TMI Blog2020 (5) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... wance of depreciation @ 60% on racks, Xerox machine and accessories, batteries and stabiliser - AO disallowed the claim and granted 15% depreciation for the reason that they are not integral part of computers which has been upheld by DRP - HELD THAT:- Undoubtedly machines like racks, batteries stabilisers can function without a computer and is attachable to any other electrical appliances. Therefore these machines do not form part of computer peripherals. Insofar as the Xerox machine is concerned, it is an ascertained able at this stage whether these machines could be exclusively and independently used without being attached to a computer as such kinds of Xerox machines do exist. Assessee has also not been able to establish details of accessories that has been categorised to be forming part of computer peripherals. We set aside this issue back to Ld.AO/TPO for verifying the actual use and nature of Xerox machines and the accessories that has been considered as computer peripherals. In the event it is ascertained able that these accessories and Xerox machines could not be independently used but could only be used on being attached to computer 60% depreciation should be allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The Ld. Panel and Ld. AO/ Ld. TPO has erred in justifying the motive of shifting of profits On the facts and in the circumstances of the case and in law, the Ld. Panel and Ld. AO/ Ld. TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provisions of Chapter X of the Act. The Ld. Panel erred in upholding the same. 3. Determination of arm's length price of international transactions 3.1 The Ld. Panel and Ld. AO/ Ld. TPO erred in rejecting the value of the international transaction of provision of software development services, as recorded in the books of account, as the arm's length price. 3.2 The Ld. Panel and Ld. AO/ Ld. TPO erred in determining a new arm's length price in substitution of the arm's length price as determined by the Appellant. 3.3 The Ld. AO/ U. TPO erred in law in holding that the fresh comparability analysis using non- contemporaneous data conducted by the Ld. TPO and further substituting the Appellant's analysis with fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FY 2012-13, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The Ld. Panel also erred in confirming the same. 5.6 The Ld.AO/Ld.TPO grossly erred in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and in arbitrarily applying a 25% related party criteria in accepting / rejecting comparables, while also rejecting the Appellant's ground for application of the related party transaction filter at a threshold of 10% or 15% of sales. The Ld. Panel also erred in confirming the same. Accordingly, basis application of 15% related party filter, ICRA Techno Analytics Limited, Persistent Systems Limited and Larsen Toubro Limited ought to be excluded from the list of comparables. 5.7 The Ld.AO/Ld.TPO grossly erred in arbitrarily rejecting companies having software development services income less than 75% of total operating revenues. The Ld. Panel also erred in confirming the same. 5.8 The Ld.AO/Ld.TPO erred in arbitrarily rejecting companies having export service incomes less than 75% of total sales and the Ld. Panel also erred in confirming the same. 5.9 The Ld.AO/Ld.TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in considering data obtained u/s 133(6). The Ld. Panel erred in upholding the actions of the TPO. 6. Non-allowance of appropriate adjustment to the comparable companies by the Ld. Panel and Ld.AO/Ld.TPO 6.1 The Ld.AO/Ld.TPO erred in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practices, (ii) marketing expenditure, (iii) research and development expenditure, (iv) working capital, and (v) risk profile between the Appellant and the comparable companies. 6.2 The Ld.AU/Ld.TPO also erred in not granting an adequate opportunity to the Appellant before making an adjustment on account of negative working capital. 6.3 The Ld.Panel and AU/TPO erred in making a negative working capital adjustment without appreciating the fact that the Appellant is a captive service provider and does not bear any working capital risks. 7. Variation of 3% from the arithmetic mean The Ld.AO/Ld.TPO erred in not granting the benefit of the proviso to Section 92C(2) of the Act to which the Appellant is entitled. 8. Reduction in amount of income-tax depreciation claimed on computer peripherals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and filed various details. Ld.AO observed that assessee had entered into international transaction with associated enterprise exceeding ₹ 15 crores and accordingly the case was referred to Transfer Pricing officer to determined arm s length price of the transaction. Upon receipt of reference under 92C of the Act, Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB, in respect of international transaction and between assessee and its associated enterprises. 