TaxTMI 
TaxTMI 
2023 (11) TMI 1185
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....gth price of the international transactions of provision of software development services on the basis of order passed by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Act. 2.1 That the Dispute Resolution Panel (DRP) erred on facts and in law in sustaining the action of the TPO in considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the appellant: i. e-Infochips Bangalore Limited ii. E-Zest Solutions Limited iii. Infinite Data Systems Pvt. Ltd. iv. Infosys Technologies Limited v. Sonata Software Limited vi. Tata Elxsi Limited vii. Thirdware Solutions Limited viii. Evoke Technologies Limited ix. Persistent Systems Limited 3. That the assessing officer erred on facts and in law in making an adjustment of Rs. 1,15,08,130 to the arm's length price of the international transactions' of Business Support Services on the basis of order passed by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Act. 3.1 That the DRP/TPO erred on facts and in law in not appreciating that since the Technical Assistance' and 'Human Resource Development' segmen....
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....ing interest on the opening receivables. i.e. receivables appearing in the books of accounts on 01.04.2009, for the entire financial year without appreciating that the interest, if any, is imputable, it shall be imputed only on the delay in receipt of receivable beyond the agreed credit period, up to the end of the said financial year i.e. 31 March 2010. 6.5 Without prejudice, that the assessing officer/DRP erred on facts and in law in not appreciating that after netting off the interest payable on delay in payment of royalty, imports of goods and fixed assets, payable by the appellant to the associated enterprise, applying the same methodology, there could not be a case of interest receivable on the delay in receipt of receivables. 6.6 Without prejudice, that the DRP/TPO erred on facts and in law in rejecting the delay in receipt of receivables on transaction undertaken with unrelated third parties as comparable uncontrolled price for the purpose of benchmarking the delay in receipt of receivables on transaction undertaken with associated enterprises, applying CUP method. 6.7 Without prejudice, while applying CUP method, the DRP/TPO erred on facts and in law in rejecting int....
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....profit level indicator (PLI) adopted by the assessee was operating profit/ operating cost (OP/OC). The assessee adopted Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for benchmarking the international transaction in the software development segment. The PLI of the assessee was 8.12% which when compared with the comparable mean margin of 12.90% fall within the range of +/-5% tolerance band and accordingly the assessee concluded that its international transaction of provision of software development services was at Arm"s Length Price (ALP). The ld TPO did not agree with the contention of the assessee and made inclusion and exclusion of certain comparables of the assessee. The assessee preferred objections before the ld DRP. Based on the order of the ld DRP, the ld TPO arrived at the final set of comparable companies as under:- SL. NO. Name of the company OP/OC Working Capital Adjusted OP/OC 1. LGS Global limited 12.78% 6.13% 2. Thirdware Solutions Limited 33.43% 29.73% 3. E-Infochips Bangalore Ltd. 71.38% 62.81% 4. Evoke Technologies Ltd. 18.56% 17.20% 5. E-Zest Solutions 18.66% 16.43% 6. Infinite Data Systems Pvt. Ltd. 88.25% ....
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....te Systems Pvt. Ltd ("IDS" or "Company") was incorporated on 26th September, 2006. The company is wholly owned subsidiary of Infinite Computer Solutions (India) Ltd. It provides solution which encompass technical consultation, design and development of software, maintenance, systems integration, implementation, testing and infrastructure management services." 10.1.2. The ld AR argued that the ld TPO in assessee"s case had applied Related Party Transaction (RPT) filter of 25% i.e. the ld TPO had accepted a comparable company to have related party transaction with its associated enterprises upto the maximum of 25% of the transactions. The ld AR argued that in the instant case, Infinite Data Services Pvt. Ltd has rendered services to Fujitsu Services Ltd based on the contract entered into by the holding company of Infinite Data Services Pvt. Ltd. Moreover, the holding company holds 99.99% share in Infinite Data Systems Pvt. Ltd. Accordingly, it fails the related party filter applied by the ld TPO. This argument was buttressed by the ld DR by stating that Infinite Data Systems Pvt. Ltd had merely rendered services to Fujitsu Services Ltd which is 3rd party and hence, the holding compa....
