TaxTMI 
TaxTMI 
2019 (8) TMI 1394
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....d. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. BUSINESS PROFILE OF THE APPELLANT COMPANY 4. The appellant company is a company incorporated in India under the provisions of the Companies Act, 1956. For the subject assessment year under consideration, the assessee was engaged in the business of manufacturing and trading of telecommunication network equipment and provision of related services such as network design, installation and commissioning. The company also provided support services to major telecom operators and IP service providers in India and to customers of its associated enterprises ("AEs"). 5. Further, the company also provided software development and certain network management support services. Further, NSN India rendered certain marketing support services to its AEs, such as, providing information on potential customers, providing assistance in marketing products of its AE. Other support services rendered by NSN India to its AEs include warranty support services. 6. During the course of assessment proceedings, ....
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....have given thoughtful consideration to the orders of the authorities below. We have also pursed the order of the co-ordinate bench in assessment year 2008-09 in ITA No. 332/DEL/2013. We find that in assessment year 2008-09, Nokia Siemens Networks Pvt Ltd was assessed pre amalgamation and Nokia Siemens Network India was assessed post-amalgamation. While deciding appeal in ITA No. 332/DEL/2013, the co-ordinate bench observed as under: "The Ld. AR submitted that the assessee is also engaged in providing software development services to its AEs. Thus, it is an undisputed position that assessee's functional profile qua the software development service division is identical to that of the erstwhile entity which has been considered by the Tribunal in M/s Nokia Siemens Networks India (supra). The TPO selected 25 comparables to benchmark the transaction pertaining to software development services division. Subsequently, DRP deleted one of the comparables selected by TPO and thus the final set of comparables comes to 24. Out of these 24 comparables, the assessee wants to exclude 18 comparables and further wants inclusion of three comparables. Thus, the Ld. AR submitted that all ....
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....termine the premium pricing; that it has a different model of revenue recognition. It is submitted on behalf of the assessee that this comparable has been rejected in Assessee's own case in immediately preceding year, i.e. AY 2007- 08 by the Tribunal on account of different risk profile, scale, nature of services, revenue ownership of branded/ proprietary products, onsite and offshore services etc. This fact is not contradicted by the revenue. 79. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the basis of its magnitude. The coordinate bench has rejected this comparable by making following observations:- "17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee's contentions. The assessee is providing and assigning software services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del)....
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....ducts on geographical basis like overseas and domestic. 90. In view of the huge capital base, resources and other factors this company cannot be a comparable to the assessee and has to be excluded from the final list of comparable companies for benchmarking international transaction related to software segment. iv) LGS GLOBAL 85. Initially the assessee offered this company as a comparable, but the assessee claims to have found that this company is not a comparable and wrongly included in the final list of comparable companies. Inasmuch as the key determinative factor as far as the inclusion/exclusion of any company from the list of comparables is the functionality of an entity, we are of the considered opinion that this company has to be considered on the parameters of functionality and assessee cannot be prevented from challenging the same. 86. Page No. 26 of the 9th annual report 2007-08 of this company can be found at page No. 935 of the paper book clearly establishes that this company is engaged in a multifarious activities including an end to end service provider and offers variety of services. It is involved in product evaluation, design & develo....
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....this, the revenues of this company as on 31st March 2008 of Rs. 64.80 millions has been included in the above revenues for that year. 93. Needless to say the vast functional dissimilarity coupled with the extraordinary event of acquisition of equity shares stated above suggests that this company is not a good comparable with the assessee and consequently is liable to be excluded from the list of comparables. vi) PERSISTENT SYSTEMS 94. The Assessee claims to have excluded this company from the list of comparables while preparing its TP study on the ground that this company was functionally different from the assessee. However, This company was selected as comparable by the TPO and the assessee, during the course of TP proceedings, opposed the inclusion of this comparable on ground of functional dissimilarity but the TPO selected it as the final comparable by rejecting the argument of the Assessee and holding that this company is deriving revenue from both software as well as products and insufficient segmental information is available in the financial statements. 95. It is evident from a reading of page numbers 1085, 1090, 1136, 1140, 1154, 1162 & 1183 ....
