TMI Blog2017 (1) TMI 1215X X X X Extracts X X X X X X X X Extracts X X X X ..... s into generation of intellectual property rights, which is absent in case of a captive service provider. Accordingly, the segment in consideration is characterized at software development services. The services rendered by the assessee are in respect of the support services for sale of software by the AE and the post sales support services are also in respect of the sale of software by the AE. The bug fixing is also part of the post sales support services, which may be treated partly as a function of technical nature but same cannot be compared with consultancy provided in the field of engineering or infrastructure field. Thus, the segmental function of the assessee is characterized as sale and post sales support services. We find that the assessee has compared the ‘turnkey contract and service’ segment of the company with the sales and post sales support segment of the assessee company. However, we do not agree with the contention of the assessee that the company segment of turnkey contract & service was functionally similar to the segment of the assessee under comparison. The segment of the company compared is turnkey contract and services. No information is available in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking an adjustment under section 92CA (3) of the Act without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of section 92C of the Act. 2. the AO/TPO has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ( the Rules ), and modifying the same for the determination of the Arm s Length Price ( ALP ) of the Appellant s international transactions to hold that the same are not at arm s length. 3. The AO/ TPO has erred in: a) Using data for a single year instead of multiple year data; and (b) Determining the arm s length margins / prices using data pertaining only to financial Year ( FY ) 2007-08 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements. 4 The AO/TPO has erred by rejecting certain comparable companies identified by the Appellant using Employee cost greater than 25 percent of total revenue as a comparability criterion. 5 The AO/TPO has erred by rejecting certain co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices, professional and maintenance services to its Associated Enterprises (AEs) in the field of telecommunication network including voicemail systems, Billings and other related hardware etc. The assessee filed its return of income electronically on 30/09/2008 declaring loss of ₹ 6,44,33,875/-, which was further revised to loss of ₹ 7,28,17,072/- on 31/03/2010. The case of the assessee was selected for scrutiny under Computerized Assisted Selection of Scrutiny (CASS) and notice under section 143(2) of the Act was issued and complied with. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act for determining the Arm s Length Price (ALP) under section 92CA(3) of the Act in respect of the International Transactions entered into by the assessee. According to the transfer pricing study, report submitted by the assessee under section 92E of the Act, following services were provided by the assessee to its AE: Particulars Sales and postsales support services Software development services Professional services Maintenance services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In compliance to the direction of the DRP vide order dated 06/09/2012, the TPO recomputed the adjustment as under: 1. software development service ₹ 2, 74, 97, 397/- 2. sales and post sales support service ₹ 2, 24, 83, 680/- total ₹ 4, 99, 81, 078/- 2.4 After taking into account the adjustment to ALP, as directed by the DRP, the Assessing Officer passed the impugned order under section 144C read with section 143(3) of the Act on 23/10/2012. Aggrieved with the adjustment to the ALP sustained by the DRP, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 2.5 Before us, the Ld. counsel of the assessee argued only issue of exclusion/inclusion of comparables in respect of both segments and issue of claim for working capital adjustment in software development segment. The grounds No. 4 to 9 are in respect of exclusion/inclusion of comparables and ground No. 11 is in respect of claim of working capital adjustment. As other grounds were not pressed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Mercer consulting (India) private limited in ITA No. 966/Del/2014 and submitted that the assessee should be allowed the working capital adjustment in the software segment also. On the other hand, Ld. CITDR relied on the finding of the DRP. 3.2 We have heard the rival submission of the parties and perused the relevant material on record. The TPO in para-16.2 held that during the proceedings the figures given by the taxpayer like sundry debtor, sundry creditors, did not match with the financials, hence working capital adjustment was not given to the assessee. As far as finding of the TPO on the issue in dispute is concerned, we are agreed with the Ld. counsel of the assessee that if the TPO was agreed in principle for allowing the working capital adjustment, then he should not have denied the same merely on the ground of non-matching of working capital adjustment with financials. He could have allowed an opportunity to the assessee and get the financial corrected. Further, the DRP observed that the issue of working capital would be relevant when there is a situation of inventory remaining tied