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....ing company are Indian resident entities. The ld DR drew our attention to the provisions of section 92B(2) of the Act and also explanatory notes in the form of CBDT Circular No. 14/2001 and the amended provision of section 92B(2) of Finance Act, 2014 for which corresponding Circular No. 1/2015 dated 21.01.2015 was issued by CBDT. The ld DR argued that considering the intention behind introduction of transfer pricing provisions and also considering the fact that both the comparable company as well as its holding company are Indian resident entities, the provisions of section 92B(2) of the Act having deeming fiction cannot be made applicable to the facts of the instant case. With regard to the decision relied upon by the ld AR in the case of PCIT Vs. Open Solution Software Services Pvt. Ltd in ITA No. 201/2018 rendered by Hon'ble Delhi High Court, the ld DR argued that in that case, City Corp USA was a holding company outside India hence, the Associated Enterprise was situated outside India. Hence, the transaction carried out by the Indian entity to a 3rd party at the behest of the foreign holding company was held to be falling within the ambit of section 92B(2) of the Act. Where....
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.... Exclusion of E-Infochips Bangalore Ltd The assessee pleaded that the said company is Information Technology (software development) and information technology enables services (ITES) i.e. BPO services company. Hence, it was pleaded that the said company is not functionally comparable with that of the assessee company which is only into software development. The Annual Report of the said comparable company for the year ended on 31.03.2010 is enclosed at pages 20 to 37 of the Annual Reports Paper Book. The assessee pleaded that as per the notes of accounts of the said comparable from audited financial statements, it had shown earnings in foreign currency as under:- Particulars 31.03.2010 31.03.2009 Software Development 371,388,107 476,243,642 Consultancy charges 59,075,371 27,415,329 10.2.1. Further, vide Point No. 9 of the notes on accounts of the audited financial statements , it is mentioned as under:- "Company is engaged in the development and maintenance of computer software. The production and sales of software cannot be expressed in any generic unit. Hence, it is not possible to give the quantitative details of sales and certain other information as required under....
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....the revenue from software production on overall profit from the common pool of income from both streams of software products and software services could also not be deduced. It is pertinent to note that this order of the tribunal was upheld by the Hon'ble Jurisdictional High Court in ITA No. 515/2017 dated 18.07.2017, wherein, the Hon'ble High Court did not allow the question raised by the revenue to exclude E-Infochips Bangalore Ltd from the list of comparable companies for software development companies and upheld the factual findings of the tribunal. 10.2.4. Per contra, the ld DR referred to the Annual Report of the said comparable company and drew our attention to page 27 of the PB therein containing the schedule of income from software services and stated that both income from software services and consultancy charges were grouped by the said comparable company as revenue from software services only. Accordingly, he argued that the said comparable company would be functionally comparable with the assessee. With regard to non availability of segmental data, he argued that even though it is mentioned in the segment information vide note 16 of the Annual Report, that the said co....
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....es 110,782,495 Service charges 130,664,264 Services rendered 1,005,194,944 Living / sustenance allowance 43,555,884 Travelling expenses 6,542,614 Total related party transactions (A) 1,321,034,065 Service revenue (B) 2,360,942,195 RPT as a % of sales (A/B) 55.95% 10.3.1. The Annual Report for the year ended 31.03.2010 of Sonata Software Ltd from where the aforesaid figures could be verified is enclosed in pages 38 to 122 of the Annual Reports Paper Book. This fact was also pointed out by the assessee before the ld TPO. But the ld TPO ignored the components of services rendered of 100.51 crores and living / sustenance allowance of Rs. 4.35 crores from the aforesaid table, arrived at the related party transaction as a percentage of sales of 11.93% and included this comparable company to have passed the RPT filter applied by the ld TPO. 10.3.2. The ld AR placed on record the details of value of services rendered to each of its AEs as under:- Name of the AE Transaction undertaken during the year Sonata Software North America Inc. 56,62,32,408 Sonata Software GmbH 5,33,46,999 Sonata Europe Limited 1,46,59,668 TUI InfoTec, 29,57,40,182 Sonata Software....
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....red and for the software products developed by them. This would certainly make the assessee company incomparable with Infosys. 10.4.1. Per contra, the ld DR submitted that the assessee did not object to the inclusion of L&T Infotech Ltd having turnover Rs. 1800 crores approximately and Mindtree Consultancy having turnover of Rs. 1232 crores approximately. Even these two companies are in the field for more than two decades and enjoying huge brand value and economies of scale and always would have edge over the pricing. The ld DR vehemently relied on the comparison chart made by the ld TPO in his order mentioning the margins earned by Infosys from 1997- 2012 wherein, it could be seen that the margin from the software segment remain almost same despite huge turnover earned by the said company. With regard to non availability of brand with the assessee company, the ld DR vehemently argued that Delphi has huge brand value in automotive sector having presence in 32 countries. Hence, the assessee company would be entitled to be compared with Infosys Ltd. 10.4.2. In rebuttal, the ld AR stated that under similar facts and instances to consider the fact that Infosys Ltd is inter alia engag....
