TMI Blog2016 (12) TMI 1655X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the AO to decide afresh in accordance with the law laid down by the Hon’ble jurisdictional High Court and the directions issued herein before. - ITA No.5848/Del./2011 - - - Dated:- 23-12-2016 - SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER and SHRI KULDIP SINGH, JUDICIAL MEMBER For The Assessee : Shri Rajan Sachdev, CA For The Revenue : Shri T.M. Shiva Kumar, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : The Appellant, UT Starcom Inc. (India Branch) (hereinafter referred to as the assessee company ) by filing the present appeal sought to set aside the impugned order dated 29.09.2011, passed by the AO under section 144C (1) read with section 143 (3) of the Income-tax Act, 1961 (for short the Act ) qua the assessment year 2007-08 in consonance with the orders passed by the ld. DRP/TPO on the concise grounds inter alia that :- On the facts and in the circumstances of the case and in law, the learned Additional Director of Income Tax, Transfer Pricing Officer - 11(4), New Delhi ( Ld. TPO ) and the learned Deputy Director of Income-tax, Circle 2(2), International Tax, New Delhi ( Ld. AO ) under directions issued by the Hon'ble Dispute Resolution P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g appropriate adjustment(s) in accordance with the provisions of rule 1 OB of the Rules. 1.5 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in making in adjustment to the arm's length price of international transactions without giving benefit of the proviso to section 92C(2) of the Act. 1.6 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not following principle of consistency 1.7 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO in making the adjustment without demonstrating that the Appellant had any motive to shift profits outside of India. 1.8 On the facts and in the circumstances of the case and in law, the Ld. TPO followed an unjustified approach by issuing two show-cause notices without providing appropriate responses against the replies filed by the Appellant in response to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings u/s 271 (1 )(c) of the Act as per the impugned order consequential to the above disallowances. The above grounds are notwithstanding and without prejudice to each other. The objections embodied in the above grounds are mutually exclusive. 2. Assessee company, M/s. UT Starcom Inc. (India Branch), USA (UTS US), being global leader in manufacture, integration and support of IP based, end-to-end networking and telecommunication solutions, set up its branch office in India in December 2001, to enable UTS US to offer its products and services in the Indian market. The assessee provides software development services and marketing support and IT Enables customer support services to UTS US Customers in Asia-Pacific region. 3. Assessee company entered into international transactions, hereinafter mentioned, and consequently the matter was referred to the TPO under section 92CA (1) of the Act for determination of the Arms Length Price (ALP) :- S.No. Description of transaction Method Value (in Rs.) 1. Software development services TNMM 10,69,48,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of working capital employed by the assessee vis- -vis comparable companies working capital adjustment is required in this case. TPO in order to determine the liability of working capital adjustment (WCA) examined major comparables of the assessee and came to the conclusion that the companies are efficient profit maximizer but poor management may be the reason and as such, disallowed the working capital adjustment. Similarly, assessee also claimed risk adjustment while computing the margin on the ground that assessee is a risk free entity and operates in a controlled business atmosphere and consequently claimed the risk adjustment borne by comparables vis- -vis assessee. So, the TPO computed the arms length price of international transactions qua software development services segment at ₹ 87,71,509/- and IT Enabled Customer Support Services (ITES) segment at ₹ 47,47,215/- and directed the AO to enhance the income of the assessee by ₹ 1,35,18,724/- 7. Assessee carried the matter by raising the objections before the ld. DRP by way of filing the appeals who has affirmed the order passed by AO/TPO. Feeling aggrieved with the order passed by TPO/DRP/AO, assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4-ITAT-DEL, TNT India P Ltd 2011-TII-39-ITAT BANG-TP/etcl. The AO/TPO is, therefore, directed to grant working capital adjustment based on the OECD formula by taking 10.25% as PLR as this is the rate charged by the State Bank of India which is the leading bank in India on working capital loans. The aforesaid rates should, therefore, be adopted. However, for this purpose, the assessee shall have to provide reasonably accurate information about payables and receivables in both the segments i.e. SWD and ITES. 10. Bare perusal of the findings returned by ld. DRP on this ground goes to prove that the ld. DRP has conceded the contentions raised by the assessee but with a rider that for this purpose, the assessee shall have to provide reasonably accurate information about payables and receivables in both the segments i.e. Software Development Services (SDS) and ITES. 11. Ld. AR for the assessee contended that TPO has erred in computing working capital adjustment margin of comparable companies for software development services and ITES segments of the assessee by considering balances of sundry debtors, creditors and inventory at consolidated entity level i.e. assessee s India branch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng factor for inclusion or exclusion of any comparable company. 14. However, the issue as to the comparability of Infosys Technologies Limited as chosen by the TPO for benchmarking the international transactions of SDS segment of the assessee with a similarly placed company has been determined by Hon ble Delhi High Court in case cited as CIT vs. Agnity India Technologies Pvt. Ltd. (ITA 1204/2011 dated July 10, 2013) (order available at page pages 223 to 228 of the compendium of case laws). For ready perusal, operative part of the aforesaid judgment is reproduced as under:- 5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent-assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondentassessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same: Basic Particular Infosys Technologies Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted. 7. Learned counsel for the appellant Revenue during the course of hearing, drew our attention to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable when the wage and sale ratio was between 30% to 60%. By applying this filter, several companies were excluded. This is correct as it is recorded in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L T Infotech Ltd. and Infosys Technologies as comparable to work out the mean. 