up or receivable is being held up. The DRP held that though situation might not be so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles, it would mean that is allowing its customers a relatively longer period to pay their amount which will result into higher interest cost and the resultant less profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it to pay back its suppliers which lowers the interest cost and accelerates profits. To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two other side comparables cases at par with each other. We are unable to comprehend any reason or rhyme to restrict the grant of working capital adjustment only in the case of manufacturers or traders. What is true for these categories of businesses is fully true for a service provider as well. It is a different matter that in the case of service provider, no working capital adjustment would be required towards higher or lower inventory, but the same may be warranted in respect of higher or lower trade receivables/payables. Since the authorities below have rejected the assessee s contention for grant of working capital adjustment at the threshold, which in our considered opinion is not correct, we set a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us relates to selection of comparables in both the segment. First we take up the software development segment. Selection of comparables for software development segment 4.1 The assessee chosen 16 comparables, out of which 12 comparables were rejected by the TPO, leaving the following 4 comparables which were accepted by the TPO : 1. Lanco Global Ltd. 2. Quintegra Solutions Ltd. 3. RS Software ( India) Ltd. 4. Sasken Communication Technologies Ltd. 4.1.1 The TPO included 15 comparables to the above list of four comparables chosen by the assessee. The final list of comparables considered by the TPO is as under: 4.1.2 The grievance of the assessee is against the inclusion of following five companies in the final list of comparables selected by the TPO: (i) Awani Cimcon Technologies Ltd (ii) celestial labs Ltd (iii) Infosys Ltd (iv) KALS Information Systems Ltd(segmental) and (v) Wipro Ltd. 4.2 Before proceeding further on the issue of accepting/rejecting of the above comparables, we would like to consider submission of both parties in respect of the profile and nature of services provided by the assessee. The learned counsel su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovider. Accordingly, the segment in consideration is characterized at software development services. 4.3 In view of the above discussion on profile of the assessee, now we re discussing rejecting or accepting of comparables chosen by the TPO and objected by the assessee: (1) AvaniCimcon Technologies Ltd 4.3.1 The TPO included this company on the ground that it was engaged into software development and consulting with major focus on the travel and insurance industry. Before the TPO, The assessee objected to its inclusion on account of functional dissimilarity and use of information obtained under section 133 (6) of the Act by the TPO, but the same were rejected by the TPO. The DRP also rejected the claim of the assessee by upholding the action of the TPO. 4.3.2 Before us, the learned counsel of the assessee referred to pages 419 to 422 of the Annual Report compilation and submitted that said company is not comparable with the assessee due to following reasons: (i) that AvaniCimcon is functionally dissimilar to the assessee, as it was engaged in a wide array of services including development of software products and back-office support services and no separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been downloaded and placed before us and except for these documents, no other reports, etc. constituting part of Annual report for the year ending 31.3.2008, are available. However, our attention was drawn towards certain Tribunal orders which have considered the functional profile of this company on the ITA No.5799/Del/2012 basis of information available on its website. First is Tribunal order in Agnity India Technologies Pvt. Ltd. Vs. DCIT (ITA No.6485/Del/2012). Vide its order dated 20.9.2013, the tribunal considered the functional profile of this company by noticing it to be a Product company owning software products like Dxchange, Travel Solutions, Insurance Solutions, Customer Appreciation, etc. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Net Hawk Networks India Pvt. Ltd. Vs. ITO (ITA No.7633/N/2012). Vide its order dated 6 11.2013, the Tribunal for the assessment year 2008-09 has noticed AvaniCimcon Ltd., to be a Product based company and not providing software development services. No contrary material has been placed before us by the Id. DR to show the functional profile of this company matching with the assessee. When contrasted with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable to the assessee which is also albeit in the software development, but doing it on contract basis without having any IP rights in the software developed by it. (iii) That in following decisions as well, the celestial labs was directed to be excluded for similar reasoning: Bearing Point Business Consulting Private Ltd. (ITA No. 1124/Ban/2011) 3DPLM Software Solutions (ITA No. 1303/BAN/2012 ) NXP Semiconductors Indian Private Ltd. (ITA No. 1174/BAN/2011) 4.3.7 On the other hand, the Ld. CIT(DR) submitted that this company was considered as one of the comparables in