TMI Blog2018 (7) TMI 741X X X X Extracts X X X X X X X X Extracts X X X X ..... jay Kumar Yadav, Sr.DR ORDER PER R. K. PANDA, AM : These are cross appeals. The first one is filed by the assessee and the second one filed by the Revenue and are directed against the order dated 29.02.2016 passed u/s 154/144C/143(3)/92CA of the I.T. Act, 1961 for assessment year 2011-12. For the sake of convenience, these were heard together and are being disposed of by this common order. 2. Facts of the case, in brief, are that the assessee is a company engaged in the business of development of software and export thereof. It filed its return of income on 28.11.2011 declaring income of ₹ 30,70,17,845/- after claiming exemption u/s 10A of the I.T. Act at ₹ 42,06,15,206/-. Since the assessee had undertaken international transaction with its AE, the Assessing Officer referred the matter to the TPO u/s 92CA of the I.T. Act. 3. The TPO observed that the Adobe Systems India Pvt. Ltd. is a software research and development company incorporated in India on 30.07.1997. It functions as a contract services provider and renders service to its group companies. It is primarily engaged in undertaking software development services. Further, the company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Based on the above discussion all the contention of the assessee are rejected hereby and the mean operating margin of suitable comparables is computed as under :- Sr. No. Name of the Company OP/OC (%) (F.Y. 10-11) 1. Acropetal Technologies Ltd. (Segmental) 34.91% 2. Akshay Software Technologies Limited 0.86% 3. Celstream Technologies Pvt. Ltd. 13.20% 4. Evoke Technologies Pvt. Ltd. 8.11% 5. E-Zest Solutions 39.98% 6. E-Infochips Ltd. 56.44% 7. IGate Global Solutions Ltd. 23.71% 8. Infosys Ltd. 43.39% 10. Larsen and toubro Infotech Ltd. 19.19% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indus Technical Financial consultants Limited 12.05% 13.07% 3. Cyber Media Research Ltd. 10.60% 12.17% 4. I C R Management Consulting Services Ltd. 16.14% 12.10% 5. Info Edge (India) Ltd. 15.53% 53.85% 6. M M TV Ltd. 32.94% 33.90% 7. Media Research Users Council 40.53% 72.60% 8. Power System Operational Corpn. Ltd. 22.52% 21.18% 9. Quadrant Communications Ltd. 14.58% 21.09% 10. Apito Ltd. 25.17% 20.01% 11. Global Procurement Consultants Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP directed the TPO to exclude Infosys Technology Ltd. from the list of comparables by following the decision of the Hon ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. vide ITA No.1204/2011 order dated 10.07.2013. 8. As regards the rejection of the assessee s comparables by the TPO in marketing support services is concerned, the DRP held that MM TV Limited, Media Research Users Council, Quadrant Communication Limited, Apitco Limited, Global Procurement Consultants Limited, TSR Darashaw Limited are functionally different entity and hence does not make good comparables to the assessee in MSS function. Similarly, they held that Power Systems Operation Corporation Limited being Government of India undertaking has very different economic model and environment and therefore, cannot be compared with the assessee for which they directed the same to be excluded. 9. So far as gains/losses arising out of foreign exchange fluctuations, provision for doubtful debts, bank charges and provisions written back while computing the operating margins of the assessee as well as the comparable companies are concerned, the DRP held that the losses/gains due to forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2C(3) of the Act. 4. The learned AO / TPO/ DRP have erred by rejecting certain comparable companies identified by the assessee for having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). 5. The learned AO / TPO / DRP have erred in a. Using single year data instead of multiple year data b. Determining the arm's length margins / prices using data pertaining only to FY 2010-11 which was not available to the Appellant at the time of complying with the Transfer Pricing ( TP ) documentation requirements. 6. The learned AO / TPO / DRP have erred in rejecting certain comparable companies identified by the Appellant using employee cost greater than 25 percent of the total cost as a comparability criterion. 7. The learned AO / TPO / DRP have erred in selecting certain companies (which are earning super normal profits) as comparable to the Appellant. 8. The learned AO / TPO / DRP have erred in rejecting certain comparable companies identified by the Appellant using Turnover less than INR 5 Crores as a comparability criterion for software de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.6287/Del/2015 (By Revenue) : 11. In ground of appeal no.1, the Revenue has challenged the order of the DRP in rejecting Infosys Technologies Ltd. as a comparable. 