TaxTMI 
TaxTMI 
2021 (2) TMI 777
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....oss appeals for AY 2010-11. The assessee is a subsidiary of VMware International Unlimited Company, Ireland (formerly known as VMware International Limited), which is an affiliate of VMware Inc., USA. It provides software development services ['SWD services' for short], Information Technology Enabled Services ['ITES' for short] and marketing support services ['MSS services' for short] to VMware group companies, as a captive service provider. For all the above services, the Assessee is compensated by the Associate Enterprise (AE) on a cost plus mark up basis. In terms of section 92B of the Income Tax Act, 1961 (Act), the above transactions were international transactions. In terms of section 92 of the Act, any income arising out of an international transaction has to be determined having regard to Arm's Length Price (ALP). The revenue from the international transactions are as follows: Details of international transactions entered into by the Assessee with its AE, as reflected in the TP order are as follows: International Transactions Amount (in Rs) Outcome of TP Order Purchase of fixed assets 3,75,35,500/- Accepted as being at arm's length. Receipts fo....
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.... 11. Thinksoft Global Services Ltd. 17.05 Arithmetic Mean 22.71% Computation of arm's length price by TPO and the adjustment made: Arm's Length Mean Margin 22.71% Less: WC Adjustment (restricted to 1.98%) 1.98% Adjusted margin 20.73% Operating cost Rs. 1,14,57,87,196/- Arm's Length Price (ALP): 120.73% of Operating Cost Rs. 1,38,33,08,881/- Price Received Rs. 1,22,09,69,922/- Short fall being adjustment u/s. 92CA Rs. 16,23,38,959/- 4. The adjustment suggested by the TPO was incorporated by the TPO in the draft Order of Assessment. The assessee did not file any objection to the draft Assessment Order before Dispute Resolution Panel (DRP) but filed appeal against the final Assessment Order in which the addition suggested by the TPO was incorporated by the AO. 5. The CIT(A) passed an order dated 21.11.2017 granting partial relief to the Assessee. The CIT(A) accepted the contention of the Assessee and directed exclusion of the following companies: 1. ICRA Techno Analytics Ltd.; 2. Infosys Ltd.; 3. Kals Information Systems Ltd.; 4. Persistent Systems Ltd.; 5. Sasken Commu....
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.... imposing conditions is beyond the scope of law and business reality by rejecting all close comparables on the other ground, without appreciating that not two companies can ever be the same"? 9. "The C1T(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding ICRA Techno Analytics Ltd., (seg.) as comparable". 10. 'The C1T(A) has erred in not appreciating that economies of scale is not relevant in the software industry". 11. "Whether the C1T(Appeals) was right in removing the comparables on functional similarity"? 12. "Whether the C1T(A) was right in seeking exact comparability while searching comparable companies of the assessee under TNMM method whereas requirements of and international jurisprudence require seeking similar comparable companies"? 13. `Whether the C1T(A) has erred in judging the nature and vast arena of the segment Marketing and sales support services"? 14.For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the C1T(A) in so far as it relates to the above ground....
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....s on brand-building which occasions the high profits. The company incurs sales and marketing expenses amounting to 4.6% of its sales and thus acts as an entrepreneur as against the Assessee which is a captive unit. It also focuses heavily on R & D, having its own applied research division, and thus the company is thus not comparable to the Assessee. The turnover of this company for the year ended 31st March 2010 was Rs. 21,140 crores which is far higher than the turnover of the Assessee. Infosys is a giant in the software development space while the Assessee is a captive unit. This company is being consistently excluded from the list of comparables in similar cases. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same, the company ought to remain excluded in the current assessment year. Further this Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang - Trib.)], ACIT v. Broadcom India Research (P.) Ltd [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bangalore - Trib.) directed that ....
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....s" and no break-up is available between sale of software services and sale of products. The company is thus functionally dissimilar.The company is being consistently excluded from the list of comparables in similar cases, and also in the case of the Assessee for the assessment year 2009-10. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same, the company ought to remain excluded in the current assessment year. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang - Trib.)] ACIT v. Broadcom India Research (P.) Ltd [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd.[2016] 74 taxmann.com 103 (Bangalore - Trib.), where the said company was directed to be excluded/exclusion upheld in the case of assessees similar to the Assessee herein. We, therefore, uphold the order of CIT(A). 11. Sasken Communication Technologies Ltd.: This company was excluded suo moto by the CIT(A) for the reason that it was excluded by this Hon'ble Tribunal in assessee's own case for the assessment year 2009-10. The company is engaged in....
