TaxTMI 
TaxTMI 
2019 (10) TMI 1191
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....Research and development services ("R&D"):- Rs. 1,78,23,332 3. Royalty Payment:- Rs. 9,90,11,636 Software Development Services 1.1 The learned TPO and the learned AO grossly erred in law and facts of the case in determining the ALP of the international transaction of the Appellant as and thereby making an adjustment of Rs. 31,36,792 towards software development services. 1.2 That on the facts and circumstances of the case, the learned TPO and the learned AO erred in rejecting the Transfer Pricing (`TP') documentation without appreciating the contentions, arguments, and evidentiary data .put forward by the Appellant during the course of the proceedings before them, and in doing so have grossly erred: 1.2.1. in adopting the arm's length mark up to be 23.12% in respect of international transactions of the Appellant. 1.2.2. in rejecting the upper limit for sales turnover filter proposed by the Assessee without providing any empirical analysis. In doing so, the learned TPO erred in not appreciating that the software industry is clearly demarcated based on size. 1.2.3. in not maintaining consistency in applying the filters of ....
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....ting Tata Elxsi Limited as a comparable company even though the company in its reply to the learned TPO under section 133(6) had mentioned that the company provides product design services, which is functionally not comparable to the assessee's business; 1.2.12. in rejecting Thinksoft Global Services Limited by stating that it is not functionally comparable while ignoring the fact that Thinksoft Global Services Limited is engaged in software verification and validation services form an integral part of the software development services. 1.2.13. in concluding that Maars Software International Limited is not functionally comparable without even considering the fact that the IT consultancy services forms an integral part of the software development services and cannot be classified as functionally different from that of the Appellant. 2. Research & Development 2.1 The learned TPO and learned AO grossly erred in law and facts of the case in determining the ALP of the international transaction of the appellant and thereby making an adjustment of Rs. 1,78,23,332 towards R&D: services. 2.2 The learned TPO and learned AO erred in understanding the....
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.... transfer prices. Therefore the adjustment proposed is not called for and is hence misplaced. 4.4 That the learned TPO and the learned AO erred in concluding that the Appellant is exposed to single customer risk without evaluating the business arrangement of the Appellant. 4.5 That the learned TPO and the learned AO erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm's length price. B. Non-transfer pricing adjustments 5. Deduction under Section 10A to be allowed for unbilled revenue: Rs. 92,560,000 5.1 The learned AO/ DRP erred in re-computing the deduction under section 10A of the Act after reducing the unbilled revenue amount of Rs. 92,560,000/-from Export Turnover. 5.2 The learned AO/DRP failed to appreciate the fact that the export proceeds have been repatriated into India within the time period as prescribed by RBI in accordance with Master Circular No 06/2010-11 dated 01.07.2010. 5.3 The learned AO/DRP ought to have appreciated that the Appellant has realized the foreign exchange amount prior to the completion of the assessmen....
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....ut prejudice to .the above, should the communication expenses be reduced from the export turnover, such expenses should also be reduced from the total turnover while arriving at the deduction under section 10A of the Act. 7.5 The learned AO/ DRP erred in relying on a decision of Chennai Tribunal in the case of California Software Co Ltd. Vs ACT (118-TTJ-844) which was pronounced before the decision of Sak Soft Limited. 7.6 The learned AO/ DRP ought to have placed reliance on the decision of the Special Bench of the Chennai Tribunal in the case of Sak Soft Limited v. ITO (ITA No. 691 & 1953/Mds/2007) wherein it has been held that if the telecommunication, freight and insurance 'expenses are reduced from the export turnover then the same would also have* to be reduced from the total turnover in order to compute the deduction under section 10A. 7.7 The appellant places reliance on the recent decision of the Honourable Karnataka High Court (Appeal no.451 of 2008), wherein it ha's been held that if any expenses are to be reduced from the export turnover then correspondingly such expenses should also is reduced from the total turnover. 8. Donations f....
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....per Clause (iv) of Explanation 2 to Section 10A, export turnover for purposes of claiming deduction, does not include fright, telecommunication charges, insurance attributable to the delivery of the articles or things or computer software outside India or expenses if any incurred in foreign exchange in providing technical services outside India. 2.3 Ld.AO accordingly disallowed sum of Rs. 27,91,365/- being 80% of quantified communication charges relating to software unit. 2.4 Ld.AO further observed that assessee claimed deduction under section 10 A being expenses towards donation amounting to Rs. 2,65,000/-. Ld. AO disallowed the sum by holding that eligibility of deduction under section 80G of the Act was not substantiated. 2.5 Ld.AO observed that assessee entered into international transaction with its associated enterprises, and therefore for determining arms length price of international transaction, case was referred to Ld.TPO. 2.5.1 Ld.TPO upon receipt of reference called for economic analysis of international transaction entered into by assessee. 2.5.2 From documentation so filed, it was observed that, assessee was a subsidiary of....
