TMI Blog2022 (7) TMI 489X X X X Extracts X X X X X X X X Extracts X X X X ..... development service providers such as the assessee 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. - this company is consistently excluded from the final list of comparables in cases of assessees which are placed similar to the assessee.We therefore direct that this company should be excluded from the final list of comparables. Persistent Systems Ltd. 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 available as regards the IT services and products offered by it, it is not possible to determine whether the company passes the filters applied by the TPO. The operations of the company predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers, which is completely different from the services rendered by the assessee. The company also made sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trading segment - HELD THAT:- We hold that the assessee is a mere distributor and the method applied by it ought to be adopted. Pertinently, in the assessee's own case for assessment years 2015-16 and 2016-17, the TPO accepted the method applied by the assessee in the trading segment. Since the facts and circumstances involved in the year under consideration remain the same in the assessment years 2015-16 and 2016-17, the assessee's method ought to be accepted and is directed to be accepted. We remand the question of determination of ALP to the TPO/AO for fresh consideration and opting RPM as MAM. Restriction of depreciation claimed on computer software - HELD THAT:- As relying in the case of Computer Age Management Services [ 2019 (2) TMI 37 - ITAT CHENNAI] depreciation at 60% is directed to be granted. Disallowance of provision for warranty - AO disallowed the provision created in excess of the utilization, for the reason that the provision created by the assessee at a fixed percentage of sales does not conform to the tenets of a scientific, empirical and statistically consistent method as conceived by the Hon'ble Supreme Court in the case of Rotork C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cost-plus mark-up of 19.64%. The assessee also purchased goods from its AEs for a consideration of Rs. 64,41,74,821/- for trading segment. In the trading segment, the assessee earned a gross profit margin of Rs. 24.94%. 4. On a reference made by the Assessing Officer ('AO') to the TPO, the TPO passed an order dated 31.10.2017 under Section 92CA of the Income-tax Act, 1961 ('the Act') determining a TP adjustment of Rs. 8,34,81,655/- in respect of the SWD services segment and Rs. 11,36,10,183/- in the trading segment, aggregating to total TP adjustment of Rs. 19,70,91,838/-. 5. Initially, a draft assessment order dated 15.12.2017 came to be passed by the AO in which, inter alia, the aforesaid TP adjustment was incorporated. The AO also proposed to restrict the depreciation claimed on computer software at 25% as opposed to 60% claimed by the assessee and proposed to disallow the provision for warranty in excess of the utilization. 6. Aggrieved, the assessee filed its objections before the DRP which, vide its directions dated 24.09.2018, rejected the assessee's objections to a large extent while granting marginal relief. 7. Pursuant to the directions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cigniti Technologies Ltd. 27.62 7 SQS India Ltd. 22.37 8 Thirdware Solution Ltd. 44.68 Arithmetic mean 29.40 Computation of arm s length price by the TPO and the adjustment made: Arm s length mean Mark-up 29.40% Operating Cost Rs. 85,57,58,886/- Arm s Length Price @129.40% of cost Rs.1,10,73,51,998/- Price Received Rs.1,02,38,70,343/- Shortfall being adjustment u/s. 92CA of the Act Rs.8,34,81,655/- 11. The addition of Rs. 8,34,81,655/- suggested by the TPO as short fall in the ALP was added to the total income by the AO in the Draft Order of Assessment. The assessee filed objections before the Dispute Resolution Panel (DRP) against the Draft Order of Assessment under section 144C of the Act. 12. The DRP issued the following direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company establish itself as a credible IP Owner. The company owns seven Edge products/platforms and six other product based solutions. The company leverages on its premium banking solution 'Finnacle '. The company owns significant brand value and focuses on immense brand building. For this purpose, it incurs significant brand building expenses, which goes to help the company have a premium pricing for its services. The company also heavily focuses on research and development activity and incurs significant expenditure for this account. Further, the company operates in diversified markets. Thus, the services rendered by the company are not functionally comparable to the routine SWD services rendered by the assessee. 