TMI Blog2018 (7) TMI 1748X X X X Extracts X X X X X X X X Extracts X X X X ..... 100% subsidiary of Daimler AG, Germany (DAG). It is stated that it is engaged in the business of providing research and development for automotive engineering to its holding company i.e. DAG. It is stated that the assessee-company is compensated on the cost + mark up of 10%. The return of income for the assessment year 2013-14 was filed electronically on 28/11/2013 declaring total income of ₹ 34,17,11,680/-. The assessee-company also reported the following international transactions in Form 3CEB: Particulars Received/Receivable Paid/Payable Method Used Provision of contract software R D services 3622659108 TNMM Reimbursement of expenses to AEs 146212588 Repairs and maintenance 4838023 Consultancy fees expenses 289330 Software license fees 41700439 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of the TPO. Margin adopted 20.45%. 6. Cigniti Technologies Ltd. 2.20 Software Testing Services Company. Further, the company is into Computer Programming, Consultancy and Related Activities. Functionally different, hence Rejected. 7. Evoke Technologies Private Limited 9.25 No data available in public domain. Hence rejected. 8. Goldstone Technologies Limited 1.77 The company fails the export revenue to sales filter. (51%) Hence rejected. 9. Helios Matheson Information Technology Limited 10.34 The financials are reported for year ending 30th September, 2013. Different year ending compared to that of the taxpayer and hence rejected. 10. Larsen Toubro Infotech Limited 19.91 Qualifies all the filters of the TPO, However, TPO has considered current year data only and the applicable PLI is 26.06%. 11. Lucid Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.11 No data Different year ending, hence rejected. 23. Thinksoft Global Services Limited 10.40 No data available for fy 12-13. Hence rejected. 24. Thirdware Solutions Limited 16.28 Company is engaged in implementation and consulting services of software based on ERP and Business Intelligence. Functionally different, hence Rejected. 25. Ybrant Digital Limited (Formerly known as LGS Global Limited) 10.06 No data available in public domain. Hence rejected. 26. Zylog Systems Limited 22.33 It fails employee cost filter of 25%. Employee benefit expenses/turnover works out to 24% only. Arithmetic mean 9.82 4. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for the purpose of benchmarking the above international transactions. The TPO, vide order dated 21/10/2016 passed u/s. 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Unadjusted average margin 20.90% 5. The TPO computed average profit margin of the comparables finally selected at 20.90% after giving working capital adjustment of 2.97%, adjusted margin of 17.93%. On the above basis, the TPO made the TP adjustment as follows: Arm s Length Mean Margin on cost 20.90% Less: Working Capital Adjustment 2.97% (As per Annex. B) Adjusted margin 17.93% Operating Cost 33738,87,658 Arm s Length Price (ALP) 39789,21,263 117.93% of Operating Cost Price Received 37031,30,161 Variation in Price 2757,91,102 3% of price received 1110,93,905 Shortfall being adjustment 2757,91,102 6. The AO passed draft assessment order u/s 143(3) r.w.s. 144C of the Act, dated 16/11/2016 incorpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the determination of ALP in connection with impugned international transaction and holding that Appellant s international transaction is not at arm s length; 5. Determination of the arm s length margin/price using only FY 2012-13 data which was not available to Appellant at the time of complying with transfer pricing documentation requirements is not as per law; 6. Companies comparable to Appellant were incorrectly rejected by applying following quantitative and qualitative filters: ( a) Companies having employee cost less than 25% of turnover; ( b) Companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months); ( c) Companies whose export earnings were less than 75% of the sales; and ( d) Companies hav ing turnover less than INR 1 crore, without applying an upper turnover limit; 7. Information obtained under section 133(6) was applied inconsistently and unjustly to cherry pick companies as comparables/justify conclusions. 8. Companies have been accepted or rejected by applying unreasonable comparability criteria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.l is general in nature and do not require adjudication. 