TMI Blog2019 (6) TMI 1407X X X X Extracts X X X X X X X X Extracts X X X X ..... hore research and development service provider and these services are akin to software development services. Comparibility is to be carried out on broad object of benchmarking international transaction and according to the law laid down under section 92B of the Act, read with rule 10 B (2) Income tax Rules, 1963. Comparables must be similar in material aspects and must be compared on the basis of the products/services characteristics, functions undertaken, assets used and risk assumed. Merely because certain comparables has been upheld for its exclusion/inclusion by various decisions, does not ipso facto lead to exclusion/inclusion in a given set of facts. In our considered opinion, exclusion/inclusion of any comparables must be strictly analysed on basis of FAR, in accordance with rule 10 B (2). We also are of opinion that comparables selected must be for the relevant year which is to be compared and unless contemporaneous data as section 92D read with Rule 10 D (4), is not available for the relevant year, multiple year data should not be used. Infosys technologies Ltd - This comparable has a high turnover with the huge margin of 40.3% as compared to 9% earned by assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that assessee do not even undertake the pricing risk as the prices are decided by its AE only. Under such circumstances we do not find it functionally similar even though taking the segmental details of sale of products as there is a huge difference in the products sold by this comparable with that of assessee - direct Ld.TPO to exclude this comparable from the final list. Megasoft Ltd - This comparable should not be used as there exists contradictions in the details available on public domain vis-a-vis the information gathered by Ld.TPO under section 133 (6). Deduction u/s 10A - exclusion of telecommunication expenses while computing deduction - HELD THAT:- Hon ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] on identical issue held that telecommunication expenses is to be included while computing deduction under section 10 A of the act as it is directly linked with earning of income. Ld CIT DR has not brought before us any contradictory/distinguishable facts in respect of present case before us. Respectfully following above we direct Ld.AO to include telecommunication expenses while computing exempt income u/s10A of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Appellant. 6. In connection with the payment of license fee, the Learned AO and the Learned Panel erred in facts and in law in confirming the action of the Learned TPO in determining the arm's length price of payment of license fee to be NIL, and in doing so grossly erred in; 6.1. concluding that the Appellant has not received any tangible economic benefit. 6.2. did not appreciate the fact that the Appellant is a licensed manufacturer in India and is entirely dependent on the associated enterprise for the related technical know-how, expertise, etc. 6.3 concluding that no supporting evidence were furnished to justify the payment of license fee; 6.4 erred in ignoring the fact that the Appellant had used Comparable Uncontrollable Price (CUP') Method to benchmark the transaction. 7. Learned AO and the Learned Panel erred in ignoring the fact that the Learned TPO has transgressed the powers provided u/s 92CA of the Act. B) Provision of Technical Support Services (Software Development): 8. That on the facts and in the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. That the Learned AO has erred in not allowing the reduction of telecommunication expenses of ₹ 4,431.074 from the total turnover of the Appellant in computing the deduction under section 10A of the Act. 12. The Learned AO has erred in not following the decisions of the jurisdictional Income Tax Appellate Tribunal in respect of the application of the formula as prescribed under sub-section (4) of Section 10A in terms of which the total turnover needs to be adjusted corresponding to any adjustment in export turnover. 13. The Learned AO failed to appreciate and ought to have held that the deduction under section 10A of the Act is granted on the proportion which export turnover bears to total turnover of the undertaking. corresponding effect of reduction of various expenses from export turnover would have to be given to total turnover to achieve uniformity between the export turnover and total turnover. 14. Consequently, the Learned AO erred in charging interest under section 234B of the Act. 15. Consequently. the Learned AO erred in charging interest under section 234D of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny to the Appellant, while doing the comparability analysis. The Appellant submits that Kals is not comparable to the Appellant for the following reasons: * It a predominantly a product company * It has been specifically held as not comparable to a software development service company by various judicial forums including jurisdictional ITAT Ground No. 10.4.4: Persistent Systems Limited. (seg) (Persistent') should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in including Persistent as functionally comparable company to the Appellant. while doing the comparability analysis. The Appellant submits that Persistent is not comparable to the Appellant for the following reasons: * It is engaged in diversified activities of products development and services and owns Intellectual property Rights ; * It has made strategic acquisitions during the AY 2006-07 Ground No. 10.4.5: R Systems International Limited ( R Systems ) should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following reasons: * It is engaged in product development; * It is engaged in research and development activities * The software division possess IPR which was sold during the year; * It displays highly fluctuating margins indicating that the segmental financials are highly unreliable for comparability. Ground No. 10.4.10 : Megasoft Limited ( Megasoft ) should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in including Megasoft' as functionally comparable company to the Appellant, while doing the comparability analysis. The Appellant submits that Megasoft' is not comparable to the Appellant for the following reasons: * It fails the related party transaction filter of 15% * It is predominantly software product company and holds Intellectual Property * It has made strategic acquisitions during, the year * It has different financial year ending Ground No. 10.4.11 : Flextronics Software Systems Limited ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration, U.S., primarily engaged in manufacture of power protection equipment and undertakes trading of UPS and accessories. Ld.TPO observed that, assessee primarily exported by way of sales to its associated enterprises and also had sales of manufactured products in the domestic market within India. 