TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 350
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....Income-tax Act 1961 ('Act'). In doing so the learned Dispute Resolution Panel has grossly erred in agreeing with the learned Transfer Pricing Officer's action of ; 1.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case ; 1.2 ignoring the fact that the appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions ; 1.3 disregarding the arm's length price as determined by the appellant in the transfer pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search ; and in particular modifying/rejecting the filters applied by the appellant ; 1.4 disregarding multiple year/prior years' data as used by the appellant in the transfer pricing documentation and holding that current year, (i. e., financial year 2006-07) data for comparable companies should be used despite the fact that the same was not necessarily available to....
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....costs to sales less than three per cent. were accepted. 1.7 including high-profit making companies in the final comparables' set for benchmarking a low risk captive unit such as the appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single- minded intention of making an addition to the returned income of the appellant ; 1.8 including certain companies that are not comparable to the appellant in term of functions performed, assets employed and risks assumed ; 1.9 resorting to arbitrary rejection of low-profit/loss making companies based on erroneous and inconsistent reasons ; 1.10 excluding certain companies on arbitrary/frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed ; 1.11 ignoring the business/commercial reality that since the assessee is remunerated on an arm's length cost plus basis, i. e., it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the appellant undertakes minimal business r....
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....rable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing its transfer pricing documentation ; 1.5.1 without prejudice, in case the current year data is used, the appellant should be allowed to submit a fresh search so that all companies (for whom data for the financial year 2006-07 is now available, but which was not necessarily available at the time of preparing transfer pricing documentation, including companies now reported in the databases, but which were not reported in the databases at the time of preparing transfer pricing documentation) are appropriately considered. 1.6 collecting selective information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the appellant in the public domain and relying on the same for comparability purposes (and to the extent of completely ignoring reliable data available in public domain/annual reports in numerous cases) ; 1.6.1 and in doing so violating the fundamental principles of natural justice by relying on the information sourced under section 133(6) ; and also by not sharing with the appellant, t....
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....mployed and risks assumed ; 1.12 ignoring the business/commercial reality that since the assessee is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, 1.12.1 that due to the fact that the appellant is a captive contract software development services provider undertaking minimal risks, adjustments such as risk adjustment is imperative in appellant's case ; 1.13 disregarding judicial pronouncements in India in undertaking the transfer pricing adjustment. 2. Capitalisation of software expenses 2.1 The Dispute Resolution Panel and Assessing Officer both on facts and in law erred in not appreciating the fact that the software acquired is of revenue in nature. 2.2 The Dispute Resolution Panel and Assessing Officer both on facts and in law erred in not appreciating the fact that the nature of software acquired is primarily application software which has no enduring benefit. 3. Exclusion of communication charges from export turnover i....
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.....616 5 Alcatel USA Sourcing Inc 28,13,11,368 6 Genesis Telecommunications 6,58,87,719 7 Alcatel, Australia 8,87,83,545 8 Alcatel, China 81,16,793 9 Alcatel, Spain 20,20,71,314 10 Alcatel Italy 99,57,597 11 Alcatel, Denmark 20,42,740 12 Connectivity and band width charges Alcatel, France 6,37,63,934 13 Reimbursement of expenses Alcatel, Belgium 2,46,667 14 Purchase of fixed Alcatel, France 1,51,14,683 15 Alcatel Germany 10,67,206 16 Alcatel Spain 1,78,013 17 Alcatel, USA Sourcing Inc. 3,09,48,774 18 Alcatel, France 1,55,18,964 19 Alcatel, Belgium 4,21,22,311 20 Alcatel, Canada 6,74,922 2! Alcatel, China 82,74,424 22 Alcatel, China (HK) 534 23 Alca Net, France 1,64,48,080 24 Reimbursement of expenses Alcatel, France 87,73,882 6. Functions, assets and risk analysis of the assessee Functions : Alcatel Development India Private Limited is a dedicated captive software development facility centre for Alcatel-Lucent Group Companies. I....
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....g involves the developer to test his module independently. * Industrialization team : A telephone exchange deals with an enormous volume of data, especially relating to details of their subscribers, like numbers, features available to each subscriber, etc. The entire operations of a telephone exchange are data driven. The industrialization team is involved with everything associated with the data. It is the new data created by this team which will drive the new features built by the implementations team. * The customer, i. e., telephone exchanges, provides the data in a specific format, which the product management team hands over to Alcatel Development India Private Limited. The industrialization team is responsible for conversion of this data into required format, so that this could be integrated with the code developed by the implementation team, for delivery to the customer. The data relating to each exchange would be .unique with respect to that market. The industrialization team uses some specific tools to carry out their tasks, and require knowledge in programming languages like C, C+ +, etc. to manipulate the data received. The final new set of data produced is called a....
