TaxTMI 
TaxTMI 
2017 (3) TMI 1933
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....Curam Ireland's product offerings in the social enterprise management sector and is remunerated on a cost plus basis for the services rendered. For this ay , it filed its return declaring a taxable income of Rs.43,210 after claiming a deduction u/s.10A at Rs.3,41,93,046/-. The AO has recomputed the deduction u/s.10A , by reducing Rs.35,32,499/- & Rs.15,57,339/-, incurred towards communication expenses & expenses on travel in foreign currency as attributable to delivery of services outside India, respectively, from the export turnover without simultaneously reducing similar amount from the total turnover and hence reduced the deduction claimed u/s.10A . 03. On its international transactions pertaining to "provision of software development and support services" with its AE, the assessee had undertaken analysis selecting the TNMM as the most appropriate method. For the 21 companies identified as comparables, weighted average of operating profit earned on operating costs were computed .The arithmetic mean of the unadjusted net margins of the comparable companies was at 11.26 % on operating cost. The assessee's net margin of 13.02 % was higher than the mean margin of the comparables ....
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....rgued the case based on the TPO/AO's order and on the lines of the grounds of appeal. The AR opposed them with charts , paper books, copies of case laws and other material. The gist of the AR's submissions are extracted as under: 9.1. In support of its contentions, the assessee relied on the following case laws : 1. Curam Software International P. Ltd v. ITO [ITA No.1280/Bang/2012] 2. Agnity India Technologies P. Ltd v. CIT [ITA No.1204/Del/2011] 3. DCIT v. Ikanos Communication India P. Ltd [ITA No.137/Bang/2015] 4. DCIT v. Applied Materials India P. Ltd [IT(TP)A.180/Bang.2015] and 5. DCIT v. Novell Software Development India P. Ltd [IT(TP)A.281/Bang/2015]. Now, let us examine the relevant portion of the order of this Tribunal, in the assessee's own case, supra, in the earlier year as under : "11.0 (3) KALS Information Systems Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on the grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with re....
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.... revenue from software products forms part of Application Software and there are no segmental details. (v) The assessee also placed reliance on the judicial decisions rendered in the following cases : a) Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) b) Mercedes Benz Research & Development India Pvt. Ltd. (IT(TP)A No.1222/Bang/2011). 11.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details called out from the Annual Report and quoted above (supra). 11.4 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. As discus....
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....de its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs.200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions:- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative su....
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....leaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of t....
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....m software products sale of Infosys Ltd was only 4.3% of its total revenues and its R &D expenditure was only 1.26% of its revenues. Relying on the decision of Mumbai Bench of the Tribunal in the case of Capgemini India Pvt. Ltd v. ACIT [(2014) 147 ITD 330], Ld. DR submitted that size of the company had no relevance and there was no correlation between sales volume and profits in software development services. According to him, DRP had simply relied on the annual report of Infosys Ltd, while direction its exclusion without closely verifying the reasons why TPO had rejected the contentions of the assessee. 06. Per contra, Ld. AR supported the order of the DRP. Reliance was also placed on the decision of Hyderabad bench of this Tribunal in the case of Pegasystems Worldwide India P. Ltd v. ACIT [ITA.1758 & 1936/Hyd/2014, dt.16.10.2015. As per the Ld. AR, Pegasystems Worldwide India P. Ltd, was also into software development services and the Tribunal had considered the comparability of Infosys Ltd, in the said case. 07. We have perused the orders and heard the rival contentions. It is not disputed that Infosys brand has a significant intangible value and it had revenu....
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....could not be considered as a good comparable. As per the Ld. AR, revenue of the said company included licensing and sublicensing fee, web development and hosting, but these were not separately available for analysis. As per the Ld. AR, the said company was purchasing and reselling branded computer software. Reliance was placed on the directors' report of the said company for F. Y. 2009-10. 10. We have perused the orders and heard the rival contentions. Notes to accounts of ICRA Techno Analytics Ltd forming a part of its audited financial statement of accounts and annual report for year ended 31.03.2010 mentions as under : In the note detailing of the revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web development and hosting. Thus ICRA Techno Analytics had more than one segment. There is no case for the Revenue that the segmental results were separately available in public domain or was not obtained by the TPO from the said company, invoking the powers vested on him. In such a situation the DRP, in our opinion, was justified in directing ....
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....l report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee's objections are accepted and AO is directed to exclude the company. Accordingly we are of the opinion that DRP was correct in directing exclusion of the said company from the list of comparables. 15. Assailing the directions of the DRP for exclusion of Persistent Systems and Solutions Ltd, Ld. DR submitted that assessee had not raised any objection on this comparable before the TPO. According to him assessee had for the first time assailed its comparability before the DRP, while accepting it as a good comparable before the TPO. According to him, DRP had accepted the contentions of the assessee without verifying the data furnished by it. 16. Per contra, Ld. AR submitted that Persistent Systems and Solutions Ltd was rendering outsourced product development services and not any software development as such. According to him, its revenue was from sale of product software development services and segmental results were not available. Rely....
