TMI Blog2020 (11) TMI 1097X X X X Extracts X X X X X X X X Extracts X X X X ..... he list of comparables. I2T2 India Limited - We find force in the argument of Ld. D.R. as seen from the direct report of the I2T2 India Ltd. for the year ending on 31.3.2014, which is placed on record in page no.1837 that assessee is engaged in IT enabled services industry and it cannot be compared with assessee s case, which is engaged in Software development services marketing support services and data centre services and accordingly, exclusion is justified. We confirm the findings of the loer authorities on this comparable. Daffodil Software Limited - submissions of the Ld. A.R. is that this comparable passes all filters adopted by TPO and the software development services revenue is more than 75% and hence in the interest of justice, we remit this issue to the file of TPO to see whether this comparable passes all filters adopted by TPO. Accordingly, this issue remitted back to AO/TPO for fresh consideration. Companies functionally dissimilar with that of assessee software development services need to be deselected. Disallowance of depreciation claimed in respect of additions made during the previous year - HELD THAT:- As rightly pointed out by the Ld. D.R., the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56 and confirming the adjustment of INR 723,881 in respect of notional interest on outstanding receivables. Grounds for software development services 4. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services, the learned DRP/ AO/ TPO erred in: 4.1. Rejecting the Transfer Pricing (`TP') documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 4.2. Rejecting the comparability analysis carried out by the Appellant in the TP documentation and in conducting a fresh comparability analysis for the software development services based on the application of additional filters in determining the arm's length price. 4.3. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation. 4.4. Not considering the multiple year/prior year data of comparable companies while determining the arm's length price in relation to the Appellant's international transactions with its AEs. 4.5. Using information under section 133(6) of the Act, which ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g capital of the Appellant and the comparable companies. 4.13.Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 4.14. Computing incorrect operating mark-up of certain comparable companies. (Tax Effect: INR 3,621,178) Grounds for imputat ion of not ional interest on outstanding receivables 5. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in : 5.1. Considering overdue receivables from Associated Enterprises (`AEs') as an international transaction under the provisions of Section 92B of the Act. 5.2. Without prejudice to ground nos. 3 5.1 above, ignoring the fact that the Appellant does not pay interest to the AEs in relation to outstanding payable to AEs. 5.3. Without prejudice to ground nos. 3 5.2 above, charging interest in respect of all invoices raised during the year and outstanding at the beginning of the year, after allowing a credit period of only 30 days. 5.4. Without prejudice to ground nos. 3 5.2 above, charging interest for the full year instead of restricting it till March 31, 2014, i.e. while computing the notional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... INR 3,414,676) 12. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act despite the fact that the Appellant has acted in a bona fide manner and provided all necessary details called for by the Assessing Officer. 2. Facts of the case are that Blue Coat India is the subsidiary of Blue Coat Systems BV, Netherlands, which in turn is a subsidiary of Blue Coat US, Blue Coat India has been set up as a captive contract software development unit of the Blue Coat Group. Pursuant to a Research and Development Services agreement ( SWD Agreement ) effective April 1, 2013, executed between Blue Coat Switzer and Blue Coat India, Blue Coat India provides software development services in relation to Blue Coat Switzerland's products. Further, pursuant to the Marketing Support Services agreement ( MISS Agreement ), effective April 1, 20:13, executed between Blue Coat India and Blue Switzerland, Blue Coat India provides marketing support services in the nature of marketing and after-sales support functions for customers in India in relations to Blue Coat Switzerland's products. These services focus on increasing the awareness of the Blue Coat bra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,496 TNMM Marketing and Sales Support Services 10,12,55,499 TNMM Date Centre Services 38,55,055 TNMM Recovery of restructuring costs 12,48,076 TNMM Total 15,32,68,126 As per the TP study Particulars Amount Receipt from Software development services 4,69,09,496 Particulars Amount Receipt from marketing support services 10,12,55,499 Receipt from data centre services 38,55,055 Recovery of restructuring costs 12,48,076 Total 15,31,68,126 3. While completing the TP study, the TPO rejected certain comparables selected by the assessee and included his own comparables and by applying TNMM method as most appropriate method to determine the arm s length price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roject execution, cost-reduction and enhanced business value. The company provides end to end solutions, to the clients through the various platforms / products or solutions. These platforms / products and solutions are not off the shell products as argued by the assessee. As a per the P L account, the company has revenue from software services of Rs.42,531/- crores and from software products of Rs.18,101/- crores, and that the product revenue constitute meagre 4.08% of total operating revenue. Therefore, taking into consideration the various information available in the annual report, and the fact that the company in predominately having revenue from software services, this company can be considered as functionally comparable to the assessee. 