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....troubleshooting problems in the covered software product. Alcatel Development India Private Limited also provides "remote console intervention" using a modem connection to directly operate the system and software, in cases where the problem cannot be resolved through the routine telephone assistance. emergency telephone assistance is also provided by the TAC personnel on a 24/7 basis. Alcatel Development India Private Limited's response time is based on a category of faults it produces depending on the criticality of the bugs. The delivery of the maintenance release is through tire product management operations team in the respective market. General management functions The functions addressed below are common functions that are carried out by any business irrespective of their size and type. These functions are drivers of every business and are indispensable in the economic environment. (a) Corporate strategy determination : Generally, all policies within Alcatel Development India Private Limited are determined by its own management who continuously monitor the economic environment surrounding the Indian entity, assess their strategic position within the industry and target....
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....ould provide technical support and maintenance under the warranty period to Alcatel Bell NV for the software it has developed. All risks with respect to product warranty, claims suffered or damages awarded in favour of end customers arising from any infringement of Intel lectual Property Rights of any third party in consequence of the use of its products are borne by Alcatel-Lucent Group, as the owner of the intel lectual property rights. Technology obsolescence risk : Alcatel Development India Private Limited as a contract service provider does not bear any risk in this regard because the services are performed as per Alcatel-Lucent Group's specifications. It uses certain technology of the Alcatel-Lucent Group to undertake its development work. Alcatel-Lucent Group as the owner of the product and solutions and the associated technology, bears the risks of obsolescence of its products. Research and development risk : Alcatel Development India Private Limited does not carry on any core R&D activity. It develops software as per specifications provided by the Alcatel-Lucent Group. Alcatel-Lucent Group engages in significant R&D on their own account for developing new produc....
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....s per the agreement Alcatel Development India Private Limited should place all resources, premises and energy and connection means, documentation and all elements necessary for performance of the services by Alcatel France. Risk analysis : There are no inherent external risks involved in this international trans action except foreign exchange fluctuation risk which is borne by Alcatel Development India Private Limited as it has made the payment for band width and connectivity charges in foreign currency. Purchase of fixed assets Function : Alcatel Development India Private Limited purchases fixed assets like servers, modems, etc., from associated enterprises to perform testing functions of the code developed in-house. Alcatel Development India Private Limited even employs used assets apart from hiring these assets. Used assets are employed as the specification of the asset is impracticable to obtain at a reasonable cost. These are supported by an independent valuer's report. The Alcatel-Lucent Group companies identify the assets requirement of Alcatel Development India Private Limited and procure it if required and pass it to Alcatel Development India Private Limited. Fur....
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....n 7.70 7.68 10.84 9.06 8. As per this list the average OP to cost of the comparable companies is 9.06 per cent., as against this, the consolidated profit and loss account given in the annual report for the financial year 2006-07 in the case of the assessee-company shows an OP to cost of 10.57 per cent. A separate search was conducted by the Transfer Pricing Officer which yielded 28 comparable companies and the OP margin of the comparables is 27.96 per cent. as against the assessee's margin of 10.57 per cent. Action of Transfer Pricing Officer : 9. The search resulted in 28 comparable companies and the average OP margin of comparables is 27.96 per cent. as against the company's margin of 10.57 per cent. The list of comparables and the search process and the filters adopted by the Transfer Pricing Officer are furnished below : Sl. No. Company name Sales (Rs. Cr.) OP to total cost % 1 Accel Transmatlc Ltd (Seg.) 9.68 21.11 2 Avani Clmcon Technologies Ltd 3.55 52.59 3 Bodhtree Consulting Ltd (Seg.) 7.40 109.79 4 Celestial Labs Ltd. 14.13 58.35 5 Datamatlcs Ltd. 54.51 7.27 6 E-Zest Solutions Ltd. 6.26 38.12 7 ....
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....the contention of the learned authorised representative that in the absence of segmental data, the Avani CT Ltd. is not a right comparable, cannot be accepted. Celestial Labs Ltd. 12. The Transfer Pricing Officer selected the comparable based on the reply received in response to the notice under section 133(6) that the company is engaged in provision of software development which is affirmed by the learned Dispute Resolution Panel. The learned authorised representative has taken objection on two grounds namely, the comparable is functionally different and as per the DRHP the company is engaged in the areas of IT/ Bio-Informatics and consultancy work. He relied on the case of Infogains Pvt. Ltd. 13. The part of the annual report reads as under : The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in finding the lead molecules for drug discovery and protected the intellectual property rights by filing under the Copy right/ Patent Act. (Apprised and funded by Department of Science and Technology, New Delhi). "Based on our in silico expertise (applying bio-informatics tools). The company has developed a molecule to treat Leucoderma and multiple cance....
