TaxTMI 
TaxTMI 
2024 (1) TMI 26
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...."Varian Medical Systems India Software Private Limited" has been amalgamated into the assessee. The assessee is also engaged in providing software development & related support services to its Associated Enterprises ("AEs"). 3. The return of income of the assessee was filed on 30/11/2017 declaring a total income of INR 26,63,11,380/-. The assessment was concluded at an income of INR 49,28,65,260/- after making adjustment as below: Name of the entity Nature of adjustment Amount Varian Medical System International (India) Pvt. Limited Adjustment on account of provision of warranty services 13,99,71,558 Adjustment on account of interest on outstanding receivables 1,47,66,112 Varian Medical System India Software Pvt. Limited Adjustment on account of software development and related support services 6,61,49,166 Adjustment on account of interest on outstanding receivables 56,67,048 Total 22,65,53,884 4. The assessee has raised following grounds in the present appeal before us: 1. On the facts and in the circumstances of the case and in law, the final assessment order passed by the Learned Assessing Officer ('Ld. AO') pur....
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....epting the 'e-lnfochips Ltd' as a comparable company, which was rejected by the Honorable Income Tax Tribunal ('Hon'ble ITAT') in the Appellant's own case in AY 2011-12; and b. rejecting the 'CG-VAK Software & Exports Limited' as a comparable company, which was accepted by the Hon'ble ITAT in the Appellant's own case in AY 2011-12. 7. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in excluding companies which are comparable to the Appellant's functions, asset base and risk profile. 8. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in including companies which are not comparable to the Appellant's functions, asset base and risk profile. 9. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in including companies in the comparable set which have failed the quantitative filters applied by the Ld. TPO. 10. On the facts and circumstances of the case, and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in not admitting the claim of the Appellant for granting the....
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....we proceed to adjudicate on ground number 4 pertaining to provision of warranty services, ground number 5 to 10 pertaining to provision of software development services and ground number 11 and 12 pertaining to interest on outstanding receivables. TP Adjustment made towards Provision of Warranty support Services: 6. The facts in brief as submitted by the assessee mentions that it undertakes provision of after sales warranty services for the equipments sold by the AEs to the customers in India. As narrated in the transfer pricing study report on page number 168 of the paper book, the warranty services provided by Varian India are categorized as below: (a) One Year Warranty Services Medical equipments sold by Varian AEs warrant for one year free services. The services provided by the assessee under the one year of warranty services include replacing of spares, source wires, servicing of the equipments, etc. These services rendered by the assessee are on behalf of AEs. (b) Extended warranty services In some instances, the warranty period of medical equipment sold by AEs is extended till four years. The assessee provides Annual Maintenance C....
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....t was further submitted that the Ld. TPO did not consider the warranty income recognized in the P&L account of INR 18,11,42,540 while computing the margin of warranty segment. This led to an absurd position where the expenses of the entire segment have been considered for the purpose of the operating cost, however, major part of the revenue which was disclosed in the profit and loss account has been removed from the computation of operating revenue. This resulted into computing a negative margin for the segment at (-) 92.58%. The Ld. TPO did not disturb the comparables of the assessee and applied the median of 6.55% to compute the adjustment at INR 139,971,558 in relation with the aforesaid international transactions in the Transfer Pricing Order. The Ld. AO issued the draft assessment order following the order issued by the Ld. TPO. 11. Aggrieved by the Draft Assessment Order issued by the Ld. AO, assessee had filed objections before the DRP. The DRP has rejected the arguments and rebuttals put forth by the assessee and upheld the view of the Ld. AO / TPO. 12. Before us, Ld. Counsel of the assessee submitted that, Ld. TPO has erred in rejecting the accounting policy followed by....
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....page no. 307 of the paper book Invoice No. 5480003368 dated 8 Dec 2014, the invoice is raised for warranty services to be provided from October 2015 to April 2017. Decision: 16. We have heard the rival submissions, perused the relevant finding in impugned order on the entire issue on adjustment made by the TPO on account of provision of warranty services. We have considered the transfer pricing study report, annual accounts of the assessee and documents submitted in the paper book. We have also considered the arguments of both the parties. 17. Warranty services, by the very nature, are provided for a period which may extend beyond a financial year. (For the sake of clarity and discussion the year in which warranty services are invoiced is called as Year-1. Subsequent years in which the services are provided are called Year-2, Year-3). Once the tenure of warranty services extends beyond a financial year, the assessee cannot recognize the entire revenue in the Year-1. As per the accounting policies the revenue has to be recognized in Year-1, Year-2 and Year-3 depending upon the tenure of the warranty services. We take an example for the sake of clear understanding of the iss....
