TaxTMI 
TaxTMI 
2021 (11) TMI 851
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....ing the commercial and business aspect, and disregarding the law relating 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 L....
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....ating that such comparable companies are functionally dissimilar to the Appellant; and c) disallowing relevant adjustments as per the provisions of Rule 10B(1) and Rule 10B(3) Corporate 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 understan....
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....either before or during the hearing of the appeal. 3. Brief facts and the assessee's main grievances are summarized in the following submission by assessee. 1.1. Business profile * Red Hat US is a provider of open-source solutions for internet computing; * An open source software typically grants 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 partn....
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....e Appellant i.e. services in the nature of intra-group services, for which there is no proof of any services being rendered * Proposed an adjustment under the sales & marketing support service segment and software support segment In this respect, the Appellant wishes to place its arguments as under: Ground 1.1 - 1.3: Adjustment on account of payment of service fees 2.1. Covered matter in preceding years i.e. AY 2012-13 & AY 2013-14 " The Appellant 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 car....
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.... The detailed arguments on merit, similar to previous years', is attached as Annexure I, Ground 1.4 - 1.5: Adjustment on account of provision of software support services 2.2. Non-grant of relief in the final assessment order The Appellant wishes to submit that the Assessing Officer has erred in not considering the binding directions of the Hon'ble DRP in the final order, wherein Akshay Software Technologies Limited has been reinstated as a comparable in the final set. In view of the directions of the Hon'ble DRP, 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....
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....sources 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 in the area of service tax, excise, foreign trade policy licensing, duty free credit entitlement certificates, etc.....
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....s' segment should be considered as comparable. This segment is engaged in providing event management services * ITDC selected as a comparable Reliance placed on Eli Lily Co. (India) Pvt. Ltd. (TS - 573-ITAT-2015(DEL) - TP) * Government company can be considered as a comparable Reliance placed on Vishay Components India P Limited (ITA No.133/PN/11) 4 Concept Public Relations India Limited ('Concept Public') (Ld. TPO rejected the company on the basis that it is engaged in media and communication sector) (Refer Page 282 of the Appeal Set) * Functionally similar Concept is primarily engaged in providing information services and consultancy services. The company is engaged in providing consultancy in the nature of development and marketing information based services. As per the 'Overview 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....
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....be allowed to the Appellant The amount of capital required to support business functions varies greatly, because of the level of debtors and creditors. The effect on profits from investing in different levels of working capital must be taken into account. Rule 10B(l)(e) and Rule 10B(3) of the Rules requires the difference between controlled and uncontrolled transactions should be taken into account for which necessary adjustments shall be made. OECD guidelines also points out the need to adjust comparables and the requirement for accuracy and reliability. The above is also supported by various judicial precedents, mentioned below, wherein it has been held that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other. * Nortel Networks India Private Limited v/s ACIT (ITA No. 4765/DEL/2011 & ITA 427/DEL/2013) * TNT India Private Limited vs. 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....
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....ted. Accordingly, we direct the adjustment in this regard is to be deleted. 9. Apropos ground No. 1.6 relating to international transactions pertaining to provision of sales and marketing support services. In this regard, it is the contention of the Ld. Counsel of the assessee that during AY 2014-15, the assessee was engaged in providing sales & marketing support services, for which it was remunerated at a cost plus mark-up 5%. The TPO completed it at 10.78% and made an adjustment of Rs. 2,034,038/-. The assessee's counsel has submitted that one of the comparable selected by TPO i.e Axis Integrated Systems Limited suffers from several dis-functionalities which has been reproduced the assessee's submission herein above. The assessee's contention is that if the same is removed from list of comparables selected by the TPO, the ALP margin will be appropriate and hence, no adjustment will be required. As noted above, this comparable suffers from following dissimilarities. 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....
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.... 61. Upon careful consideration we find that assessee has been following consistent system of revenue recognition. The assessee is inter alia engaged in the business of marketing, promotion and sale of 'Red Hat subscriptions' to customers in Indian sub-continent to avail support services that are for the open source software system during the subscription period ranging from one to seven year, which is established by the special services agreement or contract. As per the consistent policy of revenue recognition, the assessee accounts for the revenue for service which would be performed in future year in its books as unearned revenue. Assessee's claim is that this practice by the Assessee in respect of accounting for the sale of subscription is in with Accounting Standard-9 issued by ICAI. In support of this it is submitted that for rendering of service AS-9 provides that revenue should either be recognized on straight line basis over a period in which services are proposed to be rendered. The Assessing Officer has tinkered with this regularly adopted system on the plea that no further services is required to be performed by the assessee, that there is no significa....