TaxTMI 
TaxTMI 
2018 (3) TMI 1932
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....o.6.1 raised by the assessee are reproduced hereunder : Additional grounds : a) Akshay Software Technologies Ltd, c) Evoke Technologies Ltd, g) Sankhya Infotech Ltd, j) R System International Ltd 03. Assessee is engaged in the provision of software development services to its associated enterprises. It is the case of the assessee that it acts as a captive service provider and is remunerated by its AEs on a cost plus basis. 04. As per TP order during the Financial Year ('FY') 2012-13, Assessee has entered into the following international transactions with its Associated Enterprises ('AEs'): International Transactions Value (INR) Purchase of Software Development services 527,130,186 Reimbursement of expenses paid 21,974,895 05. The assessee has selected the following comparables in its TP study and has worked out the OP/OC margins of Assesseestood at 12.09% (considering foreign exchange as non operating item) as against 7.03% of comparable companies. SI. No. Company Name 1 Helios & Matheson Information Technology Ltd. 2 Mindtree Ltd. 3 Evoke Technologies Ltd. 4 R S Software (In....
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....e the Dispute Resolution Panel ('DRP') : 09. Feeling aggrieved by the TP order, the Assessee filed an appeal before the DRP raising objections regarding the adjustments proposed in the TP Order. 10. The DRP in its final direction had excluded Persistent Systems Ltd. on account of Significant R & D expenses and strong IP portfolio. Further the DRP has excluded ICRA Techno Analytics Ltd. - Absence of segmental information. The TP adjustment post the DRP Directions was re-worked and a Final Assessment Order was passed wherein the total adjustment stood at Rs. 34,096,113/-. After the DRP direction the final set of comparables remained were as under : Sl. No. Company Name OP/OC 1 CG-VAK Software & Exports Ltd. 20.54% 2 Larsen & Toubro Infotech Ltd. 26.06% 3 Mindtree Ltd. (Seg.) 18.19% 4 R S Software (India) Ltd. 17.41% Average 20.55% Less: Working Capital Adjustment -1.98% Working Capital adjusted Margin 18.57% 11. Aggrieved by the order of the DRP the Assessee filed the present appeal before us on various grounds. However during the course of argument the assessee has restricted to the grounds of appeal repro....
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....Applications Management, Assurance Services, Cloud Apps, Cloud, Security & Infrastructure Services, Consulting, Enterprise Integration, Geographical Information System (GIS), Internet of Things, Manufacturing Execution Systems, Maximo, Microsoft Dynamics, Open Source Technologies, Oracle, Captive services provider of software development services Risk Profile Operate as full-fledged risk taking entrepreneur having subsidiaries, Joint ventures and Investments in other financial instruments. Operate at limited risk Organizational Change Management, SAP, Smart Devices & Channels, System Integration etc. Revenue INR 3,613 crores INR 52.71 crores Ownership of branded / proprietary products Develops/owns proprietary products and services. The Assessee is a captive service provider and does not have any brand name, Intellectual Property (IP) or intangibles. Other Economies of scale NA Investments (including 100% subsidiaries) INR 401.92 Cr INR 0.00Cr Intangibles INR 63.72 Cr INR 0.00 Cr. Other L & T also involved in resale of software products and during FY 2012-13 cost of bought out goods were INR....
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....on of this company in the list of comparables on the following grounds : (i) Different revenue recognition model - Fixed Price basis Vs. Monthly Billing; (ii) Functionally different as ' L & T ' is engaged in product engineering services. (iii.) 'L & T' deals in products and does reselling of bought out items; (iv) Insufficient segmental information; (v) 'L & T' owns and develops significant intangibles; (vi) ' L & T' sub-contracts services to third parties; (vii) 'L & T' has significantly large scale operations. In support of its contentions, the assessee has submitted copy of the Annual Report of' L & T' (at pages 766 to 799 of the paper book filed) and took us through various pages therein, as mentioned in the chart (viz. pages 766 - 768, 776, 779, 785, 78-8, 793, 796 to 798 etc.). It was prayed that this company ' L & T ' be excluded from the list of com parables. 6.3 Per contra, the learned Departmental Representative for Revenue supported the orders of the authorities below in retaining this company L& T in the final list of comparables; which was in fact the original choice of the assessee itself in its TP Study. ....
