TaxTMI 
TaxTMI 
2023 (7) TMI 1406
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....see filed its return of income on 29.11.2018 declaring gross total income of Rs. 82,22,645/-. It is submitted that the assessee provides software development services to its AE and sold hardware and software products to its AE. As the Ld.AO noted that the transaction with AE exceeded the threshold limit, a reference was made to the transfer pricing officer u/s. 92CA. 2.3 On receipt of the reference, the Ld.TPO called upon assessee to furnish the economic details of the international transaction in form 3CEB. The Ld.TPO observed that assessee had carried out following functions during the year. "Etisalat is engaged in the business of providing telecommunication services in United Arab Emirates since 1976 and having established a modern telecom infrastructure, is one of the leading companies in the region. ESSPL was set up in Bangalore, India as a wholly owned subsidiary of Etisalat to take care of the information technology of Etisalat and is desirous of carrying on software development and managed services (IT and managed services) for Etisalat." 2.4 He noted that the international transaction undertaken by assessee was as under: Particulars Value Software D....
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..... Thirdware Solution Ltd. 30.18 33.36 29.27 30.94 18. Threesixty Logica Testing Services P. Ltd. 48.46 36.63 26.2 36.58 19. Infosys Ltd. 38.29 38.79 35.27 37.38 20. Cybage Software P. Ltd. 62.04 61.40 47.78 56.81 35th percentile 20.19 Median 23.60 65th percentile 26.83 2.7 The Ld.TPO further noticed that, there were outstanding receivables and thus computed notional interest by adopting SBI short term deposit interest rate and proposed an adjustment of Rs. 2,88,63,948/-. 2.8 On receipt of the order u/s. 92CA, the Ld.AO passed the draft assessment order on 30.12.2022 by proposing addition in the hands of the assessee being the transfer pricing adjustment at Rs. 7,94,94,700/-. 2.9 On receipt of the draft assessment order, assessee preferred objections before the DRP. Before the DRP, assessee raised objections in respect of certain comparables seeking exclusion by applying turnover filter which was rejected. 2.9.1 Certain comparables that assessee sought inclusion was also rejected by the DRP, however certain other comparables like Isummation Technologies Pvt. Ltd., DCIS Dot Com Solut....
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....ve perused the submissions advanced by both sides in the light of records placed before us. 4.3 We 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 foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. 4.3.1 Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to....
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....itment of manpower ESSPL employs the manpower required for performing the software development services in consultation with Emirates UAE. The recruitment process of such personnel is conducted by the HR of ESSPL in consultation with Emirates UAE. The HR Department at ESSPL is responsible for recruitment, development and training of the personnel including the emolument structure. In this respect, where appropriate, it is guided by Emirates UAE's HR policies. * Identification and assignment of qualified professionals Since the services are provided by ESSPL, ESSPL is responsible for identifying various resources required to provide software development services to Emirates UAE. ESSPL assigns technically skilled manpower to build the product(s) as per the product road map developed by Emirates UAE. The associated enterprises does not play any active role in this process. * Software services Emirates UAE provides specifications such as software architecture and other technical requirements for the software development to ESSPL. The role of ESSPL's employees is limited to performing software development and designing services in acc....
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....r services to Emirates UAE. ESSPL does not own any such online infrastructure and hence assumes negligible/no risk in this regard. It is Emirates UAE which bears normal operational risk. Product development/service liability risk Product liability risk arises when a company's products fail to perform at accepted or advertised standards or, in extreme cases, even cause its user bodily harm. ESSPL has to meet the requirements of the specific agreement with Emirates UAE, and hence bears the product development and service liability risk to the extent of the specifications provided by Emirates UAE. However, ESSPL is not responsible in case the soft ware so developed falls to perform after the same is developed based on the specifications provided by Emirates UAE. Also, such software developed is for the internal consumption of Emirates UAE, and hence, there is no service risk arising before an external party. Credit and collection risk When an entity supplies products or services to a customer in advance of customer payment, the firm runs the risk of default of such payment. Since ESSPL provides software development services to ....
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....mitted that this observation needs to be verified as the income export turnover earned by this comparable is more than 75%. 5.3 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 5.4 We have perused the submissions advanced by both sides in the light of records placed before us. 5.4.1 We note that all the above submissions by the assessee needs to be reverified by the Ld.AO/TPO. As the authorities have not disputed these comparables are functionally not similar, it is directed that the objections of the assessee may be verified having regards to their annual reports and then to consider the claim for inclusion of these comparables in accordance with law. 5.4.2 In the event, the contentions of the assessee are found to be true, the two comparables are directed for inclusion. Assessee is directed to file all the relevant documents in support of the claim. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, ground nos. 9.1 & 9.2 raised by assessee stands partly allowed for statistical purposes. 6. Ground no. 10 is in respect of exclusion of comparables. The Ld.AR submitted that following 1....