preceding year, thus the arguments of the learned counsel of the assessee need to be revisited by the TPO/AO and, therefore, matter needs to be restored back to the TPO/AO. 4.3.8 We have considered the rival submission of the parties and perused the relevant material on record. On perusal of the Annual Report of the company available on page 423 to page 464 of the Annual Report compilation of the assessee, we find that the company was engaged in the field of IT/bio informatics, biotechnology and consultancy work and offered enterprise resource planning solutions, Data warehousing, business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, accordingly, we direct for elimination of this company from the list of comparables. (3.) Infosys Ltd. 4.3.11 The TPO selected the company as comparable, as according to him, it passed all filters applied and was engaged in software development activities. The ld. DRP confirmed the action. Before us, the Ld. counsel of the assessee submitted to exclude the company from the list of the comparables due to following reasons: (i) that the company is engaged in wide range of services from package evaluation and infrastructure management to development of software products. (ii) that the company does not have adequate segmentation of revenue between services and products, in addition to the fact that such services are widely varied and dissimilar to those rendered by the assessee. The only segmental information is on the basis of geographical/industry segment. (iii) that the company is an industry leader and is significantly large scale of operations (turnover of ₹ 15, 648 crores as against the appellant s turnover of ₹ 22 crores) . (iv) that the company has significant brand value and intangible assets as against the assessee which is a capti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The Hon ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon ble Delhi High Court held Infosys Ltd. to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the extant assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt in our mind that Infosys Technologies Ltd. Is incomparable to the assessee company. Respectfully, following the judgment of the Hon ble jurisdictional High Court in Agnity India (supra), we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Summary of Significant Accounting Policies (a) .. (b) Revenue Recognition: the Company derives its revenues primarily from software services and software products. Revenue from time and material contract is recognized on the basis of software developed and billed in accordance with the terms of the contract. Revenue from the fixed price contract is recognized on the completion of milestones in contracts, under the percentage of completion method. Income from training is recognized on time proportion basis. 4.3.18 Further we find that in the case of Sun Life India service centre private limited (supra) also the revenue under application software segment of comparable company has been held to be consisted of from development of software as well as from sale of software products. The relevant part of the finding of the Tribunal is reproduced as under: We have gone through the Annual report of this company which is available at pages 24 onwards of the paper book. Schedule no. 16 comprising Notes to the Financial Statements gives background of this company to be engaged in development of software and software products since its incept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate Ltd. (ITA No.5645/Del/2011) NXP Semiconductors India Private Ltd. (ITA No. 1174/BAN/2011) 4.3.21 The Ld. CIT(DR), on the other hand, relied on the order of the lower authorities and submitted that the like Infosys , the comparable was broadly similar in functions to the assessee and therefore it should be accepted as a comparable. 4.3.22 We have heard the rival submissions and perused the relevant material on record. We find from the Annual Report of the comparable company which is placed on page 516 to 612 of the Annual Report compilation, that the revenue consist of sales and services and no separate segmental results for software development services are available. On perusal of the page 560 of the Annual Report compilation, we find that the company was engaged in research and development and activities having focus to strengthen the portfolio of Centre of Excellence (COE) and innovation projects and part of this focus, over 600 people were engaged. On perusal of page 561 of the Annual Report compilation, we find that the company has been granted 40 registered patent and 62 pending applications. As against the intellectual property rights owned by the company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost sales support segment. The assessee chosen three comparables, which the TPO rejected and The TPO included following five comparable to the set of comparables for this segment: i. Alphageo India Ltd. ii. Mahindra Consulting Engineers Ltd. iii. Kirloskar Consultants Ltd. iv. Stup Consultants Private Ltd. v. Smac Limited. 5.1 In respect of profile and nature of the activities of the assessee in this segment, the Ld. counsel submitted as under: 37. As per TP documentation maintained by the appellant, it is stated as: Sales support services includes services related to promotion and marketing of Comverse group s products and identifying potential customers in India. Post-sale support services include installation and test runs, integrating the equipment with existing network, post commissioning maintenance including warranty, extended warranty and post warranty services on products sold directly by Comverse s AEs to customers in India. 