AI Drafter 
TaxTMI 
TaxTMI 
2022 (5) TMI 350
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....the arm's length principle envisaged under the 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....
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.... 1.6.9 companies having research and development costs to sales less than 3 per cent. were accepted ; and 1.6.10 companies having advertising, marketing and distribution 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 a....
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....n accept-reject of comparables included in/excluded from in the final set of companies ; 1.5 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 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 ....
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....tain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed ; 1.10 resorting to arbitrary rejection of low-profit/loss making companies based on erroneous and inconsistent reasons ; 1.11 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 ; 1.12 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 ....
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....ation software with a significant number of dedicated software professionals working with partner organizations all over India. 5. The details of associated enterprises and the international transactions carried out by the assessed are as under : S. No. International transaction Associated enterprise Amount 1 Service income Alcatel-Lucent, Belgium 50,88,95,804 2 Alcatel-Lucent, Germany 48,04,71,130 3 Alcatel CIT, France 54,61,55,950 4 Alcatel, USA 5,40,28.616 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 ....
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....networks and communications. (a) Design : The first step in the software development life cycle for Alcatel Development India Private Limited begins with the technical design based on the functional specifications received. The technical design process translates the functional requirements into a representation of the software which ultimately is to be coded into machine readable form. (b) Coding : The next step is to write the code. Alcatel Development India Private Limited uses the chill programming language to write the code on the UNIX operating system. (c) Testing : The implementation team does unit testing at the work station level, Unit testing 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 t....
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....on. * Maintenance. and support : As per its Software Development and Licence Agreement dated May 25th 1998, Alcatel Development India Private Limited provides technical assistance, maintenance & support through its Technical Assistance Centre (TAC). Alcatel Development India Private Limited provides these services to Alcatel Bell NV without additional charge for the warranty period mentioned in the agreement to correct any errors, defects or malfunctions in the software it has delivered. In case of support beyond the warranty period or not related to the warranty performance, Alcatel Development India Private Limited bills at the normal rates. The TAC provides routine telephone assistance in investigating, diagnosing and 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 i....
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....nificant non-routine intangibles. Risks : The various risks associated with this international transaction are as under : Market Risk : Alcatel Development India Private Limited does not have any significant exposure to this risk because it renders services exclusively for Alcatel-Lucent Group and therefore can forecast its revenues with fair degree of certainty. All market risks with respect to the product including customer acceptance are borne by Alcatel-Lucent Group. It is exposed to the intensely competitive conditions in the telecom industry and impact of technological advances. Product liability risk : Alcatel Development India Private Limited's risk is minimal as it does not have any interface with the ultimate customer. However, it would 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 le....
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.... the final product/service delivered to the final customer by the Alcatel-Lucent Group. Being only a service provider, Alcatel Development India Private Limited does not carry any inventory. Alcatel-Lucent Group bears the responsibility for the security, maintenance and inventory of all its products, both hardware and software, and bears the full cost of maintaining the storage of the Inventory. In effect, Alcatel Development India Private Limited is insulated from most of the risks in respect of its international transaction entered with its associated enterprises. Payment for Bandwidth and Connectivity Charges Function : Alcatel Development India Private Limited has entered into a Master Contract with Alcatel France, for bandwidth, connectivity, hosting, data network and conferencing services. As 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 ....
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.... adopted the transactional net margin method as the method for bench marking its transactions with it's associated enterprises's. The final lists of comparable chosen by the company are as follows : Sl. No. Name of the company NCP 2004-05 (%) NCP 2005-06 (%) NCP 2006-07 (%) Weighted Average (%) 1. Intertec Communications Ltd. 8.54 5.62 NA 6.68 2. PSI Data Systems Ltd. 0.05 1.64 5.97 3.01 3 Prithvi Information Solutions Ltd. 10.49 13.68 14.11 13.24 4 R Systems international Ltd. 5.16 22.35 7.35 11.28 5 SQL Star International Ltd. 1.28 -16.18 -1.86 -3.32 6 Sasken Communication Technologies Ltd. 11.41 7.58 11.47 10.22 7 Sonata Software Ltd. 15.59 5.66 19.99 13.63 8 Visesh Infotecnics Ltd. 9.12 21.10 18.86 17.76 Arithmetic mean 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....
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....cing Officer held that the comparable is engaged in provision of software development services and clears all the filters. The learned Dispute Resolution Panel agreed to observation of the Transfer Pricing Officer and found that the company has stated that it is dealing purely in software development. The learned authorised representative argued that the comparable is functionally different and there was no segmental data available for the revenue from the sale of software development services and the software products. We find that this was not allowed as a comparable for the similarly placed companies owing to high operating margins and different asset base with regard to Motorola Solutions India Pvt. Ltd. During the year with regard to the assessee, we find that the comparable has replied that they are into software development only. We find that 97 per cent. of the revenue of the comparable is from software development which is similar to the functions of the assessee who is also having a software development facility centre. Hence, the contention of the learned authorised representative that in the absence of segmental data, the Avani CT Ltd. is not a right comparable, cannot ....
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....ct development and knowledge process outsourcing. The segmental data is also not available. The inventory ratio to total revenue is 19.90 per cent., whereas the assessee company does not hold any inventory. Besides this, E-zest is into professional services and full risk bearing entrepreneur, whereas the assessed company is limited risk capital company dealing in software development and is performing limited functions like coding, testing. 10.14 The learned Departmental representative submitted that the Transfer Pricing Officer has rightly selected this comparable and relied upon the order of the Transfer Pricing Officer. 10.15 We heard both the parties and perused the records. The functions of both the companies are different. There is no segmental data available in the annual report of the company. The service income filter which was applied by the Transfer Pricing Officer clearly has not been followed by the Transfer Pricing Officer in this company while selecting as comparable. Therefore, this company has to be excluded. We, therefore, direct Transfer Pricing Officer to exclude this company from comparable." 15. Hence, we hold that this may not be considered as a righ....