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L T Infotech Ltd. which gives us the figure of 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the compendium of case laws). 17. Comparability of KALS with Global Logic India Pvt. Limited has been examined by the coordinate Bench, a similarly placed company which is also into the software development as in the case of assessee company, and held to be not a comparable company. When we peruse TP study available at page 47 of the paper book-1, it is not in dispute that the assessee company is only into cutting and testing of software development in India whereas the core design is made in US and intangibles are created in US. Whereas, on the other hand, KALS has undisputedly drawn its income from software product and is engaged in executing end to end project through the entire value chain of software development life cycle and this issue has been determined by the coordinate Bench in the order (supra). 18. Moreover, when KALS has not prepared segment-wise data to prove its customized software development services and sale of proprietary products, it is difficult to fathom as to what extent the overall profit of this company have been impacted by the revenue from software products. So, we are of the considered view that KALS is also not a valid comparable, hence order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company which is simply providing software related services. So, by following the order passed by the coordinate Bench, we are of the considered view that since the TEL software development and services segment consist of three sub-segments, namely, Embedded Product Design Services (Design and Development of Hardware and Software), Industrial Design and Engineering (Mechanical Design with a focus on Industrial Design) and Animation and Visual Effects (Animation and Special Effects), the same cannot be compared with assessee company which is simply providing software development services without creating any intangible. So, we order to exclude this segment from the list of comparables. ITES SEGMENT VISHAL INFORMATION TECHNOLOGIES LIMITED (NOW KNOWN AS CORAL HUB LIMITED) (VITL) 23. Assessee sought exclusion of this comparable on the grounds inter alia that this comparable company is outsourced substantial part of its business to the other parties whereas the assessee company has used its own sources, infrastructure and manpower and relied upon the judgment cited as Rampgreen Solutions Pvt. Ltd. vs. CIT (ITA 102/2015 dated August 10, 2015) (order avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year under consideration; that Directors/management of the company were involved in fraud due to serious allegations of financial irregularities and relied upon the orders cited as ITO vs. CRM Services India (P) Ltd. (ITA No.4068/Del/2009 4769/Del/2010 dated June306, 2011) (order available at page pages 158 to 169 of the compendium of case laws) , Calibrated Healthcare Systems India Pvt. Limited vs. ACIT (ITA No.5271/Del/2012 dated December 4, 2014) (order available at page pages 191 to 200 of the compendium of case laws) and Avaya India (P) Ltd. vs. Addl.CIT (ITA No.5528/Del/2011 dated September 18, 2015) (order available at page pages 201 to 208 of the compendium of case laws) . 27. On the other hand, ld. DR opposed the exclusion on the ground that the allegations of fraud against both these companies were leveled way back in 1980 and mid-1990 and acquisition of Maple eSolutions Ltd. by Triton Corporation Limited has no effect on the profitability. 28. However, we are of the considered view that both the aforesaid companies have already been examined for comparability by the Tribunal in aforesaid judgments. ITAT, Delhi Bench B , Delhi in CRM Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, ld. DR relied upon the order passed by ld. DRP/AO. 33. Undisputedly, the revenue has been extending the benefit of section 10A to the assessee company since AY 2003-04 upto AY 2006-07 and business model of the assessee company has not been changed qua AYs 2007-08 and 2008-09. 34. More so, the issue in controversy has been answered in favour of the assessee by the Hon ble jurisdictional High Court in DDIT vs. Virage Logic International (supra) in the similar set of facts and circumstances, wherein following questions of law were framed : (i) Whether the transfer of computer software by the Indian branch to the head office can be said to be sale to the head office out of India? (ii) Whether the assessee is entitled to claim benefit of Section 10A of the Income Tax Act, 1961, as the software is developed by the branch as per the requirement of Head Office and not sold to any third party? 35. Operative part of the judgment in DDIT vs. Virage Logic International (supra) is reproduced for ready perusal as under :- 11. The decision in Moser Baer (supra) specifically dealt with the ITAT s logic and reasoning in the present case. There the Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2007, 1249/2009 and 173/2016 are, accordingly, dismissed. It is clarified, however, that the AO is at liberty to give tax effect as a consequence of the interpretation adopted by this Court. The ratio of the judgment in Virage Logic International (supra) is that the transfer of computer software, by the Indian branch to the Head Office is not sale, having been developed as per requirement of Head Office, and not being sold to third party and as such entitled for the benefit of section 10A of the Act. 36. So following the law laid down by Hon ble High Court in DDIT vs. Virage Logic International (supra), we are of the considered view that since assessee company has exported computer software from India to its Head Office in US as per its requirement and not sold to any third party, it is entitled to exemption u/s 10A, so AO / DRP have erred in denying the benefit of section 10A to the assessee. So, the matter is restored to the AO to decide afresh in accordance with the law laid down by the Hon ble jurisdictional High Court and the directions issued herein before. So, Grounds No.2.1, 2.2, 2.3, 2.4, 2.5, 2.6 are determined in favour of the assessee. 37. Ground No.3 n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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