AI Drafter 
TaxTMI 
TaxTMI 
2017 (1) TMI 1631
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....ational Transaction (IT. s)with its Associate Enterprises(AE). He made a reference to the Transfer Pricing Officer (TPO). During the Transfer Pricing (TP) proceedings, he found that IT. s of the assessee could be summarised as under : SN. Nature of Transactions A.Y.2004-05 (Rs.) A.Y.2005-06 (Rs.) Method Adopted 1. Royalty to CA Management Inc.USA 74,167,183 76082319 CUP 2. Commission from CA Management Inc., USA 22,053,507 32408445 TNMM 3. Call centre Services provided to CA Management Inc.,USA 165,438,736 184747465 TNMM 4. Software development services provided to computed associates, USA 84,806,590 810818654 TNMM 5. Support services received from associated enterprises 2,05,80,992 35976017 TNMM 6. Reimbursement of cost 1,63,78,199 81672755 At cost 7. Allocation of common cost 1,49,87,222 20729698 At cost TOTAL 1242435353 He found that the assessee had benchmarked the transactions using TNMM, that the PLI used was the ratio of operating profit to total cost (OP/TC) that the mean operating profit margin of the compa....
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....should be excluded from the list of the valid comparables. The FAA held that Infosys, Satyam computer Services Limited, Geometric Software Solutions Co. Ltd. and Sankhay Infotech Ltd. were not valid comparables. He held that remaining 15 comparables should be considered as valid comparables in the final list of comaparable. As the arithmetic mean of the said comparables was found 25. 50%, so, he directed the AO/TPO to work out the amount of adjustment considering the above mentioned 15 comparables. The assessee has challenged the inclusion of five comparables whereas, the AO is aggrieved by the exclusion of four comparables. 4. During the course of hearing before us, with regard to Exensys Software Solutions Ltd. (ESSL), the Authorised Representative(AR)argued that ESSL had amalgamated with Hollol India Ltd. with retrospective effect for 01. 04. 2004, that amalgamation had an impact on the profit margins, . He referred to the performance review of the company wherein the directors had stated that the company earned an income of Rs. 7. 37 crores which consisted of an export turnover of Rs. 6. 91crores, that the figures for 2004-05 were combined figures of Hollol India Ltd. and th....
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....year was possible because of the amalgamation. It is also a fact that ESSL acquired brand value(intangible)of Rs. 5 crores during the year under consideration. We find that in the case of DE Shaw India Software (P. )Ltd. , the Tribunal has excluded ESSL as a valid comp - arable as it had an extraordinary event resulting into higher operating margin. We are reproducing the relevant portion of the said order and it reads as under : "7. As regards the Exensys Software Solutions Ltd. , as seenfrom the paper book placed on record, there is a merger of Holool India Ltd. and in the director's report (PB-951), there is a clear mention that the company's income ofRs. 737. 79 lakhs is possible with the amalgamation of Holool India Ltd. It was further mentioned that Assessee company has got benefit by advanced latest technical expertise on various technology domains of the transferor company. Further, that company has charged deferred expenditure and the amount claimed in this year is Rs. 1. 22 crores as against Rs. 30. 21 lakhs in earlier year. This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies. Vide page....
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....ng Ojficer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz. , Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct the Assessing Officer/Tl'O to exclude this company from the list of comparables. " 8. In view of the above, we are of the opinion that there is an extra-ordinary event which resulted in high operating margin of that company and we, therefore, direct the AO to exclude this company from the list of comparables. In the above referred case of Into to Software India Pvt. Ltd. , complete details were not placed on record, therefore, the matter was sent to AO for verification whereas in this case assessee has objected even before the AO/CIT(A), therefore, there is no need to set aside the issue to the file of the AO for examination as was done in the case of Into to Software (supra). We are, therefore, of the opinion that on the basis of facts placed on record, the case of Exensys Software Solutions Ltd. cannot be taken as comparable. " It is found that i....
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....h. htmstated that the company is a distributor of products; As per the company's website www. thirdware. net/ourcapabilities. htm. has stated the company has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Pre-sales, sales, training, consulting, implementation and support to application management services. The following rulings have analysed and rejected this company as it is into trading of software licenses: - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - ITO v. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011) - ACIT v. Sonata Software (ITA No. 3514/Mum/2010) - E-Gain Communications (P) Ltd. v. ITO [2008] 23 SOT 385 (Pune). 9. Similarly, the other cases, Bodhtree Consulting Ltd, Four Soft Ltd, Infosys, . , Sankhya Infotech Ltd. , Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not di....
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....mental accounts, Compulink cannot be taken as a comparable. 4. 1. e. We find that Infosys Technologies Ltd. and Satyam Computer Services Ltd. were excluded from the list of comparables in the cases of Intoto Software India(P. )Ltd. (supra) and Textron Global technology Centre(P)Ltd. (supra). As far as Sankhya Infotech Ltd. and Geo - metric Software Solutions are concerned, we find that Tribunal had held, in the matters relied upon by the AR, that both were functionally different from the assessee and in both the cases segmentals were not available. In this regard we would like to refer to the cases of DE Shaw Software(supra)and SAP LABS India)(P. )Ltd. (44SOT156). Considering the above, we are of the opinion, that FAA had rightly excluded the above mentioned four comparables from the final list of comparables. 4. 2. In our opinion working capital adjustment had to be considered for selecting the valid comparables. In the cases of Capgemini India(P. )Ltd. (ITA/540/Mum/2014) and Mersk Global Services India (P) Ltd. the Tribunal has held that for a valid comparability working capital adjustment is a pre-condition. Therefore, we are of the opinion that FAA was not justified in no....
