TaxTMI 
TaxTMI 
TaxTMI 
2020 (5) TMI 662
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....red on facts and in law in passing order under section 143(3) read with Section 144C of the Act at an income of Rs. 57,96,95,314 as against returned income of Rs. 35,04,84,700. 2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 18,16,82,680/- to the arm's length price of the 'international transactions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/Dispute Resolution Panel ('DRP'). 2.1 That while giving effect to the direction of DRP, the AO/TPO erred on facts and in law in computing the operating profit to cost ratio of appellant at 9.61% as against 15.20% (13.17% in AE segment) computed by the appellant, by erroneously considering foreign exchange fluctuation income of Rs. 10,51,15,282/- as non-operating item of income. 2.2 That the AO/TPO erred on facts and in law in passing order under Section 143(3) read with section 144C of the Act in gross violation of section 144C(10) of the Act, by not considering the specific direction of the DRP to consider foreign exchange fluctuation income as operating item of income. 2.3 That DRP/T....
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....haracterizing the alleged transaction of delay in receipts of receivables as unsecured loans advanced to the associated enterprises. 3.2 That the DRP/TPO erred on facts and in law in not appreciating that delay in receipt of receivable is not an 'international transaction', per se, under section 92B of the Act but is a consequence of an 'international transaction' undertaken in the form of services rendered to the associated enterprise. 3.3 That the DRP erred on facts and in law in holding that the nonrealization of invoice value beyond the stipulated period (as per contract) is a separate international transaction, whose arm's length price is required to be determined separately. 3.4 Without prejudice, that the DRP/TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely linked to the 'international transaction'of export and since the profit earned by the assessee as a percentage of cost is higher than the profit earned by comparable companies, no transfer pricing adjustment was even otherwise required to be made in this regard. 3.5 That the DRP erred on facts and in law in holding that working capital a....
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....') were issued and complied with. In view of the international transaction carried out by the assessee with its Associated Enterprises (AEs), the learned Assessing Officer referred the matter of determination of arm's-length price of the said transaction to the learned Transfer Pricing Officer (TPO). The Learned TPO in his order dated 04/10/2017 proposed transfer pricing adjustment of Rs. 26,82,48,663/-which consisted of adjustment for provision of software development services amounting to Rs. 21,09,11,213/- and adjustment for interest on receivables amounting to Rs. 5,73,37,450/-. The Assessing Officer in his draft assessment order included the transfer pricing adjustment proposed by the learned TPO. On the objection filed by the assessee against the proposed transfer pricing adjustments, the learned DRP after considering submission of the assessee issued certain directions to the Assessing Officer/ TPO. The learned TPO re-computed the transfer pricing adjustment in compliance with the direction of the learned DRP, which was worked out to Rs. 22,92,10,640/-. Pursuant to the direction of the learned DRP, the learned Assessing Officer issued the impugned final assessment order maki....
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....ns of the Companies Act, 1956 and is a subsidiary of Global Logic Inc. GL India is engaged in the provision of software development services to its customers including Global Logic Group Companies. The departments of GL India include delivery, finance & legal, human resource (including employee services, recruitment, resourcing and learning & development and operations. During the year, there were approximately 1,575 employees on the payroll of GL India. The company has offices in Noida, Bangalore and Nagpur. The Company operates through certain EOU registered with the STPI and SEZ." 4.2 The assessee reported following international transactions in its transfer pricing study: Sl. No. Nature of transaction Method applied Value of transaction (in Rs.) 1. Amount Received for the software services provided TNMM 1,77,98,61,522 2. Purchase of Equipments 1,19,862 3. Reimbursement of Expenses by AEs Other Method 28,26,31,589 4. Amount Received on behalf of AE 21,24,490 4.3 The learned TPO has proposed adjustment only to the transaction of provision of the software services. 4.4 The FAR analysis of the provision of the software development services ....
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....omparable sought to be excluded before us by the assessee are adjudicated as under: Mindtree Ltd. 5. This company was initially selected by the assessee as comparable, however during the course of proceeding before the Ld. TPO, the assessee sought to exclude the company from the set of the comparables on the ground of functional dissimilarity. The learned TPO referred to the various pages of the Annual Report of the company ( i.e. P-77, P-92 , P-32 ) and profit and loss account and held that the company provided software development services, which is functionally similar to the assessee, who is also developing software for the associated enterprises. 5.1 Before the Learned DRP, the assessee taken following objections against inclusion of the company: "1. It is functionally different as it is seen that the company has developed various products to offer to its customer's. The company developed a software product 'I GOT GARBATE' and also launched a produce, 'Gladius', a video management software. 2. The company also have SAP mobility applications which can be operated on mobile phones and tablets. 3. At page 76 of the annual report the company, the company in its notes to ....
