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TMI Blog2018 (1) TMI 1370X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant for Assessment Year ('"AY") 2008-09 at INR 27,30,95,863 as against the returned income of INR 12,07,44,372. 2. The Ld. AO erred in proposing and the Hon'ble DRP further erred in confirming the addition of Rs. 15,23,51,491 to the Appellant's returned income of Rs. 12,07,44,372. Transfer Pricing Adjustment - INR 10,91,38,523 3. On the facts and in law, the Learned Additional Director of Income Tax, Transfer Pricing Officer- II(4) ("'Ld. TPO") and the Ld. AO erred in proposing and the Hon'ble DRP erred in confirming the addition of Rs. 10,91,38,523 in relation to the international transactions of provision of software development, competency center and IT support services. 4. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant under section 92D of the Income-tax Act, 1961 ("the Act") read with Rule 10D of the Income-tax Rule, 1962 ("the Rules") and calling for a fresh search, applying arbitrary filters during the assessment proceedings, without discharging the statutory onus to establish that any of the conditions specified in clause (a) to (d) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant for the year under consideration and that on similar facts the Hon'ble Tribunal deleted such additions in earlier years. 12. Without prejudice to above and in alternate, Ld. AO and the Hon'ble DRP has erred on facts and in law in disregarding the regular and the consistent method of accounting being followed by the Appellant in recognizing the revenue from maintenance, enhancement and support services provided by the Appellant to its customers. 13. On the facts and in law, the Ld. AO erred in initiating penalty proceedings u/s 271( 1)(c) of the Act. 14. On the facts and in law, the Ld. AO has erred holding that interest under Section 234B and Section 234C be charged on the assessed income of the Appellant. 15. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in withdrawing interest u/s 244A of the Act." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : the taxpayer is a subsidiary of Siemens US (formerly UGS Corp., USA). The taxpayer is engaged in providing Product Lifecycle Management software solutions and maintenance, enhancement and support services for the same. The taxpaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udy made by the taxpayer in its economic analysis, finally selected 14 comparables having average OP/TC at 27.43% as against taxpayer's OP/TC margin of 10.96% and thereby proposed the TP adjustment of Rs. 16,20,62,898/-. 7. The taxpayer carried the matter before the ld. DRP by filing objections who has partly accepted the contentions raised by the taxpayer. Post DRP directions, mean OP/TC margin of comparables come down to 19.67% (18% after treating forex mean/loss as operating) and accordingly, AO recomputed the ALP adjustment at Rs. 10,91,38,523/-. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1, 2, 3 &4 9. Grounds No.1, 2, 3 & 4 need no findings being general in nature and having been covered by the subsequent grounds. GROUNDS NO.5, 6 & 7 10. TNMM method used by the taxpayer as the MAM and Profit Level Indicator (PLI) has not been disputed by the TPO. However, the TPO rejected the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nologies Ltd., KALS Information Systems (Seg.), Persistent Systems Ltd., Bodhtree Consulting Ltd. and Zylog Systems Ltd.. 14. Before examining the comparability of the aforesaid companies vis-à-vis the taxpayer, we would like to have an overview of the nature of the work done by the taxpayer for its AE which is otherwise not in dispute, for ready perusal. 15. During the year under assessment, the taxpayer provided software development services, competency centre services and IT Support Services to its AE qua which ALP adjustment of Rs. 10,91,38,523/- have been made. 16. Now, we would like to examine the comparability of the aforesaid companies vis-à-vis the taxpayer one by one. INFOSYS TECHNOLOGIES LTD. (INFOSYS) 17. The taxpayer sought to exclude Infosys from the final set of comparables on the grounds inter alia that Infosys is functionally dis-similar; it has huge sales/turnover of Rs. 15648 crores having substantial intangible assets incurring huge amount on R&D for developing new area of functions; it owns products/leverages on its premium banking solution 'Finacle'; and relied upon the cases of CIT vs. M/s. Agnity India Technologies Private Ltd. - (2013) 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny in the area of development of software, assumption of risk leading to higher profits etc. Keeping in view the aforesaid discussion, we are of the considered view that Infosys being a giant company operating on full-fledged risk leading to maximum profit having huge revenue and expending 1.3% of its turnover on R&D having huge intangibles is not a suitable comparable vis-à-vis taxpayer which is a captive service provider operating on a minimum risk and only having turnover of Rs. 109 crores as against turnover of Infosys of Rs. 15648 crores. So, we order to exclude Infosys from the final set of comparables. 3K TECHNOLOGIES LTD. (3K) 21. The taxpayer sought exclusion of 3K for benchmarking the international transactions on grounds of functional dissimilarities, unreliable financial information, fails employee cost filter applied by the TPO and relied upon the case of Ness Technologies India Pvt. Ltd. vs. ACIT - (2014) 52 taxmann.com 406 (Mumbai-Trib). 