TaxTMI 
TaxTMI 
2019 (6) TMI 1407
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....issued by the Learned Panel is a vitiated order as the Learned Panel erred both on facts and in law in confirming the addition made by the Learned AO to the Appellant's income by issuing a non-speaking order without appropriate application of mind. A) Payment of License Fee (Royalty): 3. That on the facts and in the circumstances of the case the Learned AO/ the Learned Joint Director of Income Tax (Transfer Pricing) - I, Bangalore (Transfer Pricing Officer' or Learned TPO') and the Learned Panel erred in making adjustment in arm's length price of the Appellant's international transactions with related parties of Rs. 69,264,977 /- (pertaining to payment of license fee). 4. That the Learned AO and the Learned Panel erred in not appreciating the fact that the Appellant had prepared the TP documentation bona fide and in good faith in compliance with the Act and Income tax Rules, 1962 (the Rules). 5. The Learned AO and the Learned Panel erred in disregarding the determination of the arm's length pricing for the international transactions relating to the payment of license fee (royalty) as per the Transfer Pricing Documentation, maintained by the Appel....
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....s. instead of that available during financial year 2005-06 wherein the Appellant was required to prepare and maintain the TP documentation. 10.4. That the Learned TPO erred in including companies in the comparability analysis, which are different from the Appellant in functions, assets and risk profile. 10.5. That the Learned TPO erred in rejecting companies that are similar to the Appellant, while performing the comparability analysis. 10.6. That the Learned TPO erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act, while determining the arm's length price. 10.7. The Learned TPO erred in not providing appropriate adjustment towards the working capital difference. 10.8. That the Learned Panel erred in upholding the erroneous actions of the Learned TPO as stated in Grounds 10.1 to 10.7 above. C) Others: 11. That the Learned AO has erred in not allowing the reduction of telecommunication expenses of Rs. 4,431.074 from the total turnover of the Appellant in computing the deduction under section 10A of the Act. 12. The Learned AO has erred in not following the decisions of the jurisdictional Income Tax Appel....
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.... and sales is brand driven * It is not comparable on the basis of its size, scale of operations, * It is engaged in product development and diversified services; * It has its own technology research center for software engineering and enterprise technology. Ground No. 10.4.3 : Kals Information Systems Ltd. (seg) ('Kals' ) should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in including 'Kals' as functionally comparable company to the Appellant, while doing the comparability analysis. The Appellant submits that Kals is not comparable to the Appellant for the following reasons: * It a predominantly a product company * It has been specifically held as not comparable to a software development service company by various judicial forums including jurisdictional ITAT Ground No. 10.4.4: Persistent Systems Limited. (seg) (Persistent') should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in including 'Persistent' as functionally comparable company to the Appellant. while doing the comparability analysis. The Appellant submits that Persistent is not comparable to the Appellant for the following reas....
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....s that Accel Transmatics is not comparable to the Appellant for the following reasons: * It is engaged in product development; * It is engaged in research and development activities * The software division possess IPR which was sold during the year; * It displays highly fluctuating margins indicating that the segmental financials are highly unreliable for comparability. Ground No. 10.4.10 : Megasoft Limited ("Megasoft") should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in including 'Megasoft' as functionally comparable company to the Appellant, while doing the comparability analysis. The Appellant submits that 'Megasoft' is not comparable to the Appellant for the following reasons: * It fails the related party transaction filter of 15% * It is predominantly software product company and holds Intellectual Property * It has made strategic acquisitions during, the year * It has different financial year ending Ground No. 10.4.11 : Flextronics Software Systems Limited ("Flextronics") should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in including *Flextronics. as functionall....
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....AE provides all technical support services in the nature of software application development and maintenance and research and development in the nature of software design and testing services. Ld.TPO observed that assessee entered into following international transactions with its associated enterprise: Description Amount (Rs.) Import of raw materials & Components 127,54,06,961 Export of Manufactured UPS 1344,79,58,216 Royalty 6,92,64,977 Cross charge by APC Group (paid) 42,41,753 Cross charge by APC India (received) 10,03,07,680 7. Ld.TPO observed that assessee paid a sum of Rs. 6,92,64,977/-as royalty to its AE. FromTP study, Ld.TPO observed that each of the manufacturing subsidiaries of AE entered into non-exclusive license agreement with AE, for license of technology and trademark intangibles, for using in manufacturing, and royalty was payable on such revenues from sale of products in their local territories. Ld.TPO observed that assessee during the year under consideration entered into similar exclusive license agreement with its AE, according to which, royalty at 4.5 % was payable on domestic sale of manufactured products by assessee in local markets withi....
