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2016 (1) TMI 306 - ITAT MUMBAI

2016 (1) TMI 306 - ITAT MUMBAI - TMI - Transfer pricing adjustment - whether the transactions of the assessee need to be benchmarked as KPO? - Held that:- The assessee claims itself to be a Software Development Service Provider whereas the TPO has treated the assessee as engaged in providing contract Research & Development Services. This dispute gets strength from the nomenclature used by the assessee in Form No. 3CEB and also in its Transfer Pricing Study Report. However, the documentary eviden .....

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e issue by denovo assessment. The TPO is directed to decide the issue on the basis of Softex Form filed with the STPI authorities and related orders of the STPI authorities. The assessee is directed to furnish necessary details and the TPO is directed to examine the same after giving reasonable opportunity of being heard to the assessee. Needless to mention, the TPO shall also decide all other related issues with the TP adjustments relating to working capital adjustments and differences in the r .....

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includes additional grounds. 3. Ground No. 1 & 2 are of general in nature and need no separate adjudication. 4. Ground No. 3 is not pressed and accordingly it is dismissed as not pressed. 5. Ground No. 4, 5 & 6 relate to the Transfer Pricing Adjustment made by the TPO. 5.1. The TPO alleged that the assessee engaged in providing contract research and development service to its associated enterprises, though the claim of the assessee is that it is engaged in contract software development s .....

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. Following comparables were selected by the assessee as per its study report. Sr. No. Name of the Company Wt. Avg.(OP/OC) 1 Akshay Software Technologies Limited, 6.79% 2. Ancent Software International Limited 7.41% 3. Aztecsoft Limited 12.13% 4. CG-VAK Software & Exports Limited - 1.41% 5. Goldstone Technologies Limited 24.01% 6. Indium Software (India) Limited 1.25% 7. KPIT Cummins Infosystems Ltimited 12.36% 8. Larsen & Toubro Infotech Limited 16.46% 9. LGS Global Limited (Lanco Globa .....

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der: FY 2008-09 Particulars Amt. (in Rs.) INCOME Income from Services rendered 16,03,85,489 Prior period income 37,14,056 Total Operating Income 16,40,99,545 EXPENDITURE Administrative, sales promotion and other expenses 3,57,17,522 Personal expenses 9,25,75,200 Foreign Exchange loss 56,62,994 Depreciation 36,93,991 Fringe Benefit tax 16,00,000 Prior period expenses 32,29,614 Less: Non operating expense (1,36,988) Total Operating Expenses 14,25,58,269 Operating Profit 2,15,41,376 OP/OC(%) 15.11 .....

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es provided to the AE But on the perusal of the Transfer Pricing Study Report (TPSR), the same transaction is treated as provision of contract software development services. Thus, there is a contradiction between Form No. 3CEB and the TPSR. 5.5. The assessee was asked to justify its claim of business/services. The assessee was also asked to justify the arrival of markup of 15% on the services provided by it. The assessee filed a detailed reply vide submission dated 17.1.2013. It was strongly con .....

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as also brought to the notice of the TPO that the assessee is a contract service provider and does not perform end to end product development in India. It only undertakes certain portions of a typical software development lifecycle and is not exposed to any business risks. Hence, it is compensated on a cost plus basis. Therefore, it was pointed out that profit split method is not applicable in the instant case. 5.6. The assessee s submission was considered by the TPO but was not accepted for the .....

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Sl. No. Name of the Comparable OP/TC 1. Acropetal Technologies Ltd. 71.92% 2. Coral Hubs Ltd. 38.69% 3. Eclerx Services Ltd. 50.43% Arithmetic Mean 53.68% 5.8. Based on the above comparable companies, the TPO concluded by making adjustments as under: Operating cost for services ₹ 14,25,58,269/- Operating profit @ 53.68% ₹ 7,65,25,279 Arms Length price @ 53.68% ₹ 21,90,83,548/- Variation ₹ 5,49,84,003/- 5% of International transaction ₹ 82,04,977/- Adjustment ₹ .....

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and report dated 8.10.2013. However, in his remand report, the TPO was once again carried away with his strong belief that the transactions of the assessee need to be benchmarked as KPO. Once again, the TPO proceeded by the belief that assessee s business activities are of performing Research & Development services, to further develop and improve the teleconferencing products which are akin to Research and Development activities which is also a sub- domain of Knowledge Process Outsourcing (K .....

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ely in the nature of Software Development Services. In support of his contention, the Ld. Counsel filed a complete set of documents to substantiate his claim of Software Development Services provider. 9. Per contra, the Ld. Departmental Representative strongly stated that the claim of the service provided by the assessee is actually embedded in the software itself. The Ld. DR strongly relied upon the decision of the Tribunal Delhi Bench in the case of ST Microelectronics (P) Ltd Vs CIT 145 TTJ 5 .....

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record. In our considered opinion, the entire dispute revolves around the nature of business of the assessee. The assessee claims itself to be a Software Development Service Provider whereas the TPO has treated the assessee as engaged in providing contract Research & Development Services. This dispute gets strength from the nomenclature used by the assessee in Form No. 3CEB and also in its Transfer Pricing Study Report. However, the documentary evidences filed in the form of copies of Softe .....

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directed to decide the issue on the basis of Softex Form filed with the STPI authorities and related orders of the STPI authorities. The assessee is directed to furnish necessary details and the TPO is directed to examine the same after giving reasonable opportunity of being heard to the assessee. Needless to mention, the TPO shall also decide all other related issues with the TP adjustments relating to working capital adjustments and differences in the risks. Ground No. 4,5 & 6 are treated .....

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