AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 1406
X X X X Extracts X X X X
X X X X Extracts X X X X
....aring 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 Development Services 385,553,406 Reimbursement of expenses 5,610....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les 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 Solutions India Pvt. Ltd., Maveric Systems Ltd., Sagarsoft India Ltd., ASM Technologies Ltd. were accepted by the DRP for inclusion. 2.10 On receipt of the DRP directions, the Ld.AO passed the final assessment order by making an addition on the transfer pricing issue at Rs. 7,94,94,700/-. Aggrieved by the order of the Ld.AO, the assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that the assessee wish to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ively, 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 be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nment 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 accordance with such specifications. Assets analysis While performing a comparison of the functions performed it is relevant to take into account the type of assets employed in rendering services. An understanding of the assets employed and owned by ESSPL and their contribution to the business process/economic activities is required. The following section discusses the assets owned by the company vis-a-vis its associated enterprises for performing the aforementioned functions. Tangible assets ESSPL employs manpower and r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 its associated enterprises Emirates UAE, they would bear a very limited credit and collection risk (only in case of bankruptcy of the associated enter prises). No credit risk arises to Emirates UAE as Emirates UAE uses the software developed for its captive consumption. Foreign exchange fluctuation risk This risk relates to the potential impact on profits when transaction currency is different from the reporting currency and arises because of fluctuation in foreign exchange rates. ESSPL receives its consideration in foreign currency in respect of its software development services to Emirates UAE. Hence, ESSPL is exposed to the potential risk of foreign currency fluctuation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 11 comparables deserves to be excluded on application of upper turnover filter. Sl. No. Name of the Company Turnover (in crores) 1 Exilant Technologies Pvt. Ltd. 332 2 Tech Mahindra Ltd. 23,661 3 Larsen & Toubro Infotech Ltd. 6,906 4 Mindtree Ltd. 5,325 5 Nihilent Ltd. 280 6 Persistent Systems Ltd. 1,733 7 Wipro Ltd. 44,710 8 Tata Elxsi Ltd. 1,386 9 Thirdware Solution Ltd. 204 10 Infosys Ltd. 61,941 11 Cybage Software Pvt. Ltd. 737 6.1 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 6.2 We have perused the submissions advanced by both sides in the light of records placed before us. 6.2.1 We note that the Ld.TPO erred in not applying a cap on upper limit on the turnover....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roviding 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 Pvt. Ltd. vs. DCIT in IT(TP)A No.940/Bang/2022 where this comparable was excluded for the above reason. 7.4 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 7.5 We have perused the submissions advanced by both sides in the light of records placed before us. 7.6 We note that this Tribunal in case of NTS Technology Services Pvt. Ltd. vs. DCIT (supra) directed the exclusion of this comparable by observing as under: "11.7.5 From the annual reports filed by the Ld.AR in the paper book, we note that this company derives 100% income from writing, modifying, testing of computer program to meet the needs of a particular client excluding webgage and designing. In the annual report, the revenue recognition by this company is stated to be primarily from software testing, QA and related services which is a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 data analytics and support services. The Company has also earned revenue from sale of products. The company is engaged in diverse activities for which no segmental details is available. It is further submitted that the company owns significant intangibles and that this company earned significant onsite revenue which demonstrates that it operates on a different model and therefore functionally not comparable with the assessee. 9.2 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. in IT(TP)A No. 713/Bang/2022 by order dated 11.01.2023. 9.3 The Ld.DR on the contrary, relied on the observations of the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 9.4 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was remanded ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 services are distinct from the software development life cycle and cannot be considered to be akin to software development services and comparables engaged in testing services have been excluded: - Advice America Software Development Center (P.) Ltd. v. ITO [2018] 94 taxmann.com 179 (Bang. - Trib.) Extracts from the annual report are provided below: Service Offerings BUSINESS STRATEGY: Product Strategy - Enterprise Resource Planning (ERP) Our ERP product development vertical is focused on addressing the specific needs of the supply chain and manufacturing industries. This focused approach would enable the company to research more on adding new features to Enterprise Resource Planning tools that help companies overcome their challenges in manufacturing and supply chain management. (Page 46 of Annual Report - FY 2016-17) Services Strategy - Outsourced Product Development In the software services ou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Company has QA resources trained in several of the major automated testing tools such as: Selenium, UFT (Formerly QTP), Badboy, LoadRunner, Load Complete, Appium and Calaba.sh 14. The Ld. D.R. submitted that the ld DRP on perusal of the annual report, he noted that the company is into software development activities. The company as per the Note 14 to financial statements give at page 72 of the annual report derives income from software development only. As regards employment cost filter, the company passes the employment cost filter. On perusal of the profit and loss account of the company an amount of Rs. 3,81,28,529/- is debited towards employment cost as against total sales of Rs. 9,37,54,000/- which comes to 40.66%. The assessee argued that it fails the employment cost filter for the F.Y. 2014-15. The assessee also argued before the ld DRP that if the OFS included in the final list of comparable the margin pertaining to only F.Y. 2015-16 and 2016-17 ought to be considered. 14.1 The ld D.R stated that at the outset, the company is functionally comparable to the assessee and also passes the employment cost filter. Therefore, the company has to be included in the list of ....