AI Drafter 
TaxTMI 
TaxTMI 
2022 (2) TMI 1283
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....Delhi (hereinafter referred to as the 'Ld. AO'), under Section 143(3) r.w.s 144C(13) read with Section 144B of the Income-tax Act, 1961 ('the Act'), on the grounds as set out herein: The following grounds are independent of, and without prejudice to, one another: Transfer Pricing Adjustment relating to international transaction pertaining to payment of royalty and service fee (subscription segment) - INR 171,407,494 1. The Ld. AO [along with the Learned Transfer Pricing Officer ('Ld. TPO')] under the directions of Hon'ble Dispute Resolution Panel ('DRP') erred on facts and in law, in determining the arm's length price for payment of royalty and service fees under subscription segment and thereby making an adjustment of INR 171,407,494 to the taxable income of the Assessee. In doing so, having grossly erred in: 1.1 modifying the economic analysis carried out by the Assessee in the Transfer Pricing Documentation ("TP Documentation') and arbitrary applying incorrect quantitative filters without providing any cogent reasons; 1.2 rejecting various comparable companies selected by the Assessee in the TP Documentation basis the provisi....
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....e value of international transactions, thereby extending the quantum of transfer pricing adjustment to transactions with the nonassociated enterprises also. Adjustment relating to international transactions pertaining to provision of software support services - INR 68,493,639 3. The Ld. AO (along with the Ld. TPO) under the directions of Hon'ble DRP erred on facts and in law, in determining the arm's length price for provision of software support services and thereby making an adjustment of INR 68,493,639 to the taxable income of the Assessee In doing so, having grossly erred in: 3.1 modifying the economic analysis carried out by the Assessee in the TP Documentation and arbitrarily applying incorrect quantitative filters without providing any cogent reasons; 3.2 rejecting various comparable companies selected by the Assessee m the TP Documentation basis the provisions of Rule 10B(2) of the Rules; 3.3 introducing additional companies without appreciating that such companies are functionally dissimilar to the Assessee and violating the provisions of Rule 10B(2) of the Rules 3.4 considering fresh comparable companies without apprec....
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....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 receipt of advance and is not chargeable to tax in the current year; 5.3. The Ld. AO and Hon'ble DRP erred on facts and in law in preponing the income to the current C year, without appreciating that the books of accounts are duly audited and unqualified by the auditor, and the said income is offered to tax in the respective year in which it is accounted, thereby, it is revenue neutral; 5.4 Without prejudice to the above, the Ld. AO and Hon'ble DRP erred in not granting a corresponding deduction/relief of INR 276,267,924 on the preponement of income, for a corresponding increase in expenses in the nature of 'royalty' and 'service fees' payment as per the terms of the 'License and Service' agreement entered into by the Appellant with the AE and in view of the matching concept of accounting. Additions on account of Employee Stock Option Plan ('ESOP') expenses - INR 259,721,357 6.1 The Ld. AO and Hon'ble DRP erred on the facts and in law, in disallowi....
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....access various features including modifications, additions, enhancement or support in relation to such open source software. During the year under assessment the assessee has four business segments viz. Subscription Segment, Services Segment, Software Support Service Segment & IT Enabled Support Services. 3. The assessee reported to have entered into international transactions during the year under assessment as under: S. No. Associated Enterprise Nature of International Transaction Payment/Receipt by assessee Amount (in Rs.) Method used for determining ALP by the assessee 1 Red Hat Inc., USA Royalty as per Lincese and Services Agreement Payment 5,35,86,135/- TNMM 2 Red Hat Inc., USA Provision of ITeS Receipt 83,76,55,778/- TNMM 3 Red Hat Limited, Ireland Provision of ITeS Receipt 20,94,13,945/- TNMM 4 Red Hat Inc., USA Provision of Software Development Services Receipt 55,82,40,145/- TNMM 5 Red Hat Inc., USA Service Fees as per License and Service Agreement Payment 90,65,99,5 63/- TNMM 4. The assessee in order to benchmark its international transactions qua subscriptio....
