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TMI Blog2018 (7) TMI 2150X X X X Extracts X X X X X X X X Extracts X X X X ..... d on facts and in law in determining income of the appellant at Rs. 6,91,16,570 against the total income returned by the appellant of Rs. 2,86,27,959. Transfer Pricing Matters: 3. That the assessing officer erred on facts and in law in making an addition of Rs. 3,87,23,769 to the income of the appellant, on account of the alleged difference in the arm's length price of the international transactions of rendering software services undertaken during the previous year, on the basis of the order passed under section 92C(3) of the Act by the TPO. 3.1 That the TPO / DRP erred on facts and in law in not appreciating that outsourcing costs, being pass through items, ought to be excluded from the cost base of the of the appellant for the purpose of bench marking analysis, applying TNMM('transactional net margin method'). 3.1.1. That the TPO/ DRP erred on facts and in law by not adjudication on the aforesaid ground. 3.2 That the TPO I DRP erred on facts and in law in rejecting the following companies by applying filter of 75% export sales: (i) Blue Star Infotech Ltd (ii) Helios & Matheson Information Technology Ltd (iii) Priya Softweb Solutions Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt's margin at 13.14% falls within +/-5% range after taking into consideration correct margin of the comparable companies at 18.25%. 3.11. That the TPO / DRP erred on facts and in law in not allowing appropriate risk adjustment for the purpose of benchmarking the international transaction of provision of software services undertaken by the appellant allegedly holding that in absence of robust and reliable data risk adjustment could not be considered. Corporate Tax Matters: 4. That the assessing officer erred on facts and in law in disallowing deduction under section 10A of the Act to the extent of Rs. 17,64,838/- with respect to unbilled revenue of Rs. 95,58,274 recorded by the appellant. 4.1. That the assessing officer erred on facts and in law in reducing the unbilled revenue amounting to Rs. 95,58,274 from export turnover for the purpose of computing deduction under section 10A of the Act. 4.2. Without prejudice that the assessing officer erred on facts and in law in not reducing the unbilled revenue of Rs. 95,58,274 from the total turnover for computing deduction under section 10A of the Act. 4.3. Without prejudice that the assessing officer erred on facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t services TNMM OP/OC Rs. 56,99,17,912/- 2. Payment of outsourcing costs TNMM OP/OC Rs. 5,64,57,819/- 3. Payment of management services TNMM NA Rs. 11,24,993/- 4. Payment of lease rent TNMM NA Rs. 52,54,085/- 5. Purchase of fixed assets TNMM NA Rs. 2,74,068/- 6. Reimbursement of expenses to AEs TNMM NA Rs. 1,11,32,096/- 7. Payment of royalty for using brand name TNMM NA Rs. 8,81,159/- Ld.TPO computed Arm's length price with respect to software development services at Rs. 63,41,55,955/- and proposed an adjustment of Rs. 6,13,66,720/-. Assessee filed objections before DRP against draft assessment order passed by Ld.AO. DRP issued directions u/s 144C(5), pursuant to which Ld. DCIT passed final assessment order u/s 143(3) read with Section 144C of the Act, wherein transfer pricing adjustment of Rs. 3,87,23,796/- was made along with disallowance u/s 10A amounting to Rs. 17,64,838/-. 2.2. Against the final assessment order assessee as well as revenue are in appeal before us. 3. We shall first take up assessee's appeal. 4. ITA No. 6283/Del/2015 Ld. Counsel submitted that Ground No. 1, 2, 3 are general in nature and accordingly do not require a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve India Ltd dated 06/01/16 has been followed. Hon'ble Court refused to admit the appeal of revenue, against order of Coordinate Bench on the issue that foreign exchange fluctuations are operating expenses. Ld.Counsel submitted that this issue is now squarely covered in favour of assessee by decision of jurisdictional High Court. 4.5. Ld. DR, however, placed reliance upon the order of Ld. TPO/DRP. 5. We have considered rival submissions advanced by both sides in light of records placed before us. 5.1. It is observed that in assessee's own case for AY 2009-10 Coordinate Bench of this Tribunal in ITA No. 926/Del/2014 and 2776/Del/2015 has held foreign exchange fluctuation as operating income. Further it is observed that Coordinate Bench while deciding the issue relied upon DRP directions passed for assessment year under consideration before us. 5.2. In our considered view this issue now squarely stands covered in favour of assessee by virtue of decision of Hon'ble Delhi High Court in the case of Principal CIT Vs. Fiserve India Pvt. Ltd(supra), wherein Hon'ble Court held as under:- "8. The ITAT has also dealt with the issue of foreign exchange fluctuation as operating income/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business development efforts of AE however assessee has to participate in competitive bidding for obtaining contracts for services from its AE's. Conceptualisation and design of software assessee has no involvement in specifications/requirement analysis. All such activities are carried out by AE and assessee simply engaged in provision of software-based on requirements/specifications and instructions provided by AE. Provision of software development services Assessee works on different projects which involve provision of software services to the NEC group/its customers on the existing software product and solutions owned by NBC group/its customers. The scope of work specifications/requirements, design documents are all provided by the NEC group while assessee is engaged in the provision of Ltd software services pertaining to a product some of the projects undertaken by assessee are: * testing of the hardware system implemented by NTC hardware design language; * maintenance of certain software products of NEC group, which consists of bug fixing, small modification to the software for periodic release based on the specifications provided by the NEC group; * coding and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Assessment Year 2010-11 in ITA No.1102/Del/2015. Ld.Counsel placed reliance upon various other decisions like in case of Cash Edge India Pvt. Ltd., vs. ITO in ITA No. 279/2016, wherein Hon'ble Delhi High Court observed this company to be dealing in software products and earns income from sale of both software products as well as services. It has also been observed that for the year under consideration this company was having insufficient segmental information. 