6.1. It was pointed out that the merger of Infosys Consulting India Limited has been accounted for under pooling of interest method, and that the assets and liabilities of ICIL have been transferred to Infosys Limited on a going concern basis. On account of such merger, it was pleaded that this company should be excluded. But the assessee could not point any information from the annual report to indicate that such merger has affected and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m such transactions in the open market. Hence, Ld. D.R. contended that these pleas may be rejected. 6.4 Being so, Ld. D.R. contended that it has to be considered as comparable to assessee s case and order of the lower authorities to be confirmed. 7. We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. The Tribunal in the case of LG Soft India Limited in IT(TP)A No.3122/Bang/2018 vide order dated 28.5.2019 considered the Infosys Limited as not comparable to the assessee s case by observing as follows: 6. We notice that the co-ordinate bench has excluded M/s. Infosys Ltd in AY 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd. (ITA No.1054/Bang/2011) was followed and it was held that M/s. Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the breakup of revenue from software services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xmann.com 294. We have perused submissions advanced by both sides in light of records placed before us. The decision relied upon by Ld.CIT DR in case of CGI Information Systems 86 Management Consultants (P) Ltd. vs DCIT has not considered details that has been obtained under 133 (6) in respect of this company for year under consideration. Therefore, in our opinion this decision cannot be of any help to revenue. Coming to information received under section 133 (6) of the Act, it is observed that this company has acquired certain intellectual property products and generate revenue from licensing and support of such products. It is also observed that this company is involved in the entire life-cycle of software development which is not similar to what assessee caters to its associated enterprises. Assessee carries out only such functions which are required by associated enterprise under its supervision and guidance. 12. The reading of that whole paragraph suggest that Persistent Systems Limited was excluded from the comparable. However, due to typographical error, it was mentioned as included instead of mentioning excluded . Accordingly, we direct the A.O/TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to reject these pleas of assessee and to uphold this company as comparable. 15. We have heard the rival submissions and perused the record. This issue was considered by the Tribunal in the case of Microsoft Research Lab India Pvt. Ltd. cited (supra) and observed as under: This comparable has been included by Ld.TPO the f inal l ist . Ld. counsel submi t ted that i t is funct ional ly not simi lar wi th that of assessee. It is submit ted that assessee engaged in providing services such as Agi le, analyt ics and informat ion management , appl icat ion development and maintenance, business process management , business technology consul t ing, Cloud, Digital business, independent testing, infrastructure management services, mobi l i ty, product engineering and SAP services. Ld.AR referred to page 1088 in support . It is further been submit ted that this company does not have segmental informat ion on the basis of which revenue earned from di f ferent verticals could be ident i fied. This company also owns huge intangibles and therefore deserves to be excluded. On the contrary Ld. CIT DR placed reliance upon orders passed by authorities below. We have examined th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany placed at page 2334-2444, it is observed that at page 2413, segment reporting of this company is set to be comprised of software development, implementation and support services. Further- it has been submitted therein that primary segment reporting is based on geographical areas, viz Domestic = India (products and services) and International = rest of the world (exports-software services). It is also been submitted therein that this company maintains separate books of account for the reported segments. In profit and loss account at page 2431, it is observed that during the year under consideration, this company earned revenue from sale of products whereas, revenue from sale of services is shown to be at 'nil'. Ld.TPO while considering this comparable only considered footnote at page 2433, wherein bifurcations of revenue from sale of products has been given as; export of software services has been recorded to be at Rs.20194.37, software services from local units amounting to Rs.414.07, revenue from subscription and training amounting to Rs.59.32 and sale of licenses amounting to Rs.7.98. We therefore reject the contention of assessee that segmental details are not avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consultants (P) Ltd. vs DCIT reported in (2019) 101 Taxmann.com 294. We have perused submissions advanced by both sides in light of records placed before us. Ld.CIT DR placed reliance on decision of CGI Information Systems and management consultants (P) Ltd. vs DCIT (supra), wherein this Tribunal observed and decided as under: 9. In respect of the applicability of this Tribunal order for exclusion of Larsen Toubro Infotech Ltd, this has been submitted by ld. AR of assessee in the chart submitted before us that on page no. 698 of Annual Report paper book, this company has debited an amount of Rs. 27,10,89,274/- as cost of bought-out items for resale. But this fact was not brought to the notice of the Tribunal in the case of Advice America Software Development Center (P.) Ltd. (supra). It has also been submitted that on page no. 706 of Annual Report paper book, this has been reported that this company is engaged in sale of services to its related parties and this fact was also not brought to the noticeof Tribunal in case of Advice America Software Development Center (P.) Ltd. (supra). When we examine paras 14 to 20 of this Tribunal order where there is discussion regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. Accordingly, we remit this issue to the file of the AO/TPO on similar directions. 