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....pment, implementation and consulting services of software based on ERP and Business Intelligence. The ld AR pleaded that the said company is functionally dissimilar with the assessee company. We find from the audited financial statements in Schedule 12 under the head "sales", the said comparable company has derived revenue from subscription, sales of license, software services amongst others. This goes to prove that this comparable company is selling software products license apart from software services and on perusal of the audited financial statement containing the segmental data, we find that there is no break up of revenue from subscription, sales of license and software services and the related margins thereon. Hence, in the absence of segmental data for each category of income, this comparable deserves to be excluded from the final set up comparables. Further, we notice from the profit and loss account, a sum of Rs. 11.40 crores was paid as outsourcing charges by the said comparable company which goes to prove that the services are rendered by the said comparable companies to it AEs by outsourcing the activity. No such outsourcing activity is done for the assessee. Hence, th....
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....cts Development (OPD) is being developed by this comparable company and this comparable is a clear leader in the world of OPD, an emerging category in the outsourced software industry. The Annual Report of the said comparable company also categorically states that OPD is completely different from outsourced IT service. The Annual Report clearly goes to prove that the said comparable is into the business of software products apart from software development and their focus is more on product development. The revenue model of the said comparable company clearly shows software services produce (export) of Rs 4739.62 million and software service and product (domestic) of Rs 304.31 million for the year under consideration. There is no absolutely break-up of the revenue earned out of software services and out of product development. Segmental data to that effect is not available in the Annual Report. 10.6.2. Per Contra, the ld DR argued that the Delhi Tribunal in the case of Steria India Pvt. Ltd dated 28.09.2020 in ITA No. 5745/Del/2018 for AY 2014-15 after considering the similar lines of arguments had held that this comparable company to be a good comparable with software development.....
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....d the findings of the Tribunal. Further, the Hon'ble Delhi High Court in the case of PCIT Vs. Open Solutions Software Services Pvt. Ltd in ITA No. 201/2018 dated 18.05.2020 had also held that Persistent Systems Ltd had upheld findings of the Tribunal which held this comparable company is predominantly engaged in the product development and hence cannot be compared with routine software services provider. Further, the Tribunal had also held that segmental data is not available in the public domain. This finding of the Tribunal has been upheld by the Hon'ble Delhi High Court. 10.6.4. In view of the aforesaid observations and respectfully following the judicial precedents relied upon herein above more particularly the decisions of Hon'ble Jurisdictional High Court, we hold that Persistent Systems Ltd to be functionally not comparable with that of the assessee company and also in the absence of segmental data. Accordingly, we direct the ld AO/ TPO to exclude the same from the final set of comparables while benchmarking international transaction of the assessee in respect of software development segment. 10.7. Exclusion of E-Zest Ltd This comparable company is engaged in deve....
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....; ID Services include global offshore software development, custom software development/ bespoke software development, intelligent software testing RIA/ AJAX application development etc and technology expertise of this company include the technology competency centre in relation to Microsoft Competency Centre, Sun Java Competency Centre, Open Source Competency Centre, Cloud Computing practice, mobility practice and BI practice. Accordingly, this Tribunal have concluded that this comparable company is rendering product development services and high end technology services which come under the Knowledge Process Outsourcing (KPO) services and cannot be comparable with Captive Software Development company like assessee. Respectfully following the said decision, we hold that this comparable company is functionally different from the assessee company and accordingly, we direct the ld AO/ TPO to exclude the same from the final set of comparables while benchmarking the international transaction by the assessee in respect of software development segment. 10.8. Exclusion of Tata Elxsi This company is engaged in the business of systems integration and support services by catering to the dom....
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....iance with a leading hospital to jointly develop innovative healthcare devices with an emphasis on user and functional efficiencies: It also further strengthened its range of services in the areas of branding, signages and virtual marketing. It was involved in the creation of the marketing content for the launch of a new vehicle for one of India's leading automotive companies and also won a significant order for signages and graphic design from a metro transport operator. This is a testimony of the Division's capabilities to address emerging areas of design where design is adding exponential value to the end product. Another area of growth for the Division is the defence and aerospace sector, considering the potential of design services for these industries. The expertise in these areas are scalable and the Division is hopeful of similar future opportunities. Visual Computing Labs: This Division delivers 3D computer graphics, animation and special effects in the pre-production, production and post-production of content for the film, television, gaming and advertising industry. During the year, an overseas VFX studio was set up at Santa Monica near Hollywood, which is th....