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...., Siebtel, MS exchange and databases (Oracle, SQL Server, DB2, Sybase, MS access) . The assessee claimed to have included services development delivery and integration of a specialized items, product testing. The assessee also uses a migration methodology provided by the GL group that covers all phases from impact analysis to deployment and testing. The assessee also was engaged in providing product extension services, append new features and functionality to existing products. Thus, the assessee is engaged in developing software products for the Associated Enterprises through skills possessed in various technologies and also in extension of functionality of existing products of the Associated Enterprises. The assessee is also engaged in providing services of maintenance and support, testing, migration and porting etc to its Associated Enterprises. The assessee can be categorized as provider of software development and services. 5.7 The learned Counsel has referred to page 141 and 135 of the paper-book to contest that the company has developed various products to offer to its customer. The Learned Counsel referred two products namely "I GOT GARBAGE" and "Galdius". The learned Coun....
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....ect the contention of the assessee for excluding the company from the set of the comparable on the ground of functional dissimilarity. 5.11 The next argument of the learned Counsel of the assessee that company possess intangible assets worth millions of rupees. This argument of the company has been rejected by the learned DRP. The learned DRP has noted that the company owns intangible of Rs. 17.10 crores, which includes software of Rs. 15.50 crores and intellectual property is only of Rs. 1.50 crore as against the operating revenue of Rs. 3081 crores and thus the intellectual property owned is very insignificant. We agree with this finding of the learned DRP, and accordingly reject the contention of the assessee of difference in the asset base of the company as compared to the assessee. 5.12 The learned Counsel has relied on the decision of the Agilis Information Technologies India Private Limited (supra), wherein the company was excluded by the Tribunal holding as under: "4.13 We have heard both the parties and perused the records available before us. This company is engaged in development and sale of software product and also owns intangible assets (Patents). In assessee's ca....
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....rm of the software and intangible assets under development. On perusal of fixed assets schedule, available on page S-1245 of the Annual Report ( page 116 of PB-2), we find that at the beginning of the year the assessee owned intangible assets of Rs. 153,42,45,196/- which included software of Rs. 143,61,95,196 ( 93 %), thus the intangible other then the software are insignificant. During the year, the company has sold/transferred the software and claimed depreciation, which resulted in net block of software at the end of the year to Rs. 33,22,11,879/-. The assessee has also shown intangible assets under development of Rs. 41,82,66,450/-, which makes the net intangibles owned by the company to Rs. 75,04,78,329/- at the end of the year. But no depreciation has been claimed on the under developed intangibles, therefore there is no effect on the profitability of the company on account of the underdeveloped intangibles. Thus, the objection of the assessee of non-comparability of the assets is rejected. 6.5 Further, the learned Counsel submitted that operating expenses amounting to Rs. 34,91,74,116/-and Rs. 54,82,74,109/- on cost of the software packages for own use and cost of the bough....
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....s (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs. 489.53 crs based on fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year." 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- ( page 129 of PB-2) , which has not been allocated into three segments, and thus the segmental r....
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....gn and analysis services, which is functionally different from a pure software service provider and therefore it ought to be excluded. The learned Counsel submitted that the appeal filed by the Revenue against the decision was dismissed by the Hon'ble Delhi High Court in ITA No. 682/2016. The Learned Counsel also submitted that in assessee's own case for assessment at 2008-09 (ITA No, 122/Del/2013) the company has been excluded from set of comparables. Accordingly, he submitted that the company might be excluded in the year under consideration also. 7.3 The Learned DR, on the other hand, relied on the order of the lower authorities. 7.4 We have heard rival submission of the parties and perused relevant material on record. Regarding the contention of the learned Counsel of the assessee of the functional dissimilarity, we have perused the Annual Report of the company. On page 136 of the Annual Report (page 323 of PB-2), the revenue from operation of sale of the software services amounting to Rs. 16, 691.53 million has been reported. On page 27 of the Annual Report (page 265 of PB-2), in the director's report business over view of the company has been reported as specializes in buil....