6. In the TP study, it has been submitted that AE provides all technical support services in the nature of software application development and maintenance and research and development in the nature of software design and testing services. Ld.TPO observed that assessee entered into following international transactions with its associated enterprise: Description Amount (Rs.) Import of raw materials Components 127,54,06,961 Export of Manufactured UPS 1344,79,58,216 Royalty 6,92,64,977 Cross charge by APC Group (paid) 42,41,753 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6%, and since assessee s margin was within the range of +/-5%, transaction with its AE s was considered to be at arms length. Sl. No. Company Name Unadjusted Margins FY 2005-06 1 3 i Infotech Limited 6.42% 2 Akshay Software Technologies Limited 8.24% 3 Aztec Software Technology Services Limited 13.94% 4 Bangalore Softsell Limited 4.37% 5 Bristlecone India Limited - 2.92% 6 Compucom Software Limited 16.00% 7 Datamatics Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 58.70% 26 Sasken Communication Technologies Limited 14.50% 27 Sasken Network Systems Limited 16.19% 28 Satyam Computers Services Limited 29.27% 29 Software Technology Group International Limited 15.39% 30 Sonata Software Limited 1 5.31% 31 Subex Systems Limited 6.39% 32 Transworld Infotech Limited 2 6.34% 33 Tyche Industries Limited 1 0.62% 34 V J I L Consulting Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.90% 10 Tata Elxsi Limited (Segment) 27.65% 11 Lucid Software Limited 8.92% 12 Mediasoft Solutions Private Limited 6.29% 13 R S Software (India) Ltd 15.69% 14 SIP Technologies Exports Limited 3.06% 15 Bodhtree Consulting Ltd 15.99% 16 Accel Transmatics Ltd (Segment) 44.07% 17 Synfosys Business Solutions Ltd 10.61% 18 Megasoft Ltd 52.74% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method for benchmarking transaction, which is evident from page 9 of TP order. It has been submitted that Ld.TPO while concluding his remark on this issue proceeded on the footing that TNMM has been used as most appropriate method. 18. Before DRP, it has been acknowledged that assessee used CUP as most appropriate method to determined arm s length rate of royalties paid to AE. 19. Ld.AR submitted that, both authorities below proceeded on the footing that, no evidence has been provided by assessee to prove tangible benefit derived from AE for which royalty has been paid by assessee. Referring to pages 323-367 of paper book, Ld.AR submitted that additional evidences has been placed which includes documents to establish that assessee is a licensed manufacturer, that products manufactured by assessee cannot be carried out without technological and R D assistance from its AE, details establishing actual receipt of technical knowhow from its AE, against which royalty has been paid, details to prove that IPRs and know-how received from AE are confidential property of AE being guidelines, directions, screenshots etc, that helps assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. Functions performed: Functional analysis Information and specifications The technical support services performed by APC India are based on the instructions and specifications provided by APCC US. There are regular interactions with APCC US regarding project specifications and obtaining certain clarifications/information on the projects provided by APCC US to APC India. Technical assistance and clarifications We understand that APCC US provides technical assistance, information and certain technical clarifications in the provision of technical support services provided by APC India. There are regular weekly updates by the IDC to APCC US on the status of the projects/activity assigned by APCC US. Training APC India provides both internal and external training to its employees. These training programs could be organized either in the US or in India. Design and software development APC India does not develop software products for sale in open market. It caters to the specific needs of APCC US and its associated enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets. Further, any intangible assets developed by APC India in the provision of technical support services would be owned by APCC US. It is submitted that, as assessee is a captive service provider and is compensated at cost +10%, it does not bear any risks like market risk, financial risk, credit and collection risk and service liability risk. The only risk that would be assumed by assessee is in terms of foreign exchange risk as revenue received by assessee is in foreign exchange. 27. In our considered opinion, comparibility is to be carried out on broad object of benchmarking international transaction and according to the law laid down under section 92B of the Act, read with rule 10 B (2) Income tax Rules, 1963. Comparables must be similar in material aspects and must be compared on the basis of the products/services characteristics, functions undertaken, assets used and risk assumed. Merely because certain comparables has been upheld for its exclusion/inclusion by various decisions, does not ipso facto lead to exclusion/inclusion in a given set of facts. In our considered opinion, exclusion/inclusion of any comparables must be strictly analysed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusively owned by AE. Under such circumstances we do not find appropriate for this comparable to be included to determine arms length price. Accordingly we direct Ld.TPO to exclude this comparable from the final list. 33. KALS Information Systems Ltd : It has been submitted that this comparable has been included by Ld.TPO though it is functionally dissimilar with that of assessee. Ld.AR submitted that this comparable is engaged in development of software and software products and also has a training centre for drop software professionals or online projects. Ld. CIT DR placed reliance upon the observations of authorities below and prayed for its inclusion. We have perused submissions advanced by both sides in the light of the records placed before us. Excellent from the audited accounts and annual reports placed in the paper book in respect of this comparable it is observed that this company is engaged in development of software and software products since its inception. Further it is observed that in the year 2000 this company has been converted into a public limited company is which itself makes it not a fit comparable with assessee who is a capt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have already analyse the functions and the risks assumed, it is observed that assessee do not even undertake the pricing risk as the prices are decided by its AE only. Under such circumstances we do not find it functionally similar even though taking the segmental details of sale of products as there is a huge difference in the products sold by this comparable with that of assessee. 36. Accordingly, we direct Ld.TPO to exclude this comparable from the final list. 37. Megasoft Ltd.: It has been submitted that this comparable has been included by Ld.TPO. Ld.AR submitted that the information collected by Ld.TPO is by issuing notice under section 133 (6) of the act. He has further submitted that information so paid by Ld. TPO varies with that of the information that is available on the public domain. He submitted that under such circumstances these comparable should be excluded as there is no clarity regarding the functions performed, the assets owned and the risks assumed by this comparable. Ld. CIT DR though supported the observations of authorities below could not controvert therefore stated submissions advanced by Ld.A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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