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....e development services' is not clear from the statement referred to. At page 798 of the Annual Report, the segmental details of all three of the aforesaid clusters are given. It may be mentioned here that the assessee had raised the issue of insufficient segmental details before the TPO, which we find that has not been examined by the TPO. 6.4.5 Cost of bought-out items for sale. We also find at page 788 of the Annual Report of' L & T' that under the head "Operating Expenses", the company has shown 'cost of bought-out items of sale'. It is not clear whether this item of expense is related to the earning of income from services or these are related to any buying and selling of products. This issue was raised by the assessee for the first time before us and does not appear to have been raised before the authorities below. Therefore, this issue has neither been examined by the TPO nor the DRP. 6.4.6 Sub-contracting Expenses. At page 793 of the Annual Report of' L & T' under the head "Income / Expenditure in foreign currency", we find that this company has shown substantial "sub-contracting expenses". It is not clear whether these expenses are re....
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....a is available in Capitaline database * Accepted by Ld. TPO in Assessee's own case for AY 2011-12 3 Sankhya Infotech Ltd. ("Sankhya") * Functionally comparable * The company clears all the filters acceptable to the Ld. TPO. 4 R Systems International Limited (Segmental) ("R Systems") * Functionally comparable * Audited 12 months march ending data is available in public domain * The company clears all the filters acceptable to the Ld. TPO Akshay Software Technologies Ltd. ("Akshay") 17. The assessee has submitted that Akshay Software is one of the comparable companies selected by the Assessee in the TP documentation. It was further submitted that The Ld. TPO rejected Akshay as a comparable on the ground of functional dissimilarity saying that the company is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas on the basis of reply to notice u/s 133(6) received by Ld. TPO from Akshay Software. The submitted that the services rendered by Akshay were forming part of the subset of software development services and all the functions mentioned in ....
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....ofessional services, procurement and installation, implementation, support and maintenance, ERP products and services in India and overseas. On account of that, the comparable is attending the business operation of AE by rendering the above said services to the clients of AE both in India and outside India. Thus the revenue of the comparable had been consolidated and disclosed under the income under the head 'income from software services'. In fact, when the comparable rendering services outside India, then it is rendering services onsite and therefore the segregation of financials is required for making it comparable with the assessee company. Further the assessee was shared with the response received by the TPO from the comparable u/s.133(6) of the Act and the assessee was given the opportunity. Further in our considered opinion, the financial of the comparable clearly shows that Akshay Software Technologies Ltd is primarily earning its revenue from onsite services as mentioned at page 86 of the DRP order and Note 28 of the P & L account. Thus in the considered opinion of the Bench, Akshay Software Technologies Ltd is not comparable with the assessee. The reliance on the decision....
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....s and perused the record. The primary reason for not including Evoke Technologies Ltd was that the data were not available in public domain when search was conducted by the TPO. However the assessee has submitted that data was available and the same was submitted to the authorities below. The DRP, has recorded that were various contradictions in the director's report and P & L account and further it was mentioned that there were abnormal espenses debited under other expenses on account of consultancy charges and the comparable Evoke Technologies Ltd was into IT services and end to end IT services, which were akin to ITES and there were the same is not comparable. However in the considered view of the Tribunal all these aspects are required to be examined by the TPO at the first instance and the assessee should be given a chance to explain the same. In the light of the above, we remand the matter for a fresh examination to the file of the TPO with a direction to decide the inclusion of Evoke Technologies Ltd after giving due opportunity to the assessee. Sankhya Infotech Ltd. ("Sankhya") : 23. Sankhya is one of the comparable companies selected by the Assessee in the fresh sear....
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....ual report) clearly shows that for AY 2013-14, no revenue has been shown to have been earned by the assessee from software products and the total turnover has been shown as Rs. 1057107636/- from the software services. Further M/s. Sankhya Infotech Ltd is engaged in providing IT services to customers globally in transportation segment. However, considering the reporting done by Sankhya Infotech Ltd, wholly under the software services in contradiction to the submissions given with respect to segment reporting and segment information relating to the activities of the assessee, we deem it appropriate to remand the matter to the file of the TPO to examine afresh the profile of Sankhya Infotech Ltd, on the touchstone of FAR with the assessee. Accordingly, the inclusion of Sankhya Infotech Ltd is remanded back to the file of TPO for examining afresh. R Systems International Ltd. ("R Systems") : 24. R Systems is one of the comparable companies selected by the Assessee in the fresh search given during TP Assessment proceedings. The Ld. TPO has rejected R Systems on the ground of "different financial year no data available". The relevant extract of the TP order is as below: Assessee....
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....2014] 62 SOT 8/[2013] 34 taxmann.com 241 in which it had been held that a company with a different financial year ending cannot be compared. 28. We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audite....