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....chnology and that any independent enterprise would like to pay royalty to access superior technology, only if the same results in either reduction of cost or improved profitability. Ld.TPO concluded that, loss incurred in domestic segment was mainly due to payment of royalty, which otherwise would not be paid between two independent enterprises, dealing at arms length. 2.6.2 Ld.TPO thus determined ALP of royalty as 'nil". He thus proposed adjustment of Rs. 9,90,11,636/- as value of these transaction in uncontrolled conditions. 2.7. Software development services. Ld.TPO observed that during the year assessee rendered technical support services to its AE's, against which revenue amounting to Rs. 15,92,01,918/-was received. It was observed in TP study that, assessee used TNMM as most appropriate method, with PLI of OP/TC and determined margin of assessee to be at 11.63%. Assessee selected following 18 comparables in transfer prising study with average margin of 13%, and since assessee's margin was within the range of +/-5%, transaction with its AE's were considered to be at arms length. Company Name Markup on total cost Bodhtree Consulting 18% ....
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.....65% 27.96% Ld.TPO thus proposed adjustment under this segment amounting to Rs. 31,36,297/-. 2.8 Ld.TPO observed that assessee undertook research and development services during year. Arms length price of international transaction representing research and development services was determined by applying TNMM as most appropriate method and OP/TC as PLI. Assessee computed its margin at 10% on cost and average margin of 3 comparables were determined at 7% in TP study report. Assessee thus held that the transaction was within +/5% of the price charged and thus was treated to be at arms length. S.No. Particulars Margin 1. Telecommunication consultants India limited -2% 2. Crisil research and information services Ltd 5% 3. Engineers India limited 18% Average Margine 7% 2.8.1 Ld.TPO accordingly called for economic analysis and by applying various filters and rejected comparables selected by assessee and brought on new set off 7 comparables having average margin of 39.48%. Sl.No. Name of the company Operating Profit to Cost 1 Engineers India Ltd.,(seg.) 45.16% 2 Alp....
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....ils in the public domain the appellant was not in a position to controvert the stand of the Ld.TPO at the time of assessment proceedings. Therefore, the inclusion of this company as a comparable was not specifically contested before the Ld.TPO at that time. For the same reasons, no specific grounds objecting to the inclusion of the company in the set of comparables was taken before the Hon'ble Dispute Resolution Panel(DRP Further, no specific ground of appeal was raised before the Hon'ble Tribunal as well objecting to the inclusion of the company as a comparable while filing Form 36B before the Hon'ble Tribunal. However, subsequent to the filing of the appeal, it has come to the notice of the appellant that it has been held by the Hon'ble Tribunal in various decisions that this company is in the business of product development and earns revenue from sale of license and subscriptions. Hence, the company is functionally different from software development service provider and as such is functionally not comparable to that of the appellant" 5.1 It has been submitted that alleged comparable were selected by Ld.TPO on fresh comparability analysis during Transf....
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....l in various decisions has excluded these comparables on functional dissimilarity. He placed reliance upon decision of assessee's own case for Assessment year 2006-07 in ITA No. 1415/B/2010 and Assessment year 2009-10 in ITA No. 299/B/2014 along with IT(TP)No.2188/B/2014, passed by Coordinate Bench of this Tribunal vide order dated 07/06/19 and 30/04/19 respectively. 6.3. 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. 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 ser....
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.... given set of facts. In our considered opinion, exclusion/inclusion of any comparables must be strictly analysed on basis of FAR, in accordance with rule 10 B (2). We also are of opinion that comparables selected must be for relevant year which is to be compared and unless contemporaneous data as section 92D read with Rule 10 D (4), is not available for a relevant year, multiple year data should not be used. 7.1 Based upon above FAR analysis, we shall now undertake compatibility tests of assessee with comparables under objection for inclusion. 8. With aforestated understanding, let us analyse comparables alleged to be excluded by assessee before us. 8.1 At the outset, Ld.AR submits that for year under consideration, in the event, following comparables are considered for exclusion, assessee would be within acceptable arms length margin. • Avani Cimcom Technologies Ltd • Celestial Labs Ltd • E-Zest Solutions Ltd • Flextronics Software Systems Ltd (Seg.) • Helio and Matheson Information Technology Ltd • Ishir Infotech Ltd • Lucid Software Ltd • Megasoft Ltd. ....