16. We find that it is submitted that this company is consistently excluded from the final list of comparables in cases of other assessees who are placed similar to the assessee. Reliance in this regard is placed on the decisions of this Hon'ble Tribunal in the cases of LG Soft India Pvt. Ltd. v. DCIT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15), EMC Software and Services Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (TP)A No. 3122/Bang/2018 for the assessment year 2014-15), EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the cases of the assessee which is similar to the assessee, the company was directed to be excluded. We therefore direct that this company should be excluded from the final list of comparables. (c) Persistent Systems Ltd. ('Persistent')- As far as exclusion of this company as a comparable company is concerned, it is submitted that this company 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 available as regards the IT services and products offered by it, it is not possible to determine whether the company passes the filters applied by the TPO. The operations of the company predominantly relate to providing software products, services and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entirely different from the routine SWD services rendered by the assessee. The company is also engaged in development of software products and earns revenues from sale of user licenses for software applications. These diverse services are reported under one segment without any details being available as regards these services. 19. We find that this company is consistently excluded from the final list of comparables in cases of assessees placed similar to that of the assessee. Reliance in this regard is placed on the decisions of this Hon'ble Tribunal in the cases of LG Soft India Pvt. Ltd. v. DCIT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15), EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the cases of assessee which is placed similar to the assessee, the company was directed to be excluded. Therefore, this company is directed to be excluded from the final list of comparables. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the case of an assessee which placed similar to the assessee, the comparability of this company was remanded to the TPO. We accordingly remand the comparability of this company with the assessee to the AO/TPO for a decision afresh. (b) Maveric Systems Ltd. ( Maveric ): As far as exclusion of this company is concerned, the TPO without any specific reason being assigned did not include this company as a comparable company. The DRP rejected the contention of the assessee seeking its inclusion on the basis that generally, companies with R D expenditure of less than 3% alone were considered. In this regard, it is submitted that the action of the DRP is wholly erroneous in as much as the TPO did not apply a filter to exclude companies incurring R D expenses. In the absence of application of a filter, rejecting a company on an arbitrary basis, more so when it is otherwise functionally comparable, is erroneous. Therefore, this company ought to be included in the final list of comparables. 24. We find that this Tribunal in the cases of EMC Software and Services India Pvt. Ltd. v. JCIT (Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 787/- Gross profit Rs. 66,93,36,501/- Gross profit margin (GP/Sales) 24.94% The assessee chose the following companies as comparable companies and their arithmetic mean of profit margin was as follows: Sl. No. Name of the company Weighted average 1. Phillips Electronics India Ltd. 35.73 2. Redington (India) Ltd. 1.21 3. Salora International Ltd. 12.41 4. Sony India Pvt. Ltd. 6.80 Arithmetic mean 14.04 Since the profit margin of the assessee was higher than that of the comparable companies, the assessee claimed that the price received from the AE should be regarded as at Arm's Length. 29. The TPO did not accept assessee's choice of MAM and he chose TNMM as MAM for the reason that data for compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,183/- 31. The assessee filed objections before the DRP against the aforesaid addition suggested by the TPO which was incorporated by the AO in the Draft Order of Assessment. The DRP summarily rejected the contention of the assessee challenging the application of TNMM as opposed to RPM adopted by it. The DRP rejected the contentions of the assessee seeking exclusion of incomparable companies and inclusion of comparable companies, while granting marginal relief by directing exclusion of Intec Infonet Pvt. Ltd. While determining the adjustment to the trading segment, the TPO had taken into consideration the revenue of the assessee at entity level as opposed to transaction level, which the assessee objected to before the DRP. The DRP rejected the assessee's contention and upheld the action of the TPO is determining the adjustment at entity level. 32. The AO passed the impugned final assessment order in line with the directions of the DRP in which the TP adjustment was reworked at Rs. 11,25,36,877/-. Aggrieved by the said addition, the assessee is in appeal before the Tribunal. 33. The grounds in the appeal which are being pressed are as follows: (i) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is engaged in trading of consumer products in its lifestyle segment through authorized distributors and channel partners. Sales and pricing: In respect of the trading operations, the assessee purchases products mostly from its AEs for resale to domestic customers in India. The assessee does not add value to the products procured from ground companies and merely resells the same to domestic customers in India. The assessee is responsible for determining the price at which the goods are sold to customers in India. The pricing structure is mainly dependent on the product margin. The assessee fixes its prices in accordance with a published price list. The prices may be changed to meet specific customer demands. The assessee is responsible for negotiating sales contracts. Product marketing and advertising: The assessee has established both direct distribution networks and network of dealers for marketing its products. The assessee also bears sales and support costs for marketing its products in India. Inventory management: Inventory management is performed by the assessee. The assessee reviews inventories on hand and records a provision for excess, slow movin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 13 of the assessee's TP study nowhere lists out the above contents, and more importantly, the assessee does not render any such additional services. Therefore, this finding of the TPO is clearly contrary to the material placed on record and is wholly baseless. In any case, even if such services were to be provided, that does not alter the function of the assessee being a distributor of products. 