TaxTMI 
TaxTMI 
2019 (9) TMI 1664
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.... Ltd, L & T Infotech, Infosys Ltd., in software development segment without appreciating that economies of scale is not relevant in the software industry and turnover criterion is not prescribed in Rule 10B of IT Rules. 3. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to provide for depreciation adjustment without appreciating the fact that such criterion is not prescribed in Rule 10B of IT Rules. 4.On the facts and in the circumstances of the case the learned CIT(A) erred in law in deleting the disallowance u/s 40(a)(ia) without appreciating the fact that the assessee had purchased software which is in nature of a license paid for usage of the software and the consideration for such licenses would fall within the definition of the royalty defined in Explanation 9(1)(iv) and hence deduction of tax at source under Section 194J should have been done by the assessee. 5. On the facts and in the circumstances of the case the learned CIT(A) erred in law in deleting the disallowance u/s 14A r.w.r. 8D without appreciating the fact that as per provisions of Section 14A there is no differentiation to be made o....
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....s as recorded in the books of accounts, as the arm's length price. b) The Ld. CIT(A) erred in upholding the action of the Ld. AO/ Ld. TPO on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Respondent's analysis with fresh benchmarking analysis on his own conjectures and surmises and in doing so determined a new arm's length price. Thus, the Respondent prays that the fresh benchmarking analysis conducted by the Ld. AO/ Ld. TPO is liable to be quashed. 3 Comparability Analysis adopted by the TPO for determination of arm's length price. a) The Ld CIT(A) erred in confirming the action of the Ld. AO/ Ld. TPO who erred in comparing the benchmarking of the Respondent's international transaction (i.e., software development services) with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Respondent vis-à-vis comparable companies identified. b)The Ld. CIT(A) erred in accepting the action of the Ld.AO/TPO/Ld. TPO in applying arbitrary filters to arrive at a fres....
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....ion of the Ld. AO/ Ld. TPO in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Respondent. b) The ld.CIT(A) also erred in confirming the action of Ld.AO/TPO in rejecting application of multiple year data while computing the margin of alleged comparable companies as such data had an influence in determining the transfer pricing policy of the Respondent. 5. Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO. The Ld. CIT(A) erred in upholding the action of the Ld. AO/the Ld. TPO in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) marketing expenditure adjustment, (b) research and development expenditure adjustment, (c) risk profile between the Respondent and the comparable companies; and (d) working capital adjustment. Further, the Ld. TPO erred in restricting the working capital adjustment in the case of the Company to 1.71%. The Ld. AO / the Ld. CIT(A) erred in upholding the same. 6. Variation of 5% from the arithmetic mean The Ld. CIT(A) erred in upholding....
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....enses received 73,96,565 3. Ld.TPO accepted arms length price, computed by assessee in respect of reimbursement of expenses paid and recovery of expenses received. The only segment disputed by the ld.TPO was in respect of Software Development Services. It is observed that assessee used TNMM as most appropriate method and computed its margin by using OP/TC as PLI and computed its margin at 16.61%. Assessee selected following 17 comparables with an average margin of 12.66%: Company Name Prowess, Capitaline, Segmental Markup on Total cost Akshay Software Technologies Ltd. 6.17% Aztecsoft Ltd. 8.38% Birla Technologies Ltd. -1.77% CG Vak Software & Exports Ltd. 5.73% Computech International Ltd. 1.94% Helios & Matheson Information Technology Ltd. 28.52% LGS Global Ltd. 22.00% PSI Data Systems Ltd 2.94% Powersoft Global Solutions 19.26% Quinnox Consultancy Services Ltd. 11.70% R S Software (India) Pvt.Ltd. 18.20% R Systems International Ltd. 9.66% Sagarsoft(India)Ltd 11.82% Sonata Software Ltd 13.49% Thirdware Solutions Ltd. 25.54% Vama Industries Ltd 23.31% Number of Compani....
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....e compatibility, it is sine qua non to understand functions performed, assets employed, risks assumed by assessee under this segment. It has been observed by Ld. TPO, that assessee is wholly owned subsidiary of Novell Inc. USA, and is engaged in providing software development support services to Novell Inc. USA. Functions In TP study, assessee is submitted to be providing development services to AE which includes developing certain components of Novell products, like e-directory, developer tools for NetWare 6 and NetWare 5 ex-IP etc. In TP study, assessee has been classified into various product groups: • the application group; • networking and advanced services group; • network management services group; • operating Systems group; • quality management group and technology group; It has been submitted in TP study that workflow of software development services provided by assessee can be summarised as follows: • Novell US prepares a product requirement document(PRD) which is developed y the product management team of Nov ell based on the inputs from the customer, the marketing team of the produ....
