TMI Blog2014 (10) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... ional assignee cost were considered as technical service fee - Held that:- The issue requires a revisit by the Assessing Officer. Whether the employees of the affiliates abroad were rendering services to the assessee company, as a part of any technical services agreed to be rendered by such affiliates to the assessee, has to be seen based on the verification of actual services rendered by them. Assessee should also be given an opportunity to show that the employees came to India only on a secondment and had not rendered any technical services on behalf of the affiliates abroad. We, therefore, set aside the order of the Assessing Officer in this regard and remit the issue back to the file of the Assessing Officer for consideration afresh. - Decided in favour of assessee for statistical purposes. TPA - selection of comparable - Held that:- Assessee here is engaged in the software development business thus comparbles of same nature are to be accepted . - IT(TP)A No.270/Bang/2014, S.P. No.129/Bang/2014 - - - Dated:- 17-10-2014 - Smt. P. Madhavi Devi, Judicial Member and Shri Abraham P. George, Accountant Member Appellant by: Shri Rajan Vora, CA Respondent by: Ms. Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said letter dated 27.08.2007 issued by M/s Cisco Systrems Hong Kong Ltd to Shri Tali Badrinath clearly abroad that the said person though an employee of M/s Cisco Systems Hong Kong was working for the assessee in India. The learned AR submitted that there were two elements for the reimbursements; 75% to the salary cost was paid to the concerned seconded personnel directly by the assessee and 25% of their salaries were paid by their employer abroad and such amount was in turn reimbursed by the assessee to such employer. Expenditure incurred by the affiliates aborad in relation to such seconded personnel were also reimbursed by the assessee. As per the learned AR, there were 4 individuals who were rendering their services to the assessee in India. Their employers abroad was not giving any technical service to the assessee. The assessee had not received any technical services from such affiliate companies. 5. Continuing his arguments the learned AR submitted that tax was deducted by the assessee for the whole of the salary, including the 25% reimbursed by the assessee to the affiliate. Thus the payments were subject to tax deduction at source in India. According to the learned AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Thali K Badrinath Director 365 days Management of projects relating to network design, planning and implementation 2 Srinivas Ketavarapu Director 247 days projects relating to network design, planning and implementation 3 Abhinay Padhye Director 322 days projects relating to network design, planning and implementation 4 Vishan Gupta Vice President 304 days projects relating to network design, planning and implementation That the payment effected were in relation to the above persons has not been disputed by the Revenue. However, the Assessing Officer took a view that these payments were nothing but fees for technical services falling within section 9(1)(vii) of the Act. According to the learned Assessing Officer the conditions of the assignments were laid down by the affiliates and the salaries, incentive payments were to be administered and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the company to do so, some listed provisions may be changed from time to time as legal requirements may dictate, new practices may require, or for other reasons at the discretion of the company. In the event this should happen, notification will be provided. If questiona should arise concerning any provision listed or any subsequent revisions to policies applicable to employees on International assignment, you are urged to consult with your Cartus International Assignment Consultant, Chel C Lim or yours Cartus RMC, Macy Lau. You will be an employee of the home country company, paid on the home country payroll. Salary actions including timing and amounts of increases will be consistent with the salary program in effect in your home country. While on assignment, incentive payments will be administered and paid according to the programe in the payroll country. While you are on International Assignment, the method of your pay delivery will be split between home and host locations unless you are in a country with strict exchange rate currency regulations. Life Insurance, retirement plans, disability and healthcare coverage will be provided from your payroll country while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rior to completing one year of employment in the new assignment are in the nature of an advance, that is, I have not earned those payments until I have completed one year of employment in the new assignment. In the event you resign, Cisco will not assume the cost for return transportation to the home country or return shipment of furniture, household goods, or personal effects except where mandated by law. Should you choose to remain in the host location, your tax equalization calculation will assume that you left the country within thirty days of separation. Should you resign within the first twelve months you will be required to repay a prorated portion of the relocation/assignment costs. In the event of involuntary termination due to performance issues and/or job restructuring, no reimbursement is required. If my employment with Cisco terminates prior to one year of service in the new assignment, I authorize at the time of termination of my employment Cisco Systems, Inc. to withold from my final paycheck any assignment related monies due to Cisco Systems Inc. in accordance with the formula stated above. In the event the amount I owe Cisco Systems Inc. is greater than th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned to assist with the payment of my actual home and host country tax liabilities within the limits prescribed by the Policy. I understand that these wagwe advances provided by Cisco for payment of taxes constitutes an obligation by me to Cisco, which will be reconciled with the final liabilities that are Cisco s responsibility through the annual tax equalization settlement calculation. After completion of the tax equalization settlement statement