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....is predominantly a software development company and that the other activities carried out by the company is only 10% of total revenue and software development services constitutes 90% of the total revenue. The ld DR relied on the decision of the Delhi Tribunal in the case of Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 which is rendered for AY 2007- 08 dated 26.08.2014 wherein, it was held in para 20.2 that this company is functionally comparable with the software development as predominantly services rendered by this company is only routine software development services. 10.8.2. The ld AR relied on the coordinate bench"s decision of the Delhi Tribunal in the case of Agilis Information Technologies International Pvt. Ltd Vs. ITO in ITA No. 787/Del/2015 dated 26.06.2015 rendered for AY 2010-11 (i.e. year under consideration before us in the case of the assessee herein) which inturn had relied on the decision of Hyderabad Tribunal in the case of Adaptech India (P) Ltd Vs. ITO in ITA No. 481/Hyd/2011 and held that this comparable company is engaged in the development of Niche product and had to be considered incomparable with the routine software service provider. It is pertine....
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....enter into discussions for sourcing components directly from such vendors. The assessee is not involved in the transaction between the AE and the supplier at all, and does not secure orders or negotiate on behalf of its AES. It only provides basic preliminary information about the vendors to its AES. The assessee also provides payroll support for its employees sent on secondment to its AES. Additionally, the assessee renders other administrative support activities like public relations and corporate communication services to its AES. For rendering the aforesaid risk free services, the assessee is remunerated for the functions performed and risks assumed on a cost plus mark-up of 5%. 14. The assessee benchmarked this international transaction by adopting TNMM method as the Most Appropriate Method (MAM). The Profit Level Indicator (PLI) adopted by the assessee was OP/OC. The assessee considered four comparables who are engaged in similar line of activities as under:- S.No. Name of the company Weighted average of operating profits on operating costs (%) 1. Asian Business Exhibition & Conferences Ltd. 18.10 % 2 Educational Consultants (India) Limited (Segmental 4.37% 3. IDC....
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.... as a comparable company with that of the private ITES service provider. It is a known fact that Govt enterprises operate on a model of zero risk with no profit intent, hence, the Govt. company cannot be compared with the private enterprises. This issue is no longer res integra in view of the decision of the Hon'ble Jurisdictional High Court in the case of PCIT Vs. International SOS Services India Pvt. Ltd in ITA 454/2016 dated 30.05.2017 wherein, it was held as under:- "7. The Assessee's appeal before the ITAT was allowed in part by the impugned order. After discussing the comparables as finally approved by the DRP, the ITAT drew a distinction between 100% government owned companies and private companies and gave its reasons why the government companies would not be appropriate comparables when the ALP of international transaction involving private companies is being examined. The ITAT, therefore, held that ECIL, ITDCL and Apitco being 100% government companies are to be excluded as comparables. The final list of comparables as approved by the ITAT included just four of the comparables. 8. Mr. Ruchir Bhatia, learned counsel appearing for the Revenue, submitted that there w....
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.... It is also pertinent to note that against this decision, the revenue carried the matter before the Hon'ble Supreme Court and the Special Leave Petition in Civil Appeal No. 18255/2018 dated 03.07.2018 was dismissed by the Apex Court. 18.1.1. Per contra, the ld DR vehemently argued that the assessee itself had included Educational Consultants (India) Ltd as one of the comparable in its TP Study report, which is also a public sector undertaking. In principle, we hold that the Govt. company cannot be compared with private enterprises at all in view of the reasons mentioned hereinabove. Hence, merely because the assessee itself included a particular public sector undertaking as a comparable company, it cannot be held that company would become a proper comparable with that of private enterprises. Moreover, this aspect is also considered by the decision of the Hon'ble Jurisdictional High Court referred (supra). Accordingly, we have no hesitation in directing the ld AO/ TPO for excluding Apitco Ltd from the final set of comparables while benchmarking the international transaction of ITES services of the assessee. 18.2. Exclusion of Alphageo (India) Ltd This company's business consi....
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....& 16 MW Cogen power plant of Yashwantrao Mohite Krishna SSK; Introduction of additional business lines like ESCo, Conditioning & Monitoring, Wind Resource Assessment & Micro sitting, Carbon Foot Printing etc.; Start of project management consultancy services for Solar PV & Thermal and Small Hydro Electric Projects; Project Monitoring Consultancy (PMC) work bagged from Tamilnadu Mega Food Park.; Assignment received from Kolhapur Foundry Cluster under IIUS scheme of Govt. of India.; Environmental Clearance to Khed Economic Infrastructure Private Ltd., for about 100000 sq. feet construction area.; During the year, company carried out Environmental Monitoring, Analysis of Air, Water, Soil, Biogas Samples, Environmental Audits, Environmental Due Diligence/ESR, Consent to Establish / Consent to Operate, ELA/EMP/Environmental Clearances for various clients. During the year, company carried out various vocational training programmes under Prime Minister Employment Generation Programme (PMEGP), Special Component Plan (SCP), Swarnjayanti Gram Swarozgar Yojana (SGSY), Swarna Jayanti Shahari Rozgar Yojana (SJSRY) and Entrepreneurship Development Programmes for GOI. During the year, company pro....
