TaxTMI 
TaxTMI 
2021 (11) TMI 851
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....elating to determination of the arm's length price under Rule 10B of the Income-tax Rules, 1962 ('the Rules') 1.2 The Ld. TPO and Hon'ble DRP erred on facts and in law, in not appreciating the business model followed by the Appellant. In doing so, have grossly erred in: a) disregarding the 'License and Service' Agreement justifying the arm's length nature of transaction of payment of "Royalty" and 'Service fees'; b) misinterpreting the payment of 'service fees' as a payment of 'royalty' based on its own conjecture and surmises, and ignoring the explanations offered by the Appellant; c) disregarding the fact that the payment of 'service fee' was in connection with the support provided by AE directly to the end customers of the Appellant; d) disregarding the fact that the Appellant acts as a limited risk distributor and earns assured margins on revenue in 'Subscription segment'; and e) disregarding the fact that due withholding taxes were deducted on the service payment made to the AE 1.3 The Ld. TPO and Hon'ble DRP confirming the Ld. TPO's action erred on facts and in law in disregarding the Transa....
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....rate tax Additions on account of unearned revenue from subscription services of Rs. 18,54,92,479 2.1 The Ld. AO and Hon'ble DRP erred on facts and in law in making an addition of Rs. 18,54,92,479 pertaining to subscription services and forming part of the 'unearned revenue', disclosed in the liabilities side of balance sheet of the Appellant, as income of the current year, without appreciating the fact that the impugned amount is in the nature of advance and is not chargeable to tax in the current year; 2.2 The Ld. AO and Hon'ble DRP, while itself accepting the fact that the Assessee is following percentage completion method of revenue recognition for services as per Accounting Standard - 9, issued by ICAI (AS-9), has erred on facts and in law making the addition on the erroneous premise that the completed contract method of revenue recognition is not applicable to the facts of the Assessee; 2.3 The Ld. AO and Hon'ble DRP erred in understanding the nature of services and the contractual framework between the Appellant and its customers and while doing so: a) erred on facts in holding that the services are complete on entering of the subscription services....
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.... every user free access to the source code and enable the customers to modify and customize the software to suit their requirements, unlike a proprietary software where source codes are owned by developers; # * Once an open source software is downloaded, software users may require access to ongoing support services; * The sale of 'Red Hat subscriptions' enable the customers to directly avail and access 24*7*365 support service from various support centres of Red Hat Group located in US, UK, Asia, Australia, Czech Republic, Africa, Russia and various language specific countries; * The Appellant enters into an Enterprise Agreement with the customers and distributes the open source 'Red Hat subscriptions'; * Further, the Appellant provides Red Hat software training content to the customers/ Red Hat training partners for which Red Hat US offers various training courses, renders consultancy services for the application of the systems, etc.; * Based thereon, the Appellant sub-contract services to Red Hat US vide a 'License and Service Agreement', pursuant to which the Global support service centres of Red Hat provide support services directly to customer....
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....llant wishes to submit that Hon'ble ITAT in Appellant's own case of AY 2012-13 and AY 2013-14, on identical facts, has deleted the entire adjustment on account of payment of service fees. There has been no change in the functions, assets, and risk profile of the Appellant in the impugned year and preceding two years. In this respect, the Appellant wishes to place reliance on the Hon'ble Mumbai ITAT judgment in its own case: * AY 2012-13 - ITA No. 1456/Mum/2017 * AY 2013-14-ITA No. 727I/Mum/2017 The relevant extract of the Hon'ble Mumbai ITAT Judgment in Appellant's own case of AY 2012-13 & AY 2013-14 is provided below: '28. Upon careful consideration, we find that the actual payment for royalty and serivce fees both under subscription and services segment are as per the agreement entered into between the assessee and its AE, No fault in the computation thereof has been pointed by the Revenue. Only due to error entire payment was booked under royalty. The sole basis on which the adjustments has been made is that the entire payment has been booked under royalty and the difference between the royalty as per the agreement and the total amount paid has ....
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....the net cost plus mark-up of 15% earned by the Appellant for the provision of software support services falls within the +/-3% of arm's length price earned by comparable companies as per the proviso to Sec 92C(2) of the Income Tax Act 1961. The Appellant had filed an Appeal Effect Application before the Ld. TPO pursuant to DRP directions dated October 24, 2018(Refer Page 337 of Paper-book /)and then a Rectification Application and a follow-up thereon (Refer Page 379 and Page 417 of Paper-book I), wherein the Appellant had requested following the DRP directions, the adjustment on account of provision of software support services. The arm's length net cost plus mark-up ('NCP') of the final selected 6 comparable companies is provided below for your ready reference: s No. Name of Comparable company NCP(%) AY 2014-15 1 CG-VAK Software & Exports Limited 9.38 2 Sasken Communications Limited 10.28 3 Kelton Tech Solutions Limited 19.72 4 Infobeans Technologies Limited 40.52 5 Ingenuity Technologies Limited 24.79 6 Akshay Software Technologies Limited (Upheld by DRP) 1.84 Arithmetic mean 17.75% The NCP earned by the Assessee....