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....nd no mistake in the accounting policy adopted by the assessee. 20. We have also considered the other arguments of the Ld. AR that the entire revenue recognized during the year amounting to INR 19,16,24,516 has been offered for taxation. Since we have accepted the accounting methodology adopted by the assessee, we do not wish to comment on this argument of Ld. AR. 21. In conclusion, we hold that the margin of the assessee under this segment should be computed by considering the entire revenue of INR 19,16,24,516. This computation is available at page number 3-4 of the order of the TPO and the margin works out to 35.71%. The median margin of the comparables which has been accepted by the TPO works out to 6.55% as available on page number 6 of the order of the TPO. Since the margin of the assessee is higher, the entire transfer pricing addition of INR 13,99,71,558 made by the TPO on account of provision of warranty services, is deleted. Provision of Software Development Services: 22. Now we turn to Ground numbers 5-10 pertaining to provision of software development services. The Appellant is engaged in providing software development & related support services to its AEs. ....
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....Ltd Accepted by TPO in AY 2016-17 8 Nihilent Analytics Ltd. Accepted by TPO in AY 2016-17 9 InfoBeans Technologies Limited (Formerly Known as InfoBeans Systems India Private Limited) Functionally comparable 10 E-Infochips Ltd Functionally comparable 11 Saven technologies Accepted by TPO in AY 2016-17 12 Dynamic Digital Technology Pvt. Ltd. Accepted by TPO in AY 2016-17 13 Tavant Technologies India Pvt. Ltd. Accepted by TPO in AY 2016-17 14 Sonata Software Accepted by TPO in AY 2016-17 27. Based on the above, the TPO used 22 companies as comparables and determined the Arm's Length range of 19.53% to 30.22% with a median of 23.99%. Accordingly, the TPO made an adjustment of INR 6,61,49,166. The assessee approached the DRP which confirmed the adjustment proposed by the Ld. TPO. 28. Before us the assessee furnished a chart and sought exclusion of 14 companies and inclusion of 8 companies. The chart furnished by the assessee contains the arguments on the aforesaid inclusion and exclusion of comparable companies and also case laws relied upon for the same. The Ld. AR submitted that out of 14 companies, there are 4 co....
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....reet Technologies & Data Services Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP. 29.3 Interglobe Technology Quotient Pvt. Ltd.: The assessee has argued that company is not functionally comparable considering it is engaged in data processing export services travel technologies, and other support services. Further as per website, the company also has its business unit "Interglobe Technology Quotient" which is an official distributor of Travelport in 6 different markets. Further the assessee submitted that the employee cost to total sales ratio of this company is less than 25% which shows that the business mode of this company is entirely different. Considering the aforesaid submission, the assessee prays that Interglobe Technology Quotient Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP. 29.4 Cybage Software Private Limited: The assessee has argued that this company is not functionally comparable considering it is a technology consulting organization specializing in outsourced product engineering services. More specifically the company performs data analytics, marketing and advertising act....
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....services, Engineering and project management services and digital media & Project management services and balancing Cognitive strength of human mind and computing power of Machine to its clients. Further the company also has Significant Job work charges indicating outsourcing of work. Considering the aforesaid submission, the assessee prays that Cadsys India Ltd. ought to be excluded in the final set of comparables for determination of the ALP. 29.9 Cygnet Infotech Pvt. Ltd.: The assessee has submitted that this Company is not functionally comparable as it is engaged in the business of providing enterprise solutions, Application, Content Management services and IT enabled services. However no separate segmentare reported by the Company. The list of services provided by Cygnet pertains to blockchain, Artificial Intelligence, Robotic process Automation, Cloud, Internet of Things, Tax Technology, Augmented / Virtual Reality, Digital Transformation, Content Management, Microsoft, etc. Considering the aforesaid submission, the assessee prays that Cygnet Infotech Pvt. Ltd.ought to be excluded in the final set of comparables for determination of the ALP. 29.10 InfoBeans Technologies....
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....6 and FY 2014-15 respectively. Further the company is not functionally comparable as it is engaged in providing solutions such as web application development, telecom services, porting applications to its clients. Considering the aforesaid submission, the Assessee prays that Dynamic Digital Technology Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP. 29.14 Saven Technologies Ltd.: The assessee has argued that Saven Technologies Ltd fails RPT Filter (i.e. RPT Sales to Total Sales amounts to 99.66%, 100%, 100% for FY 2016-17, FY 2015-16 and FY 2014-15 respectively. Further the company is not functionally comparable as it is engaged in providing end to end services such as development of new software, web solutions, enterprise application services, re-engineering and enhancements, application integration and maintenance. The Assessee also submitted that Saven Technologies Ltd. Also holds significant Intangible Assets which is not similar to the software development services provided by the Assessee on Contract basis. Considering the aforesaid submission, the Assessee prays that Saven Technologies Limited ought to be excluded in the final s....
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....ssessee as well as the Ld. TPO. Sasken Technologies Limited (Software Service Segment) is engaged in Software development services; The Revenue from operation has "Sale of software service" as major item. The Company has reported Segment reporting between 'Software service' and ' Software Product' and the relevant Segment 'Software Service' Selected by the Assessee. As per the website the company is engaged in software development for various industries including semiconductors, consumer electronics, Enterprise devices, satcom, telecom, etc. Hence, Sasken Technologies Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. Considering the aforesaid submission, the Assessee prays that Sasken Technologies Ltd. ought to be included in the final set of comparables for determination of the ALP. 30.4 Sagarsoft (India) Ltd.: The Assessee sought inclusion of the company Sagarsoft (India) Ltd. as the Company passes all the quantitative filters adopted by the Assessee as well as the TPO. Further Sagarsoft (India) Ltd. is engaged in Software development services, as per the Company overview "Sagarsoft is engag....