3. Ld.TPO observed that, assessee was engaged in rendering software development service to Applied Inc. It was also observed that assessee employed services of 3rd party service provider for subcontracting specific part of their work. L assessee had following international transaction: International transaction as per Form 3CEB Particulars Amount (Rs.) Provision of Software Development services 2,93,60,04,474 Reimbursement of expenses 9,70,06,389 Purchase of fixed asset 5,291,307 Recovery of expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies with employee cost less than 25% of turnover- excluded. 9 Companies having positive net worth- selected 6. Final set of comparables considered by Ld.TPO are as under: S.no. Particulars Margine 1. Akshay Software Technologies Ltd. 20.54 2. Evoke Technologies Pvt.Ltd. 17.10 3. Helios Matheson Information Technology ltd. 26.06 4. RS Software (India) ltd. 18.19 5. R Systems International ltd. 28.27 6. Sasken Communication Technologies Ltd 17.41 7. Ybrant Digital Ltd. 18.72 AVERAGE MARK -UP 20.90 7. Further, while computing PLI of assessee, Ld.TPO was of the view that subcontracting charges of ₹ 81,29,78,005/- during relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,190/- Batte 6,001/- Xerox Accessories 24,931/- 16,031/- Stabilizer 3,839/- Total 6,64,467/- Total addition made by Ld.AO in the hands of assessee amounted to be ₹ 65,51,34,461/-. Aggrieved by order of Ld.AO, assessee is in appeal before us now. 10. It has been submitted that Ground No. 1-2 are general in nature and therefore do not require any adjudication. He also is submitted that Grounds 3, 5.1-5.11, 5.13, 5.16-5.18, 6, 7, 10-11 are not pressed at the instructions of assessee. Accordingly these grounds stands dismissed 10.1. Ld.AR submitted that, assessee wish to press and argue certain grounds. Ld.AR thus restricted his arguments to Ground No. 4, 5.12, 5.14, 5.15, 8 and 9, as under. 11. Ground No. 4: 11.1. This ground relates to the claim of assessee that subcontracting charges paid to 3rd parties should not be considered in the operating profit while computing assessee s margin. Ld.AR submitted that this issue has been considered by this Tribunal in preceding assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of DCIT Vs. Cheil Communications India Pvt. Ltd (supra) would not help the case of the assessee as in the said case the activity of the assessee was only a distributor without any value addition. It is pertinent to note that outsourcing cost in software development services activity is part and parcel of cost of providing the service to the AE and cannot be separated from the operating cost and operating revenue of the said segment of services. Accordingly, the cost of software development services cannot be treated in this fashion as claimed by the assessee. Hence we do not find any merit or substance in the contention raised by the assessee on this issue. 11.3. It has been submitted by both sides that there is no change in facts relating to this claim and the consistent view has been taken by coordinate bench in the preceding assessment years. Respectfully following the view taken by this Tribunal in assessee s own case, we reject the claim of assessee. Accordingly this ground stands dismissed. 12. Before we undertake comparability analysis, it is sine qua non to understand functions carried out by assessee, assets employed and risks assumed in provision of softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TP study and has been rejected by Ld.TPO on functional dissimilarities. It has been submitted that Ld.TPO relied upon response received from this company to the notice under section 133 (6) of the Act, wherein, this company is stated to be engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas. Ld.AR submitted that assessee had them on stated before authorities below that this company was involved in software development activities and thus was comparable to assessee. He referred to page 1630-1649 wherein annual report of this company has been placed in paper book. He submitted that revenue earned by this comparable is software services for which segmental information is are available. Note 29 at page 1647 reveals that this company earns foreign currency from export of software services. On the contrary, Ld.CIT.DR submitted that, it is an accepted position that this company is providing ERP products and services. Further, it is also an admitted position that this company is operating in variance segments including software product however the segmental information avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d submissions advanced by both sides in light of records placed before us. Merely because comparable has a different year ending, cannot lead to the conclusion, of it being non-comparable with that of assessee. In the event quarterly results are available and the same can be extrapolated, this comparable should be considered. We therefore, set aside Helio and Matheson Information Technology Ltd. and R Systems International Ltd., which are admittedly functionally similar with assessee Ld.AO/TPO is directed to consider quarterly report and extrapolate the same for purposes of comparing its margin with assessee. Accordingly, we set aside these comparables to Ld.AO/TPO. Accordingly, these grounds stands partly allowed. 