12. Facts of the case, in brief, are that the TPO included Infosys Technologies Ltd. as comparable in the software development services segment on the ground that the company passes all the filters and, therefore, it is a robust comparable. The argument of the assessee before the TPO that Infosys Technologies Ltd. is functionally dissimilar, engaged in significant R D activities, having significant intangible assets, brand value of Infosys and earning supernormal profits was rejected by the TPO. The DRP directed the TPO to exclude Infosys Technologies Ltd. from the list of comparables on the ground that it is an industrial giant and has to be excluded in view of the decision of the Hon ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) wherein it has been held that the giant entities which have tremendous economic advantage compared to the assessees like that of the assessee. The ld. DRP further held that the Tribunal in assessee s own case for assessment year 2008- 09 had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d maintenance. He submitted that the assessee is doing all 7 activities and not the last three i.e. code generation, testing and maintenance. He submitted that Infosys Technologies Ltd. also is doing similar function. Therefore, it is functionally same. Referring to page 29 of the Paper Book, ld. DR drew the attention of the Bench to the terms and conditions of the provisions of software development services, according to which, Adobe India provides engineering, research and development services to Adobe US. Further, Adobe India also performs design, development, support improvement and enhancement services for Adobe US products. As per the said terms and conditions, Adobe India is reimbursed by Adobe US all direct, indirect and overhead expenses incurred in rendering services along with a mark up on such costs. Referring to page 31, Volume- 1 of the Paper Book, he submitted that Adobe India undertakes the coding and documentation function with respect to the software modules that it develops. Adobe US plans, supervises and manages the coding and documentation function performed by Adobe India. Adobe India is only responsible for the development of modules of the software for a pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a P. Ltd. vide ITA No.602/2016 order dated 07.10.2016, he submitted that Infosys Technologies Ltd. was excluded from the list of comparables on the ground that it is engaged not merely in software development both offsite and onsite and that it receives the substantial revenues on account of onsite software financial development. It also owns brand intangibles an advantage which the assessee does not possess. 17. Referring to the decision of the Hon ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. vide ITA No.1204/2011 order dated 10.07.2013, he submitted that Infosys Technologies Ltd. was excluded from the list of comparables on account of its operating as full-fledge risk taking entrepreneurs has diversified services and develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iPrime, Infosys mConnect etc. He submitted that substantial expenditure has been incurred on account of R D, expenditure on account of advertising/sales promotion and brand building and onsite services by Infosys. He also relied on various other decisions and submitted that Infosys Technologies Ltd. should be excluded from the list of comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase before us, from page 65 of the Annual Report of the company (page 938 of the paper book), we find that during the year the company has shown income from software service and products. Further, on page 80 of the Annual Report (page 953 of the paper book) under the head 'segment reporting', it is reported that the company's operations predominately relate to provide end-to-end business solutions that leverage technology, thereby enabling clients to enhance business performance delivered to customers globally operating various industry segments and accordingly segment information in respect of operation in industries and geographic location has been provided. 6.5.8 When we compare the activity of the instant assessee, we find from the transfer pricing study as under: a) Adobe India provide engineering, research and development services to Adobe US . Adobe India also performs design, development, support improvement in enhancement services for Adobe US products (para-4.2.1 on page 22 of the TP study) b) Adobe India undertakes, the coding and documentation function with respect to the software modules that it develops ( page 24 of the TP study) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calendar year 2010 having originated in India. The learned TPO has further given finding on the economic ownership of the intangibles as under: It is seen as per clauses of software Research Agreement dt. 01.09.1997 the legal ownership of R D intangibles developed by the assessee in India automatically gets transferred to the Associated Enterprises without any compensation i.e. by the application of these clauses of the agreement the associated Enterprises becomes legal owner of the intangibles developed by the assessee in India. It is pertinent to mentioned here that the assessee has developed these intangibles in India and had borne cost and risk and had used its asset. Accordingly, the economic ownership of the intangibles is with the assessee. It is now well accepted principle that local economic ownership of intangible can be created separately distinctly from the legal ownership of parents, trademarks etc. The assessee claim that the Associated Enterprise is the legal owner of the intangibles may be correct, but the economic ownership of the intangible is with the assessee. That during the period 2008-09 number of patents have been developed with India origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and comparable. Similarly, the Ld. counsel has not brought out impact of risks undertaken by the assessee and comparable on the profit level indicator. 