13. Ground No.2 challenges the finding of the TPO as confirmed by the Hon ble DRP applying TNMM as the most appropriate method. This issue is covered against the assessee-company in the assessee s own case for assessment year 2008-09 in Mercedes Benz Research Development India (P.) Ltd. v. Asstt. CIT 2016 (3) TMI 1114 wherein it has been held as under: 5.4 We have considered the rival contentions and perused the details placed on record. As stated by the ld. counsel, the issue of selecting the most appropriate method in the earlier two years has been set aside to the TPO. For the AY 2006-07, the same was done by way of Misc. Application and in A.Y. 2007-08, consequent to earlier year s order, the Bench has set aside the issue again. Without prejudice to the same, the Bench has also decided the same under TNMM by excluding certain comparables and given directions in case TNMM is accepted as most appropriate method. The ld. counsel, however, submitted that deciding most appropriate method is required as the contentions of the assessee and department have already been on record. We have considered this conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nversion generally done at the prevailing rate of USD or foreign currency involved. Therefore, the basic concept is the margin would be about 5%. In case of any foreign exchange gain, this could increase the margin to that extent. In case of foreign exchange loss on the USD/foreign currency quoted by the assessee, then the margin would come down to that extent. However, as seen in this case, the margin without foreign exchange gain itself is less than 5%. Therefore, in the absence of correct cost structure and billing procedure, it is very difficult to accept the Cost Plus Method and analyse the issue. 5.7 The next contention of the assessee is with reference to CUP method. The assessee states in the Annexure III to 3CEB report that there are no internal comparables within the group as entire services of assessee are bought back by AE. Offshore software development work by other companies may represent external comparables. However, data in respect of the same which is available in terms of Euros per hour is not comparable without making suitable adjustments to the differences in the nature and terms of contract/transactions . As necessary information required for these adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, the ground of appeal raised by the assessee is dismissed. 14. Ground Nos. 3 to 9 and the additional grounds of appeal Nos. 14 to 16 challenge exclusion of the following comparables by TPO as confirmed by the Hon ble DRP. 14. The learned AO/TPO and Hon ble DRP erred in accepting Persistent Systems Limited as comparable company by applying unreasonable comparability criteria. 15. The learned AO/TPO and Hon ble DRP erred in rejecting the following comparable companies by applying unreasonable comparability criteria: (a) Akshay Software Technologies Limited, (b) Cat Technologies Limited, (c) Caliber Point Business Solutions Limited (Segmental), (d) Helios Matheson Information Technology Limited, (e) R Systems International Limited (Segmental), (f) Cigniti Technologies Limited, (g) Evoke Technologies Private limited. (h) Thinksoft Global Services Limited. (i) Lucid Software Limited. (j) Sasken Communications and Technologies Limited (Segmental). (k) Kals Information Systems Limited and (l) Spry Resources India Private Limited 16. Larsen Toubro Infotech Limited and CG-VAK Software and Exports Limited (Segmental) were chosen as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The company owns intellectual properties. iv. Company is involved in providing Outsourced Product Development ( OPD ) services. v. Company has differentiated OPD business from software development services. vi. Company is predominantly involved in providing software products, services and technology innovation covering full life cycle of products to its customers. However the primary reporting segments are based upon review of market and business dynamics based on risk and return and accordingly three segments namely (a) Telecom and Wireless, (b) Life science and healthcare and (c) Infrastructure and Systems, were identified. Accordingly there is no breakup available for differet kind of services provided by the company. vii. The company owns huge intangible assets. viii. The company has inorganic development plans in relation to third party acquisition and development of IP s. ix. The company is into in-house research and development. x. The company has received various awards and recognition during the year which also includes award relating to OPD. 15.3 Reliance was placed on the following decisions of the co-ordinate benches: (1) Electronics ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the findings of the TPO with the help of any material brought on record, The reference of assessee to website of the company is also misplaced, as the same relates to entire group of Persistent Systems. Further, the annual report of the company is more reliable than the website as the latter is dynamic in nature and may represent the status at the time of accessing the same rather than the status during the relevant financial year. Further the purpose of website is to advertise and to attract more clients and thus it may reflect the capabilities of the group rather than the actual functioning during a specific year. On perusal on annual report of Persistent Systems, it is observed that the company is developing software for its customers, who in turn are in business of software product development and outsourcing the work of software development to this company. Thus the assessee has wrongly inferred that M/s. Persistent Systems Ltd. itself is in software product development. The issue has been detailed by the TPO in her order also. In fact, the assessee itself is similarly placed as it is developing software for its AE, which in turn is finally using it in its own products. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he objection of the assessee is not accepted. 9.7 The assessee has argued that Persistent Systems is incurring expenditure on Research and Development (R D). The submissions of the assessee have duly been considered. The submissions of the assessee to support its arguments are just assertions, without any material basis. On perusing the annual report of Persistent Systems, it is observed that the expenditure on R D is less than 0.35% of the operating expenditure. This itself shows that the claim of the assessee is highly exaggerated, with the sole purpose to get the company excluded from the list of comparables. The assessee itself is into software related R D for its AE. Considering above, the objection of the assessee is not accepted. 9.8 The assessee has argued that there was occurrence of extraordinary events during the year under consideration in the case of this company and so it should not be considered as a comparable. The submissions of the assessee have duly been considered. On perusal of the annual report the company, it is observed that the assessee is relying on its page 27, which in fact relates to the entire group. The acquisition of r cloud is by one of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and hence the company is comparable. ii. The company is predominantly engaged in providing IT services to its client. iii. The revenue from software services account for 99.45% of the total revenue of the company. iv. The foreign exchange earnings from export of software services which amounts to 93.55% of the total revenue of the company. Reliance was placed on the decision of the co-ordiante bench in the case of Novell Software Development India [IT (TP) Appeal No. 281 (Bang.) of 2015] 16.2 We heard rival submissions and perused the material on record and the Annual Report placed at pages 1873 to 1933 of the paper book. The only ground on which this company was excluded by the TPO as well as the DRP was on the ground that the functions performed by this company are not in the nature of software development services. It is in the multiple segments including software products as well as re-sale of ERP products and no segmental information was available. It is further observed that this company was involved in procurement, installation, implementation, support and maintenance of ERP products and services which are in the nature of managerial services. From perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken as a comparable. The Hon ble DRP further observed that revenue from software development is only 75% of the total revenue. Therefore, fails to pass through the filter of earning from software development more than 75%. 17.1 Being aggrieved, the assessee-company is before us seeking inclusion of this company on the following ground: (i) The company is predominantly engaged in software development services as per the annual report. Further, the revenue from software development services is more than 93.93% of the total revenue. (ii) As per response to 133(6) notice, it is very clear that the company is engaged in software development services 17.2 We heard rival submissions and perused the material on record and the Annual Report placed at pages 1988 to 2059 of the paper book. In the schedule 20 forming part of the Annual Report of the company at page 64 of the Annual report and placed at page 2052 of the paper book breakup of sales and services is given below: PARTICULARS AS ON 31.03.2013 ( Rs.) 31.03.2012 ( Rs.) 20. Sales S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed material on record. We perused the annual report of the company placed at pages 2060 to 2167 of the paper book. At page 21 of the Annual report placed at page 2082 of the paper book functions of software testing are mentioned below. Software testing - Overview Software testing plays an integral part in the software development lifecycle (SDLC) where the software is testea in various ways during the development process to reduce defects before it goes to the end user. Software testing is a quality control (QC) activity aimed at evaluating a software item to detect differences between given input and expected output. Software testing constitutes two processes - verification and validation. Verification is the process which makes sure that the product satisfies the conditions imposed at the start of the development phase and behaves the way the manufacturer wants to. Validation is the process which makes sure that the product satisfies the specified requirements at the end of the development phase. It is undisputed fact that the entire revenue is derived from sale of software testing services. The only issue which requires to be adjudicated is whether software testing serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Electronics Services [IT Appeal No. 343 of 2017, dated 29-5-2017] (ii) CIT v. Mckinsey Knowledge Centre India (P.) Ltd. [IT Appeal No. 217 of 2014, dated 27-3-2015] 19.3 We heard rival submissions and perused material on record and also perused the Annual Report of the company placed at pages 2198 to 2282 