9911796707
TMI Blog2018 (4) TMI 878X X X X Extracts X X X X X X X X Extracts X X X X ..... r passed under section 143(3) of the Income-tax Act, 1961 ('the Act'), by holding that the international related party transaction of the Appellant with respect to the provision of software development services do not satisfy the arm's length principle as envisaged under the Act. In doing so the Ld. CIT(A) has erred: 2.1 by not appreciating the fact that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2.2 by disregarding the economic analysis conducted by the Appellant to determine the Arm's Length price ('ALP') of the international transaction pertaining to software development services in compliance with section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') in the Transfer Pricing ('TP') documentation; 2.3 by disregarding multiple year/prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2008-09) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 2.4 by rejecting comparability analysis in the TP documentation/ Appellant's fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia while computing an adjustment to the transfer price of the international transaction entered into by the Appellant. 2.12 The Ld. CIT(A)/ AO has erred by not limiting the amount of adjustment to the lower end of the arithmetic mean as envisaged under second proviso to section 92C sub section 2 of the Act. 2.13 by ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 3. That the learned AO, on the facts and in the circumstances of the case and in law, has erred in 4. That given the facts and circumstances of the case and in law, the Ld. CIT(A)/ AO has grossly erred in confirming the action of the Ld. AO of initiating penalty proceedings under section 27i(i)(c) of the Act. The above grounds and sub-grounds are independent, mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal, as may be considered necessary, either before or during the hearing of this appeal. 2.1 The grounds rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. The Transfer Pricing exercise does not obliterate the fundamental fact that the Branch Office and the Head Office together constitute a single entity. 1.3 Whether on the facts and in the circumstances of the case, the Ld CIT(A) has erred in not appreciating the fact that the true intention of legislature behind enshrining the deduction u/s 10A, as evident from subsection (3) thereof, was to bring in precious foreign exchange, which is not fulfilled in the present case, because the assessee being a foreign company is not retaining the sale proceeds in India except the tax on a fraction of the profit which is attributable to Indian branch of the foreign company. 1.4 Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in not appreciating the fact that in this case the Indian Branch Office has received in India only the remuneration fixed on man hour basis for preparation of software and not the actual sale proceeds of the software which had been sold by the Head Office. 1.5 Whether the Ld. CIT(A) has erred in inferring from the provisions of section 80IA(8) and 80IA(10), referentially made applicable in terms of subsection (7) of section 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot appreciating the fact that in Section 10A of the Act there is no provision akin to explanation 2 to Section 80HHC and therefore there is no concept of deemed export under the provisions of Section 10A of the I.T. Act. 2. Whether on the facts and in circumstances of the case, the Ld. CIT(A) has erred in directing the Assessing Officer/Transfer Pricing Officer (AO/TPO) to exclude M/s Bodhtree Consulting Ltd from the list of comparables for the purpose of benchmarking the International Transaction and computation of Arm's Length Price in relation to software development services. 2.1 Whether the action of Ld. CIT(A) in excluding M/ s Bodhtree Consulting Ltd from the list of comparables solely on the basis of abnormally high profits is erroneous and unsustainable in law, considering the settled position of law to the effect that no comparable can be excluded merely on the ground of abnormally higher profits, unless it is shown that such high profits were due to abnormal factors. 3. Whether on the facts and in circumstances of the case, the Ld. CIT(A) has erred in directing the Assessing Officer/Transfer Pricing Officer (AO/TPO) to include M/s Quintegra Solution Ltd in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffice in USA. Products delivered by Virage group consist of various software tools along with supporting files that contain design data for creating the requisite silicon IP (Memory or Logic elements). Since inception of India Branch Office in May 1999, the engineering site at India has been working on various following activities related to the IP products and platforms offered: * Software development in C, C++ and TCL/Tk on our Embedded-IT range of software tools. * Development of programs and files that constitute our Memory Compilers or Logic libraries. - EDA views in TCL/Tk programming language. - Programming files in appellant's proprietary format that describes the physical, functional and timing behavior of the Memory or Logic elements. All of the above files are developed on UNIX operating systems on Sun platforms or in the Windows NT environment. The created files are shipped overseas electronically via Internet." 3.1 For the year under consideration, the assessee filed its return of income on 24/09/2009, declaring total income of Rs. 1,05,08,672/-, after claiming deduction of Rs. 1,26,28,052/- under section 10A of the Income Tax Act, 1961 (in short ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Method (TNMM) as the most appropriate method and Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI). The assessee selected 16 companies as comparable and worked out average PLI of 11.64 percent, by using multiple year data as compared to PLI of the assessee of 7.53%. The margin of the assessee being in the +/- range of 5% as prescribed under section 92C(2) of the Act, the assessee concluded that the international transaction is at arm's length. The Ld. TPO observed that the assessee should have used current year data rather than multiple year data of comparables. The filter applied by the assessee was also not found appropriate by the Ld. TPO. The Ld. TPO after considering the submission of the assessee, selected 10 comparables with their average PLI of 30.86% using current year data, as under: S. No. Company Name OP/TC (%) 1. Bodhtree Consulting (standalone) 69.80 2. Cat Technologies (Standalone) 34.43 3. Goldstone Technologies (Seg) 10.28 4. Larsen & Turbo Infortech 21.33 5. Mindtree Ltd. 27.36 6. Persistent Systems Ltd. 37.77 7. Tata Elxsi Ltd. (Seg) 16.88 8. Thirdware 37.27 9. FCS Software Solutions Ltd. 43.35 