TaxTMI 
TaxTMI 
2019 (10) TMI 1191
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....e 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 rejecting companies with software development revenue less than 75% of the total revenue, companies of different year end and in rejecting comp....
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....hich 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 nature of business carried out by the Appellant. The learned TPO and learned AO have wrongly interpreted the functions of the Appellant and have wrongly compared the Appellant to pure R & D companies. 2.3 The lea....
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.... 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 assessment. 5.4 The Learned AO/DRP ought to have appreciated the fact that, section 10B contemplates repatriation of convertible foreign exchange in to India within stipulated time and does not mandatorily require the Appellant to raise the invoices. 5.5 The learned AO/DRP ought to have observed that raising of ....
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....ounced 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 for 10A units: Rs. 265,000 8.1 The learned AO/ DRP have erred in disallowing the donation expenditure without attributing the same to the corresponding unit where it was incurred. 8.2 The learned AO/DRP ought to have observed that the said expenditure pertains to the unit eligible to avail benefit under section 10A of the Act. 9. Calculation of Interest on resulting adjustment under sect....
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....ftware 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 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 domestic market within India. 2.5.3 In TP study, it has been submitted that AE provides all technical support services in nature of software application development and maintenance and research a....
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.... 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% FCS Software Solutions Ltd., 14% Goldstone Technologies Ltd., 3% Larsen & Toubro Infotech Ltd., 11% Melstar Information Technology Ltd., 0% Orient Information Technology 06% Powersoft Global Solutions Ltd., 19% SIP Technologies & Exports 25% Sonata software Ltd 9% Synetairos Technologies Ltd., 11% Trident Info-Tech Corpn.Ltd., 66% VJIL Consulting Ltd., 7% Akshay Software Technology Ltd., 7% Cambridge Technology Enterprises 21% ICRA Techno Analytics Ltd., 15% Mindtree Consulting Ltd., 11% Computech International Ltd., 7% Karuturi Networks Ltd., 4% Aver....
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....alled 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 Alphageo (India) Ltd. 38.21% 3 Vimta Labs Ltd 27.44% 4 IDC (India)Ltd., 15.89% 5 Oil Field Instrumentation (India) Ltd., 76.46% 6 Celestial Labs Ltd., 58.35% 7 Mindtree Ltd.(seg.) 14.90% Arithmetic mean 39.48% 3.4 Ld.TPO computed adjustment for this segment at Rs. 1,78,23,332/- 3. Aggrieved by adjustments proposed by Ld.TPO, under various segments assessee raised objections before DRP, who upheld view of Ld.TPO. 3.1 On receipt of DRP directions, Ld.AO passed final impugned assessment order, wherein following additions were made * transfer pricing additions in software service development segment was made amounting to Rs. 31,36297/- * transfer pricing addition in research and development segment was made at rupees would Rs. 1,78,23,332/- * disallowance of Royalty amounting to Rs. 9,90,11,636/-. * deduction claimed by assessee under section 10 A of the Act, was rest....
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...." 5.1 It has been submitted that alleged comparable were selected by Ld.TPO on fresh comparability analysis during Transfer Pricing assessment proceedings and in absence of any specific details in public domain and assessee was unable to controvert stand of Ld.TPO. Ld.AR submitted that it is for this reason that no specific ground was raised for exclusion of this comparable before Ld.DRP and before this Tribunal. Placing reliance upon decision of Hon'ble Supreme Court in case of NTPC Ltd vs CIT reported in 229 ITR 383 and Jute Corporation of India vs CIT reported in 53 taxman 85, submitted that comparables specified in additional grounds may be admitted. Ld.CIT DR, though opposed admission of additional ground, could not controvert submissions advance by Ld.AR. We have perused details relied upon by both sides In our considered opinion comparables alleged in additional ground arises out of records and was objected before DRP for its exclusion/inclusion. Considering inadvertent mistake on behalf of assessee in raising these grounds before this Tribunal, we allow additional ground raised now. Accordingly additional ground no.1.2.14 in application dated 03/03/2016 st....
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....y assigned by APCC US. Training APC India provides both internal and external training to its employees. These training programs could be organized either in the US or in India. Design and software development APC India does not develop software products for sale in open market. It caters to the specific needs of APCC US and its associated enterprises worldwide that help exploiting new opportunities by harnessing knowledge of business processes with proven skills in applying technology. Technical support and maintenance activity APC India provides internal technical support services which includes creating, maintaining or enhancing APC company-wide internal use software infrastructure. Billing and collection APC India is responsible for raising invoices and their subsequent collection. Assets Owned: It has been submitted in TP study that, assessee does not own any significant intangible assets. It only has technical manpower employed and trained by company being most important assets along with furniture fixtures computer peripherals etc. Risks Assumed: It is submitted that, as assessee is a captive service provider and is compensated at cost +10....