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....2.2 Accordingly, this comparable is set aside to Ld.TPO. 8.2.3. Avani Cimcon Technologies Ltd. It has been submitted that this company is functionally different from the assessee. Based on the information available in company's website, it has been submitted that this company developed a software product by name "DXchange". It was also submitted that this company has revenue from software product sales, apart from rendering of software services for which segmental information is not available. It has therefore been submitted that this company is functionally different from assessee. It was further submitted that Mumbai Bench of Tribunal in case of Telcordia Technologies Pvt. Ltd. v. ACIT in ITA No.7821/Mum/2011 accepted assessee's contention that this company has revenue from software product and observed that in absence of segmental details, Avani Cincom cannot be considered as comparable to an assessee who was rendering captive software development services. Ld.DR, on the other hand, relied on order of Ld.TPO. We have considered submissions advanced by both sides and perused records placed before us. It was submitted that this company ....
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.... biotechnology facility to manufacture industrial enzymes, which include research laboratories for carrying out further R & D activities to develop new drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. It is thus observed that this company is into diversified activities and therefore cannot be considered as functionally comparable with Assessee who is a captive service provider. It was thus submitted that, this company is not into software development activities, accordingly, this company should be rejected as comparable being functionally different. Ld.DR, on the other hand, relied on order of Ld.TPO. We have considered submissions advanced by both sides and perused records placed before us. It has been pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee pointed out from annual report highlighting the fact that, this company is into developing biotechnology products and provides related software development serv....
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....onsidered material on record. It is seen from record that Ld.TPO included this company on the basis of statement made by the company in its reply to notice under section 133(6) of the Act. It appears that Ld.TPO did not examine services rendered by this company to give a finding whether services performed by this company are similar to Captive software development services performed by assessee. From details on record, we find that while assessee is a captive software development service provider, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under category of KPO services. It has been held by co-ordinate bench of this Tribunal in case of Hewlett Packard (I) Ltd Vs.DCIT(supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from set of comparables for period under consideration We therefore direct Ld.TPO to exclude this company from final list. 8.2.6. F....
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.... 2006-07 reveals under software segment it is engaged in business of sale of software products and software services. It has been submitted that segmental details are not available in respect of sale of software products and software service segment, and therefore, it was not appropriate to adopt application software segment of this company for purposes of comparability with assessee. On the contrary, Ld.DR supported the inclusion of this company in the list of comparables by the TPO and submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies.. We have heard rival submissions and perused and carefully considered material on record. It is observed that this company has substantial revenues from software products and break-up of software product revenues is not available. This company has incurred huge research and development expenditure to the tune of approximately Rs. 200 Crores. Ld.AR placed reliance o....
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....tted that this view of Agnity India technologies Pvt.Ltd., has been upheld by Hon'ble Delhi High Court in ITA No. 3856/2010. Ld. CIT DR placed reliance upon the order of Ld. TPO. 22. We have considered the various distinguishing features submitted by Ld.Counsel on the basis of records placed before us. Since all the distinguishing features exist even in the year under consideration, respectfully following the order of this Tribunal in assessee's own case, we direct this company to be excluded from the final list of comparables. Accordingly this comparable is excluded from finalist. 8.2.9. Ishir Ltd. Ld.TPO included this company in the finalist, and objected by assessee due to functional dissimalirities. It has been submitted that as this company outsources its work, it does not satisfy 25% employee cost filter and thus has to be excluded. He placed reliance on decision of coordinate bench of this Tribunal in case of First Advantage Offshore Services Pvt. Ltd. V DCIT in IT(TP)A No.1086/Bang/2011 for AY: 2007-08, wherein it has been held that this company is not comparable in case of software development services provider. ....
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....133(6) of the Act. This information which was not available in public domain could not have been used by Ld.TPO, when the same is contrary to annual report of this company as highlighted by Ld.AR. We also find that in the decision referred to by Ld.AR, of this Tribunal held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. 8.2.11 Lucid Software Ltd. As observed, Ishir Ltd.(Supra) Lucid Software Ltd, this Company is also involved in the development of software as compared to the assessee, which is only into software services. 8.2.12. 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 perform....