36. The laws by now are well settled that in the case of a routine distributor who does not perform any value-added services to the product. RPM is the MAM. The additional functions performed by the assessee as stated by the TPO/DRP will not make the assessee as not a trader. The true test is value addition to the product that is sold by the assessee as a trader. These is no such value addition to the product and therefore the assessee has to be regarded as a pure trade only. Since the assessee is merely a routine trader of services, without any value addition, RPM is the MAM. 37. As already stated, the law is well settled that MAM in the case of trader is RPM, reliance in this regard is placed on the following decisions: (i) Textronix India (P.) Ltd. v. DCIT ([2013] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allenging the action of the Revenue in restricting the depreciation claimed on computer software at 25% instead of 60%, by holding that 'computer software' is license eligible for depreciation at the rate of 25%. The Respondent arrived at this conclusion by holding that under Appendix-1 to the Income-tax Rules, 1962 ( the Rules ), what is eligible for depreciation at the rate of 60% is 'computer including computer software' indicating that the computer software which is eligible for depreciation at 60% is the software which is embedded in the computer. The DRP upheld the action of the AO. 41. It was submitted before us that the interpretation adopted by the lower authorities is contrary to the provisions of the Rules. It was submitted that Note No. 7 to Appendix-1 defines the term 'computer software', in terms of which, a computer software means any computer program recorded on any disc, tape, perforated media or other information storage device. The definition does not make any distinction between a software embedded in a computer or otherwise. In fact, the medium of storage of the software not being restricted to a computer itself demonstrates that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Office Std 2010 licence 7. Dynamics Nav Final Milestone license 8. Server licenses and customization charges for insurance process 9. Server licenses and customization charges for insurance process 10. Citrus software license basic server licenses 1 11. Server licenses and customization charges for insurance process 12. Server License 13. Server License 14. Server License 15. Server License 16. Cisco-firewall license 17. Window 2008 R2 standard license What we find from the above description is that all these were nothing but items in the nature software or software applications. Entry No. 5 coming in III of Part A in New Appendix I clearly says that computer included computer software. Note 7 of the Appendix, defines computer software as any computer programme recorded in any information storage device. We are therefore of the opinion that assessee was eligible to claim depreciation at the rate of 60% on the above items. Orders of the lower authorities on this issue are set aside and the claim is allowed. Ground No. 4 of the assessee stands allowed. 43. In view of the above, depreciation at 60% is directed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 19,255,192 32,362,936 (12,404,786) - 39,213,342 47,191,482 (25,231,299) - Closing as on March 31 5,045,729 19,255,192 39,213,342 61,173,525 As per financials Under short-term provisions Under long-term provisions - 5,045,729 12,677,212 6,577,980 17,696,144 21,517,198 29,487,216 31,686,309 Total 5,045,729 19,255,192 39,213,342 61,173,525 Breakup of Warranty Utilization made during the year Year Pertaining to sales for FY 2011-12 Pertaining to sales for FY 2012-13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l trends and empirical evidence. 47. The DRP had confirmed the disallowance on the basis of the chart above by stating that the amount of utilization is much less than the provision created. The panel took FY 2012-13 data where the utilization of Rs. 4,30,259 was compared with the provision created for the year Rs. 54,75,988 to conclude that the% of utilization is at 7.8% which does not justify the amount of provision created as a% of sales. In this regard the learned counsel submitted that the warranty provision is created for the entire period of warranty which would depend on the nature of product. Drawing reference from the letter submitted before the DRP, the learned counsel demonstrated for example that Amplifier has warrant of 5 years and 3 years whereas Studer has a warranty of 1 year only. Therefore the utilization of warranty for 1 year cannot be compared with provision for warranty which is created for the entire period of 6 years warranty period. The annexures to the letter submitted to the DRP give a complete break up for all the items sold by the assessee like loudspeaker, microphones etc. 48. The learned counsel submitted that provision of Rs. 54,75,988/- for A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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