TMI Blog2020 (5) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... r in pursuance of the directions of the Dispute Resolution Panle (hereinafter referred to as DRP ) under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( Act ), is bad in law, violative of principles of natural justice and void ab-initio. 1.1 That the Assessing Officer erred on facts and in law in passing order under section 143(3) read with Section 144C of the Act at an income of ₹ 57,96,95,314 as against returned income of ₹ 35,04,84,700. 2. That the assessing officer erred on facts and in law in making an adjustment of ₹ 18,16,82,680/- to the arm s length price of the international transactions of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ( TPO )/Dispute Resolution Panel ( DRP ). 2.1 That while giving effect to the direction of DRP, the AO/TPO erred on facts and in law in computing the operating profit to cost ratio of appellant at 9.61% as against 15.20% (13.17% in AE segment) computed by the appellant, by erroneously considering foreign exchange fluctuation income of ₹ 10,51,15,282/- as non-operating item of income. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and in law in making an adjustment of ₹ 4,75,27,934/- to the arm s length price of alleged international transactions of delay in receipt of outstanding receivables, on the basis of order passed by the Transfer Pricing Officer ( TPO )/Dispute Resolution Panel ( DRP ). 3.1 That the DRP/TPO erred on facts and in law in re-characterizing the alleged transaction of delay in receipts of receivables as unsecured loans advanced to the associated enterprises. 3.2 That the DRP/TPO erred on facts and in law in not appreciating that delay in receipt of receivable is not an international transaction , per se, under section 92B of the Act but is a consequence of an international transaction undertaken in the form of services rendered to the associated enterprise. 3.3 That the DRP erred on facts and in law in holding that the nonrealization of invoice value beyond the stipulated period (as per contract) is a separate international transaction, whose arm s length price is required to be determined separately. 3.4 Without prejudice, that the DRP/TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stered with the Software Technology Parks of India scheme (STPI). For the year under consideration, the assessee filed its return of income on 27/11/2014 declaring total income of ₹ 35,04,84,700/-. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Income-Tax Act, 1961 (in short the Act ) were issued and complied with. In view of the international transaction carried out by the assessee with its Associated Enterprises (AEs), the learned Assessing Officer referred the matter of determination of arm s-length price of the said transaction to the learned Transfer Pricing Officer (TPO). The Learned TPO in his order dated 04/10/2017 proposed transfer pricing adjustment of ₹ 26,82,48,663/-which consisted of adjustment for provision of software development services amounting to ₹ 21,09,11,213/- and adjustment for interest on receivables amounting to ₹ 5,73,37,450/-. The Assessing Officer in his draft assessment order included the transfer pricing adjustment proposed by the learned TPO. On the objection filed by the assessee against the proposed transfer pricing adjustments, the learned DRP after consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has claimed to have been engaged in the provision of the software development services which included product realization, product testing, migration and porting, product maintenance and support and product extensions. The profile of the assessee available on page 49 of PB-I is reproduced as under: 2.6 PROFIT OF GL INDIA GL India is a company registered under the provisions of the Companies Act, 1956 and is a subsidiary of Global Logic Inc. GL India is engaged in the provision of software development services to its customers including Global Logic Group Companies. The departments of GL India include delivery, finance legal, human resource (including employee services, recruitment, resourcing and learning development and operations. During the year, there were approximately 1,575 employees on the payroll of GL India. The company has offices in Noida, Bangalore and Nagpur. The Company operates through certain EOU registered with the STPI and SEZ. 4.2 The assessee reported following international transactions in its transfer pricing study: Sl. No. Nature of transaction Method applied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned TPO, the OP/OC of the assessee was only 9.61%. The learned TPO also rejected the multiple year data of the comparables taken by the assessee. The learned TPO finally retained 15 comparables and using their current year data, arrived at average margin (OP/OC) of 22.60 percent. In view of the average margin of the comparables being more than the margin of the assessee , the learned TPO computed adjustment of ₹ 21,09,11,213/-to the value of the international transaction reported by the assessee. On the direction of the learned DRP to exclude/include the comparables, finally 13 comparables are retained with their average margin at 20.80%. The adjustment has accordingly has been computed at ₹ 18,16,82,680/-. 4.8 The comparable sought to be excluded before us by the assessee are adjudicated as under: Mindtree Ltd. 5. This company was initially selected by the assessee as comparable, however during the course of proceeding before the Ld. TPO, the assessee sought to exclude the company from the set of the comparables on the ground of functional dissimilarity. The learned TPO referred to the various pages of the Annual Report of the company ( i.e. P-77, P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d comparable to the assessee. 