AI Drafter 
TaxTMI 
TaxTMI 
2022 (11) TMI 1336
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion. 2.2 On receipt of the reference under 92CA, the Ld.TPO called for the economic analysis of the following international transaction in form 3CEB. Particulars Amount in Rs. Provision of software development services Rs. 55,50,25,698/- Provision of sales and marketing services Rs. 14,44,38,306/- Provision of IT enabled services Rs. 39,36,80,401/- Purchase of fixed assets Rs. 4,64,73,040/- Issue of shares Rs. 16,51,22,464/- Recovery of expenses (in the nature of ESOP taxes of employees) Rs. 72,66,034/- Reimbursement of expenses (in the nature of computer hardware maintenance and travel cost) Rs. 2,22,60,171/- Remittance of amount collected from employees towards Employee Stock Purchase Plan Rs. 2,51,03,011/- 2.3 The Ld.TPO observed that assessee computed its segmental margins as under: Particular ITeS SWD MSS Total Revenue from operations 39,36,80,401 55,50,25,698 14,44,38,306 1,09,31,44,405 Employee benefits and other expenses 13,32,25,635 29,95,60,203 8,71,14,141 51,98,99,979 Depreciation and amortization 4,83,52,035 5,80,22,442 77,88,829 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....atisfied with the bench marking of the transaction. He adopted following filters for all the 3 segments and shortlisted the final set of comparables as under: Filters applied by the Ld.TPO for all the 3 segments are common are as under: Step Description 1. Companies whose data is not available for FY 2015-16 - excluded. 2. Companies having different financial year ending (i.e., not March 31 2016) or data of the company does not fall within 12 month period i.e., 01-04-2015 to 31-03-2016 - excluded. 3. Companies whose income was less than Rs. 1 Crore - excluded. 4. Companies having negative net worth 5. Companies having persistent losses for any 2 out of 3 years 6. Companies whose software development service income is less than 75% of the total operating revenues - excluded. 7. Companies which have more than 25% related party transactions of the sales or 25% of the expenses - excluded. 8. Companies which have export service income less than 75% of the sales - excluded. 9. Companies with employee cost less than 25% of turnover - excluded. And the following are the comparables selected by the Ld.TPO for the 3 segments. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the draft assessment order by making further disallowance in respect of the expenditure claimed as rent amounting to Rs.13,72,413/-. 2.9 On receipt of the draft assessment order by the assessee, objections were raised before the DRP. The DRP on perusal of the submissions of the assessee, accepted its contention in respect of some comparables sought for exclusion / inclusion under the 3 segments which are as under: 2.10 The comparables that remained after giving effect to the directions of the DRP are as under: SWD Sl. No. Name of the Company Weighted Average 1. Kals Information Systems Pvt. Ltd. 8.60% 2. Rheal Software Pvt. Ltd. 14.50% 3. R S Software (India) Ltd. 20.87% 4. Larsen & Toubro Infotech Ltd. 24.83% 5. Nihilent Technologies Ltd. 26.36% 6. Inteq Software Pvt. Ltd. 28.20% 7. Persistent Systems Ltd. 30.89% 8. Infobeans Technologies Ltd. 32.42% 9. Thirdware Solution Ltd. 36.90% 10. Infosys Ltd. 38.61% 11. Aspire Systems (India) Pvt. Ltd. 39.28% 35th Percentile 24.83% Median....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e product development team at FireEye US. The principal functions relating to the new products are performed by FireEye US. Software engineering is a complex process involving a number of stages ranging from system and requirement analysis to implementation. The development process broadly includes system and requirement analysis, high-level designing, low-level designing, coding, testing and implementation. Requirement analysis coupled with the high level design ("HLD") gives the broad definition of the software to be designed. The analysis usually includes broad functionality of the software program to be designed, broad specification of the software program and feasibility of the design. The system and requirement analysis, and high-level designing is done by the FireEye US and the low-level designing, coding, testing and implementation support is done by both FireEye US and FireEye India. The following activities generally form part of the software development life-cycle: Requirement analysis or feasibility study encompasses all of the tasks that go into the instigation, scoping and definition of a new or altered system. This is an important part of the system design process....