25. The assessee wants herein to include the following 5 comparables: 1. I2T2 India Limited 2. Daffodil Software Limited 3. Exilant Technologies Pvt. Ltd. 4. Maveric Systems Limited 5. Evoke Technologies Pvt. Ltd. 26. Further, assessee has not considered other comparables raised in its ground to be included. The other comparables assessee not pressed. I2T2 India Limited: 27. First we will consider I2T2 India Limited. The Ld. A.R. submitted that I2T2 Limited is engaged in the Software development services and passes all filters followed by the TPO. 28. Ld. D.R. submitted that the company is in the IT enabled Services industry and has not done transaction processing work which is not functionally comparable to assessee s case. 29. We have heard the rival submissions and perused the materials available on record. We find force in the argument of Ld. D.R. as seen from the direct report of the I2T2 India Ltd. for the year ending on 31.3.2014, which is placed on record in page no.1837 that assessee is engaged in IT enabled services industry and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. We have heard the rival submissions and perused the materials available on record. Admittedly, assessee filed the financials for the assessment years 2015-16 which includes the financials relating to assessment year 2014-15 also. However, this was not considered by the TPO. Hence, in the interest of justice, we remit this issue to the file of AO/TPO for fresh consideration. Maveric Systems Ltd.:- 37. Ld. A.R. submitted that this is functionally compared to assessee s case as this assessee is engaged in rendering software development services and incurring substantial amount on R D won t effect is revenue. He relied on the order of the Tribunal Pune bench in the case of Xpanxion International Pvt. Ltd. in ITA No.666/Pune/2016 dated 14.5.2019 in support. 38. On the other hand, Ld. D.R. submitted that the company incurred substantial expenses to the tune of 6% of turnover towards R D, which is beyond the generally acceptable tolerable limit of 3% of revenue, hence, it cannot be comparable to the assessee s case. More so, before the DRP assessee has not controverted this finding of the TPO. 39. We have heard the rival submissions and perused the materials available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a comparable. 42. On the other hand, Ld. D.R. submitted that one unaudited financial statement was made available to the lower authorities. Further, as per the geographical segmentation information, the revenue from India was given to be Rs.3621.72 lakhs and that the revenue from USA was given to be Rs.924.87 lakhs. Thus, it can be seen that the export revenue constitute only 20.34% of the total revenue. Therefore, this company cannot be considered as comparable. 43. He relied on the order of the Tribunal in the case of Goldman Sachs Research Pvt. Ltd. in IT(TP)A No.3244/Bang/2018 dated 29.1.2020 for this proposition. 44. We have heard the rival submissions and perused the materials available on record. Admittedly, this comparable was considered by this Tribunal and observed in para 6.1 in the case of Goldman Sachs Research Pvt. Ltd. (supra) as follows: Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that financial results incorporated branch revenue and profit, which was based on unaudited financial statements of branch outside India. It was also observed by DRP that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut prejudice to ground nos. 3 5.2 above, charging interest for the full year instead of restricting it till March 31, 2014, i.e. while computing the notional interest on overdue receivable the interest should be computed only from the date of raising invoices, after allowing credit period of 180 days, up till the date of realization of such invoices or March 31, 2014, whichever is earlier. 5.5. Without prejudice to ground nos. 3 5.2 above, imputing the notional interest invoice-wise and disregarding the weighted average method of computing the credit period for the outstanding receivables from the AEs. 51. Ld. D.R. submitted that notional interest to be considered as operating income while computing the margin. 52. We have heard the rival submissions, perused the materials available on record and relied on the order of the Tribunal in the case of CGI Information Management Consultation Pvt. Ltd. in IT(TP)A No.505/Bang/2016 dated 30.10.2020. This issue was considered by this Tribunal in the above case as follows: 3.5.7.-We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in, conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly, this ground raised by assessee stands allowed for statistical purpose. 53. In view of the above order of the Tribunal, taking a consistent view, we remit the issue to the file of the AO/TPO for deciding the same in conformity with the order of the Tribunal in the case of CGI Information Systems Management Consultants (P) Ltd. cited (supra). 54. Next ground C.6, C.7 C.8 relates to disallowance of depreciation claimed in respect of additions made during the previous year. Ld. A.R. submitted that the learned AO erred in disallowing excess depreciation amounting to INR 465,396 in respect of fixed assets additions in the previous year 2013-14 of INR 775,660 on account of failure to furnish invoices. The Ld. A.O. further erred in disallowing excess depreciation amounting to INR 1,560,735 in respect of fixed addition in the previous yea? 2013-14 of INR 2,601,225 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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