TaxTMI 
TaxTMI 
2024 (1) TMI 648
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct, 1961 ("the Act") on the following grounds: That on the facts and circumstances of the case and in law. General grounds 1. Impugned order passed by the Ld. CIT(A) and the Learned Assessing Officer ('Ld. AO") pursuant to the order of the Transfer Pricing Officer - 3(1)(1), Bengaluru ("Transfer Pricing Officer" or "Ld. TPO") are based on incorrect appreciation of facts and incorrect interpretation of law, and therefore, bad in law. 2. The Ld. AO/ TPO, erred in assessing the total income of the Appellant at INR 2,01,56,28.070, as against returned income of INR 72,23,42,710. Grounds relating to transfer pricing matters: 3. The Ld. AO/ TPO. erred in making an addition of INR 1,29,32,85,364 to the total income of the Appellant on account of adjustment in the Arm's Length Price ("ALP") for the international transaction of software development services undertaken by the Appellant with its Associated Enterprises (`AEs"). The Ld. CIT(A) has erred in law and in facts by upholding the action of the Ld. AO/ TPO in: 4. Not accepting the economic analysis undertaken by the Appellant in accordance with the Act read with the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... than 25 percent of total expenses) i) Applying a filter of 75 percent of operating revenue from software development services. for rejecting comparable companies. j) Applying persistent loss filter for rejecting companies that have incurred loss for any 2 out of preceding 3 years. 8. Rejecting companies while carrying out the comparability analysis without evaluating comparability based on the financial data for the year preceding the current year in accordance with Rule 10B(5) of the Rules. 9. Collecting selective information of the companies by exercising power granted under Section 133(6) of the Act that was not available to the Appellant in the public domain and relying on the same for comparability purposes in denial of natural justice. 10. Rejecting certain functionally comparable companies based on unreasonable comparability criteria for the software development service segment. i. Melstar Information Technologies Limited ii. Tera Software Limited iii. Sasken Communication Technologies Limited (seg) iv. Akshay Software Technologies Limited v. Yudiz Solutions Private Limited vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law." Grounds of appeal by Revenue: "1. Whether the CIT(A) was right in fact and in law in rejecting Persistent Systems Limited on the ground of functional dissimilarity by seeking exact comparability, while searching for comparable companies of the assessee under TNMM whereas the requirements of law and international jurisprudence require seeking similar comparables companies? 2. Whether the CIT(A) was right in fact and in law in rejecting, Infosys limited as comparables on the ground of functional dissimilarity and high turnover by seeking exact comparability, while searching for comparable companies of the assessee under TNMM whereas the requirements of law and international jurisprudence require seeking similar comparables companies? 3. Whether the CIT(A) was right in fact and in law in re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T (TS-235-ITAT- 2013(CHNY)-TP) where the claim of the assessee for working capital adjustment was rejected on the ground that the assessee was unable to justify the adjustment to be made on account of negative working capital as the assessee could not show the impact of the negative working capital on its margin. 11. Whether on the facts and circumstances of the case, the CIT(A) erred in not recognizing that reasonable accurate working capital adjustment is not possible as the differences in working capital requirement is itself based on various assumptions." Brief facts of the case are as under: 2. HTIPL, the assessee before us having its registered office at Bangalore was incorporated in India with limited liability on 04.09.2000 and is a subsidiary of Huawei Tech Investment Company Ltd., Hong Kong ("Huawei Hong Kong"), which is in- turn a subsidiary of Huawei Technologies Company Ltd. ("Huawei China"). The assessee is registered under the Software Technology Parks of India Scheme at Bangalore with effect from 27.03.2001. During the year under consideration, assessee rendered software development ("SWD") services and IT services in the field of telecommunications t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Sl. No. Name of comparable company Weighted average unadjusted margin (OP/OC)(%) 1. Melstar Information Technologies Limited -3.43% 2. Akshay Software Technologies Limited 0.04% 3. C G-V A K Software & Exports Limited 10.53% 4. Tera Software Limited 11.74% 5. Cigniti Technologies Limited 19.39% 6. Tata Elxsi Limited 21.90% 7. R Systems International Limited (seg) 24.40% 8. Sasken Communication Technologies Limited (seg) 32.73% 35^th Percentile 10.53% Median 15.57% 65th Percentile 21.90% ITeS Sl. No. Name of the company OP/OC as per Appellant 1 Locuz Enterprise Solutions Ltd. 1.12% 2 Allied Digital Services Ltd. - Infrastructure Management Services 1.62% 3 Take Solutions Ltd. - Sale Of IT Infrastructure Et Support services 3.64% 4 D C M Ltd. - I T Business 6.12% 5 Net Access India Ltd. 9.97% 6 P C S Technology Ltd. 10.65% 7 Accel Frontline Ltd. - IMS 17.55% 8 Kellton Tech Solutions Ltd. 24.31% No of comparables 8 35^th Percentile 3.64% Median 8.05% 65^th Percentile 10.65% 2.5 The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee at Rs. 1,29,32,85,364/-. Aggrieved by the order of the Ld.AO, assessee filed appeal before the Ld.CIT(A). 