TaxTMI 
TaxTMI 
2017 (8) TMI 1561
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....ent of expenses 8,60,212 Total value of International Transactions 17,76,70,036 Segment in dispute Software development services Methodology adopted to determine ALP TNMM Turnover from software d evelopment services 17,68,09,824 Margins : Appellant's Margin in software segment 12.00% ALP Margin in software segment as per TPO 22.71% Adjustment under Section 92CA 1,65,04,805 To bench-mark its international transactions the assessee selected 14 companies in Transfer Pricing Study Analysis however, the TPO rejected 12 companies selected by the assessee and carried out a fresh search. The TPO finally selected a set of 11 companies as under : Accordingly, the TPO proposed an adjustment under Section 92CA of Rs. 1,65,04,805. The assessee challenged the action of the TPO and draft order framed by the Assessing Officer before the DRP and filed its objections. The DRP rejected 8 companies out of set of 11 companies selected by the TPO. The DRP rejected 5 companies on the ground of turnover filter of Rs. 1 to Rs. 200 Crores and further 2 companies on the ground by applying 0% Related Party Transactio....
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....re products & when there is a material difference/error in the segmental information available in the annual report thereby making the said company incomparable. 7. Without prejudice to the above, the Honourable DRP is not justified in upholding the computation of the margin of M/s. Kals Information Systems Ltd. (Seg.) at segment level and not at enterprise level, when the Honourable DRP held that there is no activity other than the software development and when the training segment is incidental to software development activity of the said Company and the said segment did not exceed 10% limit prescribed under Accounting Standard 17 for disclosing segment report. 8. The Learned TPO while computing the margin in respect of M/s. RS Software (India) Ltd is not justified in not treating miscellaneous expenses written off Rs. 14,98,572/- and deposits written off Rs. 92,57,112/- as operating in nature, which resulted in arriving at incorrect margin of 10.29% as against the correct margin of 9.12%. 9. The Learned TPO is not justified in not granting single customer risk adjustment of miniscule 1% without following the directions of the Honourable DRP. 1....
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....on of deduction of telecommunication charges of Rs. 19,05,751/- would arise only if the same has been incurred in foreign-exchange and as the telecommunication charges have been incurred in Indian rupee, the question of deduction thereof does not arise. 5. The Honourable DRP is not justified in upholding the action of the Learned Assessing Officer in reducing the telecommunication charges of Rs. 19,05,751/- from the export turnover when such expenditure is incurred in respect of a standard facility and the same cannot be wholly attributable to delivery of computer software outside India. VIII. As regards exclusion of expenditure incurred in foreign currency {i.e. travelling expenses} from export turnover when the Appellant is engaged in software development: 1. The Honourable DRP is not justified in upholding the exclusion of sum of Rs. 1,58,82,853/- from export turnover for the purpose of computation of deduction under section 10B of the Act, merely on the basis that the same was incurred in foreign currency by rejecting the contention of the Appellant that it is not engaged in providing technical services but is engaged in development and export of comp....
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....mpanies which were excluded by the DRP on this ground may be excluded on functional dissimilarity. In view of the statement of learned Authorised Representative that the assessee has no objection if the directions of the DRP to the extent of applying the turnover filter are set aside. We set aside the directions of the DRP to the extent of applying turnover filter in respect of the comparables selected by the TPO. The functional comparability of those companies will be examined separately. 7. The second objection of the revenue is regarding 0% RPT filter by DRP. 8. We have considered the rival submissions as well as the relevant material on record. At the outset we note that in strict sense, the ALP has to be determined by considering uncontrolled comparable prices which means unrelated comparable prices has to be taken into account to bench mark the international transactions which are the control and RPTs. However, 0% RPTs of the comparable price is an impossible situation and therefore a reasonable tolerance range of the revenue from RPT can be considered for selecting the uncontrolled comparables. There cannot be a single criteria / parameter which can be applied as a gen....
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....per in the case of the assessee. Accordingly we direct the Assessing Officer/TPO to exclude the comparable companies having the revenue of more than 15% from related parties. Since we have determined the RPT filter at 15% and the assessee has agreed not to apply any turnover filter, the only issue remained to be decided is functional comparability of various companies selected by the TPO and objected by the assessee. 9. The assessee is seeking exclusion of 8 companies from the set of comparables selected by the TPO/A.O. on functional dissimilarity as well as on the ground of exceeding 15% RPT. We will deal with the functional comparability of these 8 companies one by one as under : ICRA TECHNO ANALYTICS LIMITED (SEG.) 10. The learned Authorised Representative of the assessee has submitted that this company is engaged in the diversified business activities including the business analytics and business process outsourcing. The service segment of this company comprises of software development, software consultancy, engineering services, web development, web hoisting etc. for which no segmental information is available. He has also pointed out that the RPT to total sale of thi....