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....er to exclude this company from comparable." 15. Hence, we hold that this may not be considered as a right comparable. Flextronics Software Systems Ltd. 16. On going through the record, we find that this is not a correct comparable owing to the diversified segment of software services and products are grouped together. Helios and Motherson (IT) Ltd. 17. We find that this comparable fails the employee cost filter implied by the Transfer Pricing Officer himself and also the fact that the company is engaged in the services like information technology enables services/ business process outsourcing/off-shore delivery/project management and maritime practices makes it functionally dissimilar to be a right comparable. KALS Information Systems Ltd. 18. The reply of the company that "the use of ready-made object laboratories is only to the tune of about (0.33 to 3) per cent. in the year 2005-06 and 2006-07" has been examined by the Tribunal and came to the conclusion that "what has been written is that the company's use the ready-made object laboratories is only to the tune of maximum three per cent. and it doesn't convey that the software products' revenue stands at thre....
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....milarly, the contention that amount incurred in product development and owing of the software product does not influence the profit levels on annual basis. Hence, we decline to interfere with this comparable. Ground No. 2 : Capitalization of Software Expenses : 26. The assessee debited software expenses to its profit and loss account whereas the Assessing Officer altered the expenses to capital expenditure. The rationale given by the Assessing Officer and the reliance on the different judgments is as under : "(i) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business or for a substantial replacement of equipment. (ii) Expenditure may be treated as properly attributable to capital when it is made not once and for all, but with a view to bringing into existence as asset or an advantage for the enduring benefit or a trade. The enduring benefits or the permanent character means acquisition of the assets or the right having enough durability to justify its being treated as capital assets. (iii) Whether the expenditure incurred was a part of fixed capital of the business or a part of its circulating capital. The Assessing Of....
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....ounds with regard to computation of deduction under section 10A pertaining to exclusion of communication charges, expenditure incurred in foreign exchange from the export turnover. The issue of computation of deduction under section 10A has reached a finality in view of the judgment of the hon'ble Supreme Court in the case of CIT v. HCL Technologies Ltd. [2018] 404 ITR 719 (SC). The relevant portion of the said order dealing with the similar issues raised by the assessee in the present appeal is reproduced for the sake of ready reference (page 723) : "5. The only point for consideration before this court is whether in the facts and circumstances of the case, the software development charges are to be excluded while working out the deduction admissible under section 10A of the Income-tax Act on the ground that such charges are relatable towards expenses incurred on providing technical services outside India ? Rival contentions : 6. At the outset, learned senior counsel for the Revenue submitted that when the total turnover is not defined under section 10A of the Income-tax Act, the ordinary meaning of the words is to be adopted. As it was a technical term, the technical me....
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....1991, the expression "total turnover" shall have effect as if it also included any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 ;' 9. It is also pertinent to mention here the relevant terminologies which are as under : 'Export turnover : Explanation 2(iv) to section 10A of the Income-tax Act defines "export turnover" to mean the consideration that has been received for export of articles/things/computer software. Normally the consideration will include the freight/telecommunication charges/insurance which had been incurred to deliver the article/things/computer software outside India. However, the Explanation 2(iv) specifically seeks to exclude these three categories of expenditure incurred for delivering the export of articles/things/computer software. It also seeks to exclude expenses for providing technical service, etc., outside India. Therefore, where an Indian technician goes abroad and receives fees for service, the foreign client will normally be required to reimburse the expenses as well. Therefore, out of the consideration received, the portion representing reimbursement of expenditure has to be excluded. Export turnov....
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....nt. of the software development charges required to be attributed towards expenses incurred for providing technical services outside India. On appeal, the learned Commissioner of Income-tax (Appeals) again made a detailed analysis of the activity of the respondent and arrived at a conclusion that the Assessing Officer failed to bring any evidence which can indicate that respondent was providing technical services outside India and it has incurred expenses towards salary, etc. on rendering such services. Inspite that, the learned Commissioner of Income-tax (Appeals), estimated 10 per cent. of software development charge as charges incurred for technical services provided outside India. 12. It is undisputed fact that the respondent was engaged in the business of software development for its customers engaged in different activities at software development centres of the respondent. However, in the process of such customized software development, certain activities were required to be carried out at the sight of customers on site, located outside India for which the employees of the branches of the respondent located in the country of the customers are deployed. It is true that it i....
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....he interpretation by the court shall be done in such a way that the intention of the Legislature shall prevail and no injustice occurred with the parties. The rule of harmonious construction is the thumb rule to interpretation of any statute. An interpretation which makes the enactment a consistent whole, should be the aim of the courts and a construction which avoids inconsistency or repugnancy between the various sections or parts of the statute should be adopted. 16. In CIT v. J. H. Gotla [1985] 156 ITR 323 (SC) ; [1985] 23 Tax man 14J (SC) this court has held as under (page 339 of 159 ITR) : 'Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of statutory provision is an attempt to discover the intention of the Legislature from the language used . . . . . . . . If the purpose of a particular provision is easily discernible from the whole scheme of the Act which, in the present case, was to cou....