and expenditure in this regard is claimed, income to that extent will be taxable in' the subsequent year. Even if the' amount is not separately shown in invoice the effect remain that addition sum was charged for ME&S services. The amount is not uncertain not to be calculated. The amount can very well be arrived at best on the sale price of software sold with or without ME&S services. The sales-tax return cannot be a criteria to determine what is the income accruing or arising to the assessee. Even if the payer do not deduct tax at source, it will not determine the taxability or otherwise of the sum ....