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....the adjustment proposed by the Transfer Pricing Officer (TPO) and directed by the Ld. DRP, the AO proceeded to frame the assessment order at total income of Rs.119,34,09,434/- under section 143(3) read with section 144C(13) read with section 144B of the Act. Feeling aggrieved, the assessee has approached the Tribunal by way of filing the present appeal. 10. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto. 11. The Ld. A.R. for the assessee challenging the impugned order relied upon its transfer pricing study and has also filed ground-wise chart, the copy of which was also supplied to Ld. D.R. However, on the other hand, the Ld. D.R. relied upon the order passed by the Ld. TPO/DRP/AO. Transfer Pricing Grounds Ground No.1 & Grounds No.1.1, 1.2, 1.3, 1.4, 1.5 1.6 & 1.7; Ground No.2 & Grounds No.2.1, 2.2, 2.3, 2.4, 2.5, 2.6 & 2.7; Ground No.3 & Grounds No.3.1, 3.2, 3.3, 3.4, 3.5 & 3.6; Ground No.4 & Grounds No.4.1, 4.2, 4.3, 4.4, 4.5 & 4.6 12. The Ld. TPO ....
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....larly in service segment also the assessee pays its AE a royalty @ 3% of its revenue and a service fees equal to entire revenue of the assessee from this segment -13.50, the detail of which is as under: 1. Royalty - Rs.1,02,55,763/- (i.e. 3% of the assessee's revenue from service segment) 2. Service Fee - Rs.(89,12,059/- (i.e. revenue of the assessee from subscription segment minus 13.50% of its revenue from subscription segment) 17. At the same time, under this plan the assessee is assured a margin of 1.4% of revenue earned from subscription segment and 13.50% of revenue earned from service segment. 18. The Ld. TPO aggregated transaction under the head 'Royalty and service fees' in each segment and considered the same as single transaction under the head 'software distribution activity and computer training/education activity' for the subscription segment and service segment respectively. 19. The Ld. TPO modified the economic analysis of the assessee by rejecting comparables chosen by the assessee by introducing new comparables and determined the arm's length margin of 11.8% in subscription segment and 21.53% in service segment. 20. The Ld. TPO after ....
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.... the TPO/DRP/AO sought to exclude two comparables viz. Innovana Thinklabs Limited and K7 Computing Pvt. Ltd. and sought inclusion of 9 comparables viz. Funny Software Ltd., Dynacons Technologies Ltd., Empower India Ltd., PS IT Infrastructure & Services Ltd., JMD Ventures Ltd. (formerly JMD Telefilms), Unisys Software & Holding Industries Ltd., Compuage Infocom Ltd., Sonata Information Technology Ltd. and Advance Technologies Ltd. qua subscription segment. 25. Similarly, the assessee sought exclusion of MT Education Services Pvt. Ltd. as comparables and sought inclusion of 3 comparables viz. Compucom Software Ltd. (segment), Chitale's Personalised Learning Pvt. Ltd. and Anthena Eduspark Ltd. qua the service segment. 26. Let us examine the suitability of these comparables sought to be excluded and included by the assessee for the purpose of benchmarking one by one as under: Subscription segment Comparable sought to be excluded Innovana Thinklabs Ltd. 27. The assessee challenged inclusion of Innovana Thinklabs Limited (for short Innovana) as a comparable on the grounds inter alia that it fails TPO's own turnover filters which has less than 10% of the assessee's turno....
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....tructure & Services Ltd., JMD Ventures Ltd. (formerly JMD Telefilms), Unisys Software & Holding Industries Ltd., Compuage Infocom Ltd., Sonata Information Technology Ltd. and Advance Technologies Ltd. contended that the Ld. TPO has rejected these comparables on the sole ground that the word 'royalty' being introduced in the search process for comparables by the assessee gave absurd results and as such the assessee has not determined the price charged or paid in the international transactions in accordance with sub section 1 & 2 of the Act. 32. However, the Ld. A.R. taken us to the detail search strategies extracted at page A1056 of the paper book wherein the word 'royalty' doesn't find a place in the search process for subscription segment. We are of the considered view that when the assessee's business model has already been accepted by the Tribunal in assessee's own case in earlier years by holding that the actual payment of royalty and service fee both under subscription and service segment are in accordance with agreement entered into between assessee and its AE the rejection of the comparable chosen by the assessee and its benchmarking rejected by the Ld. TPO/DRP is not sus....