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....ee, he held that the assessee had written off bad debts in its books of account, that the AO had not disputed the said fact. Following the decision of the Hon'ble Apex Court in the case of TRF Ltd. , he held that claim made by the assessee was allowed. However, he held that the amount of bad debts also included an amount of Rs. 8. 74 lakhs and the said amount pertained to non receipt of C- Forms from the customers, the assessee had not mentioned that while raising the Debit Notes it had offered the corresponding amount for taxation. Finally, he held that bad debts written off to the extent of Rs. 8. 74 lakhs was not allowable. 5. 2. During the course of hearing before us, the Authorized Representative relied upon the cases of Harshad J. Choksi(349ITR250);Smita Conductors(152ITD417)and argued that the assessee would pay on behalf of the customers, that it has raised Debit Notes, that the expenditure was incurred for carrying out business. Alternatively, it was argued that expenditure should be allowed as business loss. The DR relied upon the order of the FAA. 5. 3. We have heard the rival submissions and perused the material on record. We find that incurring of expenditure....
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....n of the scrutiny assessment, an order u/s. 143(3) of the Act was passed, assessing the total loss of the assessee at Rs. 3, 98, 69, 991/-as against 24, 40, 44, 974/-, as stated earlier. The disallowances/adjustments included transfer pricing adjustment of Rs. 18, 57, 454/-on account of royalty payable to CAII and addition of Rs. 19, 96, 50, 209/-on account of change in method of accounting for sale of software license. During the assessment proceedings, the AO found that in the notes to financial statement the auditors had made qualifying remark regarding the change in method, that prior to AY. under appeal the assessee recognised its revenue depending on the year in which the products were sold, that earlier the entire billing was shown assessee in the first year of the sale/ license, that during the year under consideration it changed its accounting policy. With regard to the change of policy, it was argued that the assessee provided to its customers not only the upgrades and enhancements of software purchased/licensed but also the maintenance of the software and unspecified future software products i. e. new release of a product, that under terms of the agreement it was require....
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.... accrued on a straight line basis over the period of contract were recognised as Advance Billings in the financial statements of the assessee under the head Current Liabilities, that it also recognised the royalty paid to CAII in respect of the revenues considered for the year only and the balance royalty was considered as Prepaid Royalty under the head Loans and Advances, that method of accounting was changed to converge with the AS prescribed by the ICAI. The FAA held that the change in method of accounting was not genuine and the assessee had in the garb of change had postponed 79% of its revenue. We are of the opinion that the primary issue to be decided is whether the change in method of accounting can be allowed considering the facts of the case. Undisputed facts are that the assessee is selling the software of the parent company it paid royalty to the CIIA, that it was following a particular method of accounting from inception and was recognsing the income on sale of software for that particular year, that during the year under appeal it started recongnising its income on straight line method. There is no doubt that the change in method of accounting for bona fide p....
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....upply of some ingredients in subsequent years of the sale of the product. Definitely the assessee is bound for future service/upgrade of the software. But. it is not preparing the software, so, it was duty of the assessee to prove that it had actually incurred some expenses on account of such service/ upgrade. If any expenditure has been incurred, it has been incurred by the parent company who develops the software as well as upgrades it. We find that during the appellate proceedings, the FAA had made a specific query with regard to the expenditure incurred under the head service/ upgrade of software in the subsequent years and the hearing was fixed on 02. 08. 2011. As per the FAA the assessee did not furnish required details. He again directed it to file necessary details and adjourned the matter to 16. 08. 20 11. But, the details were not made available to him. He again directed the assessee to comply the directions and on 27. 08. 2011, the assessee submitted as under: "As you are aware that during the year under consideration, the appellant had changed its method of accounting for recognizing revenue from license fee and maintenance contract to Straight Line basis such ....
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.... the year under appeal to subsequent years. 3. b. In the case under appeal, the receipt of income as well as accrual took place as soon as the sale proceeds of software were received and not when the life span of software would come to an end. Therefore, spreading the income over the licence-period of the software, in our opinion, was not justified. The agreement was for up-gradation and improvisation of software - it was not warranty. Even in the matter of warranty, after the case of Rotork Controls India P. Ltd. (314ITR62)things have become very clear-it talks of historical trend. During the course of hearing before us. the assessee had not given any indication about the expenditure incurred by it for improving and upgrading the software during the remaining period of licence. ln short, the argument of matching the revenue v/s. cost is missing. lt our opinion, the method adopted by it would fall in the category which 'tends to distort the picture for the purpose of taxable income of the assessee'. 3. c. Now, we would like to discuss the cases relied upon by the assessee. We find that in the case of Mahindra Holding and Resorts(supra)it was held that the ....
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....hat during the year under consideration royalty was computed at Rs. 7. 60 crores, that for computing the ALP the assessee had used a US Research data base and assigned a rate of royalty for sale of software products in the selected agreements range of 40% to 80%. Before the TPO it was argued that CAMI had entered into a similar distribution agreements with Group companies in the various countries, that such agreements provided for royalty rate of 30% . After considering the submission of the assessee the TPO made an adjustment of Rs. 15. 88 lakhs with regard to payment of royalty. 8. 1. During the appellate proceedings, the assessee made elaborate submissions before the FAA and referred to the order of the Tribunal delivered for AY. s 2002-03 and 2003-04. After considering the same, the FAA held that there was no justification for the addition made by AO for royalty payment in view of the order of the Tribunal for the earlier years. 8. 2. Before us the DR stated that matter could be decided on merits. The AR supported the order of the FAA. We find that the Tribunal had decided the issue of royalty as under : "xx. That the Appellant contends that write off of the, ....