6.1. Ld. CIT DR placed reliance upon the order of Ld. TPO. 6.2. We have considered the rival submissions advanced by both the sides in the light of records placed before us. From the Transfer Pricing study placed at page 70-103 of paper book, it is observed that revenue generated by this company is from sale of software services and products. From the schedules to the accounts, there is no segmental information in respect of sale of software services and sale of products. This shows that company is engaged in both software development services, as well as sale of software products. It is very difficult to compare contribution made by sale of software products to the total profits of the company due to non-availability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that products delivered by this company are owned by it and therefore holds intangibles in respect of the same. He thus submitted that it cannot be considered as a captive service provider. 8.1. On the contrary Ld. DR placed reliance upon the order of Ld. TPO/DRP. 8.2. We have perused the submissions on the basis of the records placed before us. 8.3. In our view the company owns brand in respect of the products developed by it. It is also into research and development activities and owns significant intangibles. From the financials placed at page 152-177 it is observed that software development services rendered by it are basically online, and has operations in Wi-Fi place and broadband connectivity. We do not find this company to be comparable functionally, with that of assessee and accordingly direct to exclude the same from the final list of comparables. 9. Persistent Systems and Solutions Ltd Ld.TPO has included this company in the list of comparables. Ld. Counsel at the outset submitted that it is engaged in software development, licensing of products, sale of software products and maintenance contracts. It is also submitted that segmental data with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application development and maintenance services After acquisition by Wipro, name of Company was changed to Wipro Technology Services Limited ('WTS' or 'the Company') on 16 March 2009." 10.3. It is observed from the above that, Wipro Technology Services Ltd., which was earlier Citi Technology Services Ltd., was held by Citi Corp. Banking Corporation, USA upto 20th January, 2009. Wipro Ltd., parent company of which executed agreement with Citi Group Inc., for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd. On 21.1.2009, Wipro Ltd. signed master agreement with Citi Group Inc., for the delivery of technology Infrastructure Services and application development and maintenance services for the period of six years, which also includes the year under consideration. This shows that income from software development support and maintenance services was earned by Wipro Technology Services Ltd., from Citi Group Inc., by means of master service agreement entered into between Wipro Ltd., its parent company and Citi Group Inc., a third person. It is observed that the issues raised by Ld. CIT DR in respect of comparability of this comparable has been dealt wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Wipro Technology Services Ltd. earned revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables." Respectfully following the same we also direct removal of this company from the list of comparables. 11. Corporate tax issue 11.1. Ground No. 4-5 are in respect of the disallowance of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 A ends with assessment year 2011-12, which means assessee cannot claim deduction under section 10 A beyond assessment year 2011-12. In this regard we are of the opinion that RBI had allowed assessee to receive unbilled revenue from the export within a period of 12 months from the date of export. And section 10 A (3) allows the period granted by appropriate authority, in this case being RBI. The agreements entered into by assessee with the parties with whom export have been effectuated, were placed before Ld.AO for his perusal and Assessing Officer has not disputed the export of goods. In the light of the above and considering the fact that assessee generally has some amount of unbilled revenue for every Assessment Year which is subsequently received, we allow this ground raised by assessee. 11.8. Ground No. 6 is in respect of levy of interest under section 234B and C of the Act. In our considered opinion these are consequential in nature and therefore do not require any adjudication. 12. In the result appeal filed by assessee stands partly allowed. 13. ITA No. 312/Del/2016 Revenue in its appeal is challenging exclusion of following comparables: a) E-Info Chips Ltd b) In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product development, Ld.Counsel submitted that Infosys develops its own proprietary products and owns intangibles in respect of the same and therefore cannot be considered as functionally similar. 15.3. We have perused the submissions in the light of records placed before us. 15.4. It is observed that this company is involved in integrated services and therefore it is functionally dissimilar. Undisputedly Infosys brand is a huge brand and definitely result of the brand goes into the comparables and therefore results in opening higher profits to the company. We are therefore of the considered opinion that DRP was correct in excluding this comparable. 16. Calibre Point Business Solutions (SEG): This company was directed by DRP to be included in the final list of comparables. Ld.AR at the outset submitted that Ld.TPO has already given effect to the DRP direction and considered profits of this company, relating to software development services as segmental information was made available. He has placed before us order passed by JCIT, TPO-II(3), New Delhi by including company into the list of comparables and considering the income in respect of software development services. 16.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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