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....g.): 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. 10. 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 prici....
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....a comparable. It was observed by this Tribunal in case of Telcordia Technologies Pvt. Ltd. v. ACIT(supra ) that margin of this company is 52.59% which represents abnormal circumstances and profits. Following figures were relied by Ld.AR, as observed by coordinate bench of this Tribunal in case of First Advantage Offshore Services Pvt.Ltd. Vs DCIT(supra):- Particulars 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Exports 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% We, therefore, direct Ld.TPO to exclude this company from final list. 8.2.4.Celestial Labs Ltd. It has been submitted that this research & development company. In this regard, the following submissions were made:- As per Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure", it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and same has been written off in 10 years equally yearly instalments from the year in which it is incurred." An amount of Rs. 11,692....
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.... there is no clear basis on which it could be held that this company is mainly in the business of providing software development services. We therefore direct Ld.TPO to exclude this company from final list. 8.2.5 E-Zest Solutions Ltd: This company has been selected by Ld.TPO and objected by assessee on the ground that, it was functionally different from assessee. Ld.TPO rejected contentions of assessee on the basis of information received in response to notice under section 133(6) of the Act, wherein it was held that this company is engaged in software development services. It was thus held by Ld.TPO that this company satisfies all filters. Ld.AR submitted that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. He submitted that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, IT design services and in Technology Consulting Services including product development consulting services, and are high end ITES normally categorized as knowledge process outsourcing ('KPO') services. It is further submitted that this company has not provided segmental dat....
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.... reliance on decision of co-ordinate bench of this Tribunal in case of Hewlett Packard (I) Ltd Vs.DCIT in ITA no. 1031/Bang/2011. On the contrary, Ld.DR supported the inclusion of this company in the list of comparables by the TPO. We have heard rival submissions and perused and carefully considered material on record. It is seen from record that Ld.TPO included this company on the basis of statement made by company in its reply to notice under section 133(6) of the Act. It is observed that there is no segmental information in respect of this company in annual report. We are unable to understand how segmentation was done by Ld.TPO and reconciliation of annual report. In such a situation we are of the opinion that Flextronics Software Solutions Ltd (seg) cannot not be considered as a proper comparable. We therefore direct Ld.TPO to exclude this company from final list. 8.2.7. Helios & Matheson Information Technology Ltd. This comparable has been included by Ld.TPO, and objected by assessee as it is functionally incomparable. It has been submitted that this company is engaged in development and sale of software products which is functionally different from servic....
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....are products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. We therefore direct Ld.TPO to exclude this company from final list. 8.2.8. Infosys Ltd: It has been submitted that Infosys Ltd., was selected as comparable by Ld.TPO in assessee's own case for assessment year 2008-09. However, Co-ordinate Benches of this Tribunal has directed exclusion of the same on the ground that it is functionally different with that of assessee. It has also been observed that this company was owning brand and having substantial intangible assets which cannot be held to be suitable comparable for assessee who was only providing contract software development services and IT staffing services. It has been submitted that functions of assessee, assets and risk profile has not undergone any change for the year under consideration. Ld.Counsel has also submitted that this company is not functionally comparable to assessee inasmuch as, it is also engaged in software development services and generate substantial revenue from the sa....
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.... revenue and therefore fails in salary cost filter testapplied by Ld.TPO. Reliance has been placed on decision of this Tribunal for assessment year 2007-08, in case of Maphasis Ltd. vs ACIT (supra) wherein KALS as comparable was rejected being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this ....
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....in vis-a-vis the information gathered by Ld.TPO under section 133 (6). Accordingly, we direct Ld.TPO to exclude this comparable from the final list. 8.2.13. Persistent systems Ltd. Ld. Counsel submitted that this comparable has been included by Ld.TPO, however in assessee's own case for assessment year 2008-09 this Tribunal in ITA No.5401/Del/2012 directed exclusion of the same on the ground that it is functionally different with that of assessee. Ld.Counsel submitted that there is lack of segmental accounting in the financials of this company. He also submitted that there are no bifurcations between the services rendered by this company. This Tribunal while considering this comparable for assessment year 2008-09 (supra) has observed that during the relevant assessment year company developed its own software products, and its revenue included licensing of software products. Ld.CIT, DR submitted that this company is into software services and products. And segmental accounting of software services and products are available for the year under consideration. We have perused the submissions on the basis of the records. It is observed that assessee has developed softw....