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess outsourcing services, medical transcription services and infrastructure services and thus, it was not functionally comparable to the assessee. The Ld. TPO rejected objection of the assessee on the ground that majority of the income of the company is from software development and consulting. The Ld. CIT(A) accepted the finding of the Ld. TPO and retained the company as comparable. ii. Before us, the Ld. counsel of the assessee referred to page No. 40, 11, 36 of the Annual Report Compendium and submitted that the company derived its income from training, software development and medical transcription receipts. He also referred to page No. 12 of the Annual Report Compendium and submitted that the company has entered into field of job placement portal during the year under consideration and it was well-placed in the market as leading Human Resource (HR) BPO service provider. The Ld. counsel submitted that in view of the diversified business activity and no separate segment of software development services, the company could not be selected as comparable. The Ld. counsel also relied on the decision of the Tribunal in the case of Sun Life India service centre private limited vers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apparent that it not only includes revenues from Medical transcription and Training, but the major component of Rs. 8.49 crore is income from 'Software Development and Consulting Services.' It is reiterated that the segment under consideration is 'Software development and maintenance support services' and the assessee has a separate international transaction of 'Provision of advisory services' with the transacted value at Rs. 1.75 crore, whose ALP has been disjointedly determined by the TPO. When we come back to the revenues of CAT Technologies Ltd., it is seen that the major component of Rs. 8.49 crore is on account of 'Software development and consulting services'. Since the segment of the assessee under consideration is only 'Software development and maintenance support services' independent of 'Advisory services', it becomes manifest that a company rendering both the software development and also advisory services, cannot be considered as comparable on entity level with the assessee's separate segment of software development maintenance support services. Be that as it may, CAT Technologies Ltd., has also earned Medical transcription receipts of Rs. 83.74 lac an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also referred to pages 122, 125 and 145 of the Annual Report Compendium and submitted that company is functionally in different lines service which include business process management, cloud computing services, infrastructure management services, product engineering and mobility solutions, and on this ground also the company need to be excluded from the set of comparables. The Ld. counsel referred to page 145 of the Annual Report Compendium and submitted that two segment of R&D services and IT services have been reported but expenses of Rs. 226,78,00,043/- have not been allocated and, thus, segment results being distorted, the company cannot be compared at the segment level also. iv. In support of the contention for rejecting the company as comparable, the Ld. counsel also relied on the decision of the Hon'ble Andhra Pradesh High Court in ITA No. 233 of 2014 in the case of CIT-II Vs. Intoto Software (I) Pvt. Ltd. v. The Ld. DR on the other hand relying on the order of the Ld. TPO and the Ld. CIT(A) submitted that the Ld. Counsel of the assessee has failed to demonstrate the effect of extraordinary event of acquisition on the profitability of the company. He submitted that reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t decrease in profit before interest depredation and tax, during the year under consideration was mainly due to increase in administrative and other expenses, on account of exchange loss. Thus, in our opinion, the event of acquisition has not increased the profit of the company abnormally, which may become one of the reason for its exclusion from the set of comparables. viii. The 2nd ground for exclusion of the comparable has been claimed as diversified functions of the company in the area of R&D services and there are unallocated expenses of more than Rs. 226 crores. In this regard, we find it relevant to reproduce notes to the account, available on page 145 of the Annual Report Compendium, which reads as under: "The Company's operations predominantly relate to providing IT services in two primary business segments viz. IT Services and R&D Services. The company considers the business segment as the primary segment and geographical segment based on the location of customers as the secondary segment." ix. In view of the above disclosure in the Annual Report of the company, it is evident that operations of IT services have been claimed related to business segments of IT servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct was in respect of software product development services to independent software vendors and thus there is no sale of software product as such. The Ld. counsel failed to brought any material before us, contrary to the above finding of the Ld. TPO. Regarding the claim of the Ld. counsel that revenue consist of licensing of product, we find from page 273 of the Annual Report Compendium that in notes to account only method of revenue recognition in respect of revenue from licensing a product is mentioned, which is recognized on delivery of products and there is no mention of any revenue earned during the year from licensing of products. In view of aforesaid discussion, we are of the opinion that the company is functionally similar to the assessee and accordingly, we direct the Ld. TPO/AO to retain the company as comparable. 4. Thirdware Solutions Ltd: i. Before the Ld. TPO, the assessee made a claim that the company derives revenue from sources such as sale of license, software services, export from SEZ unit, revenue from subscriptions etc and thus cannot be compared at entity level. According to the Ld. TPO, the SEZ unit also exported software services and, thus, dominantly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant material on record. It is observed from the Annual Report of this company that apart from revenue from 'Software services', this company has also earned revenue from 'Sales.' The TPO has considered entity level figures of this company for comparison. In view of the joining of the revenue from sales with the revenue from software services, this company ceases to be comparable with the assessee's 'Software development and maintenance services' segment. Here, it is pertinent to mention that this company was considered by the TPO as comparable in the immediately preceding year as well. The Tribunal vide its aforenoted order, has held it to be incomparable. Since no distinguishing features of the functional profile of this company and the assessee for the current year vis-a-vis the preceding year have been brought to our notice, following the precedent, we order for the removal of this company from e list of comparables." vi. Thus, in view of non-availability of separate segment of software development services, the company is held to be functionality disimilar, and accordingly, the Learned TPO/AO is directed to exclude the company from set of comparables. 