2.9 Before the Ld.CIT(A), assessee raised the grounds challenging aggregation of ITeS and SWD segment of the assessee, recomputation of operating margin of the assessee and inappropriate selection of certain comparables under SWD segment. 2.10 The Ld.CIT(A) after considering various submissions of the assessee confirmed the action of the Ld.AO regarding aggregation of ITeS and SWD segments. The Ld.CIT(A) relied on the order of this Tribunal in assessee's own case for A.Ys. 2012-13 to 2014- 15, and held that as no distinction has been made in respect of the services rendered by the assessee and the entire service segment was benchmarked under SWD services, during 2012-13 to 2014-15, upheld the action of the Ld.AO. The Ld.CIT(A) also agreed with the recomputation of operating margin of the assessee and that of the comparables. 2.11 Regarding the inappropriate selection of certain comparables challenged by the assessee, the Ld.CIT(A) accepted the exclusion of 3 companies being Infosys Ltd., Aspire Systems India Pvt. Ltd. and Persistent Systems Ltd. In respect ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in assessee's own case for A.Ys. 2012-13, 2013-14 and 2014-15, the Ld.AR submitted that in those years, ITeS segment was not there and the year under consideration before this Tribunal is the first year when assessee has provided ITeS services to its AE. 3.5 The Ld.DR on the contrary, relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 3.6 In order to understand the functions performed by the assessee under SWD and ITeS segment, it is necessary to go through the transfer pricing study report filed by the assessee and identifying the services that has been rendered by it under the relevant segments. The Ld.TPO in the transfer pricing order has observed that assessee operates under two business segments; The Ld.TPO has noted as under: "1. The IT services rendered by the taxpayer is in the nature of providing Network Operating Services (NOS) covering real-time network monitoring, fault management, proactive maintenance etc. According to Rule 10TA(m) "software development services" means,- (i) Business application software and information system dev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ype. These functions are drivers of every business and are indispensable in the economic environment. • Corporate Strategy Determination: Generally, all policies within Huawei India are determined by its own management who continuously monitor the economic environment surrounding the Indian entity, assess their strategic position within the industry and target to achieve its corporate objective with guidance from Huawei Group. • Finance, Accounting, Treasury and Legal Function: The management in Huawei India is responsible for managing the finance, treasury, legal and accounting functions. In certain areas, wherever necessary, Huawei India is guided by the Huawei Group. Huawei India is also responsible for all local statutory compliance. • Human Resource Management Function: The human resource function at Huawei India is coordinated by its management, which is responsible for recruitment, development and training of the personnel including the emolument structure. In this respect, where appropriate, it is guided by Huawei Group policies. 3.8 On analysis of the functions performed by the assessee under both segments, it is clear that the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....agreement dated August 1, 2015" with the Huawei China defining the scope and nature of the services. Huawei India primarily undertakes software development activities for the Huawei Group under its various business lines. Each of the above mentioned business lines are headed by either a Vice President or an Assistant Vice President. Huawei India employed about 1678 employees as on March 31, 2106 including the support departments like Human Resource, Finance, Administration, Corporate Affairs and Quality & Operations, which take care of the overall administration work including travel, IT issues and normal housekeeping and facilities. These are depicted in the chart given below and briefly described in the following paragraphs. Figure 1: Organisation Chart Huawei Technologies India Private Limited Human Resources Administration Finance Quality& Operations Corporate Affairs osa Labs & Single Network Carrier Software & Core Network 055 Terminal Global Service Development Center GNOC 2012 Labs & Single OSS Business Line: 2012 Lab Business Line in India works on the base platform and the middleware....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Requirement Analysis: The product conceptualization, Product specification and Product feasibility are given by the Huawei Group. Once product is found feasible, raw requirements are communicated to engineers in Huawei India. System engineers understand the raw requirements and further derive the allocated requirements. Agile/ iterative development, way of working is adopted where requirements and solutions evolve through collaboration between self-organizing cross- functional teams. High level Design: In this stage, Product architecture block diagram will be explained with entire system, identifying the main components that would be developed for the product and their interfaces. Based on this various tasks are derived which are required to carry out the development. Document 4 Product Backlog: It is prioritized work for the team where all requirements which are required to build the product / solution are listed. The most important items are shown at the top of the product backlog so the team knows what to deliver first. Release Plan: Release Planning is about planning multiple Iterations/ Sprints, in order to predict when a release might ....