5.5 We have heard rival submission of the parties on the issue in dispute. The Associated Enterprises , namely M/s Global Logic Inc, USA , to whom the assessee is providing services is a full life cycle product development service company which operates, design and engineering centers around the world in field of digital media, retail, finance, infrastructure, telecommunication, electronics and healthcare and also has ongoing partnership with product markets in these fields. The assessee company, during the year was having approximately 1575 employees on its payroll and was possessing skills in major technologies like Java, Microsoft, VoIP, mobile technologies, Web services, integration with back-office application such as SAP, Siebtel, MS exchange and databases (Oracle, SQL Server, DB2, Sybase, MS access) . The assessee claimed to have included services development delivery and integration of a specialized items, product testing. The assessee also uses a migration methodology provided by the GL group that covers all phases from impact analysis to deployment and testing. The assessee also was engaged in providing product extension services, append n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness process management, business technology consulting, cloud, independent testing infrastructure management services, mobility, product engineering etc. We find that the assessee also is engaged in providing services related to the software including product testing, maintenance and support. It is specifically mentioned in the profile that GL India has invested in creating extended support infrastructure for software companies in the product support team as a combination of the domain and technology experts providing quality supports. In view of the fact that assessee is also engaged in providing various kind of services associated to software product development in comparison to the company which is engaged in providing services related to software. Thus, we reject the contention of the assessee for excluding the company from the set of the comparable on the ground of functional dissimilarity. 5.11 The next argument of the learned Counsel of the assessee that company possess intangible assets worth millions of rupees. This argument of the company has been rejected by the learned DRP. The learned DRP has noted that the company owns intangible of ₹ 17.10 crores, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aordinary event, significant intangiblesand software packages purchased for resale (sale of product). The learned DRP held that company s revenue was not impacted by the intangibles held by the company as most of the intangibles were software. The Ld DRP also held that there is no revenue from the sale of the products. 6.2 Before us, the learnedCounsel has sought to excludethe company on the ground of significant intangibles, expenses on cost of the bought-out items for resale, multiple segments and extraordinary event. 6.3 The Learned DR, on the other hand, relied on the finding of the lower authorities. 6.4 We have heard rival submission of the parties on the issue in dispute. The learnedCounsel of the assessee submitted that the company owns significant intangibles (₹ 75,04,78,329/-) in the form of the software and intangible assets under development. On perusal of fixed assets schedule, available on page S-1245 of the Annual Report ( page 116 of PB-2), we find that at the beginning of the year the assessee owned intangible assets of ₹ 153,42,45,196/- which included software of ₹ 143,61,95,196 ( 93 %), thus the intangible other then the software are in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director s report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under: TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L T, L T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of ₹ 489.53 crs based on fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that company is equipped to carry out high-end technology driven software development services, which is also the function of the assessee, and therefore the company is comparable. 7.1 The Ld. DRP observed that there is no sale of the product in the revenue stream in the profit and loss account. The intangible assets held by the company were also not found to be significant by the learned DRP, and thus retained the company as comparable. 7.2 Before us, the learned Counsel of the assessee referred to page 257 of PB-2 and submitted that company specialize in software products, service and technology and it offers complete product life-cycle services. The Learned Counsel relied on the decision of the coordinate bench of the Tribunal in the case of Saxo India private limited Vs ACIT (ITA No. 6148/Del/2015) to support that the company is engaged in development and product design and analysis services, which is functionally different from a pure software service provider and therefore it ought to be excluded. The learned Counsel submitted that the appeal filed by the Revenue against the decision was dismissed by the Hon ble Delhi High Court in ITA No. 682/2016. The Learned Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 16,691.53 Millions as against ₹ 12,945.12 Million representing a growth of 28.9% over the previous year. The rupees depreciated by 11.9% during the year. During the year, the growth in revenue was driven by growth in both, IP and software services which recorded a rise orf 34.7% and 27.7% respectively. 7.6 Further, on same pace of the Annual Report, a bar graph has been shown. According to the graph in the financial year 2013-14 i.e. corresponding to the assessment year under consideration, the share of revenue from software services was of 82.0% and IP led product was of 18%. 