TMI Blog2016 (10) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... ered under Rule 10AB. - TPO directed to eliminate the upward adjustment on Business value transferred to the Associated Enterprise. TPO adjustment on sale of software services business to the Associated Enterprise - Held that:- software services remained in India before the transfer and after transfer and both transfer took place within India and there is no evasion of tax and TPO provision are not applicable. - In respect of TPO adjustments on sale of software services business, the ld. TPO does not have powers to make upward adjustment. - I.T.A. No.398/Mds/2015, I.T.A. No.557/Mds/2015, C.O.No.45/Mds/2015, I.T.A. No.417/Mds/2015 - - - Dated:- 15-9-2016 - Shri Chandra Poojari, Accountant Member And Shri G. Pavan Kumar, Judicial Member Assessee by : Shri. Percy Pardiwalla Department by : Smt. Parminder Kaur, CIT ORDER Per G. Pavan Kumar, Judicial Member The cross-appeals filed by the assessee and Revenue and Cross Objection filed by the assessee respectively are directed against order passed u/s.143(3) r.w.s. 144C (13), 92CA(3) dated 21.01.2015, and 250 of the Income Tax Act, 1961 (herein after referred to as the Act ). Since the issue in these appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d u/s.143(1) of the Act on 04.09.2010. Subsequently, the case for selected for scrutiny and notice u/s.142(1) and 143(2) of the Act were issued. In compliance to notices, the ld. Authorised Representative of assessee appeared from time to time and filed information and ld. Assessing Officer verified information submitted. The ld. Assessing Officer found that assessee company entered into international transactions with Associate Enterprise were value exceeds B15 Crores and the ld. TPO relied on the Arms Length Price (ALP) as mentioned in form No.3CEB and passed order u/s.92CA of the Act with upward adjustment of B39,84,34,513/- towards Associate Enterprise sales and the business value transferred to the Associated Enterprise. The ld. Assessing Officer made other additions and passed draft assessment order u/s.143(3) r.w.s. 144C(1) of the Act dated 28.03.2014. Subsequently, assessee filed objections in form 35A alongwith relevant annexures objecting to the proposed objections made in the Draft assessment order before Dispute Resolution Panel. The ld. Dispute Resolution Panel considered the submissions, objections and findings of the ld. Assessing Officer and ld. TPO and passed order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of non competition in the transaction. But the assessee compny is transferring the rights, title and interest in the business to the Associated Enterprise and it is a clear case the assessee is forgoing its right to conduct business in such specified line and the amount paid takes the characteristic of non compete fee is taxable in the hands of the recipient. Further, non compete fees is made taxable from the assessment year 2003-2004 u/s.28(va) of the Act whereas transfer of software undertaking being treated as non compete fee and therefore the order of the ld. Assessing Officer relied on DRP be set aside and treat the sale consideration under the head income from Business. 3.6 Contra, the ld. Authorised Representative of assessee contested the grounds and submitted that the submissions of the ld. Departmental Representative to treat the transactions as non compete fee is without any basis and charged to income from business. The ld. Assessing Officer should have considered the mode of transactions as transfer. The amount received is a slump sale amount pursuant to takeover of software undertaking by Banca Sella S.p.A. Chennai Branch. The ld. DRP considered the slump sale amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the agreements and the assessment order, the transaction entered by the assessee company which was incorporated in the year 1996 and the assessee company is primarily engaged for provision of software development services in Financial and Banking domain for their exclusive deployment and production for Sella Group Companies. Whereas shareholding of the assessee company 99.99% is held by Sella Holdings Netherlands being outside India and further Sella Holdings Netherlands shares are held 100% by Banca Sella Holding S.P.A. Italy. The assessee has entered into international transactions with his Associated Enterprise. The assessee considering the business module and terms of agreements has transferred software undertaking to company Banca Sella S.p.A. Chennai Branch for a valuable consideration of B12,24,77,000/- Associated Enterprise on transfer of business and treated as Capital Gains and was offered to tax separately under Capital Gains and disclosed in Schedule 15 of notes of Accounting. On reference to the ld. TPO, the ld. TPO was made upward adjustment towards business value to the extent of B37,74,20,967/-. On perusal of the terms and provisions of software and business t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group. The assessee had entered into a Master Services Agreement with Sella Servizi Bancari S.C.p.A ('SSB'), the shared services entity of the GBS group, for the provision of the Software development and related support services to the GBS Group. The Software services operations of the assessee related to application development and maintenance of Software used by GBS group, based on requirements provided by the group. The Software services development was done on the proprietary framework developed by GBS on which all of the Group's banking application run; and is exclusively used by the Group. Hence, there was a clear distinction between a routine software development company that would typically provide its services to a broad customer-base and the Assessee, also performed Software development functions exclusively for a Single customer - viz. SSB. In the previous year 2009-2010, as a part of a reorganization exercise, Assessee's customer (i.e. SSB) decided to undertake the Software development activity under its own umbrella. Consequently, the Software services undertaking of the assessee - including all assets, liabilities and employees - were taken over by SS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source. This is based on a simple displacement theory or replacement theory of the source. In the present case, the source of revenue is the existing business and the expected revenue is B4.72 crores per annum. If this business is transferred out, the assessee will be losing its 'revenue earning source' and in its place, a 'new revenue earning asset will come into existence, which is in the form of cash (the sale consideration). In light of the categorical and accurate findings recorded by the Honorable DRP that the Transaction had resulted in loss of profitearning source, it is submitted that the receipt from the Transaction would constitute a capital receipt in assessee's hands, not subject to tax. The ld. AR supported his case and relied on the decision of Tribunal of Mumbai in the case of 3i Infotech [ITAT Nos. 3354/MUM/2010 Others, 3i Infotech Limited]. Whereas 3i Infotech, a subsidiary of IClCI Bank was engaged in providing back-office support services exclusively to the Bank. For providing such services, 3i Infotech had put in place adequate resources in terms of IT infrastructure, software, manpower etc. In the year 2002, the Bank decided to carry o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wari Devi Jute Mills [57 ITR 36](SC) and the Transfer Pricing provisions come into play only when an assessee is in receipt of income or claims an expense in relation to a transaction entered into by the assessee with its AE. In the given case, since the receipt from the Transaction relating to Transfer of Software business undertaking constituted a 'capital receipt' in the hands of the assessee, Not liable to be taxed and Transfer Pricing provisions were not applicable to assessee's case. 4.2 Contra, ld. Departmental Representative has objected to the Cross-objections and opposed that the provisions of Transfer Pricing are applicable even to the transactions in India irrespective of the fact that the Arms Length Price covered u/s. Rule 10AB is applicable to relevant assessment year and vehemently opposed to the grounds. 4.3 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. Authorised Representative contention that the transfer of undertaking has resulted in loss and is not subjected to tax. On perusal of the submissions, the consideration received is in the nature of compensation and not subjected to Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olation of Article 24.Joint venture formed by assessee were resident in India. In the present case, all the decisions relating to the affairs of the Joint Venture are taken in India and the business is executed in India through a Joint Venture Agreement in India. Indisputably, Joint Ventures are residents in India. Ever otherwise, Clause 3 of Article 4 of Malaysia provides that a person which includes AOPs also shall be deemed to be residents of the State in which its place of effective management is situated. On perusal of the Joint Venture agreements, it can be seen the, all the decisions relating to the Joint Venture are taken in India and, therefore, the JVs are to be treated as residents only. Transfer pricing regulation not applicable. Further in the present case the transactions are between two resident parties as outlined at paras 3.18 and 3.19 of this order. There is no possibility of shifting of profits outside India on erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits. No shifti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and after transfer and both transfer took place within India and there is no evasion of tax and TPO provision are not applicable. The DRP upheld the ld. TPO action without considering the objections were the assessee business was valued by assessee s independent expert valuer were the figure were substituted with Transfer Pricing Officer. The method of value adopted by experts DCF method and NAV method is one of the acceptable valuation method and the same was rejected and DCF valuation was applied. The DCF valuation extended to eight years from four years adopted by the expert valuers and also growth rate projection adopted by the experts valuers estimated specifically for assessee s line of business and the risk-free rate of 4.5% for DCF method for incorrectly discounted and prayed for set aside the value adopted by the ld. TPO which is not applicable. 5.2 On the other hand, the ld. Departmental Representative relied on the orders of TPO and DRP directions and supported with judicial decisions. 5.3 We heard the rival submissions, perused the material on record and judicial decisions cited. In respect of TPO adjustments on sale of software services business, the ld. TPO doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntenance support functions like documentation of the programmed code, IT integration and configuration management to its Associated Enterprise and it is a product development company. Therefore shold be rejected as comparable and relied on the judicial decisions Ikanos Communication India P. Ltd in ITA No./137/Bang/2015, CNO IT Services (India) P. Ltd in ITA No.336/Hyd/2015, M/s. Lionbridge Technologies P. Ltd in ITA No.7415/Mum/2014, Obopay Mobile Technology India P. Ltd (46 ITR(T) 42, Parexel International (India) P. Ltd (66 taxmann.com 150), pegasystems Worldwide India (P) Ltd Lexreported and Prana Studios Pvt. Ltd in ITA No.2077/Mum/2014. 6.4 The ld. Departmental Representative relied on the orders of lower authorities. 6.5 We heard the rival submission, perused the material on record and judicial decisions. The company is not functionally comparable to the assessee company as the company is in providing 3D animation as captive service provider and also provide software development activities and segmental information is not available. Hence, we accept the contention of the ld. Authorised Representative and this company is excluded from the comparables and we direct the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are performed. However, there is no breakup of Revenue development software development services and other services. The assessee company has not disclosed separate segments for ascertaining profitability and also cannot be regarded for the purpose of TNM analysis. We are of the opinion that the said company should be excluded from the list of comparables and we direct the ld. TPO to exclude. 