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.... any software products, this company on entity level, cannot be considered as comparable. The Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. Vs. ACIT (ITA No.5645/Del/2011, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. Vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Respectfully following the precedents, we order for the exclusion of this company from the list of comparables." 97. In view of the functional dissimilarity coupled with the fact of nonavailability of the segmental information, while respectfully following the decision in Aircom (supra), we hold that this company is liable to be excluded from the list of comparables. vii) R. SYSTEMS . SOFTWARE "103. Assessee objected the inclusion of this company in the set o....
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....tware), Innovation design and engineering (mechanical design with a focus on industrial design) and Visual Computing Labs (Animation and Visual Effects). Since this company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable with the assessee company, which is simply providing software related services. The Tribunal in Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions India Pvt. Ltd. (supra), both of which were rendering software development services, has treated this company as functionally not comparable. We, therefore, order for the exclusion of this company from the list of comparables." 111. No change of circumstances is brought to our notice either by the assessee or by the revenue, as such, by respectfully following the reasoning of this Tribunal in assessee's own case for the immediately preceding year, we conclude that this company is not a suitable one to be continued in the set of comparables. We therefore direct the exclusion of this company from the final set of comparable companies for benchmarking international transaction related to software segment." 16. As no new fa....
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...., which means that these segments constitute only 15% of the total revenue. Further, sale of equipment and software licence constitute only 3.76% of total sales. With these factual datas, it can be safely concluded that this company is predominantly a software development service provider. The R & D expense is only 0.20% of the revenue and there is no demonstrative evidence on record to suggest that the revenue expenses have substantially impacted the profit margin of this company. The intangibles as per fixed asset schedule in the balance sheet shows that they have been fully depreciated during the year. 22. The acquisition mentioned in the Annual Report also does not show any substantial impact in the profit margin of this company. Keeping in mind that TNMM has been accepted as the most appropriate method, it is difficult to find exact replica of the comparable with tested party. In our considered opinion, the TPO has rightly included this company in the final set of comparables and we do not find any error or infirmity in that. Accordingly, TCS stands included in the final set of comparables. THINKSOFT GLOBAL SERVICES LTD 23. Pleading for exclusion of this company, the ....
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....ition for software testing is based on software tested and billed to clients as per the terms of specific contracts. For fixed price contracts, revenue is recognised on proportionate completion method on basis of work completed. Strong reliance was placed on the decision of the Tribunal in the case of St Ericsson India Pvt Ltd 79 Taxmann.com 207 [Del-Trib] 207. 28. It is the say of the ld. DR that this company is primarily into software development services and, therefore, functionally similar and placed reliance on the findings of the TPO. 29. On careful consideration of the Annual Report of this company, we are of the considered opinion that it is functionally dissimilar. Our view is fortified by the decision of the co-ordinate bench in the case of St Ericsson India Pvt Ltd. Further, revenue recognition model of this company cannot be accepted, as there is no room for any adjustment for different revenue recognition model. As mentioned elsewhere, the assessee recognises its revenue at cost +5%. Therefore, this company cannot be accepted as a good comparable. The same is directed to be excluded. CG-VAK SOFTWARE & EXPORTS LIMTIED 30. We find that the issue relating to t....
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....n behalf of its AEs. Further, in respect of goods exported to its AEs, the AEs are responsible for marketing the products in their respective jurisdiction. 35. The TPO has made an upward adjustment under this segment. Before us, the ld. counsel for the assessee explained that this being part of the main network division, the assessee has adopted aggregated approach to benchmark the international transactions. 36. The TPO, during the course of TP assessment proceedings observed that the assessee has not bench-marked these services separately and combined with other operations of network division. The TPO dismissed the claim of the assessee that all these transactions are integral to each other and cannot be separated. 37. A show cause notice was issued to the assessee to explain how these transactions are intricately connected with each other. In its reply, the assessee once again contended that the support services were integral and intricately connected to the net work division. Rejecting this contention of the assessee, the TPO observed that from the TP report, it can be seen that the transactions are not intricately inter-connected. The TPO further observed that these s....
