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TMI Blog2020 (6) TMI 584X X X X Extracts X X X X X X X X Extracts X X X X ..... land with the latter holding 99.99% of equity shares of the assessee. The assessee provided software research & development services and marketing & technical support services to its AEs. 4. For the year under consideration, the assessee, inter alia, provided contract SWD services to its AEs for a consideration of Rs. 161,91,46,172. It is not in dispute that the transaction of rendering SWD services by the assessee to its AE was an international transaction and therefore the price received by the assessee from its AE and income received from such transaction has to pass the Arm's Length Price [ALP] test as laid down in section 92 of the Act. 5. The assessee in support of its claim, that the price received from the AE was at arm's length, filed a TP analysis in which it adopted Transaction Net Margin Method [TNMM] as the Most Appropriate Method [MAM] for determining the ALP. The Profit Level Indicator [PLI] chosen for comparing the assessee's profit margin with that of the comparables was Operating Profit to Operating Cost [OP/OC]. The OP/OC of the assessee was as follows:- Operating Income Rs. 162,92,37,531/- Operating Cost Rs. 139,58,15,664/- Operating Profit (Op. Income - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Working capital and risk adjustments: The DRP upheld the action of the TPO in not granting any adjustment towards the differences in working capital ("WC Adjustment") and risk of the Appellant and the comparable companies. 10. On giving effect to the above directions issued by the DRP, the final list of comparables is as follows: Sl. No. Name of the Company 1 Infosys Ltd. 2 Larsen & Toubro Infotech Ltd. 3 Mindtree Ltd. 4 Persistent Systems Ltd. 5 R S Software (India) Ltd. 6 Thirdware Solutions Ltd. 7 CG-Vak Software and Exports Ltd. 11. The AO passed the impugned final assessment order in line with the directions of the DRP in which the TP adjustment was reworked. Aggrieved by the addition made in the final assessment order, the assessee is in appeal before the Tribunal. 12. Briefly, the grounds in the appeal which are being pressed are as follows:- (i) That the DRP erred in upholding the inclusion of Infosys Ltd., Persistent Systems Ltd., Larsen and Toubro Infotech Ltd. and Thirdware Solutions Ltd. (Ground No. 9). (ii) That the DRP erred in upholding the exclusion Akshay Software Technologies Ltd., Sasken Communication Technologies Ltd., Maveric Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as regards the diverse services, it is not possible to determine whether the company passes the filters applied by the TPO. Therefore, the company ought to be excluded. Further, the company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, the Appellant submits that L&T is a product company having significant intangibles and is thus not comparable to captive software development service providers such as the Appellant who does not own any significant or non-routine intangibles. Further, L&T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market. (c) Persistent Systems Ltd. ("Persistent") was excluded on the ground that it is functionally dissimilar as it is engaged in rendering IT services and in the development of software products without there being separate segmental information disclosed in its Annual Report for such activities. In the absence of segmental data being made availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by the TPO for the reason that the company is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services, and that the company incurred expenditure to the tune of 85% on foreign branches, which suggested that the business model adopted by the company was different from that of the assessee. The exclusion of this company came to be upheld by the DRP on the latter basis. 18. Before the Tribunal, the ld. AR submitted that firstly, perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the assessee. The website of the company states that the company is engaged in rendering IT services, which are in the nature of SWD and caters to the needs of corporate bodies, banks and financial institutions. Further, it was submitted that the income from commission and sale of software licenses constitutes a meagre 0.5% of the total revenue and therefore the same would not have any impact on the profitability of the company. It was submitted that the action of the DRP in upholding the exclusion of this company on the basis that it incurs foreign branch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid services. The income from software products constitutes a meagre 0.88% of total revenue, which would not have any impact on the profitability of the company's SWD services segment. Detailed submissions in this regard are placed at pages 169 and 429 of the paperbook. Further, the services rendered by the company predominantly fall within the ambit of SWD services as per the Safe Harbour rules prescribed by the CBDT and therefore the company is comparable to the assessee. Further, it was submitted that the DRP erred in taking into account only the revenues earned from services rendered to customers in North America, Europe and Asia Pacific region while determining whether the company passes the export revenue filter applied by the TPO. It was submitted that if the entire foreign exchange earned by the company during the year is taken into consideration, it would pass the export revenue filter applied by the TPO. Therefore, it was submitted that the company ought to be included in the final list of comparables. 24. In any event, it was submitted that the DRP upheld the rejection of this company as its income from export of services as a percentage of total revenue was 74.35%, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue. This action of the DRP is wholly baseless and arbitrary and on that ground, the company ought to be included in the final list of comparables. It was submitted that the company is functionally comparable and passes all filters applied by the TPO, which is not disputed by the lower authorities. Therefore this company ought to be included in the final list of comparables. Relevant submissions in this regard are placed at pages 171 and 474 of the paperbook. 