6.5.16 Further, the cases relied upon by the assessee are not applicable over the facts of the instant case as the functions carried out and the economic interest in the products developed by the assessee are different as compared to the entities in the cases relied upon by the assessee. Since function of the comparable company and the assessee may differ from year to year, the decision of Tribunal in earlier year, for not treating the company as comparable, cannot be taken as binding precedent. 6.5.17 In view of above discussion, we direct the learned TPO to retain M/s Infosys Technologies Ltd. as one of the comparable to the assessee. 21. While holding so, the Tribunal has further observed that the assessee has not provided the details of software developed or designed and that conceptualizations was done abroad and development work was done in India. Similarly, the assessee has not provided the details of software developed completely and description of functions in India and abroad either before the TPO or before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies are functionally dissimilar. Similarly, MMTV Limited, Media Research Users Council, Apitco Limited, Global Procurement Consultants Limited failed export turnover filter. The DRP only upheld the inclusion of Info Edge (India) Limited and directed the TPO to exclude the remaining 7 comparables for which the Revenue is not in appeal before the Tribunal. 25. We have considered the rival arguments made by both the sides and perused the material available on record. So far as MMTV Limited is concerned, the DRP excluded this company from the list of comparables on the ground that this is functionally different entity and does not make a good comparable to the assessee in MSS function. Further, the submission of the assessee that it has significant intangibles could not be converted by the ld. DR. Since the above company is engaged in the business of television broadcasting and related operations and it has got significant intangibles, therefore, we hold that this company cannot be compared with that of the assessee company. The order of the DRP is accordingly upheld. 26. So far as Media Research Users Council is concerned, we find this company is a council of media companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, uphold the order of the DRP in holding that this is a functionally different entity and hence does not make a good comparable in MMS function. 31. So far as TSR Darashaw Limited is concerned, we find this company is engaged in share registry and transfer services, depository services, record management, payroll and provident fund management and corporate fixed deposit management which are in the nature of IT enabled services as evident from page 21 of the annual report. We, therefore, uphold the order of the DRP in holding that this is functionally different entity. Further, this company was rejected by the Tribunal in assessee s own case for assessment year 2009-10 and the DRP in assessee s own case for assessment year 2010-11 and no appeal was filed by the Revenue before the Tribunal. We, therefore, uphold the order of the DRP in excluding the company from list of comparables. The ground no.2 by the Revenue is accordingly dismissed. 32. In ground no.3, the Revenue has challenged the order of the DRP in directing that Forex Fluctuations, bank charges, provision for doubtful debt and provisions written back should be considered part of operating margin calculation. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. vide ITA No.1304/Cal/2000 has held that the provisions for doubtful debts, advances and investment are indeed provision for diminution in value of assets as against provision for un-ascertain liability as contended by the Revenue. The Hyderabad Bench of the Tribunal in the case of Alliance Global Services IT India (P) Ltd. vide ITA No.58/Hyd/2014 has held that the provision for bad and doubtful debts should form part of the operating expenses. Similar view has been taken by the Delhi Bench of the Tribunal in the case of Rolls Royce India Private Limited vs. DCIT vide ITA No.1310/Del/2015. In view of the above discussion, we do not find any infirmity in the order of the DRP holding that the losses/gains due to foreign exchange fluctuation as part of the operating margin and the bank charges as part of the operating expenditure of the assessee. Further, the order of the DRP holding the provision for doubtful debts and provision for written back as part of operating margin is also upheld. The ground raised by the Revenue on this issue is accordingly dismissed. 36. The ground no.4 and 5 being general in nature are dismissed. ITA No.6165/Del/2015 (By Assessee) : 37. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nial related services and owns significant Rolls Royce India Private Limited V DCIT ITA No 6636 Del 2015 A.Y. 2011- 12intangibles/websites such as naukri.com, 99 acre.com etc.Therefore this company is functionally different as it is providing an advertisement space as well as online portal based on subscription by the buyer and seller of the services compared to services provided by the assessee of marketing support services . In view of this we direct ld. TPO for exclusion of this comparable. 