for each taxable year, I agree to repay any obligation for each taxable year within thirty (30) days. If I fail to repay any obligation to Cisco within thirty (30) days after completion of the tax equalization settlement statement, then, unless Cisco and I have agreed otherwise in writing, Cisco shall have the right to: a) reduce any foreign assignment allowances or reimbursements due to me and/or b) reduce future amounts paid to me whether as wages, salary or other compensation for services performed in light of my havign received wage advances that I have not yet earned. The total obligation will become immediately due and payable if my employment with Cisco or any of its affiliate corporations is terminated, whether volun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has worked in the Branch have not been stated and it is merely stated that he had rendered services in relation to management of proejcts relating to network design, planning and implementation. Further, the Long Term Assignment Policy of Cisco which has been referred to in the Letter of Agreement has not been furnished No doubt even if we come to a conclusion that there indeed were no secondment agreements and the persons sent were all along the employees of the affiliates abroad, it would not necessarily means that such affiliates were rendering technical services to the assessee. In our opinion, three cases relied on by the learned DR namely IDS Software Solutions India (P) Ltd, Ariba Technologies India (P) Ltd and M/s Abbey Business India (P) Ltd (Supra) all had different factual scenarios. In the case of IDS Software Solutions, there was an agreement between the U.S. Co which had sent the persons to India, with its Indian subsidiary. It was from such agreement that the Tribunal came to a conclusion that the concerned employees were employees of the assessee during the relevant time. There was also a minutes of the Board of Directors of the U.S Co which substantiated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009 by which it was to provide software support services to the parent company abroad, for which it was to be paid cost plus 10%. On account of such srvices, assessee had during the relevant previous year paid an amount of ₹ 224,86,73,636. To justify the price so received, assessee had furnished transfer pricing documentation alongwith the audit report in form No.3CEB. The assessee had considered 17 comparables for its T.P. study. TNNM method was adopted and profit level indicator taken was the margin on operating cost. Assessee s profit as the margin on its operating cost came to 14.82%. As per the TP study of the assessee, such margin in the case of the comparable averaged to 13.18% only and therefore, did not call for any adjustment in the Arms Length Price. 14. Out of the comparable selected by the assessee, the TPO while he was working out the ALP, pursuant to a reference made by the Assessing Officer, rejected 12 and after making his own analysis included 6 fresh comparables. Though the assessee had requested the TPO to consider an additional set of 7 comparables also, this was rejected by the TPO. The final set of 11 comparables considered by the TPO were as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now before us the learned AR submitted that foreign exchange gain of ₹ 44,19,30,032/- were entirely operational in nature, coming out of debtors realization, creditors payments, inter company cross charges etc. According to him the gain on foreign exchange fluctuation was arrived after adjusting the exchange loss on purchase of fixed assets coming to ₹ 1,47,634/-. As per the learned AR, there was no dispute that foreign exchange fluctuation gain was on account of operational transactions. Relying on the decision dated 14.08.2014 of the Coordinate Bench in the case of one of the affiliates of the assessee, namely Cisco Systems India (P) Ltd vs. DCIT in IT(TP)A No.271/Bang/2014, the learned DR submitted that foreign exchange fluctuation gain had to be treated as a part of operating income. The learned AR submitted that the observations of the DRP in the case of the assessee were very similar to those made in the case of Cisco Systems India (P) Ltd (Supra) and even the assessment year was the same. As per the learned AR the Tribunal had come down heavily on DRP s refusal to follow the decision in the case of Saplap India (P) Ltd vs. DCIT (2010) 6 ITR (Trib.) 81. 16. Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the foreign exchange fluctuation in question has to be treated as part of the operating income of software development services segment of the assessee and the operating profit to operating cost has to be determined accordingly. The DRP has refused to follow the decision of ITAT Bangalore Bench in the case of SAP Labs India Pvt. Ltd. (supra). In our view, the decision rendered by the Tribunal is binding on the DRP and the DRP cannot be heard to say that the decision rendered by the Tribunal is incorrect and refuse to follow the same. In the given facts and circumstances, we hold that the foreign exchange gain from software development services has to be considered as part of the income from software development services while computing the margin of the assessee and accordingly the margin of 12.67% computed by the assessee is directed to be adopted. 18. Once operating margin of the assessee is recomputed considering forex as operating in nature, its profit level indicator would arise to 37.38% as under: Cisco Systems Services B.V.India-Branch A.Y 2009-10 Margin computation Particulars As per TPO Considering forex as operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and Tata Elxsi Ltd to be not proper comparables. Relevant paras of the order dated 14.08.2014 is reproduced hereunder: 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open end to end web solutions software consultancy and design development of software using latest technology. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07. 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable . 21. Assessee here is also engaged in the software development business and therefore, for the same reasons as mentioned by the Tribunal in the case of M/s. Cisco Systems India (P) Ltd (Su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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