12.2. Ground No. 5.14-5.15 These grounds have been raised by assessee against inclusion of following comparables: CG Vak Software Exports Ltd. Mindtree Ltd. Persistent Systems Ltd. Larsen and Toubro Infotech Ltd. a) CG Vak Software Exports Ltd. This company has been included by Ld.TPO since revenue from software services is ₹ 8.55 crores as compared to the BPO segment being ₹ 14.43 Lacs. The Ld.AR submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces we find it fit and proper to set aside this comparable back to Ld.AO/TPO. Ld.AO/TPO shall verify details/discrepancies mentioned hereinabove. Assessee is granted full liberty to file requisite details in support of its contention which shall be verified by Ld.AO/TPO before considering it in the finalist. Accordingly this comparable is set aside to Ld.AO/TPO. b) Mindtree Ltd. This comparable has been included by Ld.TPO the final list. Ld.AR submitted that it is functionally not similar with that of assessee. It is submitted that assessee engaged in providing services such as Agile, analytics and information management, application development and maintenance, business process management, business technology consulting, Cloud, Digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. It is further been submitted that this company does not have segmental information on the basis of which revenue earned from different verticals could be identified. This company also owns huge intangibles and therefore deserves to be excluded. Ld.AR referred to page 1259, 268, 1273, 1291, 1297, 1299, 1334, 1335, 1337,a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s them to work for a wide range of customers. From the annual report of this company is also observed that this company earns income from royalty fee and is engaged in development of products which is not at all comparable with the services provided by assessee to its associated enterprise. Respectfully following the consistant view in decisions of this Tribunal in assessee s own case for assessment year 2011-12 and 2012-13(supra) and the discussions herein above for revelant year, we hold this company to be not a good comparable in assessee s case. Accordingly we direct this comparable to be excluded from finalist. d) Larsen and Toubro Infotech Ltd: Ld.AR submitted that this comparable was included by Ld.TPO in finalist, and objected by assessee for various reasons. Ld.AR submitted that this company earns revenue from software solutions and products without there being segmental details available. It has been submitted that Ld.TPO has accepted that this company deals and products but still has included in the list of comparables to be compared with a contract software service provider like assessee. This comparable also owns huge intangibles and incurs expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble in assessee s case. On the basis of above, we direct the Ld.AO/TPO to exclude this company from final list. Accordingly, this ground stands partly allowed. 13. Ground no.8: This ground has been raised by assessee against disallowance of depreciation claimed at the rate of 60% on racks, Xerox machine and accessories, batteries and stabiliser. Ld. AO disallowed the claim and granted 15% depreciation for the reason that they are not integral part of computers which has been upheld by DRP. 13.1. Ld.AR submitted that these machines are required for keeping computer peripherals and integral parts of the computer and ought to be granted depreciation at the rate of 60%. 13.2. On the contrary learn CIT DR submitted that the machinery is listed are not required to run the computer and can function independently without being attached to a computer. He thus submitted that these machines do not therefore fall into the category of peripherals attached to the computer. He thus supported the orders passed by authorities below. 13.3. We have perused submissions advanced by both sides in light of records placed before us. Undoubtedly machines like racks, batte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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