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....h as network management, engineering services capabilities for broadcast technology players, products for wireless communication etc. The company is being consistently excluded from the list of comparables in similar cases, and also in the case of the Assessee for the assessment year 2009-10. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same, the company ought to remain excluded in the current assessment year. Further, this Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang - Trib.)] and ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bangalore - Trib.) excluded this company in the case of an Assessee similar to the Assessee herein. Following the same, we uphold exclusion of this company. 13. As far as ground No.9 raised by the Revenue is concerned, vide this ground, the Revenue is challenging the action of the CIT(A) in excluding ICRA Techno Analytics Ltd. upon taking its turnover into consideration. In this regard, it is seen that while the Assessee had sought for its exclusion inter alia on the ground that the turnover ....
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.... (OP/ OC) earned by the Assessee (as reflected in the TP order): Particulars As per TP order Operating Income Rs. 16,55,05,334/- Operating Expenses Rs. 15,31,18,416/- Operating Profit (Op. Income - Op. Expenses) Rs. 1,23,86,918/- OP/OC 8% Comparison of TP study done by the Assessee and the TPO: Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/OC Database used PROWESS & CAPITALINE PROWESS Comparables selected 6 7 Comparables selected by TPO and their arithmetic mean as per TPO order: Sl. No. Name of the Company Mark up WC Unadj. (%) 1. Asian Business Exhibition & Conference Ltd. 60.13 2. Cyber Media Research Ltd. 13.68 3. HCCA Business Services Pvt. Ltd. 19.09 4. Hindustan Housing Co. Ltd. 38.12 5. ICC International Agencies Ltd. 13.72 6. Killick Agencies & Mktg. Ltd. 17.36 7. Priya International Ltd. 11.47 ARITHMETIC MEAN 24.80 Computation of arm's length price by TPO and the adjustment made: Arm's Length Mean Margin 24.80% Operating cost Rs. 15,31,18,416....
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.... 70 taxmann.com 299 (Bang - Trib.)] and ITO v. Interwoven Software Services (India) (P.) [2016] 74 taxmann.com 103 (Bangalore - Trib.) directed this company to be excluded as a comparable in the case of assessees similar to the Assessee herein. We find no grounds to interfere with the findings of the CIT(A). 21. HCCA Business Services P. Ltd: This company was excluded by the CIT(A) for the reason that it is functionally dissimilar to the Assessee. This company is a service provider and provides services in the gamut of HR operations and administration. It provides HR operations and administration services, offering payroll processing and compensation restructuring, management of labour and legal compliances, employee reimbursement processing and accounting services. It is thus clear that the activities of HCCA are not similar to marketing support services provided by the Assessee. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang - Trib.)] and ITO v. Interwoven Software Services (India) (P.) [2016] 74 taxmann.com 103 (Bangalore - Trib.) directed this company to be excluded as a comparable in the case of assessees similar to the Assess....
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.... Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 &Ors. dated 24.04.2018. In view of the above, we are of the view that the telecommunication charges should be excluded both from the export turnover as well as total turnover while computing deduction u/s.10A of the Act. The order of the CIT(A) is therefore upheld. In view of the ground Nos.2 and 3 raised by the Revenue are without merit, the same are dismissed. 25. Ground Nos.1, 14 and 15 are general and require no specific adjudication. 26. What now remains for consideration in the appeal relating to AY 2010-11 is ground Nos.2.1, 2.2, 3 and 4 raised by the assessee in its appeal. We may add that the ground Nos.5 to 17 raised by the assessee in its appeal has already been dismissed as infructuous and ground No.18 raised by the assessee being levy of interest under section 234B of the Act being purely consequential in nature and a direction to the AO give consequential effect would be sufficient to dispose off the said ground. 27. Ground Nos.2.1 and 2.2 raised by the assessee reads as follows: 2.1 The learned CIT(A) erred in law and facts by upholding the action of ....
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....ncerned, the issue is with regard to deduction of tax at source on purchase of application software from non-resident. It was the case of the Revenue that the aforesaid payment made to the non-resident constitutes royalty and the assessee was under obligation to deduct tax at source on the aforesaid payment in terms of section 195 of the Act. Since the assessee did not deduct tax at source, the AO invoked the provisions of section 40(a)(ia) of the Act and disallowed the claim of the assessee for deduction of a sum of Rs. 3,63,397/-. The CIT(A) confirmed the order of the AO. 31. The learned Counsel for the assessee made submission that even assuming that the payment in question is in the nature of royalty as laid down by the Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Ltd., 16 taxmann.com 141 which was passed on 15.10.2011, the assessee in the present case had made payments to the non-resident during the period 01.04.2009 to 31.03.2010. It is the submission of the learned Counsel for the assessee that prior to the decision of Hon'ble Karnataka High Court referred to above, payments made for purchase of software were not considered as in the nature o....