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....perations (India) Private Limited vs DCIT[ITA No.23/PN/2014] * Google India Pvt. Ltd. vs DCIT [ITA No. 1368/Bang/2010] * Belkin India Private Limited vs ACIT [ITA No.2292/Del./20!7] * Functionally dissimilar Axis is engaged in the business of trading digital signatures. Further, Axis is also engaged in providing Liasioningservices in the area of service tax, excise, foreign trade policy licensing, duty free credit entitlement certificates, etc. Uses proprietary tool Axis develops and owns unique intellectual property tool 'Axis Mine'. Judicial Pronouncements supporting exclusion of companies deriving significant benefit from proprietary process: * Rolls Royce Marine India Pvt. Ltd (ITA No.1384/Mum/2014) * Global Logic India Pvt Ltd vs DCIT (ITA No 122/Del/2013) * Capita India Pvt Ltd vs ACIT (ITA No 356/Mum/2016) * Genyme India Private Limited (ITA No, 892/DEL/2014) * Axis rejected as a comparable Reliance placed on Li & Fung India Private Limited (ITA No. 7549/DEL/2017) Comparable proposed to be rejected by Ld.TPO 2 EDCIL (India) Ltd ('EDCIL') (Ld. TPO rejected this comparable solely on the ground of being a Government Company) ....
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....ew of the company' as provided in the annual report, the company earned of its income from building images and marketing the product/ a brand of the company. On perusal of the company's official website, it is seen that Concept Public is in engaged in providing marketing services through image enhancement and promoting the product or brand of the company thereby, broadly similar to support functions of the Appellant. 5 Impresario Event Management India Limited ('Impresario India') (Ld. TPO has rejected the company on the basis that it is engaged in event management) (Refer Page 290 of the Appeal Set) * Functionally similar Impresario India caters to the business needs of sales promotions, road shows, product launches, exhibitions, trade shows, sports events, musical nights, MICE events and many more such services. On perusal of the company's official website, it was observed that Impresario India has conducted events of various magnitudes like corporate event, conferences, seminars, trade shows, stage shows, corporate events/meetings, etc. As per the break-up of 'revenue from operations" provided in Note -26 of the annual report, the company e....
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..... ACIT (ITA No. 1442 {BNG}/ 08) * Federal Mogul Anand Bearing India Limited vs. DCIT (ITA No. 463/Mum/2016) * DCIT vs. Exedy India Limited (ITA no.897/Mum/2018) * Income Tax Office vs. Smarsh India Private Limited (IT(TP)A No.847/Bang/2013) * I apian India Pvt. Ltd. vs. ITO (ITA No.-1481/Del/2015) 4. Per contra, Ld. DR relied upon the orders of the authorities below. 5. We have heard rival submissions and perused the material available on record. As regards, ground No.1-1.3 adjustment relating to international transactions pertaining to payment of royalty and service fee. It is noted that identical issue was decided by this Tribunal in assessee's own case for AY 2012-13 and 2013-14. No distinguishing feature in the facts in the present year was pointed out by the revenue. It is also not the case that Hon'ble jurisdictional High Court has reversed the order of the ITAT. In this view of the matter following the decision of the co-ordinate bench in assessee's own case, we set aside the Transfer Pricing Adjustment (TPA), in this regard and direct the same to be deleted. 6. As regards, the ground No.1.4-1.5, the same is in relationship to adjustment on account of provision of....
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.... S. No Comparable Appellant's contention Comparable proposed to be selected by Ld. TPO 1 Axis Integrated Systems Limited ('Axis') (Refer Page 276 of the Appeal Set) Outsources services to third party vendors Axis is engaged in providing services by way of outsourcing the services to third party vendors. The same can be inferred from the significant commission expense incurred during the impugned year which accounts for 58.28% .of the other operating expenses: Particulars Amount Commission Paid (A) 19,933,443 Total expenses (B) 34,202,921 A/B 58.28% judicial pronouncements supporting the contention of the Assessee that a company engaged in providing agency services by way of outsourcing the services to third party vendors is not comparable to a company operating through its own employees * BNY Mellon International Operations (India) Private Limited vs DCIT[ITA No.23/PN/2014] * Google India Pvt. Ltd. vs DCIT [ITA No. 1368/Bang/2010] * Belkin India Private Limited vs ACIT [ITA No.2292/Del./20!7] * Functionally dissimilar Axis is engaged in the business of trading digital signatures. Further, Axis is also engaged in providing Liasioningservices i....
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....n the plea that no further services is required to be performed by the assessee, that there is no significant uncertainty existing regarding amount of consideration that will be derived. The Assessing Officer has also find fault with completed contract method claimed to have been followed by the assessee. 62. Assessee's contention in this regard is that the assessee never claimed that it is recognizing revenue from subscription under completed service contract method rather it is following the percentage competition method for recognition of revenue. Assessee has further reiterated that the assessee has been regularly recognizing revenue over a period to which such subscription relates. It has been claimed that the said practice of recognizing revenue is in accordance with paragraph-7 of percentage complete method of AS-9. The assessee has further placed reliance upon the Income Computation and Disclosure Standard (ICDS) issued by the CBDT pursuant to section 145(2) vide Notification No. 21/2016 dated 29.9.2016 for the proposition that when services arc provided by indeterminate number of acts over a period of specified time. Revenue may be recognized on straight line basis o....