31. Reliance was placed on the decision of this Tribunal in the case of EMC Software and Services India Pvt. Ltd. v. JCIT (supra) wherein in the case of an assessee placed similar to the assessee, the company's comparability was remanded to the TPO. 32. The ld. DR relied on the order of the DRP. 33. In the light of the submissions made as above and as directed by the Tribunal in the case of EMC Software and Services India Pvt. Ltd. (supra), we are of the view that the comparability of this company should be considered afresh by the TPO after affording assessee opportunity of being heard. It is ordered accordingly. Sankhya Infotech Ltd. ("Sankhya") 34. This company was selected by the assessee in its TP study and came to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng capital adjustment (WCA) and risk adjustment. The assessee submits that that Rule 10B(3) of the Income-tax Rules, 1962 ("the Rules"), itself categorically provides that an adjustment ought to be provided for any differences in the economic factors between the tested party and the comparables. A working capital adjustment is one such adjustment which is to be applied in order to adjust for the differences between the working capital positions of the tested party and of the comparable. 41. Reliance was placed by the assessee on the decision of this Tribunal in the cases of Bearing Point Business Consulting (P.) Ltd. vs. DCIT [(2013) 33 taxmann.com 92]. Further in the assessee's own case for the AY 2010-11, this Tribunal held that working capital adjustment ought to be granted while computing the ALP. Further, in the assessee's own case for the AY 2009-10, this Tribunal upheld the action of the DRP in directing allowing working capital adjustment on actual basis without applying any restriction. 42. The ld. DR relied on the order of DRP. 43. We are of the view that it is now a settled proposition of law that necessary adjustments are to be made to the margins of comparables to g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO has considered provision for doubtful debts and provision for doubtful advances are nonoperating in nature and the action was upheld by the DRP. In this regard it was submitted that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence, and therefore it is not correct to contend that the same is non-operating in nature. Reliance in this regard is placed on the decision of the Delhi Bench of the Tribunal in the case of Rolls- Royce India (P.) Ltd. v. DCIT (reported in [2016] 69 taxmann.com 209 (Delhi - Trib.). Therefore it was submitted that the aforesaid items are to be treated as being operating in nature. 48. The ld. DR relied on the order of the DRP. 49. We are of the view that in the light of the decision of the Tribunal in the case of Rolls- Royce India (P.) Ltd. (supra), the PLI should directed to be reworked by considering the provision for doubtful debts as operating expenditure. We hold and direct accordingly. 50. The other grounds raised in the appeal in relation to its international transaction of provision of SWD services were not pressed at this stage. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the assets received by the assessee cannot be treated as income inasmuch as the goods are capital in nature and therefore cannot be treated as a trading receipt. 56. It was submitted that out of the total amount of Rs. 15,07,90,003/- brought to tax under Section 28(iv) by the AO, the DRP directed that an amount of Rs. 1,65,86,025/- be brought to tax under Section 69 of the Act. It was submitted that the AO grossly erred in bring the value of certain assets received free of cost by the assessee to tax under Section 69 of the Act. It was submitted that the said section does not apply at the very threshold as the requirements for invoking the said provision is not satisfied in the present case. It was submitted that Section 69 of the Act applies only in a case where the assessee has made certain investments which are not recorded in the books of accounts, and the assessee offers no explanation about the nature and source of the investment. It was submitted that the assets were not recorded in the books of the assessee as the same were received by it free of cost, and recording of assets received free of cost would run counter to the applicable accounting standards. The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not attracted because there is nothing brought on record to show that the assessee was the owner of these assets. From the fact that invoices were in the name of assessee, it cannot be said that assessee was the owner of the assets, especially in the light of the affirmation by Brocade Communication LLC that they are given all the assets free of cost to the assessee. Therefore, the addition of Rs. 1,65,86,025 u/s. 69 of the Act cannot be sustained. 61. The entire value of assets totalling Rs. 15,07,90,003 has to be regarded as an addition made u/s. 28(1)(iv) of the Act, as was done by the AO in the order of assessment. The issue that arises for consideration in ground Nos.11 & 13 is as to, whether the revenue authorities were justified in treating the value of assets as a benefit/perquisite received by the assessee and taxing the same u/s. 28(1)(iv) of the Act. We are of the view that this issue need not be adjudicated in view of ground No.12 raised by the assessee before us. In ground No.12, the assessee has prayed that the addition made will go to enhance its profits and that profit is eligible for claim of deduction u/s. 10A of the Act and therefore, the addition, even if susta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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