TMI Blog2021 (11) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... of revenue recognition. The assessee is inter alia engaged in the business of marketing, promotion and sale of 'Red Hat subscriptions' to customers in Indian sub-continent to avail support services that are for the open source software system during the subscription period ranging from one to seven year, which is established by the special services agreement or contract. AO has clearly erred in changing consistently followed method of revenue recognition adopted by the assessee.We find due merits of the revenue recognition adopted by the assessee which is duly supported by mandate of AS-9 and other parameters referred above - it is also a settled law that unless there is change in the facts and circumstances or that it can be said that earlier adopted system was wrong, revenue recognition method cannot be disturbed. We note that such case exists here. In these circumstances, we set aside the order of the Assessing Officer and delete the addition in this regard.- Decided in favour of assessee. - I.T.A. No. 7210/Mum/2018 - - - Dated:- 29-6-2021 - Shri Shamim Yahya (AM) And Shri Pavankumar Gadale (JM) For the Assessee : Shri Ajit Tolani And Shri Darpan Kriplan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions pertaining to provision of software support services 1.4 On facts and in law, the Ld. AO erred in confirming the Ld. TPO's action of rejecting Akshay Software Technologies Limited as comparable company despite this comparable being reinstated by the Hon'ble DRP and thereby, violating the provisions of Section 144C(10)of the Act. 1.5 The Ld. TPO and Hon'ble DRP confirming the Ld. TPO's action erred on facts and in law in determining the arm's length price for provision of software support services and thereby making an adjustment of INR 12,558,704 to the taxable income of the Appellant. In doing so, have grossly erred in a) modifying the economic analysis carried out by the Appellant in the Transfer Pricing documentation without providing any cogent reasons; b) rejecting various comparable companies selected by the Appellant in the Transfer Pricing Documentation and considering various comparable companies as comparable to the Appellant without appreciating that such comparable companies are functionally dissimilar to the Appellant; and c) disallowing relevant adjustments as per the provisions of Rule 10B(1) and Rule 10B(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services with sale of goods based on the incorrect premise that performance of the Appellant is complete on signing of the subscription services agreement; and c) erred on facts in not appreciating that the Appellant is solely responsible for provision of services during the term of the subscription services agreement. 2.4 The Ld. AO and Hon'ble DRP erred on facts and in law in preponing the income to the current year, without appreciating that the books of accounts are duly audited and unqualified by the auditor, and the said income is offered to tax in the respective year in which it is accounted, thereby, it is revenue neutral; 2.5 Without prejudice to the above, the Ld. AO and Hon'ble DRP erred in not granting a corresponding deduction/relief of 1NR 18,28,95,584 on the preponment of income, for a corresponding increase in expenses in the nature of 'royalty' and 'service fees' payment as per the terms of the 'License and Service' agreement entered into by the Appellant with the AE and in view of the matching concept of accounting; Other grounds 2.6 The Ld. AO erred in not considering the total income as per the revised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt -Appellant sells Red Hat service offerings to customers in India; o Services segment - Appellant provides Red Hat training content to customers in India, Alongside, offers training and certification courses, etc. In consideration for such services, the Appellant compensates Red Hat US with: o royalty for use of intellectual property (trademark/ trade name); and o service fees for provision of support services directly to customers In addition to the above, the Appellant renders sales marketing and software support service to AEs International transaction Transfer pricing policy Methodology Payment of royalty - Use of intellectual property (trademark/trade name) Royalty @ 3% TNMM- Subscription segment (comparable engaged in trading of software products) Service segment (comparable engaged in providing comparable services) Payment of service fee - Provision of support services from Global support centres to Appellant's customers RH1PL pays service fee to AE after recovering its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ror entire payment was booked under royalty. The sole basis on which the adjustments has been made is that the entire payment has been booked under royalty and the difference between the royalty as per the agreement and the total amount paid has been disallowed by the Revenue Authorities. We find that this is totally de hors the substance of the transactions. It is settled law that it is the substance that counts and not the nomenclature given by the party. In this situation, the disallowance/ adjustment made by the TPO confirmed by the DRP is without any application of mind and the same cannot be sustained. Moreover, the assessee's claim has been duly supported b}' the certificate from the statutory auditor which has also been ignored by the authorities below, without assigning any reason for the same. In these circumstances, we are oj the considered opinion that the transfer pricing adjustment of INR 23,52,26,045 for AY 2012-13 and INK 27,70,02,848 for AY 2013-14 is unjustified and deserves to be deleted. We order accordingly. 