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....nificantly higher turnover, abnormal margins, presence of intellectual property, diversified business, brand value and turnover. He placed reliance upon the decision of ICC India Pvt.Ltd., vs. ACIT (supra).. On the contrary, Ld.DR submitted that there is no related party transaction during the year under consideration. We have heard rival submissions of both sides in the light of records placed before us. It is observed that Co-ordinate Bench of the Delhi Tribunal in ICC India Pvt.Ltd., vs. ACIT (supra) has excluded this comparable by placing reliance upon Calibrated Healthcare Systems (I) (P) Ltd. Vs ACIT (OSD) reported in (2015) 54 Taxmann.com 53. It is observed that in this decision this tribunal has examined comparability of WIPRO and ordered its exclusion on the ground that this is a giant entity with marked differences as regards risk profile, nature of services, ownership of IP rights, expenditure on R&D, etc. So, following the decision rendered by co-ordinate bench as well as the fact that the assessee company is a captive service provider taking minimum risk having no intangibles cannot be compared with WIPRO which is having diversified business, ownership of signifi....
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....hosen to characterize the transaction with AE as R & D Services cannot now be permitted to say that the nature of services is akin to SWD services. In this regard he also drew our attention to the Agreement between the Assessee and its AE under which the services in question were rendered by drawing our attention to Page 4997 of the Assessee's paper book. 16. We have heard the rival contentions and the nature of service as set out in the note filed as part of the written submission before us. We are not reproducing the note filed by the parties before us and the contentions put forth therein because it requires examination by the AO/TPO. We are of the view that in the light of the TPO's acceptance in AY 20010-11 & 2011-12 that the nature of services rendered was akin to SWD services, the entire comparability criteria will change and the comparable companies already retained in the SWD segment will hold good for this segment also. We therefore feel that it would be just and appropriate to remand for fresh consideration by the AO/TPO of the nature of services rendered by the Assessee in this segment. This will depend upon the terms of the Agreement between the Assessee and....
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....inted out that in TP order Ld. TPO wrongly held that assessee applied TNMM as most appropriate method for benchmarking the 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 the most appropriate method. 10.3 Before DRP, it has been acknowledged that assessee has used CUP as the most appropriate method to determined arm's length rate of royalties paid to AE. 10.4 Ld.AR submitted that, both authorities below proceeded on the footing that, no evidence has been provided by assessee to prove any tangible benefit derived from being the royalty for the so-called superior technology. 10.5 Referring to pages of small paper book filed by Ld.AR submitted as additional evidences at the time of haring, which includes documents to establishes assessee as a licensed manufacturer, that products manufactured by assessee cannot be carried out without technological and R & D assistance from its AE, details establishing actual receipt of technical knowhow from its AE against which royalty is paid, details to prove that IPRs and know-how received from AE are confid....
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....t assessee fulfilled requirement prescribed under RBI circular (supra). He submitted that assessee realised the sum within period of 6 months from the end of financial year or such further period as the competent authority May allow in this behalf. He submitted that 10A being a beneficial provision was introduced for purpose of increasing exports from India and to encourage establishment of export-oriented industrial undertaking in free trade zone 12.2 Ld.AR in support of his argument placed reliance upon decision of Mumbai Tribunal dated 15/05/18 in case of M/s.Tech Mahindra R&D Services Ltd vs DCIT in ITA No. 4462/M/2016 for assessment year 2008-09. 12.3 On the contrary Ld.DR submitted that, facts in case of assessee is distinguishable with that facts in case of M/s.Tech Mahindra R&D Services Ltd vs DCIT(supra) . It has been submitted that M/s.Tech Mahindra R&D Services Ltd vs DCIT (supra) in turn relied upon decision of Madras Tribunal in case of iNautix Technologies India Pvt.Ltd., vs ACIT in ITA No. 541/Mds/2006 for AY 2002-03 vide order dated 9/08/2011. It has been submitted that in present case, income has not accrued to assessee of which invoices has been raised in Ma....
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....ssee stands allowed for statistical purposes. 14. Ground No.7 These grounds has been raised by assessee, is in respect of exclusion of telecommunication expenses while computing deduction under section 10 A of the act upheld by Ld. CIT (A). Ld.AR placed reliance upon the decision of Hon'ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd reported in 349 ITR 98 and submitted that this issue stands covered in favour of assessee. On the contrary,Ld.CIT DR placed reliance upon the order passed by Ld.AO. 44. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that, Hon'ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd(supra) on identical issue held that telecommunication expenses is to be included while computing deduction under section 10 A of the act as it is directly linked with earning of income. Ld CIT DR has not brought before us any contradictory/distinguishable facts in respect of present case before us. Respectfully following Hon'ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd(supra), we direct Ld.AO to include telecommunication expenses while computing exempt income u/s10A of the ....