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....e. Similar observation is applicable to Wipro Ltd. Thirdware Solutions Ltd. 21. The company is engaged in product development and earns revenue from trading of software licences and subscription. Further, the segmental information of different streams of revenue is not available. Megasoft Ltd. 22. The Transfer Pricing Officer while determining the arm's length price used the entity wise margins instead of segmental margins. Hence, needs to be obliterated. 23. With regard to the Akshay Software Technologies Ltd. and SQL Star International Ltd., the same cannot be considered as the revenue filter and the export turnover filter have not been met. Ishir Infotech Ltd. 24. The assessee contended that the comparable fails the employee cost filter as per annual report. However, the information provided under section 133(6) clears the employee filter. Lucid Software Ltd. 25. The company submitted that it is a pure software development company and does not have any revenue from sale of products or licence. Hence, the appellant's contention on the similarity of the functions is overruled. Similarly, the contention that amount incurred in product development ....
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....[2008] 301 ITR (A.T.) 1 (Delhi) [SB] ; [2008] 111 ITD 112S (Delhi-ITAT) [SB]. • IBM India Ltd. v. CIT (Appeals) [2007] 290 ITR (A.T.) 183 (Bang). • CIT v. K and Co. [2003] 181 CTR 378 (Delhi). • Addl. CIT v. Asahi India Safety Glass [2006] 6 SOT 656 (Delhi). • ITO v. Shivani Locks Ltd. [2008] 22 SOT 122 (Delhi). 28. Heard the arguments of both the parties and perused the material available on record. 29. We have gone through the various judgments relied upon by both the parties. We have also gone the judgment of the hon'ble apex court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) ; AIR 1980 SC 1946. From the facts, relevant to the instant case, we find that the assessee has not acquired any capital asset of enduring in nature with regard to the software purchases. It is the user rights which has been purchased by the assessee and requires updation and modification at regular intervals. Hence, it cannot be said that the assessee has acquired any asset capital in nature by way of payment of software expenses. Hence, the addition made by the Assessing Officer is directed to be deleted. Computation of d....
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....nge for providing technical services outside India. The same cannot be included in the total turnover as if numerator included the aforesaid amount, which the denominator doesn't include, the formula would render undesirable results. Therefore, the respondent is legally entitled to exclude the above said expenses from the total turnover as well. Hence, these appeals deserve to be dismissed at the outset. Discussion : 8. The whole controversy revolves around the claim of certain expenses attributable to the delivery of software outside India or in providing technical services from 'total turnover' by the respondent under section 10A of the Income-tax Act. It is an undisputed fact that neither section 10A nor section 2 of the Income-tax Act define the term 'total turnover'. However, the term 'total turnover' is given in clause (ba) of the Explanation to section 80HHC of the Income-tax Act which defines the meaning of total turnover as follows : '(ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs stations as defined in the Customs Act, 1962 ....
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....same Act ? Section 10A of the Income-tax Act is a special beneficial provision and the purpose of deduction under such section is to encourage and boost the new business undertakings situated in the free trade zone of this Nation by providing suitable deductions to such business entities. Sometimes, while calculating the deduction, disputes arise regarding the methodology of deduction which ought to be followed. Undisputedly, it is a matter of record that the respondent is engaged in the activity of trading of generic software and providing customized software development services for domestic as well as for foreign clients through its two units situated in Software Technology Park, Gurgaon (Now Gurugram) which falls under the definition of the section 10A of the Income-tax Act. The contention of the respondent is that it incurred expenditure in foreign exchange in sending professionals abroad as per the agreements with the foreign constituents. 11. On an analysis of the respondent's activity taken from its website, the Assessing Officer arrived at a conclusion that respondent has been rendering technical services outside India and, therefore, expenses incurred on such....
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....ctions 80HHC and 80HHE of the Income-tax Act. As discussed earlier, the definition of total turnover has not been defined under section 10A of the Income-tax Act. 14. In the above backdrop, we are of the opinion that the definition of total turnover given under sections 80HHC and 80HHE cannot be adopted for the purpose of section 10A as the technical meaning of total turnover, which does not envisage the reduction of any expenses from the total amount, is to be taken into consideration for computing the deduction under section 10A. When the meaning is clear, there is no necessity of importing the meaning of total turnover from the other provisions. If a term is defined under section 2 of the Income-tax Act, then the definition would be applicable to all the provisions wherein the same term appears. As the term 'total turnover' has been defined in the Explanation to sections 80HHC and 80HHE, wherein it has been clearly stated that 'for the purposes of this section only', it would be applicable only for the purposes of that sections and not for the purpose of section 10A. If denominator includes certain amount of certain type which numerator does not include,....
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.... liability by trans fer . . . .' 17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Karn) ; [2012] 204 Taxman 321 (Karn) ; 17 taxmann.com 100 (Karn). The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under section 10A of the Income-tax Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover ? While giving the answer to the issue, the High Court, inter alia, held that when a particular word is not defined by the Legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from 'export turnover' must also be excluded from 'total turnover', since one of the components of 'total turnover' is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible. 18. Accordingly, the formula for computation of the deduction under section 10A of the Act would be....