7.7 Further on page 97 of the Annual Report ( page 284 of PB-2) under management discussion and analysis, the product strategy has been reported as under: Product strategy Over the last three years, in consultation with our large customers, we have created a business that is based on IP revenues. In this business line, our revenues are not directly related to the number of employees on the project but depend on the outcome from product sales. There are three kinds of IP business that we are focusing on: a) Business acquired from customers by taking over some of their non-strate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar. The learned TPO, however, referred to page 35 of the Annual Report containing details of the activities under segment of software development and service and system integration and support and concluded that the company is functionally similar to the assessee. Before the learned DRP, the assessee again submitted that the company provides technology consulting, new product design development and testing services. The company also provide solutions and services for technologies such as Internet of things (IOT), big data analytics, cloud mobility, virtual reality and artificial intelligence. All these functions being different from the assessee, the company should be excluded. The learned DRP, however held that under TNMM, the broad functional similarity is to be seen and thus upheld the action of the learned TPO. Before us the Learned Counsel of the assessee repeated the submissions made before the learned DRP and submitted that revenue from the operations include revenue from product design, graphics animation and gaming and system integration and support. According to him all these activities are functionally different from that of the assessee. He also submitted that the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices and software maintenance services. The other services of graphic animation and gaming includes major project for animation and visual effects for two feature films, which won the 59th Filmfare award and the star Guild Award 2014 for Best visual effects for it works in film Dhoom 3 . The company also carried out visual effects for the film Bhag Milka Bhag . The services under the revenue from graphics animation and gaming are also different from services of software development. 8.4 In view of the activity from which revenue has been earned by the company, the company is functionally different from the assessee at entity level, thus, we direct the Learned AO/TPO to exclude the company from the set of the comparables. Thirdware Solutions Ltd. : 9. Before the Ld. TPO, the assessee sought to exclude this company on the ground that it derives revenue from various sources such as sale of license, software services, export from SEZ, revenue from subscription etc. The learned TPO, however referred to pages 13 and 80 of the Annual Report to highlight that the company s operation comprises of software development, implementation and support services, which are various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49.31 141,95,69,028 Revenue 20675.74 205,28,98,016 Employee cost/revenue 41.35% 69.14% 9.4 The Ld. Counsel submitted that the Coordinate bench of Tribunal in the case of Fisev India P ltd Vs ITO ( ITA No. 1822/Del/2014) has excluded the company on account of nonavailability of segmental data. He further submitted that the Tribunal in the case of ION Trading India Private Limited vs ITO (ITA No.1035/Del/2015) has excluded the company on account of functional dissimilarity. Accordingly, submitted that company should be excluded in the case of the assessee also. 9.5 The learned DR on the other hand relied on finding of the lower authorities. 9.6 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As far as the profit and loss of account of company available on pages 528 and 529 of PB-2 ( Page-2 and 3 of profit and loss account part of the Annual Report) , we find that revenue of ₹ 20,675.74 lakhs has been shown from sale of products, but in footnotes to the sub classification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is a public company domiciled in India and incorporated under the provisions of the Company At, 1956. The company is engaged in the business of Software Development and Consultancy Services. The company caters to both domestic and international markets. 9.8 All these information available in the Annual Report clearly indicate that majority of the revenue is earned from software services and insignificant part is earned from subscription and training and sale of license. The Ld. Counsel in its submission in the synopsis has submitted that the Learned TPO has not considered the direction of the learned DRP of considering segment data. The Learned Counsel further mentioned that in rectification dated 25/07/2018 has concluded that segmental data of the company is available in public domain and that in terms of the information sought under section 133(6) of the Act the company has explained its revenue as from software development services. 9.9 In view of the information available in the Annual Report and further confirmed from the company under section 133(6) of the Act, we reject the arguments of the Learned Counsel the assessee that the company is engaged in sale of product. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now, UX and UI and customize software services are all part of software development or software services. The Automation information technology is focused on service automation and quality assurance testing of automated process. Under the automation the goal is to eliminate defects, errors and problems with products Software Development and with business or customer service processes. Example of automation are automated chatbots to help solve customer issues or to direct customer to the right person. Automation is also used to streamline IT help desk ticketing, service management and to deliver quality products and software faster, with fewer defects. Thus, automation engineering is part of the process of the software development services. 10.6 Further, the term service now has been described on the website of the company as under: Service Now provides a framework that describes, organizes and automates the flow of work, and removes unnecessary emails and spreadsheets from the process to streamline the delivery of services. There is no denying the fact that Service Now has myriad benefits for an enterprise besides replacing manual transactions with consumerized and fast ..... 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