5. Tata El ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company both are enaged developing chipset software development and therefore the company is comparable at segment level. iv. We have heard the rival submission and perused the relevant metal on record. We note that the Ld. TPO has compared the company at segment level. On perusal of the 361 of the Annual Report Compendium, we find that companies operation are broken into two business segments, i.e., (i) software development and services and; (ii) system integration and support. Further, we find that on page 348 of the Annual Report Compendium, details of activities under software development and service segment and system integration and support segment are given. Under software development and service segment, services of product design, innovation designing engineering service and visual computing lab are reported. Under the visual computing labs following activities carried by the assessee are reported: "Visual Computing Labs: VCL delivers 3D computer graphics, animation and special effects in the pre-production, production and post-production of content for the film, television, gaming and advertising industry. During the year, VCL successfully completed India' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar to software development services, the company cannot be compared functionally with the assessee. The Learned counsel also drawn our attention to page 74 of the Annual Report Compendium, which is profit and loss account of the company and submitted that revenue of the company include software development service and products, which cannot be compared with a software development revenue of the assessee. Alternatively, the Ld. counsel submitted that in case the company is retained as comparable, then it's PLI need to be corrected. According to the Ld. counsel, the correct PLI of the company is 20.70% as against worked out by the Ld. TPO as 21.33%. iii. On the contrary, the Learned DR submitted that during the year under consideration there is no revenue from consulting service and only revenue shown is from software development services and product. The Learned DR referred to page 93 of the Compendium of the Annual Report and submitted that the revenue earned is from software development services in the field of financial, manufacturing and telecom and no revenue from sale of product is reported. The Learned counsel also submitted that expenses of the assessee are also related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the set of comparables. 6.1 The Ld. TPO held that the company was having only segment of software development and engaged in providing solutions in the field of sharing data management, data warehousing etc., thus, he retained the company as comparable to the assessee. According to the Ld. CIT(A), the Ld. TPO has not considered extraordinary growth in the margin of the company. The Ld. CIT(A) observed that company has a growth of 353% in its net profit for the financial year 2008-09 and there is very high volatility in the profit of the company and, therefore, he directed to exclude the company from the final set of comparables. 6.2 The Ld. DR submitted that the ld. CIT(A) has not given any basis or referred the Annual Report for concluding that there is 300% growth in the profit and volatility in the profit of the company. According to him, increase in profit in one year cannot be basis for excluding the company, if it is otherwise functionally similar to the assessee. 6.3 The Learned counsel of the assessee, on the other hand, filed pages No. 12 and 25 of the annual report of the company and submitted that the company has recognized its revenue from software development on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inclusion of the company M/s Quintegra solutions Ltd as comparable. 7.1 The Learned TPO excluded the company from the set of comparables on the ground that it is functionally different company. Before the ld. CIT(A) the assessee submitted that the company is engaged in the provision of IT and software development services. The Ld. CIT(A) accepted the contention of the assessee and directed to include as comparable. 7.2 Before us, the Ld. DR submitted that page 40 of the Annual Report, the activity of the company during the year under consideration included computer software development and support services, computer software products and other information technology related services. He also referred to the copyrights of Rs. 2,71,75,655/- held by the company to show that company has several products which it customizes for the clients and thus the company is functionally dissimilar to the assessee at entity level. 7.3 On the contrary, the Ld. counsel referred to page 40 of the Annual Report and submitted that the reporting as stated by the Ld. DR is in respect of 'Quintegra solutions Ltd., UK' and not in respect of Quintegra solutions Ltd, India. He referred to page 21 of the An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparables and compute adjustments to the value of international transaction carried out by the assessee, if required so, in accordance with law. 9. Now, we take up the ground No.2.8 of the appeal of the assessee, challenging denial of benefit of working capital adjustment 9.1 The Learned counsel before us submitted that in the immediately preceding year, the Tribunal has restored the issue of working capital adjustment to the file of the Learned TPO/AO. 9.2 The Ld. DR could not controvert this finding of the Tribunal and did not object to restoring the matter to the Learned TPO/AO. 9.3 We have heard the rival submission of the parties and perused the material on record particularly the order of the Tribunal in ITA No. 6918/Del/2014 in the case of the assessee for assessment year 2008-09. The relevant finding of the Tribunal on the issue of working capital adjustment in margin of comparables is reproduced as under: "9. Considering the submission advanced and the precedent relied upon in view of the above, we are of the view that it would be appropriate in the peculiar facts and circumstances restore the issue back to the TPO. While so restoring it is made clear that the on ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