6.10 In the case of Taksheel Solutions Limited, the ld. TPO worked out margin at 30.72 and the TPO himself sought to reject comparable companies which earned revenues from predominately onsite services RS Software is rejected based on the Onsite Revenue filter. Even Taksheel Solutions Limited earns significant margins from on site services. 6.11 We heard the rival submissions, perused the material on record. We found that the comparable company having compressive IT solutions by providing software development services for the enterprises engaged in financial services. The arguments of the ld. Authorised Representative that it has significant onsite Revenue and segmental comparables. We reject for excluding comparables and the assessee does not succeed on this ground. 6.12 In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss due to other factor cannot be treated as incomparable and also supported with Tribunal decisions. Considering the High Court decision, we are inclined to direct the ld. TPO to include the said company as comparable. 6.16 In the case of CG-VAK Software Exports Ltd, the assessee has included with margin (9.96) rejected on the basis that there is persistent losses. However, the same is not factually correct. Immediately preceding the year, the company had earned segmental profits and relied on judicial decisions of Ness Technologies (India) Pvt. Ltd in ITA No.943/2015 and Goldman Sachs (India) Securities Pvt. Ltd in ITA No.7724/Mum/2011. 6.17 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. TPO has wrongly excluded said comparables company as a persistent loss making company. Whereas the said company has earned net profit both in preceding and subsequent year. But the comparable turnover to be current financial year is less than B1 crores is respect of income from software development, product and services of domestic region as against the turnover of assessee company B22.71 crores. Accordingly, in our opinion turnover is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions to the income of the assessee on account of transfer pricing adjustment proposed by the ld. TPO. Aggrieved by the order, the assessee filed an appeal before the Tribunal. 7.1 Before us, the ld. Authorised Representative made a submissions that the ld. TP adjustment made by the ld. TPO upheld by the DRP B31,12,718/- provided to the Associated Enterprise rejected without any reasoning irrespective of the fact that assessee applied Transaction Net Margin (TNM) whereas it was substituted with own analysis. The ld. TPO ignored that the assessee being first year of operation the assessee operated only for one and half months whereas margin of comparable based on full year of operation which cannot be accepted. The ld. TOP erred in selection of comparables were sum of the comparables are on different footing and segment and working conditions. Further the ld. TPO rejected the comparables without any proper reasoning and also TPO erred in adopting working capital adjustment margins in respect of transferor of the business Sella Synergy India P. Ltd despite following search methodology as comparables for TNMM analysis and also the ld. TPO further erred in levy of 5% as provided in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company has earned Revenue from Software consultancy and sale of software products and there is no breakup of Revenue segment wise between software products and software services. The operating income @16% from work in progress and the software consultancy and products functions differ from software development activities carried out by the assessee. Since there is no segmental income and company is not functionally in comparables, we are inclined to accept the contention of the ld. Authorised Representative and company should be excluded from the comparables. Accordingly, we direct the ld. TPO to exclude the company from comparables. 7.7 In ICRA Techno Analytics Ltd, the ld. TPO worked out margin at 28.90. The Company is engaged in diverse activities such, as income from sales software development consultancy, licensing sub-licensing fee, web development and hosting. However, no segmental data is available within the broad head of services and relied on the Judicial decisions of Ikanos Communication India P. Ltd in ITA No./137/Bang/2015 and Obopay Mobile Technology India P. Ltd (46 ITR(T) 42. In the case of CTIL Limited, the ld. TPO worked out margin at 17.03. 7.8 We on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld have similar services and activity of the assessee whereas the comparable company is the business of IT consulting education based on internet and infrastructure management working on remote net management data backup as per Annual report produced. Out of the above broad category of services lines the transaction can be comparable only with IT services comparables and the company derives only 42% of Revenue from the IT consulting. Therefore, the company has not provided segment to ascertain accurate profitability of service lines. Considering the apparent facts, we direct the ld. TPO to compare the comparable company to the extent of segment reporting of only IT consulting and we remit the issue to the ld. TPO. 7.13 In the case of Quintegra Solutions Ltd the assessee has margin (9.42) and was rejected on the basis that there is persistent loss. However, the same is not factually correct and relied on the judicial decisions of Goldman Sachs (India) Securities Pvt. Ltd in ITA No.7724/Mum/2011, Brigade Global Services P. Ltd 28 ITR (Trib) 411 and Bobst India P. Ltd 63 taxmann.com 339 7.14 We heard the rival submissions, perused the material on record and judicial decisions ci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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