TaxTMI 
TaxTMI 
2019 (6) TMI 1407
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.... 2. That the Assessment Order passed in pursuance the directions 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....
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....data for comparable companies while determining arm's length price. 10.3. That the Learned TPO erred in using data as at the time of assessment proceedings. 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. ....
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....pellant submits that the Ld.TPO has erred in including, 'Infosys' as functionally comparable company to the Appellant, while doing the comparability analysis. The Appellant submits that Infosys is not comparable to the Appellant for the following reasons: * It owns substantial brand value 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....
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....the following reasons: * It provides software solutions in the data cleansing and healthcare * It is engaged in Software development Ground No. 10.4.9: Accel Transmatics Limited ("Aced Transmatics") should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in including 'Accel Transmatics' as functionally comparable company to the Appellant, while doing the comparability analysis. The Appellant submits 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' i....
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....TPO upon receipt of reference called for economic analysis of international transaction entered into by assessee. 5. From documentation so filed, it was observed that, assessee was a subsidiary of American Power Conversion Corporation, U.S., primarily engaged in manufacture of power protection equipment and undertakes trading of UPS and accessories. Ld.TPO observed that, assessee primarily exported by way of sales to its associated enterprises and also had sales of manufactured products in the domestic market within India. 6. In the TP study, it has been submitted that 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....
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....6.42% 2 Akshay Software Technologies Limited 8.24% 3 Aztec Software & Technology Services Limited 13.94% 4 Bangalore Softsell Limited 4.37% 5 Bristlecone India Limited -2.92% 6 Compucom Software Limited 16.00% 7 Datamatics Limited -5.87% 8 Encore Software Limited -33.94% 9 Flextronics Software Systems Limited 32.69% 10 Four Soft Limited 22.27% 11 Future Software Limited 2.88% 12 Gebbs Infotech Limited 23.69% 13 Goldstone Technologies Limited 7.48% 14 Infosys Technologies Limited 41.29% 15 I ntertec Communications Limited 46.07% 16 K 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 C....
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.... of DRP directions, Ld.AO passed final impugned assessment order, wherein total transfer pricing addition amounted to Rs. 7,63,43,600/- and deduction claimed by assessee under section 10A of the Act, was restricted to Rs. 56,87,840/-, thereby disallowing communication expenses claimed by assessee amounting to Rs. 44,31,0474/-. Aggrieved by order passed by Ld.AO, assessee is in appeal before us now. 15. Ld.AR submitted that Ground No. 1 and 2 are general in nature, and therefore do not require any adjustment. 16. Ground No. 3-7 is in respect of the treatment of royalty paid by assessee to its AE by the authorities below is. 17. Contentions raised by Ld.AR is that, assessee in its manufacturing activity, uses various marketing intangibles, technology intangibles, process manuals and standards, quality standards etc which is owned by its AE-UK. It has been submitted 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 suc....
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.... per which royalty has been paid. Ld.TPO is directed to verify details, and if necessary, called for any further documents in order to establish true nature of transaction regarding payment of royalties by assessee and consider the claim of assessee as per law. 21. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 22. Ground No. 8-10 and additional has been raised by assessee challenging addition made by Ld.AO on account of arms length price computed for software design and development service segment being technical support services provided by assessee to its AE's. At the outset, it has been submitted that only issue is regarding inappropriate comparables selected by Ld.TPO. Primary allegations regarding comparables is that, they are functionally dissimilar with assessee and does not fulfill filters applied by TPO himself. 23. 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 • B....
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....ased on the specifications received from APCC US for the provision of services. APC India does not assume any risk with respect to the ultimate success or failure of the development activities. Also, in case the technical support services provided by APC India do not meet the specifications mentioned by APCC US, it is sent back for rework. Foreign exchange Risk APC India invoices APCC US in dollars to be settled at a later date. Since there is a time gap between the invoice date and the date of realization of the invoice, APC India would be subjected to foreign exchange risk. Therefore, it bears a foreign exchange risk on its receivables. Credit and collection Risk We understand that APC India provides technical support services to its associated enterprises and accordingly, would not bear credit and collection risk. Service liability Risk With respect to the technical support services provided, APC India does not bear any significant risks since it provides internal technical support services which includes creating, maintaining or enhancing APC company-wide internal use software infrastructure. There is no market risk or servi....
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....as been included by Ld.TPO, and is functionally different with that of assessee. He submitted that this comparable is dealing in both services and products had is involved in huge research and development activities. Ld.AR submitted that, this comparable owns substantial intangibles thereby making it very different from a captive service provider who caters only to its AE and their customers, on cost plus basis. On the contrary, Ld. CIT DR placed reliance upon the view taken by authorities below. 32. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that this comparable has a high turnover with the huge margin of 40.3% as compared to 9% earned by assessee. The turnover filter fixed by Ld.TPO does not satisfy for inclusion of this comparable. Further it is observed that this comparable owns huge intangibles, as it undertakes, research and development activities, owns branded/proprietary products. Whereas, in case of assessee, is contract service provider for its AE's. Further that in the process of software development, in the event any intangibles are created, the same is exclusively owned by AE. Under such circumstan....
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....): It has been submitted that this comparable has been included by Ld.TPO even though this functionally dissimilar with that of assessee. He further submitted that this comparable has sold its intellectual property rights in "Prodigy" and receives royalties on sale of software. Ld.AR thus submitted that the segment applied by Ld.TPO itself is not identical with that of assessee. 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 records placed before us. It is observed that Ld.TPO used segmental information in respect of products of this comparable. However, from various products developed by this comparable, it is observed that, they are not into contract software development, which is the case of assessee, developing software for its AE only, for which assessee is remunerated on cost +10% markup. Further that in the process of software development, in the event any intangibles are created, the same is exclusively owned by AE. As we have already analyse the functions and the risks assumed, it is observed that assessee do not even undertake the pricing risk as the ....