TaxTMI 
TaxTMI 
2018 (5) TMI 2031
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.... same are dismissed as not pressed. 3. The Ground No. 2 raised by the assessee is general in nature and does not require any adjudication. 4. The first ground to be decided in this appeal for the Asst Year 2012-13 is with regard to exclusion of E-Infochips Ltd as a comparable while determining the Arm's Length Price of the assessee with regard to software development services (international transaction ) of the assessee. The inter connected issue to be decided in this appeal is as to whether the ld DRP was justified in treating the foreign exchange gain as nonoperating income while determining the ALP of international transactions, in the facts and circumstances of the case. The other issue involved in this appeal is with regard to determination of Arm's Length Price (ALP) of Royalty payments at Rs Nil by the ld TPO. The assessee had raised the following grounds in this regard:- 3. Determination of arm's length price by the AO, TPO and DRP for the software design & development services That on the facts and circumstances of the case and in law, , the Ld. DRP, TPO and AO erred in not accepting the arm's length price of the transaction undertaken by th....
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....essee. The assessee vis a vis the group is involved in the execution of the software development i.e primarily coding of software ("software services") outsourced to it by LVS US. 4.2. Further, LVS India is also engaged in the resale of packaged software namely 'Sapphire' in the domestic market. This software caters to the laboratory requirements of process industries, pharmaceutical companies and contract laboratory organizations. With respect to the said distribution activity, the AE charges Royalty based on software packages sold by the assessee. 4.3. The assessee had following international transactions with its AE during the financial year 2011-12 relevant to Asst Year 2012-13:- (i) Provision of software design & development services Rs. 11,60,79,838 (ii) Payment of Royalty to LVS US (including TDS) Rs. 55,80,071/- The assessee used Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with a Profit Level Indicator (PLI) of Net Cost Plus (NCP) Margin to demonstrate the arm's length nature of the international transaction. The assessee arrived at a set of 12 comparable companies with a NCP margin of 15.68%. Table 9....
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....sh benchmarking exercise by selecting 16 companies as under:- Sl.No. Name of the Company PLI-OP/TC(%) Remarks 1 Acropetal Technologies Ltd 6.84 PLI revised 2 CTIL 11.47 3 Datamatics Global Solutions Ltd 14.09 4 RS Software Ltd 15.28 5 Spry Resources (India) Pvt Ltd 35.12 6 Lucid Software Ltd 13.42 7 PreludeSys (India) Ltd 56.38 8 ASM Technologies Ltd 16.41 9 E-Infochips Ltd 74.97 10 Onward Technologies Ltd 13.61 11 Trigyn Technologies Ltd 7.74 12 Thirdware Solutions (P) Ltd 25.24 13 Sasken Communications Technologies Ltd 12.13 14 E-Zest Solutions Pvt Ltd 16.06 15 Akshay Software Technologies Ltd 7.84 16 Evoke Technologies Ltd 12.13 Simple Arithmetic Mean 21.17 4.5. The assessee pleaded that some of the companies selected by the ld TPO were not functionally comparable to the activities undertaken by the assessee with respect to the international transaction. While computing the adjustment for software development services for LVS India, ....
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.... 12.13 13.77 12. R S Software Ltd. 16.06 14.53 13. ASM Technologies Limited 7.84 11.08 14. e-Infochips Limited 11.60 13.97 Simple Arithmetic Mean 18.77 15.94 5.2. The assessee submitted before the ld DRP that the ld TPO had erroneously considered royalty payment in the cost base of the assessee while computing the adjustment amount, completely ignoring the fact that a separate adjustment on account of such royalty paid had already been undertaken. In this regad, the ld DRP accepted the objections of the assessee. The ld TPO in his order dated 24.11.2016 supra noted that revised cost base to be considered post excluding the cost incurred for royalty as under:- Operating Cost as considered by the TPO in order dt 31.12.2015 Rs. 12,37,09,733/- Less: Royalty to LVS Inc. (since adjustment has been Made for it separately) Rs. 8,01,318/- Net Operating expense to be considered Rs. 2,29,08,415/- The ALP after incorporating the directions of the ld DRP was arrived by the ld TPO finally as under:- Software design and development services rendered 1. Operating Cost [OC] (as per order dated 31.12.2....