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....t of main network division and the assessee has adopted the best approach of aggregating transaction for bench marking. The ld. counsel for the assessee further pointed out that the AE has reimbursed the cost with mark up of 3% and in doing so, the AE has reimbursed the entire marketing cost incurred by the assessee for its domestic market also. The ld. counsel for the assessee further stated that since the stock incurred by the assessee to its own market support services has gone to reduced margin, the same should be excluded for the purposes of bench marking the transactions with the AE. 41. The ld. counsel for the assessee further brought to our notice that the TPO has failed to appreciate that the cost of service to AE was only Rs. 36.32 crores ,which reflected in the operating margin Rs. 64.89 crores on operating cost to the assessee, which is far in excess of operating margin from the company selected by the TPO. 42. The ld. counsel for the assessee further drew our attention to the fact that this issue was raised before the DRP and arguments were made but could not be supported by any documentary evidence and hence the DRP did not give any direction to the TPO. The ld.....
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....India also provides repair and replace services. Where products break down, these are repaired on site by NSN India. In case the same cannot be repaired, the same are replaced and the faulty parts, if purchased from the AE are sent back to the respective associated enterprise to be repaired. Once repaired, the product is then made available for use at a different customer site. The functions performed by NSN India and its AEs are summarized in the table below: Type of Functions NSN India AEs Product Strategy and design Limited Yes Purchase function Yes Yes Production scheduling Yes Yes Technical assistance No Yes Pricing Yes Yes Marketing and business development Yes Yes Installation and commissioning Yes No Quality control Yes Yes Post sales support Yes No 47. During the TP assessment proceedings, the TPO found that the assessee has not bench-marked these services separately and combined them with other operations of network division. Being not satisfied with the action of the assessee, the TPO used the following set of comparables for bench marking of this segment: No. Company Name ....
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....td. 34.68 14.60 0.22 97.31 43.22 #N/A 25.22 25.22 10 T C E Consulting Engineers Ltd. 319.05 116.47 0.66 98.29 50.10 0.05 27.20 27.20 11 WAPCOS Ltd 223.92 75.21 0.41 100.00 27.92 0.00 25.57 25.57 12 Zipper Trading Enterprises Ltd. 1.02 1.04 1.16 93.58 62.35 #N/A 34.11 34.11 27.38 27.36 49. Based on the above, an adjustment of Rs. 1,01,23,623/- was made, which was confirmed by the DRP. 50. Before us, the ld. counsel for the assessee vehemently stated that TSS segment is an integral part of network division and hence the assessee has rightly bench marked the same by adopting aggregated approach. The assessee has received cost + mark up of 5%. The ld. counsel for the assessee further drew our attention to the Advance Pricing Agreement u/s 92CC of the Act dated 28.03.2016. It is the say of the ld. counsel for the assessee that though this agreement shall apply to five consecutive years commencing from the previous year 2013-14 and also apply to four consecutive roll back years commenc....
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....nd other remote support services in nature of network support to its AEs. • NSN India is reimbursed by NSN Finland on a cost plus 10% mark up basis for provision of services; NSN India invoices NSN Finland on a monthly basis; and • The invoices are denominated in US Dollars. As per the Support Agreement, NSN India, at the request of its AEs, provides following services to it AEs: • Data processing and customization services including analysis of global business data and customization of data/ information required for bid preparation; • Network operations support services to AEs/its customers through operation of the global networks operation center; • Technical and operational software support, including troubleshooting, problem diagnostics and resolution; • Back-office data support for facilitating cost-effective sourcing and delivery of telecommunication infrastructure products / spares for AEs; • Network remote integration services through operation of the global network integration center; • Service product development for use by AEs; and • Other remote del....
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....with the comparables whose financials are for the entire F.Y. The ld. counsel for the assessee further drew our attention to Rule 10TA(e) of the ITAT Rules and pointed out that the Rule itself has distinguished ITES from the knowledge process of outsourcing services and, therefore, most of the comparables used by the TPO have to be rejected. 59. Per contra, though the ld. DR strongly supported the findings fo the TPO but accepted that Rule 10TA specifically distinguished between the two services. 60. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. Rule 10TA(e) read as as under: "Information technology enabled services" means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:- (i) back office operations; (ii) call centres or contact centre services; (iii) data processing and data mining; (iv) insurance claim processing; (v) legal databases; (vi) creation and maintenance of medical transcription excluding medical advice; (vii) translation services; (viii....