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed software, as well as remedying defects. The software maintenance phase involves changes to the software in order to correct defects and deficiencies found during field usage as well as the addition of new functionality to improve the usability and applicability of the software. Software will undergo some modifications after it is delivered to the customer. Both FireEye US and FireEye India carry out software maintenance work on a continuous basis by rectifying defects, optimizing and enhancing the deployed software. Functions performed by FireEye India and its AEs Description of Functions FireEy e India FireEy e US Software development and related Requirement analysis X √ High level design X √ Low level design √ √ Software development/Coding √ √ Testing & Quality assurance √ √ Maintenance √ √ Sales and marketing services FireEye India provides MSS to FireEye US and FireEye Ireland. Pursuant to the intercompany agreement, FireEye India has been appointed a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y bug fix required to resolve the problem is always referred to the R&D team located in US. Infrastructure Support Services FireEye India provide ISS which includes the following: Network Management & Support Services • Installation & maintenance of passive and active network equipment. • Network monitoring & incident management. • Troubleshooting. • SLA based operations. Users IT Support services • End user support, both technical and functional (on local applications use). • Installation, configuration, monitoring & maintenance of end-user computing equipment; and • IT asset management services. FireEye India provides services to the customers 24/7 for any issues raised by the customers. The ISS team will provide both voice and non-voice based support. The services provided by FireEye India could be broadly classified in the nature of IT Enabled Services. FireEye AEs will supervise and guide FireEye India in relation to the activities performed in rendering the services. In addition, AEs will create market visibility for the services provided by FireEye India through various ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fails to make payment or the payment is deferred. FireEye US assumes full credit risk in respect of contracts entered into with its third parties customers. Since FireEye India provides services only to its AEs for which it gets remunerated directly by the latter, it is insulated from any credit risk. Foreign exchange fluctuation Risk This risk relates to the potential impact on profits that may arise because of changes in foreign exchange rates. FireEye India invoices FireEye US in mutually agreed currency and is thus to some extent exposed to foreign currency fluctuation risk in respect of its international transactions with the latter. Accordingly, the exchange fluctuation risk is borne by FireEye India. Service Liability Risk Service liability risk arises when the services rendered fails to perform at accepted or advertised standards. Malfunctions, errors, or defects in the services rendered could cause the appliances to run erratically and may even cause personal injury to users. If any of these events occurs, AEs could be subject to significant liability for personal injury. FireEye India provides IT services, ITeS and MSS to FireEye US based on its servi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d on the functional and risk analysis relating to IT services, ITeS and MSS rendered by FireEye India to its AEs, it can be characterized as captive service provider performing routine functions and bearing limited risk with respect to its international transactions. On the other hand, AEs performs critical functions of product conceptualization and design, identification of customers and own significant non-routine intangibles. Accordingly, AEs can be characterized as an entrepreneur being the contracting entity and bearing the significant risks, viz. marketing, contractual risks and client ownership. 6. The above characterisation of assessee under all 3 segments are not disputed by the revenue authorities and assessee has been accepted to be a captive service provider performing routine functions and bearing limited risk with respect to its international transactions. 7. Based on the above, we shall deal with the comparables sought for inclusion / exclusion by the assessee under all the 3 segments. 7.1 In Ground no. 4.3, assessee is seeking exclusion of following comparables under the SWD segment. a. Persistent Systems Ltd. b. Thirdware Solution Ltd.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "17.3 At the outset, the Ld.AR submitted that the above comparables have been considered by Coordinate Bench of this Tribunal, Hon'ble Hyderabad Tribunal as well as Hon'ble Mumbai Tribunal in other cases having similar facts it is also been submitted by Ld.AR that these comparables do not satisfy the turnover filter that has been applied by the Ld.TPO and at the outset deserves to be eliminated. The Ld.AR referring to the annual reports, placed in the paper books filed before this Tribunal reveals that turnover is more than Rs.200 crores and does not match even 10 times the turnover of assessee. The Ld.AR thus submitted that applying either the turnover filter of Rs. 1 crore to Rs. 200 crores or 10 times the assessee's turnover to 1/10th , these comparables deserves to be excluded. 