38. The appellant is remunerated on a cost-plus basis by its AE for such services and it carries out limited and routine functions and mitigated from all risks. Any intangible/technical know-how of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: Alphaoeo India Limited: The Ld. counsel submitted that above company should be excluded from the list of comparable due to following reasons: - It is an integrated seismic service provider and offers various topographical survey, tape transcription, digitalization, seismic sections and well logs into various formats for oil exploration companies. - It uses advanced technologies such as state-of-art software for 2D and 3D seismic data interpretations, distortion free 24 sensors and deploys the latest seismic data analysis with advanced interactive workstations. - It had a huge asset base of INR 705 crore (majority of which is seismic equipment), with substantial expenses on survey and drilling. - The Hon ble ITAT excluded in the case of Syngenta Biosciences Private Limited (ITA No 1083/MUM/2015) by holding that it is engaged in seismic research activity including 3D data seismic data acquisition Mahindra Consulting Engineers Limited Mahindra Consulting Engineers Limited: - It is engaged in infrastructure consultancy services and provides services in multidisciplinary projects (such as special economic zones, water supply and sewerage, solid waste ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elatively less-complex services (such as installation, after-sales services). A product design engineer employed by Apple could not be said to perform similar functions and activity as an after-sales technician for Apple products. 5.7 We heard rival submissions of the parties and perused the relevant material on record. On perusal of the page 7, of the compilation of the annual reports, we find that M/s Alphageo India Ltd was engaged in providing 2D and 3D seismic services for design and preplanning of 2-D and 3-D surveys, seismic data acquisition, seismic data processing/reprocessing/special processing, seismic data interpretation, generation ,evolution and ranking of prospectus, Rservoir data acquisition, Reservoir analysis etc. This company has also been held as engaged in seismic research activity by the Tribunal in the case of Syngenta Bioscience private limited (supra). On perusal of page 119 of the compilation of the annual reports, we find that M/s Mahindra consulting Engineers Ltd is engaged in infrastructure sector by providing consultancy services in the areas of special economic zone, water supply and sewerage, solid waste management, urban infrastructure, Agri and H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd post sales support services. In view of our discussion above, we are of the considered opinion that above five companies chosen by the TPO, cannot be selected as comparables. Accordingly, we direct the AO/TPO to exclude above five companies from the list of comparables for sale and post sale support segment of the assessee. 5.9 In respect of the comparables included by the assessee and rejected by the TPO, the assessee challenged the action of the TPO in respect of company M/s Himachal Futuristic Communication Ltd. The company was selected as a comparable by the assessee but was rejected by the TPO on functional dissimilarity. 5.10 Before us, the Ld. counsel submitted that the company was engaged in activities similar to the assessee. He further submitted that in the immediately preceding year i.e. A Y 2007-08 the company was chosen as comparable by the TPO and there was no change in the functional profile of either the assessee or the company and thus there was no rationale behind TPO s exclusion of this company from the list of comparables. 5.11 Before us, Ld. CIT(DR) submitted that the TPO rejected the company as it was engaged in providing telecom solutions and prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company. However, we do not agree with the contention of the assessee that the company segment of turnkey contract service was functionally similar to the segment of the assessee under comparison. The segment of the company compared is turnkey contract and services. No information is available in respect of the turnkey contract executed by the company and, therefore, the result of turnkey contract and service segment are not comparable with the sales and post sale support services in respect of software products. Normally, the turnkey contracts include executing of all component of contract contracts, i.e., from start to the end including civil, electrical, transportation etc. kind of work. In the Annual Report of the company, no information in respect of turnkey contract executed by the company, is available. In our opinion, the segment of the company inclusive of turnkey contract, cannot be compared functionally with the sales and post sale support segment of the assessee. Further, the argument of the learned counsel that it was considered as comparable in preceding year also cannot be accepted because the functional comparability has to be made in the current year only a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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