of the paper book. Income from operations was mentioned as income from software sales and services as ₹ 306,34,58,126/-. However, in the item No.28 of Notes forming part of Annual Report, had given the break-up of foreign exchange earning was shown at ₹ 231,55,57,795/- which is obviously less than 75% of the total earning. Thus, this company does not pass through the filter of export earnings more than 75%. Needless to say, once the comparable entity fails to pass through one of the filters applied, there was no necessity to examine whether it meets other filters. Therefore, we uphold exclusion of this company from the list of comparables. R Systems International Ltd. 20. This company was chosen by the assessee-company in its TP study. The TPO rejected this company on the ground that it follows different accounting year. The Hon ble DRP also confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany nor even before us extrapolated results were filed. Thus, since assessee-company had not discharged its onus, no relief can be granted to the assessee-company. Therefore, we uphold exclusion of this company. Caliber Point Business Solutions Ltd. 21. This company was chosen by the assessee-company in its TP study. The TPO rejected this company on the ground that no information was available in public domain and following different accounting year. The Hon ble DRP also confirmed the exclusion of this company as it follows different financial year ending. Therefore, cannot be compared. 21.1 Being aggrieved, the assessee-company is before us seeking inclusion of this company on the following grounds: i. The Annual report of the company is available in public domain. ii. As per the note to segment reporting, the company has two segments, viz., BPO and others. The Others segment represents software support, maintenance and consulting related activities. Thus, the Others segment has been considered as the comparable segment to Assessee. 21.2 We heard rival submissions and perused material on record. We perused the annual report of the company placed at pages 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is before us seeking inclusion of this company on the following grounds: (1) After the thorough review of the annual report we observed that the comparable is passing the export revenue filter of 75%. (2) The comparable is engaged in rendering software development services and it is passing all the filters adopted by the learned TPO, hence it can be considered as a comparable. 22.2 We heard rival submissions and perused material on record. We perused the annual report of the company placed at pages 2168 to 2197. We find from Note No.14 to Annual Report placed at page 2169 of the paper book that out of total revenue of ₹ 37,39,04,810/- the company made export earnings of ₹ 37,38,26,810/- constituting more than 75% of the total earnings. For the purpose of applying this filter, actual realization of export proceedings is immaterial. Therefore, the findings of the TPO as well as the Hon ble DRP are based on irrelevant considerations. Therefore, we direct the AO/TPO to include this company in the list of comparables. Thinksoft Global Services Ltd. 23. This company was proposed by the assessee-company during the course of proceedings before the TPO. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d validate that the software developed by the other person is as per specifications provided to the software developer or not and give a report on the same. Software testing is only part of software development cycle and thus can t be equated with software development. So considering this aspect M/s Thinksoft Global Solutions Ltd. cannot be considered as a comparable as it is functionally different. In similar circumstances, the ITAT Bangalore in the case of Trilogy E- Business Software Ltd v. DCIT 2013 (1) TMI 672 rejected M/s. Thinksoft Global Solutions Ltd. as a comparable as it was providing software testing services and the same was held to be not comparable with software development services. The ITAT held as follows; Software testing is only part of software development life cycle. It cannot be equated with software development services. Thus, the TPO rightly excluded this company for comparability purposes. Considering above, the argument of the assessee that testing service is same as software development is not accepted. Considering above the objection of the assessee is not accepted. 