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....f the assessee by rejecting remaining 11 and introduced 7 new comparables. The list of final comparable with weighted average OP/OC is as under: S.No. Name of the Companies Weighted Average OP/OC (%) 1 C G-V A K Software & Exports Ltd. 18.05 2 Puresoftware Pvt. Ltd. 19.08 3 R S Software (India) Ltd. 21.37 4 R Systems international Ltd. 22.55 5 Nihilent Ltd. 25.64 6 Kellton Tech Solutions Ltd. 32.57 7 Infobeans Technologies Ltd. 32.71 8 Aspire Systems (India) Pvt. Ltd. 33.55 9 Nihilent Analytics Ltd. 34.20 10 Cybercom Datamatics Information Solutions Ltd. 61.72 11 Dun & Bradstreet Technologies & Data Services Pvt. Ltd. 69.56 12 Interglobe Technology Quotient Pvt. Ltd. 81.75 35th percentile 25.64 Median 32.64 65th Percentile 33.55 38. The Ld. TPO determined the arm's length price of SDS segment on the basis of margin of the comparables at 32.64% vis-àvis 15% of the assessee at Rs.8,56,29,184/-. 39. The Ld. A.R. for the assessee challenging the impugned adjustment on account of arm's length price qua SDS segme....
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....otal sales ratio it needs to be reconsidered by the Ld. TPO after providing opportunity of being heard to the assessee. So this comparable is also remitted back to the Ld. TPO to decide afresh after providing opportunity of being heard to the assessee. Nihilent Analytics Ltd. (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No.405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise's reportable segment explanatory available at page No.A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absenc....
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....supply management solution etc. It has also come on record that the assessee has earned abnormally high margin of 58.19% as is evident from the annual report of Dun & Bradstreet and as such is not a valid comparable vis-à-vis assessee who is a routine software development service provider to its AE working on cost + markup model, hence order to be excluded. Infobeans Technologies Ltd. (Infobeans) 49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to comput....
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....o exclude this company as a comparable on the ground that from the website of the company which is extracted at page A457 it has come on record that it is into providing wide range of services i.e. graphic solutions, packaging brand management services, learning solutions, digital publishing solutions and technology solutions, web development and other services but its segmental financials are not available. Since the assessee has relied upon information drawn from the website of the assessee and has not brought on record complete annual reports we direct the Ld. TPO to re-examine this comparable in the light of the objections raised by the assessee by providing opportunity of being heard to the assessee. MPS Ltd. (MPS) 57. The assessee sought exclusion of MPS on the ground that MPS is functionally dissimilar to the assessee being into diversified business of providing publishing solutions i.e. type setting and data digitalization services for overseas publishers and supports international publishers through every stage of the author to reader publishing process. This company also provides digital first strategy for publishers across content production, enhancement and transf....
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....0B(1)(e)(iii) of the Income Tax Rules which certainly effects profit margin of every company. Because every company is working in a different business environment on the basis of funds available with them and many other companies ought to borrow money to fund its business activities. Many companies are benefiting from a long period to pay its supplier which would reduce its borrowing components. 63. So all these facts show that though there are no science to arrive at exact working capital requirement of every company but it needs to be made on the basis of estimation in order to provide a level playing field both for comparables as well as for the tested party/assessee in this case. 64. This issue has already been examined and decided in favour of the assessee by the co-ordinate Bench of the Tribunal in the case of E Value Serve.Com vs. ITO (ITA No.393/Del/2010, New River Software Services Pvt. Ltd. vs. ACIT (ITA No.451/Del/2013) & Huawei Technologies India Pvt. Ltd. vs. JCIT (ITA(TP)No.1939/Bang/2017). So we are of the considered view that the assessee is entitled for working capital adjustment. The Ld. TPO is directed to verify the computation furnished in transfer pricing....
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....Segment Particulars Computation as per order dated 31 October 2019 (INR) Computation as per order dated 18 December 2019Corrected (INR) Operating Revenue of the Assessee 144,43,45,751 144,43,45,751 Operating Operating (OP/OR) Appellant Profit/ Revenue of the 1.40% 1.40% Operating Operating (OP/OR) of Profit/ Revenue comparables 11.86% 11.86% Operating cost of the Assessee 142,41,24,910 142,41,24,910 Arm's length Operating Revenue 161,57,53,245 1,27,30,46,345 Shortfall in the Revenue 17,14,07,494 15,10,78,566 Service Segment Particulars Computation as per order dated 31 October 2019 (INR) Computation as per order dated 18 December 2019Corrected (INR) Operating Revenue of the Assessee 34,18,58,758 34,18,58,758 Operating Profit/ Operating Revenue (OP/OR) of the Appellant 13.50% 13.50% Operating Profit/ Operating Revenue (OP/OR) of comparables 21.04% 21.04% Operating cost of the Assessee 29,57,07,826 29,57,07,826 Arm's length Operating Revenue 26,82,56,567 26,99,31,675 Shortfall in the Revenue 2,74,51,259 2,57,76,150 68. Before proceedings with his....