41. Similarly, the Tribunal in the case of Linkedin Technology Information Private Limited (supra) has directed the TPO to exclude this company from the list of comparable. 42. Following the above two decisions and considering the fact that the functions of Info Edge (India) Limited is different from that of the case of the assessee, we hold that the above company is not a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company from the list of comparables. 43. So far as inclusion of E-Infochips Limited in the list of comparables in the software services segment is concerned, ld. counsel for the assessee submitted that the TPO added the above company on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment in IT enabled which is considered only reportable business segment as per the Accounting Standard- 17 segment report . Thus, no segmental details are available. Further this company is also engaged in the development and maintenance of the computer software and software development consultancy and also manufacturing EVM and VDB Electronic Board (Hardware Division). We find considering all aspects the Co-ordinate Bench of the Tribunal in the case of Ness Technologies Private Limited (supra) has directed to exclude this company from the list of comparables. The relevant observation of the Tribunal from para 4 onwards read as under :- 8. We have carefully considered the rival submissions. In the context of the objections raised by the assessee, we have perused the ITA No. 696 1006/Mum/2016 (Assessment Year 2011-12) Annual Report of the said concern, a copy of which has been placed in the Paper Book at pages 418 to 429. A perusal of the same reveals that apart from providing software development services, the said concern is also engaged in selling software products. The Annual Report also reveals that the said concern is also engaged in manufacturing EVM and VDB Elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables. 8.1 It is also pertinent to note that the aforesaid observations of our Co-ordinate bench are in relation to the assessment year 2011-12, which is also the assessment year under consideration before us. 8.2 On the basis of the aforesaid discussion, in our view, the said concern cannot be considered as a good comparable and deserves to be excluded from the final set of comparables for benchmarking the international transactions of Provision of software development services undertaken by the assessee. Thus, on this aspect we uphold the stand of assessee and Ground of appeal no. 15 is allowed. 47. Following the decision of the Tribunal cited (supra) and in view of our above discussion, we hold that the E-Infochips Limited is not a good comparable. We accordingly direct the TPO/Assessing Officer to exclude this company from the list of comparables. 48. So far as Wipro Technology Services Limited is concerned, we find this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in the case of Symnatec Software and Services Pvt. Ltd. vide ITA No.614/Mad/2016 for assessment year 2011-12 and the Bangalore Bench of the Tribunal in the case of Electronic Imaging India Pvt. Ltd. vide ITA No.1506/Bang/2015. 52. It is the submission of the ld. DR that since this company passes all the filters, therefore, it is good comparable. 53. In our opinion, the matter needs to go back to the TPO/Assessing Officer on this issue to give an opportunity to the assessee to substantiate as to how this company is functionally different from that of the assessee company. The Assessing Officer/TPO shall decide the issue afresh after giving due opportunity of being heard to the assessee. 54. So far as Igate Global Solutions Ltd. is concerned, the TPO included this company on the ground that it passes all the filters which was upheld by the DRP. It is the submission of the ld. counsel for the assessee that Igate Global Solutions Ltd. is engaged in IT and ITeS services. Referring to various pages from the annual report, he submitted that there is insufficient segmental information and, therefore, the same should be excluded from the list of comparables. 55. It is the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal, we restore this issue to the file of the Assessing Officer/TPO to decide the issue afresh in the light of the direction of the Tribunal. While doing so, he shall also keep in mind the decision in the case of McKinsey Knowledge Centre India Pvt. Ltd. vs. CIT vide ITA No.217/2014 and the decision of the Special Bench of the Tribunal in the case of Sun Life India Service Centre Pvt. Ltd. vide ITA No.750/Del/2015. We hold and direct accordingly. This issue is accordingly allowed for statistical purposes. 60. So far as R Systems International Limited is concerned, it was rejected by the TPO on account of different financial year ending which has been upheld by the DRP. It is the submission of the ld. counsel for the assessee that since quarterly results of the company are available in public domain, therefore, margin computation for the period ended on 31.03.2011 is possible. Further it was accepted by the Tribunal in assessee s own case for assessment year 2010-11. 61. After hearing both the sides, we find the Tribunal in assessee s own case at para 8.11 had directed the TPO to consider the allowability of this company as comparable with certain direction. We, therefore, r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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