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....veloped by it on which depreciation is claimed. Thus this company has been characterized itself as engaged in providing outsourced product development services to independent software vendors and enterprises. It has been characterised to having earned significant portion of its revenues from export of software services and products. This function, the assets owned by this company and the risk assumed are not comparable with that of the present assessee and hence has to be excluded from the final list of comparables. Accordingly, this comparable is directed to be excluded from finalist. 8.2.14. R Systems International Ltd. Ld.Counsel submitted that this Tribunal while deciding the case of Hewlett-Packard (India) Global Soft Pvt.Ltd (supra) held this comparable to be excluded since this company has a different year ending. Assessee has submitted this comparable to be into IT related and BPO services. However on perusal of annual report placed at page 831-994 of paper book volume- 2, we observe that this comparable has income from software development and customization services and to a lesser extent from BPO services. It has been submitted that this compara....
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.... exclusion of comparables considered herein above, assessee falls into +/- 5% range. However, we grant liberty to assesse to allege other comparables, not considered by us in an appropriate instance. Accordingly we allow Ground no.1.26 to 1.21 as discussed herein above. 9. Ground No.2.1 to 2.6 Both sides submitted that identical issue has been considered by Co-ordinate Bench of this Tribunal in assessee's own case for assessment year 2009-10 vide order dated 30/04/19 in ITA No. 299/Bang/2014 and 218/Bang/2014, wherein this issue has been set aside to Ld.TPO. It has been submitted that following the same the issue may be set aside to Ld.TPO. 35. We have perused the order passed by this Tribunal in assessee's own case for assessment year 2009-10 (supra) and observed that the issue has been decided by observing as under: RESEARCH AND DEVELOPMENT SERVICES SEGMENT: 14. As far as determination of ALP in this segment is concerned, the disputes raised by the Assessee are that the nature of services rendered by the Assessee to its AE was SWD services and it is not correct to characterize the same as R& D Services. Though this was the basis on which the TP....
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....evant factors. If the TPO comes to the conclusion that the nature of services rendered is SWD services, then the comparable companies chosen in the SWD services segment, which we have already decided in the earlier paragraphs, would be applicable. If he comes to the conclusion that the services rendered were in the nature of R & D and not SWD services, then the issue with regard to comparability of companies already chosen by the TPO/DRP on the basis of assumption that the Assessee is rendering R & D services and working adjustment to be made to the profit margin of comparable companies chosen on that basis are left open for consideration de novo by the TPO in the set aside proceedings. Respectfully following the same, we direct Ld.TPO to compute ALP as directed hereinabove. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 10. Ground No.3.1- 3.7 is in respect of the treatment of royalty paid by assessee to its AE by the authorities below. 10.1 The contentions raised by assessee is that assessee in its manufacturing activity uses various marketing intangibles, technology intangibles, process manuals and standards, qu....
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.... authorities below and therefore requires consideration. 10.6 Ld.CIT DR supported Ld.AR, that based upon these documents, the issue needs to be reconsidered for establishing actual nature of payments made by assessee. 10.7. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that assessee has placed substantial evidence which was not before the authorities below. We are therefore inclined to set aside this issue back to Ld.TPO/AO, for determination of this issue in the light of these documents vis-a-vis the agreement entered into by assessee with its AE under which the royalty has been paid. It has been observed that for assessment year 2006-07 in assessee's own case in ITA No. 1415/be a NG/2010 vide order dated 07/06/19, the issue has been set aside on the basis of additional evidence filed by assessee for verification of the same. Respectfully following the same we are also inclined to set aside this issue back to Ld. TPO to verify the issue on basis of documents filed by assessee and to establish true nature of transaction regarding payment of royalty by assessee to its AE. Ld.TPO is directed ....
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....ns revenue that has been earned but not yet billed to customers as of the end of accounting year. It is very different from unearned revenue. When goods or services has been transferred to customers but customer payment is contingent based on a future event, this amount is generally referred to as an unbilled revenue. In our considered opinion export proceeds received on or brought into India in accordance with RBI guidelines satisfy requirements of section 10 A (3). Further Section 10A (3) provides that competent authority being RBI can grant extension of time to receive unbilled amounts by assessee pertaining to a particular year. 40.1 Before us assessee has not been able to establish that RBI extended time period to receive income arising out of export of services declared during the year under consideration. In decisions relied upon by Ld.AR in case of Tech Mahindra R&D Services Ltd (supra), assessee therein received income within 6 months of invoice being raised and therefore this Tribunal held that revenue should be included in export turnover and also the total turnover. In the facts of present case, assessee raised invoice in March 2008 that is en....