17.4 It is also submitted that these comparables are not functionally similar with that of the assessee as has been observed by Coordinate Bench of this Tribunal in following cases: 1. Decision of Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT in ITA No. 1379/M/2021 by order dated 25.02.2022 for A.Y. 2016-17. 2. Decision of Hon'ble Hyderabad Tribuna....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd. We also notice that in AY 2008-09, the co-ordinate bench has excluded M/s Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh." "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 busin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Ld.AR submitted that this company is functionally different engaged in the diversifying business activities and having super profits which cannot be compared to the assessee's case. On the other hand, Ld.DR relied on the order of authorities below. We have perused the submission advanced by both sides in light of records placed before us. Admitedly, there is no discussion about any other other revenue stream in its annual and financial statements. Further, in the various notes of the annual report, it is mentioned that the company has its entire earnings from software development services. Under Segment Reporting, in the annual report, it is mentioned that 'the company operates in a single business segment namely software development services. There is no reference in the annual report to indicate that this company is engaged in rendering any other services or any other activity. It was contended that the company is engaged in functionally dissimilar activities and ITeS activities DRP was of the view that high profitability as such cannot be criteria for exclusion of companies, when it is found to he functionally comparable in terms of rule 10B. The Hon'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ltd., Infosys BPM Ltd., SPI Technologies India Pvt. Ltd. and Eclerx Services Ltd. to exclude from the final list for failing the turnover filter under ITES segment. 9. Ground no. 6.1 - assessee is seeking exclusion of following comparables on functional dissimilarity under SWD and ITES segment. For SWD segment; 1) R S Software (India) Ltd. 2) Infobeans Technologies Ltd. R S Software (India) Ltd. In this regard, it is submitted that the company, during the financial years 2013-14 and 2014-15 had a turnover of Rs. 351.88 crores and 345.51 crores, and profit margin of 24.14% and 32.75%, respectively. However, during the financial year 2015-16, the company realised a turnover of Rs. 171.41 crores, leading to loss of -2.09%. It is submitted that there is an apparent wide fluctuation in the margin of the company. The relevant details as computed by the TPO is extracted hereunder: *figures in crores FY 2015-16 FY 2014-15 FY 2013-14 Operating revenue 171.41 345.50 351.89 Operating cost 175.07 260.26 283.47 Operating profit -3.66 85.24 68.42 OP/OC -2.09% 32.75% 24.14% 9.1 The reason for decline in m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om AY 2014-15 onwards or whether in computing the weighted average profit margin of this company, the earlier two years profit margins have to be ignored because they fail the test of comparability in those two earlier years by reason of the application of the Rs. 200 Crore turnover filter. 16. To answer the above question, we need to look at the amendment to the rules that allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases. The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices. The manner of computation of ALP is laid down under the Income-tax Rules. The Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a "range concept" for determination of ALP....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,- (i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1): Provided further that in a case referred to in clause (ii) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immedia....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the respective prices; (iii) where the prices have been determined using the method referred to in clause (e) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices ***** 17. Let us apply the above rules to the comparable company R.S. Software (India) Ltd. As per rule 10CA(2), the dataset of comparable companies chosen has to be arranged in ascending order. As per the 1st proviso to rule 10CA(2), R.S. Software (India) Ltd., was chosen as a comparable company based on the data relating to the current year and in the earlier two financial years immediately preceding the current financial year. In all the financial years the said company has undertaken similar comparable uncontrolled transaction. Clause (i) to 1st proviso to sec. 10CA(2) mandates that the same MAM has to be used to arrive at the price of the comparable uncontrolled transaction undertaken by R.S. Software (India) Ltd., in the financial years 2013-14 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d transaction") undertaking uncontrolled transaction during the relevant previous year and if this condition is satisfied then the profit margin of R.S.Software for the 2 financial years immediately prior to the current financial year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to rule 10CA(2) of the Rules. The provisions of rule 10CA(2) have to be read harmoniously with the other provisions of rule 10B Determination of arm's length price under section 92C . 