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TMI Blog2021 (3) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... " i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the Any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 3. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92CA in respect of software development segment of the taxpayer's international transactions." Thus a sum of R.86,67,88,686/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the Assessee by the AO. The Assessee filed objections before the DRP and the DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal. 7. At the time of hearing the learned counsel for the Assessee prayed for limited relief of exclusion of 3 companies chosen by the TPO and retained by the DRP, viz., CG Vak Software & Exports Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd. He also prayed for inclusion of 4 companies rejected by the TPO and DRP viz., Evoke Technoligies Private Ltd., R Systems International Ltd., Spry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Larsen & Toubro Infotech Limited has incurred expenditure on "cost of brought out items for resale at Rs.27,10,89,274 for which he drew our attention to the financial statement of Larsen & Toubro Infotech Limited placed at paper book page No.1081, which is absent in the case of present assessee. He also submitted that it has huge intangible assets and brand value in software at Rs.143,61,95,196 and it has intangible asset in the form of business rights to the tune of Rs.153,42,45,196 as shown in the Fixed Assets as on 31.03.2013 placed at paper book page No.1078. Being so, in our opinion, it cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the same from the list of comparables. II. PERSISTENT SYSTEMS LIMITED 23. As discussed in earlier year, Persistent Systems Limited is engaged in product engineering services, platforms and solutions, IP and related business, which is functionally different from assessee's case and it has earned revenue from R & D activities. Persistent Systems Limited also owns intellectual properties. Further, segmental data is not available as seen from the Notes forming part of financial statements under the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we direct the TPO to exclude the said company from the list of comparables, with the similar directions given in the above order of the Tribunal (supra). III. C G VAX SOFTWARE & EXPORTS LIMITED 24. The learned AR submitted that this company should be excluded for the reason that C G VAX Software & Exports Limited is engaged in software development and sale of products which involves high degree of R & D expenditure and to demonstrate the same, he drew our attention to the paper book page Nos.1018 and 1034 and submitted that the nature of the business of software development involves inbuilt, constant Research and Development as a part of its process of manufacturing (development). The company is developing applications engines, re-usable codes and libraries as a part of its R & D activities. Further, it has intangible assets as shown in the financial statement as on 31.03.2013 at Rs.3,03,83,536 and it is also engaged in outsource product development, as is evident from the attached notes forming part of the accounts. The learned AR also submitted that C G VAK Software & Exports Limited was not considered as a comparable in the case of M/s.EPAM Systems India Private Limited (IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the same reasons which the Tribunal has not accepted in its order in the case of NXP India Pvt.Ltd. (supra). Therefore, respectfully following the aforesaid decision, we direct exclusion of the following three companies from the list of comparable companies viz., CG Vak Software & Exports Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd. 10. As far as inclusion of 4 comparable companies which the Assessee wants to be included are concerned, we find that in the decision in the case of NXP India Pvt.Ltd. (supra) directed inclusion of the following 2 companies viz., Helios & Matheson Information Technology Ltd., and R.Systems International Ltd. The following were the relevant observations of the Tribunal: "HELIOS & MATHESON INFORMATION TECHNOLOGY LIMITED 30. The TPO rejected this company for the reason that the financial report by submitted by the assessee is for the year ending on 31st September, which is different when compared to that of the assessee's case. There is no dispute that this company is engaged in business of software development services. This company is considered to be comparable though it has different financial year, as held in the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate. 40.Ld.CIT DR placed reliance upon orders passed by authorities below. 41.We have perused submissions advanced by both sides in light of records placed before us. 42.We are of opinion that this comparable needs to be relooked into by Ld.AO/TPO, as this has not been raised before DRP and nothing has been filed before DRP in respect of this comparable. Ld.CIT DR did not object for considering this comparable and therefore in the interest of Justice, we direct Ld.AO/TPO to look into export income earned by this comparable. 43.Accordingly this comparable is set aside to Ld.AO/TPO for due verification." 13. Respectively following the decision of the Tribunal, we remand the question of comparability of the aforesaid company to the TPO as directed in the case referred to above. 14. The assessee seeks inclusion of a company by name Evoke Technologies Ltd. On the comparability of this company, the DRP held as follows: "Evoke Technologies Private Limited It was stated that the TPO rejected the company as it failed the Export revenue filter, It was submitted that it was engaged in rendering software development services and it was passing all the filter adopted by the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is not allowed to compare each and every item of operating cost incurred by assessee with similar cost in case of comparables to ask for adjustment, rather it is overall effect of all such individual items culminating into operating profit, which is considered for benchmarking assessee's international transaction. 16. In the light of the aforesaid decision of the Delhi Bench, we are of the view that Evoke Technologies Pvt. Ltd., which is admittedly rendering SWD services should be regarded as a comparable company and the reasons given for not including the comparable by the DRP cannot be sustained. We direct the inclusion of the aforesaid companies. 17. The TPO is directed to compute the ALP in accordance with the directions given in this order, after affording opportunity of being heard to the assessee. 18. The assessee has also raised grounds with regard to the action of the AO in treating software expenses amounting to Rs.1,98,26,333/- incurred by the assessee as a capital expenditure. It is the plea of the assessee in ground No.11 raised before the Tribunal that the expenses were revenue in nature and ought to have been allowed as a deduction. On this issue, the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X
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