TMI Blog2018 (5) TMI 2031X X X X Extracts X X X X X X X X Extracts X X X X ..... got no bearing on the determination of ALP of the subject mentioned payment in the scheme of transfer pricing. Since the ld AR before us had stated that what is paid is only share of AE pursuant to revenue sharing arrangement and not royalty, this aspect deserves to be remanded back to the file of the ld TPO for denovo adjudication. Accordingly, we hold that this issue of disallowance of payment of royalty is remanded to the file of ld TPO / ld AO for denovo adjudication with a direction to ld TPO to benchmark the subject mentioned payment vis a vis the comparables afresh, in order to determine the ALP of the said international transaction. Initiation of penalty proceedings u/s 271(1)(c ) of the Act which does not survive in view of the aforesaid decisions rendered for the quantum additions with a liberty granted to the revenue to initiate fresh penalty proceedings u/s 271(1)(c ) of the Act on completion of the set aside assessment, if they so desire - I.T.A Nos. 927 & 2400/Kol/2017 - - - Dated:- 11-5-2018 - Hon ble Shri A.T.Varkey, JM Shri M.Balaganesh, AM For the Appellant : Shri Manoneet Dalal And Shri Gyan Prakash Srivastava For the Respondent : Shri G.Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of functions, assets and risk profile. 3.5. excluding the foreign exchange gain / loss while calculating the Profit Level Indicator (PLI) of the Appellant as well as of the comparable companies. 5. Erroneous disallowance of the Royalty payment 5.1 The Ld. DRP, AO, and TPO erred on facts and in law by separately determining the arm's length price of the royalty paid, by using TNMM while determining the amount of adjustment on a proportionate basis. 5.2 The Ld. DRP, AO, and TPO also erred on facts and in law in not giving cognizance to the separate benchmarking analysis done by Appellant, by virtue of which such payment of royalty by the Appellant to its AEs was determined to be at arm's length. 5.3 The Ld. DRP, AO and TPO erred on facts and in law in making an adjustment on account of payment of royalty by completely disregarding the business and pricing model of the Appellant and thereby challenging the commercial wisdom of the Appellant in making such payments while passing the order. 4.1. The brief facts of this issue is that the Labvantage Solutions Private Limited ( LVS India ) and Labvantage Solutions inc. ( LVS US / AE ) are group companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 9.87 2.93 2. Evoke Technologies Pvt. Ltd. 18.72 8.33 NA 12.55 3. E-Zest Solutions Ltd. 18.14 41.85 NA 29.57 4. Goldstone Technologies Ltd. 3.01 5.92 11.01 6.62 5. Mindtree Ltd. 22.98 9.06 14.43 14.81 6. Persistent Systems Ltd. 30.53 25.87 27.09 27.57 7. R S Software (India) Ltd. 9.88 16.35 15.28 14.09 8. R Systems International Ltd. 18.62 6.50 2.60 8.90 9. Sasken Communication Technologies Ltd. 24.71 27.03 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Name of the Company PLI-OP/TC(%) Remarks 1 Acropetal Technologies Ltd 6.84 PLI revised 2 CTIL 11.47 3 Datamatics Global Solutions Ltd 14.09 4 RS Software Ltd 15.28 5 Spry Resources (India) Pvt Ltd 35.12 6 Lucid Software Ltd 13.42 7 PreludeSys (India) Ltd 56.38 8 ASM Technologies Ltd 16.41 9 E-Infochips Ltd 74.97 10 Onward Technologies Ltd 13.61 11 Trigyn Technologies Ltd 7.74 12 Thirdware Solutions (P) Ltd 25.24 13 Sasken Communications Technologies Ltd 12.13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. R S Software Ltd. 13. ASM Technologies Limited 14. E-Infochips Limited 5.1. The ld TPO after taking into account the working capital adjustments as directed by the ld DRP, arrived at the arithmetic mean of comparables at 15.94% as under:- Sl.No. Name of the comparables PLI as per order of the TPO dt. 31.12.2015(%) Revised PLI on incorporation of working capital adjustment in compliance with DRP s direction (%) 1. Acropetal Technologies Ltd. 4.66 4.07 2. CTIL Ltd 11.47 (12.61) 3. Spry Resources India Pvt. Ltd. 15.28 17.57 4. Lucid Software Ltd. 31.87 16.10 5. Onward Technologies Ltd 14.90 15.84 6. Trigyn Technologies Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating cost adjustment on Royalty) ₹ 12,29,08,415/- 4. Arm s Length Mean Margin Post Working Capital Adj. 15.94% of OC 5. ALP @ 115.94% of Net Operating Costs ₹ 14,25,00,016/- 6. Total Operational Revenue ₹ 13,02,39,108/- 7. Sales to AE ₹ 11,60,79,838/- 8. Percentage of Sales to AE to Operational Revenue 89.13% 9. ALP of transaction with AE ₹ 12,70,10,265/- 10. 5% variation from international transactions ₹ 12,18,83,830/- 11. Upward Adjustment ₹ 12,70,10,265/- 5.3. The assessee objected before the ld DRP regarding the adjustment made on account of Royalty. However, the ld DRP relying on the remand report furnished by the ld TPO rejected the assessee s objection. The ld TPO observed in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84 4.66 4.07 2. CTIL Ltd 11.47 11.47 (12.61) 3. Spry Resources India Pvt. Ltd. 35.12 31.87 11.76 4. Lucid Software Ltd. 13.42 11.10 12.04 5. Onward Technologies Ltd 13.61 13.61 16.04 6. Trigyn Technologies Ltd. 7.74 6.80 1.46 7. Thirdware Solutions Ltd 25.24 25.24 24.34 8. Sasken Communication Technologies Ltd. 12.13 12.13 13.77 9. E-Zest Solutions Pvt. Ltd. 16.06 16.06 14.53 10. Akshay Software Technologies Ltd. 7.84 7.84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction (i.e. Sl no.7 X 105%) ₹ 12,18,83,830/- 11. (-) 5% variation from international transaction (i.e. Sl. No.7 X 95%) ₹ 11,02,75,846/- 12. Shortfall