TMI Blog2018 (1) TMI 1370X X X X Extracts X X X X X X X X Extracts X X X X ..... at:- 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 of working capital adjustment and thereafter TPO is directed to decide this issue afresh. Similarly, so far as question of denial of risk adjustment to the taxpayer by the ld. TPO/DRP is concerned, the same has also been denied on the ground that the taxpayer has failed to provide any back up calculation for claim of risk adjustment. So, in the given circumstances, we are of the considered view that ld. TPO is to re-examine the issue on providing back up calculation by the taxpayer for the claim of risk adjustment. Addition on account of income from maintenance, enhancement and support services (advance b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the assessment proceedings, without discharging the statutory onus to establish that any of the conditions specified in clause (a) to (d) of Section 92C(3) of the Act has not been satisfied. 5. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in disregarding the use of current year and prior two years' data by the Appellant to benchmark the international transactions in the TP documentation for the relevant previous year in contravention of Rule 10B(4) of the Rules. 6. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP violated the provisions of Rule 10B(2) of the Rules by arbitrarily rejecting the companies selected by the Appellant in the TP documentation and the fresh search, which are functionally comparable to the Appellant. 7. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP violated the provisions of Rule 10B(2) of the Rules by arbitrarily introducing new companies as comparable to the Appellant, disregarding the differences in the functional profile of the Appellant and such additional companies. 8. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxpayer is engaged in providing Product Lifecycle Management software solutions and maintenance, enhancement and support services for the same. The taxpayer also provides software related research and development services to its holding company though a unit registered under the Software Technology Park (STP) scheme of the Government of India and technical support to its follow subsidiary companies. 3. During the year under assessment, the taxpayer entered into international transaction as under :- Nature of International Transaction Method Selected Amount (in INR) Payment for purchase depiction and replication of software TNMM Payment of license fee for use of software 391,913,055 Provision of software development services to AEs 963,111,115 Provision of competency centre services to AEs 11,564,838 Provision of IT support services to AEs 77,430,923 Cost allocation of infrastructure utilization ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrough 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 segregated approach adopted by the taxpayer rather clubbed all the segments in question for benchmarking the international transactions, which has also not been challenged by the taxpayer. 11. TPO, after applying various filters, making analysis of TP study of the taxpayer and on the basis of its own economic analysis, finally selected 14 comparables having average OP/TC of 27.43% as against 10.01% of the taxpayer determined the ALP of ₹ 16,20,62,898/-. However, post DRP directions, 15 comparables have been taken by the AO to calculate the operating margin (OP/TC) by treating this forex gain/loss as non operating in nature which are as under :- Sl. No. Company name OP/TC (tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to be made 14,89,35,079 Adjustment already offered by the taxpayer 3,97,96,556 Adjustment required to be made by the AO 10,91,38,523 13. In the backdrop of the aforesaid facts and circumstances of this case, the ld. AR to cut short the controversy sought exclusion of six comparables viz. Infosys Technologies Ltd., 3K Technologies 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- -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 ₹ 10,91,38,523/- have been made. 16. Now, we would like to examine the comparability of the aforesaid companies vis- -vis the taxpayer one by one. INFOSYS TECHNOLOGIES LTD. (INFOSYS) 17. The taxp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been ordered to be excluded by the Hon ble Delhi High Court in case cited as CIT vs. Agnity India Technologies (P.) Ltd. (supra) while examining its comparability with Agnity India Technologies which was a captive service provider operating on minimal risk providing software development services which has affirmed the decision rendered by the coordinate Bench of the Tribunal for excluding Infosys from the list of comparables for the reason that Infosys is a giant company 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- -vis taxpayer which is a captive service provider operating on a minimum risk and only having turnover of ₹ 109 crores as against turnover of Infosys of ₹ 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 internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered view that keeping in view the functional dissimilarity, unreliable financials of the company and failing employee cost filter applied by the TPO, 3K is not a suitable comparable for benchmarking the international transactions, hence ordered to be excluded. KALS INFORMATION SYSTEMS (SEG.) (KALS) 27. The taxpayer sought exclusion of KALS on ground of functional dis-similarity being into the business of software services and software products. Undisputedly, the taxpayer is into the business 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 availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the matter, we are of the considered view that the Persistent is not a suitable comparable for benchmarking the international transaction, hence ordered to be excluded. BODHTREE CONSULTING LTD. (BODHTREE) 34. The taxpayer sought exclusion of Bodhtree on grounds inter alia that it is functionally dis-similar having volatile margin which has been ordered to be excluded by the coordinate Bench of the Tribunal in Intoto Software India (P.) Ltd. vs. ITO (2016) 65 taxmann.com 119 (Hyderabad Trib.) from the list of comparables to benchmarking the international transaction vis- vis 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at pages 383 to 434 of the annual report compendium, particularly page 399, shows that in the intangible assets, Zylog has shown product development cost of ₹ 1787.57 lakhs. So, it is a product company. From page 393, it is also proved that during the year under assessment, Zylog has acquired Anados Software Limited, a UK based Life Insurance product company and Ewak Creative Compusoft Limited, Cheenai based Replacement Technology solution provider. Benefits from such acquisitions, as envisaged, include access to new clients, new geographical areas and new service offerings as well as an increase in per-capita revenue productivity. 44. Hon ble High Court of Andhra Pradesh in case cited as CIT vs. M/s. Intoto Software India Pvt. Ltd. in ITTA No.233 of 2014 dated 27.03.2014 decided the 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case of the taxpayer foreign exchange gain and loss has been treated as operating item. However, both the taxpayer as well as comparable companies is required to be on the same page for treating foreign exchange loss/gain arising from transactions of revenue nature as an operating item. So, the TPO is directed to compute the ALP accordingly. So, this ground is allowed for statistical purposes. GROUND NO.10 51. Ld. TPO as well as Ld. DRP have denied the working capital with adjustment claimed by the taxpayer. The ld. AR for the taxpayer submitted that high levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs and as such, no profit maximizing or entrepreneurial firm would hold working capital without a return and relied upon Rule 10B (3) of the Income-tax Rules, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urned the findings in favour of the taxpayer as under :- 5.1 The appellant sells the software products. In addition to the sale of software, the appellant, at the option of the customer, also provides Maintenance Enhancement Support Services (ME S Services). The revenue relating to the ME S Services are recognized on monthly basis over a period when these services are to be rendered. Thus, the revenue for services which are to be provided after the end of the year is accounted for in books in the subsequent year when services are actually rendered. 5.2 The above procedure of accounting is consistently followed by the appellant and is also so declared in its Accounting Policy No.2 in the Significant accounting policies and notes to the accounts forming integral part of the audited balance sheet which was attached with the return of income. 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of software license is with extended period of warranty or with the paid maintenance enhancement and support services, extra amount is being charged though not separately mentioned in the invoice. However, the same can be measured compared to invoices for sale of same software whether MES services are included or not. Thus, when the assessee charges extra sum for MES services, the revenue in this regard can be recognized only after such services are rendered or the period of contract is over. Hon'ble Delhi High Court in the case of Uttam Singh Duggal Co. vs. CIT, 127 ITR 21 recognized this principle of matching revenue with cost. On general principle, it was held that if no work is done in the year of receipt of sum, it has to be treated as kind of advance payment and when the work was done thereafter and expenditure in this regard is claimed, income 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 witho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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