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....;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 which generally spreads from 1 to 7 years. 74. The Ld. A.R. for the assessee contended that the assessee has recognized revenue from subscription service in its books of account as per the Percentage Completion Method (PCM) prescribed under Accounting Standard-9 (AS-9). Revenue recognition and subscriptions are provided over a period of 1 to 7 years, the amount received from customer in relation to subscription services are offered to tax on straight line basis under "Long term basis" and "other current liabilities" and is offered as income in the profit & loss account in subsequent years and accordingly offered to tax. 75. For this subscription services the assessee also claimed to have entered into agreement with Red Hat US under which it is required to pay royalty and services fee to Read Hat US, computed as specific percentage of revenue recorded in profit & loss account of the assessee for the respective years, available at page B239, B252 of the paper book of volume-2. At the same time due taxes have been ....
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....ith paragraph-? 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 are provided by indeterminate number of acts over a period of specified time, Revenue may be recognized on straight line basis over specified period. The assessee has further relied upon the analogy from recently introduced section 43CB. In the light of the above assessee's contention is that subscription package agreed may involve various support services which cannot be predeterminate. Recipient of service can raise queries numerous times during the tenure of agreement. Similarly, any correction bug fixes etc. can be required by the customers any time during the duration of the agreement. In the light of the above submissions in our considered opinion the Assessing Officer has clearly erred in changing consistently followed method of revenue recognition adopted by the assessee. In the facts and circumstances elaborately dealt with above, we find due merits of the revenue recognition adopted by t....
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.... interior to rendering of service, the income, therefore, would accrue on rendering of services..." 79. So in view of the matter and by following the order passed by co-ordinate Bench of the Tribunal in assessee's own case for A.Y. 2012-13 & 2013-14 (supra), we are of the considered view that when due taxes have been deducted and paid to the Income Tax Authorities while making such payment to Red Hat US in terms of the agreement entered into between the assessee and the Red Hat US in accordance with the consistent revenue recognition policy adopted by the assessee, upheld by the Tribunal in assessee's own case for earlier years, addition made by the Ld. AO/DRP on account of unearned revenue qua subscription services is not sustainable in the eyes of law. So grounds No.5.1, 5.2, 5.3 & 5.4 are determined in favour of the assessee for statistical purposes. Grounds No.6.1, 6.2, 6.3 & 6.4 80. The Ld. AO/DRP has made addition of Rs.25,97,21,357/- on account of employee stock option plan (ESOP) expenses. During the year under assessment Red Hat US granted ESOPs/restricted stock units (RSU) to certain employees of the assessee for which Red Hat Inc. charged the ESOP cost of Rs.25,....
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....rge agreement" and "internal memorandum prior to the execution of recharge agreement" and has never sought "valuation report" or the "incentive plan", we are of the considered view that this issue is required to be remitted back to the AO to decide afresh after providing opportunity of being heard to the assessee, in the light of the case law relied upon by the assessee viz. the Mumbai Tribunal in case of DCIT v. Accenture Services Pvt. Ltd. (ITA Nos. 4540, 4541, 5029, 5008 & 5009/M/2008 and Cross objections 214/M/2008, 47, 20, 44 & 45/M/2009, the Bangalore Tribunal in the case of Novo Nordisk India Private Limited vs. DCIT, Circle 12(2) (ITA No.1275/Bang/2011), DCIT vs L&T Infrastructure Finance Co. Ltd. (ITA No.3636/MUM/2017), Kotak Mahindra Asset Management Co. vs DCIT (ITA No.1416/Mum/2008), Aricent Technologies Holdings Ltd. vs. Addl. CIT (ITA No.5708/Del/2019) and Hon'ble Supreme Court's (SC) judgment in Sassoon J David & Co. Ltd. vs. CIT (118 ITR 261). Consequently the grounds No.6.1, 6.2, 6.3 & 6.4 are decided for statistical purposes in favour of the assessee. Ground No.7.1 85. Ground No.7.1 is dismissed having not been pressed by the Ld. A.R. during the course o....