22. Para 3.2.1 at page 14 of the TP order apparently shows that the ld. TPO has himself applied the employee cost filter at 25% of the total cost, however when we examine annual report of 3K, available at page 14 of the AR c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of software development services. Perusal of the annual report of KALS, available at pages 219 to 242 of the annual report compendium, particularly schedule 16 of the Notes to the Financial statements apparently proved that KALS is engaged in development of software and software products since its inception. The company consisting of STPI Unit engaged in software and software products and training centre engaged in training of software professionals on online projects. Revenue recognition of KALS is that it drives its revenues primarily from software services and software products, however, segmental data bifurcating the revenue from product and software development is not available. In the given circumstances, we are of the considered view that KALS cannot be considered as a suitable comparable visà- vis the taxpayer which is a routine software developer, hence ordered to be excluded. PERSISTENT SYSTEMS LTD. (PERSISTENT) 28. The taxpayer sought exclusion of Persistent on grounds inter alia that it is functionally different being a product company; it has undergone extra ordinary events during the year under assessment; having high research and development expenses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Trib.) from the list of comparables to benchmarking the international transaction vis-àvis software developer. 35. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR. 36. Profile of the Bodhtree is described at page 33 of the annual report compendium as under :- "Bodhtree has only one segment, namely, software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions using the latest technologies. It has a large pool of skilled resources on advanced technology platform including J2EE, Microsoft, NET and Linux platforms. Bodhtree is ISO certified and has a presence in USA and South East Asian countries." 37. Bodhtree was founded as a product engineering company and continues to deliver world-class product engineering services ranging from application development and maintenance, web development and outsourced product development to QA and managed testing services. Applying agile and scrum-based methodologies, we engaged customers in a highly interactive process to develop superior software products on timelines that beat the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identical issue of differences between a product and software development services provider in assessee's favour by returning the following findings :- "Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available." 45. Furthermore, perusal of the profit & loss account of Zylog, available at page 425 of the annual report compendium, shows that its income from software development services and product overseas is Rs. 4,03,43,04,874/- as on 31.03.2007 and Rs. 6,05,94,45,088 as on 31.03.2008 having no segmental detail. So, keeping in view the fact that Zylog is a product company with no segmental financials and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules, 1962 which are reproduced as under :- "Rule 10B 3) An uncontrolled transaction shall be comparable to an international transaction if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 52. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR. 53. It is a settled principle of law that for reasonably accurate adjustments tested party as well as comparables should be on the same page. However, so far as issue of working capital adjustment is concerned that the ld. TPO disallowed the same for lack of sufficient data as the audited accounts of the taxpayer do not show that it has received any advance from its AE. So, we are of the considered view that in the absence of any reliable data, working capital adjustment cannot be granted. So, the assessee is directed to provide complete computation to avail of the facility o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 5.3 The above accounting procedure is stated to be based on Accounting Standard-9 "Revenue Recognition" issued by the ICAI. The AO held that the entire amount raised in the bill is income of the year and to be taxed accordingly as (i) amount not separately shown in invoice; (ii) amount is uncertain and cannot be calculated; (iii) sales-tax return shows total amount as sale; (iv) No tax is deducted by payer on such sum; and (v) It is a device to defer payment of tax. 5.4 Learned counsel for assessee submitted that it is not correct to say that the amount of ME&S services is not determined. Where ME&S is provided alongwith the sale of software, the invoice contains one consolidated figure but the details of ME&S are invariably available in the details attached with the invoice. In any case, the period of ME&S is invariably mentioned on the face of the invoice. Where the ME&S is provided independently of sale of software, a separate invoice of ME&S is raised. This position was explained to the AO and CIT(A) particularly for assessment year 2003-04. Since the AO did not specifically asked for any clarification in the matter, there was no occasion to further explain the factual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome to that extent will be taxable in' the subsequent year. Even if the' amount is not separately shown in invoice the effect remain that addition sum was charged for ME&S services. The amount is not uncertain not to be calculated. The amount can very well be arrived at best on the sale price of software sold with or without ME&S services. The sales-tax return cannot be a criteria to determine what is the income accruing or arising to the assessee. Even if the payer do not deduct tax at source, it will not determine the taxability or otherwise of the sum chargeable to tax. Thus, there is nothing like device to defer payment of taxes due but as per the recognized method of accounting of matching revenue with cost, the income accrues only in the subsequent year when such services are provided. This is in form of a provision for warranty claims which is also recognized by Hon'ble Delhi High Court in the case of CIT vs. Vintec Corporation P. Ltd., 278 ITR 337 wherein it was held that provision for warranties embedded in the sale price is an ascertained liability and to that extent, revenue need not be recognized. We accordingly hold that the amount treated as deferred rev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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