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.... Co. operates in one segment i.e. Software and IT services. Further as per website, the company is engaged in providing customized software solutions and offshore software development activities. Hence, Kireeti Soft Technologies Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. In addition to above, the aforesaid comparable company is accepted by the TPO as a comparable company in AY 2016-17 as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Kireeti Soft Technologies Ltd ought to be included in the final set of comparables for determination of the ALP. 30.7 Maveric Systems Limited: The Assessee sought inclusion of the company Maveric Systems Limited as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. As per the Annual Report, Maveric Systems Ltd. is engaged in Software development services and earns Revenue from Sale of Services. The company is engaged in 'Computer programming activities and software testing activites'. As per the segmental analysis and nature of operations mentioned, the company is engaged in software te....
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....t there are RPT of more than 25% in these companies. We have examined the transfer pricing study report at page number 486-488. The assessee while selecting the comparables had applied the RPT of more than 25% filter. The TPO at page number 14 of his order has also applied the filter of RPT more than 25%. Despite application of this filter, the TPO has selected the companies having RPT > 25% which is against the well settled position. We, therefore, hold that companies (1) Sonata Software Limited, (2) Tavant Technologies Limited, (3) Dynamic Digital Technology Pvt. Ltd. and (4) Saven Technologies be excluded from the comparables set. The TPO is however direct to verify the numbers of RPT submitted by the assessee and if the RPT is more than 25% to exclude these 4 companies. We hold accordingly. 33. Now we turn to the other 10 companies argued by the Ld. AR for exclusion. Each company is discussed herein below: 33.1 We noticed that E-Infochip Limited is not functionally comparable company since it is engaged in embedded research and development activity, it holds Inventory and there are no separate segments available in the annual report. 33.2 Dun & Bradstreet Technologies ....
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....since it is engaged in rendering diversified services including software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. 34. We have considered the functional profile of the assessee and the functional profile of 10 companies as discussed above. We find that all these companies are not comparable to the assessee for the reasons recorded above. We direct the TPO to exclude all the 10 companies mentioned above. We hold accordingly. 35. Now we turn to the other arguments of the Ld. AR regarding the inclusion of 8 companies. We notice that the primary argument of the Ld. AR is that there are 7 companies which have been accepted as a good comparable by the TPO either in AY 2016-17 being the earlier assessment year or AY 2018-19 being the subsequent assessment year. Further, on page number 19-21 of his order, the TPO has given only a general comment against the name of each company "Based on the perusal of the business profile, the TPO is of the view that the company is functionally dissimilar. Hence rejected." It has been argued before us that the TPO or DRP have not pointed out any specif....
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.... had accounts receivable balances from its AEs amounting to INR 55,58,90,618. The TPO considered amount of receivables from AE as indirect advance which benefitted the AE. The TPO in his order has observed that the Assessee has not submitted the required details in relation with the outstanding receivables. The TPO imputed interest on the entire outstanding receivables of INR 55,58,90,618 considering the interest rate of respective LIBOR rates plus 400 bps and proposed an adjustment of INR 2,04,33,160. 39. Before us Ld. AR invited our attention to paper book page no. 632 to 634, whereby details of the outstanding receivables from the AEs were submitted on sample basis; such as invoice details (date of invoice, due date for payment), details of payment received, actual credit period granted by the Assessee to the AE, etc. Ld. AR submitted that the TPO ignored the above submission and proceeded to compute the interest on outstanding receivables for the entire year. 40. Ld. AR pleaded before us that the interest if any, on outstanding balances should be computed considering actual outstanding days of the receivable balance.Further, the Assessee prays that interest if any, is only to b....
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....n grant the grace period. We, however, clarify that in business world there is always a grace period and therefore non-granting of grace period is ignoring the business realities. 45. Coming to the last issue of rate of interest we have considered the arguments of both the sides. Following various judicial precedents, we hold that the rate of interest of Libor + 200 bps should be applied. We hold accordingly. 46. In the result, appeal of the assessee is partly allowed. Order pronounced on 27th Dec, 2023. ============= Document 1 Particulars Balancesheet - Opening of Contract Deferred Revenue (Note 5- Other current liabilities) Add: Warranty Income received in advance during FY 2016-17 from AE Less: Warranty income recognised in P&L during FY 2016-17 Closing balance of Contract Deferred Revenue Closing balance of Contract Deferred Revenue as per Financials Amount 372,433,396 190,206,055 (181,142,540) 460,296,300 460,296,300 Document 2 B. 7.2 C. i. 7.3 ii. 7.4 111. 7.5 Functions performed by Varian Software vis-Ã -vis Varian AEs The functional analysis presented in this section describes the functions....