29. As regards the submission of the Ld. DR that the matter be remanded to the TPO for examination of the issue, on the bench mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 CG-VAK Software Exports Limited 9.38 2 Sasken Communications Limited 10.28 3 Kelton Tech Solutions Limited 19.72 4 Infobeans Technologies Limited 40.52 5 Ingenuity Technologies Limited 24.79 6 Akshay Software Technologies Limited (Upheld by DRP) 1.84 Arithmetic mean 17.75% The NCP earned by the Assessee under the software development segment is provided below: Particulars NCP (%) +3% Revenues 243,139,883 250,434,079 Total Revenues 243,139,883 250,434,079 Employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19,933,443 Total expenses (B) 34,202,921 A/B 58.28% judicial pronouncements supporting the contention of the Assessee that a company engaged in providing agency services by way of outsourcing the services to third party vendors is not comparable to a company operating through its own employees * BNY Mellon International Operations (India) Private Limited vs DCIT[ITA No.23/PN/2014] * Google India Pvt. Ltd. vs DCIT [ITA No. 1368/Bang/2010] * Belkin India Private Limited vs ACIT [ITA No.2292/Del./20!7] * Functionally dissimilar Axis is engaged in the business of trading digital signatures. Further, Axis is also engaged in providing Liasioningservices in the area of service tax, excise, foreign trade policy licensing, duty free credit entitlement certificates, etc. Uses proprietary tool Axis develops and owns unique intellectual property tool 'Axis Mine'. Judicial Pronouncements supporting exclusion of companies deriving significant benefit fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar ITDC 'Anns and Misc. operations' segment should be considered as comparable. This segment is engaged in providing event management services ITDC selected as a comparable Reliance placed on Eli Lily Co. (India) Pvt. Ltd. (TS - 573-ITAT-2015(DEL) - TP) Government company can be considered as a comparable Reliance placed on Vishay Components India P Limited (ITA No.133/PN/11) 4 Concept Public Relations India Limited ('Concept Public') (Ld. TPO rejected the company on the basis that it is engaged in media and communication sector) (Refer Page 282 of the Appeal Set) Functionally similar Concept is primarily engaged in providing information services and consultancy services. The company is engaged in providing consultancy in the nature of development and marketing information based services. As per the 'Overview of the company' as provided in the annual report, the company earned of its income from building images and marketing the product/ a brand of the company. On perusal of the company's official webs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessee. Judicial precedent supporting event management company as comparable to marketing support service provider: Genzyme India Pvt Ltd [ITA 892/DEL/2014] Eli lily Co. (India) Pvt. Ltd. (ITA No. 788/Del/2015) 2.4. Arguments for working capital adjustment to be allowed to the Appellant The amount of capital required to support business functions varies greatly, because of the level of debtors and creditors. The effect on profits from investing in different levels of working capital must be taken into account. Rule 10B(l)(e) and Rule 10B(3) of the Rules requires the difference between controlled and uncontrolled transactions should be taken into account for which necessary adjustments shall be made. OECD guidelines also points out the need to adjust comparables and the requirement for accuracy and reliability. The above is also supported by various judicial precedents, mentioned below, wherein it has been held that the working capital adjustment should be carried out to bring two otherwise comparable cases at par with each other. Nortel Networks India Private Limited v/s ACIT (ITA No. 4765/DEL/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be quashed. It is settled law that there cannot be a disproportionate retribution. In this view of the matter, we are of the opinion that since, the AO has not followed the direction of DRP, the adjustment on account for provision of software support services is not sustainable and same is liable to be deleted. Accordingly, we direct the adjustment in this regard is to be deleted. 9. Apropos ground No. 1.6 relating to international transactions pertaining to provision of sales and marketing support services. In this regard, it is the contention of the Ld. Counsel of the assessee that during AY 2014-15, the assessee was engaged in providing sales marketing support services, for which it was remunerated at a cost plus mark-up 5%. The TPO completed it at 10.78% and made an adjustment of ₹ 2,034,038/-. The assessee s counsel has submitted that one of the comparable selected by TPO i.e Axis Integrated Systems Limited suffers from several dis-functionalities which has been reproduced the assessee s submission herein above. The assessee s contention is that if the same is removed from list of comparables selected by the TPO, the ALP margin will be appropriate and hence, no a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited (ITA No. 7549/DEL/2017) We find cogency in the above submissions, which are duly supported by the case laws. Hence, we direct that this comparable should be removed from the final set of comparables. The AO should make computation accordingly. 10. Apropos additions on account of unearned revenue from subscription services of ₹ 18,54,92,479/-. At the outset, Ld. Counsel of the assessee states that the issue is covered in favour of the assesse by ITAT order in assessee s own case for AY 2012-13 2013-14. Upon careful consideration, we note that ITAT co-ordinate Bench vide order date for AY 2012-13 and 2013-14 in assessees own case has held as under:- 61. Upon careful consideration we find that assessee has been following consistent system of revenue recognition. The assessee is inter alia engaged in the business of marketing, promotion and sale of 'Red Hat subscriptions' to customers in Indian sub-continent to avail support services that are for the open source software system during the subscription period ranging from one to seven year, which is established by the special services agreement or contract. As per the consistent pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed method of revenue recognition adopted by the assessee. In the facts and circumstances elaborately dealt with above, we find due merits of the revenue recognition adopted by the assessee which is duly supported by mandate of AS-9 and other parameters referred above. 63. We also note that it is also a settled law that unless there is change in the facts and circumstances or that it can be said that earlier adopted system was wrong, revenue recognition method cannot be disturbed. We note that such case exists here. In these circumstances, we set aside the order of the Assessing Officer and delete the addition in this regard. 11. We find that DRP has followed its own order for AY 2013-14 which has already been set aside by ITAT as above. No case has been made out that facts in the present case are different. Hence, we set aside the order of authorities below and decide the issue in favour of assessee. 12. Apropos ground No.2.6 to 2.10, these are consequential grounds, we direct the AO to examining the submission of the assessee and decide as per law. 13. In the result, the appeal is partly allowed. Pronounced in the open court on 29 .06.2021 - - TaxTMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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