to be adjusted upward (i.e. Sl no.9-7) 1,02,35,212 Payment to royalty Arm s length mean profit margin 15.36% Total royalty paid (as per form 3 ceb) 50,27,091/- Total royalty paid (gross including TDS) 55,80,071/- Arm s length price of royalty (84.64% of ₹ 55,80,071) 47,22,972/- Excess paid 8,57,099/- Downward adjustment 8,57,099/- Thus, total adjustment would be as follows : S.No. Issue Amount 1 Rendering of software development services 1,02,35,212 2 Payment of royalty 8,57,099/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange gain / loss while calculating the Profit Level Indicator (PLI) , for which assessee has raised Ground No. 3.5, we find that the ld TPO had treated forex gain as non-operating even though the assessee functionally bears forex risk. We find that this has been captured in the TP study report enclosed in page 66 of the paper book as under:- 4.3.7. Foreign Exchange Risk Foreign exchange risk means the risk associated with the adverse fluctuation in the rate of currencies in which entity is dealing. Since LVS india s expenses are incurred in Indian Rupees and the payment is received from AE in foreign currency, LVS India bears risk of currency rate fluctuations. We find that the exchange fluctuation risk is factored by the assessee in its FAR analysis and the same need to be treated as operating income while computing PLI. We find that the assessee had borne the foreign exchange risk as part and parcel of its trading transactions with its AE which is on revenue account and hence the ratio laid down by the Hon ble Supreme Court in the case of CIT vs Woodward Governor India (P) Ltd reported in 312 ITR 254 (SC). We also find that the Hon ble Delhi High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad paid royalty to its AE on the license sales made by it to the third party customers as well as on the maintenance revenue generated from such licenses earlier sold to third party customers. The ld AR argued that since such payment was integral to the operations of assessee, and in the nature of operating expenses, such transaction was aggregated with the provision of software design and development services transaction and benchmarked using TNMM as the MAM. Thus, owing to closely linked and integrated nature of said transaction, TNMM is the MAM for its evaluation. The ld AR submitted that while determining the arm s length nature of the said transaction, the ld TPO has used the same set of comparable companies as those selected for the software development segment. This is contrary to the position taken by the ld TPO himself, wherein, he had on one hand segregated the said transaction for determination of the arm s length price and on the other hand, had in turn used the same margin to determine the arm s length margin. The ld AR submitted that in case the said transaction had to be benchmarked separately, then the correct approach to benchmark the said transaction would be to u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty. The ld AR also pointed out that the assessee to be on the safer side, had also subjected the payment of 40% to AE to withholding tax treating the same as royalty to avoid possible disallowance of the same u/s 40(a)(i) read with section 195 of the Act. We find that this has got no bearing on the determination of ALP of the subject mentioned payment in the scheme of transfer pricing. Since the ld AR before us had stated that what is paid is only share of AE pursuant to revenue sharing arrangement and not royalty, this aspect deserves to be remanded back to the file of the ld TPO for denovo adjudication. Accordingly, we hold that this issue of disallowance of payment of royalty is remanded to the file of ld TPO / ld AO for denovo adjudication with a direction to ld TPO to benchmark the subject mentioned payment vis a vis the comparables afresh, in order to determine the ALP of the said international transaction, in accordance with law. Accordingly, the Ground Nos. 5.1., 5.2. and 5.3. raised by the assessee are allowed for statistical purposes. 11. The Ground No. 8 raised by the assessee is with regard to initiation of penalty proceedings u/s 271(1)(c ) of the Act which do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rival submissions. We find that as in Asst Year 2012-13, even in Asst Year 2013-14, the ld DRP / ld TPO had not disputed the compliance of benefit test by the assessee pursuant to payment of royalty / license fees to its AE. We have already held supra that what is paid to the AE is only the share of revenue which is nomenclatured as royalty. We find lot of force in the argument of the ld AR that the ld TPO having decided not to make any adjustment to ALP of software development services, ought not to have applied the same comparables margin of 16.50% on the royalty payment thereby resulting in excess payment of royalty of ₹ 3,55,323/- and consequentially making downward adjustment to the same. We hold that the decision rendered by us supra for Asst Year 2012-13 would apply with equal force for this Asst Year 2013-14 also except with variance in figures. Accordingly, the Ground Nos. 2.1., 2.2. and 2.3. raised by the assessee are allowed for statistical purposes. 16. The Ground No. 3 raised by the assessee is with regard to initiation of penalty proceedings u/s 271(1)(c ) of the Act which does not survive in view of the aforesaid decisions rendered for the quantum additi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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