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....onsidered by the TPO for bench marking the pricing of the international transactions in the nature of software development services rendered by the assessee to its AE abroad. Ground 4 of the Revenue therefore stands dismissed." Since this Tribunal has found that the comparables, ICRA Techno Analytics Ltd, Infosys Techologies Ltd, Kals information Systems Ltd (Seg) and Tata Elxsi Ltd (Seg) are functionally different, in the above cases, following them, the DRP's decision is upheld and the corresponding grounds of the Revenue are dismissed. Per contra, ground nos.1, 2 & 3 of the CO of the assessee are allowed. 10. The next issue is seeking inclusion of the following two comparables (Ground No.7 of Revenue's appeal and ground no 4 of the assessee's CO). The gist of the AR's submissions are as under : 1. R S Software (India) Ltd : The TPO's/DRP's reason for exclusion is that 82% expenses in the P & L are incurred by foreign branches , hence it is an onsite software development company The assessee's reasons for inclusion are that : * The company is engaged in the provision of software development services. Onsite development should not be a cri....
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....opment of software The assessee's reasons for inclusion are : * The company is engaged in the provision of software development services. Onsite development should not be a criteria to judge comparability. * Onsite revenue is not one of the filters adopted by the TPO in the order. * LGS passes the filter, export turnover is 98.71%. TPO and DRP have considered the earnings in foreign currency to total turnover, instead of considering the export turnover. 4. Silverline Technologies Ltd : The DRP's reasons for exclusion are : * Company has different financial year ending. * Company is providing IT services comprising if software development system solution, application software system and maintenance of software and no segmental information is provided in this regard. * Engaged in onsite development of software. The assessee's reasons for inclusion are : Extrapolated data can be considered in the light of the High Court ruling in Mckinsey Knowledge Centre India Pvt Ltd * The company is engaged in the provision of software development services. Onsite development should not be a criteria ....
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.... regard. The materials on record clearly prove the fact that the assessee is a captive service provider. It has transactions only with its AE. It is also a fact that all the risks lies with the AE. Different benches of the Tribunal have also taken a divergent view on this issue. The Income-tax Appellate Tribunal, Mumbai Bench in the case of Simontech (supra) has held that no separate adjustment is required on account of risk and functional difference, the Income-tax Appellate Tribunal Delhi Bench in the case of Sony India Pvt. Limited V/s. DCIT (114 ITD 448) has held that deduction on account of ownership of intangibles, risk factors can be allowed. In aforesaid view of the matter, we are inclined to accept the view favorable to the assessee. We therefore uphold the direction of the CIT (A) in this regard in allowing the benefit of risk adjustments at 1%. Accordingly, the ground raised by the department is dismissed." On the other hand, the DR submitted that the TPO is not against granting any risk adjustment but the risk has to be established by the assessee . In the facts and circumstances, this issue is remitted back to the TPO/AO shall re-adjudicate it in accordance with law....
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....asis of its appropriateness / inappropriateness in some other case is not possible. On the facts and in the circumstances of the case, whether the Hon'ble Dispute Resolution Panel were justified in directing the TPO to exclude M/s RS Software India Ltd and M/s Persistent Systems & Solutions Ltd without considering the discussion made by the TPO in respect of the comparable company which was accepted by the taxpayer during the TP Proceedings. Document 2 GROUNDS OF CROSS OBJECTIONS On the facts and circumstances of the case and in law: 1. The learned AO has erred, in law and in facts, by not finding merit in the view of the DRP for excluding M/s Infosys Ltd, M/s Tata Elxsi Ltd and M/s Kals Information Systems Ltd from the final set of comparable companies for the transaction due to the following reasons: M/s Infosys Ltd - Difference in level of functions performed and levels of risk assumed vis-Ã -vis the assesse, huge revenues derived, market leader and owns significant intangibles, huge expenditure on research and development. M/s Tata Elxsi Ltd - Engaged in providing services other than software development as well and revenue....
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.... company is engaged in wide array of services like engineering services, web development & hosting, business analytics, BPO services. (Refer Page 524 of Paperbook) • Revenue break of the same is not provided in the AR. (Refer Page 528 of Paperbook) • The company was excluded by the Hon'ble ITAT in Appellant's own case for AY 2008-09 on ground of being functionally different. (Refer Page 1047 of Paperbook) . Infosys provides end to end solutions in various fields. It also generates revenue from software products and no segmental breakup available between service revenue and product Document 5 SI. Comparable DRP's No. companies exclusion 3 Kals Info Systems Limited 4 Tata Elxsi Lirnited reasons for Functionally different Has significant inventory Product company (Refer Page 32 Paperbook) Functionally different of No further segmental data for the software segment .In house technology expertise development & R&D programs (Refer Page 32 and 33 of Paperbook) Remarks revenue. (Refer Page 567 and 579 of Paperbook) Infosys is a ....