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....bona fide view that the payment of software license fee was not subject to tax deduction at source under section 194J/195 of the Act. It is submitted that liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15, 2011). Courts have consistently upheld this principle as seen in: * ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) * Kerala Vision Ltd v. ACIT (46 taxmann.com 50) * Sonic Biochem Extractions (P.) Ltd v. ITO (35 taxmann.com 463) * Channel Guide India Ltd v. ACIT (25 taxmann.com 25) * DCIv. Virola International (20 14(2) TMI 653) * CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 04. The relevant portion of the CIT(A) order is extracted as under : "Disallowance of expenses under 40(a)(i) / 40(a)(ia) : 5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been s....
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.... and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright which attracts tax deduction at source under section 194J, the Assessing Officer involved the provisions of section 40(a)(ia) and disallowed the depreciation claimed. The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of "royalty". Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business." 5.3. Relying on the above deci sion, the I T A T ' C ' B e nc h , Bangalore upheld the order o....
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.... to 15.10.2011 cannot be disallowed u/s.40(a)(ia) of the Act for non deduction of tax at source as on the date of payment to non-resident, there was no such obligation. In view of the above said decisions, we hold that the disallowance under section 40(a)(ia) of the Act has to be deleted. We hold and direct accordingly. 34. Ground No.4 raised by the Assessee reads as follows: 4. The CIT(A) erred in upholding the action of the larned AO by rejecting the audit adjustments made in the Appellant's financial statements amounting to INR 8,34,62,981 and adding back the same to the taxable income by alleging that the same is suppressed income of the Appellant. 35. As far as ground No.4 is concerned, the facts are that during the assessment proceedings, the AO issued a notice seeking details of the Foreign Inward Remittances Certificate (FIRC) statement regarding receipt of export of services. In response to the notice, the Assessee filed the FIRCs and reconciliation of FIRCs with sales invoices for the FY 2009-10. There was a difference in the total revenue as recorded in the financial statements and the total of the FIRCs. The AO sought reasons for difference between the re....
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....ng its customers with respect to installation and configuration of software products, resolving problems and resolving availability and stability issues. A mark-up of 16% on cost is charged for the services as provided in the agreement • Marketing support services - for providing the overseas company general, administrative, marketing, liaising and promotional services and developing and expanding the customer base. A mark-up of 8% on cost is charged for the services as provided in the agreement The revenue earned from such services are recognized in accordance with Accounting Standard ('AS') - 9. According to AS - 9, revenue is recognized based on the percentage completion method which is on the basis of associated costs incurred towards rendering the services. In this regard, the revenue recognition policy of the Assessee as mentioned in Note L (iv) of the financials which is reproduced below was brought to our notice : "(vi) Revenue recognition- Revenue from Research and development is recognised as services are rendered, on cost plus basis, and billed as per the terms of the Master Services Agreement dated November 01, 2007 between the Company and VMwar....
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.... a) True-up/down of costs The Assessee follows a cost-plus model and the invoices are raised based on costs after adding the agreed mark-up to such costs. Such costs initially considered at the time of raising invoices may be subsequently trued up/down on the basis of AS at the time of audit. Similarly, there may be cases where certain items are recorded as cost at the time of raising invoices, but subsequently removed from the cost base in accordance with the AS. For instance, at the time of raising the invoices on monthly basis, service tax credit/ VAT refund receivable from revenue authorities was recorded as an expense in the books. The invoices were raised by applying the agreed mark-up on the cost including service tax credit /VAT refund receivable. Given that the service tax is recoverable, the same was reclassified as an asset in the balance sheet at the time of statutory audit in accordance with the AS ( see Note F of the financial statements). To the extent the service tax was recorded as an asset, the corresponding cost was reduced. Given that the Assessee follows cost plus model wherein the revenue is a function of cost, the corresponding revenue woul....
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....at that point in time. Subsequently, during the said year, the Assessee raised its invoices in USD based on the exchange rate prevailing at the time of raising such invoices. As per the AS, the Assessee is required to record revenue in its financial statements based on the exchange rate that prevailed at the time of receiving the advance and not at the time of raising the invoice. Accordingly, the amount of revenue recorded in the financial statements was lower than the amount of revenue as per the invoices raised. The above facts were explained by way of the following illustration: Particulars Amount (USD) Exchange rate Amount (INR) Advance received on 1 April 2009 100 55 5,500 Invoice raised on 1 May 2009 100 60 6,000 Recognition of revenue in the financial statements at the year-end based on AS 100 55 5,500 Excess revenue recognized at the time of raising invoice 500 41. Without prejudice to the above, it was submitted that if any portion of the adjustment made by the TPO is sustained in the Revenue's appeal before this Hon'ble Tribunal, since the above amount would form part of the said adjust....