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d)** ** ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....parable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction [or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: A reading of rule 10B(3) shows ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pect of Infobeans Technologies Ltd., the Ld.AR submitted that, this company is engaged in providing custom developed services to offshore clients. It was submitted that, it is engaged in providing software engineering services primarily in Custom application development ('CAD'), Content Management Systems ('CMS'), Enterprise Mobility ('EM'), Big data analytics ('BDA'), and has incurred expenses towards the software licenses and subscription fees worth INR 46.44 lakhs. The Ld.AR referred to Pg 47 of the paper book in support. 9.6 The Ld.AR also submitted that the segmental information is not available for the company and the company is into diversified activities such as providing business IT services (comprising application development and maintenance, Big Data, UX & UI, Automation engineering services, including product engineering and lifecycle solutions, and business process management); in the Verticals of Storage & Virtualization, Media & Publishing, HR & Payroll and e commerce The Ld.AR referred to page 854 of the paper book in support of the submission. We have perused the submission advanced by both sides in light of records placed before us. 9.7 We also note that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....logies India Ltd. b) AlIsec Technologies Ltd. c) Microgenetic Systems Ltd. d) Jindal Intellicom Ltd. e) Cosmic Global Ltd. f) E-Zest Solutions Ltd. 10.1 It is submitted that in respect of SWD and ITES segment, these comparables were not considered as it did not form part of the search matrix by the Ld.TPO. We are therefore of the opinion that these comparables needs to be reconsidered by the Ld.TPO afresh, based on the annual reports filed by the assessee. Accordingly, this ground raised by the assessee stands allowed for statistical purposes. Ground Nos. 5.1 & 6.1 in respect of MSS segment: 11. In respect of the comparables sought for exclusion and inclusion by the assessee under Marketing Support Services segment, it is submitted that, the functions performed by the assessee has not been considered by the Revenue authorities. It is submitted that, the comparables selected by the Ld.TPO are into high end marketing services which is not comparable with that of services provided by the assessee. It is thus submitted that, Marketing Support Services segment is to be analysed afresh. The Ld.DR did not object for the de novo v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7/17, in CC No. 4956/2017. 12.4 It was submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables as assessee adopted TNMM as the MAM for computing its margin, and therefore no separate adjustment is required to be made. 12.5 On the contrary, Ld.CIT.DR submitted that, interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of her contentions, she placed reliance on decision of Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DEL-TP) wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of legislative amendment. It was thus argued that non/undercharging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. He thus submitted that the Interest on outstanding receivables have been rightly constituted as independent international transaction 12.7 We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15/07/2016, held that outstanding sum of invoices is akin to loan advanced by assessee to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st to be charged must be LIBOR + 300 basis points which is in accordance with the principles laid down by Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt.Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly this ground raised by the assessee stands allowed for statistical purposes. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 10th November, 2022. ============= Document 1 Sl. No Grounds of Appeal Tax effect E 1. The Order/ Directions are bad in law and on facts 1.1 12 2. 2.1 2.2 2 2.3 The assessment order passed by the Ld. Income Tax Officer, National e-Assessment Centre (ITO), under Section 143(3) read with Section 144C(13) and 1448 of the Income-tax Act, 1961 (the Act), is bad in law and on facts and is in violation of the principles of natural justice. Without prejudice to the generality of the above, the order issued by the Ld. ITO is bad in law in so far as the fact that the Ld. ITO ....