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....t size and turnover of these companies were deciding factors and therefore, was not comparable with that of assessee. Ld. CIT DR submitted that, Ld. CIT (A) excluded Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd, L&T Infotech Ltd., and Infosys Ltd., by applying turnover filter. She submitted that such filter is not prescribed under IT Rules, as one, which is to be applied while determining arms length price of international transaction. Ld. CIT DR placed reliance on orders passed by Ld.AO/TPO. She relied upon following decisions of this Tribunal in support of her contention: • NTT Data Global Delivery Services Ltd. vs ACIT reported in (2016) 59 Taxmann.com 7; • LSI Technologies India Pvt.Ltd vs ITO reported in (2016) 70 Taxmann.com 189; • Societe Generale Global Solutions Centre Pvt.Ltd vs DCIT reported in (2016) 69 Taxmann.com 336; • Capgemini India Pvt.Ltd vs ACIT reported in (2015) 58 Taxmann.com 175; • Wills Processing Services India Pvt.Ltd vs DCIT reported in (2013) 30 Taxmann.com 350. 8. Ld.AR submitted that, application of turnover filter has been upheld by this Tribunal in several decisions in....
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.... decide whether it would be in addition to existing software or is it new application, a new subsystem or a whole new system. This is what is generally referred to as 'Domain Analysis'. Assuming that the developers are not sufficiently knowledgeable in the subject area of the new software, the first task is to investigate the so called 'domain' of the software, because more knowledgeable they are about the domain already, the less the work that is required. Another objective of this work is to make the analysts who will later try to elicit and gather the requirements from the area experts or professionals, speak with them in the domain's own terminology and to better understand what is being said by these people because otherwise they will not be taken seriously. The next most important task in creating a software product is extracting the requirement of the customers and then precisely describing the software to be written possibly in a rigorous way. In practice, most successful specifications are written to understand and fine tune applications that were already well developed, although safety critical software systems are often carefully specified prior to ap....
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....ware development life cycle. It does not generate any intellectual property of its own. The intellectual property generated belongs to the customer and not to the service provider. A software customization company buys software products in the form of licenses from third party or uses its own software products for customization to suit the requirements of the customer and in this case, only the right to use the software is passed on to the customer and therefore, the same is also considered as software development service providers. A software trading company purchases software products in the form of licenses or on royalty basis as a right to use and sells these products as a reseller. 3.1 The assessee being a software development service provider, it cannot be compared to a software development company or a software trading company. Therefore, the companies that are functionally different from that of the tax payer are to be excluded."... 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This sh....
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.... It is observed that comparables sought to be excluded are 100 % Software Development Companies, having high turnover and therefore respectfully following aforestated view in case of Genesis Integrating Systems India Pvt. Ltd., vs DCIT (supra) these comparables are to be excluded on both the counts of functionally not being similar with that of assessee and also because they have a high turnover of more than 200 crore. It is submitted that subsequently this Tribunal in case of Yodlee Infotech Pvt. Ltd vs ITO in IT(TP)A no. 108/Bang/2014 For assessment year 2009-10, vide order dated 12/12/14, excluded these companies following Genesis Integrating systems Indi Pvt. Ltd vs. DCIT(supra). Reliance has been placed on decision of this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT reported in (2018) 96 Taxmann.com 263 followed similar view to exclude identical comparables by applying turnover filter, wherein all the decisions relied upon by Ld. CIT DR has been considered and dealt with. Therefore, respectfully following above decisions, we uphold exclusion of Infosys Ltd, Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd., by Ld. CIT (A) from final list. Now coming....
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....tions Pvt.Ltd vs ITO reported in (2008) 23 SOT 385, she submitted that Ld. CIT (A) rightly directed Ld.TPO to exclude depreciation from operating costs of assessee as well as comparables. Ld. CIT DR placed reliance upon orders passed by Ld.AO/TPO. 12. We have perused submissions advanced by both sides in the light of the records placed before us. It has been submitted by the Ld.AR that for assessment year 2005-06 in assessee's own case when this issue was remanded by this Tribunal is Ld.TPO/AO had inter alia granted the adjustment on depreciation after taking into consideration the detailed working submitted by assessee. Placing reliance upon page 892-898 of paper book, it has been submitted that for year under consideration detailed working is already available before authorities below. Ld. CIT (A) observed as under: "14.5.(v) Depreciation Adjustment 14.5.1. An extract of my predecessor's order is reproduced as under; During the appellate proceedings, it is submitted that the appellant company as a policy of charging a higher rate of depreciation as compared to the Companies selected by the TPO, therefore, there is need for making an adjustment ....