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.... of Spry Resources India Pvt Ltd at 16.10% instead of 11.10% Among others 5.6. The ld TPO passed the rectification order u/s 92CA(5) r.w.s. 92CA(3) and 144C(5) of the Act dated 8.3.2017 pursuant to the 154 petition of the assessee and arrived at the revised PLI of comparables after taking into account working capital adjustments as under:- Sl.No. Comparable companies PLI as per order of the TPO dt. 31.12.2015(%) Corrected PLI post directions issued by the Dispute Resolution Panel (%) Revised PLI on incorporation of working capital adjustment in compliance with DRP's direction (%) 1. Acropetal Technologies Ltd. 6.84 4.66 4.07 2. CTIL Ltd 11.47 11.47 (12.61) 3. Spry Resources India Pvt. Ltd. 35.12 31.87 11.76 4. Lucid Software Ltd. 13.42 11.10 12.04 5. Onward Technologies Ltd 13.61 13.61 16.04 6. Trigyn Technologies Ltd. 7.74 6.80 1.46 7. Thirdware Solutions Ltd 25.24 25.24 24.34 8. Sasken Communication Technologies Ltd. 12.13 12.13 13.77 9. E-Zest Solutions Pvt. Ltd. 16.06 16.06 14.53 10. Akshay Software Technologies Ltd. 7....
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.... before us on the grounds stated supra. 7. With regard to arm's length computation of software services, we find that the assessee had sought exclusion of E-Infochips Ltd from the list of final comparables for which Ground No. 3.4. is raised by the assessee. We find that during the Asst Year 2012-13, the company amalgamated one of its wholly owned subsidiary, namely EInfochips Bangalore Ltd w.e.f. 1.4.2011 which is evident from the fact reported in their annual report for the financial year 2011-12 enclosed in page 1054 of the paper book. Pursuant to the said amalgamation, E-Infochips Bangalore Ltd's functions, assets as well as risks too got merged with that of E-Infochips Ltd with effect from 1.4.2011. We find from the nature of business mentioned in the business profile of the said comparable enclosed in page 1118 of the paper book, that the said comparable is engaged in IT, ITES and sale of products for which segmental information is not available. The assessee herein does not have ITES. Hence no comparison could be made for want of segmental data. We also find that the co-ordinate bench decision of Delhi Tribunal in the case of Alcatel Lucent India Ltd vs DCIT reported in (....
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....art of the operative expenses, the issue stands covered against the Revenue and in favour of the Assessee by the decision of the Supreme Court in Commissioner of Income-tax v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC). Likewise, the issue concerning the rate of interest for capital adjustment is covered against the Revenue and in favour of the Assessee in terms of the decision of this Court in Cotton Natural (P) Ltd. v. CIT (2015) 276 CTR 445. Consequently, no substantial question of law arises in respect of these issues as well." The ld AR stated that the ld DRP in Asst Year 2013-14 (i.e succeeding assessment year) had accepted that the foreign exchange fluctuation is to be treated as operating income while computing PLI in assessee's own case. We find this fact to be correct from the record of Asst Year 2013-14 which is also before us along with this appeal. Hence we have no hesitation in holding that forex gain . loss is to be treated as operating income while computing PLI and accordingly we direct the ld TPO to compute the PLI accordingly. The Ground No. 3.5. raised by the assessee is allowed. 9. The ld AR argued that with the exclusion of E-Infochip....
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....en by the assessee and filed with the ld DRP vide submission dated 16.6.2016 should be accepted. The ld AR further argued that what is effectively carried out by the assessee is only trading in software as far as this transaction is concerned. The assessee bought software from its AE and sold it locally to third party customers and 40% of it is given to the AE as Royalty. This royalty admittedly is paid pursuant to the Royalty agreement entered into with AE and which was also placed before the lower authorities. But what is effectively paid is pursuant to revenue sharing arrangement between the assessee and its AE by sharing 40% of the revenue from trading of software to its AE by the assessee. The ld AR also placed reliance on the decision in assessee's own case for the Asst Year 2010-11 of this tribunal in ITA No. 617/Kol/2015 dated 19.10.2016 wherein it had been held that the assessee had complied with the benefit test in the form of increased turnover and profitability in that year pursuant to payment of royalty to its AE. However, we find that during the year under appeal, the ld TPO himself had accepted the fact that the assessee had indeed satisfied the benefit test pursuant....
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....mpletion of the set aside assessment, if they so desire. Accordingly, the Ground No. 8.1. raised by the assessee is allowed. 12. In the result, the appeal of the assessee for the Asst Year 2012-13 in ITA No. 927/Kol/2017 is partly allowed for statistical purposes. ITA No. 2400/Kol/2017 - Asst Year 2013-14 - Assessee Appeal 13. The Ground No.1 raised by the assessee for the Asst Year 2013-14 is general in nature and does not require any specific adjudication. 14. The only issue contested in this year is with regard to disallowance of Royalty payment of Rs. 21,53,468/-. We find that the ld TPO had accepted the margin earned by the assessee from its software development services to be at Arm's Length by giving the benefit of (+) / (-) 5% range difference. The assessee's margin was 13.47% and the comparables margin chosen by the ld TPO was 16.50%. Accordingly, no adjustment was made by the ld TPO for the software development services. However, the ld TPO as was done by him in Asst Year 2012-13, applied the same comparables margin (i.e margin of software development services) of 16.50% to the royalty payment of Rs. 21,53,468/- and made a downward adjustment of Rs. 3,55,323/-....