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.... the CIT(A). 43. After hearing the rival submissions, we are of the view that the issue has to be remanded to the AO for fresh consideration. The assessee works on a cost + mark-up as its margin. The revenue that the assessee shows in the financial statements is dependent on cost and if due to an incorrect estimation of cost or other reasons as submitted by the learned counsel for the Assessee before us, there is change in the revenue shown by the assessee then the corresponding cost which was wrongly estimated also needs to be identified. It is only when there is reconciliation of the incorrect estimate of the cost can it be said that the audit adjustment suggested would be correct. In other words, the restatement of revenue has to be matched by corresponding reduction in the estimated cost only then can it be said that the audit adjustment suggested will not have any effect on the income of the assessee. The submissions made before us as well as the revenue authorities are general and do not give one to one tally or reconciliation of the differences and the reasons for such differences. The assessee is, therefore, directed to give a complete breakup of the difference between t....
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....VERAGE MARK-UP 24.82 Computation of arm's length price by the TPO and the adjustment made: Arm's Length Mean Mark-up 24.82% Less: Working Capital Adjustment (restricted) 1.63% Adjusted mean mark-up of the comparables 23.19% Operating Cost Rs. 1,54,58,77,571/- Arm's Length Price - 123.19% of Operating Cost Rs. 1,90,43,66,580/- Price Received Rs. 1,75,03,90,732/- Shortfall being adjustment u/s. 92CA Rs. 15,39,75,848/- 47. The AO passed an assessment order inter alia incorporating the aforesaid adjustment. On appeal by the assessee, the CIT(A), accepting the contentions of the Assessee, the CIT(A) directed the exclusion of (i) Acropetal Technologies Ltd.; (ii) E-Infochips Ltd.; (iii) ICRA Techno Analytics Ltd.; (iv) Infosys Ltd.; (v) Tata Elxsi Ltd. However, the contentions of the Assessee seeking exclusion of certain other companies and inclusion of certain companies came to be rejected by the CIT(A).Following the order passed by this Hon'ble Tribunal in the Assessee's own case for the assessment year 2009-10, the CIT(A) directed the TPO to grant working capital adjustment on actual basis without any restriction. The CIT(A) agr....
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....ess Exhibition & Conferences Ltd. 19.51 2. Cyber Media Research Ltd. 10.59 3. ICC International Agencies Ltd. 24.66 AVERAGE MARGIN 18.25 Computation of arm's length price by the TPO and the adjustment made: Arm's Length Mean Margin 18.25% Operating Cost Rs. 29,05,98,930/- Arm's Length Price - 118.25% of Operating Cost Rs. 34,36,33,235/- Price Received Rs. 31,41,76,777/- Shortfall being adjustment u/S. 92CA Rs. 2,94,56,458/- 50. The AO passed an assessment order inter alia incorporating the aforesaid adjustment. On appeal by the assessee, the CIT(A) accepted the contention of the Assessee and directed the exclusion of Asian Business Exhibition & Conferences Ltd. However, the CIT(A) rejected the contention of the Assessee seeking exclusion of ICC International Agencies Ltd. and consequently upheld its inclusion. The CIT(A) agreed with the contention of the Assessee as regards the inclusion of gains arising on account of foreign exchange fluctuation while computing the margin of the Assessee and the comparable companies as the same is operating in nature. In view of the reliefs granted by the CIT(A), the TP....
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....CL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 &Ors. dated 24.04.2018. In view of the above, we are of the view that the telecommunication charges should be excluded both from the export turnover as well as total turnover while computing deduction u/s.10A of the Act. The order of the CIT(A) is therefore upheld. In view of the ground Nos.2 and 3 raised by the Revenue are without merit, the same are dismissed. 52. We shall now take up for consideration corporate tax grounds in assessee's appeal. Ground No.1 is general and calls for no specific adjudication.Ground No.2 was not pressed for adjudication. Hence, dismissed. Ground 3 raised by the Assessee is with regard to disallowance of expenses on purchase of application software for non-deduction of taxes under section 40a(ia) of the Act. The issue is identical to the issue raised by the assessee in Assessment Year 2010-11. The payment to the non-resident in this Assessment Year is also prior to the decision of Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd., (supra). For the reasons stated in the order for Assessment Year 2010-11 is deleted and ground No.3 is allowed. 53. In Ground No. 4, the as....