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....formed by the said comparable company based on the data available in the website of the comparable company. In principle, we do not uphold the view of placing reliance on any information that is available in the website of the company as it may not depict the true picture. Be that as it may, the ld TPO had already taken cognizance of the said information provided by the assessee by placing reliance on the website of the comparable company. From the perusal of the said information which are reproduced in pages 127 to 128 of the order of the ld TPO, we find that the said company is involved in providing high end activities which required professional skill and domain expertise to render those services and accordingly would apparently fall under the category of Knowledge Process Outsourcing (KPO), thereby making it incomparable with the assessee company as it is low end Business Processing Outsourcing (BPO) services provider to its AEs. However, some of the activities carried out by this comparable company also falls within the ambit of BPO services. However, there is no segmental data available to ascertain the segmental margins from KPO services and BPO services separately. Hence, w....
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....s considered after DRP OP/OI (WC adjusted) 1 A N G Industries Ltd. 6.37% 2 Banco Products (India) Ltd. 20.36% 3 Precision Camshafts Ltd. 20.13% 4 Rane Engine Valve Ltd. 4.71% 5 Roots Industries India Ltd. - 6 Talbros Automotive Components Ltd. 3.74% 7 Remsons Engine Valve Limited 4.87% Arithmetic mean 10.03% Assessee's Margin 8.41% 19.2. The ld AR submitted that based on the aforesaid table, it could be easily concluded that the operating profit of the assessee is 8.41% which is well within the range of +/-5% range of average margin of comparable companies at 10.03%. Accordingly, we hold that international transaction carried out by the assessee in the manufacturing segment is to be considered at Arm"s Length price. Accordingly, ground No. 4 and 4.1 raised by the assessee are allowed. 20. The Ground No.5 raised by the assessee is challenging the Transfer Pricing Adjustment of Rs.62,87,498/- to the Arm"s Length Price of International Transactions of import of fixed assets. 20.1. We have heard the rival submissions and perused the materials available on record. During the year under consideration, the assessee imported tools amounting to ....
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.... Nil. The Ld. TPO is bound to follow any of the prescribed six methods as the most appropriate method for benchmarking the international transactions of the assessee. Without following any of the prescribed method, the Ld. TPO is prohibited from benchmarking the international transaction of the assessee. This issue is no longer res-integra in view of the decision of Hon'ble Bombay High Court in the case of CIT vs. Johnson & Johnson Ltd. in ITA No.1291/2014 dated 03.04.2017 reported in 80 taxmann.com 269 (Bombay). Even though the Ld. TPO had mentioned that he is following CUP method as the most appropriate method for benchmarking this transaction, in effect, he had not adopted CUP method as per Rule 10B of the Rules. This is because of the fact that he had not brought on record any comparable uncontrolled transactions to justify the basis of adoption under CUP. In view of the same, the benchmarking carried out by the TPO for import of fixed assets is hereby directed to be deleted. Accordingly, the ground no.5 raised by the assessee is allowed. 21. The ground No.6 to 6.7 by the assessee is challenging the Transfer Pricing Adjustment of Rs.7,21,61,494/- in respect of delayed receipt ....
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....anding as on 01.04.2009 from the AEs; and c. Details of amounts payable to the AEs as on 31.03.2010. 21.4. The ld AR prayed for admission of these additional evidences and requested for remanding back the issue to the file of ld. AO/ TPO to readdress the issue in dispute in the light of the aforesaid additional evidences. 21.5. The ld AR also argued that details of closing receivables from AEs as on 31.03.2010 were furnished by the assessee before the ld TPO. The ld AR argued that the agreed credit period with the AEs for receiving the trade debts was 30 days from the date of receipt of goods. The ld AR submitted that even though the trade debts were realized from the AEs beyond the agreed credit period, it does not have any impact on the profits of the assessee herein as assessee is a debt free company and had not suffered any interest cost. 21.6. The ld AR also argued that the ld AO had considered only the interest to be imputed on the outstanding receivables from the AEs. However, the assessee had to make huge payments to its AEs on which no interest is paid by it. Accordingly, if the payables to AEs are set off with receivables from AEs, since the payables are more than th....