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....whose turnover in the current year is more than Rs. 200 crores should be excluded from the list of comparable companies. Accordingly all the above comparables stands rejected. 7. Threesixty Logica Testing Services Pvt. Ltd. 7.1 The Ld.AR submitted that, this comparable fails RPT filter as its RPT is 30.42%. It is also submitted that, this comparable is functionally not similar with that of assessee as it owns certain brand names "SAQAMA" & "STAQK". He referred to pages 1075 to 1252 of paper book in support, wherein the annual reports of this comparable is placed. Referring to page 1129, the Ld.AR submitted that the income has been declared by this company under the head "Revenue from operations". Referring to the company overview mentioned at page 1135, the Ld.AR submitted that, this company is primarily engaged in providing information technology services viz. software testing and QA services. 7.2 The Ld.AR submitted that, this company also earns revenue from sale of third party software product and hardware for which there is no segmental data available. 7.3 He placed reliance on the decision of Coordinate Bench of this Tribunal in case of NTS Technology Services P....
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....ed that this company is functionally not at all similar with that of the assessee. 8.2 On the contrary, the Ld.DR relied on the observations of the authorities below. We have perused the submission advanced by both sides in light of records placed before us. 8.3 We note that this company is in the business of Chip and semiconductor design services where as the assessee before us is into basic SWD services of coding an documentation, Testing and quality assurance, software patches and maintenance. There is no similarity between the functions performed by the assessee vis-à-vis that of this company. We therefore at the threshold reject this company being functionally not similar with that of the assessee. Accordingly, the Ld.TPO is directed to exclude this company from the final list of comparables. 9. Great Software Laboratory Pvt. Ltd. 9.1 The Ld.AR submitted that this company is engaged in the business of design and development services of software applications including customisation and packaged software. She further submitted that the primary service of the Company are cloud products and operations management, IDM and connected experience practice, big ....
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....er like the assessee. "13. The ld AR for the assessee submitted that this company OFS Technologies Ltd. is engaged in diversified activities. OFS is a software development and information technology outsourcing company, enriched its core expertise over the last financial year in Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development, DevOps Implementation and Data Analytics solutions. He submitted that OFS is engaged in outsourced product development which is different from software development activity carried out by the assessee. The Company is also engaged in independent testing. The assessee further submitted that OFS is into diverse activities and there is no segmental data available in the financial statements. Accordingly, based on the above, the assessee submitted that OFS should be rejected as a comparable. Additionally, a. the assessee placed reliance on the following ruling wherein exclusion of the comparables engaged in outsourced product development was upheld: - SAP Labs India (P.) Ltd. (supra) - The assessee placed reliance on the following ruling wherein it was upheld that testing ser....
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.... OFS helps clients to take control of the testing process. All features, both new and existing, can be thoroughly tested. It helps make sure that the test cases cover virtually 100% of user cases and can even help build a complete library of unit test cases that the client's developers can extend as they change the code. Having such a large percentage of the code covered by the test cases can shrink the client's software release cycle by as much as 35% since the end-of-cycle testing period can be dramatically reduced due to the higher quality of code that is turned over for QA. We have experienced quality Assurance professionals that provide a number of different types of testing. OFS helps in building test plans, test cases, and test scripts to thoroughly examine the software and make sure it meets requirements and design goals. Also, platform certification is provided to make sure that the current release of software works with latest upgrades to windows, Oracle, SQL server, hardware Devices, Mobile Phones, and other platforms. The Company has QA resources trained in several of the major automated testing tools such as: Selenium, UFT (Formerly QTP), Badb....
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....separate expenditure item under the head R&D in the profit and loss account statement. There is no indication in the annual report to show that the R&D had resulted in any distinct product development giving rise to source of separate revenue stream. The information on technology absorption on which the assessee relied states that R&D activities are integrated with software development process with objective of ensuring efficiency and quality. Therefore, they are to be taken as routine activities in enhancing the quality of delivery of services. In view of the above these pleas were rejected by the ld DRP. Subjected to the above discussion, the selection of this company was upheld by the ld DRP. 15. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable fails the functionality test and this company OFS Technologies Ltd. is not functionally similar and deserves to be excluded." Accordingly, Ground no. 10 raised by the assessee stands allowed. In the result, the appeal filed by assessee stands partly allowed. Order pronounced in the open court on 18th July, 2023. ============= Document 1 NU WP No....