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....n he has relied upon the coordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra). Persistent Systems Limited 14. The learned Authorised Representative of the assessee has submitted that this company has derived income from sale of software services and products. There is no segmental information in respect of software services and products therefore this company cannot be considered as a good comparable to the assessee. He has also contended that the RPT of this company is 15.47% which is more than the tolerance range of 15% therefore this company be excluded from the set of comparables. In support of his contention he has relied upon the co-ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra). Sasken Communication Technology Ltd. 15. The learned Authorised Representative of the assessee has submitted that this company has earned revenue from three segments i.e. software services and software products and other services. He has contended that there is no segmental information available and this company also has a significant brand value in the market. In support of his c....
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....n.com 107. He has also relied upon the decision of Delhi Benches of the Tribunal in the case of Sony Mobile Communications India Pvt. Ltd. Vs. ACIT 147 ITD 399. 18. We have considered the rival submissions as well as the relevant material on record. At the outset, we find that the functional comparability of the above 7 companies has been considered by the co ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra). However the learned Departmental Representative has raised an objection against the applicability of the precedent in the case of TP matters as held by this Tribunal in Sony Mobile Communications India Pvt. Ltd. Vs. ACIT (supra). In the case on hand, the functional profile of the assessee being a software development services provider to the AE has not been disputed by the department therefore the functional profile of the assessee can be safely accepted as software development captive service provider. The coordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra) has considered all these aspects of the functional profile of the tested party in the said case as well as vari....
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....omparable with that of a pure software development service provider. (2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs. 21,140 crores, which is 442 times higher than the assessee. 18. The DRP accepted the objections of the assessee and by following the decision of the Delhi Benches of the Tribunal in the case of Agnity India Technologies (P.) Ltd. v. ITO [2015] 58 taxmann.com 167/154 ITD 293 (Delhi - Trib.), directed the TPO to exclude this company from the list of comparables. 19. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Technologies (P.) Ltd. (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an o....
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....3.2010, there are inventories of Rs. 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persistent Systems Ltd. 24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration. 25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue f....
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.... of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1/22 taxmann.com 96. 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra). 32. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged i....
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.... TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables. 66. As regards the functional comparability of this company is concerned, the assessee has referred to the income under the head software development services and products. However, it is not clear from the details whether any revenue is earned from products or entire revenue is from the software development services. Therefore, in the facts and circumstances of the cas....
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....tice, we set aside the issue of functional comparability of this company to the record of the TPO/A.O. for considering the objections raised by the assessee and fresh adjudication. 22. The next issue raised by the assessee in Ground Nos.VII & VIII is regarding exclusion of telecommunication expenses from the export turnover while computing the deduction under Section 10B of the Act. The learned Authorised Representative of the as has submitted that the assessee has not received the telecommunication expenses from its AE and the same is not part of the export turnover. Therefore, there is no need of further exclusion of the said amount from the export turnover. The learned Authorised Representative has further contended that the assessee has not charged the AE, the telecommunication expenses incurred by the assessee. In support of his contention, he has relied upon the decision of the co-ordinate Bench of this Tribunal in the case of M/s. Subex Limited Vs. DCIT dt.6.3.2017 in ITA No.1430/Bang/2010. 23. On the other hand, the learned Departmental Representative has submitted that an identical issue was considered and decided by the Tribunal in assessee's own case for the As....
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....f material on record. The Assessing Officer shall verify whether the expenditure such as courier charges, insurance charges and internet charges were actually recovered and included in the export turnover, by the assessee while computing deduction under Section 10A of the Act. If the above said expenses were not recovered and was not included in the export turnover, the Assessing Officer shall not reduce the same from the export turnover while computing the deduction under Section 10A of the IT Act. Accordingly, the issue is restored to the Assessing Officer. The Assessing Officer is directed to verify this aspect and shall take a decision in accordance with the law. It is ordered accordingly." 26. Having considered the rival submissions as well as the decisions of the co-ordinate Bench of this Tribunal, we are of the view that it is purely the factual aspect of the issue and in case the expenses incurred by the assessee are not part of the export turnover being adjusted by the AE then it would amount to reduction of export turnover and therefore no further reduction of the said amount is required from the export turnover. Therefore this issue requires a proper verification and ....
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....inition of export turnover has held in paras 17 to 19 as under : "17. For the purpose of this Section export turnover has been defined in Explanation (c) to the section and it reads as under: (c) "export turnover" means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (2), but does not include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; 18. From the aforesaid provision it is clear that the consideration in respect of computer software received in or brought into India by the assessee in convertible foreign exchange is deducted from the profits of the said business. In other words the assessee is not liable to pay any income tax on such consideration received from export of computer software. However the said export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of computer software outside India or expenses if any in....
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....India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of sub-section (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (i) of subsection (1) of Section 80HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Ordered accordingly." 30. Similar view has been taken by the Hon'ble jurisdictional High Court in the case of CIT Vs. Kshema Technologies Ltd. 381 ITR 435 as well as in the case of CIT Vs. HP Gl....