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....d. TPO has erred in modifying the OP/ OC computed by the Assessee in the TP documentation by considering gain or loss arising out of fluctuation in foreign exchange as operating in nature, which are sought to be corrected 25.1 In this regard, the Assessee submitted that the foreign exchange losses/ gains should not be considered in Assessee's case as it has nothing to do with the main operations of the Company. Further it was submitted that foreign exchange losses/ gains are a direct manifestation of the underlying risk embedded in a business arising from uncertainties in the spot market price of the nominal exchange rate. Thus in a comparable analysis wherein, a set of companies are identified as comparable, it is imperative that the comparable companies will have different level of foreign currency exposure depending upon i) extent of transactions with overseas entities, ii) Geographical location of the transacting entities (The market and price dynamics differ for same services/ same products in different economies and geographies) and iii) the respective hedging policies adopted by respective companies. Further for the purposes of provision for bad and doubtful debts the ....
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....g in nature was without any basis. Hence it is rejected. 25.4 With respect to provision for treating doubtful debts as operating or non-operating in nature, in the considered opinion of the bench the provision for doubtful debts are required to be treated as operating in nature in case the said provisions were there for the same assessment year under consideration. Further the said provision for doubtful debts should be closely linked with the business operation of the assessee. In the present case before the TPO the assessee has not furnished any documents or basis for both, i.e., whether the provision of doubtful debts are for the same year for the assessee as well as for the comparable. Moreover the assessee has not substantiated that the provision for doubtful debts are closely linked with the business operations of the assessee. In our view, the judgment relied upon by the assessee on Outsource Partners International (P.) Ltd. (supra), clearly lays down that if the provision for doubtful debts is closely linked with the business operations of the assessee then the same is required to be treated as operational in nature. As the needful has not been done therefore the bench d....
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....e functionally not comparable to the Appellant. 4. That on the facts and circumstances of the case and in law, the DRP / AO / TPO have erred in arbitrarily rejecting certain functionally comparable companies identified by the Appellant. 6./The AO/ TPO/ DRP erred in not providing the benefit of economic adjustment on account of difference in risk profile in arriving at the arm's length mean margin. 8 That on the facts and circumstances of the case and in law, the AQ/ TPO / DRP have erred in (i) treating foreign exchange gain/loss as operatч in nature and (ii) considering provision for doubtful debts as non-operating in nature while computing the margin of the Appellant and comparables. Document 2 Ground No. 3.1: The learned TPO / Hon'ble DRP erred in accepting Larsen and Toubro Infotech Limited as a comparable company on the ground that it is functionally comparable to the Appellant. The Appellant submits that the learned AO/TPO/DRP has erred in comparing the Appellant to Larsen and Toubro Infotech Limited, as it is a software product company and engaged in diversified business operations and thereby erred in including the company i....
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....ntangible assets The basis of amortization of intangible assets is as follows: • Computer software ⚫ Intellectual Property Rights (IPR) - Business Rights d) 33.33% 33.33% Over a period of five years L&T Infotech is conscious about brand building BRANDING Your Company's Brand has been growing steadily across the globe, riding on the continually increasing visibility of the Company in new geographies. Your Company's efforts to contribute value to its global clients and making them more successful, more cost-effective and more agile, have also strengthened the 'L&T Infotech' Brand. The overall brand recall and brand experience amongst our stakeholders is being continuously enhanced. This is due to the fact that our clients commend us because we demonstrate passion to go the extra mile for them. They also perceive us as a 'trusted partner' rather than a mere supplier. e) Segmental information not available Document 6 Revenue Services Cluster Rs. 15,564,561,325 (12,635,403,192) Segmental operating profit Unallocable expenses (net) 3,768,532,477 (3,559,466,188) Industrials Cluster Telecom Tot....
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....unctionally dissimilar counter The Taxpayer contends that the company owns proprietary products like 'UNITRAX', 'ACCURUSI', 'SERVICEFIRST' which makes the comparable a product company. On perusal of the annual report it is found that the above mentioned products are platforms used by the company to design and develop software applications for different business segments where its customers operate. For eg the product UNITRAX is a Saas based transfer agency record keeping platform, enabling fund and insurance manufactures to manage the administration of their wealth management products. Similarly the products Accrusi' and 'Service First' are catering to the company's customers operating in the Insurance Underwriting and Aftermarket Service Management segments. These are platforms used by the company to design specific customer related software programs and not sold as off the shelf software products themselves. Hence the objection of the Taxpayer is not acceptable. Segmental information not available - counter Since the entire company is engaged in software development, the company in entirety has been considered as a comparable. Scale of....