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....P I T Cummins Infosystems Limited 13.69% 17 Lanco Global Systems Limited 12.26% 18 Larsen & Toubro Infotech Limited 8.09% 19 Maars Software International Limited 4.27% 20 Melstar information Technologies limited -0.15% 21 Mphasis BFL Limited 52.87% 22 Orient Information Technology Limited 14.76% 23 Quintegra Solutions Limited 8.59% 24 R S Software (India) Limited 7.65% 25 S I P Technologies and F>morts Limited -58.70% 26 Sasken Communication Technologies Limited 14.50% 27 Sasken Network Systems Limited 16.19% 28 Satyam Computers Services Limited 29.27% 29 Software Technology Group International Limited 15.39% 30 Sonata Software Limited 1 5.31% 31 Subex Systems Limited 6.39% 32 Transworld Infotech Limited 2 6.34% 33 Tyche Industries Limited 1 0.62% 34 V J I L Consulting Limited 6.56% 35 V M F Softech Limited 18.70% 36 Visualsoft Technologies Limited 29.02% Mean 12.06% Maximum 52.87% Minimum -58.70% 11. Ld.TPO on examination of TP documentation filed by assessee was of the opinion that assessee is mainly into offshore research and development servi....
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....itted that assessee also has access to subsequent product improvements and development through licensing agreement, received by assessee enables assessee to update technological development in the market. He submitted that vide this license agreement entered into by assessee with its AE, also allows assessee to sell such manufactured products in India in domestic market. Ld.AR further submitted that on such sale in domestic market, assessee is to pay 4.5% of the net revenues earned as per the terms and conditions of the exclusive license agreement to AE. He thus submitted that assessee while benchmarking payment of royalty, used CUP as most appropriate method, referring to page 59 of TP documentation filed, Ld.AR then pointed out that in TP order Ld. TPO wrongly held that assessee applied TNMM as most appropriate method for benchmarking transaction, which is evident from page 9 of TP order. It has been submitted that Ld.TPO while concluding his remark on this issue proceeded on the footing that TNMM has been used as most appropriate method. 18. Before DRP, it has been acknowledged that assessee used CUP as most appropriate method to determined arm's length rate of royalties paid ....
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.... Ld.AR submitted that following are the comparables that has been objected by assessee for its inclusion: * Aztec Software and Exports * Infosys Technologies Ltd * KALS Information Systems Ltd * Persistent Systems Ltd * Tata Elxi Ltd * Bodhtree Consulting Ltd. * Accel Transmatic Ltd (Seg.) * Flextronics Software Systems Ltd (Seg.) * Megasoft Ltd. 24. Before we go into compatibility analysis of these comparables with that of assessee, it is sine qua non to understand functions performed, assets owned and risks assumed by assessee under this segment. 25. Functions performed: Functional analysis Information and specifications The technical support services performed by APC India are based on the instructions and specifications provided by APCC US. There are regular interactions with APCC US regarding project specifications and obtaining certain clarifications/information on the projects provided by APCC US to APC India. Technical assistance and clarifications We understand that APCC US provides technical assistance, information and certain technical clarifications in the provision of technical support services provided by APC India. There are....
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....ng APC company-wide internal use software infrastructure. There is no market risk or service liability risk to APC India. Intangibles APC India does not own any significant intangible assets. Further, any intangible assets developed by APC India in the provision of technical support services would be owned by APCC US." It is submitted that, as assessee is a captive service provider and is compensated at cost +10%, it does not bear any risks like market risk, financial risk, credit and collection risk and service liability risk. The only risk that would be assumed by assessee is in terms of foreign exchange risk as revenue received by assessee is in foreign exchange. 27. In our considered opinion, comparibility is to be carried out on broad object of benchmarking international transaction and according to the law laid down under section 92B of the Act, read with rule 10 B (2) Income tax Rules, 1963. Comparables must be similar in material aspects and must be compared on the basis of the products/services characteristics, functions undertaken, assets used and risk assumed. Merely because certain comparables has been upheld for its exclusion/inclusion by various decisions, d....
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....xclusively owned by AE. Under such circumstances we do not find appropriate for this comparable to be included to determine arms length price. Accordingly we direct Ld.TPO to exclude this comparable from the final list. 33. KALS Information Systems Ltd: It has been submitted that this comparable has been included by Ld.TPO though it is functionally dissimilar with that of assessee. Ld.AR submitted that this comparable is engaged in development of software and software products and also has a training centre for drop software professionals or online projects. Ld. CIT DR placed reliance upon the observations of authorities below and prayed for its inclusion. We have perused submissions advanced by both sides in the light of the records placed before us. Excellent from the audited accounts and annual reports placed in the paper book in respect of this comparable it is observed that this company is engaged in development of software and software products since its inception. Further it is observed that in the year 2000 this company has been converted into a public limited company is which itself makes it not a fit comparable with assessee who is a captive service provider to its AE....
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....even undertake the pricing risk as the prices are decided by its AE only. Under such circumstances we do not find it functionally similar even though taking the segmental details of sale of products as there is a huge difference in the products sold by this comparable with that of assessee. 36. Accordingly, we direct Ld.TPO to exclude this comparable from the final list. 37. Megasoft Ltd.: It has been submitted that this comparable has been included by Ld.TPO. Ld.AR submitted that the information collected by Ld.TPO is by issuing notice under section 133 (6) of the act. He has further submitted that information so paid by Ld. TPO varies with that of the information that is available on the public domain. He submitted that under such circumstances these comparable should be excluded as there is no clarity regarding the functions performed, the assets owned and the risks assumed by this comparable. Ld. CIT DR though supported the observations of authorities below could not controvert therefore stated submissions advanced by Ld.AR. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that at page 386 of paper book vo....