23.1 Being aggrieved, the assessee-company is before us seeking inclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Significant Accounting Policies And Notes for the Year ended 31.03.2013 Note 2.14 Revenue from Operations Revenue from operations consists of the following (In Rs.) Particulars For the Year ended 31.03.2013 For the Year ended 31.03.2012 Income from Software Services Exports 24,240,202 29,807,707 Income from Software Products sold 1,158,000 6,709,892 Total 25,390,202 36,517,599 24.3 Though it is stated that income is generated from software services but from the description of the functions performed given under overview at page 2392, it is clear that it is rendering software testing services which cannot be treated as software development service in the light of the definition given in clause (m) of section 10TA of the IT Rules, extracted above. Therefore, this company cannot be compared with that of software development company and therefore, we uphold e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT v. Target Corpn. of India (P.) Ltd. IT. (T.R) Appeal No 3431 (Bang) of 2015 CO No. 103/Bang/2015 AY 2010-11, the ITAT decided the issue of functionality of this company by relying on the decision of Tribunal in the cases of Dy. CIT v. Electronics for Imaging India (P.) Ltd. 2013 (1) TMI 672. The ITAT held that this company is not a proper comparable in the case of assessee (a software development company), as it is operating in multiple segments and segmental operating margins were not available. For the year under consideration too, the TPO has analysed the functionality of this company and as discussed above, it cannot be considered as a proper comparable due to absence of segmental data. Thus, the objection of the assessee is not accepted. 25.1 Being aggrieved, the assessee-company is before us seeking inclusion of this company on the following grounds: i. After the thorough review of the annual report we observed that the company is engaged in software products and services for which segmental details is available in the annual report. The software segment can be considered for as comparable. ii. The revenue from software services is 96.18%. 25.2 We heard riv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment services and 100% revenue is derived from rendering software services. 27.2 We heard rival submissions and perused material on record including the Annual Report of the company placed at pages 2994 to 3011 of the paper book. From perusal of Annual Report, under item No.2 Revenue Recognition as under: 2. Revenue Recognition Revenue is primarily derived from software development and related services and from the licensing of software products, Arrangements with clients for software development and related services are either on a fixed-price, fixed-time-frame or on a time-and-material basis. 27.3 However, there was no segmental information between software development services and software product development. In the absence of segmental information, this company cannot be considered as a comparable. In the circumstances, we uphold exclusion of this company from the list of comparables. Larsen Toubro Infotech Ltd. CG-VAK Software and Exports Ltd. 28. The assessee is seeking inclusion of Larsen Toubro Infotech Ltd and CG-VAK Software and Exports Ltd. by filing additional grounds of appeal. It is stated that these companies were not subject of either T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in NTPC Ltd. (supra), a judicial decision when an appeal is pending will entitle raising of additional ground. 24 In any view of the matter, the aforesaid decision does not deal with the situation which arises for consideration in this case viz. relying upon the evidence on record for a subsequent assessment year to hold that the assessee is entitled to a benefit of deduction u/s 80-IA of the Act for an earlier assessment year. A deduction under Chapter VIA of the Act under which Section 80-IA of the Act falls would depend, as pointed out above, upon the satisfaction of the facts necessary for claiming a deduction. The allowing of a deduction in a subsequent year s assessment order cannot determine the facts as existing in the earlier assessment year, such as in this case so as to allow the deduction. 25 In fact, the issue with regard to the raising of new grounds in the absence of any evidence on record is no longer res integra in view of decision of the Apex Court in Addl. Commissioner of Income Tax v. Gurjargravures Pvt. Ltd. (supra). In the above case, it has been held that an additional ground cannot be raised before the appellate Authority when no claim for a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of law arises from facts which are already on record, then there is no reason why the appellate authority should not consider the question of law so as to determine the correct tax liability of an assessee in accordance with law. However, where evidence is to be examined and that is not on record, then it will be considered only if the parties seeking to raise the additional ground satisfies the authority concerned that for good and sufficient reasons, the ground could not be raised before the lower authorities. In the present facts, no such ground has been made out by the assessee before the Tribunal. In the present facts, as pointed out above and being reiterated once more, the additional ground, which is raised, is not a pure question of law, but would depend upon the satisfaction of the authority as to the facts existing in the subject assessment year for allowing the benefit of Section 80-IA of the Act. The additional ground is being raised for the first time before the Tribunal without relevant evidence being on record. 28.2 Following the law laid down by the Hon ble Bombay High Court in the case of Ultratech Cement Ltd. (supra) which is squarely applicable to t ..... 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