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....usiness line, our revenues are not directly related to the number of employees on the project but depend on the outcome from product sales. There are three kinds of IP business that we are focusing on: a) Business acquired from customers by taking over some of their non-strategic products b) Developing products that fill white-spaces in our customer's products. c) New products built by us Over the last three years, our IP portfolio has grown well and contributes to nearly 20% of our business and is growing. To accentuate our focus on products and to ensure that we are seen as a credible product company, we have created a separate business unit branded as Accelerite based out of our Silicon Valley offices. Accelerite will be our product brand for some of our infrastructure products - Radia Client Automation, rCloud Disaster Recovery, Location Based Services and Paxpro. As part of this strategy, we have set apart the team that is working on products under the new brand and are operating this team as a typical silicon-valley software early stage product company. The product group will operate independently with policies, hierarchies and processes appropriate for a produc....
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....ed that revenue from the operations include revenue from product design, graphics animation and gaming and system integration and support. According to him all these activities are functionally different from that of the assessee. He also submitted that the in assessee's own case for assessment year 2007-08 and 2008-09, the Coordinate bench of the Tribunal in ITA No. 5809/Del/2011 and 122/De/2013 has directed to exclude the company from the set of the comparables. 8.1 The learned DR on the other and relied on the order of the lower authorities. 8.2 We have heard the rival submission of the parties on the issue in dispute and perused the relevant material including annual report of the company. The details of revenue from operations available on page 51 of the Annual Report ( page 394 of PB-2) , reproduced as under: 18. Revenue From Operations Year ended 31 March, 2014 Sale of traded goods [Refer None(i) below] 4,700.51 Rendering on services [Refer None(ii) below] 72,509.25 Total 77,209.76 (i) Sale of traded goods include sales of computers, networking and storage systems. (ii) Rendering of services comprises: &nb....
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....ing the year the assessee has earned revenue aggregating to Rs. 20,675.74 lakhs from sale of the software products and in absence of segmental result of software development services and sale of the software products, the company cannot be treated as comparable. The learned DRP, held that company is engaged in two business segments namely information technology (IT) and information technology enabled services (ITes) and held the company as functionally similar to the assessee. 9.2 Before us, the learned Counsel of the assessee repeated the argument that the company is engaged in sale of products. He supported this claim on three grounds. Firstly, in the profit and loss account revenue has been shown from sale of software products. Secondly, the following information on the website of the company also support sale of the products: "Thirdware's manufacturing solutions and capabilities include-ERP & Supply Chain. We have capabilities in multiple industry-leading ERP and SCM solutions to help our clients develop an enterprise system strategy, re-engineer business processes and implement large scale enterprise-wise programs. We also help integrate back-end enterprise systems with b....
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....gement discussion and analysis , available on page 13 of Annual Report ( PB-445), we find that under the heading foreign exchange earning an outgoing and technology absorption, adaption and innovation, the activities of the company has been shown as export of software services. The relevant part of the management discussion and analysis reproduced as under: "FOREIGN EXCHANGE EARNING AND OUTGOING: The Company's earnings are to a significant extent export oriented and the company is constantly reviewing and augmenting its efforts to increase export of software services and applications to existing and new markets and for this purpose has also drawn long-term strategy to strengthen its overseas marketing infrastructure. The particulars regarding foreign exchange and outgoings are reflected in Notes to Accounts. TECHNOLOGY ABSORPTION, ADAPTATION AND INNOVATION: Your Company will focus on latest development in technology in software services in which it is carrying on business. The Company leverages its excellence in technology by adapting it to producing world-class technology solutions. The continual exposure to new and improved technologies has helped maintain high motivati....
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....opment services. 10.1 Before the Ld. DRP, the assessee submitted that company is providing wide-ranging services including automation engineering, Service Now, UX and UI and customize software services. Further it was submitted that company is doing business in three verticals i.e. Storage and visualization, publishing and SDO and e-commerce and no segmental bifurcations available in respect of the range of services. It was also submitted that this is exceptional year of operation in view of the increasing revenue of 52.0% and increase in profit before tax of 85.66%. The learned DRP however held that automation engineering is in context of providing automated testing services, which is part of software development services. Regarding exceptional year of operation, the learned DRP, held that the assessee has not demonstrated as to how high turnover/profit has affected the margins. Accordingly, the Ld. DRP, retained the company as comparable. 10.2 Before us, the learned Counsel repeated the submission which were made before the Learned DRP. Further, the Learned Counsel relied on the decision of the Pune bench of the Tribunal in the case of PubMatic India (p) ltd Vs ACIT (ITA No 655....